Mediware Information Systems

Jul 8, 2019

SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 10-KSB|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 or|_|Transition Report pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934Commission File Number 1-10768 MEDIWARE INFORMATION SYSTEMS, INC.(Exact name of small business issuer in its charter) New York 11-2209324(State of other jurisdiction of (I.R.S. )1121 Old Walt Whitman Road Melville , New York 11747-3005 (Address of Principal Executive Offices) (Zip Code)( 516 ) 423-7800(Issuer's telephone number, including area code)Securities to be registered under Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, par value $.10 per share Nasdaq SmallCap Market The Pacific Stock Exchange,Inc.Securities to be registered pursuant to Section 12(g) of the Act: NoneCheck whether the issuer (1) filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports) and(2) has been subject to such filing requirements for the part 90 days. Yes x NoCheck if there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B contained in this form, and no disclosure will be contained, tothe best of registrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB. [ ]State issuer's revenues for its most recent fiscal year. $10,432,000.The aggregate market value of the voting stock held by non-affiliates on October 25, 1996 was approximately $12,270,864.Number of shares of Common Stock outstanding at October 25, 1996 : 4,939,344shares. Documents Incorporated by Reference :The Proxy Statement for the Registrant 's 1996 Annual Meeting of Shareholders is incorporated by reference in Part III of this Report.P--> 10KSB PART I ITEM 1. BUSINESS The Company develops, sells and supports computer-basedmanagement information systems for use in various clinical departments ofhospitals. The systems are designed to automate the data these departmentsprovide hospital management and therefore increase productivity, reduceoperating costs, enhance revenues and improve quality assurance and patientcare. These benefits are of critical importance to hospital administrators whoface increasing financial and regulatory pressures. At present, the Company offers systems for three different departments: the blood bank, the pharmacy andthe surgical suite. With the completion of the Acquisition referred to below theinstalled base of clinical information systems has increased to approximately825 clients. See " Financial Statements " herein for information about theCompany's revenues, operating profit and loss and assets. The Company 'soperations are within one industry segment.Products HEMOCARE - The Company 's cornerstone product is one of NorthAmerica's leading "best of breed" blood bank information systems, and is soldeither "stand-alone" or as part of an integrated "LAB/Blood Bank" system. Thesystem was designed in collaboration with Memorial Sloan-Kettering Cancer Centerin New York City. Hemocare's software programs are organized into subsystemsperforming over 200 functions of which the major ones (a) manage and controlblood inventory; (b) perform long-term donor and transfusion record keeping; (c)store and manage characteristics of blood products to be transfused; (d)maintain patient and transfusion records; (e) maintain the records of patienttest results; and (f) automate billing and workload recording. Hemocare's core technology is the UNIX operating system andthe "C" programming language, allowing it to run on multiple hardware platforms.Current versions of the system are ported to the IBM RS/6000, as well as IntelPC technologies. The scalability of these platforms allows Hemocare to addressthe needs of virtually any size hospital. Hemocare has been the first to attemptto market innovative product enhancements such as Validation Templates, VideoValidation, Standard Integration Module and Mock Regulatory Inspection. At thistime Hemocare is the only blood banker to offer these products, which assistcustomers in their efforts to remain compliant with regulatory agencyguidelines. The Standard Integration Module was instrumental in the growth oflaboratory vendors, who have integrated and remarketed this product. The Company currently has remarketing agreements with HBO and Company, Citation ComputerSystems, Inc., Dynacor, Inc., Keane, Inc., NLFC, Inc. and Shared MedicalSystems, Inc. The Hemocare system is installed in approximately 250hospitals which range in size from 100 beds to over 1,600 beds.P--> 10KSB DIGMEDICS - In May of 1990, the Company acquired DigimedicsCorporation, one of the country's leading vendors in information managementsystems for hospital pharmacies. Digimedics had been developing and sellingproducts and services to hospital pharmacies since 1976. In the mid-1980's,Digimedics introduced the first open systems version of a comprehensive pharmacyinformation management system. Digimedics Corporation is a wholly ownedsubsidiary of the Company . The benefits of Digimedics include (a) potential customersavings through the automation of drug formulary and perpetual inventory; (b)potential enhanced revenues through more accurate and complete patient billing;(c) improved patient care by more accurate drug dispensing, automatic checkingof adverse drug-drug interactions and automatic checking of previously recordeddrug allergies; and (d) interfacing with other hospital information systems,drug wholesalers, and various dispensing machines, such as PYXIS and theautomated Pharmacy System robotics devices. The current version of Digimedics, called "Digimedics XA forWindows," is based on the UNIX operating system, the "C" programming language,and the UNIFY relational database management system. Although largely a"character based" application, certain Microsoft Windows features have beenincluded, offering the Company certain sales advantages by providing customersand prospective customers with the type of graphical user interface they prefer. By the end of 1996, Digimedics will introduce a new clientserver pharmacy system called "Digimedics/WORx". WORx (Windows, Open, Rx) willhave a complete Microsoft Windows based graphical user interface, which theCompany feels will increase the attractiveness of the system. Also, newtechnologies include integration features such as the Informix relationaldatabase management system, point and click Windows based ad-hoc report writing,and an integrated inpatient/outpatient database.Other WORx features will include:o Support of clinical pathways.o A clinical database and drug monographs.o Incorporation of an extensive array of clinical drug alerts concerning allergy, diagnosis, dose, food, IV incompatibility, interaction andtherapeutic duplication.o Foreign-language patient education monographs.o Customization to meet community standards. By taking advantage of its open architecture, WORx is capableof linking with expert systems, decision-support software and clinicaldatabases. WORx will act as the central hub of information in the pharmacy andwill provide specialized tools for all aspects of pharmaceutical care includingorder entry, distribution, outcomes, billing, utilization evaluation, education,critical pathways, purchasing and research. WORx can adapt into a diversity of hardware and networkingenvironments. Utilizing technologies such as the UNIX operation system, C++ -2-P--> 10KSB programming language, Informix, and Microsoft Windows 95, WORx is positioned asa state of the art client/server solution. Over 130 Digimedics systems have been installed at 121hospitals (some hospitals have separate systems for inpatient and outpatientpharmacies), including the University of California Medical Center, SanFrancisco; University Medical Center, Las Vegas; Columbia-Presbyterian MedicalCenter, New York City; Shands Hospital at the University of Florida,Gainesville; University of Kansas Medical Center, Kansas City; and theUniversity of Michigan Hospitals and Clinics, Ann Arbor. On June 17, 1996 , the Company acquired certain assets of theU.S. based Pharmakon division ("Pharmakon") and a pharmacy management systemoperating in the United Kingdom, JAC Computer Service, LTD. ("JAC"), ofContinental Healthcare Systems, Inc. (the "Acquisition"), which will beincorporated into the Company 's Digimedics operation. The addition of Pharmakonand its client base has increased the Company 's installed base of clinicalinformation systems to approximately 825 (over 500 of which are pharmacy systeminstallations). This places the Company in the position of providing the largestnumber of stand-alone pharmacy information systems in the country. TheAcquisition also provides the Company with a significant international presence;JAC has approximately 180 pharmacy information systems installed in the UnitedKingdom. Pharmakon and JAC, which generated sales and service ofapproximately $8.4 million in the fiscal year ended November 30, 1995 , markets amanagement information system for hospital pharmacies. The Acquisition isexpected to add approximately 415 hospital systems and 235 hospitals to theCompany's customer base in the United States and an additional 180 customers inthe United Kingdom. Pharmakon had been providing pharmacy systems for almosttwenty years. Management's goal is to begin converting Pharmakon's U.S.customers to the Digimedics WORx system in the fourth calendar quarter of 1996.Pending this conversion, the Company expects to assume the existing support andmaintenance contracts and to generate approximately $3.4 million per year inservice revenues by continuing to service the newly acquired customers. Throughthe Acquisition, the Company will also acquire certain technologies which arecurrently under development and are expected to be integrated into futuresystems offerings of Digimedics. The Company 's management team believes there exists strongparallels between its current Digimedics customer base and that of Pharmakon,both of which include not only large university hospitals and multi-site acutecare facilities, but also progressive community, municipal, and long-term carefacilities. Management has retained approximately 43 of Pharmakon's 75 totalemployees in the U.S. SURGIWARE - In September of 1990, the Company licensed theright to market and relicense the Surgiware system for use in surgical suites.Surgiware is a comprehensive information system for managing the humanresources, facilities, equipment and supplies required for surgery. TheSurgiware system integrates clinical data capture, inventory and equipmentcontrol scheduling, quality assurance and report writing. For example, the -3-P--> 10KSB system contains a program that presents a proprietary, real time moving scheduleon a color graphics display allowing the user to visually identify potentialscheduling conflicts based upon what is happening in the surgical suite at themoment, and to test alternative solutions on the system. The core of the systemis in its unique ability to gather and disseminate data at the point of care,providing unique advantages to hospitals in need of timely, accurate data ontheir surgical activities. Additional modules and functions can be added, suchas a clinical data module that keeps track of all aspects of a patient'streatment, including pre-operative and post-operative control. The benefits of a fully-implemented system include (a)improvement in the efficiency and output of operating rooms; (b) improvement inthe management of staffing, equipment and supplies; (c) improvement in inventorycontrols; and (d) incremental billings resulting from procedures that, withoutSurgiware, might be overlooked for billing purposes because they either wereunplanned or fall outside the billing category for the planned procedure.Surgiware also integrates clinical data capture, and equipment control,scheduling, quality assurance and report writing. These benefits can translateinto significant revenues and savings since the surgical suite usually producesmore revenue than any other department and is the greatest cost center in thehospital. The record keeping functions of Surgiware can also be of significantbenefit in the areas of quality assurance, risk management, and theaccreditation of physicians. Surgiware uses the UNIX operating system, the "C" programminglanguage, the INFORMIX SQL 4th generation relational database manager, and afault-tolerant architecture that allows the personal computer that is placed ineach operating room to operate independently in the event of a failure of thecentral Surgiware computer. The system has been ported to the IBM RS-6000 andthe Data General AViiON series, and to 386, 486 and Pentium IBM compatiblepersonal computers. The Company 's marketing is concentrated on the approximately1,000 hospitals that have more than 300 beds and 10 operating rooms, wherestudies indicate that approximately 80% of all surgical services in this countryare performed. The Company has installed 25 Surgiware sites. In 1992, the licensor of Surgiware commenced an arbitrationagainst the Company which, in late 1994, led to an award in favor of the Company which confirmed the Company 's license for the Surgiware product, includingimprovements developed by the licensor. The arbitral panel confirmed theCompany's right to retain exclusivity for the Surgiware product and to licenseanother generic hospital scheduling software product developed by the licensorupon the payment of additional royalties. The Company determined in early 1995that the benefits of exclusivity and the generic hospital product did notjustify the required additional royalty payments. The Company has initiatednegotiations with the licensor of the Surgiware system to replace the existingroyalty arrangement with a fully paid-up license, requiring additional royaltypayments only in the case of a simultaneous sale by the Company of multiplesublicenses. In the course of these negotiations the licensor has asserted that the Company has breached the existing license agreement. The Company believesthat this assertion is meritless and is being made for negotiating purposesonly. -4-P--> 10KSB Sales and Marketing The Company 's three products are sold directly by tenfull-time sales people, as well as four Company officers, with the assistance ofseven clinical specialists who demonstrate the systems and address technicalquestions. The Company continues an on-going, in-house lead generation programthat generates numerous sales leads. Sales leads and support are received fromcertain hardware manufacturers, especially IBM Corporation and Data GeneralCorporation, whose products the Company sells as a Value Added Reseller ("VAR"). The Company 's products are also sold increasingly through remarketers who arevendors of laboratory and other information systems that offer Company systemsas subsystems of their product. The Company has entered into agreements withvendors such as HBO and Company (for both STAR and ALS product lines), CitationComputer Systems, Inc., Dynacor, Inc., Keane, Inc., NLFC, Inc. and SharedMedical Systems, Inc.Software Support and Hardware Maintenance Services The Company provides comprehensive service to its installedbase of customers through its own service organization. Virtually all of theCompany's customers enter into software support agreements with either theCompany or its resellers which are renewed either annually or at longerintervals but, in the case of former Pharmakon customers, may be cancelled byeither party on 60 days notice. These agreements generally provide for 24-houraccess to customer support staff, as well as periodic product enhancements and alimited product warranty, for which the customer pays a monthly fee subject tocancellation after a specified notice period. Some of the Company 's customershave also entered into agreements for hardware maintenance, which the Company generally subcontracts to hardware manufacturers. As of June 30, 1996 , theCompany had software support and hardware maintenance agreements providing forperiodic payments totaling approximately $7.94 million on an annualized basis,including the revenues of Pharmakon. HEMOCARE and DIGIMEDICS are trademarks of the Company and itssubsidiary, Digimedics Corporation, respectively.Competition The competition in the market for clinical information systemsis intense. The principal competitive factors are the functionality of thesystem, its design and capabilities, site references, reputation for ongoingsupport, the potential for enhancements, price and salesmanship. Differentdynamics and competitors, however, affect each of the Company 's products. HEMOCARE -- The Company currently competes principally withone other specialty vendor of stand-alone blood bank systems (Western Star,Inc. ), which is a company of comparable size, and with two vendors (CernerCorporation and Sunquest Information Systems, Inc.) of laboratory informationsystems ("LIS") that contain a blood bank subsystem. The LIS vendors are muchlarger companies with greater technical, marketing, financial and otherresources than the Company , and have established reputations for success indeveloping and selling hospital information systems. -5-P--> 10KSB DIGIMEDICS -- The Company currently competes with numerouscompanies, including some of the leading vendors of healthcare informationsystems. As a result of the Acquisition of Pharmakon, the Company believes thatit has the largest number of stand-alone hospital pharmacy systems in itsmarket. Many competitors have established reputations for success in developingand selling medical information systems and have far greater resources than theCompany. The principal competitors of the Digimedics system are believed to beCerner Corporation, BDM Corp., HCS Corp. and Pharmacy Computer Systems, Inc., aswell as numerous providers of complete healthcare information systems. SURGIWARE -- The competitors of Surgiware have significantlylarger installed bases and have substantially greater technical, marketing,financial and other resources than the Company and have established reputationsfor success in developing and selling hospital information systems. Theprincipal vendors competing with the Surgiware system are believed to be ServingSoftware Incorporated, a wholly owned subsidiary of HBO and Company, EnterpriseSystems Incorporated, and Atwork Corporation, a wholly owned subsidiary ofMedaphis Corporation.Copyright, Patents and Trade Secrets The Company has relied primarily on copyright, trade secretprotection and confidentiality agreements for protection of its softwaresystems. Certain features of the Surgiware system are covered by a patent heldby the licensor.Government Regulation The hospitals that comprise the primary market for theCompany's products must comply with various federal, state and local statutesand regulations. The adequacy of blood bank information management and recordkeeping is subject to inspection and review by the Food and Drug Administration("FDA"). Hemocare and other blood bank systems are also subject to regulation bythe FDA as medical devices. Consequently, the Company and its competitors whoprovide blood bank information management systems are also subject to thejurisdiction of the FDA as suppliers of medical devices. The Company hasdedicated substantial time and resources in its attempts to comply withapplicable guidelines and regulations and believes that it is in substantialcompliance therewith. Legislation has been introduced in Congress seeking toexpand the jurisdiction of the FDA, and the FDA is in the process of developingnew guidelines which it intends to apply to blood bank information systems andto the inspection of vendors of such systems. The Company cannot predict whetherit will be in compliance with these new guidelines or any future guidelines,regulations or inspection procedures. Non-compliance with any such guidelines,regulations or procedures could have a material adverse effect on the operationsof vendors of blood bank information systems, including the Company . Any of theCompany's other activities could also become subject to Congressional orgovernmental agency efforts to establish or expand governmental agencyjurisdiction. -6-P--> 10KSB Miscellaneous The Company 's software development expenditures were asfollows: during fiscal 1996 -- $1,438,000; during fiscal 1995 -- $1,387,000; andduring fiscal 1994 -- $1,791,000. These expenditures included write-downs andamortization of software development costs. In addition, software costs of$496,000, $356,000 and $367,000, respectively, were capitalized in each year. Inaddition, the Company purchased $3,891,000 of research and development in theAcquisition of Pharmakon and JAC, which were charged to operations uponacquisition. The Company 's business is not dependent on a single customeror a few customers. The Company considers that its market area and customer baseis the United States and Canada. However, the Company intends to market itsproducts in the United Kingdom in fiscal 1997 through JAC.Employees As of June 30, 1996 , the Company had 138 full-time employeesand 12 part-time employees, including 27 in sales and marketing, 92 in customersupport and product development, and 19 in administration. No employees arerepresented by a labor union and the Company considers its employee relations tobe good. ITEM 2. PROPERTIES The Company 's corporate headquarters are in Melville, NewYork, where the Company occupies approximately 5,738 square feet under a leasethat expires on July 31, 1998 . The Digimedics division is headquartered inScotts Valley, California, where the Company occupies approximately 11,646square feet under a lease expiring on May 1, 2001 . The Pharmakon Division isheadquartered in Overland Park, Kansas, where the company occupies approximately13,683 square feet under a lease expiring on September 30, 1998 . The UnitedKingdom group is headquartered in Basildon, Essex, where the Company occupiesapproximately 2,567 square feet under a lease expiring on September 26, 2004 . The Company believes that its facilities are adequate for its current needs andthat, if necessary, it will have no difficulty in securing alternate facilitiesat the expiration of its current leases. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter to a vote of itssecurity holders during the fourth quarter of its fiscal year ended June 30, 1996 . -7-P--> 10KSB PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company 's Common Stock is traded and quoted on the NasdaqSmallCap Market under the symbol MEDW. It is also traded on the Pacific StockExchange under the symbol MIS. Prior to August 1991, there was no establishedtrading market for the Company 's Common Stock. The table below indicates the high and low of quoted bidmarket prices as reported by Nasdaq for the Company 's Common Stock for eachquarter during the fiscal years ended June 30, 1995 and 1996 , and the firstquarter of fiscal 1997. [ Enlarge/Download Table ] 1st quarter 2nd quarter 3rd quarter 4th quarter ended 9/30 ended 12/31 ended 3/31 ended 6/30 -------------------- -------------------- -------------------- -------------------- High Low High Low High Low High Low ------------------ ------------------ ------------------ ------------------Fiscal 1997 4 1/8 3 3/4Fiscal 1996 1/18 5/8 1 1/2 7/8 3 5/8 7/8 4 1/4 3Fiscal 1995 1 3/8 11/16 1 3/8 11/16 1 9/16 13/16 1 1/4 13/16 Such over-the-counter quotations reflect inter-dealers prices,without retail mark-ups, mark downs or commissions, and may not represent actualtransactions. The reported trading volume is low. As of June 30, 1996 , theapproximate number of shareholders of record of the Company 's Common Stock was1,121.Dividend Policy The Company has never paid dividends on its Common Stock andhas no present intention to pay cash dividends on its Common Stock. Earnings, ifany, will be used to finance the development and continued expansion of theCompany's business. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSInternal and External Sources of Liquidity and Capital Resources In June of 1996, Digimedics Corporation, a wholly ownedsubsidiary of the Company , purchased the Pharmakon division and JAC, a U.K.affiliate, from Continental Healthcare Systems, Inc. ("Continental"). The totalpurchase price, net of acquisition costs, was approximately $9.7 million, $3.7million of which was paid in cash and the remaining $6.0 million of which was -8-P--> 10KSB paid pursuant to a promissory note issued to Continental, due November 30, 1996 .On October 28, 1996 the promissory note was amended to provide for an extensionof the due date to August 1, 1997 . The amendment provides for an immediatepayment of $1.0 million and monthly payments of $100,000 for principal andinterest and an increase in the interest rate to 15% on approximately $3,763,000of the note (with the original rate remaining on $1,237,000). As a result ofthis amendment, $4,549,000 of this liability is classified as long-term debt. The Company will require additional sources of liquidity to fund the $4,549,000debt payment due August 1, 1997 . Management believes that they will be able toreduce this liability by approximately $1,237,000 by providing services under anagreement entered into in connection with the Acquisition. To finance the cash portion of the acquisition, the Company made a private placement of 1,692,308 shares of its Common Stock in June of1996, at a price of $3.25 per share, for total proceeds before expenses of$5,500,002. The Company 's cash and cash equivalent position at June 30, 1996 was $2,504,000, an increase of $1,995,000 from fiscal year end 1995. At June 30, 1996 the net working capital was $1,536,000 and the current ratio was1.3 - 1. In order to cover its cash needs during fiscal years 1994 and1995, the Company carried out financing programs under which it borrowed anaggregate of$1,299,000 from investors, including directors. As part of thefinancing package such investors received 1,040,025 warrants at $0.50 per shareand 129,695 warrants at $1.25 per share. During fiscal year 1996 the Company repaid $120,000, leaving a balance of $1,179,000 due August 1, 1997 . The Company will require additional sources of liquidity to fund this balance due. In May of1996 some of the investors exercised 495,025 of the $0.50 warrants for a totalof $247,512.50. A portion of these funds was used by the Company for acquisitionexpenses. The Company has procured a line of credit from its bank in NewYork City in the total sum of $75,000. As of June 30, 1996 , there were nobalances outstanding under this facility.Material Changes in Results of Operations: Fiscal 1996 vs. Fiscal 1995: Total revenues increased by $2,353,000, or 29%, to $10,432,000in fiscal 1996 from $8,079,000 in fiscal 1995. This increase was due primarilyto the improved performance of the Hemocare product center. System sales increased by $1,957,000, or 51%, to $5,781,000 infiscal 1996 from $3,824,000 in fiscal 1995. This was attributable to increasedsales of new systems by the Hemocare product center in conjunction with itsremarketers and an aggressive upgrade program which took advantage of thepressure on hospitals to consolidate onto current product revisions. Service revenues increased by $396,000, or 9%, to $4,651,000in fiscal 1996 from $4,255,000 in fiscal 1995. This was due primarily to anincrease in service contracts from newly installed systems and modules. -9-P--> 10KSB Cost of systems increased by $787,000, or 64%, to $2,023,000in fiscal 1996 from $1,236,000 in fiscal 1995. This was due primarily to thelarge numbers of upgrades by the Hemocare product center that included sales ofhardware purchased from third parties, as opposed to sales of software. Cost of services increased by $163,000, or 13%, to $1,403,000in fiscal 1996 from $1,240,000 in fiscal 1995. This increase is due to theCompany's increase of the number of personnel and other related costs of thecustomer support organization in the three product centers. Software development costs increased by $51,000, or 4%, to$1,438,000 in fiscal 1996 from $1,387,000 in fiscal 1995, due to an increase insoftware engineering personnel. Selling, general and administrative increased by $830,000, or20%, to $4,966,000 in fiscal 1996 from $4,136,000 in fiscal 1995. This was dueprimarily to increased cost of product marketing, product consulting andincentive commission payouts. Interest expense of $216,000 for fiscal 1996, decreased by$33,000, or 13%, as compared to interest expense of $249,000 in fiscal 1995. Thedecrease is primarily due to the fact that fiscal 1996 did not include a debtdiscount as did fiscal 1995, coupled with interest incurred in fiscal 1996 onoutstanding loans. The Company had a net loss of $3,491,000 in fiscal 1996, or$1.24 per share, as compared to net earnings of $90,000 in fiscal 1995, or $.04per share, which reflects the charge to operations of acquired research anddevelopment of $3,891,000 from the Pharmakon Acquisition. If this charge wereexcluded, however, net income would result in $400,000, or $.12 and $.11 pershare on a primary and fully diluted basis, respectively, in fiscal 1996.Material Changes in Results of Operations: Fiscal 1995 vs. Fiscal 1994: Total revenues decreased by $198,000, or 2%, to $8,079,000 infiscal 1995 from $8,277,000 in fiscal 1994. This decrease was due to the salesof more software-only systems and to slower sales of the Surgiware Product,reflecting uncertainties resulting from an arbitration that concluded in fiscal1995 (as described in " Business ", above). System sales decreased by $906,000, or 19%, to $3,824,000 infiscal 1995 from $4,730,000 in fiscal 1994. This was due to a decrease of salesof hardware as a system component and a larger number of software only systemssold, and decreases in Surgiware's sales due to the arbitration, which causeduncertainties in the marketplace in fiscal 1995. Service revenues increased by $708,000, or 20%, to $4,255,000in fiscal 1995 from $3,547,000 in fiscal 1994. This was due primarily to productmaintenance increases relating to an increased installed base.-10-P--> 10KSB Cost of systems decreased by $858,000, or 41%, to $1,236,000in fiscal 1995 from $2,094,000 in fiscal 1994. This decrease was due primarilyto a larger number of software-only systems in fiscal 1995 as compared to salessoftware and hardware in fiscal 1994. Cost of services increased by $151,000, or 14%, to $1,240,000in fiscal 1995 from $1,089,000 in fiscal 1994, as the Company had increased thenumber of personnel and other related costs of the customer supportorganization. Software development costs decreased by $404,000, or 23%, to$1,387,000 in fiscal 1995 from $1,791,000 in fiscal 1994. The decrease isprimarily due to a decrease in Surgiware development and the result of thewrite-off of $242,000 of capitalized software in fiscal 1994. Selling, general and administrative increased by $277,000, or7%, to $4,136,000 in 1995 from $3,859,000 in 1994. The increase is due primarilyto increased payroll and travel expenses, commissions, professional fees andemployee health insurance claims. The Company expensed costs of $1,222,000 in connection withthe arbitration in fiscal 1994. Such costs included $208,000, which the Company intended to pay the licensor to retain exclusivity; the balance was principallylegal fees and expenses in connection with the arbitration. During fiscal 1995 the Company , after review of the then current circumstances, decided not toelect to make the payments required to maintain exclusivity. Accordingly, the$208,000 accrued expense recorded in the prior year was eliminated, resulting inincreased income. Interest expense of $249,000, including approximately $100,000in debt discount, for fiscal 1995 was incurred on the interim financing frominvestors referred to above and the loans to the Company from the chairman ofthe board. The Company had a net profit of $90,000 for fiscal 1995, or$.04 per share, compared to a net loss of $1,902,000, or $.75 per share, infiscal 1994. The net profit is due to the elimination of arbitration costs infiscal 1995 and the improvement in gross profits.-11-P--> 10KSB REPORT OF INDEPENDENT AUDITORSBoard of Directors and StockholdersMediware Information Systems, Inc.Melville, New York We have audited the accompanying consolidated balance sheet of MediwareInformation Systems, Inc. and subsidiaries as at June 30, 1996 and the relatedconsolidated statements of operations, stockholders' equity and cash flows foreach of the years in the two-year period ended June 30, 1996 . These financialstatements are the responsibility of the Company 's management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits in accordance with generally accepted auditingstandards. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements enumerated above presentfairly, in all material respects, the consolidated financial position ofMediware Information Systems, Inc. and subsidiaries at June 30, 1996 and theresults of their operations and their cash flows for each of the years in thetwo-year period ended June 30, 1996 in conformity with generally acceptedaccounting principles./s/ Richard A. Eisner & Company, LLP New York, New York August 23, 1996 With respect to Note E(1) October 28, 1996 F-1P--> 10KSB MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 1996 ================================================================================ A S S E T S(Notes)Current assets: Cash and cash equivalents (Note G) ......................... $ 2,504,000Accounts receivable, less estimated doubtful accounts of $188,000 (Note A)...................................... 3,509,000Current portion of contract installment receivable (Note A).................................................. 252,000 Inventories (Note A)........................................ 208,000 Prepaid expenses and other current assets .................. 166,000 ------------- Total current assets ................................ 6,639,000Long-term contract installments receivable, less current portion (Note A)............................................ 155,000Fixed assets, at cost, less accumulated depreciation of $1,364,000 (Notes A and C).................................. 576,000Capitalized software costs (Notes A and D)..................... 1,012,000Excess of cost over fair value of net assets acquired,net of accumulated amortization of $372,000 (Notes A and B) ............................................ 6,737,000Other assets .................................................. 38,000 -------------- T O T A L............................................ $ 15,157,000 ============== L I A B I L I T I E SCurrent liabilities: Accounts payable............................................ $ 483,000 Accrued expenses and other current liabilities (Note F)..... 1,775,000 Advances from customers (Note A)............................ 1,379,000 Current portion of capital leases payable .................. 15,000 Notes payable (Note E)...................................... 1,451,000 -------------- Total current liabilities............................ 5,103,000Notes payable, less current portion (Note E)................... 5,728,000Capital leases payable, less current portion .................. 43,000 -------------- Total liabilities.................................... 10,874,000 --------------Commitments and contingencies (Note H)STOCKHOLDERS' EQUITY(Note G)Common stock - $.10 par value; authorized 12,000,000 shares; 4,931,320 shares issued and outstanding ............ 493,000Additional paid-in capital .................................... 13,419,000(Deficit)...................................................... (9,629,000) -------------- Total stockholders' equity .......................... 4,283,000 -------------- T O T A L............................................ $ 15,157,000 ============== The accompanying notes to financial statements are an integral part hereof. F-2P--> 10KSB MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended June 30, ------------------- 1996 1995 ------ -----Revenues:System sales............................. $ 5,781,000 $ 3,824,000Services................................. 4,651,000 4,255,000 ---------------- ------------- Total revenues.................... 10,432,000 8,079,000 ---------------- -------------Costs and expenses:Cost of systems........................... 2,023,000 1,236,000Cost of services......................... 1,403,000 1,240,000Purchased research and development(Note B)................................ 3,891,000Software development costs................ 1,438,000 1,387,000Selling, general and administrative....... 4,966,000 4,136,000Arbitration (income) (Note H)............. (208,000) --------------- ------------- 13,721,000 7,791,000 --------------- -------------Earnings (loss) before interest incomeand expense............................... (3,289,000) 288,000Interest income.............................. 14,000 51,000Interest (expense)........................... (216,000) (249,000) --------------- -------------NET EARNINGS (LOSS).......................... $ (3,491,000) $ 90,000 =============== =============Earnings (loss) per share (Note A)........... $ (1.24) $ .04 =============== =============Weighted average number of common and commonequivalent shares......................... 2,817,405 2,569,447 =============== ============= The accompanying notes to financial statements are an integral part hereof. F-3P--> 10KSB [ Enlarge/Download Table ] MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Additional Paid-in Capital Common Stock Shares Amount (Deficit) TotalBalance - July 1, 1994 ........................ 2,521,743 $ 252,000 $ 8,083,000 $ (6,228,000) $ 2,107,000Release of escrow shares...................... 74,667 8,000 43,000 51,000Issuance of warrants.................... 21,000 21,000Net earnings................... 90,000 90,000 ------------- ------------ -------------- -------------- --------------Balance - June 30, 1995 ........................ 2,596,410 260,000 8,147,000 (6,138,000) 2,269,000Shares issued to nonemployee directors................... 86,040 9,000 86,000 95,000Exercise of warrants.................... 495,025 49,000 198,000 247,000Shares issued in connection with private placement (Note G).................... 1,723,076 172,000 4,891,000 5,063,000Shares issued as fees for acquisitions (Note B).................... 30,769 3,000 97,000 100,000Net (loss)..................... (3,491,000) (3,491,000) ------------- ------------ -------------- -------------- --------------BALANCE - JUNE 30, 1996 ........................ 4,931,320 $ 493,000 $ 13,419,000 $ (9,629,000) $ 4,283,000 ============== ============= ============== ============== ============== The accompanying notes to financial statements are an integral part hereof. F-4P--> 10KSB [ Enlarge/Download Table ] MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended June 30, 1996 1995 ------ -----Cash flows from operating activities: Net earnings (loss)............................................................ $ (3,491,000) $ 90,000 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Shares issued to nonemployee directors..................................... 95,000 Provision for doubtful accounts............................................ 162,000 128,000 Depreciation and amortization.............................................. 709,000 735,000 Purchased research and development......................................... 3,891,000 Proceeds from contract installments receivable............................. 20,000 7,000 Changes in operating assets and liabilities, net of effects from purchase of Pharmakon & JAC: (Increase) in accounts receivable...................................... (640,000) (314,000) (Increase) in inventories.............................................. (53,000) (13,000) (Increase) decrease in prepaid and other assets (28,000) 14,000 Increase (decrease) in accounts payable, accrued expenses and customer advances............................... 665,000 (406,000) --------------- ---------------- Net cash provided by operating activities............................ 1,330,000 241,000 --------------- ----------------Cash flows from investing activities: Acquisitions of fixed assets................................................... (127,000) (101,000) Capitalized software costs..................................................... (496,000) (356,000) Purchase of Pharmakon and JAC, net of cash acquired. (3,893,000) ---------------- ---------------- Net cash (used in) investing activities.............................. (4,516,000) (457,000) --------------- ----------------Cash flows from financing activities: Proceeds from note payable and warrants........................................ 334,000 Repayment of debt.............................................................. (129,000) (23,000) Proceeds from exercise of warrants............................................. 247,000 Proceeds from private placement................................................ 5,063,000 --------------- --------------- Net cash provided by financing activities............................ 5,181,000 311,000 --------------- ----------------NET INCREASE IN CASH AND CASH EQUIVALENTS 1,995,000 95,000 Cash and cash equivalents - beginning of period................................... 509,000 414,000 --------------- ----------------CASH AND CASH EQUIVALENTS - END OF PERIOD......................................... $ 2,504,000 $ 509,000 =============== ================Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................................................................... $ 64,000 $ 47,000 Income taxes............................................................... 6,000 3,000 Noncash transactions: Shares released from escrow, recorded as additional purchase price........................................................... 51,000 Equipment acquired with capital leases..................................... 41,000 The Company made acquisitions for $3,893,000 of cash in the year ended June 30, 1996 . The purchase price was allocated to the assets acquired and liabilities assumed based on their fair value as indicated in Note B........................................................ 10,004,000 Less cash acquired........................................................... (11,000) Promissory note issued....................................................... (6,000,000) Common stock issued.......................................................... (100,000) ----------------- $ 3,893,000 ==================== The accompanying notes to financial statements are an integral part hereof. F-5P--> 10KSB (NOTE A) - The Company and its Significant Accounting Policies:The consolidated financial statements include the accounts of MediwareInformation Systems, Inc. and its wholly owned subsidiary, DigimedicsCorporation ("Digimedics") and its subsidiary J.A.C. Computer Services Limited("JAC"). All significant intercompany transactions have been eliminated inconsolidation.Mediware Information Systems, Inc. and subsidiaries (the "Company")develops, installs and maintains computerized information systems forhospital blood banks, pharmacies and surgical suites.As discussed in Note E, the Company has $5,728,000 of long-term debt which isdue on August 1, 1997 . The Company will have to refinance this indebtedness.There is no assurance that it will be able to do so on acceptable terms. [1] Cash equivalents: The Company considers all highly liquid short-term investmentswith a maturity of three months or less to be cash equivalents. [2] Revenue recognition: Revenue from the sale of systems is recognized upon delivery,although payment may be due upon completion of other contractual obligations.Service revenue is recognized on a straight-line basis over the life of theservice agreements. [3] Long-term contract installments receivable: Contract installments receivable arising from sales of systemswith extended payment terms bear interest at rates from 7% to 16% and are due inmonthly installments through 1999. [4] Inventories: Inventories, which consist of equipment purchased for resale,are valued at the lower of cost or market. Cost is determined by the specificidentification method. [5] Fixed assets: Furniture and equipment are depreciated by the straight-linemethod over their estimated useful lives of five years. Leasehold improvementsare amortized by the straight-line method over the remaining terms of therespective leases. F-6P--> 10KSB (NOTE A) - The Company and its Significant Accounting Policies:(continued)[6] Software development costs: In accordance with Statement of Financial Accounting StandardsNo. 86, the Company capitalizes certain costs associated with the development ofcomputer software. Such costs, in addition to costs of purchased software, areamortized over the software's estimated useful life of five years. Managementperiodically evaluates the recoverability of capitalized software developmentcosts and write-downs are taken if required. Costs to maintain developed programs and other developmentcosts incurred prior to achievement of technical feasibility are expensed asincurred. Such costs were $956,000 and $951,000 for the years ended June 30, 1996 and June 30, 1995 , respectively. Software development costs reported on theconsolidated statements of operations include amortization (Note D). [7] Excess of cost over the fair value of net assets acquired: The excess of cost over the fair value of net assets acquired,which arose from the acquisition of Digimedics, Pharmakon and JAC, is beingamortized on a straight-line basis over twenty years. [8] Advances from customers: Advances from customers represent contractual paymentsreceived by the Company . Such amounts are recorded as income upon delivery ofthe system with respect to system revenues or over the life of the serviceagreement with respect to service revenue. [9] Earnings (loss) per share: Earnings (loss) per share are based on the weighted averagenumber of shares outstanding during each year. Earnings per share are computed on a primary basis since thefully diluted basis does not result in further dilution. [10] Use of estimates: The preparation of financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. F-7P--> 10KSB (NOTE A) - The Company and its Significant Accounting Policies:(continued) [11] Change in accounting principle and recently issued accountingpronouncements: In 1995, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 121, "Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"("SFAS 121"), and Statement of Financial Accounting Standards No. 123,"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 121 requires, amongother things, that entities identify events or changes in circumstances whichindicate that the carrying amount of an asset may not be recoverable. SFAS 123requires, among other things, that companies establish a fair value based methodof accounting or disclosure for stock-based compensation plans. These statementsare effective for the Company 's fiscal year commencing July 1, 1996 . The Company believes that adoption of SFAS 121 and SFAS 123 will not have a material impacton its financial statements. The Company expects to continue to account foremployee stock-based compensation in accordance with Accounting Principles BoardOpinion No. 25, "Accounting for Stock Issued to Employees," using intrinsicvalues with appropriate disclosures using the fair value based method. TheCompany has not elected to adopt SFAS 123 early. (NOTE B) - Acquisitions:On June 17, 1996 , Digimedics and Information Handling Services Group, Inc.("IHS") and its wholly owned subsidiary, Continental Healthcare Systems, Inc.("Continental"), entered into an Asset Purchase Agreement whereby Digimedicspurchased from Continental its Pharmakon division ("Pharmakon"). Also on June 17, 1996 , Digimedics purchased from Holland America Investment Corporation, awholly owned subsidiary of IHS, all of the issued and outstanding capital stockof JAC, a United Kingdom corporation. Pharmakon and JAC develop, install andmaintain computerized information systems for hospital pharmacies. Digimedicspaid an aggregate of $3,666,000 in cash and issued a $6,000,000 securedpromissory note (Note E) for both acquisitions. Digimedics also incurredacquisition costs of $238,000 in cash (of which approximately $26,000 was to arelated party) and issued 30,769 shares of common stock as a fee valued at$100,000 to related parties. F-8P--> 10KSB (NOTE B) - Acquisitions: (continued)The purchase price has been allocated to the assets acquired, including cash of$11,000, and liabilities assumed based on their fair values as follows:Purchase price:Cash......................................$ 3,666,000Note payable.............................. 6,000,000Costs of acquisition...................... 338,000 ------------------T o t a l..........................$ 10,004,000 ==================Assets acquired and liabilitiesassumed:Current assets..........................$ 638,000Fixed assets............................ 248,000Other assets............................ 151,000Purchased research and development...... 3,891,000Excess of cost over fair valueof net assets acquired................ 5,873,000Current liabilities..................... (797,000) ------------------ $ 10,004,000 ===================The purchased research and development was charged to operations uponacquisition. The acquisitions have been accounted for as a purchase and,accordingly, the accompanying financial statements include the accounts ofPharmakon and JAC from date of acquisition.Pro forma summary of consolidated operations, based on the original agreement,assuming the acquisition of Pharmakon and JAC has taken place on July 1, 1994 : Year Ended June 30, 1996 1995 ------ ----- (Unaudited)Revenue..................................$ 18,965,000 $ 17,526,000 ================= ==================Net income...............................$ 26,000 $ 37,000 ================= ==================Earnings per share.......................$ .01 $ .01 ================= ================== F-9P--> 10KSB (NOTE B) - Acquisitions: (continued)Digimedics entered into an agreement with Continental to perform Continental'sobligation to provide certain services for customers of Continental, suchservices to include installation of systems, customizing systems, and providinghardware. The agreement also provides for Digimedics to assist Continental inthe collection of certain billed and unbilled accounts receivable, principallydue from the customers who will receive the above mentioned services. Digimedicsis to be paid approximately $1,237,000 plus 30% of amounts collected forperforming the foregoing services. (NOTE C) - Fixed Assets:Fixed assets consist of the following as at June 30, 1996 :Computer, machinery, and officeequipment........................... $ 1,614,000Furniture.................................... 310,000Leasehold improvements....................... 16,000 ----------- T o t a l .......................... 1,940,000Less accumulated depreciation................ 1,364,000 -----------B a l a n c e...................... $ 576,000 ===========(NOTE D) - Capitalized Software Costs: June 30, 1996 1995Balance, beginning of year(net of accumulated amortization)..........$ 998,000 $1,079,000Additions..................................... 496,000 356,000Amortization................................... (482,000) (437,000) ----------- ----------Balance, end of year (net ofaccumulated amortization)...................$1,012,000 $ 998,000 ========== ==========F-10P--> 10KSB (NOTE E) - Notes Payable:At June 30, 1996 the Company has outstanding notes payable as follows:Promissory note issued in connection with the acquisition ofPharmakon and JAC (the "Acquisition Note") (Note B) bearinginterest at Citibank N.A. 's base rate 8.25% at June 30, 1996 payable monthly commencing July 31, 1996 , due on or before November 30, 1996 , collateralized by substantially all ofthe assets of Digimedics and all of the issued andoutstanding stock of Digimedics and JAC. The loan agreement,among other matters, restricts the Company with respect toincurring any lien or encumbrance on its property or assets,entering into new indebtedness and paying any dividents (1).................................$ 6,000,000Notes issued during the years ended June 30, 1995 and June 30, 1994 , bearing interest at 12% per annum, due on orbefore August 1, 1997 , collateralized by the trade accountsreceivable of Digimedics which has a balance at June 30, 1996 of $1,069,000, net of estimated doubtful accounts of $66,000, (including $804,000 issued to directors) (2)......1,179,000 7,179,000 Less current maturities.. ........................... 1,451,000 --------- $5,728,000 ===========(1) On October 28, 1996 the promissory note was amended to provide for an extension of the due date to August 1, 1997 . The extension agreement provides for an immediate payment of $1 million and monthly payments of $100,000 for principal and interest. In addition, the interest rate was increased to 15% on approximately $3,763,000 with the original rate remaining for $1,237,000. The agreement provides for the monthly payments to be first applied to the interest on the portion of the loan subject to the original rate. The remainder is to be applied to the interest, then principal, of the loan subject to 15%. As a result of this amendment, $4,549,000 of this liability is classified as long-termdebt.F-11 P--> 10KSB (NOTE E) - Notes Payable: (continued)(2) These notes are subordinated to the acquisition note. In conjunction with the issuance of these notes the Company issued warrants to purchase 1,040,025 shares of common stock for $0.50 per share and 129,695 shares for $1.25 per share, exercisable through September 30, 2004 . The Company recorded debt discount and additional paid-in capital. The debt discount was expensed in prior years since the notes were initially due prior to the current fiscal year. During May 1996,495,025 of the $0.50 warrants were exercised. (NOTE F) - Accrued Expenses and Other Current Liabilities:Accrued expenses and other current liabilities consist of the following at June 30, 1996 :Wages and related benefits................... $ 562,000Private placement costs...................... 282,000Interest..................................... 312,000Acquisition costs............................ 133,000Other........................................ 486,000 ----------- T o t a l ............................ $ 1,775,000 ===========(NOTE G) - Stockholders' Equity:[1] Stock options and warrants: Pursuant to the Company 's Stock Option Plan (the "Plan") thenumber of shares reserved for issuance is equal to the lower of twenty percentof the outstanding shares of common stock or 500,000 shares. The options entitleholders to purchase shares of common stock at an exercise price not less thanthe fair value of the common stock at the date of grant. Up to 107,772additional options may be issued under this plan. The Company also has options outstanding pursuant to a 1982Stock Option Plan (the "1982 Plan") and a Non-Employee Directors Stock OptionPlan (the "Non-Employee Directors Plan"). No additional options may be grantedunder the 1982 Plan and 60,685 additional options may be granted under theNon-Employee Directors Plan. The options under the Non-Employee Directors Planentitle the holders to purchase shares of common stock at a price equal to thefair value on the date of grant.F-12 P--> 10KSB (NOTE G) - Stockholders' Equity: (continued)[1] Stock options and