DAOU Systems Names New CEO; Reaches Agreement with Holders of Preferred Stock; Reports Third Quarter 2000 Results

Business Wire, Nov 9, 2000

Business Editors/High-Tech Writers

SAN DIEGO--(BUSINESS WIRE)--Nov. 9, 2000

DAOU Systems Inc. (Nasdaq:DAOU) today named James T. Roberto as its new chief executive officer and board member; announced that it has negotiated removal of redemption feature on preferred stock; and reported results for the third quarter ended Sept. 30, 2000.

Roberto, a 20-year veteran of managing emerging, early-stage professional services and health care companies through their crisis stage and on to profitability, succeeds Larry D. Grandia, whose planned resignation was announced earlier by the Company. Grandia will remain a member of the Company's board of directors. Roberto also will serve as a board member, as Richard B. Jaffee and John H. Moragne retire from the board. Roberto's immediate focus will be on addressing primary issues facing the Company, identified in part through the strategic assessment recently completed by an independent consulting firm.

As a consequence of the resignation of Larry Grandia, holders of the Company's Series A Preferred Stock had the right to cause the Company to redeem their Series A Preferred Stock for approximately $12.9 million. In exchange for the permanent removal of that redemption right, DAOU has reached an agreement with the Preferred holders, under which DAOU will pay $2.0 million in cash and issue warrants to purchase 3,540,000 shares of the Company's Common Stock for $.01 per share. Total consideration valued at approximately $4.0 million will be recorded as a one-time dividend in the fourth quarter of 2000.

"We are pleased to announce the selection of Jim Roberto as chief executive officer of DAOU Systems," stated Georges Daou, chairman of the board. "We believe that the renegotiation with our Preferred shareholders and the appointment of Jim will enable DAOU to maintain cash resources and provide additional management skills we need to maximize shareholder value. Jim brings to the Company over twenty years of highly relevant experience and expertise, both in terms of our industry as well as in strategic turnaround situations. Over his career, Jim has demonstrated a record of not only turning around but also rebuilding companies, and he is taking on the CEO role at DAOU with the goal of having a true, sustainable impact on the Company. We look forward to his leadership and professional contribution as we move forward with the goal of increasing shareholder value."

Previously, from 1993-1998, Roberto was chief executive officer of Prompt Associates, a high-technology hospital billing review and analysis firm, where he successfully executed a turnaround and restructuring of the company that culminated over the next three years in a ten-fold increase in revenues and profits. Prompt was acquired by Concentra Managed Care in late 1996, and Roberto continued as Prompt's CEO and served Concentra as a member of its mergers and acquisition team for the next two years. From 1985 to 1991, Roberto was chief executive officer of Co-optics of America, a nationwide primary eyecare PPO. Also in need of intense for-profit restructuring and a major shift in strategic direction, Co-optics achieved profitability in 1987 and was subsequently sold to Vision 21 Inc. Roberto received his Bachelor of Science degree with honors in Finance, and his Master of Business Administration, from The Pennsylvania State University.

Third Quarter Results

For the third quarter of 2000, DAOU reported a loss of $4,104,000, or $.23 per share, on revenues of $15,341,000, compared to net income of $625,000, or $.04 per share, on revenues of $25,382,000 for the third quarter of 1999. Included in the loss were nonrecurring charges of $1.7 million, or $.10 per share, primarily due to costs associated with a consolidation of the Company's 401k plans and other employee benefits, termination of an unprofitable outsourcing contract, and costs associated with terminated merger discussions. These results compare to a loss of $2,768,000, or $.16 per share, excluding restructuring charges, on revenues of $17,575,000 in the second quarter of 2000.

"DAOU's third quarter revenues declined year to year due to a continued lag in the Company's core health care information technology (IT) business, attributable largely to continued weak market demand," stated Neil R. Cassidy, executive vice president and chief financial officer. "Gross margin for the third quarter of 2000 decreased to 14%, from 19% in the second quarter of this year and 30% in the same quarter last year, due primarily to a decline in utilization rates from 75% in third quarter 1999 to 67% in third quarter 2000, non-recurring accrual of certain employee benefits and severance costs, and continued investment in our Enosus Internet start-up. Total operating expenses decreased to $6,181,000 for the third quarter of 2000, compared to $6,656,000 in the second quarter of 2000 and $7,023,000 in the third quarter of 1999, due in part to our ongoing efforts to control expenditures."

As of Sept. 30, 2000, in addition to its unused line of credit, DAOU had cash and short-term investments totaling $12,036,000, compared to $12,822,000 at the end of the second quarter of 2000 and $15,480,000 at the end of 1999. Accounts receivable decreased to $13,391,000 from $14,692,000 in the second quarter of 2000 and $21,912,000 at the end of 1999. Contract work in progress decreased to $323,000 from $1,456,000 in the second quarter of 2000 and $2,816,000 in the equivalent quarter last year. DSOs decreased from 95 days in the second quarter of 2000 to 90 days in the third quarter of this year.