<PAGE>
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): June 25, 1998
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 the Current Reports on Form 8-K that were
filed by DAOU Systems, Inc. ("Registrant") with the Securities and Exchange
Commission (the "SEC") on July 10, 1998 and August 7, 1998.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED:
(1) AUDITED FINANCIAL STATEMENTS OF TECHNOLOGY MANAGEMENT, INC.
AND AFFILIATE:
(i) Report of Ernst & Young LLP, Independent Auditors
(ii) Combined Balance Sheets - December 31, 1997 and 1996
(iii) Combined Statements of Income - Years Ended December
31, 1997 and 1996
(iv) Combined Statements of Shareholders' Equity - Years
Ended December 31, 1997 and 1996
(v) Combined Statements of Cash Flows - Years Ended
December 31, 1997 and 1996
(vi) Notes to Combined Financial Statements - December 31,
1997
(2) AUDITED FINANCIAL STATEMENTS OF RESOURCES IN HEALTHCARE
INNOVATIONS, INC. AND AFFILIATES:
(i) Report of Ernst & Young LLP, Independent Auditors
(ii) Combined Balance Sheet - December 31, 1997
(iii) Combined Statement of Income - Year Ended December 31,
1997
(iv) Combined Statement of Shareholders' Equity - Year Ended
December 31, 1997
(v) Combined Statement of Cash Flows - Year Ended December
31, 1997
(vi) Notes to Combined Financial Statements - December 31,
1997
<PAGE>
(b) PRO FORMA FINANCIAL INFORMATION:
The unaudited pro forma combined condensed balance sheets at June
30, 1998 and December 31, 1997 and the unaudited pro forma combined condensed
statements of operations for the six months ended June 30, 1998 and for the
years ended December 31, 1997 and 1996 give effect to Registrant's
acquisition of Technology Management, Inc., an Indiana corporation ("TMI"),
International Health Care Systems Inc., a Florida corporation ("IHCS"),
Resources in Healthcare Innovations, Inc., an Indiana corporation ("RHI"),
Healthcare Transition Resources, Inc., an Indiana corporation ("HTR")
Innovative Systems Solutions, Inc., an Indiana corporation ("ISS"), Grand
Isle Consulting, Inc., an Indiana corporation ("GIC") and Ultitech Resources
Group, Inc., an Indiana corporation ("URG") as of (i) December 31, 1997 for
the unaudited pro forma combined condensed balance sheet and (ii) January 1,
1996 for the unaudited pro forma combined condensed statements of operations
for the years ended December 31, 1997 and 1996. The pro forma information is
based on the historical financial statements of TMI, RHI and Registrant
giving effect to the transactions 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.
(c) EXHIBITS.
The following exhibits are filed herewith or incorporated by reference
as part of this report:
<TABLE>
<CAPTION>
Exhibit
No. Document Description
-------- ---------------------------------------------------------------
<S> <C>
2.1(1)+ Agreement and Plan of Merger, dated as of June 16, 1998, by
and among Registrant, DAOU-TMI, Inc., a Delaware corporation
and wholly-owned subsidiary of Registrant, TMI, and the
stockholders of TMI.
2.2(1)+ Agreement and Plan of Merger, dated as of June 16, 1998, by
and among Registrant, DAOU-TMI, Inc., a Delaware corporation
and wholly-owned subsidiary of Registrant, IHCS and the
stockholders of IHCS.
2.3(2)+ Agreement and Plan of Merger, dated as of June 26, 1998, by
and among Registrant, DAOU-RHI, Inc., a Delaware corporation
and wholly-owned subsidiary of Registrant, RHI, HTR, URG,
ISS, GIC, and the respective shareholders of RHI, HTR, URG,
ISS and GIC.
99.1(3) Press release, dated June 17, 1998, entitled "DAOU
<PAGE>
Systems Merges with Technology Management, Inc."
99.2(4) Press release, dated June 26, 1998, entitled "DAOU Systems
Merges with Resources in Healthcare Innovations, Further
Extending its Technology Reach."
</TABLE>
(1) Filed as an exhibit to Registrant's Current Report on Form 8-K
that was filed with the SEC on July 10, 1998 and is incorporated herein by
reference.
(2) Filed as an exhibit to Registrant's Current Report on Form 8-K
that was filed with the SEC on August 7, 1998 and is incorporated herein by
reference.
(3) Filed as an exhibit to Registrant's Current Report on Form 8-K
that was filed with the SEC on June 19, 1998 and is incorporated herein by
reference.
(4) Filed as an exhibit to Registrant's Current Report on Form 8-K
that was filed with the SEC on July 6, 1998 and is incorporated herein by
reference.
+ Confidential treatment has been granted for portions of this
exhibit.
<PAGE>
Combined Financial Statements
Technology Management, Inc.
and Affiliate
<PAGE>
Technology Management, Inc. and Affiliate
Combined Financial Statements
Years ended December 31, 1997 and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors. . . . . . . . . . . . . .1
Audited Combined Financial Statements
Combined Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . .2
Combined Statements of Income. . . . . . . . . . . . . . . . . . . . . . . .3
Combined Statements of Stockholders' Equity (Deficit). . . . . . . . . . . .4
Combined Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . .5
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . . 6
</TABLE>
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Technology Management, Inc. and Affiliate
We have audited the accompanying combined balance sheets as of December 31, 1997
and 1996, of Technology Management, Inc. and Affiliate (see Note 1), and the
related combined statements of income, stockholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Companies' 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 audits 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 combined financial position at December 31, 1997 and
1996, of Technology Management, Inc. and Affiliate, and the combined results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
August 4, 1998
<PAGE>
Technology Management, Inc. and Affiliate
Combined Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,209,300 $ 569,766
Available-for-sale investments 357,836 141,156
Accounts receivable, net of allowance of $10,000 and $0
at December 31, 1997 and 1996, respectively 1,184,780 996,376
Contract work in progress 879,635 339,272
Other current assets 48,728 3,533
--------------------------
Total current assets 4,680,279 2,050,103
Equipment, furniture and fixtures, net of accumulated
depreciation of $269,088 and $224,793 at December 31, 1997
and 1996, respectively 152,292 132,802
Other 7,618 7,618
--------------------------
$4,840,189 $2,190,523
--------------------------
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 590,543 $9,467
Accrued salaries, wages, and bonuses 728,525 237,629
Other accrued liabilities 143,557 3,987
Dividends payable 485,817 -
--------------------------
Total current liabilities 1,948,442 251,083
Deferred compensation to stockholders 1,117,154 1,117,154
Commitments and contingencies (NOTE 3)
Stockholders' equity (NOTE 4):
Common stock, no par value
Authorized shares (Technology Management, Inc.) - 1,000
Authorized Shares (International Health Care Systems,
Inc.) - 1,000
Issued and outstanding shares (Technology Management, Inc.)
- 400 at December 31, 1997 and 1996 81,376 81,376
Issued and outstanding shares (International Health Care
Systems, Inc.) - 135 at December 31, 1997 and 1996 25,000 25,000
Retained earnings (deficit) (Technology Management, Inc.) (47,872) 241,688
Retained earnings (International Health Care Systems, Inc.) 1,712,866 490,863
Unrealized gain (loss) on available-for-sale investments 3,223 (16,641)
--------------------------
Total stockholders' equity 1,774,593 822,286
--------------------------
$4,840,189 $2,190,523
--------------------------
--------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Technology Management, Inc. and Affiliate
Combined Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996
------------------------
<S> <C> <C>
Revenues $6,371,388 $5,373,827
Cost of revenues 3,909,009 3,371,741
------------------------
Gross profit 2,462,379 2,002,086
Operating expenses:
Sales and marketing 123,891 318,491
General and administrative 719,060 723,985
------------------------
842,951 1,042,476
------------------------
Income from operations 1,619,428 959,610
Other income (expense)
Investment income 114,636 101,031
Interest expense (44,407) -
------------------------
Income before income taxes 1,689,657 1,060,641
Provision for income taxes 113,001 -
------------------------
Net income $1,576,656 $1,060,641
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Technology Management, Inc. and Affiliate
Combined Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
INTERNATIONAL HEALTH CARE
TECHNOLOGY MANAGEMENT INC. SYSTEMS, INC.
-------------------------------- -------------------------------
UNREALIZED
GAIN (LOSS) TOTAL
RETAINED ON STOCKHOLDERS'
COMMON STOCK EARNINGS COMMON STOCK RETAINED AVAILABLE- EQUITY
------------------- FOR-SALE
SHARES AMOUNT (DEFICIT) SHARES AMOUNT EARNINGS INVESTMENTS (DEFICIT)
------------------- ---------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 400 $81,376 $ (328,090) - $ - $ - $(17,066) $ (263,780)
Issuance of common stock
upon formation of the S
Corporation - - - 135 25,000 - - 25,000
Change in unrealized gain or
loss on available-for
sale investments - - - - - - 425 425
Net income - - 569,778 - - 490,863 - 1,060,641
------------------- ---------- -------------------------------- -------- ------------
Balance at December 31, 1996 400 81,376 241,688 135 25,000 490,863 (16,641) 822,286
Change in unrealized gain on
loss on available-for
sale investments - - - - - - 19,864 19,864
Dividends - - (644,213) - - - - (644,213)
Net income - - 354,653 - - 1,222,003 - 1,576,656
------------------- ---------- -------------------------------- -------- ------------
Balance at December 31, 1997 400 $81,376 $ (47,872) 135 $25,000 $1,712,866 $ 3,223 $1,774,593
------------------- ---------- -------------------------------- -------- ------------
------------------- ---------- -------------------------------- -------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Technology Management, Inc. and Affiliate
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $1,576,656 $1,060,641
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 44,295 42,196
Provision for uncollectible accounts 10,000 -
Changes in operating assets and liabilities:
Accounts receivable (198,404) (261,466)
Contract work in progress (540,363) (34,528)
Other current assets (45,195) 85
Trade accounts payable 581,076 (42,891)
Accrued salaries, wages, and bonuses 490,896 (235,851)
Other accrued liabilities 139,570 -
---------------------------
Net cash provided by operating activities 2,058,531 528,186
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures (63,785) (42,002)
Purchase of available-for-sale investments (235,949) -
Proceeds from sales and maturities of available-
for-sale investments 39,133 14,933
---------------------------
Net cash used in investing activities (260,601) (27,069)
FINANCING ACTIVITIES
Dividends paid (158,396) -
Proceeds from issuance of common stock upon
formation of International Health Care Systems,
Inc. - 25,000
---------------------------
Net cash (used in) provided by financing
activities (158,396) 25,000
Increase in cash and cash equivalents 1,639,534 526,117
Cash and cash equivalents at beginning of year 569,766 43,649
---------------------------
Cash and cash equivalents at end of year $2,209,300 $ 569,766
---------------------------
---------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 86,802 $ -
---------------------------
---------------------------
Tax on built-in gains $ 113,001 $ -
---------------------------
---------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Technology Management, Inc. and Affiliate provides independent consulting on
information technologies management and technical issues to commercial,
governmental, and not-for-profit organizations operating primarily in the
healthcare industry located throughout the United States. Its services
relate to the strategic, operational, current effectiveness and future
directions of an organization's information technology.
BASIS OF PRESENTATION
The combined financial statements include the accounts of Technology
Management, Inc. and International Health Care Systems, Inc. ("IHCS") an
affiliated S Corporation. Together they comprise the operations of TMI (the
"Company"). All intercompany accounts and transactions have been eliminated.
These financial statements have been presented on a combined basis as the
affiliated S corporations are under common control and, as described in Note
8, were acquired together by DAOU Systems, Inc.
REVENUE RECOGNITION
Contract revenue is recognized as services are provided based on labor hours
incurred. Contract work in progress represents unbilled revenue earned for
services provided.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMER
Substantially all of the Company's accounts receivable are from hospitals and
others within the healthcare industry and generally the Company does not
require collateral for its receivables. The Company has provided for losses
from uncollectible accounts and such losses have historically been minimal.
During the year ended December 31, 1997 one customer accounted for
approximately 37% of revenues. During the year ended December 31, 1996,
another customer accounted for approximately 29% of revenues. No other
customer accounted for greater than 10% of revenues for the years ended
December 31, 1997 and 1996.
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH, CASH EQUIVALENTS AND AVAILABLE-FOR-SALE INVESTMENTS
Cash and cash equivalents consist of cash and highly liquid investments with
original maturities of three months or less when purchased. The Company
historically has not experienced any losses on its cash equivalents.
Available-for-sale investments are recorded at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of stockholders'
equity.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
generally five years for equipment and seven years for furniture.
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 combined financial
statements and disclosures made in the accompanying notes of the combined
financial statements. The actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. This standard is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. The Company does not
believe that comprehensive income or loss will be materially different than net
income or loss.
<PAGE>
2. AVAILABLE-FOR-SALE INVESTMENTS
The following is a summary of available-for-sale investments at December 31,
1997:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE INVESTMENTS
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-----------------------------------------------
<S> <C> <C> <C> <C>
Government and corporate bonds $307,398 $228 $(5,733) $301,893
Common and preferred stock 47,215 10,608 (1,880) 55,943
-----------------------------------------------
Available-for-sale investments $354,613 $10,836 $(7,613) $357,836
-----------------------------------------------
-----------------------------------------------
</TABLE>
The following is a summary of available-for-sale investments at December 31,
1996:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE INVESTMENTS
-----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-----------------------------------------------
<S> <C> <C> <C> <C>
Government and corporate bonds $109,525 $ 103 $(18,407) $ 91,221
Common and preferred stock 48,272 6,932 (5,269) 49,935
-----------------------------------------------
Available-for-sale investments $157,797 $ 7,035 $(23,676) $141,156
-----------------------------------------------
-----------------------------------------------
</TABLE>
Government and corporate bonds by contractual maturity are as follows at
December 31, 1997:
<TABLE>
<S> <C>
Due in one year or less $100,240
Due after one year through two years 30,135
Greater than two years 171,518
--------
$301,893
--------
--------
</TABLE>
3. LEASE COMMITMENTS
The Company leases its office and certain equipment under operating lease
agreements. Rent expense totaled $84,078 and $90,240 for the years ended
December 31, 1997 and 1996, respectively.
<PAGE>
3. LEASE COMMITMENTS (CONTINUED)
The Company leases its operating facilities under an operating lease which
expires in April 2000. Annual future minimum lease payments under
noncancellable operating leases with initial terms of one year or more at
December 31, 1997, consist of the following:
<TABLE>
<S> <C>
1998 $ 81,376
1999 83,828
2000 28,217
----------
$ 193,421
----------
----------
</TABLE>
4. STOCKHOLDERS' EQUITY
In August 1997, the Company issued rights to employees to buy up to 73 shares of
stock. Each right could be exercised to purchase one share of the Company's
Common Stock at an exercise price of $12,352. Effective January 1, 1998, the
Company issued 41 shares of Common Stock to employees under terms of stock
rights outstanding. The remaining 32 shares in the stock rights plan expire on
December 31, 1998 under the terms of the original issuance.
5. INCOME TAXES
The stockholders of the Company have elected under Subchapter S of the Internal
Revenue Service Code to include the Company's income in their own income for
federal and state income tax purposes. Accordingly, the Company is not subject
to federal and state income taxes.
The provision for income taxes in 1997 consists of $113,001 for tax on
built-in-gains relating to the Company's Subchapter S election.
6. BENEFIT PLANS
The Company maintains a defined contribution profit sharing plan for all
eligible employees. Contributions are discretionary and are made solely by the
Company. Actual contributions are based on a formula applied to each
participants' annual compensation. Contribution expense for the plan was
approximately $89,000 and $74,000 for the years ended December 31, 1997 and
1996, respectively.
<PAGE>
7. RELATED PARTY TRANSACTIONS
In June 1997, the Company entered into an agreement to pay interest on the
deferred compensation to stockholders. The interest rate is based upon the 30
year Treasury Bond rate plus 1%, adjusted annually. Interest expense was
$44,407 and zero for the year ended December 31, 1997 and 1996, respectively.
8. SUBSEQUENT EVENTS
On January 1, 1998, the Company entered into promissory note agreements (the
"notes") with certain shareholders related to undistributed dividend payments
totaling $485,817. The notes were repaid by the Company on March 31, 1998.
On June 16, 1998, the Company was acquired by DAOU Systems, Inc. whereby the
Company's stockholders exchanged all of their shares in the Company for
1,303,631 shares of DAOU Systems, Inc. common stock.
In connection with the sale of the Company, the Subchapter S election will be
terminated. As a result, the Company will be subject to corporate income taxes
subsequent to the termination of its S corporation status.
9. YEAR 2000 ISSUE - UNAUDITED
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by late 1998. The Company does not expect this project to have a significant
effect on operations.
<PAGE>
Combined Financial Statements
Resources in Healthcare Innovations, Inc.
and Affiliates
<PAGE>
Resources in Healthcare Innovations, Inc. and Affiliates
Combined Financial Statements
Year ended December 31, 1997
CONTENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors. . . . . . . . . . . . . . 1
Audited Combined Financial Statements
Combined Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Combined Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . 3
Combined Statement of Stockholders' Equity . . . . . . . . . . . . . . . . . 4
Combined Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . . . 6
</TABLE>
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Resources in Healthcare Innovations, Inc. and Affiliates
We have audited the accompanying combined balance sheet as of December 31, 1997,
of Resources in Healthcare Innovations, Inc. and Affiliates (see Note 1) and the
related combined statement of income, stockholders' equity and cash flows for
the year ended December 31, 1997. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position at December 31, 1997, of
Resources in Healthcare Innovations, Inc. and Affiliates and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
August 4, 1998
<PAGE>
Resources in Healthcare Innovations, Inc. and Affiliates
Combined Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 73,300
Accounts receivable, net of $100,000 allowance for doubtful accounts 2,147,385
Other current assets 7,000
-----------
Total current assets 2,227,685
Equipment, net of accumulated depreciation of $116,164 206,173
-----------
$2,433,858
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 39,191
Accrued salaries, wages and commissions 189,794
Line of credit and note payable 1,350,000
Current portion of severance payable 210,000
-----------
Total current liabilities 1,788,985
Long-term portion of severance payable 822,500
Stockholders' deficit:
Common stock, no par value:
Authorized shares (Resources in Healthcare Innovations, Inc.) - 100,000
Authorized shares (Healthcare Transition Resources, Inc.) - 1,000
Authorized shares (Innovative Systems Solutions) - 1,000
Issued and outstanding shares (Resources in Healthcare Innovations, Inc.)
- 20,278
Issued and outstanding shares (Healthcare Transition
Resources, Inc.) - 100
Issued and outstanding (Innovative Systems Solutions) - 100 109,825
Accumulated deficit (287,452)
-----------
Total stockholders' deficit (177,627)
-----------
Total liabilities and stockholders' deficit $2,433,858
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Resources in Healthcare Innovations, Inc. and Affiliates
Combined Statement of Income
Year Ended December 31, 1997
<TABLE>
<S> <C>
Professional fees revenue $9,545,521
Cost of professional fees 6,072,252
-----------
Gross profit 3,473,269
Operating expenses:
Sales and marketing 819,427
General and administrative 2,587,400
-----------
3,406,827
-----------
Income from operations 66,442
Interest expense 39,293
-----------
Net income $ 27,149
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Resources in Healthcare Innovations, Inc. and Affiliates
Combined Statement of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
RESOURCES IN HEALTHCARE HEALTHCARE TRANSITION INNOVATIVE SYSTEMS
INNOVATIONS, INC. RESOURCES, INC. SOLUTIONS, INC.
----------------------------------------------------------------------
COMMON STOCK COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 27,778 $ 113,575 - $ - - $ -
Shares issues in connection
with the formation of the
Companies - - 100 - 100 -
Repurchase of founders stock
in accordance with buy/sell
agreement between the
original founders (NOTE 4) (7,500) (3,750) - - - -
Net income - - - - - -
----------------------------------------------------------------------
Balance at December 31, 1997 20,278 $ 109,825 100 $ - 100 $ -
----------------------------------------------------------------------
----------------------------------------------------------------------
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
EARNINGS EQUITY
(DEFICIT) (DEFICIT)
------------------------
<S> <C> <C>
Balance at December 31, 1996 $ 801,649 $ 915,224
Shares issues in connection
with the formation of the
Companies - -
Repurchase of founders stock
in accordance with buy/sell
agreement between the
original founders (NOTE 4) (1,116,250) (1,120,000)
Net income 27,149 27,149
------------------------
Balance at December 31, 1997 $ (287,452) $ (177,627)
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
Resources in Healthcare Innovations, Inc. and Affiliates
Combined Statement of Cash Flows
Year Ended December 31, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income $ 27,149
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation 43,837
Changes in operating assets and liabilities:
Accounts receivable (600,123)
Other current assets (7,000)
Accounts payable (7,394)
Accrued salaries, wages, and commissions (508,541)
Severance payable 1,032,500
------------
Net cash used in operating activities (19,572)
------------
INVESTING ACTIVITIES
Purchase of equipment (170,245)
------------
Net cash used in investing activities (170,245)
------------
FINANCING ACTIVITIES
Proceeds from line of credit 1,555,000
Repayments of line of credit (1,205,000)
Proceeds from notes payable to bank 1,000,000
Repurchase of founders stock (1,120,000)
------------
Net cash provided by financing activities 230,000
------------
Increase in cash and cash equivalents 40,183
Cash and cash equivalents at beginning of year 33,117
------------
Cash and cash equivalents at end of year $ 73,300
------------
------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 39,293
------------
------------
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Resources in Healthcare Innovations, Inc. and Affiliates is a healthcare
information technology consulting firm, dedicated to assisting healthcare
organizations with improving patient care and lowering costs by providing
systems integration and support services.
BASIS OF PRESENTATION
The combined financial statements include the accounts of Resources in
Healthcare Innovations, Inc., Healthcare Transitions Resources,
Inc. ("HTR") and Innovative Systems Solutions ("ISS") (affiliated S
Corporations). Together they comprise the operations of RHI (the "Company"). All
intercompany accounts and transactions have been eliminated. These financial
statements have been presented on a combined basis as the affiliated S
corporations are under common control and, as described in Note 7, were acquired
together by DAOU Systems, Inc.
REVENUE RECOGNITION
Revenues on professional services and support are based on contractual rates for
time and materials and are recognized as labor hours are incurred.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable are from hospitals and
other healthcare providers. The carrying amounts for accounts receivable
approximate their fair value. Losses from uncollectible accounts have
historically been minimal and the Company generally does not require collateral
for its receivables.
EQUIPMENT
Equipment is carried at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally seven years.
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 combined financial
statements and disclosures made in the accompanying notes of the combined
financial statements. The actual results could differ from those estimates.
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME. This standard is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. The Company does not
believe that comprehensive income or loss will be materially different than net
income or loss.
2. DEBT
The Company has a line of credit agreement with a bank for $700,000 which
expires on May 1, 1999. Under the terms of the agreement, advances bear interest
at the bank's prime rate plus .25% or 8.75% at December 31, 1997. There are no
compensating cash balance requirements and borrowings under the line of credit
are limited to 65% of qualifying receivables. At December 31, 1997, $350,000
was outstanding under the line of credit. Borrowings under the line of credit
are collateralized by substantially all of the Company's assets and are
personally guaranteed by the stockholders of the Company.
The Company also has a $1,000,000 note payable to a bank which has a maturity
date of September 1, 1998 and an interest rate of 8.5%. As of December 31, 1997,
no principal payments had been made.
3. SEVERANCE PAYABLE
In connection with the retirement of one of the Company's original founders, the
Company entered into a severance agreement whereby the Company will pay the
retiring founder a total of $1,050,000 in severance payments, payable in sixty
consecutive monthly installments of $17,500 beginning on December 20, 1997. At
December 31, 1997, the Company had an outstanding payable of $1,032,500.
<PAGE>
3. SEVERANCE PAYABLE (CONTINUED)
The aggregate minimum future payments under the severance agreement as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 210,000
1999 210,000
2000 210,000
2001 210,000
2002 192,500
----------
$1,032,500
----------
----------
</TABLE>
4. STOCKHOLDERS' EQUITY (DEFICIT)
During 1997, the Company repurchased the stock of one of the original founders
under a buy/sell agreement dated December 14, 1993 in connection with his
retirement. Based on the terms of the agreement the Company obtained an
independent valuation for the stock and based on the valuation paid $1,120,000
to repurchase all 7,500 shares of the founder's stock.
The retained earnings activity of HTR and ISS is not presented separately
because the amounts are not material
5. INCOME TAXES
The stockholders of the Company have elected under Subchapter S of the Internal
Revenue Service Code to include the Company's income in their own income for
federal and state income tax purposes. Accordingly, the Company is not subject
to federal and state income taxes.
6. BENEFIT PLAN
The Company has a 401(k) savings plan available to employees who have completed
6 months of eligibility service and are 21 years of age. Employees can
voluntarily contribute up to 10% of their gross salaries, subject to IRS
limitations. Matching contributions to the plan are at the Company's discretion.
The Company made matching contributions to the plan for 1997 of approximately
$100,000. The Company pays all administrative costs associated with the plan,
which were $2,415 in 1997.
<PAGE>
7. SUBSEQUENT EVENTS
In January 1998, two other affiliated S corporations were formed, Ulitech
Resource Group, Inc. ("URG") and Grand Isle Consulting, Inc. ("GIC"). These
companies provide specialized healthcare information technology consulting
services, which were not previously available by RHI. On June 26, 1998, all the
outstanding stock of the five affiliated companies was acquired by DAOU Systems,
Inc. ("DAOU") in exchange for approximately 2.9 million of DAOU's common shares.
The shares were allocated to the affiliated companies based on each company's
estimated fair value at the date of the transaction.
In connection with this transaction, the Subchapter S status will be terminated.
As a result, the Company will be subject to corporate income taxes for all
periods subsequent to the termination of the S corporation status.
8. YEAR 2000 ISSUE - UNAUDITED
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by late 1998. The Company does not expect this project to have a significant
effect on operations.
<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 Technology
Management Inc. and International Health Care Systems, Inc. (collectively
"TMI") and the merger of DAOU and Resources in Healthcare Innovations,
Inc., Healthcare Transition Resources, Inc., Ultitech Resources Group,
Inc., Innovative Systems Solutions, Inc. and Grand Isle Consulting, Inc.
(collectively "RHI"), such mergers collectively referred herein as the
"Merger". The Merger was accounted for using the pooling-of-interests
method of accounting. These pro forma financial statements are presented
for illustrative purposes only and 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 June 30, 1998 and
December 31, 1997, 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 six-month period ended June 30, 1998 and the years ended
December 31, 1997 and 1996, 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, 1997 and 1996 are derived from the audited historical financial
statements of DAOU, the audited historical combined financial statements of TMI,
the audited historical combined financial statements of RHI for the year ended
December 31, 1997 and the unaudited combined financial statements of RHI for the
year ended December 31, 1996. The pro forma combined condensed financial
statements as of and for the six-month period ended June 30, 1998 have been
prepared on the same basis as the historical information derived from the
audited financial statements. In the opinion of DAOU's, TMI's and RHI's
management, the unaudited financial statements of DAOU, TMI and RHI 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.
<PAGE>
DAOU SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED
CONDENSED BALANCE SHEETS
June 30, 1998
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
DAOU TMI RHI for the Pro Forma
Historical Historical Historical Transaction Combined
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,656 $ 933 $ 206 $ - $ 5,795
Short-term investments 3,004 - - - 3,004
Accounts receivable, net 14,828 1,266 3,884 - 19,978
Contract work-in-progress 20,812 1,123 394 - 22,329
Other current assets 3,003 24 30 - 3,057
----------------------------------------------------------------------------
Total current assets 46,303 3,346 4,514 - 54,163
Due from officers/stockholders 544 - - - 544
Equipment, furniture and fixtures, net 4,091 197 341 - 4,629
Other assets 451 100 - - 551
----------------------------------------------------------------------------
$51,389 $3,643 $4,855 $ - $59,887
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,777 $ 480 $ 865 $ - $ 3,122
Accrued salaries and wages 1,751 1,013 - - 2,764
Deferred revenue 247 - - - 247
Other accrued liabilities 7,330 23 151 - 7,504
Line of credit/Current portion of
long-term debt 485 - 1,870 - 2,355
----------------------------------------------------------------------------
Total current liabilities 11,590 1,516 2,886 - 15,992
Deferred rent 31 - - - 31
Other long-term liabilities 2,011 1,117 718 - 3,846
Stockholders' equity:
Common stock 11 622 114 (729)(a) 18
Additional paid-in capital 36,497 - - 729 (a) 37,226
Deferred compensation (778) - - - (778)
Unrealized gain (loss) on short-term
Investments 240 (8) - - 232
Retained earnings 1,787 396 1,137 - 3,320
----------------------------------------------------------------------------
Total stockholders' equity 37,757 1,010 1,251 - 40,018
----------------------------------------------------------------------------
$51,389 $3,643 $4,855 $ - $59,887
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
(a) Reclassifications to conform presentation to DAOU's financial data.
<PAGE>
DAOU SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED
CONDENSED BALANCE SHEETS
December 31, 1997
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
DAOU TMI RHI for the Pro Forma
Historical Historical Historical Transaction Combined
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,692 $2,209 $ 73 $ - $ 7,974
Short-term investments 9,949 358 - - 10,307
Accounts receivable, net 11,935 1,185 2,148 - 15,268
Contract work-in-progress 12,412 879 - - 13,291
Other current assets 2,029 49 7 - 2,085
-----------------------------------------------------------------------------
Total current assets 42,017 4,680 2,228 - 48,925
Due from officers/stockholders 371 - - - 371
Equipment, furniture and fixtures, net 3,483 152 206 - 3,841
Other assets 457 8 - - 465
-----------------------------------------------------------------------------
$46,328 $4,840 $2,434 $ - $53,602
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 1,027 $ 591 $ 39 $ - $ 1,657
Accrued salaries and wages 1,752 728 190 - 2,670
Deferred revenue 369 - - - 369
Other accrued liabilities 4,547 629 210 945(b) 6,331
Line of credit/Current portion of
Long-term debt 87 - 1,350 - 1,437
-----------------------------------------------------------------------------
Total current liabilities 7,782 1,948 1,789 945(b) 12,464
Deferred rent 55 - - - 55
Other long-term liabilities 439 1,117 822 - 2,378
Stockholders' equity:
Common stock 13 107 110 (212)(a) 18
Additional paid-in capital 35,828 - - 212 (a) 36,040
Deferred compensation (907) - - - (907)
Unrealized gain on short-term
investments 143 3 - - 146
Retained earnings 2,975 1,665 (287) (945)(b) 3,408
-----------------------------------------------------------------------------
Total stockholders' equity (deficit) 38,052 1,775 (177) (945)(b) 38,705
-----------------------------------------------------------------------------
$46,328 $4,840 $2,434 $ - $53,602
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
(a) Reclassifications to conform presentation to DAOU's financial data.
(b) Estimated charge, net of tax, for merger related costs, including costs to
integrate the operations of the two companies.
<PAGE>
DAOU SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATMENTS OF OPERATIONS
Year ended December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
DAOU TMI RHI for the Pro Forma
Historical Historical Historical Transaction Combined
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $51,561 $6,371 $9,545 $ - $67,477
Cost of revenues 34,302 3,909 6,072 - 44,283
---------------------------------------------------------------------------
Gross profit 17,259 2,462 3,473 - 23,194
Operating expenses:
Sales and marketing 6,803 124 820 - 7,747
General and administrative 8,969 719 2,587 - 12,275
Merger and related expenses 718 - - - 718
---------------------------------------------------------------------------
16,490 843 3,407 - 20,740
---------------------------------------------------------------------------
Income from operations 769 1,619 66 - 2,454
Interest income (expense), net 841 71 (39) - 873
---------------------------------------------------------------------------
Income before income taxes 1,610 1,690 27 - 3,327
Provision for income taxes 1,108 113 - 591 (a) 1,812
---------------------------------------------------------------------------
Net income $ 502 $1,577 $ 27 $(591)(a) $ 1,515
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Earnings per share data:
Net income per common share:
Basic $ 0.09
---------
---------
Diluted $ 0.09
---------
---------
Shares used in computing net
income per common share:
Basic 16,765
---------
---------
Diluted 17,724
---------
---------
</TABLE>
(a) Adjust the income tax provision for income taxes based on an incremental
tax rate of 41%. Prior to merger transaction, TMI and RHI were S
corporations, therefore income taxes were the responsibility of the
individual stockholders.
<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
(Unaudited) Adjustments
DAOU TMI RHI for the Pro Forma
Historical Historical Historical Transaction Combined
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $38,115 $5,374 $5,778 $ - $49,267
Cost of revenues 25,511 3,372 4,451 - 33,334
-----------------------------------------------------------------------------
Gross profit 12,604 2,002 1,327 15,933
Operating expenses:
Sales and marketing 3,453 318 515 - 4,286
General and administrative 7,614 724 280 - 8,618
-----------------------------------------------------------------------------
11,067 1,042 795 - 12,904
-----------------------------------------------------------------------------
Income from operations 1,537 960 532 - 3,029
Interest income (expense), net 255 101 (16) - 340
-----------------------------------------------------------------------------
Income before income taxes 1,792 1,061 516 - 3,369
Provision for income taxes 431 - - 647 (a) 1,078
-----------------------------------------------------------------------------
Net income $ 1,361 $1,061 $ 516 $(647)(a) $ 2,291
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Earnings per share data:
Net income per common share:
Basic $ 0.15
---------
---------
Diluted $ 0.15
---------
---------
Shares used in computing net
income per common share:
Basic 14,880
---------
---------
Diluted 15,082
---------
---------
</TABLE>
(a) Adjust the income tax provision for income taxes based on an incremental
tax rate of 41%. Prior to merger transaction, TMI and RHI were S
corporations, therefore income taxes were the responsibility of the
individual stockholders.
<PAGE>
DAOU SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
STATMENTS OF OPERATIONS
Six months ended June 30, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Adjustments
DAOU TMI RHI for the Pro Forma
Historical Historical Historical Transaction Combined
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $38,278 $5,748 $8,002 $ - $52,028
Cost of revenues 25,349 3,562 4,524 - 33,435
-----------------------------------------------------------------------------
Gross profit 12,929 2,186 3,478 - 18,593
Operating expenses:
Sales and marketing 4,531 197 1,074 - 5,802
General and administrative 6,089 258 326 - 6,673
Merger and related expenses 2,546 89 190 - 2,825
-----------------------------------------------------------------------------
13,166 544 1,590 - 15,300
-----------------------------------------------------------------------------
Income (loss) from operations (237) 1,642 1,888 - 3,293
Interest income (expense), net 224 37 (60) - 201
-----------------------------------------------------------------------------
Income (loss) before income taxes (13) 1,679 1,828 - 3,494
Provision for income taxes 1,676 3 - - (a) 3,114
-----------------------------------------------------------------------------
Net income (loss) $(1,689) $1,676 $1,828 $ - (a) $ 380
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Earnings per share data:
Net income per common share:
Basic $ 0.02
---------
---------
Diluted $ 0.02
---------
---------
Shares used in computing net
income per common share:
Basic 17,620
---------
---------
Diluted 18,513
---------
---------
</TABLE>
(a) No pro forma adjustment was made for the incremental income tax as DAOU
has recorded an adjustment in its historical financial statements for
the quarter ended June 30, 1998 to reflect the change in its acquired
businesses tax status from S corporations to C corporations.
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
1. The unaudited pro forma combined condensed financial statements of DAOU
Systems, Inc. ("DAOU"), Technology Management, Inc. ("TMI"),
International Health Care Systems, Inc., ("IHCS"), Resources in
Healthcare Innovations, Inc. ("RHI"), Healthcare Transition Resources,
Inc., ("HTR"), Ultitech Resources Group, Inc. ("URG"), Innovative
Systems Solutions, Inc. ("ISS") and Grand Isle Consulting, Inc. ("GIC")
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 1,078,963 fully
paid and nonassessable shares of DAOU's common stock for 441 shares of
TMI common stock to effect the Merger, reflect the issuance of 224,668
fully paid and nonassessable shares of DAOU's common stock for 135
shares of IHCS common stock to effect the Merger, reflect the issuance
of 275,662, 282,551, 308,583 and 223,645 fully paid and nonassessable
shares of DAOU's common stock for 100 shares of HTR, URG, ISS and GIC
common stock, respectively, to effect the Merger and reflect the
issuance of 1,839,381 fully paid and nonassessable shares of DAOU's
common stock for 202,780 shares of RHI common stock to effect the Merger.
2. The unaudited pro forma combined condensed balance sheets combine DAOU's
June 30, 1998 unaudited balance sheet with TMI and RHI's June 30, 1998
unaudited balance sheets. The unaudited pro forma combined condensed
balance sheets combine DAOU's December 31, 1997 audited balance sheet with
TMI and RHI's December 31, 1997 audited balance sheets. The adjustment
related to the estimated costs of the merger transaction and integration of
the businesses and are estimated to be approximately $945,000, net of
estimated tax benefits of approximately $84,000. No pro forma adjustment
was reflected in the combined condensed balance sheets as of June 30, 1998
as these costs were accrued during such quarter.
3. The unaudited pro forma combined condensed statements of operations combine
DAOU's audited historical results for the years ended December 31, 1997 and
1996 with the TMI audited historical results for the years ended December
31, 1997 and 1996, with the RHI audited historical results for the year
ended December 31, 1997 and with the RHI unaudited results for the year
ended December 31, 1996, respectively. The unaudited pro forma combined
condensed statements of operations for June 30, 1998 combine DAOU's
unaudited six-months ended June 30, 1998 with the TMI and RHI unaudited
six-months ended June 30, 1998 results.
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, TMI's and RHI's existing operations. DAOU expects to incur
charges currently estimated to approximate $945,000, net of taxes, in the
quarter ending June 30, 1998, the quarter in which the Merger was
consummated, to reflect costs associated with combining the operations of
the three companies and transaction fees and costs incident to the Merger.
This non-recurring charge is reflected in the unaudited pro forma combined
condensed balance sheet as of December 31, 1997 but is not included in the
unaudited pro forma combined condensed statement of operations.
5. The accounting policies of the separate companies are currently being
studied from a conformity perspective. The impact of conforming accounting
policies, if any, is not presently estimable.
<PAGE>
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: September 8, 1998 DAOU SYSTEMS, INC.
By:
-----------------------------------------
Fred C. McGee, Chief Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Document Description
--------- --------------------------------------------------------
<S> <C>
2.1(1)+ Agreement and Plan of Merger, dated as of June 16,
1998, by and among Registrant, DAOU-TMI, Inc., a
Delaware corporation and wholly-owned subsidiary of
Registrant, TMI, and the stockholders of TMI.
2.2(1)+ Agreement and Plan of Merger, dated as of June 16,
1998, by and among Registrant, DAOU-TMI, Inc., a
Delaware corporation and wholly-owned subsidiary of
Registrant, International Health Care Systems, Inc., a
Florida corporation, and the stockholders of
International Health Care Systems, Inc.
2.3(2)+ Agreement and Plan of Merger, dated as of June 26,
1998, by and among Registrant, DAOU-RHI, Inc., a
Delaware corporation and wholly-owned subsidiary of
Registrant, RHI, Healthcare Transition Resources, Inc.,
an Indiana corporation ("HTR"), Ultitech Resources
Group, Inc., an Indiana corporation ("URG"), Innovative
Systems Solutions, Inc., an Indiana corporation
("ISS"), Grand Isle Consulting, Inc., an Indiana
corporation ("GIC"), and the respective shareholders of
RHI, HTR, URG, ISS and GIC.
99.1(3) Press release, dated June 17, 1998, entitled "DAOU
Systems Merges with Technology Management, Inc."
99.2(4) Press release, dated June 26, 1998, entitled "DAOU
Systems Merges with Resources in Healthcare
Innovations, Further Extending its Technology Reach."
</TABLE>
(1) Filed as an exhibit to Registrant's Current Report on Form 8-K
that was filed with the SEC on July 10, 1998 and is incorporated herein by
reference.
(2) Filed as an exhibit to Registrant's Current Report on Form 8-K
that was filed with the SEC on August 7, 1998 and is incorporated herein by
reference.
<PAGE>
(3) Filed as an exhibit to Registrant's Current Report on Form 8-K
that was filed with the SEC on June 19, 1998 and is incorporated herein by
reference.
(4) Filed as an exhibit to Registrant's Current Report on Form 8-K
that was filed with the SEC on July 6, 1998 and is incorporated herein by
reference.
+ Confidential treatment has been granted for portions of this
exhibit.
