-----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, IAMZL2Zh+NfIQGC6lxprssV+xxcZU6NbczOKJw6V0uaCAx2dbXhHFxl1zUA8ntJC 3Y3th+lbFnVtEkk+TyXLgg== 0001047469-98-031184.txt : 19980814 0001047469-98-031184.hdr.sgml : 19980814 ACCESSION NUMBER: 0001047469-98-031184 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-22073 FILM NUMBER: 98686774 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 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ___________, ------------------- Commission File No.: 000-22073 DAOU SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 330284454 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 5120 Shoreham Place San Diego, California 92122 (Address of principal executive offices) (Zip Code) (619) 452-2221 (Registrant's telephone number, including area code) ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes XX No -- -- The number of shares of Registrant's Common Stock outstanding as of June 30, 1998: 17,670,393 ------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- DAOU SYSTEMS, INC. Index to Form 10-Q PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements Page Condensed Consolidated Balance Sheets (unaudited) June 30, 1998 and December 31, 1997 3 Condensed Consolidated Statements of Operations (unaudited) Three Months and Six Months Ended June 30, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-13 PART II. OTHER INFORMATION 14 SIGNATURES 16 2 Item 1. Condensed Consolidated Financial Statements DAOU SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE DATA) ASSETS
JUNE 30, DECEMBER 31, 1998 1997 ----------- ------------ (unaudited) Current assets Cash and equivalents $ 5,795 $ 7,973 Short-term investments 3,004 10,170 Accounts receivable, net 19,978 15,743 Contract work in progress 22,329 13,292 Other current assets 3,057 2,089 -------- -------- Total current assets 54,163 49,267 Equipment, furniture and fixtures, net 4,629 3,860 Other assets 1,095 983 -------- -------- $ 59,887 $ 54,110 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 6,945 $ 4,341 Accrued liabilities 6,692 4,061 Current portion of long-term debt 2,355 1,437 -------- -------- Total current liabilities 15,992 9,839 Long-term liabilities 3,877 2,433 Commitments and contingencies Stockholders' equity Preferred stock, $.001 par value Authorized shares - 5,000 Issued and outstanding - none - - Common stock, $.001 par value Authorized shares - 50,000 Issued and outstanding - 17,670 and 17,551 at June 30, 1998 and December 31, 1997, respectively 18 18 Additional paid-in capital 37,226 36,043 Deferred compensation (778) (907) Unrealized gain on short-term investments 232 146 Retained earnings 3,320 6,538 -------- -------- Total stockholders' equity 40,018 41,838 -------- -------- $ 59,887 $ 54,110 -------- -------- -------- --------
See accompanying notes. 3 DAOU SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (UNAUDITED)
PERIODS ENDED JUNE 30, THREE MONTHS SIX MONTHS 1998 1997 1998 1997 -------- -------- -------- -------- Revenues $ 28,043 $ 14,848 $ 52,028 $ 27,945 Cost of revenues 18,947 9,822 33,435 18,646 -------- -------- -------- -------- Gross profit 9,096 5,026 18,593 9,299 Operating expenses: Sales and marketing 3,069 2,036 5,802 3,856 General and administrative 3,545 2,561 6,673 4,918 Merger and related costs 1,029 - 2,825 - -------- -------- -------- -------- Total operating expenses 7,643 4,597 15,300 8,774 -------- -------- -------- -------- Income from operations 1,453 429 3,293 525 Other income, net 59 237 201 364 -------- -------- -------- -------- Income before income taxes 1,512 666 3,494 889 Provision for income taxes 2,200 215 3,114 95 -------- -------- -------- -------- Net income (loss) $ (688) $ 451 $ 380 $ 794 -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) per share: Basic $ (.04) $ .03 $ .02 $ .05 -------- -------- -------- -------- -------- -------- -------- -------- Diluted $ (.04) $ .03 $ .02 $ .05 -------- -------- -------- -------- -------- -------- -------- -------- Shares used in calculation of net income (loss) per share: Basic 17,645 16,910 17,620 16,161 -------- -------- -------- -------- -------- -------- -------- -------- Diluted 17,645 17,513 18,513 16,978 -------- -------- -------- -------- -------- -------- -------- --------
See accompanying notes. 4 DAOU SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 1997 -------- -------- Operating activities: Net income $ 380 $ 794 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 899 468 Changes in operating assets and liabilities (7,365) (440) ------- ------- Net cash flows provided by (used in) operating activities (6,086) 822 Investment activities: Additions to equipment, furniture and fixtures (1,539) (1,534) Proceeds from (purchases of) short-term investments 7,166 (9,475) Changes in other assets (173) (307) ------- ------- Net cash flows provided by (used in) investing activities 5,454 (11,316) Financing activities: Sale of common stock, net 1,183 15,703 Proceeds from lines of credit and long-term debt, net 869 118 Distributions to stockholders of acquired companies (3,598) (451) ------- ------- Net cash flows provided by (used in) financing activities (1,546) 15,370 ------- ------- Net increase (decrease) in cash and cash equivalents (2,178) 4,876 Cash and cash equivalents at beginning of period 7,973 3,123 ------- ------- Cash and cash equivalents at end of period $ 5,795 $ 7,999 ------- ------- ------- -------
See accompanying notes. 5 DAOU SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The condensed consolidated financial statements of DAOU Systems, Inc. (the "Company") at June 30, 1998 and for the six-month periods ended June 30, 1998 and 1997 are unaudited. These financial statements reflect all adjustments, consisting of only normal recurring adjustments, which in the opinion of management are necessary to fairly present the financial position of the Company at June 30, 1998 and the results of operations for the three and six-month periods ended June 30, 1998 and 1997. The results of operations for the three or six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998. For more information, these financial statements should be read in conjunction with the Company's Form 10-KSB and the audited supplemental financial statements included in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission ("SEC") on May 19, 1998. However, these documents do not reflect the acquisitions discussed in paragraph 2 of Note 3. 2. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about the future that affect the amounts reported in the financial statements and disclosures made in the accompanying notes of the financial statements. The actual results could differ from those estimates. 3. Acquisitions During March 1998, the Company acquired Synexus Incorporated ("Synexus"), a privately-held company specializing in the planning, design and implementation of enterprise networks in healthcare environments, and Sentient Systems, Inc. ("Sentient"), a privately-held company which provides integration and support services primarily to healthcare organizations. The shareholders of Synexus and Sentient received a total of 161,235 and 1,397,550 shares, respectively, of the Company's common stock in exchange for all of the outstanding stock of each of these companies. The acquisitions have been accounted for under the pooling-of-interests method of accounting, and accordingly, the historical financial statements of periods prior to the consummation of the combinations have been restated as though the companies had been combined for all periods presented. During June 1998, the Company acquired (i) Technology Management, Inc.("TMI"), a privately-held company that provides information technology consulting services primarily to the healthcare industry, (ii) International Health Care Systems, Inc.("IHCS"), a privately-held company with a common shareholder with TMI that provides information technology consulting services primarily to the healthcare industry on behalf of TMI, (iii) Resources in Healthcare Innovations, Inc. ("RHI"), a privately-held information technology services firm that provides contract management services, for healthcare information systems to hospitals and managed care organizations, and (iv) Healthcare Transition Resources, Inc. ("HTR"), Ultitech Resources Group, Inc. ("URG"), Innovative Systems Solutions, Inc. ("ISS") and Grand Isle Consulting, Inc. ("GIC"), each a privately held company with common shareholders with RHI that implements software applications from third parties and provides support services to healthcare enterprises. Shareholders of TMI, IHCS, RHI, HTR, URG, ISS and GIC received a total of 1,078,963, 224,668, 1,839,381, 275,662, 282,551, 308,583 and 223,645 shares, respectively, of the Company's common stock 6 in exchange for the outstanding stock of each of these companies. The acquisitions have been accounted for under the pooling-of-interests method of accounting, and accordingly, the historical financial statements of periods prior to the consummation of the combinations have been restated as though the companies had been combined for all periods presented. Separate results for each of DAOU, Sentient, Synexus, TMI (including IHCS), and RHI (including HTR, URG, ISS and GIC) for the three and six months ended June 30, 1998 and 1997 were as follows:
(In thousands) DAOU SENTIENT SYNEXUS TMI RHI COMBINED ---- -------- ------- --- --- -------- Three Months ended June 30, 1998: Total Revenues $ 15,752 $ 3,839 $ 626 $ 2,991 $ 4,835 $ 28,043 Net Income (loss) (1,333) 493 167 (40) 25 (688) Three Months ended June 30, 1997: Total Revenues 8,792 2,274 335 1,186 2,261 14,848 Net Income (loss) 117 120 96 (157) 275 451 Six Months ended June 30, 1998: Total Revenues 30,821 6,364 1,093 5,748 8,002 52,028 Net Income (loss) (1,106) 14 110 860 502 380 Six Months ended June 30, 1997: Total Revenues 15,886 4,787 814 2,359 4,099 27,945 Net Income (loss) (12) 288 217 (184) 485 794
In connection with these acquisitions, the Company recorded acquisition and related costs during March 1998 and June 1998 totaling $1.8 million and $1.0 million, respectively. These costs include transaction costs of approximately $720,000, estimated costs to combine and integrate operations of approximately $570,000, and other acquisition related costs of approximately $1.5 million. 4. Lines of Credit During June 1998, the Company secured two borrowing facilities, a $2.0 million revolving line of credit, under which $1.5 million is available for future borrowings at June 30, 1998 and an additional $8,000,000 line of credit, under which no borrowings are outstanding at June 30, 1998. Advances under both the revolving line of credit and line of credit bear interest at the bank's prime rate (currently 8.5%) plus 0.25% per annum. Through June 30, 1998, borrowings under the revolving line of credit, which expires July 31, 1999, total approximately $485,000. These lines of credit are secured by substantially all of the assets of the Company and contain customary covenants and restrictions. As of June 30, 1998, the Company was in compliance with all such covenants and restrictions. In addition, through its acquisition of RHI (and related companies), the Company has an additional $700,000 line of credit with a bank, under which outstanding borrowings totaled $700,000 at June 30, 1998, and a $1,000,000 note payable to a bank. The $700,000 line of credit bears interest at prime plus 0.25% 7 and the $1,000,000 note payable bears interest at 8.5%. Both obligations are due on October 30, 1998 and the line of credit is secured by all of the assets of RHI. 5. Per Share Information The following table details the computation of basic and diluted earnings (loss) per share: (In thousands, except per share information)
QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 ----------------------------------------- Numerator: Net income (loss) $ (688) $ 451 $ 380 $ 794 ----------------------------------------- Denominator: Denominator for basic earnings (loss) per share - weighted average common shares 17,645 16,910 17,620 16,161 Effect of dilutive securities: Warrants - 65 102 58 Common stock options - 538 791 488 Convertible preferred stock - - - 271 ----------------------------------------- - 603 893 817 ----------------------------------------- Denominator for diluted earnings (loss) per share -- adjusted weighted average shares and assumed conversions 17,645 17,513 18,513 16,978 ----------------------------------------- ----------------------------------------- Basic earnings (loss) per share $ (0.04) $ 0.03 $ 0.02 $ 0.05 ----------------------------------------- ----------------------------------------- Diluted earnings (loss) per share $ (0.04) $ 0.03 $ 0.02 $ 0.05 ----------------------------------------- -----------------------------------------
Recent interpretations by the SEC of Financial Accounting Standard No. 128, "Earnings per Share", have changed the treatment of convertible preferred stock previously included in the computation of basic earnings (loss) per share. For periods prior to its initial public offering ("IPO"), the Company previously included preferred stock which converted into common stock upon completion of the IPO as outstanding from the date of original issuance ("as if converted method") in the computation of basic earnings (loss) per share. To conform with recent interpretations, the effect of assuming the conversion of these securities prior to their actual conversion in the basic earnings (loss) per share calculation has been excluded. 6. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," both of which are effective for fiscal periods beginning after December 15, 1997. The adoption of Statements No. 130 and 131 did not have a material effect on the Company's financial statements. 8 Comprehensive income (loss) for the three months ended June 30, 1998 and 1997 totaled $(708,000) and $570,000, respectively. Comprehensive income for the six months ended June 30, 1998 and 1997 totaled $466,000 and $850,000, respectively. The difference from reported net income arises from the unrealized gains and losses on short-term investments. 7. Income Tax Expense The effective income tax rate for the three and six months ended June 30, 1998 was 146% and 89%, respectively, due to the non-deductibility of certain merger and related costs and adjustments made to convert the former S corporation status of certain acquired businesses to the C corporation status of the Company. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This report contains certain statements of a forward-looking nature relating to future performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. Overview The Company designs, implements, supports and manages advanced computer network systems primarily for hospitals, integrated delivery networks ("IDNs") and other provider organizations. The Company's design services include an assessment of the customer's existing computer network system, the preparation of voice, video and data network specifications, technical design documentation and diagrams. DAOU's implementation services include the purchase, delivery and installation of enterprise-wide computer network systems. Implementation service revenues consist of third-party hardware and software products, as well as the Company's professional services. The Company's gross margin with respect to implementation services varies significantly depending on the percentage of such services consisting of products (with respect to which the Company obtains a lower margin) versus professional services. The Company's support and management services include remote and on-site network management, as well as information systems function outsourcing. The Company typically provides these services under multi-year contracts. During March 1998, the Company acquired through a pooling-of-interests merger all of the issued and outstanding shares of Synexus, a Pennsylvania Corporation, that specializes in the planning, design and implementation of enterprise networks in healthcare environments, and Sentient, a Maryland Corporation that provides integration and support services primarily to healthcare organizations. The shareholders of Synexus and Sentient received a total of 161,235 and 1,397,550 shares, respectively, of the Company's common stock in exchange for the outstanding stock of each of these companies. During June 1998, the Company acquired (i) TMI, a privately-held company that provides information technology consulting services primarily to the healthcare industry, (ii) IHCS, a privately-held company with a common shareholder with TMI that provides information technology consulting services primarily to the healthcare industry on behalf of TMI, (iii) RHI, a privately-held information technology services firm that provides contract management services for healthcare information systems to hospitals and managed care organizations, and (iv) HTR, URG, ISS and GIC, each a privately held company with common shareholders with RHI that implements software applications from third parties and provides support services to healthcare enterprises. Shareholders of TMI, IHCS, RHI, HTR, URG, ISS and GIC received a total of 1,078,963, 224,668, 1,839,381, 275,662, 282,551, 308,583 and 223,645 shares, respectively, of the Company's common stock in exchange for all of the outstanding stock of each of these companies. The acquisistions have been accounted for under the pooling-of-interests method of accounting, and accordingly, the historical financial statements of periods prior to the consummation of the combinations have been restated as though the companies had been combined for all periods presented. 10 Results of Operations The Company's revenues were $28.0 million and $14.8 million for the quarters ended June 30, 1998 and 1997, respectively, representing an increase of 89%. This increase was due primarily to the increased number of professional consulting contracts and large network implementation contracts. Services to five customers accounted for $6.7 million of total revenues in this quarter, representing 24% of total revenues. For the six months ended June 30, 1998 and 1997, respectively, sales were $52.0 million and $27.9 million, which represents an increase of 86%. This increase was primarily the result of increased revenues from professional services consulting contracts, cabling services, and large network implementation contracts. Cost of revenues was $18.9 million and $9.8 million for the quarters ended June 30, 1998 and 1997, respectively, representing an increase of 93%. Gross margin was 32% and 34% for the quarters ended June 30, 1998 and 1997, respectively. This decrease in gross margin was primarily due to an increase in the product content of the Company's large network implementation contracts during the quarter. Cost of revenues for the six-month period ended June 30, 1998 and 1997 were $33.4 million and $18.6 million, respectively, which is an increase of 79%. Gross margin for the six months ended June 30, 1998 and 1997, was 36% and 33%, respectively. The increase in gross margin for the latest period is primarily attributable to increased professional services from consulting contracts, which have higher margins. Sales and marketing expenses were $3.1 million and $2.0 million for the quarters ended June 30, 1998 and 1997, respectively, representing an increase of 51%. This increase was primarily due to continued development of a regional sales structure, an increase in sales personnel and related expenses due to increased sales volume and activity. Sales and marketing expenses were 11% and 14% of revenues for the quarters ended June 30, 1998 and 1997, respectively. For the six-month periods ended June 30, 1998 and 1997, sales and marketing expenses were $5.8 million and $3.9 million, respectively, representing 11% and 14% of revenues in those periods. Although these expenses continue to decrease as a percentage of revenue, the Company expects that sales and marketing expenses will continue to increase in dollar terms to support the anticipated growth in the Company's business. General and administrative expenses were $3.5 million and $2.6 million for the quarters ended June 30, 1998 and 1997, respectively, representing an increase of 38%. The primary factors contributing to this increase were costs associated with additional administrative staffing and other increased infrastructure requirements to support growth. General and administrative expenses were 13% and 17% of revenues for the quarters ended June 30, 1998 and 1997, respectively. General and administrative expenses for the six-month periods ended June 30, 1998 and 1997 were $6.7 million and $4.9 million, or 13% and 18% of revenues, respectively. The Company expects some increase in general and administrative expenses in dollar terms to support the anticipated growth in the Company's business. As a percentage of revenues, these expenses should decrease with the increase in revenue. 11 Merger and related costs totaled $1.0 million during the quarter ended June 30, 1998 in connection with the acquisitions of TMI, IHCS, RHI, HTR, URG, ISS and GIC. Merger and related costs totaled $2.8 million during the six months ended June 30, 1998, which include costs recorded during the first quarter of 1998 in connection with the acquisitions of Sentient and Synexus. The $2.8 million total costs include transaction fees of approximately $720,000, estimated costs to combine and integrate operations of approximately $570,000 and other acquisition related costs of approximately $1.5 million. Other income, net, was $59,000 and $237,000 for the quarters ended June 30, 1998 and 1997, respectively. For the six months ended June 30, 1998 and 1997, respectively, other income, net, was $201,000 and $364,000. Other income, net, is primarily interest income on cash and cash equivalents, and short-term investments. Interest expense consists of interest associated with the Company's business lines of credit and term financing of insurance premiums, but was not significant during either period. The effective income tax rate for the three and six months ended June 30, 1998 was 146% and 89%, respectively, due to the non-deductibility of certain merger and related costs and adjustments made relative to the former S corporation status of certain acquired businesses. Liquidity and Capital Resources At June 30, 1998, the Company had working capital of $38.3 million, which is slightly down from the $39.5 million on December 31, 1997. The Company has a $2.0 million revolving line of credit, under which $1.5 million is available for future borrowings at June 30, 1998. In addition, the Company has secured an additional $8,000,000 line of credit, all of which is available for future borrowings at June 30, 1998. Advances under both the revolving line of credit and line of credit bear interest at the bank's reference rate (currently 8.5%) plus 0.25% per annum. Through June 30, 1998, borrowings under the revolving line of credit, which expires July 31, 1999, are approximately $485,000. These lines of credit are secured by substantially all of the assets of the Company and contain customary covenants and restrictions. As of June 30, 1998, the Company was in compliance with all such covenants and restrictions. For the six months ended June 30, 1998, cash used in operating activities was $6.1 million which resulted primarily from an increase in the Company's investment in work in process and accounts receivable due to increased contract volume and timing of billings. The Company believes that its present sources of liquidity will be sufficient to finance operations for the foreseeable future and such sources of liquidity may be used to fund additional acquisitions of complimentary businesses, although the Company does not have any specific proposals, arrangements or understandings with respect to any future acquisitions. The Company may sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities or issuance of same in future acquisitions could result in additional dilution to the Company's stockholders and the incurrence of debt could result in additional interest expense. 12 Business Risks In addition to the factors addressed in the preceding sections, certain dynamics of the Company's markets and operations create fluctuations in the Company's quarterly results. Uncertainty and cost containment in healthcare and competitive conditions present certain other risks to operating results which are more fully described in the Company's Form 10-KSB filed with the Securities and Exchange Commission (SEC) and other SEC filings. Except for the historical information presented herein, the matters discussed in this document are forward-looking statements that involve numerous risks and uncertainties. The Company's actual results could differ materially from those projected in such forward-looking statements and will depend upon a number of factors, including those discussed in this document and in prior SEC filings, press releases and other public filings of the Company. 13 PART II OTHER INFORMATION 1. Legal Proceedings On February 25, 1997, Gary Colvin, an ex-employee of the Company filed a lawsuit against the Company and certain of its officers and directors in the U.S. District Court of the Southern District of California (Gary L. Colvin v. DAOU Systems, et al.). In the complaint, the ex-employee alleges various claims related to his former employment with the Company, including, among other claims, wrongful termination, breach of contract, certain civil rights violations and claims of unpaid minimum wages and unpaid overtime, and seeks damages in the aggregate amount of approximately $30 million. On February 9, 1998, the parties stipulated to the dismissal of the ex-employee's remaining Federal claim under the Fair Labor Standards Act. As a result, on March 4, 1998, the lawsuit was dismissed without prejudice after the court declined to exercise supplemental jurisdiction over the remaining state law claims. On September 18, 1997, seven present and/or former employees of the Company filed a lawsuit in the Superior Court of the State of California for the County of San Diego, titled Smyth, et al. V. DAOU Systems, Inc. (Case No. 714187), purporting to represent a class of all present and former DAOU employees classified as exempt under Federal and California law from overtime pay and are entitled to pay for unpaid overtime and penalties in an unstated amount. The Plaintiffs also claim that, in response to their filing complaints with the Labor Board for the State of California, they were subjected to retaliatory discrimination by the Company. The lawsuit currently is in the preliminary stages of discovery. On April 2, 1998, the Court denied a motion by the Plaintiffs requesting the court to assist them in notifying potential Plaintiffs of the opportunity to join this lawsuit against the Company. As of the date of this report, the potential amount of exposure to the Company from this lawsuit, in the event of an unfavorable outcome, cannot be determined. The Company believes that the lawsuit is without merit and intends to defend the lawsuit vigorously. Item 4. Submission of Matters to a Vote of Security Holders. On May 19, 1998, the Company held its Annual Meeting of Stockholders. At the meeting, the stockholders approved management's slate of directors and the other two additional proposals with the following vote distribution:
WITHHELD/ BROKER/ ITEM AFFIRMATIVE NEGATIVE ABSTENTIONS NON-VOTE - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- ELECTION OF BOARD MEMBERS CLASS I DIRECTORS (term expiring at annual meeting of stockholders in 2001) Georges J. Daou 6,598,377 - 20,950 - Richard B. Jaffe 6,598,377 - 20,950 - CLASS II DIRECTORS (term expiring at annual meeting of stockholders in 2000) Daniel J. Daou 6,598,377 - 20,950 - John H. Moragne 6,598,377 - 20,950 - CLASS III DIRECTOR (term expiring at annual meeting of stockholders in 1999) David W. Jahns 6,598,377 - 20,950 - OTHER MATTERS 1) Increase the number of shares issuable under the Company's 1996 Stock Option Plan to 4,000,000 shares of Common Stock (subject to limit of 25% of outstanding shares at end of immediately preceding fiscal quarter) and limit the number of stock options issuable to any one optionee to 150,000. 2,733,653 2,372,384 13,655 1,499,635 2) Reappoint Ernst & Young L.L.P. as independent auditors for fiscal year 1998. 6,614,504 2,300 2,523 -
6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule (b) On June 19, 1998, a Form 8-K was filed to report that the Company entered into an Agreement and Plan of Merger Agreement on June 16, 1998 to exchange shares of the Company's common stock valued at $22.5 million for all of the outstanding shares of Technology Management, Inc. The merger will be accounted for as a pooling of interests. (c) On May 19, 1998, a Form 8-K was filed which included audited supplemental consolidated financial statements, selected supplemental consolidated financial data and Management's Discussion and Analysis of Financial Condition and Results of Operations (supplemental) which reflect the Company's acquisitions of Sentient Systems, Inc. ("Sentient") and Synexus Incorporated ("Synexus") on March 31, 1998. Each of the acquisitions was accounted for as a pooling-of-interests. (d) On May 19, 1998, a Form 8-K/A was filed which included audited financial statements of Sentient as of December 31, 1997 and 1996 and for the two years then ended and the one month ended December 31, 1995 and as of November 30, 1995 and the year then ended. Also included was the unaudited pro forma combined condensed balance sheet at December 31, 1997 and unaudited pro forma combined condensed statements of operations for the years ended December 31, 1997, 1996 and 1995 which give effect to the acquisition of Sentient as of December 31, 1997 for the combined condensed pro forma balance sheet and January 1, 1995 for the combined condensed pro forma statements of operations. (e) On May 8, 1998, a Form 8-K was filed to report the unaudited revenue and net income of the Company for the 30 day period ended April 30, 1998. (f) On April 14, 1998, a Form 8-K was filed to report that the Company acquired Sentient Systems, Inc. and Synexus Incorporated through the issuance of 1,397,550 and 161,235 shares, respectively, of the Company's common in exchange for all of the outstanding shares of Sentient and Synexus. The mergers were effective on March 31, 1998 and will be accounted for as a pooling-of-interests. (g) On April 2, 1998, a Form 8-K was filed to report that the Company entered into merger agreements to exchange shares of the Company's common stock in exchange for all of the outstanding shares of Sentient and Synexus. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DAOU SYSTEMS, INC. Date: August __, 1998 By: /s/ Daniel J. Daou Daniel J. Daou ------------------------------------- President Date: August __, 1998 By: /s/Fred C. McGee Fred C. McGee ------------------------------------- Chief Financial Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED JUNE 30, 1998 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 5,795 3,004 20,403 425 22,329 54,163 8,342 3,713 59,887 15,992 0 0 0 18 40,000 59,887 52,028 52,028 33,435 48,735 0 0 0 3,494 3,114 380 0 0 0 380 .02 .02
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