Business Editors and Health/Medical Writers
SAN DIEGO--(BW HealthWire)--Aug. 10, 2000
Results Include Restructuring Charge Related To Consolidation
And Resizing Of Company's Operations
DAOU Systems, Inc. (Nasdaq: DAOU) today reported financial results for the second quarter and first six months of 2000. The Company also announced that it is considering strategic alternatives designed to maximize shareholder value, and is currently holding discussions with Perot Systems Corporation (NYSE: PER) regarding the possible sale of the Company. Although no definitive agreement has been signed and a price has not been agreed upon, the price currently being discussed would not be at a substantial premium over the current market price. There can be no assurance that an agreement regarding the sale of the Company will be reached as a result of the current discussions at such a price or any price, or that an agreement will be reached with any other company at all.
For the quarter ended June 30, 2000, DAOU reported revenue of $16,127,000 and a net loss to common shareholders of $2,768,000, or $.16 per common share, excluding restructuring charges of $827,000, or $.05 per share, related to recent actions by the Company to further consolidate its operations and reduce operating expenses primarily through a reduction in headcount. Including the restructuring charge, DAOU reported a net loss of $.20 per common share, for the second quarter of 2000. This compares to a net loss of $4,650,000, or $.26 per common share on revenue of $17,575,000 for the first quarter of 2000, and to net income of $60,000, or breakeven per common share, on revenue of $27,051,000 for the second quarter of 1999. Second quarter 1999 included approximately $2 million in revenue from discontinued businesses and a contract the Company chose to terminate in early 1999.
DAOU's second quarter 2000 revenues reflect a continued lag in the demand for the Company's core health care information technology (IT) services. Gross margin for the second quarter of 2000 improved to 19% from 9% in the first quarter of 2000. Gross margin in the second quarter of 1999 was 29%. Total operating expenses, excluding the restructuring charge, decreased to $5,829,000 for the second quarter of 2000, compared to $6,254,000 in the first quarter of 2000 and from $7,739,000 in the second quarter of 1999. The decrease in operating expenses was due primarily to the consolidation of certain selling, general and administrative functions, as well as further consolidation of operating facilities.
As of June 30, 2000, cash and short-term investments increased slightly to $12,886,000, as compared to $12,701,000 at March 31, 2000, due to improved collection efforts and the realization of contract work in process. Accounts receivable decreased to $14,692,000 from $16,857,000 at the end of the first quarter of 2000, and from $21,912,000 at the end of 1999. Days sales outstanding (DSOs) declined to 95 days from 101 days at the end of the first quarter of 2000. Contract work in progress decreased to $1,456,000 from $3,743,000 at March 31, 2000 and from $8,606,000 at the end of the second quarter last year.
"Second quarter 2000 revenues were impacted by continued weak market demand for our core health care IT services, due primarily to budgets constrained by large Y2K expenditures in 1999, managed care cost pressures, the cumulative effect of the Balanced Budget Act of 1997, slower than expected demand for HIPAA (Health Insurance Portability and Accountability Act of 1996) services, and the uncertain future of real integration of health care services," stated Larry D. Grandia, President and Chief Executive Officer of DAOU Systems, Inc. "Given our current level of revenues, we have taken additional steps to further reduce our costs. Among these, we have further consolidated operations and administrative functions in San Diego, eliminated additional layers of management, and reduced our headcount.
"As a result of the changes we have made to our cost structure, we approached profitability at the end of the quarter, and expect that operating costs will continue to be lower in the third quarter as we receive the full benefit of our consolidation efforts in the second half of the year. Among the changes made, we consolidated all subsidiary-level accounting and human resource functions throughout the organization. In addition, the changes made in our management structure have resulted in a leaner cost structure, including a reduction in our management-to-employee ratio.
"While our current pace of business and our backlog are soft in our core health care IT business," stated Grandia, "we continue to expect the health care markets to improve and we are responding actively to increased opportunities in the marketplace to build our pipeline of health care IT business. In the e-commerce area, while we have built a significant pipeline of potential business for our Enosus Internet subsidiary, Enosus is only beginning to convert that pipeline into revenues sufficient to generate a profit. We expect to see that revenue stream grow as Enosus signs additional contracts.
"The steps we have taken to consolidate operations and reduce our employee related costs were necessary in light of our current level of business," Grandia said. "While they come with a short-term cost, we believe they will better position DAOU to achieve its objectives of profitability and growth. We have been, and continue to be, aggressive about resizing all facets of our business, and remain committed to generating a profit by keeping our costs in line with our current, sustainable revenue stream. With many of these cost-cutting actions now behind us, we are beginning to see the benefit in our results as compared to the first quarter of this year and we expect to see further improvement in our operating results moving forward as a result of our additional consolidation and restructuring.
"As we continue to execute our business plan," added Grandia, "we also are considering alternative strategic options for maximizing shareholder value. While we are unable at this time to make more specific disclosure on our discussions with Perot Systems, a combination of our companies is among the strategic alternatives currently being discussed by DAOU."
DAOU Systems, Inc. is a provider of integrated Information Technology (IT) solutions and services to the U.S. health care industry. DAOU's capabilities range from up-front strategic consulting to IT system design, implementation and long-term tactical support. DAOU's IT offerings include data, voice and video networking, applications consulting and implementation, as well as operational and Internet solutions. DAOU has approximately 500 employees, and has provided services to more than 1,300 health care organizations, including many of the nation's top 100 integrated delivery systems. More information about DAOU Systems can be found at www.daou.com on the World Wide Web.
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are only predictions and actual events or results may differ materially. Forward-looking statements usually contain the word "estimate," "anticipate," "believe," "expect," "plan" or similar expressions. The forward-looking statements included herein are based on current expectations and certain assumptions and entail various risks and uncertainties, including risks and uncertainties relating to: the Company's ability to obtain new customer contracts; the Company's ability to launch and manage successfully its new eCommerce services to health care and non-health care customers, including the hiring, retention and training of professionals dedicated to eCommerce services; the management and integration of the Company's operations as it develops new service offerings and management practices and implements staffing reorganizations; the ability of the Company to complete a strategic transaction with Perot Systems Corporation or execute alternative options for realizing full shareholder value; and the effects of health care industry consolidation and changes in the health care regulatory environment on existing customer contracts and the Company's ability to obtain new customer contracts. These uncertainties and risk factors and the matters set forth in the Company's Annual Report on Form 10-K under the caption "Risk Factors" and its other SEC filings could cause actual results to differ materially from those indicated by these forward-looking statements.
DAOU SYSTEMS, INC. Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) Three months Three months Six months Six months ended ended ended ended 6/30/00 6/30/99 6/30/00 6/30/99 Revenues $ 16,127 $ 27,051 $ 33,702 $ 54,373 Cost of Revenues $ 13,045 $ 19,117 $ 29,001 $ 40,936 Gross Profit 3,082 7,934 4,701 13,437 Sales and marketing 1,651 2,414 3,441 5,319 General and administrative 4,178 5,325 8,642 10,661 Restructuring charges 827 -- 827 -- Total operating expenses 6,656 7,739 12,910 15,980 Loss from operations (3,574) 195 (8,209) (2,543) Other income (expenses), net 164 (95) 333 (181) Income (loss) before taxes (3,410) 100 (7,876) (2,724) Provision (benefit) for income taxes -- 40 -- (1,116) Net income (loss) (3,410) 60 (7,876) (1,608) Dividends on preferred stock (185) -- (369) -- Net income (loss) available to common stockholders $(3,595) $ 60 $(8,245) $(1,608) Net income (loss) per common share: Basic $ (0.20) $ 0.00 $ (0.47) $ (0.09) Diluted $ (0.20) $ 0.00 $ (0.47) $ (0.09) Shares used in computing net income (loss) per common share: Basic 17,713 17,691 17,712 17,691 Diluted 17,713 17,918 17,712 17,691 DAOU SYSTEMS, INC. CONSOLIDATED BALANCE SHEET (in thousands) June 30 December 31, 2000 1999 Current assets: (unaudited) Cash and cash equivalents $ 12,822 $ 15,480 Short-term investments 64 68 Accounts receivable, net 14,692 21,912 Contract work in progress 1,456 2,816 Other current assets 1,692 1,048 Total current assets 30,726 41,324 Equipment, furniture and fixtures, net 4,032 4,319 Other assets 267 417 35,025 46,060 Current liabilities: Accounts payable and accrued expenses 2,287 4,698 Accrued salaries and wages 3,505 4,248 Current portion of long-term debt 210 210 Total current liabilities 6,002 9,156 Long-term liabilities 471 548 Redeemable convertible preferred stock 11,751 11,382 Stockholders' equity Common stock 18 18 Additional paid-in capital 37,396 37,395 Deferred compensation (117) (192) Unrealized gain on securities (47) (43) Retained deficit (20,449) (12,204) Total stockholders equity 16,801 24,974 $ 35,025 $ 46,060
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