Daou Systems Inc--Form 10-Q

-----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, Oew4ig83D2bb4BLPdXHwO+mweBwj92Y/fNO5yRLaWEJJjpi0Ukr+iJOWxarwdsLa 6FJ3voNrkMxjsTantIwC4Q== 0001193125-04-195489.txt : 20041112 0001193125-04-195489.hdr.sgml : 20041111 20041112170139 ACCESSION NUMBER: 0001193125-04-195489 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041112 DATE AS OF CHANGE: 20041112 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: 1934 Act SEC FILE NUMBER: 000-22073 FILM NUMBER: 041140286 BUSINESS ADDRESS: STREET 1: 412 CREAMERY WAY STREET 2: STE 300 CITY: EXTON STATE: PA ZIP: 19341 BUSINESS PHONE: 8005783268 MAIL ADDRESS: STREET 1: 412 CREAMERY WAY STREET 2: STE 300 CITY: EXTON STATE: PA ZIP: 19341 10-Q 1 d10q.htm DAOU SYSTEMS INC--FORM 10-Q Daou Systems Inc--Form 10-Q

DRAFT 11/11/2004

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No.: 000-22073

Daou Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware

33-0284454

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

412 Creamery Way, Suite 300

Exton, Pennsylvania 19341

(Address of principal executive offices) (Zip Code)

(610) 594-2700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of Registrant’s Common Stock, par value $.001 per share, outstanding as of October 29, 2004: 21,815,378.

Daou Systems, Inc.

Index to Form 10-Q


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Financial Statements	2

	Condensed Balance Sheets at September 30, 2004 (unaudited) and December 31, 2003	2

	Condensed Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2004 and 2003	3

	Condensed Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2004 and 2003	4

	Notes to Condensed Financial Statements (unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosure about Market Risk	18

Item 4.	Controls and Procedures	18

PART II.	OTHER INFORMATION	19

Item 1.	Legal Proceedings	19

Item 2.	Unregistered Sales of Equities Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	20

Item 4.	Submission of Matters to a Vote of Security Holders	20

Item 5.	Other Information	20

Item 6.	Exhibits	21

	SIGNATURES	22

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

Daou Systems, Inc.

Condensed Balance Sheets

(In thousands, except for per share data)


	September 30, 2004 *(unaudited)*			December 31, 2003
Assets
Current assets:
Cash and cash equivalents	$	10,813		$	13,045
Investments, available-for-sale		109			102
Accounts receivable, net of allowance for doubtful accounts of $629 and $789 at September 30, 2004 and December 31, 2003, respectively		5,564			8,226
Contract work in progress		354			1,457
Other current assets		637			640

Total current assets		17,477			23,470

Equipment, furniture and fixtures, net		1,021			1,144
Other assets		961			614

Total Assets	$	19,459		$	25,228

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and other accrued liabilities	$	2,349		$	2,171
Accrued salaries and benefits		2,183			4,063
Deferred revenue		604			1,426

Total current liabilities		5,136			7,660
Long-term liabilities		451			523

Commitments and contingencies		—			—

Stockholders’ equity:
Convertible preferred stock, $.001 par value. Authorized 3,520 shares; issued and outstanding 2,182 shares with a liquidation preference of $17,400 and $16,256, respectively, at September 30, 2004 and December 31, 2003, including accrued dividends		2			2
Common stock, $.001 par value. Authorized 50,000 shares; issued and outstanding 21,815 and 21,583 shares at September 30, 2004 and December 31, 2003, respectively and 1,292 shares held in treasury		22			22
Additional paid-in capital		57,118			55,936
Notes receivable from stockholders		(1,160	)		(1,160	)
Accumulated other comprehensive loss		(22	)		(29	)
Accumulated deficit		(42,088	)		(37,726	)

Total stockholders’ equity		13,872			17,045

Total Liabilities and Stockholders’ Equity	$	19,459		$	25,228

See accompanying notes to the condensed financial statements.

Daou Systems, Inc.

Condensed Statements of Operations

(In thousands, except for per share data)

(unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Revenue before reimbursements (net revenue)	$	5,631			10,127		$	21,112		$	32,546
Out-of-pocket reimbursements		486			761			1,790			2,606

Total revenue		6,117			10,888			22,902			35,152

Cost of revenue before reimbursable expenses		4,513			7,014			16,523			21,798
Out-of-pocket reimbursable expenses		486			761			1,790			2,606

Total cost of revenue		4,999			7,775			18,313			24,404

Gross profit		1,118			3,113			4,589			10,748

Operating expenses:
Sales and marketing		707			1,112			2,674			3,417
General and administrative		1,813			1,659			5,270			5,544
Restructuring credits		—			(252	)		—			(252	)

		2,520			2,519			7,944			8,709

(Loss) income from operations		(1,402	)		594			(3,355	)		2,039
Other income, net		49			54			137			156

(Loss) income before income taxes		(1,353	)		648			(3,218	)		2,195
Provision for income taxes		—			8			—			23

Net (loss) income		(1,353	)		640			(3,218	)		2,172
Accrued dividends on preferred stock		(411	)		(309	)		(1,144	)		(909	)

Net (loss) income available to common stockholders	$	(1,764	)	$	331		$	(4,362	)	$	1,263

(Loss) earnings per share:
Basic	$	(0.08	)	$	0.02		$	(0.20	)	$	0.06

Diluted	$	(0.08	)	$	0.01		$	(0.20	)	$	0.05

Shares used in computing (loss) earnings per share:
Basic		21,793			20,842			21,603			20,739

Diluted		21,793			26,682			21,603			26,288

See accompanying notes to the condensed financial statements.

Daou Systems, Inc.

Condensed Statements of Cash Flows

(In thousands)

(unaudited)


	Nine Months Ended September 30,
	2004			2003
Operating activities
Net (loss) income	$	(3,218	)	$	2,172
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		449			511
Amortization of deferred compensation		40			81
Provision for uncollectible accounts		(142	)		143
Non cash compensation charge		—			10
Changes in operating assets and liabilities:
Accounts receivable		2,804			(1,002	)
Contract work in process		1,103			(840	)
Other current assets		3			(261	)
Accounts payable and accrued liabilities		84			(3,369	)
Accrued salaries and benefits		(1,880	)		(741	)
Deferred revenue		(822	)		2,710
Other		(339	)		(87	)

Net cash used in operating activities		(1,918	)		(673	)

Investing activities
Purchases of equipment, furniture and fixtures, net		(326	)		(210	)
Changes in other assets		(26	)		30

Net cash used in investing activities		(352	)		(180	)

Financing activities
Proceeds from issuance of common stock		38			17
Repurchase of restricted stock, net of notes receivable		—			(74	)

Net cash provided by (used in) financing activities		38			(57	)

Decrease in cash and cash equivalents		(2,232	)		(910	)
Cash and cash equivalents at beginning of period		13,045			12,319

Cash and cash equivalents at end of period	$	10,813		$	11,409

See accompanying notes to the condensed financial statements.

Daou Systems, Inc.

Notes to Condensed Financial Statements

(unaudited)

1. Basis of Presentation

The unaudited condensed financial statements of Daou Systems, Inc. (“Daou” or the “Company”) at September 30, 2004 and for the three- and nine-month periods ended September 30, 2004 and 2003 have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all information and footnotes required by GAAP for a complete set of financial statements. These financial statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary to present fairly the financial position of the Company at September 30, 2004 and the results of operations for the three- and nine-month periods ended September 30, 2004 and 2003. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations will continue. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 30, 2004.

2. Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

Daou Systems, Inc.

Notes to Condensed Financial Statements

(unaudited)

3. Earnings Per Share

The following table details the computation of basic and diluted earnings per share:

(In thousands, except per share information)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Numerator:
Net (loss) income	$	(1,353	)	$	640		$	(3,218	)	$	2,172
Preferred stock dividends		411			309			1,144			909

Numerator for basic and diluted (loss) earnings per share – (loss) income available common stockholders	$	(1,764	)	$	331		$	(4,362	)	$	1,263

Denominator:
Weighted-average common shares outstanding		21,793			21,542			21,718			21,699
Weighted-average unvested common shares subject to repurchase agreements		—			(700	)		(115	)		(960	)

Denominator for basic (loss) earnings per share		21,793			20,842			21,603			20,739

Effect of dilutive securities:
Unvested common shares subject to repurchase agreements		—			700			—			960
Employee stock options		—			1,649			—			1,116
Warrants		—			3,491			—			3,473

Dilutive potential common shares		—			5,840			—			5,549

Denominator for diluted (loss) earnings per share – adjusted weighted-average common shares and equivalents		21,793			26,682			21,603			26,288

Basic (loss) earnings per share	$	(0.08	)	$	0.02		$	(0.20	)	$	0.06

Diluted (loss) earnings per share	$	(0.08	)	$	0.01		$	(0.20	)	$	0.05

For the three- and nine- month periods ending September 30, 2004, diluted loss per share is unchanged from basic loss per share because the effects of the assumed conversions of Series A Preferred Stock, stock options and warrants would be anti-dilutive.

Options to purchase an additional 1,496,247 and 1,499,747 shares of common stock were outstanding during the three- and nine- month periods ended September 30, 2003, respectively, but were not included in the computation of diluted earnings per share for their respective periods because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. In addition, the Series A Preferred Stock and accrued dividends were excluded from diluted earnings per share for the three- and nine-month periods ending September 30, 2003 as the assumed conversion is anti-dilutive.

Daou Systems, Inc.

Notes to Condensed Financial Statements

(unaudited)

4. Stock-Based Compensation

The Company has stock-based employee compensation plans. The Company applies the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for those plans. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, “Accounting for Stock-Based Compensation,” and has been determined as if the Company had accounted for its stock plans under the fair value method of SFAS No. 123. For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. The following table illustrates the effect on net income available to common shareholders and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net (loss) income available to common shareholders before stock-based employee compensation	$	(1,764	)	$	331		$	(4,362	)	$	1,263
Add total stock-based employee compensation determined under APB No. 25		—			—			—			10

	$	(1,764	)	$	331		$	(4,362	)	$	1,273
Deduct total stock-based employee compensation determined under the fair value method for all awards, net of tax		(61	)		(419	)		(171	)		(973	)

Pro forma net (loss) income available to common shareholders	$	(1,825	)	$	(88	)	$	(4,533	)	$	300

(Loss) earnings per share:
Basic – as reported	$	(0.08	)	$	0.02		$	(0.20	)	$	0.06

Diluted – as reported	$	(0.08	)	$	0.01		$	(0.20	)	$	0.05

Basic – pro forma	$	(0.08	)	$	—		$	(0.21	)	$	0.01

Diluted – pro forma	$	(0.08	)	$	—		$	(0.21	)	$	0.01

The fair value of options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 3%; dividend yield of 0%; volatility factors of the expected market price of the Company’s common stock of 82%; and a weighted-average expected life of the options of five years.

5. Restructuring Plan

The Company recorded restructuring charges for years prior to 2003 in accordance with SEC SAB No. 100, Restructuring And Impairment Charges, and EITF No. 94-3, Liability Recognition For Certain Employee Termination Benefits And Other Costs To Exit An Activity (Including Certain Cost Incurred In A Restructuring). Effective January 1, 2003, the Company follows the provisions of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

As of September 30, 2004, the Company’s remaining restructuring liability was $56,000 related to the closure of certain facilities. The future lease obligations relating to the closure of these facilities are payable through June 2005.

Daou Systems, Inc.

Notes to Condensed Financial Statements

(unaudited)

6. Commitments

On June 29, 2004, the Company’s Board of Directors approved a plan to transition from Daniel J. Malcolm to Vincent K. Roach as Daou’s President and Chief Executive Officer. The planned transition was completed on July 19, 2004. In connection with the transaction, Mr. Malcolm receives a severance payment in accordance with his employment agreement with the Company equal to one year’s salary, payable semi-monthly, subject to acceleration in the event of a change-in-control of the Company. In addition, certain unvested stock options immediately vested. Mr. Malcolm provided a general release and waiver of liability against the Company. In addition, Mr. Malcolm resigned from the Board of Directors effective July 19, 2004. The Company recorded a charge of $300,000 in the second quarter of 2004 related to this severance obligation. This charge is included in general and administrative expenses.

Vincent K. Roach, former Executive Vice President, was promoted to the position of President and Chief Executive Officer, effective July 19, 2004. The Company entered into a new employment agreement with Mr. Roach on August 13, 2004, which provides for base salary through December 31, 2004 at the annualized rate of $750,000, less compensation already paid for calendar year 2004. Mr. Roach will also be paid an additional $444,000 in connection with expanded post-employment non-compete arrangements in bi-weekly installments until December 31, 2004. Mr. Roach’s base salary plus the payment for post-employment non-compete arrangements is approximately equivalent to the amount Mr. Roach would have been paid under his prior employment contract with the Company. Pursuant to the new employment agreement, commencing January 1, 2005, Mr. Roach will be paid an annualized base salary of $300,000. The Board of Directors, in its sole discretion, may pay Mr. Roach a discretionary bonus in an amount to be determined by the Board of Directors from time to time. Mr. Roach will also be eligible to earn retention bonuses if the Company completes a strategic transaction while Mr. Roach is President and Chief Executive Officer. The amount of each retention bonus would be based upon the nature of the transaction and the amount of proceeds received by the Company or its shareholders in each transaction and could range from 5% of the amount of proceeds received by the Company or its shareholders in the transaction up to a cumulative maximum of $2,500,000. In the event that Mr. Roach’s employment with the Company terminates without cause or good reason, or if a calendar year ends prior to the closing of a transaction, the Board of Directors, in its sole discretion, may pay Mr. Roach a discretionary bonus in an amount to be determined by the Board of Directors. The Company may terminate Mr. Roach’s employment at any time for cause or because of Mr. Roach’s death or disability, provided that the Company will pay Mr. Roach or his estate within thirty days after the effective date of termination his base salary and any retention bonus earned through the date of termination. In the event the Company terminates Mr. Roach’s employment for a reason other than cause, death or disability or Mr. Roach terminates his employment for good reason prior to December 31, 2004, Mr. Roach will receive his base salary, additional compensation and any earned retention bonus through December 31, 2004. If such a termination occurs after December 31, 2004, Mr. Roach will receive any earned retention bonus and a severance payment of $300,000, unless Mr. Roach has already received retention bonuses aggregating at least $300,000. Payments under these provisions are subject to Mr. Roach executing a release of all claims in favor of the Company.

7. Contingencies

On August 24, 1998, August 31, 1998, September 14, 1998 and September 23, 1998, four separate complaints were filed against the Company and certain of its officers and directors in the United States District Court for the Southern District of California. On October 15, 2002, the Court granted the Company’s Motion to Dismiss the class action complaint, with prejudice. The plaintiffs timely noticed appeal and filed their Appellants’ Brief with the Ninth Circuit Court of Appeal on April 9, 2003. On July 2, 2003, the Company filed its Respondents’ Brief and Cross-Appeal. The Cross-Appeal challenges the trial court’s failure to assess whether the complaint complied with applicable pleadings standards. After the Appeal and Cross-Appeal were fully briefed, oral arguments were heard before a panel in February 2004. The Company is currently awaiting the court’s decision, which is expected in early 2005.

Daou Systems, Inc.

Notes to Condensed Financial Statements

(unaudited)

7. Contingencies (continued)

As background, a group of shareholders were appointed the lead plaintiff in this federal litigation, and they filed a second amended consolidated class action complaint on January 21, 2000. Their second amended complaint realleges that the Company improperly used the “percentage-of-completion” accounting method for revenue recognition. Claims are pleaded under both the 1933 Securities Act (relating to the Company’s initial public offering) and section 10b of the 1934 Securities Act. The complaint was brought on behalf of a purported class of investors who purchased the Company’s Common Stock between February 13, 1997 and October 28, 1998, but it does not allege specific damage amounts. A Motion to Dismiss the second amended consolidated class action complaint was filed on February 22, 2000. On March 27, 2002, the Court granted the Motion but extended to plaintiffs the opportunity to file a Third Amended Complaint. The plaintiffs filed their Third Amended Complaint on May 16, 2002, to which the Company responded with another Motion to Dismiss. The Motion was filed on June 24, 2002 and challenged the legal sufficiency of the allegations. On October 15, 2002, the Court granted that Motion, this time with prejudice. On October 7, 1998 and October 15, 1998, two separate complaints were filed in the Superior Court of San Diego County, California. These state court complaints mirror the allegations set forth in the federal complaints. They also assert claims for common law fraud and the violation of certain California statutes. As with their federal counterparts, they do not allege specific damage amounts. On April 1, 1999, a Consolidated Amended Class Action was filed on behalf of the same state court plaintiffs, and this new complaint alleges the same factual basis as is asserted in the federal litigation. The state litigation pleads claims for fraud and violations of certain California Corporation Code provisions. By stipulation of the parties and order of the court, this state court litigation was stayed pending the outcome of the motion to dismiss the federal lawsuits. The Company believes that the allegations set forth in the federal and state complaints are without merit, and the Company intends to defend against these lawsuits vigorously. No assurance as to the outcome of this matter can be given, however, and an unfavorable resolution of this matter could have a material adverse effect on the Company’s business, results of operations, and financial condition.

On February 27, 2002, a Complaint was filed against certain of the Company’s former officers and directors as well as DAOU On-Line, Inc. in the Superior Court of New Jersey located in Bergen County. A First Amended Complaint was filed on March 1, 2002, adding the Company and its former Chief Financial Officer as parties-defendant. The gravaman of the First Amended Complaint is two-fold. First, it alleges that the Company’s financial statements were misleading and fraudulently induced the plaintiff to merge his company with the Company. Second, the First Amended Complaint alleges breach of an indemnification and severance agreement obligating the Company to defend the plaintiff in a lawsuit filed by Traci Melia, a former employee. Neither the Complaint nor the First Amended Complaint alleges specific damage amounts.

The Company filed a Motion to Dismiss the First Amended Complaint on April 24, 2002. The Court conducted a hearing on June 7, 2002 and granted the motion. On July 23, 2002, plaintiffs filed a Notice of Appeal, but later abandoned their appeal in favor of refiling their lawsuit in San Diego County Superior Court. The parties stipulated to a stay of this lawsuit and submission of the matter to arbitration before the American Arbitration Association. The court approved that stipulation and stayed all proceedings by order dated July 22, 2003. On October 6, 2003, plaintiffs filed a Statement of Claim with the American Arbitration Association, the gravaman of which is the same as the former complaint filed in Bergen County, New Jersey and San Diego County Superior Court. The Statement of Claim alleges compensatory damages in the amount of $1,094,600 and also prays for punitive damages as well as attorneys’ fees and costs. On December 3, 2003, the Company filed an answer to the Statement of Claim, generally denying the allegations and alleging certain affirmative defenses. All parties agreed to the appointment of an arbitrator. A preliminary hearing was conducted on February 3, 2004, during which the parties agreed to the scope of written and oral discovery and how the arbitration would proceed. Arbitration was set for July 26, 2004, however, the plaintiff requested, and was granted, a delay in the proceedings. The parties are finalizing a settlement agreement which is expected to be signed in November 2004. The agreement represents a compromise of the disputed claims and is not to be considered as any admission of fault or liability on the part of either party. The Company has recorded a charge of $250,000 in the third quarter of 2004 which represents management’s estimate of the Company’s requirements under the proposed settlement agreement. This charge is included in general and administrative expenses in the third quarter 2004.

Daou Systems, Inc.

Notes to Condensed Financial Statements

(unaudited)

7. Contingencies (continued)

The Company is party to other various claims and legal actions arising in the normal course of business. Although the ultimate outcome of the matters is not presently determinable, management believes that the resolution of all such pending matters, net of amounts accrued, will not have a material adverse affect on the Company’s business, results of operations or financial condition; however, there can be no assurance that the ultimate resolution of these matters will not have a material impact on the Company’s results of operations in any period.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of Daou Systems, Inc. You should not place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements usually contain the word “estimate,” “anticipate,” “hope”, “believe,” “think”, “expect,” “intend”, “plan” or similar expressions, and are subject to numerous known and unknown risks and uncertainties. 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 achieve a successful sales program and to obtain new customer contracts; the long sales cycle in obtaining new customers and larger contracts; industry spending patterns and market conditions, including seasonal trends; the reduction in size, delay in commencement or loss or termination of one or more significant projects; the management of the Company’s operations; management of future growth; the Company’s ability to continually offer services and products that meet its customers’ demands, as new technologies or industry standards could render its services obsolete or unmarketable; the ability of the company to successfully execute strategies for realizing shareholder value; and the effects of healthcare industry consolidation and changes in the healthcare regulatory environment on existing customer contracts. In evaluating such statements, you should carefully review various risks and uncertainties identified in this report, including our Financial Statements and the related notes and in our other SEC filings, including those more fully set forth in the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of our Form 10-K for the year ended December 31, 2003 on file with the SEC. These risks and uncertainties could cause our actual results to differ materially from those indicated in the forward-looking statements. We do not undertake any obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.

Overview of the Company

Daou provides integrated information technology (IT) solutions and services to the healthcare industry in the United States. The Company is principally focused on providing IT services and solutions to healthcare providers, payers and health plans and government healthcare. Our services include application development and integration, application implementation and support, network services, management consulting, and business process redesign. We design and implement solutions to help healthcare organizations navigate the intersection of legacy systems with emerging technologies, such as Web portals, wireless and other portable computing solutions.

Recent Developments

Vincent K. Roach, former Executive Vice President, was promoted to the position of President and Chief Executive Officer, effective July 19, 2004. For a description of the terms of the employment agreement with Mr. Roach refer to Note 6 of our condensed financial statements.

Overview of the IT industry and material trends impacting the Company’s results of operations

In recent years, the healthcare industry has experienced a slow-down in consulting expenditures as fiscal constraints imposed by federal, state and commercial payers reduced overall industry demand for new IT service consulting projects. Some of these forces and others negatively impacted the demand for our services in the first three quarters of 2004. Furthermore, changes in federal, state and commercial payer reimbursement may continue to adversely affect the financial stability of our clients and may impact their ability to contract for and pay for professional services such as those offered by Daou.

Our challenges in the third quarter 2004 were a result of the previously announced discontinuation of our support center management services, the completion of a large network upgrade project, the continued softness in the demand for new implementations of financial and administrative software solutions in the payer market, and our difficulty in establishing sustainable sales results. In the third quarter 2004, we retained billable employees not engaged in contract work by investing in their continuing industry specific education, training and professional development, resulting in lower gross margins, as we continue to diversify our service offerings to include business process improvement consulting, wireless and mobile computing, and other related IT consulting services.

Vincent K. Roach, our newly appointed President and Chief Executive Officer, assumed his new role on July 19, 2004 and is focusing his efforts on evaluating the strategic direction of our operations. We are assessing the merits of organizing our sales and service delivery operations by markets, with direct concentration in the payer, provider and government markets. Our ability to focus and effectively sell our services continues to be our major challenge as we finish 2004 and look ahead to 2005. We are pressured by the increase in outsourcing of IT services and reduced IT budgets of both payers and providers. We continue to experience downward pressure on prices for professional IT services as a result of greater competition and there can be no assurances that we will be successful in reengineering our services to meet the current or future demands of the healthcare industry.

Key indicators of our financial condition and operating performance

Utilization of our professional staff, which is the ratio of total billable hours to available hours in a given period, and our ability to manage fixed price contracts, are among our top challenges. We employed 95 billable professionals on September 30, 2004, down from 154 at December 31, 2003 and 163 at September 30, 2003. The salaries and benefits of this staff are recognized in our cost of revenue before reimbursable expenses. Most non-billable employee salaries and benefits are recognized as a component of either selling or general and administrative expenses. While quarterly net revenues declined by 44% in the third quarter 2004 as compared to the third quarter 2003, we worked to balance maintaining enough experienced professionals ready to be deployed when the business opportunities were presented, making appropriate investments in education and training of our employees to remain competitive, while striving to protect our gross margin.

Effective February 25, 2004, with the completion of our final contract, we discontinued providing support center management services to hospitals and Integrated Delivery Networks. Net revenue from this service line represented approximately 11% of 2003 net revenue. We experienced the full impact of this decision on our revenue in the second and third quarters 2004.

Selling, general and administrative (SG&A) overhead expenses were flat in the third quarter 2004 compared to the second quarter 2003, however, these expenses increased as a percentage of net revenue to 45% of net revenue. SG&A costs remained high in the third quarter partially due to our recording an expense of $250,000 related to the pending settlement of litigation and applicable legal and professional fees associated with the matter. We will strive to reduce our general and administrative expenses by managing those costs that are mostly controllable such as staffing, facilities, IT and operating systems in order to more closely align these costs with net revenue.

Characteristics of our revenue and expenses

We generate substantially all of our revenue from professional services, primarily on a “time and expense” project basis, under which revenue is recognized as the services are performed. Billings for these services occur on a semi-monthly or monthly basis as specified by the contract with a particular customer. Our billing rates are commensurate with the healthcare-domain IT expertise, know-how and skills of our people. Our time and expense projects generally range from three to six months, although certain projects have been for periods in excess of a year. Our network system and payer application system implementation engagements typically average six months, but may vary depending on the size and complexity of the project.

We continue to provide some of our professional services on a fixed-fee basis. Revenue on fixed-fee contracts is recognized relative to the level of service performed based upon the amount of labor cost incurred on the project versus the total labor costs to complete the project. Our gross margin with respect to fixed fee contracts varies significantly depending on the percentage of such services consisting of the resale of third-party products (with respect to which we obtain a lower margin) versus professional services.

We bill our customers for out-of-pocket expenses, primarily travel and related expenses incurred with respect to services provided to customers, and have adopted the provisions of the Emerging Issues Task Force (“EITF”) Topic D-103, Income Statement Characterization of Reimbursements for “Out-of-Pocket” Expenses Incurred, issued in November 2001. EITF Topic D-103 states that reimbursements received for out of pocket expenses should be characterized as revenue on the income statement. The application of EITF Topic D-103 does not have an impact on current or previously reported net income (loss) or net income (loss) per share. We will continue to use net revenue (revenue before reimbursements) and cost of revenue before reimbursable expenses to compute percentage and margin calculations, as well as for purposes of comparing the results of operations for the three- and nine-months ended September 30, 2004 to the three- and nine- months ended September 30, 2003.

Payments received in advance of services performed are recorded as deferred revenue. Certain contract payment terms may result in customer billing occurring at a pace slower than revenue recognition. The resulting revenue recognized in excess of amounts billed and project cost is included in contract work in progress on our balance sheet.

Cost of revenue primarily consists of all expenses that are directly attributable to our service lines and include the salaries, bonuses and related benefits of our consultants as well as non-billable managers and support staff, subcontractor expenses, training costs and unit-specific office space costs. Our consultant-related costs are relatively fixed; therefore, fluctuations in our gross margin may occur due to changes in project margins and utilization rates of our professional staff. We often continue to employ non-engaged employees in anticipation of commencement of a project. If delays in contract signing occur or projects do not materialize, our gross margin could vary due to the associated loss of revenue to cover fixed labor costs.

Sales and marketing expenses primarily consist of the salaries, benefits, travel and other costs of our sales and marketing teams, as well as marketing initiatives and business development expenses. General and administrative expenses primarily consist of the costs attributable to the support of our consultants, such as: investments in information systems, salaries, expenses and office space costs for executive management, financial accounting, purchasing, administrative and human resources personnel, recruiting fees, legal and other professional services.

Results of Operations

The following table sets forth, for the periods indicated, certain statement of operations data as a percentage of net revenue.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Revenue before reimbursements (net revenue)	100	%	100	%	100	%	100	%
Cost of revenue before reimbursable expenses	80		69		78		67

Gross profit	20		31		22		33
Operating expenses:	45		25		38		27

(Loss) income from operations	(25	)	6		(16	)	6
Other income, net	1		—		1		1

Net (loss) income	(24	)%	6	%	(15	)%	7	%

Three Months Ended September 30, 2004 and 2003

Our net revenue decreased 44% or $4.5 million to $5.6 million for the three months ended September 30, 2004 from $10.1 million for the three months ended September 30, 2003. The decrease was primarily due to the discontinuation of our support center management services, the completion of a large network upgrade project, the continued softness in the demand for new implementations of financial and administrative software solutions in the payer market, and the weak performance of our sales efforts.

Services to our five largest customers accounted for $2.2 million of net revenue for the three months ended September 30, 2004, representing 39% of total net revenue, with one customer accounting for 11% of total net revenue. This compares to net revenue from the five largest customers for the three months ended September 30, 2003 totaling $4.7 million, or 47% of total net revenue. With the discontinuation of our support center management services and the completion of large network upgrade projects, revenues are becoming less concentrated among a small group of customers.

Cost of revenue before reimbursable expenses decreased 36% or $2.5 million to $4.5 million for the three months ended September 30, 2004 from $7.0 million for the three months ended September 30, 2003. This was attributable primarily to a decrease in our billable workforce to 95 professionals in the third quarter 2004 from 163 in the third quarter of 2003, and a decrease in direct material costs by $635,000 in the third quarter 2004 compared to the third quarter of 2003 as a result of the completion of a large network upgrade project at the end of the first quarter 2004.

Gross margin was 20% in the third quarter of 2004, compared to 31% in the third quarter of 2003. We experienced lower margins on professional services related to infrastructure services, payer application implementation services, and government healthcare integration services. Lower margins were attributable to continued downward pricing pressure for professional IT consulting services and lower utilization of a smaller staff of professionals as a result of the lack of new sales for these services.

Third quarter 2004 operating results reflected a reduced level of marketing and business development expenses as we attempt to lower our costs as a result of declining revenue. During the third quarter 2004, sales and marketing expenses decreased 36% or $405,000 to $707,000 for the three months ended September 30, 2004 from $1.1 million from the three months ended September 30, 2003.

General and administrative expenses increased 9%, or $154,000 to $1.8 million for the three months ended September 30, 2004 from $1.7 million for the three months ended September 30, 2003, partially due to our recording an expense of $250,000 related to the proposed settlement of litigation and legal and professional fees associated with the matter. We continue to manage those costs that are mostly controllable such as staffing, facilities and operational overhead.

Nine Months Ended September 30, 2004 and 2003

Our net revenue decreased 35% or $11.4 million to $21.1 million for the nine months ended September 30, 2004 from $32.5 million for the nine months ended September 30, 2003. The decrease was primarily due to the discontinuation of our support center management services, the completion of a large network upgrade project, the continued softness in the demand for new implementations of financial and administrative software solutions in the payer market, the delays and resulting decline in our activity with federal government health care, and the weak performance of our sales efforts in each of the markets we serve.

Services to our five largest customers accounted for $7.5 million of net revenue for the nine months ended September 30, 2004, representing 35% of total net revenue, with one customer accounting for 10% of total net revenue. This compares to net revenue from the five largest customers for the nine months ended September 30, 2003 totaling $14.1 million, or 43% of total net revenue. With the discontinuation of our support center management services and the completion of large network upgrade projects, revenues are becoming less concentrated among a small group of customers.

Cost of revenue before reimbursable expenses decreased 24%, or $5.3 million, to $16.5 million on revenue of $21.1 million for the nine months ended September 30, 2003, from $21.8 million on revenue of $32.5 million for the nine months ended September 30, 2003. The decrease in cost of revenue was attributable primarily to the reduction in our billable workforce. Additionally, we had a decrease in direct material costs of $979,000 in the period, and a decrease of $606,000 in third party sub-contractor costs.

Gross margin decreased to 22% for the nine months ended September 30, 2004 compared to 33% for the nine months ended September 30, 2003. We experienced lower margins on professional services related to infrastructure services, payer application implementation services and government healthcare integration services, offset by higher margins in our support center management services as a result of final billings related to the completion of one large contract. Lower margins were attributable to continued downward pricing pressure for professional IT consulting services and lower utilization of a smaller staff of professionals as a result of the lack of new sales for these services.

Operating results reflected a reduced level of marketing and business development expenses as we attempt to lower our costs as a result of declining revenue. During the first nine months of 2004, sales and marketing expenses decreased 22%, or $743,000 to $2.7 million for the nine months ended September 30, 2004 from $3.4 million for the nine months ended September 30, 2003.

General and administrative expenses decreased 5%, or $274,000, to $5.3 million for the nine months ended September 30, 2004 from $5.5 million for the nine months ended September 30, 2003. General and administrative expenses for the nine months ended September 30, 2004 reflected savings in employee-related costs attributable to our decision in March 2004 to decrease the size of our administrative and management staff, and was partially offset by certain one-time expenses due to severance obligations to our former chief executive officer and other administrative and management staff, and legal and professional fees and costs associated with the proposed settlement of litigation.

Income Taxes

We have a history of losses, which, for income tax purposes, generated sizeable federal and state tax net operating loss (“NOL”) carryforwards, at December 31, 2003, of approximately $27.0 million and approximately $8.2 million, respectively. The federal loss carryforwards will expire beginning 2018 through 2022, and the state loss carryforwards expire from 2004 through 2022, unless previously utilized. Pursuant to generally accepted accounting principles, we previously recorded a valuation allowance against the deferred tax asset associated with these NOL carryforwards as it is more likely than not that we will not be able to utilize the NOL carryforwards to offset future taxes. Due to the size of the NOL carryforwards in relation to our history of unprofitable operations, we have not recognized any of this net deferred tax asset. It is possible that we could be profitable in the future at levels which would cause us to conclude that it is more likely than not that we will be able to realize all or a portion of the NOL carryforwards. Upon reaching such a conclusion, we would record the estimated net realizable value of the deferred

tax asset at that time and would then begin to provide for income taxes at a rate equal to our combined federal and state effective rates, which we believe would approximate 40%. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period.

Under Section 382 of the Internal Revenue Code, the annual use of our NOL carryforwards may be limited in the event of a cumulative change in ownership of more that 50%. However, we currently do not believe such a limitation will have a material impact on the ultimate utilization of these carryforwards.

Liquidity and Capital Resources

On September 30, 2004, we had working capital of $12.3 million, a decrease of $3.5 million from $15.8 million on December 31, 2003. The decrease was primarily attributable to the operating loss for the nine months ended September 30, 2004.

For the nine months ended September 30, 2004, net cash used by operating activities was $1.9 million, compared to net cash used by operating activities of $673,000 for the nine months ended September 30, 2003. The increase in the use of our cash was primarily the result of net operating losses experienced in the nine months ended September 30, 2004.

Net cash used in investing activities was $352,000 for the nine months ended September 30, 2004, compared to net cash used in investing activities of $180,000 in the comparable prior period. The increase was primarily due to the purchase of fixed assets (upgrading computer systems) in 2004.

Net cash provided by financing activities for the nine months ended September 30, 2004 was $38,000 compared to net cash used in financing activities of $57,000 in the comparable prior period. Net cash used in financing activities for the nine months ended September 30, 2003 included $74,000 related to the repurchase of restricted stock, net of notes receivable during the period.

As previously disclosed, in July 1999 we issued 2,181,818 shares of Series A Convertible Preferred Stock to Galen Partners and their affiliates for an aggregate amount of $12 million; or $5.50 per share. Holders were initially entitled to receive cumulative dividends at the rate of six percent per annum, generally payable in the form of shares of Series A Preferred Stock until July 26, 2001. The dividend rate increased to 7% on July 26, 2001, and increases an additional 1% on July 26 of each year up to a maximum of 12%. The current dividend rate is 10%. No dividends may be paid on the common stock unless full dividends on the Series A Preferred Stock for the then current dividend period have been either paid or declared with a sum sufficient for the payment set apart.

The holders of the Series A Convertible Preferred Stock vote on an as converted to common stock basis with the holders of common stock. The Series A Preferred stockholders also have a liquidation preference of $5.50 per Series A share, plus any accrued but unpaid dividends. We are required to make a best efforts attempt to secure one Board of Director seat for a representative of the holders of Series A Preferred Stock. The holders of Series A Preferred Stock also obtained certain Registration Rights as part of the original financing transaction in July 1999. They have since permanently waived those rights.

As of September 30, 2004, we have accrued but undeclared preferred stock dividends of $5.4 million (payable in kind by the issuance of approximately 981,346 shares of Series A Preferred Stock), thereby entitling the holders of the Series A Preferred Stock to a total liquidation preference of $17.4 million.

We are continuing to evaluate ways to improve our financial structure. Although we have an accumulated deficit as of September 30, 2004, we believe that our available funds are sufficient to meet our current operating needs. However, there can be no assurances that our available funds will be adequate to sustain cash requirements in the future. We have no bank debt or outstanding lines of credit. We may sell additional equity or debt securities or obtain credit facilities. The sale of equity securities or issuance of equity securities in future acquisitions or financing could result in dilution to our stockholders and the incurrence of debt could result in interest expense. However, there can be no assurance that we will be able to sell additional equity or debt securities, or be able to

obtain financing on acceptable terms, if at all. Our management and Board of Directors continue to explore alternatives to redeem the Preferred Stock to maximize common shareholder value. In connection with such opportunities, we may need to incur debt or sell additional equity securities. There can be no assurances that we will be successful in modifying our capital structure.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. On an on-going basis, we evaluate these estimates, including those related to revenue recognition, long-lived assets, accrued liabilities, stock-based compensation, and income taxes. Estimates are based on historical experience, information received from third parties and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

We recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition. SAB 104 requires that the following criteria be met in determining whether revenue has been earned:

•

persuasive evidence of an arrangement,

•

services have been delivered,

•

price is fixed and determinable, and

•

collectibility is reasonably assured.

We have the following types of revenue recognition: i) services performed on an hourly basis, ii) services performed on a fixed fee basis and iii) sales of software, material and maintenance contracts. In general, we enter into contracts with customers to provide services at a specified fee or rate per hour. Revenue from professional services is recognized primarily on an hourly basis. Revenue from technical support, network management and help desk services is recognized as the services are performed. Contract revenue for the development and implementation of network solutions under fixed-fee contracts is recognized related to the level of service performed based upon the amount of labor cost incurred on the project versus the total labor costs to complete the project. Provisions for estimated losses on contracts, if any, are made during the period when the loss becomes probable and can be reasonably estimated. Revenue recognized in excess of amounts billed and project costs are classified as contract work in progress. Payments received in advance of services performed are recorded as deferred revenue and amortized as the services are performed.

Bad Debt

We are required to estimate the collectibility of our trade accounts receivable. We perform this analysis on a specific customer identification basis. A considerable amount of judgment is required in assessing the ultimate realization of these receivables, including the credit worthiness of each customer and the age of the customer balances. We estimate the amount to reserve for a specific customer by taking into account the age of the receivables and the payment history of the customer. Significant changes in required reserves have been recorded in recent periods and may occur in the future due to the current market environment and changes in client payment history.

Litigation

We are currently involved in legal proceedings regarding shareholder litigation and other general legal proceedings. As discussed in Note 7 of our financial statements, we believe that the lawsuits are without merit and intend to defend against them vigorously. Although the ultimate outcome of these matters is not presently determinable, management believes that the resolution of all such pending matters, net of amounts accrued, will not have a material adverse effect on our financial position. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions, or the effectiveness of our strategies, related to these proceedings.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Daou invests excess cash primarily in U.S. government securities and marketable debt securities of financial institutions and corporations with strong credit ratings. These instruments have maturities of three months or less when acquired. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. Accordingly, we believe that, while the instruments held are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates, foreign currency exchanges rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective, as of September 30, 2004, in alerting them in a timely manner to material information relating to the Company required to be included in the Company’s periodic SEC filings. There were no significant changes in the Company’s disclosure controls or internal controls over financial reporting during the third quarter of 2004.

Disclosure controls and procedures are designed to ensure information required to be disclosed in reports filed with the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Disclosure controls include internal controls that are designed to provide reasonable assurance that transactions are safeguarded against unauthorized or improper use and that transactions are properly recorded and reported.

Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of the control system inherently has limitations, and the benefits of controls must be weighed against their costs. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Therefore, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On August 24, 1998, August 31, 1998, September 14, 1998 and September 23, 1998, four separate complaints were filed against the Company and certain of its officers and directors in the United States District Court for the Southern District of California. On October 15, 2002, the Court granted the Company’s Motion to Dismiss the class action complaint, with prejudice. The plaintiffs timely noticed appeal and filed their Appellants’ Brief with the Ninth Circuit Court of Appeal on April 9, 2003. On July 2, 2003, Company filed its Respondents’ Brief and Cross-Appeal. The Cross-Appeal challenges the trial court’s failure to assess whether the complaint complied with applicable pleadings standards. After the Appeal and Cross-Appeal were fully briefed, oral arguments were heard before a panel in February 2004. The Company is currently awaiting the court’s decision, which is expected in early 2005.

attorneys’ fees and costs. On December 3, 2003, the Company filed an answer to the Statement of Claim, generally denying the allegations and alleging certain affirmative defenses. All parties agreed to the appointment of an arbitrator. A preliminary hearing was conducted on February 3, 2004, during which the parties agreed to the scope of written and oral discovery and how the arbitration would proceed. Arbitration was set for July 26, 2004, however, the plaintiff requested, and was granted, a delay in the proceedings. The parties are finalizing a settlement agreement which is expected to be signed in November 2004. The agreement represents a compromise of the disputed claims and is not to be considered as any admission of fault or liability on the part of either party. The Company has recorded a charge of $250,000 in the third quarter of 2004 which represents management’s estimate of the Company’s requirements under the proposed settlement agreement. This charge is included in general and administrative expenses.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company’s 2004 Annual Meeting of Stockholders was held on July 22, 2004. The following matters were voted on by the stockholders:

1.	Election of two Class I Directors

Douglas L. Cox and Robert F. Radin were elected to the Board of Directors for terms expiring at the 2007 Annual Meeting of Stockholders and until their successors are duly qualified and elected. The vote was 19.1 million in favor of Mr. Cox with 58,000 votes withheld and 19.1 million in favor of Mr. Radin with 39,000 votes withheld.

The other directors whose terms of office continued after the Annual Meeting are: Larry R. Ferguson, David W. Jahns and Vincent. K. Roach.

2.	Ratification of Independent Auditors

The stockholders ratified the selection of Ernst & Young LLP as the Company’s independent auditors for the fiscal year ending December 31, 2004. The vote was 19.1 million in favor, with 28,000 votes against and 4,000 abstained.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibit No.		Description
10.35		Amended and Restated Employment Agreement, dated August 13, 2004 between Registrant and Vincent K. Roach

31.1		Certification of Vincent K. Roach required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended

31.2		Certification of John A. Roberts required by Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended

32.1		Certification of Vincent K. Roach required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of John A. Roberts required by Rule 13a-14(b) or Rule 15a-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.


Date: November 12, 2004
	Daou Systems, Inc.

	By:	/s/ Vincent K. Roach
		Vincent K. Roach
		Chief Executive Officer and President

	By:	/s/ John A. Roberts
		John A. Roberts
		Chief Financial Officer and Secretary
		(principal financial and accounting officer)

EX-10.35 2 dex1035.htm AMENDED AND RESTATED EMPLOYMENT AGREEMENT Amended and Restated Employment Agreement

Exhibit 10.35

AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This Amended and Restated Employment Agreement (this “Agreement”) is made as of August 13, 2004 by and between DAOU Systems, Inc., a Delaware corporation (“Employer”), and Vincent Roach, an individual resident of Florida (“Employee”).

WHEREAS, Employee and Employer are parties to an Employment Agreement dated June 1, 2001 (the “Prior Agreement”), pursuant to which Employer has employed Employee;

WHEREAS, the Prior Agreement is scheduled to expire on December 31, 2004; and

WHEREAS, Employer and Employee wish to amend the Employment Agreement to create rights in Employee in connection with his promotion to the position of President and Chief Executive Officer (“CEO”);

NOW THEREFORE, in consideration of the mutual covenants and obligations contained herein, and intending to be legally bound, the parties, subject to the terms and conditions set forth herein, agree as follows:

1. Employment Terms and Duties.

1.1. Employment. Employer employs Employee, and Employee accepts employment by Employer, upon the terms and conditions set forth in this Agreement.

1.2. Employment Period. Employer hereby employs Employee and Employee hereby accepts employment with the Company, until termination of this Agreement in accordance with the provisions of Section 5 hereof (the “Term”), to hold the office of President and Chief Executive Officer of Employer during the Term (such office, referred to herein as the “Position”).

1.3. Duties. During the Term, Employee shall serve Employer faithfully and to the best of his ability and shall devote his entire business time, attention, skill and efforts to the performance of the duties required by or appropriate for the Position. Employee shall use his best efforts to promote the success of Employer’s business, and will cooperate fully with the Board of Directors in the advancement of the best interests of Employer. Subject to the oversight of the Board of Directors, Employee shall have (i) responsibility for the exercise of the executive authority of Employer, being the general and active management of the business of Employer and the carrying into effect of all orders and resolutions of the Board of Directors, which executive authority may be delegated by Employee to other officers and/or employees of Employer, and (ii) such duties and responsibilities as may be assigned to him from time to time by the Board of Directors. Employee shall report to the Board of Directors and shall perform his duties and responsibilities hereunder at such location or locations as may be set reasonably from time to time by the Board of Directors.

1.4. Compliance with Employer’s Policies. Employee acknowledges and agrees to comply with Employer’s Confidentiality, Inventions and Non-Compete Agreement (“Confidentiality Agreement”). The Confidentiality Agreement is attached to this Agreement as Exhibit A and is incorporated by reference.

2. Compensation. Employer shall pay Employee, and Employee hereby agrees to accept, as compensation for all services to be rendered to Employer and for Employee’s covenants, assignments and covenants not to compete, the compensation set forth in this Section 2.

2.1. Base Salary Through December 31, 2004. From the effective date of this Agreement through December 31, 2004, Employer shall pay Employee a base salary at the annualized rate of Seven Hundred Fifty Thousand Dollars and Zero Cents ($750,000.00), less all gross compensation previously paid to Employee by Employer with respect to the calendar year 2004, with the remainder to be paid in equal semi-monthly installments in accordance with Employer’s normal payroll schedule. The salary amounts shall be subject to all applicable income, social security, and other taxes required to be withheld by Employer.

2.2. Additional Compensation Through December 31, 2004. Subject to Section 2.4(e), from the effective date of this Agreement through December 31, 2004, Employer shall pay additional compensation to Employee in the gross amount of Four Hundred Forty Four Thousand Dollars and Zero Cents ($444,000.00) in consideration for his execution of the Confidentiality Agreement. This additional compensation shall be paid in equal semi-monthly installments in accordance with Employer’s normal payroll schedule and shall be subject to all applicable income, social security, and other taxes required to be withheld by Employer.

2.3. Base Salary Commencing January 1, 2005. Commencing January 1, 2005, Employee shall be paid an annualized base salary (“Base Salary”) of Three Hundred Thousand Dollars and Zero Cents ($300,000.00), in equal semi-monthly installments in accordance with Employer’s normal payroll schedule and shall be subject to all applicable income, social security, and other taxes required to be withheld by Employer.

2.4. Retention Bonus.

(a) Subject to Section 2.4(d), Employee shall be eligible to receive a Retention Bonus if (i) a Transaction occurs, and (ii) Employee is the President and CEO as of the closing of the applicable Transaction.

-2-

(b) Determination of the Retention Bonus. Subject to the terms of this Agreement, Employee’s Retention Bonus shall be based upon one of the following alternative transaction models consistent with the form of a Transaction:


Transaction	Selling Price (Including cash equivalents of any non-cash consideration provided by the Buyer)	Retention Bonus Increment
Sale of ASD independently (retention bonus for such a sale to be paid in addition to any retention bonus amounts paid in conjunction with sale of other business units independently or as a group)	Up to $5 Million Between $5 Million and $10 Million Between $10 Million and $15 Million	0 10% of the Selling Price $500,000 plus 12.5% of the Selling Price in excess of $10 Million
	Over $15 Million	$1,125,000 plus 15% of the excess of the Selling Price over $15 Million, up to a maximum of $2,000,000

Sale of any one business unit in a single transaction other than ASD independently (retention bonus for such a sale to be paid in addition to any retention bonus amounts paid on conjunction with a sale of other business units independently or as a group)	Up to $2.5 Million Between $2.5 Million and $5 Million	5% of the Selling Price $125,000 plus 7.5% of the Selling Price in excess of $2.5 Million
	Over $5 Million	$312,500 plus 10% of the Selling Price in excess of $5 Million, up to a maximum of $1,000,000 (for all such transactions).

-3-


Transaction	Selling Price (Including cash equivalents of any non-cash consideration provided by the Buyer)	Retention Bonus Increment
Sale of the entire business, as it existed at the time of execution of this Agreement Note: This bonus shall not be combined with any other bonus under this Section 2.4(b).	Up to $10 Million Between $10 Million and $20 Million Over $20 Million	6% of the Selling Price $600,000 plus 7% of the Selling Price in excess of $10 Million $1,300,000 plus 8% of the Selling Price in excess of $20 Million, up to a maximum of $2,500,000


Merger of the entire business as it existed at the time of execution of this Agreement, with or into another business with no additional material payment of cash or other consideration (i.e., essentially an all stock or mostly stock transaction)	Not Applicable	$1,000,000

Note: This bonus shall not be combined with any other bonus under this Section 2.4(b).

(c) Payment of Retention Bonus. The Retention Bonus shall be paid in a lump sum payment, without interest or earnings, within five (5) business days following the closing of the Transaction.

(d) Limitation on Retention Bonus. If one or more Transactions are closed prior to December 31, 2004, Employee shall receive a Retention Bonus with respect to such Transactions only if the aggregate Retention Bonus amount is greater than the aggregate compensation set forth in Sections 2.1 and 2.2 and, in such case, Employee’s Retention Bonus for such Transactions shall be equal to such excess.

(e) Termination of Employment. If Employee’s employment is terminated for any reason (or no reason) by Employer or Employee, Employee shall be eligible to receive a Retention Bonus for Transactions that have closed prior to Employee’s effective date of termination.

-4-

(f) Possible Discretionary Bonus. If Employee’s employment terminates without Cause or for Good Reason, or if a calendar year ends prior to the closing of a Transaction, the Board of Directors, in their sole discretion, may pay Employee a discretionary bonus in an amount to be determined by the Board of Directors.

(g) Allocation of Retention Bonus. The parties agree that all amounts to be paid as Retention Bonuses have been determined by mutual agreement of the parties for the purpose of compensating Employee, and shall be deemed to have been paid, 50% in consideration of Employee’s efforts on behalf of the Company and 50% in consideration for the extension of the post-employment period of non-competition and related covenants contemplated by the Confidentiality Agreement.

(h) Definitions. For purposes of this Agreement, the following terms shall have the meaning specified:

(i) “ASD” means the component of Daou Systems, Inc. known as the Application Services Division, of which Employee, per the Prior Agreement, was President.

(ii) “Control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.

(iii) “Transaction” means any transaction or a series of transactions whereby, directly or indirectly, Control of (except in the ordinary course of business or routine securities trading activity) Employer, ASD or other business units is transferred for consideration to an unaffiliated third party, including, without limitation, a sale or exchange of capital stock or assets, a merger or consolidation, a tender or exchange offer, or any similar transaction; and

(iv) “Retention Bonus” means the monetary award set forth in Section 2.4(b) for the applicable Transaction.

2.5. Possible Reduction in Payments. Payments under Section 2.4 shall be made without regard to whether the deductibility of such payments (or any other payments) would be limited or precluded by Section 280G of the Internal Revenue Code of 1986 (the “Code”) and without regard to whether such payments would subject Employee to the federal excise tax levied on certain “excess parachute payments” under Section 4999 of the Code; provided, however, that if the Total After-Tax Payments (as defined below) would be increased by the limitation or elimination of any amount payable under Section 2.4, then the amount payable under Section 2.4 will be reduced to the extent necessary to maximize the Total After-Tax Payments. The determination of whether and to what extent payments under Section 2.4 are required to be reduced in accordance with the preceding sentence will be made at the Company’s expense by the Company’s independent auditor or, upon the mutual consent of the parties, another independent certified public accountant, which determination will be final and binding absent manifest error. In the event of any underpayment or overpayment (as determined after the application of this Section 2.5), the amount of such underpayment or overpayment will be immediately paid by the Company to Employee or refunded by Employee to the Company, as the case may be, with interest at the applicable federal rate provided for in Section 7872(f)(2) of

-5-

the Code. For the purposes of this Agreement, “Total After-Tax Payments” means the total of all “parachute payments” (as that term is defined in Section 280G(b)(2) of the Code) made to or for the benefit of Employee (whether made under this Agreement or otherwise), after reduction for all applicable federal taxes (including, without limitation, the excise tax described in Section 4999 of the Code).

2.6. Interest Amounts. Employer will pay Employee an amount equal to Employee’s interest obligations less applicable taxes (“Interest Amounts”) pursuant to the Promissory Note executed by Employee in favor of Employer pursuant to the Prior Agreement and its related documents.

2.7. Discretionary Bonuses. Employer may, but is not required to, grant Employee future cash bonus awards at such times and in such amounts as Employer’s Board of Directors may determine.

3. Benefits. Employee will, during the Employment Period, be permitted to participate in such pension, profit sharing, bonus, life insurance, hospitalization, major medical and other employee benefit plans of Employer that may be in effect from time to time, to the extent Employee is eligible under the terms of those plans (collectively, the “Benefits”).

4. Vacations and Holidays. Employee will be entitled to paid vacation in an amount of four weeks per year. Employee may carry-over from one year to the next any accrued but unused vacation up to a maximum of six weeks of vacation. Once Employee accrues the maximum vacation, he will not accrue additional vacation until he takes enough vacation to bring his accrual below the maximum. Employee may take vacation at such time or times as approved by the Board of Directors, such approval not to be unreasonably withheld. Employee is entitled to holidays in accordance with the holiday policies of the Company in effect for its employees from time to time.

5. Termination.

5.1. Termination by Employer for Cause or because of Employee’s Death or Disability; Termination by Employee without Good Reason.

(a) Termination by Employer for Cause or because of Employee’s Death or Disability. Employer may terminate Employee’s employment at any time for Cause or because of Employee’s death or Disability. In the event that Employee’s employment terminates for one of the reasons set forth in this Section 5.1(a), Employer will pay Employee or his estate within thirty days after the effective date of termination his Base Salary and any Retention Bonus earned through the date of termination; and any vacation accrued and owing through the termination date. Employee will not be entitled to any other compensation.

(b) Definition of Cause. For purposes of this Agreement, “Cause” is defined as (i) Employee’s knowing and willful misconduct in the performance of his duties; (ii) Employee’s failure to reasonably and in good faith perform the duties of his position; (iii) Employee’s material breach of the Confidentiality Agreement; (iv) Employee’s material failure to adhere to any written policy of Employer that is legal and generally applicable to officers of Employer; or (v) the conviction of, or the entering of a guilty plea or plea of no

-6-

contest with respect to a felony, the equivalent thereof, or any other crime which involves dishonesty, fraud (financial or other) or other moral turpitude. Employee shall be provided a period of fifteen days from Employee’s receipt of the written notice of the existence of Cause to cure the harm or breach that gives rise to the determination that Cause exists for termination.

(c) Definition of Disability. For purposes of this Agreement, “Disability” shall be defined as a mental or physical impairment of Employee that renders him unable to perform the essential functions of his position, with or without a reasonable accommodation, for a period of ninety (90) days. In the event of a dispute as to whether Employee has a Disability as defined in this Agreement, Employer and Employee shall have equal rights in securing a confirming or countervailing professional opinion.

(d) Termination by Employee without Good Reason. In the event Employee terminates his employment for any reason other than Good Reason as defined in this Agreement, Employer will pay Employee within thirty days after the effective date of termination his Base Salary earned through the date of termination and any vacation accrued and owing through the termination date. Employee will not be entitled to any other compensation.

(e) Definition of Good Reason. For purposes of this Agreement, termination for “Good Reason” is defined as the termination by Employee of his employment with Employer within three (3) months after the first occurrence of any of the following events:

(i) other than as set forth in this Agreement, any reduction in Employee’s base salary or material detrimental change to the terms under which Employee is eligible for bonus compensation under this Agreement;

(ii) any significant reduction in Employee’s responsibilities and authority or a material change in Employee’s responsibility or authority that would be inconsistent or interfere with the duties of the President, CEO and/or an officer of Employer;

(iii) any failure by Employer to pay Employee’s compensation in a timely manner;

An event described in Section 5.1(e)(i) through (iii) will not constitute Good Reason unless Employee provides written notice to Employer of his intention to terminate his employment for Good Reason and unless Employer does not cure the Good Reason within fifteen (15) days of Employer’s receipt of the written notice, except that Employer shall have only seven (7) days from Employee’s written notice to cure a failure to timely pay Employee’s compensation.

5.2. Termination by Employer for Reason Other Than Cause, Death or Disability; Termination by Employee for Good Reason.

(a) Termination by Employer for Reason Other Than Cause, Death or Disability or Termination by Employee for Good Reason Prior to December 31, 2004. If Employer terminates Employee’s employment for a reason other than Cause, death or Disability or Employee terminates his employment for Good Reason prior to December 31, 2004, Employee shall receive his base salary and additional compensation payments set forth in

-7-

Sections 2.1 and 2.2 herein through December 31, 2004, and any earned Retention Bonus. The payments provided for in this Section 5.2(a) shall be paid in equal semi-monthly installments, or according to Employer’s regular payroll practices. Employee’s receipt of the payments described in this Section 5.2(a) is conditioned upon his execution of a release of all claims in favor of Employer in substantially the form attached to this Agreement as Exhibit B. Employee will not be entitled to any other compensation.

(b) Termination by Employer for Reason Other Than Cause, Death or Disability or Termination by Employee for Good Reason On or After January 1, 2005. If Employer terminates Employee’s employment for a reason other than Cause, death or Disability or Employee terminates his employment for Good Reason on or after January 1, 2005, Employee shall receive (i) any Retention Bonus earned through the date of termination; and (ii) a severance payment of Three Hundred Thousand Dollars and Zero Cents ($300,000.00); provided, however, Employee shall be eligible to receive, and Employer shall have no obligation to pay, such severance payment if Employer had previously paid Employee one or more Retention Bonuses in the aggregate of at least Three Hundred Thousand Dollars ($300,000) under this Agreement. The payment provided for in this Section 5.2(b) shall be paid in equal semi-monthly installments, or according to Employer’s regular payroll practices. Employee’s receipt of the payments described in this Section 5.2(b) is conditioned upon his execution of a release of all claims in favor of Employer in substantially the form attached to this Agreement as Exhibit B. Employee will not be entitled to any other compensation.

5.3. Benefits. Employee’s accrual of, and participation in plans providing for, Benefits will cease at the effective date of Employee’s termination for any reason, and Employee will be entitled to accrued Benefits pursuant to such plans only as provided in such plans.

5.4. Subsequent Employment by Affiliate or Assignee. Employment shall not be deemed to have been terminated under this Agreement if Employee is offered employment under substantially the same or better terms by an affiliate of Employer, or by any successor in interest, assignee or purchaser of substantially all of Employer’s assets.

6. General Provisions.

6.1. Representations and Warranties by Employee. Employee represents and warrants to Employer that the execution and delivery of this Agreement do not, and the performance by the parties of their obligations hereunder will not, with or without the giving of notice or the passage of time, or both: (a) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to Employee; or (b) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which Employee is a party or by which Employee is or may be bound.

6.2. Waiver. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor any delay by either party in exercising any right, power, or privilege under this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right

-8-

arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement.

6.3. Binding Effect; Delegation of Duties Prohibited. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors, assigns, heirs, and legal representatives, including any entity with which Employer may merge or consolidate or (at Employer’s election) any entity to which all or substantially all of its assets may be transferred. The duties and covenants of Employee under this Agreement, being personal, may not be delegated.

6.4. Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties):


If to Employer:		DAOU Systems, Inc.
		Suite 300
		412 Creamery Way
		Exton, PA 19341
		Attention: John A. Roberts
		Facsimile No.: 610.524.3182

With a copy to:		Pepper Hamilton LLP
		400 Berwyn Park
		899 Cassatt Road
		Berwyn, PA 19312-1183
		Attention: Steven J. Feder
		Facsimile: 610.640.7835

If to Employee:		Vincent Roach
		101 West Washington Street
		Suite 1110-E
		Indianapolis, IN 46240
		Facsimile No.: 610.524.3182

With a copy to:		Gibson, Dunn & Crutcher, LLP
		1050 Connecticut Avenue, N.W.
		Washington, DC 20036
		Attention: Brian Lane
		Facsimile: 202.530.9589

-9-

6.5. Entire Agreement; Amendments. This Agreement and its Exhibits, by and between Employer and Employee, contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the parties to this Agreement with respect to the subject matter of this Agreement, including, without limitation, the Prior Agreement. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties.

6.6. Governing Law. This Agreement will be governed by the laws of Indiana without regard to conflicts of laws principles.

6.7. Drafting Ambiguities. Each party to this Agreement has had an opportunity to consult with counsel regarding this Agreement and its covenants. The rule of construction that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any of the amendments to this Agreement.

6.8. Binding Arbitration. Any dispute or claim arising out of this Agreement shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association (AAA) or of the Judicial Arbitration and Mediation Services (JAMS) and will be governed by the Model Employment Arbitration rules of AAA. The arbitration shall be held in Indianapolis, Indiana. The arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Any final judgment only may be appealed on the grounds of improper bias or improper conduct of the arbitrator. Any arbitration award will be enforceable in any court of competent jurisdiction. The arbitrator will apply Indiana substantive law in all respects. The arbitrator shall have the power to award the party prevailing in the resolution of any such claim, in addition to such other relief as may be granted, an award of all reasonable attorneys fees, expenses and costs incurred in pursuit of the claim, without regard to any statute, schedule, or rule purported to restrict such award.

6.9. Injunctive Relief. Notwithstanding the provisions of Section 6.9, Employee acknowledges that any breach of Exhibit A to this Agreement may result in irreparable and continuing damage to Employer for which there can be no adequate remedy at law, and in the event of any such breach, Employer shall be entitled to seek immediate injunctive relief, and that Employer may seek this injunctive relief from the appropriate court of law and to this limited extent is not bound by Section 6.8. Employer’s obligation to post an undertaking in support of a petition for injunction under this Section 6.9 will be determined under the applicable law and in an amount to be determined by the court.

6.10. Section Headings, Construction. The Section headings in this Agreement are provided for convenience only and will not affect its construction or interpretation. All references to “section” or “sections” refer to the corresponding Section or sections of this

-10-

Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word “including” does not limit the preceding words or terms.

6.11. Severability. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

6.12. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement.


EMPLOYER:		EMPLOYEE:

DAOU Systems, Inc.

By:	/s/ John A. Roberts	/s/ Vincent K. Roach
	John A. Roberts	Vincent K. Roach
Its:	Chief Financial Officer

-11-

EXHIBIT A

CONFIDENTIALITY, INVENTIONS AND NON-COMPETE AGREEMENT

This Confidentiality, Inventions and Non-Compete Agreement (this “Confidentiality Agreement”), confirms the agreement between Vincent Roach (“Employee”) and DAOU Systems, Inc., a Delaware corporation (the “Employer”), which is a material part of the consideration for the August 13, 2004 Amended and Restated Employment Agreement between Employee and Employer (the “Agreement”).

1. Acknowledgments by Employee. Employee acknowledges that (a) during the Term, as that term is defined in the Agreement, and as a part of the Employment, Employee will be afforded access to Employer’s Confidential Information; (b) public disclosure of such Confidential Information could have an adverse effect on Employer and its business; (c) because Employee possesses substantial technical expertise and skill with respect to Employer’s business, Employer desires to obtain exclusive ownership of each Employee Invention, and Employer will be at a substantial competitive disadvantage if it fails to acquire exclusive ownership of each Employee Invention; and (d) the provisions of this Confidentiality Agreement are reasonable and necessary to prevent the improper use or disclosure of Confidential Information and to provide Employer with exclusive ownership of all Employee Inventions. For purposes of this Agreement, “Confidential Information” is defined as information which Employer reasonably considers to be confidential and proprietary to Employer.

2. Confidential and Trade Secret Information.

2.1. Employee acknowledges and agrees that all Confidential Information known or obtained by Employee, whether before or after the date of this Confidentiality Agreement, is the property of Employer. Therefore, Employee agrees that Employee shall hold in confidence the Confidential Information and shall not disclose it to any Person, including disclosures for the benefit of competitors of Employer, or use for personal gain any Confidential Information, whether Employee has such information in Employee’s memory or embodied in writing or other physical form, except with the specific prior written consent of Employer or except as otherwise expressly permitted by the terms of this Confidentiality Agreement or unless and to the extent that the Confidential Information is or becomes generally known to and available for use by the public other than as a result of Employee’s fault or the fault of any other person bound by a duty of confidentiality to Employer. Employee agrees to deliver or make available to Employer at any reasonable time Employer may request, all documents, memoranda, notes, plans, records, reports, and other documentation, models, components, devices, or computer software, whether embodied in a disk or in other form (and all copies of all of the foregoing), relating to the businesses, operations or affairs of Employer and any other Confidential Information that Employee may then possess or have under his control. Employee’s obligations under this Confidentiality Agreement are in addition to and cumulative with those he owes Employer under the Indiana Uniform Trade Secrets Act and any other applicable law.

2.2. Any trade secrets of Employer will be entitled to all of the protections and benefits under the Indiana Uniform Trade Secrets Act and any other applicable law.

2.3. None of the foregoing obligations and restrictions applies to any part of the Confidential Information that: (a) that Employee demonstrates was or became generally available to the public other than as a result of an improper disclosure by Employee; (b) Employee demonstrates was independently developed by Employee prior to receipt of the Confidential Information from Employer; (c) was approved for release by written authorization from Employer or (d) where disclosure was ordered by a court of competent jurisdiction.

2.4. Employee will not remove from Employer’s premises (except to the extent such removal is for purposes of the performance of Employee’s duties at home or while traveling, or except as otherwise specifically authorized by Employer) any document, record, notebook, plan, model, component, device or computer software or code, whether embodied in a disk or in any other form, (but not including devices, software or code owned by Employee and used by Employee in personal applications not involving Employer’s business), that relates in any way to, or is useful in any manner in, the business then being conducted or proposed to be conducted by Employer (collectively, the “Proprietary Items”). Employee recognizes that, as between Employer and Employee, all of the Proprietary Items, whether or not developed by Employee, are the exclusive property of Employer. Upon termination of the Agreement by either party, or upon the request of Employer during the Term, Employee will return to Employer all of the Proprietary Items in Employee’s possession or subject to Employee’s control, and Employee shall not retain any copies, abstracts, sketches or other physical embodiment of any of the Proprietary Items. Notwithstanding the foregoing, upon the reasonable request of Employee, Employer will permit Employee to obtain copies of specifically identified Proprietary Items that are necessary for Employee to respond to legal, tax or other regulatory proceedings.

3. Employee Inventions. For purposes of this Confidentiality Agreement, “Employee Inventions” shall be defined to include any discoveries, improvements, developments, tools, machines, apparatus, appliances, concepts, designs, computer software programs, promotional ideas, production processes or techniques, practices, formula methods and new products, useful in or related to the business in which Employer is engaged, whether patentable, copyrightable or otherwise, that are made, discovered, developed or secured by the Employee while employed by Employer and that pertain to the subject matter of Employee’s employment with Employer. Each such Employee Invention shall belong exclusively to Employer. Employee acknowledges that all of Employee’s Employee Inventions are works made for hire and the property of Employer including any copyrights, patents or other intellectual property rights pertaining thereto. Unless it is determined by a court of competent jurisdiction that any Employee Inventions were not made within the scope of the Employment, Employee hereby assigns to Employer all of Employee’s right, title, and interest, including all rights of copyright, patent, trademark and other intellectual property rights, to or in such Employee Inventions. Employee covenants that he will promptly:

3.1. disclose to Employer in writing any Employee Invention;

3.2. assign to Employer or to a party designated by Employer, at Employer’s request and without additional compensation, all of Employee’s right to the Employee Invention for the United States and all foreign jurisdictions;

-2-

3.3. execute and deliver to Employer such applications, assignments, and other documents as Employer may request in order to apply for and obtain patents or other registrations with respect to any Employee Invention in the United States and any foreign jurisdictions;

3.4. sign all other papers necessary to carry out the above obligations; and

3.5. give testimony and render any other assistance in support of Employer’s rights to any Employee Invention.

4. Client Confidential Information. “Client Confidential Information” is information disclosed to Employee by a client or customer (“Client”) of Employer or other parties involved in a business arrangement between Employer and a Client, which at the time of disclosure is (a) designated by the Client as confidential; or (b) which by its nature or by the circumstances of its disclosure reasonably should be confidential; or (c) which is subject to a confidentiality agreement between Employer and the Client; or (d) because the information disclosed is not generally known by persons other than employees or representatives of Employer and the Client. Employee acknowledges and agrees that all Client Confidential Information known or obtained by Employee, whether before or after the date of this Agreement, is the property of the Client. Therefore, Employee agrees that, at any time during or after the Term, Employee shall hold in confidence the Client Confidential Information and shall not disclose it to any Person or use for his personal gain or for the benefit of any third party competitor of said Client any Client Confidential Information, whether Employee has such information in Employee’s memory or embodied in writing or other physical form, except (a) to the extent that the Client Confidential Information is or becomes generally known to and available for use by the public other than as a result of Employee’s fault or the fault of any other Person bound by a duty of confidentiality to the Client; (b) that the Client Confidential Information was independently developed by Employee prior to receipt of it from the Client; (c) with the specific prior written consent of an authorized representative of the Client or; (d) if the disclosure thereof was ordered by a court of competent jurisdiction. Employee agrees to deliver to Employer at any reasonable time Employer or the Client may request, all documents, memoranda, notes, plans, records, reports, and other documentation, models, components, devices, or computer software, whether embodied in a disk or in other form (and all copies of all of the foregoing), relating to the Client Confidential Information that Employee may then possess or have under his control.

5. Non-competition and Non-interference.

5.1. Acknowledgments by Employee. Employee acknowledges that: (a) the services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary and intellectual character; (b) Employer’s business is national in scope and its products and services are marketed throughout the United States; (c) Employer competes with other businesses that are or could be located in any part of the United States; and (d) the provisions of this Section 5 are reasonable and necessary to protect Employer’s business.

-3-

5.2. Covenants of Employee. In consideration of the acknowledgments by Employee, and in consideration of the compensation and benefits to be paid or provided to Employee by Employer, the receipt and sufficiency of which are hereby acknowledged, Employee covenants that he will not, directly or indirectly:

(a) during the Term, except in the course of his employment, and during the Post-Employment Period, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend Employee’s name or any similar name to, lend Employee’s credit to or render services or advice to, any business that has products or activities which compete in whole or in part with any of Employer’s products or activities which existed during his employment, anywhere within the United States where Employer, has or is doing business or marketing the services of Employer in the areas of healthcare information technology services that are related to planning, selecting, implementing or manufacturing general purpose computer networks and associated software for healthcare providers and consulting on or about healthcare information processing systems in the healthcare and healthcare finance industries; provided, however, that Employee may purchase or otherwise acquire up to (but not more than) five percent (5%) of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934, as amended. For any other exceptions to this non-compete Employee must seek and obtain express permission from Employer’s Board of Directors, which permission will not be unreasonably refused.

(b) Employee acknowledges and agrees that Employer is currently performing and marketing the above described services in a majority of states throughout the United States, but particularly in the states of California, Connecticut, Florida, Illinois, Indiana, Maryland, Massachusetts, Michigan, New York, Pennsylvania, and Wisconsin. Employee acknowledges and agrees that this list of states may expand during his employment such that this Section may, at the time his employment is terminated, apply to states not listed at the time this Confidentiality Agreement is executed. Employee agrees that this covenant is reasonable with respect to its duration, geographical area and scope. Notwithstanding the foregoing, following the Term, Employee shall not be prohibited from engaging or investing in, owning, managing, operating, financing, controlling, or participating in the ownership, management, operation, financing, or control of, being employed by, associated with, or in any manner connected with, lending Employee’s name or any similar name to, lending Employee’s credit to or rendering services or advice to, any business whose products or activities do not compete with the above described services of Employer; nor shall Section 5.2(a) of this Confidentiality Agreement prevent Employee, following the Term, from acting in his individual capacity as a direct consultant (without employees or other professional assistance) for up to $500,000 per year of income, fees or other benefits to Employee, provided, however, that Employee must continue to comply with the remaining terms and conditions of this Confidentiality Agreement and Employee shall use his best efforts to recommend Employer for any work the Employee is not able to handle on his own;

(c) whether for Employee’s own account or for the account of any other person, at any time during the Term and the Post-Employment Period, accept, divert or solicit business of the same or similar type being carried on by Employer, from any individual or entity that is or was a customer of Employer during Employee’s employment with Employer;

-4-

(d) whether for Employee’s own account or the account of any other Person (i) at any time during the Term and the Post-Employment Period, solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any Person who is or was an employee of Employer at any time during the Employee’s employment with the Employer or in any manner induce or attempt to induce any employee of Employer to terminate his employment with Employer; or (ii) at any time during the Term or the Post-Employment Period, interfere with Employer’s relationship with any Person, including any Person who at any time during the Term was an employee, contractor, supplier, or customer of Employer; or

(e) at any time during or after the Term, disparage Employer or any of its shareholders, directors, officers, employees or agents.

5.3. For purposes of Section 5.2, the term “Post-Employment Period” means the longer of (i) one (1) year after the date Employee’s employment is terminated for any reason or (ii) up to three (3) years after the date Employee’s employment is terminated for any reason, as requested by any acquirer in a Transaction (as defined in the Agreement).

5.4. If any covenant in this Section 5 is held to be unreasonable, arbitrary or against public policy, such covenant will be considered to be divisible with respect to scope, time and geographic area, and such lesser scope, time or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary and not against public policy, will be effective, binding and enforceable against Employee.

5.5. The period of time applicable to any covenant in this Section 5 will be extended by the duration of any violation by Employee of such covenant.

5.6. Employee will, while the covenant under this Section 5.2 is in effect, give notice to Employer, within ten (10) days after accepting any other employment, of the identity of Employee’s employer. Employer may notify such employer that Employee is bound by this Confidentiality Agreement and, at Employer’s election, furnish such employer with a copy of this Confidentiality Agreement or relevant portions thereof.

6. Disputes or Controversies. Employee recognizes that should a dispute or controversy arising from or relating to this Confidentiality Agreement be submitted for adjudication to any court, arbitration panel or other third party, the preservation of the secrecy of Confidential Information may be jeopardized. All pleadings, documents, testimony, and records relating to any such adjudication will be maintained in secrecy and, subject to the order of such court, arbitration panel or other third party, will be available for inspection by Employer, Employee, and their respective attorneys and experts, who will agree, in advance and in writing, to receive and maintain all such information in secrecy, except as may be limited by them in writing.

7. Injunctive Relief. Employee acknowledges that any breach of this Confidentiality Agreement may result in irreparable and continuing damage to Employer for which there can be no adequate remedy at law, and in the event of any such breach, Employer shall be entitled to seek immediate injunctive relief and other equitable remedies in addition to such other and further relief as may be proper. Employer’s obligation to post an undertaking in support of a petition for injunction under this Section will be determined under the applicable law and in an amount to be determined by the court.

-5-

8. No Contrary Agreement. Employee represents that his performance of all the terms of the Agreement and this Confidentiality Agreement will not breach any agreement to keep in confidence any proprietary information acquired by him in confidence or in trust prior to his employment by Employer. Employee has not entered into, and will not enter into, any agreement either written or oral in conflict with this Confidentiality Agreement or in conflict with the Agreement.

9. Term of Employment. Nothing in this Confidentiality Agreement is intended to describe or define the conditions under which Employee’s employment may be terminated, which conditions are described in the Employment Agreement.

10. Limitation. Employee agrees that this Confidentiality Agreement does not purport to set forth all of the terms and conditions of his employment, and that as an employee of Employer he has obligations to Employer which are not set forth in this Confidentiality Agreement.

11. Applicable Law. Employee agrees that any dispute in the meaning, effect or validity of this Confidentiality Agreement will be resolved in accordance with the laws of Indiana without regard to the conflict of laws provisions to this Confidentiality Agreement. Employee further agrees that if one or more provisions of this Confidentiality Agreement are held to be illegal or unenforceable under applicable Indiana law, such illegal or unenforceable portion(s) will be revised to make them legal and enforceable. The remainder of this Confidentiality Agreement will otherwise remain in full force and effect and enforceable in accordance with its terms.

12. Binding Nature. This Confidentiality Agreement will be effective as of the date executed and will be binding upon Employee, his heirs, executors, assigns, and administrators and will inure to the benefit of Employer, its subsidiaries, successors and assigns. Further, this Confidentiality Agreement supersedes prior or contemporaneous agreements and understandings on the same subject.

13. Modification. This Confidentiality Agreement only can be modified by a subsequent written agreement executed by both the Employer and the Employee.

Effective as of August 13, 2004

/s/ Vincent Roach

Vincent Roach

-6-

EXHIBIT B

GENERAL RELEASE

THIS GENERAL RELEASE (this “Release”) is entered into effective as of (“Effective Date”) by and between DAOU Systems, Inc., a Delaware corporation (“the Company”), and Vince Roach, an individual resident of Florida (“Employee”), with reference to the following facts:

RECITALS

A. The parties entered into an Amended and Restated Employment Agreement effective as of August 13, 2004 (the “Agreement”). Pursuant to the terms and conditions of the Agreement, and contingent upon satisfaction of the conditions described in the Agreement, Employee would become eligible for severance payments, in exchange for Employee’s release of the Company from all claims which Employee may have against the Company through the Separation Date.

B. The parties desire to dispose of, fully and completely, all claims which Employee may have against the Company in the manner set forth in this Release.

AGREEMENT

1. Release. In exchange for the consideration described in the Agreement, receipt of which is hereby acknowledged, Employee, for himself and his heirs, successors and assigns, fully releases, and discharges the Company and its officers, directors, employees, shareholders, attorneys, accountants, other professionals, insurers and agents (collectively “Agents”), and all entities related to the Company and its Agents, including, but not limited to, heirs, executors, administrators, personal representatives, assigns, parent, subsidiary and sister corporations, affiliates, partners and co-venturers (collectively, “Related Entities”), from all rights, claims, demands, actions, causes of action, liabilities and obligations of every kind, nature and description whatsoever, Employee now has, owns or holds or has at anytime had, owned or held or may have, own or hold against the Company, Agents or Related Entities from any source whatsoever, whether or not arising from or related to the facts recited in this Release. Employee specifically releases and waives any and all claims arising under any express or implied contract, rule, regulation or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act, and the Age Discrimination in Employment Act, as amended (“ADEA”), and any applicable state law.

2. This Release is intended as a full and complete release and discharge of any and all claims that Employee may have against the Company, Agents or Related Entities through the Separation Date. In making this release, Employee intends to release the Company, Agents and Related Entities from liability of any nature whatsoever for any claim of damages or injury or for equitable or declaratory relief of any kind, whether the claim, or any facts on which such claim might be based, is known or unknown to him. Employee acknowledges that he may discover facts different from or in addition to those that he now believes to be true with respect to this Release. Employee agrees that this Release shall remain effective notwithstanding the discovery of any different or additional facts.

3. Waiver of Certain Claims. Employee acknowledges that, with this Release, he has been advised in writing of his right to consult with an attorney prior to executing the waivers set out in this Release, and that he has been given a 21-day period in which to consider entering into the release of ADEA claims, if any. In addition, Employee acknowledges that he has been informed that he may revoke a signed waiver of the ADEA claims for up to seven (7) days after executing this Release with this Release not becoming effective until the expiration of the seven-day revocation period. .

4. No Undue Influence. This Release is executed voluntarily and without any duress or undue influence. Employee acknowledges he has read this Release and executed it with his full and free consent. No provision of this Release shall be construed against any party by virtue of the fact that such party or its counsel drafted such provision or the entirety of this Release.

5. Confidentiality of Agreement and Release. Employee further agrees to keep confidential the terms of the Agreement and this Release and to refrain from disclosing any information regarding the Agreement, this Release and their respective terms to any third party, unless required to do so (a) by a regulatory body (e.g. filings with the Securities Exchange Commission); (b) in financial disclosures to auditors or in audited financial statements; or (c) under oath, if properly ordered, in a court of competent jurisdiction. Employee agrees to notify the Company in writing upon first notification that he may be required by law to disclose any information deemed confidential by the Agreement or this Release. Notice must be provided in sufficient time for the party receiving notice to oppose or otherwise respond to the request.

6. Governing Law. This Release is made and entered into in Indiana and accordingly the rights and obligations of the parties hereunder shall in all respects be construed, interpreted, enforced and governed in accordance with the laws of Indiana as applied to contracts entered into in Indiana to be wholly performed within Indiana.

7. Severability. If any provision of this Release is held to be invalid, void or unenforceable, the balance of the provisions of this Release shall, nevertheless, remain in full force and effect and shall in no way be affected, impaired or invalidated.

8. Counterparts. This Release may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Release may be executed by facsimile, with originals to follow by overnight courier.

9. Arbitration. Any dispute or claim arising out of this Release shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association (the “AAA”) and will be governed by the Model Employment Arbitration rules of the AAA. All fees and costs will be allocated to the parties to the arbitration as determined by the arbitrator; provided, however, that each party will pay one-half of the estimated arbitrator’s fees up front; and, if either party fails to do so, then a default will be entered against such party solely with respect to such fees. Any determination of the arbitrator

-19-

shall be final and binding on the parties. Nothing in this Release will prevent a party from applying to a court that would otherwise have jurisdiction for provisional or interim injunctive or other equitable measures.

10. Entire Agreement. This Release constitutes the entire agreement of the parties with respect to the subject matter of this Release, and supersedes all prior and contemporaneous negotiations, agreements and understandings between the parties, oral or written.

11. Modification; Waivers. No modification, termination or attempted waiver of this Release will be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced.

12. Amendment. This Release may be amended or supplemented only by a writing signed by Employee and the Company.


DAOU Systems, Inc.	VINCE ROACH

By:	By:
Its:		Vince Roach

EX-31.1 3 dex311.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

Exhibit 31.1

CERTIFICATION

I, Vincent K. Roach, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Daou Systems, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)),for the registrant and we have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 12, 2004

/s/ Vincent K. Roach

Vincent K. Roach

Chief Executive Officer and President

EX-31.2 4 dex312.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

Exhibit 31.2

CERTIFICATION

I, John A. Roberts, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Daou Systems, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 12, 2004

/s/ John A. Roberts

John A. Roberts

Chief Financial Officer and Secretary

(principal financial and accounting officer)

EX-32.1 5 dex321.htm SECTION 906 CEO CERTIFICATION Section 906 CEO Certification

Exhibit 32.1

Certification Pursuant to

18 U.S.C. Section 1350

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Daou Systems, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Vincent K. Roach, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Vincent K. Roach

Vincent K. Roach

Chief Executive Officer and President

November 12, 2004

EX-32.2 6 dex322.htm SECTION 906 CFO CERTIFICATION Section 906 CFO Certification

Exhibit 32.2

Certification Pursuant to

18 U.S.C. Section 1350

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Daou Systems, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John A. Roberts, Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John A. Roberts

John A. Roberts

Chief Financial Officer and Secretary

November 12, 2004

-----END PRIVACY-ENHANCED MESSAGE-----

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents