<PAGE>
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)
<PAGE>
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
<PAGE>
(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
<PAGE>
Financial Statements
On-Line Networking, Inc.
YEARS ENDED DECEMBER 31, 1996 AND 1995
WITH REPORT OF INDEPENDENT AUDITORS
4
<PAGE>
On-Line Networking, Inc.
Financial Statements
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
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
</TABLE>
5
<PAGE>
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
<PAGE>
On-Line Networking, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-----------------------
<S> <C> <C>
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
-----------------------
-----------------------
</TABLE>
SEE ACCOMPANYING NOTES.
7
<PAGE>
On-Line Networking, Inc.
Statements of Operations and Retained Earnings
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995
-------------------------
<S> <C> <C>
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
-------------------------
-------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
8
<PAGE>
On-Line Networking, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
--------------------------
<S> <C> <C>
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
--------------------------
--------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
9
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ending December 31,
-------------------------
<S> <C>
1997 $68,800
1998 85,600
1999 60,400
2000 33,700
2001 10,300
</TABLE>
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
<PAGE>
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
<PAGE>
DAOU Systems, Inc.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEETS
September 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
DAOU ON-LINE FOR THE PRO FORMA
HISTORICAL HISTORICAL TRANSACTION COMBINED
------------------------------------------------------
<S> <C> <C> <C> <C>
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
------------------------------------------------------
------------------------------------------------------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS.
14
<PAGE>
DAOU Systems, Inc.
UNAUDITED PRO FORMA COMBINED CONDENSED
BALANCE SHEETS
December 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
DAOU ON-LINE FOR THE PRO FORMA
HISTORICAL HISTORICAL TRANSACTION COMBINED
------------------------------------------------------
<S> <C> <C> <C> <C>
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
----------------------------------------------------
----------------------------------------------------
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS.
15
<PAGE>
DAOU Systems, Inc.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATMENTS OF OPERATIONS
Year ended December 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
DAOU ON-LINE FOR THE PRO FORMA
HISTORICAL HISTORICAL TRANSACTION COMBINED
------------------------------------------------------
<S> <C> <C> <C> <C>
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
---------
---------
</TABLE>
(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
<PAGE>
DAOU Systems, Inc.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATMENTS OF OPERATIONS
Year ended December 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
DAOU ON-LINE FOR THE PRO FORMA
HISTORICAL HISTORICAL TRANSACTION COMBINED
------------------------------------------------------
<S> <C> <C> <C> <C>
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
----------
----------
</TABLE>
(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
<PAGE>
DAOU Systems, Inc.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATMENTS OF OPERATIONS
Nine months ended September 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
DAOU ON-LINE FOR THE PRO FORMA
HISTORICAL HISTORICAL TRANSACTION COMBINED
------------------------------------------------------
<S> <C> <C> <C> <C>
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
---------
---------
</TABLE>
(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
<PAGE>
DAOU Systems, Inc.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATMENTS OF OPERATIONS
Nine months ended September 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
DAOU ON-LINE FOR THE PRO FORMA
HISTORICAL HISTORICAL TRANSACTION COMBINED
------------------------------------------------------
<S> <C> <C> <C> <C>
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
---------
---------
</TABLE>
(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
<PAGE>
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
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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
<PAGE>
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.
