-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QruM7ott5hWG2N/zL/phLt+r5/HT46ybYLpCV3Jh5DhDJQxedmcRvB7nd9kad7j/ qU+P4v0EuAnlBAhnrQiTCQ== 0001047469-98-020717.txt : 19980518 0001047469-98-020717.hdr.sgml : 19980518 ACCESSION NUMBER: 0001047469-98-020717 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAOU SYSTEMS INC CENTRAL INDEX KEY: 0001003989 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 330284454 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22073 FILM NUMBER: 98624922 BUSINESS ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 BUSINESS PHONE: 6196462996 MAIL ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 / / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to , 1998 Commission File No.: 000-22073 DAOU SYSTEMS, INC. (Exact name of small business issuer as specified in its charter) Delaware 330284454 (State or other jurisdiction of (IRS Employer incorporation or organization Identification No.) 5120 Shoreham Place San Diego, California 92122 (Address of principal executive offices) (619) 452-2221 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes /X/ The number of shares of Registrant's Common Stock outstanding as of May 15, 1998: 13,405,447 Transactional Small Business Disclosure Format (check one): Yes / / No /X/ DAOU SYSTEMS, INC. Index to Form 10-Q PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements Page Condensed Consolidated Balance Sheets (unaudited) March 31, 1998 and December 31, 1997 3 Condensed Consolidated Statements of Operations (unaudited) Three Months Ended March 31, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-8 PART II. OTHER INFORMATION 9 SIGNATURES 10 2 Item 1. Condensed Consolidated Financial Statements DAOU SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE DATA) ASSETS
MARCH 31, DECEMBER 31, 1998 1997 ------------- ------------- (unaudited) Current assets: Cash and cash equivalents $ 887 $ 5,699 Short-term investments 7,111 9,949 Accounts receivable, net 16,546 12,411 Contract work in progress 20,126 12,412 Other current assets 3,077 2,033 --------- --------- Total current assets 47,747 42,504 Equipment, furniture and fixtures, net 4,005 3,501 Other assets 804 831 --------- --------- $ 52,556 $ 46,836 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,268 $ 1,032 Accrued liabilities 10,454 5,070 --------- --------- Total current liabilities 11,722 6,102 Long Term Liabilities 482 494 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value Authorized shares - 5,000 Issued and outstanding - none - - Common stock, $.001 par value Authorized shares - 50,000 Issued and outstanding - 13,391 and 13,318 at March 31, 1998 and December 31, 1997, respectively 13 13 Additional paid-in capital 36,225 35,828 Deferred compensation (842) (907) Unrealized gain on short-term investments 249 143 Retained earnings 4,707 5,163 --------- --------- Total stockholders' equity 40,352 40,240 --------- --------- $ 52,556 $ 46,836 --------- --------- --------- ---------
See accompanying notes. 3 DAOU SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 1997 -------- -------- Revenues $ 18,063 $ 10,087 Cost of revenues 10,772 6,607 -------- -------- Gross profit 7,291 3,480 Operating expenses Sales and marketing 2,194 1,495 General and administrative 2,847 2,087 Merger and related expenses 1,796 - -------- -------- Total operating expenses 6,837 3,582 -------- -------- Income (loss) from operations 454 (102) Other income, net 153 114 -------- -------- Income before income taxes 607 12 Provision (benefit) for income taxes 911 (148) -------- -------- Net income (loss) $ (304) $ 160 -------- -------- -------- -------- Basic earnings (loss) per share $ (.02) $ .01 -------- -------- -------- -------- Diluted earnings (loss) per share $ (.02) $ .01 -------- -------- -------- -------- Shares used in calculation of: Basic earnings (loss) per share 13,362 11,721 -------- -------- -------- -------- Diluted earnings (loss) per share 13,362 12,210 -------- -------- -------- --------
See accompanying notes. 4 DAOU SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 1997 -------------- ------------ Operating activities: Net income (loss) $ (304) $ 160 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 401 121 Changes in operating assets and liabilities (7,281) 94 -------- ------- Net cash flows provided by (used in) operating activities (7,184) 375 Investment activities: Maturities/sales of short-term investments 2,944 - Additions to equipment, furniture and fixtures (840) (904) Changes in other assets 27 53 -------- ------- Net cash flows provided by (used in) investing activities 2,131 (851) Financing activities: Distribution to stockholders (152) (249) Sale of common stock 397 15,856 Other (4) (9) -------- ------- Net cash flows provided by financing activities 241 15,598 -------- ------- Net increase (decrease) in cash and cash equivalents (4,812) 15,122 Cash and cash equivalents at beginning of period 5,699 2,520 -------- ------- Cash and cash equivalents at end of period $ 887 $17,642 -------- -------- -------- --------
See accompanying notes. 5 DAOU SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 1. Basis of Presentation The condensed consolidated financial statements of DAOU Systems, Inc. (the "Company") for the three-month periods ended March 31, 1998 and 1997 are unaudited. These financial statements reflect all adjustments, consisting of only normal recurring adjustments which in the opinion of management, are necessary to fairly present the financial position at March 31, 1998 and the results of operations for the three-month periods ended March 31,1998 and 1997. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998. For more complete financial information, these financial statements, and the notes thereto, should be read in conjunction with the audited financial statements for the year ended December 31, 1997 included in the Company's Form 10-KSB filed with the Securities and Exchange Commission. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about the future that affect the amounts reported in the financial statements and disclosures made in the accompanying notes of the financial statements. The actual results could differ from those estimates. 2. Acquisitions During March 1998, the Company acquired Synexus Incorporated ("Synexus"), a a Pennsylvania Corporation specializing in the planning, design and implementation of enterprise networks in healthcare environments, and Sentient Systems, Inc., a Maryland Corporation, which provides integration and support services primarily to health-care organizations. Shareholders of Synexus and Sentient received a total of 161,235 and 1,397,550 shares, respectively, of the Company's common stock in exchange for the outstanding stock of each of these companies. The acquisitions have been accounted for under the pooling-of-interests method of accounting, and accordingly, the historical financial statements of periods prior to the consumation of the combinations have been restated as though the companies had been combined for all periods presented. Separate results for each of DAOU, Sentient and Synexus for the three months ended March 31, 1998 and 1997 were as follows (in thousands):
DAOU SENTIENT SYNEXUS COMBINED ------- -------- ------- -------- Three Months ended March 31, 1998 Total Revenues $15,070 $2,526 $467 $18,063 Net Income (loss) 233 (480) (57) (304) Three Months ended March 31, 1997 Total Revenues 7,094 2,514 479 10,087 Net Income (loss) (129) 168 121 160
In connection with these acquisitions, the Company recorded acquisition and related costs during March 1998 totaling $1.8 million. These costs include transaction fees of approximately $341,000, estimated costs to combine and integrate operations of approximately $420,000 and other acquisition related costs of approximately $1.0 million. 6 3. Per Share Information The following table details the computation of basic and diluted income (loss) per share:
THREE MONTHS ENDED MARCH 31, 1998 1997 ------------------- Numerator: Net income (loss) $ (304) $ 160 ------ ------ Denominator: Weighted average common shares 13,362 10,118 Effect of assumed conversion of convertible preferred stock to common stock from the date of issuance - 1,603 ------ ------ Denominator for basic income (loss) per share - adjusted weighted average common shares 13,362 11,721 Effect of dilutive securities: Warrants - 52 Common stock options - 437 ------ ------ - 489 ------ ------ Denominator for diluted income (loss) per share -- adjusted weighted average shares and assumed conversions 13,362 12,210 ------ ------ ------ ------ Basic income (loss) per share $(0.02) $0.01 ------ ------ ------ ------ Diluted income (loss) per share $(0.02) $0.01 ------ ------ ------ ------
4. New Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," both of which are effective for fiscal periods beginning after December 15, 1997. The adoption of Statement No. 131 did not have a material effect on the Company's financial statements. Comprehensive income (loss) for the three months ended March 31, 1998 and 1997 totalled $(198,000) and $97,000. The difference from reported net income arises from the unrealized gains and losses on short-term investments. 5. Income Tax Expense The effective income tax rate for the quarter ended March 31, 1998 was 150% due to the non-deductibility of certain merger and related costs and adjustments made relative to Sentient's and Synexus' former S corporation status. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This report contains certain statements of a forward-looking nature relating to future performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. Overview The Company designs, implements, supports and manages advanced computer network systems primarily for hospitals, integrated delivery networks ("IDNs") and other provider organizations. The Company's design services include an assessment of the customer's existing computer network system, the preparation of voice, video and data network specifications, technical design documentation and diagrams. DAOU's implementation services include the purchase, delivery and installation of enterprise-wide computer network systems. Implementation service revenues consist of third-party hardware and software products, as well as the Company's professional services. The Company's gross margin with respect to implementation services varies significantly depending on the percentage of such services consisting of products (with respect to which the Company obtains a lower margin) versus professional services. The Company's support and management services include remote and on-site network management, as well as information systems function outsourcing. The Company typically provides these services under multi-year contracts. In March 1998, the Company acquired through a pooling-of-interests merger all of the issued and outstanding shares of Synexus, a Pennsylvania Corporation, which specializes in the planning, design and implementation of enterprise networks in healthcare environments, and Sentient, Maryland Corporation, which provides integration and support services primarily to health-care organizations. The shareholders of Synexus and Sentient received a total of 161,235 and 1,397,550 shares, respectively, of the Company's common stock in exchange for the outstanding stock of each of these companies. Results of Operations The Company's revenues were $18.1 million and $10.1 million for the quarters ended March 31, 1998 and 1997, respectively, representing an increase of 79%. This increase was primarily due to growth of I/S outsourcing, voice and video design, and cabling services. Cost of revenues was $10.8 million and $6.6 million for the quarters ended March 31, 1998 and 1997, respectively, representing an increase of 63% primarily due to increased revenues. Gross margin was 40% and 34% for the quarters ended March 31, 1998 and 1997, respectively. This increase in gross margin was primarily due to an increase in the professional service component of the Company's services which provides higher gross margin revenue. Sales and marketing expenses were $2.2 million and $1.5 million for the quarters ended March 31, 1998 and 1997, respectively, representing an increase of 47%. This increase was primarily due to expansion of the Company's marketing programs, increase in sales personnel, and implementation of a regional sales structure . Sales and marketing expenses were 12% and 15% of revenues for the quarters ended March 31, 1998 and 1997, respectively. The Company expects that sales and marketing expenses will continue to decrease as a percentage of revenue, but will likely increase in dollar terms to support the anticipated growth in the Company's business. General and administrative expenses were $2.8 million and $2.1 million for the quarters ended March 31, 1998 and 1997, respectively, representing an increase of 36%. The primary factors contributing to this increase are associated with the addition of senior management, increased support staff, and other infrastructure expansion. General and administrative expenses were 16% and 21% of revenues for the quarters ended March 31, 1998 and 1997 8 respectively. The Company expects general and administrative expenses will continue to decrease as a percentage of revenue, but will likely increase in dollar terms to support anticipated growth. Merger and related costs totaled $1.8 million during the quarter ended March 31, 1998 in connection with the acquisitions of Synexus and Sentient. These transaction costs include transaction fees of approximately $341,000, estimated costs to combine and integrate operations of approximately $420,000 and other acquisition related costs of approximately $1.0 million. Other income net was $153,000 and $114,000 for the quarters ended March 31, 1998 and 1997, respectively. Other income is primarily interest income which consists of interest on cash and cash equivalents, short-term investments, and notes receivable from officers and stockholders. Interest expense consisted of interest associated with auto loans from Ford Motor Credit Corporation, but was not significant during either period. Liquidity and Capital Resources At March 31, 1998, the Company had working capital of $36.0 million, compared to $36.4 million at December 31, 1997. The decrease in working capital was primarily due to a net post merger loss during the first quarter. During the quarter ended March 31, 1998, cash used in operating activities was $7.2 million relating to an increase in the Company's investment in work-in-process due to higher contract volume. The Company believes that through the collection of accounts receivable and reduction of contract work-in-process, through subsequent billings, will provide sufficient liquidity to finance operations for the foreseeable future. The Company may sell additional equity or debt securities or obtain additional credit facilities, however, there are no assurances that such financings can be obtained at terms favorable to the Company. The sale of additional equity securities could result in additional dilution to the Company's stockholders and the incurrence of debt could result in additional interest expense. Business Risks In addition to the factors addressed in the preceding sections, certain dynamics of the Company's markets and operations create fluctuations in the Company's quarterly results. Uncertainty and cost containment in healthcare and competitive conditions present certain other risks to operating results which are more fully described in the Company's Form 10-KSB for the year ended December 31, 1997 filed with the Securities and Exchange Commission and other SEC filings. Except for the historical information presented herein, the matters discussed in this document are forward-looking statements that involve numerous risks and uncertainties. The Company's actual results could differ materially from those projected in such forward-looking statements and will depend upon a number of factors, including those discussed in this document and in prior SEC filings, press releases and other public filings of the Company. 9 PART II OTHER INFORMATION 1. Legal Proceedings On February 25, 1997, Gary Colvin, an ex-employee of the Company, filed a lawsuit against the Company and certain of its officers and directors in the U.S. District Court of the Southern District of California (Gary L. Colvin v. DAOU Systems, et al.). In the complaint, the ex-employee alleged various claims related to his former employment with the Company, including, among other claims, wrongful termination, breach of contract, certain civil rights violations and claims of unpaid minimum wages and unpaid overtime, and damages in the aggregate amount of approximately $30 million. On February 9, 1998, the parties stipulated to the dismissal of the ex-employee's remaining Federal claim under the Fair Labor Standards Act. As a result, on March 4, 1998, the lawsuit was dismissed without prejudice after the court declined to exercise supplemental jurisdiction over the remaining state law claims. On September 18, 1997, seven present and/or former employees of the Company filed a lawsuit in the Superior Court of the State of California for the County of San Diego, titled Smyth, et al. V. DAOU Systems, Inc. (Case No. 714187), purporting to represent a class of all present and former DAOU employees classified as exempt under Federal and California law from overtime pay and are entitled to pay for unpaid overtime and penalties in an un-stated amount. The Plaintiffs also claim that, in response to their filing complaints with the Labor Board for the State of California, they were subjected to retaliatory discrimination by the Company. The lawsuit currently is in the preliminary stages of discovery. On April 2, 1998, the court denied a motion by the Plaintiffs requesting the court to assist them in notifying potential Plaintiffs of the opportunity to join this lawsuit against the Company. As of the date of this Report, the potential amount of exposure to the Company from this lawsuit, in the event of an unfavorable outcome, cannot be determined. The Company believes that the lawsuit is without merit and intends to defend the lawsuit vigorously. 6. Exhibits and Reports on Form 8-K (a) Exhibits EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule (b) The Company did not file any reports on Form 8-K during the three months ended March 31, 1998. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAOU SYSTEMS, INC. Date: May 15, 1998 By: /s/Daniel J. Daou Daniel J. Daou President Date: May 15, 1998 By: /s/Fred C. McGee Fred C. McGee Chief Financial Officer 10 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 MAR-31-1998 887 7,111 16,746 200 20,126 47,747 6,899 2,894 52,556 11,722 0 0 0 13 40,339 52,556 18,063 18,063 10,772 17,609 0 0 0 607 (911) (304) 0 0 0 (304) (.02) (.02)
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