Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, New York 10004
Tel. (212) 858-1000
December 19, 1997
Securities and Exchange Commission
1933 Act Filing Desk
450 Fifth Street, N.W.
Washington, DC 20549
Re: Registration Statement on Form SB-2
Mediware Information Systems, Inc.
-----------------------------------
Dear Sirs:
On behalf of Mediware Information Systems, Inc., we are transmitting a
Registration Statement on Form SB-2 covering up to 440,000 shares of Common
Stock of the Company.
Please call Jonathan Churchill (212-858-1109) or Dori Speer (212-858-1136)
with any comments or other communications.
Very truly yours,
/s/ Jonathan H. Churchill
-------------------------
Jonathan H. Churchill
Enc.
cc: Mediware Information Systems, Inc. (w/enc.)
1121 Old Walt Whitman Road
Melville, New York 11747-30005
Attention: Corporate Secretary
NASDAQ Stock Market (w/enc.)
National Association of Securities
Dealers, Inc.
1735 K Street, N.W.
Washington, DC 20006
Pacific Stock Exchange (w/enc.)
301 Pine Street
San Francisco, CA 94104
<PAGE>
As filed with the Securities and Exchange Commission on December 22, 1997 File
No.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MEDIWARE INFORMATION SYSTEMS, INC.
(Name of Small Business Issuer in Its Charter)
NEW YORK 7372 11-2209324
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
1121 Old Walt Whitman Road, Melville, New York 11747-3005
(516) 423-7800
(Address and Telephone Number of Principal Executive Offices)
1121 Old Walt Whitman Road, Melville, New York 11747-3005
(Address of Principal Place of Business or Intended Principal Place of Business)
Les N. Dace
President and Chief Executive Officer
Mediware Information Systems, Inc.
1121 Old Walt Whitman Road
Melville, New York 11747-3005
Tel. No. (516) 423-7800
(Name, Address and Telephone Number of Agent for Service)
Copies to:
Jonathan H. Churchill, Esq.
Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, New York 10004-1490
Tel. No. 212-858-1000
---------------------------------------
Approximate Date of Proposed Sale to the Public: From time to time after
the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. ___________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ___________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. ___
--------------------------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
======================= ====================== ======================= ======================== ====================
Title of Each Class Dollar Amount to be Proposed Maximum Proposed Maximum Amount of
of Securities to be Registered Aggregate Price Per Aggregate Offering Registration Fee
Registered Unit Price
======================= ====================== ======================= ======================== ====================
======================= ====================== ======================= ======================== ====================
<S> <C> <C> <C> <C>
Common Stock 440,000 shares $10.125* $4,455,000* $1,315
======================= ====================== ======================= ======================== ====================
</TABLE>
* Estimated solely for the purpose of calculating the registration fee pursuant
to Rule 457. Based on the last reported sale price for the shares of Common
Stock on December 17, 1997.
- ---------------------
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
1
<PAGE>
SUBJECT TO COMPLETION DATED DECEMBER 22, 1997
PROSPECTUS
440,000 Shares
MEDIWARE INFORMATION SYSTEMS, INC.
COMMON STOCK
-----------------------------------
This Prospectus may be used by persons (Selling Shareholders) who have
received or will receive shares of Common Stock (par value $.10 per share) (the
Common Stock) of Mediware Information Systems, Inc. (the Company or Mediware)
covered by this Prospectus in connection with (i) the purchase of such Common
Stock in a private placement in August 1997 and (ii) the exercise of a warrant
to purchase Common Stock.
Selling Shareholders may sell shares of Common Stock from time to time
privately in negotiated transactions or publicly in open-market transactions on
the Nasdaq Smallcap Market or otherwise, in one or more transactions, as
described more fully herein. See Plan of Distribution. Selling Shareholders and
broker-dealers that participate with Selling Shareholders in such sales of
Common Stock, and any brokers or finders who receive Common Stock as fees, may
be deemed to be underwriters within the meaning of Section 2(11) of the
Securities Act of 1933 (the Act), and any commissions or fees received by them
and any profit on the resale of shares of Common Stock may be deemed to be
underwriting compensation. The Company will not receive any of the proceeds of
the sale of shares of Common Stock by any such person.
The Company may agree to indemnify the Selling Shareholders and/or
broker-dealers against certain civil liabilities, including liabilities under
the Act, and to reimburse them for certain expenses in connection with the sale
of Common Stock.
The outstanding shares of Common Stock are currently listed on The Nasdaq
SmallCap Market under the symbol MEDW. The last reported sale price on Nasdaq on
December 17, 1997 was $10.125 per share.
------------------------------------
See Risk Factors on page 3 herein for a discussion of certain risks which
should be considered by prospective investors.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
----------------------
The date of this Prospectus is _________________________, 1998
2
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus in connection with an offer made by
this Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or by any other
person, underwriter, dealer or agent. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create an implication
that there has been no change in the affairs of the Company since the date
hereof or thereof or that the information contained herein is current as of any
time subsequent to the date hereof. This Prospectus does not constitute an offer
or solicitation by anyone in any State in which such offer or solicitation is
not authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation.
Pursuant to Rule 174 under the Act, dealers effecting transactions in the
registered securities, whether or not participating in this distribution, are
not required to deliver a prospectus, except that dealers have the obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
TABLE OF CONTENTS
AVAILABLE INFORMATION.............. 2 MARKET FOR REGISTRANT'S COMMON
EQUITY 18
RISK FACTORS....................... 3 SECURITY OWNERSHIP................ 20
THE COMPANY........................ 6 DIRECTORS......................... 22
USE OF PROCEEDS.................... 7 EXECUTIVE OFFICERS ............... 25
CAPITALIZATION..................... 8 EXECUTIVE COMPENSATION............ 26
DIVIDEND POLICY.................... 8 SHARES ELIGIBLE FOR FUTURE SALE... 28
DESCRIPTION OF THE BUSINESS........ 8 CERTAIN TRANSACTIONS.............. 29
INDEMNIFICATION OF OFFICERS
AND DIRECTORS................... 29
PROPERTIES......................... 14
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........ 14
PLAN OF DISTRIBUTION.............. 30
LEGAL MATTERS..................... 31
DESCRIPTION OF CAPITAL STOCK....... 17 EXPERTS........................... 31
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (1934 Act) and in accordance therewith files reports, proxy
statements and other information (collectively, 1934 Act Reports) with the
Securities and Exchange Commission (the SEC). Such reports, proxy statements and
other information can be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
its regional offices at Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60661 and Suite 1300, 7 World Trade Center, New York, New York
10048. Copies of such material can also be obtained from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The SEC also maintains a web site (http://www.sec.gov.) that
contains reports, proxy and information statements and other information
regarding the Company. Certain securities of the Company are listed on The
Nasdaq SmallCap Market, and reports, proxy material and other information
concerning the Company may be inspected at the office of Nasdaq.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus is delivered, upon written or oral request of
such person, a copy of any or all of the information that was incorporated by
reference in this Prospectus, other than exhibits to such documents not
specifically incorporated by reference herein. Requests for such copies should
be directed to Office of the Secretary, Mediware Information Systems, Inc., 1121
Old Walt Whitman Road, Melville, New York 11747-3005, Tel.No.(516) 423-7800.
3
<PAGE>
RISK FACTORS
The shares offered hereby represent a speculative investment and involve a
high degree of risk. Each prospective purchaser should carefully consider the
following risks among other factors before making an investment in the shares
offered hereby.
Past Operating Losses. For the fiscal years ended June 30, 1997 and 1996,
the Company has operating revenues of $18,519,000 and $10,432,000, respectively,
and net income of $2,081,000 and a net (loss) of ($3,491,000), respectively. The
Company had net earnings in only three of the last five fiscal years. Previous
losses have been funded in part with proceeds from bridge financings, in
connection with which the Company issued promissory notes and warrants to
purchase Common Stock.
Significant Indebtness and Restrictive Covenants. In connection with the
Pharmakon acquisition (described more fully herein, see The Company and
Description of the Business), the Company issued a promissory note (Acquisition
Note) to the seller of the acquired divisions, which, as amended, is due in
quarterly installments of $150,000 commencing October 31, 1997 with the balance
due November 30, 1998. The Company will require additional sources of liquidity
to fund the balance of approximately $3.4 million due November 30, 1998 on the
Acquisition Note, as well as the $854,000 balance due on the promissory notes
issued in bridge financings which are subordinated to the Acquisition Note. The
Acquisition Note is collateralized by all of the issued and outstanding capital
stock of Digimedics and JAC, the subsidiaries of the Company engaged in its
pharmaceutical information business, and all of the assets of Digimedics. The
Acquisition Note is also guaranteed by the Company and restricts numerous
corporate activities of the Company. See Description of Capital Stock.
Need for Additional Financing. The Company will require additional
financing to funds its operations and plans for future growth. The Companys
ability to arrange such financing and the cost of such financing are dependent
upon numerous factors, including general economic and capital market conditions,
regulatory developments, credit availability from banks or other lenders,
investor confidence in the industry and the Company, the success of the Companys
products, and provisions of tax and securities laws that are conducive to
raising capital. There can be no assurance that financing will be available to
the Company on acceptable terms or at all.
Variability of Operating Results. The Company expects its revenues and
profitability to continue to fluctuate widely from quarter to quarter and, to a
lesser extent, from year to year, because of the small number of information
systems sold relative to the purchase price of the systems. Revenues, earnings
and costs may also vary significantly from period to period and over a longer
time frame depending upon the timing of deliveries, installation schedules, the
product mix, i.e., proprietary software or non-proprietary software and
hardware, variability of hospital decision cycles, length of time that the
product has been available in the market, and the availability to hospitals of
funding for capital expenditures.
Possible Volatility of Stock Price. The market price of the Common Stock
may continue to be subject to significant positive or negative fluctuations in
response to variations in financial results or the occurrence of material
developments or corporate transactions involving the Company or its competitors,
or the expectation or change in expectation in the market of any of the
foregoing. Regulatory changes or changes in the general condition of the economy
or the financial markets could also adversely affect the market price of the
Common Stock. See Market for Registrants Common Equity.
Market Acceptance of new WORx Product. The Companys Pharmacy Division has
developed and introduced a new client server pharmacy system, WORx. While market
acceptance of this product appears favorable at this time, there can be no
assurance that actual sales will fulfill the Companys expectations.
Hospital Purchase Procedures. Under hospital financial procurement
procedures, the Companys products are treated as capital items. As such, the
sale of new systems can be a lengthy and expensive process, requiring from six
to eighteen months and approval at several levels of hospital management and is
dependent on the availability of funds.
Nasdaq Listing Requirement. The Board of Directors of The Nasdaq Stock
Market has changed its maintenance standards for listing on The Nasdaq SmallCap
Market that include a net tangible assets test. The Company currently meets the
test. However, there can be no assurance that the Company will continue to meet
the criteria for continued listing of its Common Stock on the Nasdaq SmallCap
Market. If this listing is terminated, the liquidity for the Companys Common
Stock will be severely impaired in the absence of the development of a
meaningful alternative.
Risks Relating to Acquisitions. In order to broaden product offerings,
capture market share, improve profitability and capitalize on the consolidation
trend in the hospital clinical computer-based management information system
industry, the Companys business strategy includes growth through acquisitions
and the Company has an ongoing program of reviewing and considering acquisition
possibilities. There can be no assurance that the Company will be able to
identify or reach mutually agreeable terms with acquisition candidates, or that
the Company will be able to manage additional businesses profitably or
successfully integrate such additional businesses into the Company without
substantial costs, delays or other problems. Acquisitions may involve a number
or special risks, including: initial reductions in the Companys operating
results; diversion of managements attention; unanticipated problems or legal
liabilities; and a possible reduction in reported earnings due to amortization
of acquired intangible assets in the event that such acquisitions are made at
levels that exceed the fair market value of net tangible assets. Some or all of
these items could have a material adverse effect on the Company. There can be no
assurance that businesses acquired in the future will achieve sales and
profitability that justify the investment therein.
Competition. Competition in the hospital computer software industry is
intense. In sales of the Hemocare system, the Company currently competes
principally with three substantially larger vendors of laboratory information
systems that contain a blood bank subsystem. Informedics, Inc. is also a vendor
of stand-alone blood bank systems. See Recent Developments. The Pharmacy
Division competes with numerous companies, including some of the leading vendors
of healthcare information systems. The competitors of the Surgiware Division
have significantly larger installed bases. These competitors have substantially
greater technical, marketing, financial and other resources than the Company and
have established reputations for success in developing and selling hospital
information systems. There can be no assurance that the Company will be able to
compete successfully in its markets. See Description of the Business
Competition.
Technological Obsolescence; Continual Need for Successful Marketing and
Acceptance of New Products. The computer software industry is characterized by
rapid and significant technological advances. These advances often result in
partial or total obsolescence of programs within a short time. Consequently, it
is necessary to enhance a system continuously and to modify it for use on new
computer systems and in new technical environments. There can be no assurance
that the Company will be able to develop or acquire new products or product
updates at a rate sufficient to keep them competitive or that such new products
or product updates will achieve market acceptance.
4
<PAGE>
Product Protection. The Hemocare and Digimedics systems are not patented
but have been copyrighted. Certain features of the licensed Surgiware software
are covered by a patent held by the licensor. To protect its proprietary
software, the Company relies upon the law of trade secrets, nondisclosure
agreements with employees, and restrictions on disclosure and transferability
incorporated into agreements with customers. Notwithstanding these safeguards,
it is possible for competitors of the Company to obtain its trade secrets and to
imitate its products. Furthermore, there can be no assurance that others will
not independently develop software products similar to those developed or
planned by the Company.
Government Regulation. The adequacy of blood bank information management
and record keeping is subject to inspection and review by the Food and Drug
Administration (FDA) which is in the process of developing new guidelines which
it intends to apply to blood bank information systems and to the inspection of
vendors of such systems. The Company has experienced on-site FDA inspection (see
Description of the Business-Government Regulation). Hemocare and the Company are
subject to the jurisdiction of the FDA as suppliers of medical devices. The
Company has dedicated substantial time and resources in its attempts to comply
with applicable guidelines and regulations and believes that it is in
substantial compliance therewith, but cannot predict whether it will be in
compliance with any future guidelines, regulations or inspection procedures.
Non-compliance could have a material adverse effect on the operations of the
Company. The effect of recently enacted legislation cannot be predicted but
could have a material adverse effect on the blood bank information system
operations of the Company and its other clinical information systems. See
Description of the Business-Government Regulation). Any of the Companys other
activities could also become subject to Congressional or governmental agency
efforts to establish or expand governmental agency jurisdiction. See Description
of the Business - Government Regulation.
Dependence Upon Key Employees. The success of the Company will depend, in
part, on its continuing ability to attract and retain key employees. If the
Company loses the services of its key employees, or if the Company is unable to
attract and retain additional qualified personnel, its business could be
materially adversely affected.
Management of Growth. The Company has experienced significant growth of its
operations, which has placed, and is expected to continue to place, significant
demands on the Companys managerial, technical, financial and other resources.
This growth will require the Company to continue to invest in its financial and
management information systems and to retain, motivate and effectively manage
its employees. If the Companys management is unable to manage growth
effectively, then the quality of the Companys products and services, as well as
its business, financial condition and results of operations, could be materially
and adversely affected.
Risks Associated with International Operations. There are certain risks
inherent in doing business on an international level, including regulatory
limitations restricting or prohibiting the provision of the Companys services,
unexpected changes in regulatory requirements, tariffs, customs, duties and
other trade barriers, difficulties in staffing and managing foreign operations,
longer payment cycles, problems in collecting accounts receivable, political
risks, fluctuations in currency exchange rates, technology export and import
restrictions or prohibitions, delays from customs brokers or government
agencies, and potentially adverse tax consequences resulting from operating in
multiple jurisdictions with different tax laws.
5
<PAGE>
No Dividends. The Company has historically not paid dividends and has no
present intention of paying cash dividends on its Common Stock. Future earnings,
if any, will be used to finance the development and continued expansion of its
business. See Dividend Policy.
Shares Eligible For Future Sale. The holders of substantially all of the
outstanding shares of Common Stock are free to sell their shares and/or in some
instances have the right to have their shares included in one or more
registration statements under the Securities Act. The possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Companys ability to raise capital through the sale of its equity securities.
See Shares Eligible for Future Sale.
Authorized Preferred Stock. The Company is authorized to issue 10,000,000
shares of preferred stock, the terms of which may be fixed by the Board of
Directors. The effects of any issuance of preferred stock upon the rights of
holders of Common Stock could be negative, depending upon the terms of the
preferred stock. Such effects might include: (a) reduction of the amount of
funds otherwise available for, and restrictions on, the payment of cash
dividends on Common Stock; (b) dilution of the voting power of the Common Stock;
(c) dilution of book value per share of Common Stock; and (d) inability to share
in the assets of the Company upon liquidation until satisfaction of liquidation
preferences of preferred stock.
Forward-Looking Statements. Certain statements made in or incorporating
this Prospectus are forward-looking statements, such as descriptions of the
Companys intentions to market new products, extend existing products, acquire or
develop new products, and utilize new channels of distribution. Such
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the forward-looking statements.
These risks and uncertainties are expressed in the Risk Factors discussed above,
especially those under the headings Significant Indebtedness and Restrictive
Covenants, Variability of Operating Results, Hospital Purchase Procedures, Risks
Relating to Acquisitions, Competition, Technological Obsolescence; Continual
Need for Successful Marketing and Acceptance of New Products, Product
Protection, Dependence on Key Employees, Management of Growth, Risks Associated
with International Operations and Government Regulation.
THE COMPANY
Mediware Information Systems, Inc. (together with its subsidiaries, the
Company or Mediware) develops, sells and supports computer-based management
information systems for use in various clinical departments of hospitals. The
systems are designed to automate the data these departments provide hospital
management and therefore increase productivity, reduce operating costs, enhance
revenues and improve quality assurance and patient care. These benefits are of
critical importance to hospital administrators who face increasing financial and
regulatory pressures. At present, the Company offers systems for three different
departments: the blood bank, the pharmacy and the surgical suite. The installed
base of clinical information systems is approximately 825 clients.
The Company was incorporated in 1980. The Companys headquarters are located
at 1121 Walt Whitman Road, Melville, New York 11747, telephone (516) 423-7800.
6
<PAGE>
Blood Bank
The Companys cornerstone product is one of North Americas leading blood
bank information systems and is sold either stand-alone or as part of an
integrated LAB/Blood Bank system. The system was originally designed in
collaboration with Memorial Sloan-Kettering Cancer Center in New York City.
Hemocares software programs are organized into subsystems performing over 200
functions of which the major ones (a) manage and control blood 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 patient test results; and (f)
automate billing and workload recording. The Hemocare system is installed in
approximately 260 hospitals which range in size from 100 beds to over 1,600
beds.
Pharmacy
In May of 1990, the Company acquired Digimedics Corporation, one of the
countrys leading vendors of information management systems for hospital
pharmacies. Digimedics had been developing and selling products and services to
hospital pharmacies since 1976. In the mid-1980s, Digimedics introduced the
first open systems version of a comprehensive pharmacy information management
system. Digimedics Corporation is a wholly owned subsidiary of the Company. Over
150 Digimedics systems have been installed at 125 hospitals (some hospitals have
separate systems for inpatient and outpatient pharmacies).
During 1997, the Pharmacy Division introduced a new client server pharmacy
system known as Digimedics WORx(. This advanced system features a Microsoft
Windows-based graphical user interface, point-and-click ad-hoc report writing,
integrated inpatient/outpatient profiles, and a relational database management
system. The Company believes this system will be a major factor in the next
generation of drug therapy management systems. Installation of this next
generation system began in Fiscal 1997.
In June of 1996, Digimedics Corporation acquired certain assets (the
Acquisition) of the U.S. based Pharmakon division (Pharmakon) and a pharmacy
management system operating in the United Kingdom, JAC Computer Service, LTD.
(JAC), of Continental Healthcare Systems, Inc. (Continental). The Pharmakon
operation has been subsequently merged with the Digimedics operation to form the
Pharmacy Division of the Company. The combination of client bases has increased
the Companys installed base of clinical information systems to approximately 825
(over 500 of which are pharmacy system installations). Installations which were
already in existence in Canada together with the addition of the JAC client base
provide the Company with a significant international presence.
Surgical Suites
In September of 1990 the Company licensed the right to market and relicense
the Surgiware system for use in surgical suites. Surgiware is a comprehensive
information system for managing the human resources, facilities, equipment and
supplies required for surgery. The Surgiware system integrates clinical data
capture, inventory and equipment control, scheduling, quality assurance and
report writing. For example, the system contains a program that presents a
proprietary, real-time moving schedule on a color graphics display allowing the
user to visually identify potential scheduling conflicts based upon what is
happening in the surgical suite at the moment, and to test alternative solutions
on the system. The core of the system is 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 on their surgical activities. Additional
modules and functions can be added, such as a clinical data module that keeps
track of all aspects of a patients treatment, including pre-operative and
post-operative control. The Company has recently introduced PCCWIN, a Windows 95
based module that automates the preoperative case charting process.
7
<PAGE>
The Companys marketing is concentrated on the approximately 1,000 hospitals
that have more than 300 beds and 10 operating rooms, where studies indicate that
approximately 80% of all surgical services in this country are performed. The
Company has installed 25 Surgiware sites.
RECENT DEVELOPMENTS
On December 18, 1997, the Company entered into an Agreement and Plan of
Merger with Mediware Acquisition Corporation (Acquisition), a newly formed
Oregon corporation and a wholly owned subsidiary of the Company, and
Informedics, Inc. (Informedics), an Oregon corporation, pursuant to which
Informedics will merge into Acquisition and become a wholly owned subsidiary of
the Company. The merger agreement is subject to the completion of certain
schedules. The merger will be effected by issuing to Informedics shareholders
one share of the Companys Common Stock for every 6.3 shares of Informedics stock
which they own (i.e., each share of Informedics is converted into 0.1587301 of a
share of the Company). Based upon the number of Informedics common stock
outstanding as of December 18, 1997, the Company will issue 421,383 shares of
Common Stock to Informedics shareholders in the merger (subject to increase to
reflect the conversion of certain Informedics stock options into the Companys
Common Stock). The merger is subject to the approval of the Informedics
shareholders, as well as to the consummation of other closing conditions. It is
expected that the merger will be consummated during 1998.
Informedics develops, markets and supports a line of stand-alone computer
software application management information systems for use in the blood bank
and clinical departments of hospitals. The computer-based systems typically
consist of computers, peripheral hardware (such as disk drives and printers),
local area network (LAN) hardware and software, and the Companys proprietary
software applications. Informedics products consist of a blood bank data
management system, a pathology data management system, a healthcare information
management network system and a laboratory order entry and results reporting
system.
The blood bank data management systems, called LifeLine, are modular, yet
fully integrated, software systems which have been designed for the modern blood
bank and hospital transfusion service to monitor donor records, unit inventory,
and patient test and transfusion history. The pathology data management systems,
called StarPath, are modular, yet fully integrated, software systems that are
designed to fully automate a pathology department. The laboratory order entry
and results reporting system is designed to automate the ordering and reporting
of lab tests from a physicians office or medical clinic to an independent
reference laboratory. In addition to the sales of the Companys product lines,
the Company performs ongoing support and maintenance and programming service for
its customers. For the fiscal year ended October 31, 1996 Informedics total
revenues were $5,156,000 and its reported loss was $473,000. Total assets were
$2,868,000 as of that date. For the nine months ended July 31, 1997 Informedics
total revenues were $2,483,000 and its reported loss was $1,264,000. Total
assets were $1,271,000 as of that date.
8
<PAGE>
USE OF PROCEEDS
There will be no proceeds to the Company from any sale of shares by Selling
Shareholders.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at September 30, 1997:
<TABLE>
<S> <C>
Notes payable-short-term debt............................................. $600,000
========
Notes payable, less current portion....................................... $4,450,000
----------
Capital leases payable, less current portion.............................. $11,000
-------
Shareholders' equity:
Preferred Stock, $.01 par value - 10,000,000 shares authorized,
none issued and outstanding
Common Stock, $.10 par value -- 12,000,000 shares authorized,
5,483,363 shares issued and outstanding (1)......................... 548,000
Additional paid-in capital................................................ 15,724,000
Unearned Compensation .................................................... (81,000)
Cumulative foreign currency translation adjustment........................ 20,000
(Deficit)................................................................. (6,925,000)
----------
Total shareholders' equity............................................. 9,286,000
---------
Total Capitalization ..................................................... $13,747,000
===========
</TABLE>
-----------------
(1) Does not include (a) up to 825,984 shares reserved for future issuance upon
exercise of outstanding options under the Company's 1982 Stock Option Plan,
the 1992 Equity Incentive Plan and the 1991 Stock Option Plan for
Non-Employee Directors, (b) up to an aggregate of 714,695 shares issuable
upon exercise of outstanding warrants or (c) 36,000 options granted to
directors which are subject to shareholder approval, each number as of
September 30, 1997. See "Executive Compensation" and "Directors -
Compensation of Directors".
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock and has no present
intention to pay cash dividends on its Common Stock. Earnings, if any, will be
used to finance the development and continued expansion of the Companys
business. The Company is prohibited from paying dividends so long as the
promissory note issued to Continental in the Acquisition remains outstanding.
DESCRIPTION OF THE BUSINESS
Mediware was incorporated in 1980. The Company develops, sells and supports
computer-based management information systems for use in various clinical
departments of hospitals. The systems are designed to automate the data these
departments provide hospital management and therefore increase productivity,
reduce operating costs, enhance revenues and improve quality assurance and
patient care. These benefits are of critical importance to hospital
administrators who face increasing financial and regulatory pressures. At
present, the Company offers systems for three different departments: the blood
bank, the pharmacy and the surgical suite. The installed base of clinical
information systems is approximately 825 clients.
The Companys product lines are managed through three operating divisions:
Hemocare Division (blood bank), Pharmacy Division -- Digimedics and Pharmakon
(pharmacy), and Surgiware Division (surgical suite).
9
<PAGE>
Product Lines
Hemocare -- The Companys cornerstone product is one of North Americas
leading blood bank information systems and is sold either stand-alone or as part
of an integrated LAB/Blood Bank system. The system was originally designed in
collaboration with Memorial Sloan-Kettering Cancer Center in New York City.
Hemocares software programs are organized into subsystems performing over 200
functions of which the major ones (a) manage and control blood 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 patient test results; and (f)
automate billing and workload recording.
Hemocare's core technology is the UNIX operating system and the "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 Intel PC
technologies. The scalability of these platforms allows Hemocare to address the
needs of virtually any size hospital. Hemocare markets innovative product
enhancements such as Validation Templates, Video Validation, Standard
Integration Module and Mock Regulatory Inspection. At this time Hemocare is the
only blood bank system to offer this suite of products which assist customers in
their efforts to remain compliant with regulatory agency guidelines. The
Standard Integration Module was instrumental in the growth of laboratory vendors
who have integrated and remarketed this product. The Company currently has
remarketing agreements with HBO and Company, Citation Computer Systems, Inc.,
Dynamic Healthcare Technologies, Inc., Keane, Inc., NLFC, Inc., and Shared
Medical Systems, Inc.
The Hemocare system is installed in approximately 260 hospitals which range
in size from 100 beds to over 1,600 beds.
Pharmacy -- In May of 1990, the Company acquired Digimedics Corporation,
one of the countrys leading vendors of information management systems for
hospital pharmacies. Digimedics had been developing and selling products and
services to hospital pharmacies since 1976. In the mid-1980s, Digimedics
introduced the first open systems version of a comprehensive pharmacy
information management system. Digimedics Corporation is a wholly owned
subsidiary of the Company. Over 150 Digimedics systems have been installed at
125 hospitals (some hospitals have separate systems for inpatient and outpatient
pharmacies).
In June of 1996, Digimedics Corporation acquired from Continental certain
assets of the U.S. based Pharmakon division and JAC, a pharmacy management
system company operating in the United Kingdom. The Pharmakon operation has been
subsequently merged with the Digimedics operation to form the Pharmacy Division
of the Company. The combination of client bases has increased the Companys
installed base of clinical information systems to approximately 825 (over 500 of
which are pharmacy system installations). Installations which were already in
existence in Canada together with the addition of the JAC client base provide
the Company with a significant international presence.
Clients include leading research institutions such as the University of
California Medical Center, San Francisco; Mt. Sinai Hospital, New York City;
Columbia-Presbyterian Medical Center, New York City; University of Kansas
Medical Center, Kansas City; University of Michigan Hospitals and Clinics, Ann
Arbor; Sunnybrook Health Sciences Center, Toronto; and the Royal Free Hospital,
London.
During fiscal 1997, the Pharmacy Division introduced a new client/server
pharmacy system known as Digimedics WORx(. This advanced system features a
Microsoft Windows-based graphical user interface, point-and-click ad-hoc report
writing, integrated inpatient/outpatient profiles, and a relational database
management system. The Company believes this system will be a major factor in
the next generation of drug therapy management systems. Installation of this
next generation system began in fiscal 1997.
10
<PAGE>
Other WORx features include:
- -- A Cinical database and drug monographs (including foreign language
monographs).
- -- An extensive array of drug therapy monitoring including drug interactions,
allergy monitoring, dose range checking, therapeutic duplication, and drug
alerts.
- -- A reporting system that may be tailored to local practice standards.
- -- Support for multiple drug delivery mechanisms.
- -- Extensive integration with financial systems, other clinical systems, and
robotics.
By taking advantage of its open architecture, WORx is capable of linking
with expert systems, decision-support software, and clinical databases. WORx
acts as the central hub for drug therapy information throughout the healthcare
enterprise and will provide specialized tools for all aspects of pharmaceutical
care.
WORx can adapt to a diversity of hardware and networking environments.
Utilizing technologies such as UNIX, Powerbuilder, C++ programming language,
Informix Online Dynamic Server, Microsoft Windows, Windows 95, NT and Microsoft
ActiveX"!, WORx is positioned as a state of the art client/server solution.
Surgiware -- In September 1990 the Company licensed the right to market and
relicense the Surgiware system for use in surgical suites. Surgiware is a
comprehensive information system for managing the human resources, facilities,
equipment and supplies required for surgery. The Surgiware system integrates
clinical data capture, inventory and equipment control, scheduling, quality
assurance, and report writing. For example, the system contains a program that
presents a proprietary, real-time moving schedule on a color graphics display
allowing the user to visually identify potential scheduling conflicts based upon
what is happening in the surgical suite at the moment and to test alternative
solutions on the system. The core of the system is 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 on their surgical activities.
Additional modules and functions can be added, such as a clinical data module
that keeps track of all aspects of a patients treatment, including pre-operative
and post-operative control. The Company has recently introduced PCCWIN, a
Windows 95 based module that automates the preoperative case charting process.
The benefits of a fully-implemented system include (a) improvement in the
efficiency and output of operating rooms; (b) improvement in the management of
staffing, equipment, and supplies; (c) improvement in inventory controls; and
(d) incremental billings resulting from procedures that, without Surgiware,
might be overlooked for billing purposes because they either were unplanned 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 translate into significant
revenues and savings, since, usually, the surgical suite produces more revenue
than any other department and is the greatest cost center in the hospital. The
record keeping functions of Surgiware can also be of significant benefit in the
areas of quality assurance, risk management, and the accreditation of
physicians.
11
<PAGE>
Surgiware uses the UNIX operating system, the C programming language, the
INFORMIX SQL 4th generation relational database manager, and a fault-tolerant
architecture that allows the personal computer that is placed in each operating
room to operate independently in the event of a failure of the central Surgiware
computer. The system has been ported to the IBM RS-6000 and the Data General
AViiON series and to 386, 486, and Pentium IBM compatible personal computers.
The Companys marketing is concentrated on approximately 1,000 hospitals
that have more than 300 beds and 10 operating rooms, where studies indicate that
approximately 80% of all surgical services in this country are performed. The
Company has installed 25 Surgiware sites.
Sales and Marketing
The Companys three products are sold directly by nine full-time sales
people, as well as four Company officers, with the assistance of seven clinical
specialists who demonstrate the systems and address technical questions. Sales
leads and support are received from certain hardware manufacturers, especially
IBM Corporation and Data General Corporation, for whose product the Company acts
as a Value Added Reseller. The Companys products are also sold increasingly
through remarketers who are vendors of laboratory and other information systems
that offer Company systems as subsystems of their product. The Company has
entered into agreements with vendors such as HBO and Company (for both STAR and
ALS product lines), Citation Computer Systems, Inc., Dynacor, Inc., Keane, Inc.,
NLFC, Inc., Shared Medical Systems, Inc., Triple G, and Dynamic Healthcare
Technologies, Inc.
Software Support and Hardware Maintenance Services
The Company provides comprehensive service to its installed base of
customers through its own service organization. Virtually all of the Companys
customers enter into software support agreements with either the Company or its
resellers which are renewed annually or at longer intervals, which, in the case
of former Pharmakon customers, may be canceled by either party on 60 days
notice. These agreements generally provide for 24-hour access to customer
support staff, as well as periodic product enhancements and a limited product
warranty for which the customer pays a monthly or annual fee subject to
cancellation after a specified notice period. Some of the Companys customers
have also entered into agreements for hardware maintenance, which the Company
generally subcontracts to the hardware manufacturers.
HEMOCARE and DIGIMEDICS are trademarks of the Company and its subsidiary,
Digimedics Corporation, respectively.
Competition
The competition in the market for clinical information systems is intense.
The principal competitive factors are the functionality of the system, its
design and capabilities, site references, reputation for ongoing support, the
potential for enhancements, price and salesmanship. Different dynamics and
competitors, however, affect each of the Companys products.
Hemocare -- The Company currently competes principally with three vendors
(Cerner Corporation, Sunquest Information Systems, Inc. and Soft Computer
Consultants) of laboratory information systems (LIS) that contain a blood bank
subsystem. The LIS vendors are much larger companies with greater technical,
marketing, financial and other resources than the Company and have established
reputations for success in developing and selling hospital information systems.
The Company also competes with one other specialty vendor of stand-alone blood
bank systems (Informedics, Inc., see Recent Developments).
12
<PAGE>
Digimedics -- The Company currently competes with numerous companies,
including some of the leading vendors of healthcare information systems. With
the acquisition of Pharmakon, the Company believes that it has the largest
number of stand-alone hospital pharmacy systems in its market. Many competitors
have established reputations for success in developing and selling medical
information systems and have far greater resources than the Company. The
principal competitors of the Digimedics system are believed to be Cerner
Corporation, BDM Corp., HCS Corp. and Pharmacy Computer Systems, Inc., as well
as numerous providers of complete healthcare information systems.
Surgiware -- The competitors of Surgiware have significantly larger
installed bases and have substantially greater technical, marketing, financial
and other resources than the Company and have established reputations for
success in developing and selling hospital information systems. The principal
vendors competing with the Surgiware division are believed to be Serving
Software Incorporated, a wholly owned subsidiary of HBO Company, Enterprise
Systems Incorporated and Atwork Corporation, a wholly owned subsidiary of
Medaphis Corporation.
Copyright, Patents and Trade Secrets
The Company has relied primarily on copyright, trade secret protection and
confidentiality agreements for protection of its software systems. Certain
features of the Surgiware Division are covered by a patent held by the licensor.
Government Regulation
The hospitals that comprise the primary market for the Companys products
must comply with various federal, state and local statutes and regulations. The
adequacy of blood bank information management and record keeping is subject to
inspection and review by the FDA. Hemocare and other blood bank systems are also
subject to regulation by the FDA as medical devices. Consequently, the Company
and its competitors who provide blood bank information management systems are
also subject to the jurisdiction of the FDA as suppliers of medical devices. The
Company has dedicated substantial time and resources in its attempts to comply
with applicable guidelines and regulations and believes that it is in
substantial compliance therewith.
Hemocare experienced its first regular on-site FDA inspection in July,
1997. The Agency recommended minor changes to the in-house developed call
tracking system to allow for a more precise method of problem identification,
tracking and trending. These changes were put into practice on August 1, 1997.
The Company had previously identified a notice of system limitation which it
updated in its user manual. This change to documentation was considered a
labeling change by the FDA and is therefore classified as a recall. However, a
labeling recall does not require the customer to discontinue its use of the
system. The vendor is required to update its medical device documentation with a
more accurate description of its intended use. The Hemocare Product Center had
already complied with this as part of its normal Good Manufacturing Practices at
the time of its initial notification to customers in July.
The FDA is in the process of developing new guidelines that it intends to
apply to blood bank information systems and to the inspection of vendors of such
systems. The Company cannot predict whether it 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 operations of vendors of blood bank information
systems, including the Company. The Food and Drug Administration Modernization
Act of 1997 was enacted on November 21, 1997 and will become effective on
February 20, 1998. Under this legislation the FDA is directed to consider the
extent to which reliance on post-market controls could expedite the pre-market
notification review process and the classification of devices. The legislation
also requires FDA to ensure that Good Manufacturing Practices conform, to the
extent practicable, with internationally recognized standards for medical
devices. Neither of these provisions appear on its face to contemplate
regulation which would have a material adverse effect on the Companys blood bank
information system operations; however, the legislation will expand the
jurisdiction of the FDA and the Company is unable to predict the effect of any
resulting applicable future regulation.
13
<PAGE>
Any of the Companys other clinical information system activities could also
become subject to Congressional or governmental agency efforts to establish or
expand governmental agency jurisdiction.
Miscellaneous
The Companys software development expenditures were $2,155,000 during
fiscal 1997 and $1,438,000 in fiscal 1996. These costs included write downs and
amortization of software development costs. In addition, software costs of
$929,000 and $496,000, respectively, were capitalized in each year. The Company
anticipates that it will continue to commit substantial resources to software
development in the future. Furthermore, the Company purchased $3,891,000 of
research and development in the acquisition of Pharmakon and JAC, which was
charged to operations expense in fiscal 1996. For the quarter ended September
30, 1997, the Company incurred $584,000 in software development expenditures and
capitalized $192,000 of software costs.
The Companys business is not dependent on a single customer or a few
customers. The Company considers that its market area and customer base is
United States, Canada and, through JAC, the United Kingdom.
Employees
As of September 30, 1997, the Company had 128 full-time employees and 7
part-time employees, including 23 in sales and marketing, 91 in customer support
and product development, and 21 in administration. None is represented by a
labor union and the Company considers its employee relations to be good.
Legal Proceedings
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. In addition, Mediware, Digimedics, and Continental
have been named as co-defendants in a litigation, Cedars-Sinai Medical Center
vs. Mediware Information Systems, Inc. et al, commenced on March 26, 1997 in Los
Angeles County Superior Court. The litigation arises out of a contract between
Continental and a customer, under which Continental was to install certain
computer equipment and software. The plaintiff alleges that computer equipment
and software were not operational, and that the contract the plaintiff had with
Continental was assigned without its consent to Digimedics when it acquired
Continentals Pharmakon Division. The plaintiff also alleges that Digimedics
failed to honor the contract and that Mediware did not fulfill its promise to
install and support the software as prescribed in the contract. The plaintiffs
claims against Digimedics are for breach of contract, intentional interference
with contract and negligent interference with contract. The plaintiffs claims
against Mediware are for promissory estoppel, intentional interference with
contract and negligent interference with contract. The plaintiff is seeking
unspecified compensatory, consequential and punitive damages. Management
believes that the claims against the Company are without merit. In December 1997
a settlement with the plaintiff was agreed to in principal by Mediware and
Continental. Pursuant to the proposed settlement agreement, the plaintiff would
receive $500,000. Mediware has agreed to contribute one-third of this total
amount and Continental has agreed to contribute two-thirds of this total amount
in settlement with the plaintiff. However, each Mediware and Continental has
reserved its respective rights to seek indemnification from each other for these
payments.
14
<PAGE>
The Company is not aware of any proceedings contemplated by government
authorities that would have a material adverse affect on the Company or its
business.
PROPERTIES
The Companys corporate headquarters are in Melville, New York, where the
Company occupies approximately 5,738 square feet under a lease that expires on
July 31, 1998. Digimedics Corporation is headquartered in Scotts Valley,
California, where the Company occupies approximately 11,646 square feet under a
lease expiring May 1, 2001. Pharmakon is headquartered in Overland Park, Kansas,
where the Company occupies approximately 13,683 square feet under a lease
expiring September 30, 1998. The United Kingdom group is headquartered in
Basildon, Essex, where the Company occupies approximately 2,567 square feet
under a lease expiring September 26, 2004. The Company believes that its
facilities are adequate for its current needs and that, if necessary, it will
have no difficulty in securing alternate facilities at the expiration of its
current leases.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
In June of 1996, Digimedics Corporation, a wholly-owned subsidiary of the
Company, purchased the Pharmakon division and JAC, a U.K. affiliate, from
Continental Healthcare Systems, Inc. The total purchase price, net of
acquisition costs, was approximately $9.7 million, $3.7 million of which was
paid in cash and the remaining $6.0 million of which was satisfied pursuant to a
promissory note issued to Continental, originally due November 30, 1996. On
October 28, 1996 the promissory note was amended, providing among other things,
an immediate payment of $1,000,000 and an extension of the due date to August 1,
1997. The promissory note was further amended, effective July 21, 1997, to
provide for a reduced principal amount to $4,196,000 (as described below) and
extended payment terms. The second amendment requires quarterly principal
payments of $150,000 commencing October 31, 1997, with the balance due November
30, 1998, or earlier based upon a change in control or refinancing by the
Company, and a reduction in the interest rate to 8.5%, payable monthly. The
Company will review the financing needs of this promissory note and general cash
requirements on an ongoing basis. It is expected that the Company will require
additional sources of liquidity to fund the payment of this promissory note
along with other financing needs, including potential acquisitions.
The Company entered into a service agreement with Continental as of the
acquisition date which requires the Company to perform functions in satisfying
various in-process customer contracts, collection of Continental accounts
receivables and other activities related to fulfilling post-acquisition
Continental obligations. The service agreement provided that the Company would
retain 30% of the monies collected on the receivables which the Company services
plus $1,237,000. In connection with the amendment to the promissory note, the
service agreement with Continental was also amended on July 21, 1997. The
amended service agreement allows the Company to retain 100% of accounts
receivable amounts collected after the amendment date which had not been
invoiced by Continental prior to the acquisition date. The promissory note was
reduced by $437,000 (to $4,196,000) through the application of the amount owing
from Continental to the Company for completed services in accordance with the
service agreement. Total fiscal 1997 revenues recorded from this service
agreement approximate $1.2 million.
15
<PAGE>
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 of 1996, at a price of
$3.25 per share, for total proceeds before expenses of $5,500,000. Total expense
for the June 1996 private placement aggregate $568,000. In order to provide for
general cash needs, the Company completed in August, 1997 a private placement of
its securities. The Company sold 400,000 shares of its Common Stock for $6.00
per share, all of which shares are being registered hereunder, and issued
warrants to purchase 40,000 shares of Common Stock at $6.00 per share (as part
of its placement fee). Total proceeds before expenses were $2,400,000. Expenses
of the August 1997 private placement and registration of the securities are
estimated to be approximately $310,000.
The Companys cash and cash equivalent position at September 30, 1997 was
$4,231,000, an increase of $2,296,000 from fiscal year end 1997. At September
30, 1997 the net working capital was $5,027,000 and the current ratio was 1:7 to
1. In addition to $1,276,000 in cash provided by operations, the current working
capital position was improved by the August 1997 private placement providing
proceeds of $2,090,000, net of expenses.
In order to cover its cash needs during fiscal years 1994 and 1995, the
Company carried out financing programs under which it borrowed an aggregate of
$1,299,000 from investors, including directors. As part of the financing package
such investors received promissory notes, 1,040,025 warrants to purchase shares
of Common Stock exercisable at $0.50 per share and 129,695 warrants exercisable
at $1.25 per share. During fiscal year 1996, the Company repaid $120,000,
leaving a balance of $1,179,000. In May of 1996, some of the investors exercised
495,025 of the $0.50 warrants for a total of $247,512.50. A portion of these
funds was used by the Company for the Acquisition. In September of 1997,
$325,000 of this $1,179,000 balance was repaid to individuals whose promissory
notes were not subordinate to the Continental promissory note, leaving an unpaid
balance of $854,000 owing to two directors and another person. Effective
September 15, 1997, these noteholders agreed to reduce the interest on this
unpaid amount from 12% to 9%.
The Company has a line of credit from a bank in the total sum of $75,000.
As of June 30, 1997, there were no balances outstanding under this facility.
The Company is currently reviewing the costs of addressing the year 2000
issue. No conclusions can yet be drawn.
Material Changes in Results of Operations: Three months ended September 30, 1997
compared to three months ended September 30, 1996
Total Company revenues increased by $504,000 or 11.6% from $4,359,000 in
the first quarter of fiscal 1997 to $4,863,000 for the same period in fiscal
1998. This increase is primarily due to the Companys Pharmacy division comprised
of Digimedics and Pharmakon revenues, which were offset by lower Hemocare and
JAC revenues.
System sales increased slightly from $1,818,000 for the three month period
ended September 30, 1996 to $1,863,000 for the same period ended September 30,
1997. For the periods compared, the increase is principally due to the Pharmacy
division increase, which was offset by reduced system sales in Hemocare and JAC.
16
<PAGE>
Service revenues increased by $459,000 or 18.1% from $2,541,000 to
$3,000,000 comparing the first quarter of fiscal 1997 and fiscal year 1998. The
service revenue increases were due to a combination of increases in the Companys
installed client base along with maintenance rate increases.
Costs of systems includes the cost of computer hardware and sublicensed
software purchased from computer and software manufacturers by Mediware as part
of its application subsystem. Cost of systems was 43% of related system sales in
the first quarter of fiscal 1997 and 36% of system sales in the comparable
period in fiscal 1998. Such costs, as a percentage of revenues, vary as the mix
of revenue varies between high margin proprietary software and lower margin
computer hardware and sublicensed software components. Cost of systems decreased
by $110,000 to $665,000 in the quarter ended September 30, 1997 as compared to
the same period a year ago. The improved margin is due to a favorable higher
margin mix of proprietary software in the first quarter of fiscal 1998 vs. the
first quarter of fiscal 1997.
Cost of services include salaries of client service personnel,
communications expenses, unreimbursed travel and training expenses along with
other direct expenses. Cost of services decreased $27,000 or 3.5% in the first
three months of fiscal 1998 as compared to the same period in fiscal 1997. The
cost of services tend to be relatively fixed in amount but will vary with
service and support staffing and related expense changes.
Software development cost include salaries, documentation, office and other
expenses incurred in product development along with amortization of software
development costs. Software development cost decreased $21,000 or 3.5% in the
first quarter of fiscal 1998 as compared to the first quarter of fiscal 1997.
Capitalized software cost additions were $160,000 and $192,000 for the first
three months of fiscal 1997 and fiscal 1998.
Selling, general and administrative expenses include marketing and sales
salaries, commissions, training and advertising expenses. Also included are bad
debt expense; legal, accounting and professional fees; salaries and bonus
expenses for corporate, divisional, financial and administrative staffs;
utilities, rent, communications and other office expenses; and other related
direct expenses. Selling, general and administrative expense increased $489,000
or 30.4% from $1,606,000 in the three month period ended September 30, 1996 to
$2,095,000 in the same period ended September 30, 1997. The increase reflects
higher communications, travel, bonus, professional fees, and other direct
administrative expenses.
Net interest expense decreased by $23,000 or 17.2% from $134,000 to
$111,000 in comparing the first three months of fiscal 1998 to the same period
in fiscal 1997. This decrease primarily reflects a decrease in promissory note
principal from approximately $7.2 million at September 30, 1996 to approximately
$5.0 million at September 30, 1997.
Net earnings increased 39.7% or $177,000 from $446,000 from the first three
months of fiscal 1997 to $623,000 for the same period in fiscal 1998. Earnings
per share increased to $.10 per share for the quarter ended September 30, 1997
from $.08 per share reported for the quarter ended September 30, 1996.
Material Changes in Results of Operations: Fiscal 1997 vs. Fiscal 1996
Total revenue increased by $8,087,000 or 78% from $10,432,000 in fiscal
1996 to $18,519,000 in fiscal 1997. The increase is primarily attributable to
the Pharmakon and JAC Acquisition. Pharmakon and JAC contributed $163,000, or
less than one month in revenue, in fiscal 1996 and $7,547,000 for a full year in
fiscal 1997.
17
<PAGE>
System sales increased by $448,000 or 8% from $5,781,000 in fiscal 1996 to
$6,229,000 in fiscal 1997. Pharmakon and JAC system sales increased $1,361,000
in fiscal 1997 from the prior year. The sales increase from the Acquisition was
offset primarily by a decrease in Hemocare system sales. Hemocare shifted
pricing focus from initial system dollar revenue to increased long-term
maintenance and support service revenue.
Service revenues increased 164% or $7,639,000 in fiscal 1997 vs. fiscal
1996. Service revenue increases in fiscal 1997 vs. fiscal 1996 were principally
due to the Pharmakon and JAC Acquisition, which recorded an increase of
$6,023,000. Additionally, Hemocare service revenues increased by $1,018,000 in
fiscal 1997 over the prior year due largely to a focused marketing emphasis on
increasing service revenues.
Cost of systems includes the cost of computer hardware and sublicensed
software purchased from computer and software manufacturers for delivery to
clients with related transportation costs. As a percentage of related sales,
cost of systems increased 4% from 35% in fiscal 1996 to 39% in fiscal 1997. This
increase reflects a higher proportion of third party software and computer
hardware in fiscal 1997 vs. fiscal 1996 which is sold at lower gross margins
than Company- produced product sales.
Cost of services include salaries of client service personnel,
communications expenses, unreimbursed travel and training expenses, along with
related office and other direct expenses. Cost of services increased $1,510,000
or 108% in fiscal 1997 as compared to fiscal 1996. As a percentage of service
revenue, cost of services decreased 6% from 30% in fiscal 1996 to 24% in fiscal
1997. The increase in expense is principally due to the Acquisition. Due to the
relatively fixed staffing and other expense within cost of services, the
increase in corresponding service revenues resulted in higher gross margins.
Software development costs include salaries, documentation, office and
other expenses incurred in product development along with amortization of
software development costs. Software development costs increased 50% or $717,000
in fiscal 1997 vs. fiscal 1996. This increase is primarily the result of the
Acquisition. Pharmakon and JAC development expenses were $761,000 in fiscal 1997
and $21,000 in fiscal 1996 (from under one month of activity in fiscal 1996).
Total expenditures for software development, including both capitalized and
non-capitalized portions for fiscal 1997 and fiscal 1996 were $2,591,000 and
$1,452,000, respectively. These amounts exclude amortization. Capitalized
software cost additions were $929,000 and $496,000 for fiscal 1997 and fiscal
1996, respectively. The increase in the percentage of costs capitalized is
primarily due to WORx product software development. The WORx development project
reached technical feasibility in early fiscal 1997. During fiscal 1996, the
Company recorded a charge to operations of $3,891,000 for acquired research and
development from the Acquisition. There was no such charge in fiscal 1997.
Management expects continued increases in software development in the future.
Selling, general and administrative expenses include marketing and sales
salaries, commissions, travel and advertising expenses. Also included is bad
debt expense; legal, accounting and professional fees; salaries and bonus
expenses for corporate, divisional, financial and administrative staffs;
utilities, rent, communications and other office expenses; and other related
direct administrative expenses. Selling, general and administrative expenses
increased 66% or $3,253,000 from $4,960,000 in fiscal 1996 to $8,213,000 in
fiscal 1997. The Acquisition accounted for the majority, or $2,924,000, of this
increase.
Net interest expense increased $457,000 or 226% from $202,000 in fiscal
1996 to $659,000 in fiscal 1997. This increase is primarily due to the
promissory note issued in connection with the Acquisition.
18
<PAGE>
In fiscal years ended 1997 and 1996 the Company reported income tax of
$85,000 and $6,000, respectively, or an effective rate of 3.9% in fiscal 1997
(fiscal 1996 was a loss year). Income tax for both years has principally been
state and local. The Company utilized net operating loss carry forwards in
fiscal 1997. The Company has a deferred tax asset of $3,781,000 at June 30, 1997
which is fully reserved as the likelihood of its future utilization cannot be
presently determined. Future utilization of the deferred tax asset is dependent
upon the Companys future profitability as well as the outcome of various
acquisition and other strategies and planned increased software development
activities, both of which management expects will result in future tax
deductions reducing or eliminating any taxable income.
The Company had net earnings of $2,081,000 or $0.35 per share in fiscal
1997. In fiscal 1996, the Company reported net (loss) of ($3,491,000) or ($1.24)
per share, which included $3,891,000 of acquired research and development
write-downs.
New Accounting Standards
During October 1997 the American Institute of Certified Public Accountants
issued Statement of Position 97-2 Software Revenue Recognition (SOP 97-2). SOP
97-2 provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions and will be effective for the
Companys 1999 fiscal year. The Company has not yet determined what effect, if
any, the adoption of SOP 97-2 will have on its financial position and results of
operations.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 12,000,000 shares of Common Stock, par
value $.10 per share, of which 5,483,363 shares of Common Stock were issued and
outstanding as of September 30, 1997, held of record by approximately 300
persons. The Common Stock presently outstanding is fully paid and
non-assessable.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters requiring a vote of shareholders. There is no right to cumulative
voting; thus, the holders of 50% percent or more of the shares outstanding can,
if they choose to do so, elect all directors of the Company.
Subject to the rights of holders of any series of preferred stock that may
be issued in the future, the holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. See Dividend Policy. In the event of a voluntary or
involuntary liquidation of the Company, all shareholders are entitled to a pro
rata distribution of the assets of the Company remaining after payment of claims
of creditors and liquidation preferences of any preferred stock. Shareholders
have no preemptive rights to subscribe for additional shares.
The Transfer Agent for the Common Stock of the Company is American Stock
Transfer and Trust Company, 40 Wall Street, New York, NY 10005.
The Company is also authorized to issue 10,000,000 shares of preferred
stock, the terms of which may be fixed by the Board of Directors. It is not
possible to state the actual effect of any authorization of one or more series
of preferred stock upon the rights of holders of Common Stock until the Board of
Directors of the Company determines the respective rights of the holders of one
or more series of the preferred stock. Such effects might, however, include: (a)
reduction of the amount funds otherwise available for payment of cash dividends
on Common Stock; (b) restrictions on the payment of cash dividends on Common
Stock; (c) dilution of the voting power of the Common Stock, to the extent that
any series of issued preferred stock has voting rights or is convertible into
Common Stock; and (d) the holders of Common Stock not being entitled to share in
the assets of the Company upon liquidation until satisfaction of liquidation
preferences, if any, in respect of any outstanding series of preferred stock.
19
<PAGE>
The Board of Directors ability to approve the issuance of authorized shares
of capital stock might discourage a takeover attempt. To the extent that
issuance of additional shares might impede attempts to acquire a controlling
interest in the Company, the existing authorization of shares of preferred stock
may serve to entrench management. The Company has no present intention of using
shares of preferred stock for anti-takeover purposes.
As discussed elsewhere herein (see Managements Discussion and Analysis of
Financial Condition and Results of Operations), the Company has issued a
promissory note to the seller of Pharmakon and JAC. The promissory note contains
several restrictive covenants limiting certain of the Companys corporate
activities, such as limitations and/or restrictions on: the creation of liens;
the incurrence of indebtedness; the payment of dividends and distributions;
consolidations, mergers and sales assets; the making of investments; guarantees;
and the creation of subsidiaries.
MARKET FOR REGISTRANTS COMMON EQUITY
The Companys Common Stock is traded in the over the counter market and is
quoted on The Nasdaq SmallCap Market (Nasdaq) under the symbol MEDW. It is also
traded on the Pacific Stock Exchange (PSE) under the symbol MIS. Prior to August
1991, there was no established trading market for the Companys Common Stock.
The table below indicates the high and low of quoted bid market prices as
reported by Nasdaq for the Companys Common Stock for each quarter during the
fiscal years ended June 30, 1996 and 1997, and the first and second quarters of
fiscal 1998.
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1998 9 1/2 5 1/8 12 7/8 6 3/4*
Fiscal 1997 4 1/8 3 3/4 4 5/8 3 1/8 4 3/4 3 1/4 6 1/8 2 5/8
Fiscal 1996 1 1/8 5/8 1 1/2 7/8 3 5/8 7/8 4 1/4 3
</TABLE>
* Through December 17, 1997
Such quotations reflect inter-dealers prices, without retail mark-ups, mark
downs or commissions, and may not represent actual transactions.
The listing maintenance standards of Nasdaq include a net tangible assets
test. The Company currently meets the test. However, there can be no assurance
that the Company will continue to meet the criteria for continued listing of its
Common Stock on the Nasdaq SmallCap Market. If this listing is terminated
because of failure to meet the applicable criteria, the liquidity for the
Companys Common Stock will be severely impaired in the absence of the
development of a meaningful alternative.
20
<PAGE>
SECURITY OWNERSHIP
The following tables set forth the beneficial ownership of the Companys
Common Stock as of September 30, 1997, by (i) each Selling Shareholder, (ii)
each person who is known by the Company to own beneficially more than 5% of the
Companys Common Stock, (iii) each of the executive officers named in the Summary
Compensation Table included elsewhere herein, (iv) each director of the Company
and (v) all directors and executive officers as a group:
Share Ownership by Selling Shareholders
<TABLE>
Shares Beneficially Shares Shares Beneficially
Owned Prior to Sale of Being Owned if Registered
Registered Shares Registered Shares are Sold
------------------------ ---------- ----------------------------
Name Number %(1) Number %(1)
---- ------ -- ------ --
<S> <C> <C> <C> <C> <C>
HealthCare Reform Investment Trust 100,000 1.8% 100,000 0 0
PLC
HealthReform Opportunities, L.P. 30,000 * 30,000 0 0
EuroAtlantic Investment Corporation 20,000 * 20,000 0 0
Limited
Societe Financiere Privee, S.A. 75,000 1.4% 75,000 0 0
P.A.W. Offshore Fund Ltd. 70,000 1.3% 70,000 0 0
Hathaway Partners Investment 50,000 * 50,000 0 0
Limited Partnership
Zeke, L.P. 20,000 * 20,000 0 0
Richard H. Pollak 10,000 * 10,000 0 0
Charles W. Chambers 10,000 * 10,000 0 0
James O. York & Janice M. York, 8,000 * 8,000 0 0
Co-Trustees of The York Trust
Curran Management 7,000 * 7,000 0 0
Oscar Gruss & Son Incorporated 40,000(2) 40,000 0 0
</TABLE>
(1) Based on the number of shares outstanding at September 30, 1997, plus, for
each person or group, shares acquirable within 60 days of September 30,
1997.
(2) Such shares are acquirable upon exercise of a warrant. See Plan of
Distribution.
* Represents less than 1% of the Companys outstanding Common Stock.
21
<PAGE>
Share Ownership by Principal Shareholders, Directors, Named Executive
Officers and Directors and Executive Officers as a Group
<TABLE>
Number of Such Shares
Total Number of Acquirable within Percentage of
Names and Addresses(1) Shares Beneficially Owned (2) 60 Days(3) Class Owned(4)
<S> <C> <C> <C>
Oracle Partners, L.P.,
Oracle Institutional
Partners, L.P.,
GSAM Oracle Fund, Inc. 1,117,736 0 20.4%
Lawrence Auriana(5) 1,013,277 714,695(6) 16.3%
Jonathan H. Churchill 31,054 9,030 *
Roger Clark 22,035 10,835 *
Les N. Dace 70,000 70,000 1.3%
Joseph Delario 196,018 34,030 3.6%
John Frieberg 39,807 34,807 *
Walter Kowsh, Jr. 42,582 10,835 *
Hans Utsch 109,785 10,835 2.0%
Clinton G. Weiman 4,167 1,667 *
John Esposito 51,100 50,000 *
Thomas Mulstay 35,000 35,000 *
Rodger Wilson 1,000 0 *
All Directors and Executive
Officers as a group 1,615,825 981,734 25.0%
(13 persons)
</TABLE>
- ------------------------
(1) Addresses are as follows: Lawrence Auriana: 140 East 45th Street, 43rd
Floor, New York, NY 10017. Jonathan Churchill: One Battery Park Plaza, New
York, New York 10004. Roger Clark: 330 Elm Street, Unit #1, New Canaan, CT
06840. Les Dace: 1211 Quivas Loop, Westminster, Colorado. Joseph Delario:
77 Independence Way North, Edgewater, NJ 07020. John Frieberg: 4402 South
St. Andrews Lane, Spokane, WA 99223. Walter Kowsh, Jr.: 64-08 136th Street,
Flushing, NY 11367. Hans Utsch: 140 East 45th Street, 43rd Floor, New York,
New York 10017. Clinton Weiman: 2 Roberta Lane, Greenwich, CT 06830. John
Esposito: 1121 Old Walt Whitman Road, Melville, NY 11747-3005. Thomas
Mulstay: 1121 Walt Whitman Road, Melville, NY 11747-3005.
(2) Includes shares which may be acquired by the shareholders upon exercise of
options and warrants which are exercisable within 60 days of September 30,
1997. See Directors - Compensation of Directors.
(3) Reflects the shares which may be acquired by the shareholders upon exercise
of options and warrants which are exercisable within 60 days of September
30, 1997. See Directors - Compensation of Directors.
(4) Based on the number of shares outstanding at September 30, 1997, plus, for
each person or group, shares acquirable within 60 days of September 30,
1997.
(5) Mr. Auriana is also Chairman of the Board, Treasurer and Secretary of the
Company.
(6) Includes 674,695 warrants which were granted to Mr. Auriana for his loans
to the Company in the bridge financings of the Company in fiscal 1995 and
fiscal 1994.
* Represents less than 1% of the Companys outstanding Common Stock.
22
<PAGE>
DIRECTORS
The Board of Directors is divided into three classes, with each director to
serve a three-year term. The directors of the Company are as follows:
Class III Directors
(Term Expires at the Annual Meeting Following
the 1997 Fiscal Year)
Lawrence Auriana, age 53, has been Chairman of the Board of the Company
since 1986 and a director since 1983. He has been a Wall Street analyst, money
manager and venture capitalist for over 20 years. Since 1986, he has been
Chairman, a director and, together with Mr. Hans Utsch, also a director of the
Company, Portfolio CoManager of The Kaufmann Fund, a mutual fund that invests in
small and medium-sized growth companies. He received a B.A. degree from Fordham
University, studied at New York University Graduate School of Business, and is a
senior member of The New York Society of Securities Analysts.
Jonathan H. Churchill, age 65, has been a practicing attorney in New York
City since 1958 and since May 1996 has been Counsel at Winthrop, Stimson, Putnam
& Roberts. He has been a director of the Company since 1992. Mr. Churchill was a
partner of Boulanger, Hicks, & Churchill, P.C., from January 1990 to May 1996.
Winthrop, Stimson, Putnam & Roberts rendered legal services to the Company
during the last fiscal year, and the Company has retained and proposes to retain
Winthrop, Stimson, Putnam & Roberts during the current year. Mr. Churchill
received a B.A. from Harvard College and an L.L.B. from Harvard Law School.
Clinton G. Weiman, M.D., age 72, has been a director since June 1996. From
1961 to January 1993 he was Corporate Medical Director, Senior Vice President of
Citicorp/Citibank. Since January 1996, Dr. Weiman has been independently engaged
as a consultant with the Federal Reserve. From 1956 to 1970 Dr. Weiman was
engaged in private practice in New York, New York. Dr. Weiman received a B.A.
degree from Princeton University and a medical degree from Cornell University
Medical College. His appointments have included Clinical Associate Attending
Physician at New York Hospital and Associate Professor, Clinical Medicine at
Cornell University Medical College.
Class I Directors
(Term Expires at the Annual Meeting Following
the 1998 Fiscal Year)
Roger Clark, age 63, has been a director since 1983. From 1980 to 1987, he
held a series of managerial positions in the computer products area with Xerox
Corporation. Since 1987, he has been independently engaged as a microcomputer
consultant and programmer. Mr. Clark is the author of seven books on
microcomputing and a director of The Kaufmann Fund.
Hans Utsch, age 59, has beena director since 1985. He has been
independently engaged in money management and investment banking for over 20
years. Since 1986, he has been President and, together with Mr. Lawrence
Auriana, Portfolio CoManager of The Kaufmann Fund. He received a B.A. degree
from Amherst College and an M.B.A. from Columbia University.
Les N. Dace, age 51, was appointed President and C.E.O. in 1995. He joined
the Company in 1992 as General Manager for the Digimedics and Surgiware Product
Centers. Prior thereto, he was Vice President of Sales and Marketing for PRX
Pharmacy Systems, a Colorado-based company providing hospital pharmacy
management systems and home health software solutions. From 1983 to 1987, he was
employed by NBI, Inc. as divisional President for its computer peripherals and
office supplies company. Mr. Dace has a B.S. degree in Electrical Engineering
from the University of Missouri.
23
<PAGE>
Class II Directors
(Term Expires at the Annual Meeting Following
the 1999 Fiscal Year)
Joseph Delario, age 63, was President and Chief Executive Officer of
Quadrocom, Inc., a business consulting firm, until December 31, 1992, and since
then has been a business consultant and private investor in and active in the
management of several computer service companies. Mr. Delario renders management
and financial services to the Company. Mr. Delario received a B.A. degree from
Fairleigh Dickenson University in 1956.
Walter Kowsh, Jr., age 48, has been a director since 1990. He is a
consultant programmer specializing in Client/Server database systems. He was a
Senior Programmer Analyst with Brown Bros. Harriman & Co. from 1989 to 1992.
From 1986 to 1989, he was a computer consultant with Howard Systems
International. He received a B.A. degree from Queens College and an M.B.A. from
the New York Institute of Technology, and is a diplomate of New York University
in Computer Programming and Systems Design.
John C. Frieberg, age 63, was President, C.E.O. and Chief Financial Officer
of the Company from 1992 to July 1995, and has been a director since 1993. Mr.
Frieberg joined Digimedics Corporation, which later became a wholly owned
subsidiary of the Company, as President in October 1989. Prior thereto, he was
President of Caleus, Inc., an information system company, from 1988 to 1989;
President of Synergy Computer Graphics Corp., a computer peripheral equipment
company, from 1984 to 1988; and President of NCR/DPI Inc., a computer systems
manufacturing company, from 1972 to 1982. Mr. Frieberg received a B.S. degree in
Industrial Engineering from the University of California at Los Angeles.
There are no family relationships between any of the directors.
The Certificate of Incorporation provides that no director shall be removed
from office except for cause and that the total number of directors shall not be
increased without the vote of at least 80% of the outstanding shares or by the
unanimous resolution of the Board of Directors.
The Certificate of Incorporation and the By-Laws provide that the
respective provisions related to the classified Board structure, i.e., the
number, classification, term of office, quorum for meetings, qualifications,
election and removal of directors and the filling of vacancies and newly created
directorships, may only be amended or repealed (unless an amendment or repeal of
the By-Law shall not take effect for three years) by (a) supermajority vote (80%
of the outstanding shares) unless the Board of Directors unanimously recommends
the action or (b), with respect to the By-Laws, by unanimous vote of the entire
Board.
The classified Board structure has the effect of making changes in control
of the Board of Directors more difficult and increases the period of time
required to effect a change in control of the Board of Directors. Shareholders
who do not agree with the policies of the Board would find it more difficult to
replace a majority of directors. The classified Board may also have the effect
of discouraging tender offers and other takeover attempts that many of the
Companys shareholders might deem to be in their best interests, and could
prevent them from benefiting from transactions which the incumbent Board
opposes. Since the classification could have the effect of discouraging
accumulations of large blocks of the Companys stock by purchasers whose
objective would be quickly to obtain control of the Company, it might reduce the
temporary fluctuations in price that such accumulations could cause.
Shareholders might therefore be deprived of an opportunity to sell their shares
at a temporarily elevated market price. The classified board structure would,
however, also deter inadequately priced or coercive tender offers.
24
<PAGE>
Compensation of Directors
It has been the Companys practice, starting in 1987, to conserve cash by
compensating directors for their services primarily through the grant of stock
options and shares of Common Stock.
In 1991 a Stock Option Plan for NonEmployee Directors (the 1991 Plan) was
adopted. Under the 1991 Plan, options to purchase 1,667 shares had been granted
annually on July 1 of each year to each nonemployee director of the Company
(except for the Chairman, who received options to purchase 5,000 shares
annually). Options are exercisable at 100% of fair market value of the Companys
Common Stock on the date of grant, and payment may be in cash, the Companys
Common Stock, or a combination thereof. An aggregate of 150,000 shares of Common
Stock are subject to the 1991 Plan. Options granted under the 1991 Plan are not
intended to qualify under Section 422 of the Code. Under the 1991 Plan each
director in office on July 1, 1996 received for services as director during the
1997 fiscal year a grant of 1,667 options (5,000 in the case of the Chairman),
exercisable at $3.75, which was the fair market value of the Companys Common
Stock on July 1, 1996. These options vested and became exercisable in equal
monthly installments during fiscal 1997. The 1991 Plan has expired.
A new Stock Option Plan for Non-Employee Directors (the 1997 Plan), which
the shareholders of the Company will be asked to approve at the Fiscal 1997
Annual Meeting to be held on January 6, 1998, was approved by the Board in June
1997. Under the 1997 Plan each director in office on July 1 of each fiscal year
will receive for services as director during the ensuing fiscal year a grant of
options to purchase 3,600 shares of Common stock (10,800 in the case of the
Chairman). As amended by the Board in December 1997, the options granted on July
1, 1997 under the Plan are exercisable at the higher of $5.50, which was the
fair market value of the Companys Common Stock on July 1, 1997, and the fair
market value of the Companys Common Stock on the date of the shareholder
approval. These options will vest and became exercisable in equal monthly
installments during fiscal 1998.
Each director in office on July 1, 1996 also became entitled to receive a
total of 2,500 shares of Common Stock (7,500 in the case of the Chairman),
payable on July 1, 1997, for his services during fiscal 1997. The fair market
value of the Companys Common Stock on the date of the Boards action was $3.75
per share. Each director in office on July 1, 1997 also became entitled to
receive for his services during fiscal 1998 shares of Common Stock valued at
$10,000 ($30,000 in the case of the Chairman) based on the average market price
per share for the fiscal year, earned on a monthly basis.
25
<PAGE>
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
Name Age Position
Lawrence Auriana................53 Chairman of the Board and Secretary
Les Dace........................51 President, CEO and General Manager -
Surgiware Division
George Barry ...................44 Chief Financial Officer
Rodger Wilson...................44 Vice President and General Manager -
Digimedics -- Pharmacy Division
Thomas Mulstay..................44 Vice President and General Manager -
Hemocare Division
John Esposito...................38 Vice President - Sales - Mediware
Lawrence Auriana has been Chairman of the Board of the Company since 1986
and a director since 1983. He has been a Wall Street analyst, money manager and
venture capitalist for over 20 years. Since 1986, he has been Chairman, a
director and, together with Mr. Hans Utsch, also a director of the Company,
Portfolio CoManager of The Kaufmann Fund, a mutual fund that invests in small
and medium-sized growth companies. He received a B.A. degree from Fordham
University, studied at New York University Graduate School of Business, and is a
senior member of The New York Society of Securities Analysts.
Les N. Dace was appointed President and C.E.O. in 1995. He joined the
Company in 1992 as General Manager for the Digimedics and Surgiware Product
Centers. Prior thereto, he was Vice President of Sales and Marketing for PRX
Pharmacy Systems, a Colorado-based company providing hospital pharmacy
management systems and home health software solutions. From 1983 to 1987, he was
employed by NBI, Inc. as divisional President for its computer peripherals and
office supplies company. Mr. Dace has a B.S. degree in Electrical Engineering
from the University of Missouri.
George Barry joined the Company in 1997 as Chief Financial Officer. He has
been a senior financial manager of software technology companies for over 12
years. Mr. Barry was employed as Vice President and CFO at Microware Systems
Corporation from 1994 to 1996 and at Comptek Research, Inc. from 1993 to 1994.
He was employed as a Group CFO/Controller for Dynatech Corporation from 1986 to
1992. Mr. Barry is a CPA and holds an MBA from the University of Wisconsin
Madison.
Rodger P. Wilson, R.Ph., joined the Company in 1996 as Vice
President/General Manager of the Pharmacy Division. He was President and Chief
Executive Officer of PRX Pharmacy Systems, Inc., from 1982 to 1992. Mr. Wilson
was Vice President of Operations and Chief Information Officer of Concepts
Direct, Inc., from 1992 to 1996. Mr. Wilson received a B.S. degree from the
University of Wyoming School of Pharmacy and is a registered Pharmacist.
Thomas Mulstay joined the Company as Vice President in 1990 and was
appointed General Manager, Hemocare in 1992. From 1989 to 1990, he was with
Spectrum Healthcare Solutions, a joint venture of IBM, Inc. and Baxter
Healthcare International, engaged in various sales positions. From 1986 to 1989
Mr. Mulstay was employed by Baxter Healthcare International, first as a Regional
Sales Manager, then Regional Manager, then Regional Vice President. Previously
he was a District Sales Manager at Terrano Corporation, a vendor of laboratory
information systems to hospitals, National Hospital Marketing Manager at Metpath
Laboratory, and a sales representative at Abbott Laboratories. Mr. Mulstay holds
a B.S. degree from Assumption College.
26
<PAGE>
John Esposito joined the Company as Vice President - Sales in 1990. From
1986 to 1990, he was employed in various sales positions by the Healthcare
Division of Data General Corporation. He is a two-time member of Data Generals
Million Dollar Club, and was recognized in1990 as Data Generals outstanding
healthcare sales representative. Prior to joining Data General, he worked in a
technical capacity in the Information Systems Department at the New York Public
Library. He is a graduate of Syracuse University, with a B.S. degree in
Marketing and Management Information Systems.
EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Chief Executive
Officer of the Company and each of the other most highly compensated executive
officers whose total annual salary and bonus was over $100,000 for the fiscal
year ended June 30, 1997.
Summary Compensation Table
<TABLE>
Long-Term Compensation
------------------------------
Annual Compensation Awards Payouts
------------------------------ ------------------------------
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Name and Principal Fiscal Salary Bonus sation Awards Options Payouts sation
Positions(1) Year ($) ($) ($) ($) SARs (#) ($) ($)
- ----------------- ------ ------ ----- ----- ---------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Les N. Dace 1997 110,000 151,062 6,000 - - - 262
President, CEO and CFO 1996 110,000 52,560 - - 50,000 - 262
1995 75,000 60,731 - - - - 262
Rodger Wilson(2) 1997 77,400 55,052 5,500 - 50,000 - 262
Vice President and General
Manager - Digimedics -
Pharmacy Division
John Esposito 1997 80,000 50,733 6,000 - 35,000 - 205
Vice President -- Sales 1996 70,000 71,795 - - - - 250
1995 70,000 50,595 - - - - 241
Thomas Mulstay 1997 80,000 79,519 6,000 - - - 232
Vice President and General 1996 75,000 130,313 - - - - 215
Manager - Hemocare Division 1995 75,000 90,662 - - - - 205
</TABLE>
(1) The amount of salary and bonus for fiscal 1997 for the other executive
officers did not meet the threshold reporting requirement under the rules
of the Commission.
(2) Mr. Wilson was not an executive officer of the Company in fiscal years 1996
and 1995.
27
<PAGE>
Option/SAR Grants in Last Fiscal Year
The following table sets forth certain information concerning options to
purchase Common Stock in fiscal 1997 granted to the individuals named in the
Summary Compensation Table. No stock appreciation rights were granted in fiscal
1997.
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise Expiration
Name Granted Fiscal Year Base Price Date
John Esposito 35,000(1) 26% $2.80 May 1, 2007
Rodger Wilson 35,000 26% 2.80 May 1, 2007
Rodger Wilson 15,000(2) 11% 3.25 Dec. 1, 2006
- ------------------------
(1) Options are exercisable 25%, 50%, 75% and 100% on May 1, 1998, 1999, 2000
and 2001.
(2) Options are exercisable 25%, 50%, 75% and 100% on December 1, 1997, 1998,
1999 and 2000.
Fiscal 1997 Option/SAR Exercises and Value
of Outstanding Options at June 30, 1997
The following table sets forth options exercised by the named executive
officers during fiscal 1997 and the number and value of options held by them at
June 30, 1997. No stock appreciation rights were granted and there were no
outstanding stock appreciation rights at June 30, 1997. The fair market value on
such date was $5.25 per share.
<TABLE>
Number of
Securities Underlying Value of
Shares Unexercised Unexercised
Acquired on Value Options at End In-the-Money Options
Name Exercise Realized of Fiscal Year End of Fiscal Year
---- -------- -------- -------------- ------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Les N. Dace - - 57,500 37,500 $232,975 $159,375
John Esposito - - 50,000 35,000 197,300 85,750
Thomas Mulstay 10,000 22,400 40,000 - 162,400 -
Rodger Wilson - - - 50,000 - 115,750
</TABLE>
28
<PAGE>
Employment Agreements
Messrs. Barry, Dace, Esposito, Mulstay and Wilson have employment
agreements or understandings with the Company providing for minimum compensation
levels of $80,000, $110,000, $80,000, $80,000, and $80,000 respectively, plus
bonuses based on percentages of Net Income Before Interest and Taxes ranging
from .75% to 5%. Additional bonus may be earned based upon appropriate
responsibility goal attainment. All agreements also provide for grants of stock
options and severance pay in case of involuntary termination.
1982 Employee Stock Option Plan
In 1982, the Company adopted an employee stock option plan (the 1982 Plan)
for officers and other key employees, not including directors. Options are
non-transferable except in the case of death. Options currently outstanding
under the 1982 Plan generally vest and become exercisable in monthly
installments over a two or threeyear period, with each installment remaining
exercisable for a fiveyear period after it vests. No options intended to be
incentive stock options under the Internal Revenue Code of 1986 (Code) are
currently outstanding. No options may currently be granted under this Plan.
1992 Equity Incentive Plan
Awards granted under the 1992 Equity Incentive Plan (the Equity Incentive
Plan) include a wide range of Common Stockbased awards. Officers and other
management employees of the Company are eligible to participate in the Equity
Incentive Plan. The maximum number of shares of Common Stock which may be issued
under the Equity Incentive Plan at any time is 20% of the outstanding shares of
the Companys Common Stock, except that no more than 500,000 shares may be issued
pursuant to incentive stock options. No awards may be granted after the year
2002. The term of each stock option is to be determined by the Compensation
Committee but may not exceed ten years from the date of grant. The option price
of each stock option is payable in cash, in shares of the Companys Common Stock,
or by a combination thereof. The option agreements granted to date provide that,
in the event of a change of control of the Company, the exercise of such options
may be accelerated by the Committee.
1991 and 1997 Stock Option Plans for NonEmployee Directors
The 1991 Stock Option Plan for NonEmployee Directors and the 1997 Stock
Option Plan for Non-Employee Directors are described above under Directors
Compensation of Directors.
SHARES ELIGIBLE FOR FUTURE SALE
In the event of the sale of all the shares covered by this Prospectus, the
Company would have 5,548,832 shares of Common Stock outstanding. Of these
shares, the 440,000 shares covered by this Prospectus will be freely tradeable
without restriction or further registration under the Securities Act.
Substantially all of the shares of Common Stock of the Company not included in
this Registration Statement were issued more than two years ago. A person who
has not been an affiliate of the Company for at least the three months
immediately preceding a sale and who has beneficially owned shares of Common
Stock for at least two years is entitled to sell such shares under Rule 144
without regard to the volume limitations described below.
29
<PAGE>
A person (or persons whose shares are aggregated under the terms of Rule
144), including an affiliate of the Company, who has beneficially owned
restricted shares of Common Stock for at least one year is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (a) 1% of the total number of outstanding shares of Common Stock or
(b) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the sale as reported by Nasdaq, subject to certain
restrictions on the manner of sale, notice requirements and public availability
of current information. The directors and officers of the Company, who may be
deemed to be affiliates of the Company for purposes of Rule 144, beneficially
own an aggregate of over 500,000 shares of Common Stock as to which the one-year
period under Rule 144 has been satisfied.
The effect, if any, of public sales of the such shares of Common Stock or
the availability of such shares for future sale on prevailing market prices
cannot be predicted. Nevertheless, the possibility that substantially all
outstanding shares of Common Stock may be resold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Companys ability to raise capital through the sale of its equity securities.
CERTAIN TRANSACTIONS
In 1991, the Company agreed with Bowling Green Securities, Inc., an
investment banking firm owned by Mr. Utsch and in which Messrs. Auriana and
Utsch are principals, that such firm would render investment banking advice to
the Company and that, if any merger, acquisition, divestiture or analogous
transaction is successfully consummated as a result of its efforts, the Company
would pay a total fee related to the value of the company acquired or divested
on the basis of 5% of the first $2 million, 4% of the second $2 million, 3% of
the third $2 million, 2% of the fourth $2 million and 1% of any additional
amounts.
Mr. Delario, a director of the Company since 1992, holds an option to
purchase 75,000 shares of the Companys Common Stock as payment for managerial
and financial advisory services to be rendered in connection with mergers and
acquisitions.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article X of the Companys by-laws as amended provides that the Company will
indemnify to the fullest extent permitted by the New York Business Corporation
Law (the NYBCL) any officer or director of the Company. Article X of the
Companys by-laws further requires the advancement of expenses and permits the
maintenance of insurance in connection with claims for indemnification by
officers and directors. Other provisions of Article X contain procedures to be
followed by directors and officers claiming indemnification and by the Companys
representatives in determining an indemnitees entitlement. The indemnification
of officers and directors under Article X of the Companys by-laws is intended to
be as extensive as is permitted under applicable law. No statute, charter
provisions, by-laws, contract or other arrangements that insures or indemnifies
a director or officer of the Company affects his or her liability in such
capacity.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
30
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus may be used by the Selling Shareholders who may wish to
sell shares of Common Stock covered by this Prospectus from time to time, with
the consent by the Company, under circumstances requiring or making desirable
its use. The Selling Shareholders comprise certain shareholders who have
received or who will receive shares of the Common Stock as described in the
following paragraph.
In August 1997, the Company issued an aggregate of 400,000 shares of Common
Stock to persons and entities in a private placement exempt from registration
pursuant to Regulation D under the Act, which the Company agreed to register
under the Act. All of such shares are included in this Registration Statement.
In connection with this private placement the Company issued to Oscar Gruss &
Son Incorporated, as part of its placement fee, a warrant to purchase 40,000
shares of Common Stock exercisable at $6.00 per share until August 27, 2000,
which the Company agreed to register under the Act. All of the shares issuable
upon exercise of such warrant are also included in this Registration Statement.
The Companys consent to use of this Prospectus by the Selling Shareholders
may be conditioned upon such terms and conditions as the Company, in its sole
discretion, may determine, including, without limitation, such persons or
entities agreeing not to offer more than a specified number of shares during a
particular period of time or agreeing that any such offering be effected in an
organized manner through registered securities dealers.
Sales of shares of Common Stock by persons or entities other than the
Company by means of this Prospectus may be made from time to time privately at
negotiated prices or publicly in one or more transactions (which may involve
crosses or block transactions) on Nasdaq or otherwise, in special offerings,
sales pursuant to Rule 144 under the Securities Act of 1933 (the Act), exchange
distributions or secondary distributions pursuant to and in accordance with the
rules of Nasdaq, or a combination of such methods of sale, at prices at or
reasonably related to market prices at the time of sale or at negotiated prices.
See Market for Registrants Common Equity. The Selling Shareholders may effect
such transactions by selling shares to or through broker-dealers, which may act
as agent or as principal and, when acting as agent, may receive commissions from
the purchasers as well as from the sellers (if also acting as agent for the
purchasers). Selling Shareholders and brokers or dealers selling shares of
Common Stock for Selling Shareholders or purchasing such shares for purposes of
resale may be deemed to be underwriters under the Act, and any compensation
received by any of them may be deemed underwriting compensation (which
compensation may be in excess of customary commissions). The Company will not
receive any of the proceeds of the sale of shares of Common Stock by any such
person.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters will be passed upon for the Company by Winthrop, Stimson, Putnam &
Roberts, One Battery Park Plaza, New York, New York 10004. Jonathan H.
Churchill, a counsel of such firm, owns 22,024 shares of Common Stock and
options to purchase 10,697 shares of Common Stock.
31
<PAGE>
EXPERTS
The audited consolidated balance sheet of Mediware Information Systems,
Inc. and subsidiaries as at June 30, 1997 and the related consolidated
statements of operations, and stockholders equity and cash flows for each of the
years in the two-year period ended June 30, 1997, included in this Prospectus,
have been audited by Richard A. Eisner & Company, LLP, independent auditors, as
set forth in their report appearing herein, and are included herein in reliance
upon the report of said firm given upon their authority as experts in accounting
and auditing.
32
<PAGE>
<TABLE>
Mediware Information Systems, Inc. and Subsidiaries
Page
<S> <C>
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheet as of June 30, 1997 F-3
Statements of operations for the years ended June 30, 1997 and 1996 F-4
Statements of stockholders' equity for the years ended June 30, 1997 and 1996 F-5
Statements of cash flows for the years ended June 30, 1997 and 1996 F-6
Notes to financial statements F-7
Three Months Ended September 30, 1997 and 1996 (Unaudited):
Condensed balance sheet as of September 30, 1997 (unaudited) F-19
Condensed statements of operations for the three months ended September 30,
1997 and September 30, 1996 (unaudited) F-20
Condensed statements of cash flows for the three months ended September 30,
1997 and September 30, 1996 (unaudited) F-21
Notes to condensed financial statements (unaudited) F-22
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Mediware Information Systems, Inc.
Melville, New York
We have audited the accompanying consolidated balance sheet of Mediware
Information Systems, Inc. and subsidiaries as of June30, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period ended June30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, 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 present fairly, in all
material respects, the consolidated financial position of Mediware Information
Systems, Inc. and subsidiaries as of June30, 1997 and the consolidated results
of their operations and their consolidated cash flows for each of the years in
the two-year period ended June30, 1997 in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
August 28, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
MEDIWARE INFORMATION SYSTEMS, INC . AND SUBSIDIARIES
Consolidated Balance Sheet
As of June 30, 1997
ASSETS (Note E)
<S> <C>
Current assets:
Cash and cash equivalents (Note H) ....................................................... $ 1,935,000
Accounts receivable, less estimated doubtful accounts of $282,000 (Notes A and J) ........ 6,357,000
Inventories (Note A) ..................................................................... 56,000
Prepaid expenses and other current assets ................................................ 304,000
-------
Total current assets .................................................................. 8,652,000
Fixed assets, at cost, less accumulated depreciation of $1,572,000 (Notes A and C) .......... 752,000
Capitalized software costs (Notes A and D) .................................................. 1,448,000
Excess of cost over fair value of net assets acquired, net of accumulated amortization
of $732,000 (Notes A and B) .............................................................. 6,419,000
Other assets ................................................................................ 78,000
------
Total assets .......................................................................... $17,349,000
===========
LIABILITIES
Current liabilities:
Accounts payable ......................................................................... $ 713,000
Accrued expenses and other current liabilities (Note F) .................................. 2,032,000
Advances from customers (Note A) ......................................................... 2,106,000
Current portion of capital leases payable ................................................ 102,000
Notes payable (Note E) ................................................................... 1,212,000
---------
Total current liabilities ............................................................. 6,165,000
Notes payable, less current portion (Note E) ................................................ 4,600,000
Capital leases payable, less current portion ................................................ 60,000
Total liabilities ..................................................................... 10,825,000
----------
Commitments and contingencies (Note H)
STOCKHOLDERS' EQUITY (Note G)
Preferred stock - $.01 par value; authorized 10,000,000 shares; none issued and
outstanding
Common stock - $.10 par value; authorized 12,000,000 shares; 5,056,486 shares issued
and outstanding .......................................................................... 506,000
Additional paid-in capital .................................................................. 13,621,000
Unearned compensation ....................................................................... (91,000)
Cumulative foreign currency translation adjustment .......................................... 36,000
(Deficit) ................................................................................... (7,548,000)
----------
Total stockholders' equity ............................................................ 6,524,000
---------
$17,349,000
===========
</TABLE>
See notes to financial statements
F-3
<PAGE>
<TABLE>
Consolidated Statements of Operations
Year Ended June 30,
----------------------
1997 1996
---- ----
<S> <C> <C>
Revenues:
System sales .................................................................$ 6,229,000 $ 5,781,000
Services ..................................................................... 12,290,000 4,651,000
---------- ---------
Total revenues ............................................................ 18,519,000 10,432,000
---------- ----------
Costs and expenses:
Cost of systems .............................................................. 2,413,000 2,023,000
Cost of services ............................................................. 2,913,000 1,403,000
Purchased research and development (Note B) 3,891,000
Software development costs ................................................... 2,155,000 1,438,000
Selling, general and administrative .......................................... 8,213,000 4,960,000
--------- ---------
Total costs and expenses .................................................. 15,694,000 13,715,000
---------- ----------
Earnings (loss) before interest and provision for income taxes .................. 2,825,000 (3,283,000)
Interest income ................................................................. 81,000 14,000
Interest (expense) .............................................................. (740,000) (216,000)
-------- --------
Earnings (loss) before provision for income taxes ............................... 2,166,000 (3,485,000)
Income tax provision (Notes A and I) ............................................ 85,000 6,000
------ -----
Net earnings (loss) ............................................................. $2,081,000 $(3,491,000)
========== ===========
Earnings (loss) per share (Note A) .............................................. $0.35 $(1.24)
===== ======
Weighted average number of common and common
equivalent shares ............................................................ 5,917,441 2,817,405
========= =========
</TABLE>
See notes to financial statements
F-4
<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
Unearned
Portion of Foreign
Common Stock Additional Compensatory urrency
------------------ Paid-in Stock Translation
Shares Amount Capital Options (Deficit) Adjustment Total
------ ------ ------- ------- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - July 1, 1995 2,596,410 $260,000 $ 8,147,000 - $(6,138,000) - $ 2,269,000
Shares issued to directors 86,040 9,000 86,000 - - - 95,000
Exercise of warrants 495,025 49,000 198,000 - - - 247,000
Shares issued in connection with
private placement (Note G) 1,723,076 172,000 4,891,000 - - - 5,063,000
Shares issued as fees for acquisitions
(Note B) 30,769 3,000 97,000 - - - 100,000
Net 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
Shares issued to directors (to be
delivered during fiscal 1998) 25,000 3,000 91,000 - - - 94,000
Exercise of stock options 100,166 10,000 125,000 - - - 135,000
Compensatory stock options issued - - 117,000 $(91,000) - - 26,000
Registration costs incurred in
connection
with private placement (Note G) - - (131,000) - - - (131,000)
Foreign currency translation - - - - - $36,000 36,000
Net earnings - - - - 2,081,000 - 2,081,000
--------- --------- ----------- ---------- --------- --------- ---------
Balance - June 30, 1997 5,056,486 $506,000 $13,621,000 $(91,000) $(7,548,000) $36,000 $ 6,524,000
========= ======== =========== ======== =========== ======= ===========
</TABLE>
See notes to financial statements
F-5
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Year Ended June 30,
-----------------------------------
1997 1996
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings (loss) .................................................................... $ 2,081,000 $ (3,491,000)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Shares issued to directors ........................................................ 94,000 95,000
Compensatory stock options issued to consultants .................................. 26,000
Provision for doubtful accounts ................................................... 261,000 162,000
Depreciation and amortization ..................................................... 1,058,000 709,000
Purchased research and development 3,891,000
Changes in operating assets and liabilities, net of effects from
purchase of Pharmakon & JAC:
Accounts receivable ......................................................... (2,729,000) (620,000)
Inventories ................................................................. 152,000 (53,000)
Prepaid and other assets .................................................... (151,000) (28,000)
Accounts payable, accrued expenses and customer advances .................... 1,209,000 665,000
--------- -------
Net cash provided by operating activities ................................. 2,001,000 1,330,000
--------- ---------
Cash flows from investing activities:
Acquisitions of fixed assets ........................................................... (262,000) (127,000)
Capitalized software costs ............................................................. (929,000) (496,000)
Purchase of Pharmakon and JAC, net of cash acquired .................................... (3,893,000)
--------- ----------
Net cash used in investing activities ..................................... (1,191,000) (4,516,000)
---------- ----------
Cash flows from financing activities:
Repayment of debt ...................................................................... (1,383,000) (129,000)
Proceeds from exercise of options and warrants ......................................... 135,000 247,000
Proceeds (expenses) of private placement ............................................... (131,000) 5,063,000
-------- ---------
Net cash provided by (used in) financing activities ....................... (1,379,000) 5,181,000
---------- ---------
Net (decrease) increase in cash and cash equivalents ...................................... (569,000) 1,995,000
Cash and cash equivalents - beginning of year ............................................. 2,504,000 509,000
--------- -------
Cash and cash equivalents - end of year ................................................... $ 1,935,000 $ 2,504,000
=========== ============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest ........................................................................... $ 582,000 $ 64,000
Income taxes ....................................................................... $ 46,000 $ 6,000
Noncash transactions:
Equipment acquired with capital leases .............................................. $ 120,000 $ 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
============
</TABLE>
See notes to financial statements
F-6
<PAGE>
Note A - The Company and its Significant Accounting Policies
The consolidated financial statements include the accounts of Mediware
Information Systems, Inc. and its wholly owned subsidiary, Digimedics
Corporation ("Digimedics") and its subsidiary J.A.C. Computer Services Limited
("JAC"). All significant intercompany transactions have been eliminated in
consolidation.
Mediware Information Systems, Inc. and subsidiaries (the "Company") develops,
installs and maintains computerized information systems for hospital blood
banks, pharmacies and surgical suites.
[1] Cash equivalents:
The Company considers all highly liquid short-term investments purchased with a
maturity of three months or less to be cash equivalents.
[2] Revenue recognition:
Revenues are derived primarily from the sale of clinical information systems
along with related service activities. Service activities generally include
installation, training, maintenance, and support. The Company also derives
revenue from the sale of computer hardware.
System sales contracts generally include the licensing of the companys
information system software, services related to the training and installation
of the software and sale of computer hardware. Pre-packaged software revenue is
recognized upon delivery. Computer hardware revenue is recognized upon shipment.
Training and system installation revenue is recognized when services are
performed. Support and maintenance revenue is recognized on a pro-rata basis
over the period of the contract. Contracts for the Pharmakon software that
pre-dated the acquisition of Pharmakon (NoteB) are recognized as revenue using
the percentage-of-completion method provided that collectibility is
determinable.
[3] Inventories:
Inventories, which consist of equipment purchased for resale, are valued at the
lower of cost or market. Cost is determined by the specific identification
method.
[4] Fixed assets:
Furniture and equipment are depreciated by the straight-line method over their
estimated useful lives of five years. Leasehold improvements are amortized by
the straight-line method over the remaining terms of the respective leases.
[5] Software development costs:
In accordance with Statement of Financial Accounting Standards No. 86, the
Company capitalizes certain costs associated with the development of computer
software. Such costs, in addition to costs of purchased software, are amortized
over the software's estimated useful life of five years. Management periodically
evaluates the recoverability of capitalized software development costs and
write-downs are taken if required.
F-7
<PAGE>
Note A - The Company and its Significant Accounting Policies (Continued)
[5] Software development costs: (Continued)
Costs to maintain developed programs and other development costs incurred prior
to achievement of technical feasibility are expensed as incurred. Such costs
were $1,662,000 and $956,000 for the years ended June30, 1997 and 1996,
respectively. Software development costs reported on the consolidated statements
of operations include amortization (NoteD).
[6] 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 acquisitions of Digimedics, Pharmakon and JAC, is being amortized on a
straight-line basis over twenty years. Management continually reevaluates the
appropriateness of the amortization periods and related carrying amount.
Goodwill is adjusted if events and circumstances indicate that an other than
temporary decline in value below the current unamortized historical cost has
occurred. Several factors are used to evaluate goodwill, including but not
limited to managements plans for future products and operations, market position
and continual acceptance, recent operating results and projected undiscounted
cash flows.
[7] Advances from customers:
Advances from customers represent contractual payments received by the Company.
Such amounts are recorded as income upon delivery of the system with respect to
system revenues or over the life of the service agreement with respect to
service revenue.
[8] Income taxes:
The Company utilizes the method of accounting for income taxes prescribed by
Statement of Financial Accounting StandardsNo.109, "Accounting for Income Taxes"
(SFAS109). Pursuant to SFAS109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect at the balance sheet date. The resulting asset
or liability is adjusted to reflect enacted changes in tax law.
[9] Earnings (loss) per share:
Earnings (loss) per share are based on the weighted average number of shares
outstanding during each year. Stock options and warrants are included as share
equivalents using the modified treasury stock method.
Earnings per share are computed on a primary basis since the fully diluted basis
does not result in further dilution.
[10] Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
Note A - The Company and its Significant Accounting Policies (Continued)
[11] Impairment of long-lived assets:
During the year ended June30, 1997 the Company adopted Statement of Financial
Accounting Standards No.121 (SFAS121"), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable assets, and goodwill related to those assets. The adoption
of SFAS121 had no effect on the Company's financial statements.
[12] Financial instruments:
The carrying amounts of accounts receivable, accounts payable, accrued expenses,
capitalized lease obligations and long-term debt approximate their fair value as
the interest rates on the Companys indebtedness approximate current market rates
and due to the short period to maturity of these instruments.
[13] Stock-based compensation:
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123"), Accounting for Stock-Based
Compensation. SFAS 123 encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has elected to continue to account for its employee stock-based
compensation plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No.25 (APB25"), Accounting for Stock Issued to
Employees and disclose the pro forma effects on net and earnings (loss) per
share had the fair value of options been expensed. Under the provisions of
APB25, compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Companys common stock at the date of the grant
over the amount an employee must pay to acquire the stock (see NoteG).
[14] Recently issued accounting pronouncements:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128"), Earnings per Share. This new
standard requires dual presentation of basic and diluted earnings per share
(EPS) on the face of the statement of income and requires reconciliation of the
numerators and the denominators of the basic and diluted EPS calculation. This
statement will be effective for the second quarter of the Companys 1998 fiscal
year and will require retroactive restatement of previously reported per share
data. The Company has not yet quantified what effect the adoption of SFAS 128
will have on its earnings per share of common stock.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No.130 ("SFAS130"), "Reporting Comprehensive
Income", and No.131, "Disclosures about Segments of an Enterprise and Related
Information". These statements will be effective for the Companys 1999 fiscal
year. Implementing SFAS130 and SFAS131 will not effect the Companys financial
position or results of operations.
Note B - Acquisitions
On June17, 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 Digimedics
purchased from Continental its Pharmakon division (Pharmakon) on that date. Also
F-9
<PAGE>
Note B - Acquisitions (Continued)
on June 17, 1996, Digimedics purchased from Holland America Investment
Corporation, a wholly owned subsidiary of IHS, all of the issued and outstanding
capital stock of JAC, a United Kingdom corporation. Pharmakon and JAC develop,
install and maintain computerized information systems for hospital pharmacies.
Digimedics paid an aggregate of $3,666,000 in cash and issued a $6,000,000
secured promissory note (NoteE) for both acquisitions.
Digimedics also incurred acquisition costs of $238,000 in cash (of which
approximately $76,000 was to a related party see Note K) and issued 30,769
shares of common stock valued at $100,000 as a fee to related parties.
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 $ 3,666,000
Note payable 6,000,000
Costs of acquisition 338,000
$10,004,000
Assets acquired and liabilities assumed:
Current assets $ 638,000
Fixed assets 248,000
Other assets 151,000
Purchased research and development 3,891,000
Excess of cost over fair value of net assets acquired 5,873,000
Current liabilities (797,000)
$10,004,000
The purchased research and development was charged to operations upon
acquisition. The acquisitions have been accounted for as a purchase and,
accordingly, the accompanying financial statements include the accounts of
Pharmakon and JAC from date of acquisition.
Pro forma summary consolidated results of operations, based on the original
agreement, assuming the acquisition of Pharmakon and JAC had taken place on July
1, 1995 is as follows:
Year Ended June 30, 1996
(Unaudited)
Revenue $18,965,000
Net earnings $26,000
Earnings per share $.01
F-10
<PAGE>
Note C - Fixed Assets
Fixed assets consist of the following as at June 30, 1997:
Computer, machinery, and office equipment $1,996,000
Furniture 310,000
Leasehold improvements 18,000
2,324,000
Less accumulated depreciation 1,572,000
$ 752,000
Note D - Capitalized Software Costs
<TABLE>
Year Ended
June 30
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Balance, beginning of year (net of accumulated
amortization) $1,012,000 $ 998,000
Additions 929,000 496,000
Amortization (493,000) (482,000)
Balance, end of year (net of accumulated amortization) $1,448,000 $1,012,000
</TABLE>
Note E - Notes Payable
At June 30, 1997 the Company has outstanding notes payable as follows:
<TABLE>
<S> <C>
Promissory note issued in connection with the acquisition of Pharmakon and JAC
(the Acquisition Note) (Note B) guaranteed by the Company, collateralized
by substantially all of the assets of Digimedics and all of the issued and
outstanding stock of Digimedics and JAC. The loan agreement, among other
matters, restricts the Company with respect to incurring any lien or
encumbrance on its property or assets, entering into new indebtedness and
paying any dividends (1) $4,633,000
Notesissued during the years ended June30, 1995 and 1994, bearing interest at
12% per annum, due on demand, collateralized by the trade accounts
receivable of Digimedics (including $804,000 owed to directors) (2)
1,179,000
---------
5,812,000
Less current maturities 1,212,000
---------
Balance due during fiscal year ending June 30, 1999 $4,600,000
==========
</TABLE>
F-11
<PAGE>
Notes Payable (Continued)
(1) On October28, 1996 the Acquisition Note was amended to provide for an
extension of the original due date to August1, 1997. The extension
agreement provided 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 and 8.25% on the
remaining $1,237,000. The agreement provided for the monthly payments to be
first applied to the interest on the $1,237,000 portion of the loan and the
remainder applied to the interest, then principal, of the portion of the
loan which bears interest at 15%.
Effective July21, 1997, the Acquisition Note was further amended. The
second amendment provides for (i) a reduction of the principal balance by
$437,000, which amount was owing by Continental to Digimedics pursuant to a
service agreement (NoteJ), (ii) extended payment terms which require
quarterly principal payments of $150,000 commencing October31, 1997 with
the balance due on November30, 1998, or earlier in the event of a change in
control or refinancing by the Company as described in the amended
agreement, and (iii) a reduction in the interest rate to 8.5% payable
monthly. The note is classified in the accompanying financial statements
based on the amended payment terms.
(2) Of these notes, $854,000 are subordinated to the Acquisition Note and are
accordingly classified as long-term debt. 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 September30, 2004. 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
June30, 1997:
Wages and related benefits $ 895,000
Professional fees (including $96,000 due to a related party see
Note K) 205,000
Interest (including $323,000 due to directors) 469,000
Income tax 42,000
Other 421,000
$2,032,000
Note G - Stockholders Equity
[1] Stock options and warrants:
Pursuant to the Companys Stock Option Plan (the "Plan") the number of
shares which may be issued is equal to twenty percent of the outstanding
shares of common stock, except that no more than 500,000 shares may be
issued pursuant to incentive stock options. The options entitle holders to
purchase shares of common stock at an exercise price not less than the fair
value of the common stock at the date of grant. Up to 511,519 additional
options may be issued under this plan.
F-12
<PAGE>
Note G - Stockholders Equity (continued)
[1] Stock options and warrants: (Continued)
The Company also has options outstanding pursuant to a 1982 Stock Option
Plan (the "1982 Plan") and a Non-Employee Directors Stock Option Plan (the
"Non-Employee Directors Plan"). No additional options may be granted under
the 1982 Plan or the Non-Employee Directors Plan. The options under the
Non-Employee Directors Plan entitle the holders to purchase shares of
common stock at a price equal to the fair value on the date of grant.
In November 1996, the Company granted a director of the Company options to
purchase 75,000 shares of common stock at $3.50 per share pursuant to a
consulting agreement. The options are exercisable at a rate of 25,000
options per annum commencing November 1, 1997 and expire on November 1,
2001. The Company determined the fair value of these options to be
approximately $117,000 which is being charged to operations over three
years.
The following table sets forth summarized information concerning the
Company's stock options:
<TABLE>
Year Ended June 30,
-------------------
1997 1996
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 601,674 $1.37 578,565 $1.42
Granted 226,669 $3.22 80,002 $1.14
Exercised (100,166) $1.35 - 0 -
Cancelled (27,355) $2.29 (56,893) $1.54
------- ----- ------- -----
Options outstanding at end of year 700,822 $1.93 601,674 $1.37
======= ===== ======= =====
Options exercisable at end of year 408,915 $1.56 438,060 $1.50
======= ===== ======= =====
</TABLE>
The following table presents information relating to stock options
outstanding at June 30, 1997:
Options Outstanding Options Exercisable
----------------------------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Exercise Life in Exercise
Exercise Price Shares Price Years Shares Price
- -------------- ------ ----- ----- ------ -----
$1 - $1.76 460,124 $1.13 6.01 363,217 $1.17
$2.80 - $3.625 211,669 $3.22 7.55 16,669 $3.625
$5.25 29,029 $5.25 2.00 29,029 $5.25
-------- --------
700,822 $1.93 6.31 408,915 $1.56
The Company has outstanding warrants for the purchase of 545,000 shares of
its common stock at $.50 per share and for the purchase of 129,695 shares
at $1.25 per share exercisable through September 30, 2004 (Note E).
F-13
<PAGE>
Note G - Stockholders Equity (continued)
[1] Stock options and warrants: (Continued)
The weighted-average fair value at date of grant for options granted during
the year ended June 30, 1997 and 1996 was $1.89 and $0.73 per option,
respectively. The fair value of options at date of grant was estimated
using the Black-Scholes option pricing model utilizing the following
assumptions:
June 30,
------------------------------
1997 1996
---- ----
Risk-free interest rates 5.6% - 6.5% 5.9% - 6%
Expected option life in years 3 - 8 3 - 8
Expected stock price volatility 50% 80%
Expected dividend yield - 0 - - 0 -
Had the Company elected to recognize compensation cost based on the fair value
of the options at the date of grant as prescribed by SFAS 123, net earnings
(loss) for the years ended June 30, 1997 and 1996 would have been $2,010,000 and
$(3,521,000) or $0.34 per share and $(1.25) per share, respectively.
[2] Private Placement:
During June 1996, the Company completed a private placement of its
securities. The Company issued 1,692,308 shares of its common stock for
$3.25 a share, yielding gross proceeds of approximately $5,500,000. In
connection with the private placement and the related registration of the
securities (pursuant to registration rights granted to the investors) the
Company incurred costs aggregating $568,000 (of which approximately
$118,000 was paid to a related party) ( see NoteK). The Company recorded
$437,000 of these costs during the fiscal year ended June30, 1996 and
$131,000 during the fiscal year ended June30, 1997. The Company also issued
30,768 shares of common stock to related parties as a placement fee valued
at $100,000.
Note H - Commitments and Contingencies
[1] Operating leases:
Rental commitments for the remaining term of the Company's noncancellable
leases relating to office space expiring at various dates through 2004 are
as follows:
Year Ending June 30,
1998 $ 489,000
1999 245,000
2000 191,000
2001 170,000
2002 48,000
Thereafter 97,000
------
$1,240,000
==========
F-14
<PAGE>
Note H - commitments and Contingencies (Continued)
[1] Operating leases: (Continued)
Certain leases provide for additional payments for real estate taxes and
insurance and contain an escalation clause for increases in utilities and
services. Rental expense for the years ended June30, 1997 and 1996
aggregated $442,000 and $213,000, respectively.
[2] Software license agreement:
In September1990, the Company entered into an agreement to acquire a
perpetual license for a computerized information system for hospital
operating rooms. The Company is required to pay royalties of 5% to 15% of
sales of the product.
[3] Contingency:
Mediware Information Systems, Inc., ("Mediware") its wholly owned
subsidiary, Digimedics, and Continental have been named as co-defendants in
a litigation which has been commenced by a former customer of Continental.
The litigation arises out of a contract between Continental and the
customer, under which Continental was to install certain computer equipment
and software. The plaintiff alleges that computer equipment and software
were not operational, and that the contract the plaintiff had with
Continental was assigned without its consent to Digimedics when it acquired
Continentals Pharmakon Division (see NoteJ). The plaintiff also alleges
that Digimedics failed to honor the contract and that Mediware did not
fulfill its promise to install and support the software as prescribed in
the contract. The plaintiffs claims against Digimedics are for breach of
contract, intentional interference with contract, and negligent
interference with contract. The plaintiffs claims against Mediware are for
promissory estoppel, intentional interference with contract, and negligent
interference with contract. The plaintiff is seeking unspecified
compensatory, consequential, and punitive damages. Management believes that
the claims against the Company are without merit and is vigorously opposing
those claims, however, see Note M [2].
[4] Other matters:
Substantially all of the Company's cash is held at two large financial
institutions.
Note I - Income Taxes
The provision for income taxes consists of the following:
Year Ended June 30,
---------------------------
1997 1996
Federal $ 28,000 -
State 51,000 $6,000
Foreign 6,000 -
-------- -------
$85,000 $6,000
======= ======
The principal components of deferred tax assets, liabilities and valuation
allowance are as follows:
F-15
<PAGE>
Note I - Income Taxes (Continued)
Deferred tax assets:
Net operating loss carryforwards $ 2,312,000
Business tax credit carryforwards 359,000
Purchased research and development 1,449,000
Valuation reserves and accruals deductible in different periods 242,000
Other 28,000
4,390,000
Valuation allowance (3,781,000)
609,000
Deferred tax liabilities:
Software cost capitalization 579,000
Amortization differences 30,000
609,000
Net deferred tax asset - 0 -
===========
The Company has recorded a valuation allowance for the amount by which deferred
tax assets exceed deferred tax liabilities as the likelihood of its future
realization cannot be presently determined.
The difference between the tax provision and the amount that would be computed
by applying the statutory federal income tax rate to income before taxes is
attributable to the following:
<TABLE>
Year Ended June 30,
-----------------------------------
1997 1996*
---- -----
<S> <C> <C>
Income tax provision (benefit) - statutory rate $ 736,000 $(1,187,000)
Provision for state income taxes (benefit) - net of federal
benefit (expense) 134,000 (181,000)
(Reduction) increase in valuation allowance on deferred
tax assets (857,000) 1,374,000
Nondeductible items 66,000
Other 6,000 ------------
$ 85,000 $ 6,000
</TABLE>
* Reclassified to be comparative to the current year.
At June 30, 1997 the Company has available net operating loss carryforwards to
reduce future federal taxable income of approximately $5,780,000. At June30,
1997 the Company also has available general business tax credit carryforwards to
reduce future current federal income tax expense of approximately $359,000. The
net operating loss carryforwards and business tax credit carryforwards expire in
various amounts through 2009 and 2012, respectively.
F-16
<PAGE>
Note J - Service Agreement
Concurrent with the acquisition of Pharmakon, Digimedics entered into an
agreement with Continental to perform Continentals obligation to provide certain
services for customers of Continental, such services to include installation of
systems, customizing systems, and providing hardware. The agreement also
provides for Digimedics to assist Continental in the collection of certain
billed and unbilled accounts receivable, principally due from the customers who
will receive the above mentioned services. Digimedics was to be paid
approximately $1,237,000 plus 30% of amounts collected for performing the
foregoing services.
Effective July21, 1997 the above agreement was modified to provide that
Digimedics will be entitled to retain 100% of any amounts collected after
July21, 1997 with respect to accounts receivable which had not been billed by
Continental prior to the acquisition date. In addition, the amount to be paid by
Continental to Digimedics was reduced from $1,237,000 to $437,000. Such amount
($437,000) was effectively received as of July21, 1997 by the reduction of the
principal amount of the Acquisition Note. This payment was for work performed to
date for servicing the various customers and is included in accounts receivable
at June30, 1997 (NoteE).
Note K - Related Party Transactions
During the years ended June30, 1997 and 1996 approximately $183,000 and
$166,000, respectively, was incurred for legal fees provided by a firm, a
counsel to which is also a director of the Company. The majority of these fees
represent costs incurred in connection with the Company's acquisitions referred
to in NoteB and the private placement of the Companys securities referred to in
NoteG.
Note L - Information on Business Segments
The Company operates in only one business segment, specifically engaging in
development, installation and maintenance of computerized information systems
for hospitals. The Companys worldwide activities consist of operations in the
United States and the United Kingdom. Revenue, income and identifiable assets by
geographical area as at and for the year ended June30, 1997 are as follows:
United United Consolidated
States Kingdom Total
Revenues from unaffiliated customers $16,568,000 $1,951,000 $18,519,000
Net earnings (loss) 2,099,000 (18,000) 2,081,000
Identifiable assets 15,936,000 1,413,000 17,349,000
Note M Subsequent Events
[1] Private Placement:
In August1997 the Company completed a private placement of its securities
and issued 400,000 shares of its common stock for $6.00 per share. The
Company also issued warrants to purchase 40,000 shares of common stock at
$6.00 per share as a placement fee and agreed to file a registration
statement with the Securities and Exchange Commission registering the
private placement shares within 30 days of the filing of its Annual Report
on Form 10-KSB for the year ended June30, 1997 and to use its best efforts
to have the registration statement declared and maintained effective for a
specified period of time. Costs of the private placement and the filing of
the registration statement are estimated to be $310,000.
F-17
<PAGE>
Note M Subsequent Events (continued)
[2] Litigation (unaudited):
In December 1997, a settlement in connection with the matter described in
Note H[3] was agreed to in principal by Mediware and Continental. Pursuant
to the proposed settlement agreement, the plaintiff would receive $500,000.
Mediware has agreed to contribute one-third of this total amount and
Continental has agreed to contribute two-thirds of this total amount in
settlement with the plaintiff. However, each Mediware and Continental has
reserved its respective rights to seek indemnification from each other for
these payments.
F-18
<PAGE>
<TABLE>
<CAPTION>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
As at September 30, 1997
(unaudited)
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents .................................................................... $4,231,000
Accounts receivable, less estimated doubtful accounts of $295,000 ............................ 7,237,000
Inventories .................................................................................. 48,000
Prepaid expenses and other current assets .................................................... 442,000
-------
Total current assets ..................................................................... 11,958,000
Fixed assets, at cost, less accumulated depreciation of $1,620,000 ............................... 722,000
Capitalized software costs ....................................................................... 1,573,000
Excess of cost over fair value of net assets acquired, net of accumulated ........................ 6,338,000
amortization of $813,000
Other assets ..................................................................................... 87,000
------
$20,678,000
===========
LIABILITIES
Current liabilities:
Accounts payable ............................................................................. $711,000
Notes payable ................................................................................ 600,000
Accrued expenses and other current liabilities ............................................... 2,898,000
Advances from customers ...................................................................... 2,711,000
Current portion of capital leases payable .................................................... 11,000
------
Total current liabilities ................................................................ 6,931,000
Notes payable, less current portion .......................................................... 4,450,000
Capital leases payable, less current portion ................................................. 11,000
------
Total liabilities ........................................................................ 11,392,000
----------
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value; authorized 10,000,000 shares; none issued
and outstanding
Common stock - $.10 par value; authorized 12,000,000 shares; 5,483,363 issued and outstanding .... 548,000
Unearned compensation ............................................................................ (81,000)
Cumulative foreign currency translation adjustment ............................................... 20,000
Additional paid-in capital ....................................................................... 15,724,000
(Deficit) ........................................................................................ (6,925,000)
----------
Total stockholders' equity ............................................................... 9,286,000
---------
$20,678,000
===========
</TABLE>
F-19
<PAGE>
<TABLE>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
Three Months Ended September 30,
------------------------------------
1997 1996
---- ----
Revenues:
<S> <C> <C>
System sales ............................................ $1,863,000 $1,818,000
Services ................................................ 3,000,000 2,541,000
----------- ----------
Total revenues .......................................... 4,863,000 4,359,000
----------- ----------
Costs and expenses:
Cost of systems ...................................... 665,000 775,000
Cost of services ..................................... 747,000 774,000
Software development costs ........................... 584,000 605,000
Selling, general and administrative .................. 2,095,000 1,606,000
----------- ----------
4,091,000 3,760,000
Earnings before interest and taxes ........................... 772,000 599,000
Interest income .............................................. 45,000 27,000
Interest (expense) ........................................... (156,000) (161,000)
----------- ----------
Earnings before taxes ........................................ $661,000 $465,000
Provision for income taxes ................................... 38,000 19,000
NET EARNINGS ................................................. $623,000 $446,000
----------- ----------
Earnings per share ........................................... $0.10 $0.08
----------- ----------
Weighted average number of common and common equivalent 6,312,378 5,848,764
shares ----------- ----------
</TABLE>
F-20
<PAGE>
<TABLE>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements Of Cash Flows (unaudited)
Three Months Ended
-------------------------------------
Sept. 30 Sept. 30
1997 1996
------------------ ------------------
Cash flows from operating activities:
<S> <C> <C>
Net earnings ...................................................................... $623,000 $446,000
Adjustments to reconcile net earnings (loss) to net cash provided by (used
in) operating activities:
Provision for doubtful accounts .................................................. 13,000 42,000
Depreciation and amortization .................................................... 196,000 230,000
Changes in operating assets and liabilities:
Accounts receivable .......................................................... (867,000) (1,591,000)
Inventory .................................................................... 8,000 139,000
Prepaid and other assets ..................................................... (147,000) (180,000)
Accounts payable, accrued expenses and customer advances ..................... 1,450,000 919,000
--------- --------
Net cash provided by operating activities .................................... 1,276,000 5,000
--------- -----
Cash flows from investing activities:
Acquisition of fixed assets ....................................................... (78,000) (47,000)
Capitalized software costs ........................................................ (192,000) (160,000)
-------- --------
Net cash (used in) investing activities ...................................... (270,000) (207,000)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of options and warrants .................................... 32,000 12,000
Proceeds of private placement ..................................................... 2,160,000
Repayment of debt ................................................................. (902,000)
-------- --------
Net cash (used in) provided by financing activities .......................... 1,290,000 12,000
--------- ------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS .......................................... 2,296,000 (190,000)
Cash and cash equivalents, beginning of period ....................................... 1,935,000 2,504,000
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .............................................$4,231,000 $2,314,000
========== ==========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest ..................................................................... $197,000 $144,000
Income taxes ................................................................. $26,000 $9,000
</TABLE>
F-21
<PAGE>
MEDIWARE INFORMATION SYSTEMS, INC. & SUBSIDIARIES
Notes to Unaudited Financial Statements
1. Financial Statements:
In the opinion of management, the accompanying unaudited, consolidated,
condensed financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial position
of the Company and its results of operations and cash flows for the interim
periods presented. Such financial statement have been condensed in accordance
with the applicable regulations of the Securities and Exchange Commission and
therefore, do not include all disclosures required by generally accepted
accounting principles. These financial statements should be read in conjunction
with the Companys audited financial statements for the year ended June 30, 1997
included in the Companys annual report filed on Form 10KSB.
The results of operations for the three months ended September 30, 1997 are
not necessarily indicative of the results to be expected for the entire fiscal
year.
2. Earnings Per Share:
Earnings per share is computed on the basis of the weighted average number
of common shares outstanding during each period. Common share equivalents
relating to shares which may be issued upon exercise of stock options and
warrants and are included in the computation when the results are dilutive.
3. Income Taxes:
The tax expense is minimal due to the carry forward benefit from the net
operating loss.
F-22
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Article X of the Company's by-laws as amended provides that the
Company will indemnify to the fullest extent permitted by the New York Business
Corporation Law (the "NYBCL") any officer or Director of the Company. Article X
of the Company's by-laws further requires the advancement of expenses and
permits the maintenance of insurance in connection with claims for
indemnification by officers and Directors. Other provisions of Article X contain
procedures to be followed by Directors and officers claiming indemnification and
by the Company's representatives in determining an indemnitee's entitlement. The
indemnification of officers and Directors under Article X of the Company's
by-laws is intended to be as extensive as is permitted under applicable law. No
statute, charter provisions, by-laws, contract or other arrangements that
insures or indemnifies a Director or officer of the Company affects his or her
liability in such capacity.
ss.721-726 of the NYBCL provides authorization for broad
indemnification of directors and officers by New York corporations. ss.721 of
the NYBCL provides that rights granted to officers and directors pursuant to the
NYBCL shall not be deemed exclusive of any other rights which a director or
officer may have by specific corporate authorization, except that a corporation
may not, by the certificate of incorporation or the by-laws, indemnify a
director or officer for acts that were committed in bad faith or were the result
of deliberate dishonesty. A director or officer may, however, still be
indemnified for such acts by separate contract or by other law. ss.722 of the
NYBCL is the operative section of the statute that contains the broad grant of
authority for corporations to indemnify directors and officers for losses and
expenses, including attorneys' fees. ss.723 of the NYBCL provides that a person
who has been successful in the defense of a civil or criminal action or
proceeding as an officer or director of a corporation shall be entitled to
indemnification even if indemnification was not specifically authorized by the
corporation. ss.724 of the NYBCL provides that a person who is entitled to
indemnification pursuant to ss.723 may seek such indemnification in court.
ss.725 of the NYBCL provides that expenses which were advanced to a person in
defending a civil or criminal action in connection with services performed as an
officer and director shall be returned if it is ultimately determined that such
person was not entitled to indemnification.
Item 25. Other Expenses of Issuance and Distribution
Description Amount(1)
- ----------- ---------
Securities and Exchange Commission filing fee .................. $ 1,315
Legal Services.................................................. 20,000
Accounting Services ............................................ 20,000
Miscellaneous .................................................. 3,685
-----
Total(1) ....................................................... $ 45,000
==========
(1) All fees are estimated except for the Securities and Exchange Commission
filing fee.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
During the past three years, the Company sold securities that were not
registered under the Securities Act of 1933 (the "Securities Act") in the
transactions described below.
On May 8, 1996, the Company issued 495,025 shares of Common Stock
pursuant to the exercise by warrantholders of 495,025 warrants at $0.50 per
share. Total proceeds to the Company were approximately $247,000. The issuance
was exempt from registration pursuant to Section 4(2) under the Securities Act
of 1933. No underwriting discounts or commissions were paid as a result of this
issuance.
On June 17, 1996, in connection with the financing of an acquisition,
the Company issued an aggregate of 1,692,308 shares of Common Stock to a total
of nine persons (including the Chairman of the Company) and institutional
investors for $3.25 per share, in a private placement exempt from registration
pursuant to Regulation D under the Securities Act of 1933. The total net
proceeds to the Company were approximately $4.9 million. Smith Barney Inc. was
paid a placement fee of $300,000. Also on June 17, 1996, in connection with this
acquisition transaction and related financing, the Company issued 61,537 shares
of Common Stock to two individuals, including a director of the Company as fees
for services rendered, which issuance was exempt from registration pursuant to
Section 4(2) under the Securities Act of 1933.
On August 27, 1997, the Company issued an aggregate of 400,000 shares of
Common Stock to a total of eleven persons and institutional investors for $6.00
per share, in a private placement exempt from registration pursuant to
Regulation D under the Securities Act of 1933. The total gross proceeds to the
Company were $2,400,000 (before estimated expenses of $310,000). Oscar Gruss &
Son Incorporated was paid a placement fee consisting of (i) $240,000 in cash and
(ii) a warrant representing the right to purchase 40,000 shares of the Common
Stock of the Company.
Item 27. Exhibits
An Exhibit Index, containing a list of all exhibits to this registration
statement, commences on page II-6.
Item 28. Undertakings
The small business issuer will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
II-2
<PAGE>
(iii)Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of such securities at that time
to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer, or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director,officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Scotts
Valley and State of California, on the 22nd day of December, 1997.
MEDIWARE INFORMATION SYSTEMS, INC.
By: /s/ Les Dace
------------
Les N. Dace
President and CEO
II-4
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
Signature Title Date
<S> <C> <C>
/s/ Les Dace President, Chief Executive Officer and December 22, 1997
- ----------------------- Director (Principal Executive
(Les Dace) Officer)
/s/ George J. Barry
- ----------------------- Chief Financial Officer (Principal Financial December 22, 1997
(George J. Barry) Officer and Principal Accounting Officer)
* Lawrence Auriana
- ----------------------- Chairman of the Board and December 22, 1997
(Lawrence Auriana) Director
* Jonathan H. Churchill
- ----------------------- Director December 22, 1997
(Jonathan H. Churchill)
*Roger Clark
- ----------------------- Director December 22, 1997
(Roger Clark)
- ----------------------- Director December 22, 1997
(Joseph Delario)
*John C. Frieberg
- ----------------------- Director December 22, 1997
(John C. Frieberg)
*Walter Kowsh, Jr.
- ----------------------- Director December 22, 1997
(Walter Kowsh, Jr.)
*Hans Utsch
- ----------------------- Director December 22, 1997
(Hans Utsch)
*Clinton Weiman
- ----------------------- Director December 22, 1997
(Clinton Weiman)
*By /s/ Les Dace
---------------------
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
<TABLE>
EXHIBIT INDEX
Exhibit
No. Description
<S> <C> <C>
<C>
3.1 Restated Certificate of Incorporation Incorporated by Reference to Exhibit No. 4 to
the Registration Statement (the "1996
Registration Statemen") on Form S-8 (File No.
333-7591)
3.2 By-laws *
5 Opinion of Winthrop, Stimson, Putnam & Roberts
10.1 Agreement between the Company and Intellimed Corporation **
dated September 25, 1990
10.3.1 Asset Purchase Agreement dated June 17, 1996 among ***
Digimedics Corporation and Continental Healthcare
Systems, Inc. and Information Handling Services Group,
Inc.
10.3.2 Stock Purchase Agreement dated June 17, 1996 among ***
Digimedics Corporation and Holland America Investment
Corporation and Information Handling Services Group, Inc.
10.3.3.1 Second Amended and Restated Secured Promissory Note of ****
Digimedics Corporation dated July 21, 1997 in the
principal amount of $4,195,419 to Continental Healthcare
Systems, Inc.
10.3.4 Pledge Agreement dated June 17, 1996 between Mediware and ***
Continental Healthcare Systems, Inc.
10.3.5 Charge dated June 17, 1996 between Digimedics Corporation ***
and Continental Healthcare Systems, Inc.
10.3.6 General Security Agreement dated June 17, 1996 between ***
Digimedics Corporation and Continental Healthcare
Systems, Inc.
II-6
<PAGE>
10.3.7 Guaranty dated June 17, 1996 by Mediware in favor of ***
Continental Healthcare Systems, Inc.
10.3.8 Agreement Regarding Collection of Accounts Receivable and ****
Servicing of Customers as Related to Deferred Revenues
dated as of June 17, 1996 between Digimedics Corporation
and Continental Healthcare Systems, Inc.
10.3.8.1 Agreement dated July 21, 1997 between Digimedics ****
Corporation and Continental HealthCare Systems, Inc.
modifying the Agreement Regarding Collection of Accounts
Receivable and Servicing of Customers
10.7.1 Letters outlining terms of engagement for Les Dace, ****
Thomas Mulstay, John Esposito, George Barry and Rodger
Wilson
10.8 Employee Stock Option Plan, 1982, as amended **
10.9 Form of Stock Option Agreement under 1982 Plan **
10.10 Form of Stock Option Agreement with Quadrocom, Inc. **
10.13 1992 Employee Stock Option Plan Incorporated by reference to Exhibit C to
Compan's Proxy Statement dated December 17,
1991
10.14 Stock Option Plan for Non-Employee Directors Incorporated by reference to Exhibit B to
Company's Proxy Statement dated December 17,
1991
10.15 Form of Stock Option Agreement under 1992 Employee Stock *
Option Plan
10.16.1 Form of Note for Interim Financing *
10.16.2 Form of Warrant for Interim Financing *
II-7
<PAGE>
10.17 Form of Stock Option Agreement for Joseph Delario Incorporated by reference to Exhibit No. 10.17
to the Registration Statement on Form SB-2
(File No. 333-18277)
10.18 Warrant issued to Oscar Gruss and Son Incorporated to ****
purchase 40,000 shares of Common Stock
10.19 1997 Stock Option Plan for Non-Employee Directors Incorporated by reference to Exhibit A to
Company's Proxy Statement dated November 21,
1997
21 Subsidiaries of the registrant *
23.1 Consent of Winthrop, Stimson, Putnam & Roberts (Contained
in Exhibit 5)
23.2 Consent of Richard A. Eisner & Company, LLP
24 Powers of Attorney
</TABLE>
________________________
* Incorporated by reference to the Exhibit bearing the same designation
in the Company's Annual Report on Form 10- KSB for the fiscal year
ended June 30, 1996.
** Incorporated by reference to the Exhibit bearing the same designation
in the Registration Statement on Form S-18 (File No. 33-40411).
*** Incorporated by reference to Exhibits 2(a), 2(b), 2(d), 2(e), 2(f) and
2(g), respectively, in the Company's Current Report on Form 8-K, filed
on July 1, 1996.
**** Incorporated by reference to the Exhibit bearing the same designation
in the Company's Annual Report on Form 10-KSB for the fiscal year
ended June 30, 1997.
II-8
<PAGE>
Mediware Information Systems, Inc.
December 19, 1997
Exhibit No. 5
Winthrop, Stimson, Putnam & Roberts
One Battery Park Plaza
New York, NY 10004-1490
Telephone: (212) 858-1000
December 19, 1997
Mediware Information Systems, Inc.
1121 Old Walt Whitman Road
Melville, NY 11747-3005
Attn: Mr. Les Dace
President
Gentlemen:
As special counsel to Mediware Information Systems, Inc., a New York
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933 (the "Act"), of up to 440,000 shares of the Company's
Common Stock, par value $.10 per share (the "Common Stock"), to be sold by
certain selling shareholders ("Selling Shareholders") from time to time, we have
examined the registration statement on Form SB-2 (the "Registration Statement")
filed under the Act, including the prospectus which is a part thereof. As to the
shares of Common Stock heretofore issued to the Selling Shareholders, we have
been advised by Company officers that the Company has received payment therefor
in accordance with the authorization for such shares, and we have examined such
further documents as we have considered necessary for the purposes of this
opinion. Based upon such examination and advice we hereby advise you that:
(1) We are of the opinion that the 400,000 shares of Common Stock
covered by the Registration Statement which have been issued as of the date
hereof to certain Selling Shareholders are validly issued, fully paid and
non-assessable, except to the extent, if any, provided in Section 630 of the New
York Business Corporation Law ("BCL").
(2) We are of the opinion that the 40,000 shares of Common Stock
covered by the Registration Statement which may be issued to a Selling
Shareholder pursuant to a warrant will be validly issued, fully paid and
non-assessable, except to the extent, if any, provided in Section 630 of the
BCL, if the steps enumerated in paragraph (3) shall have been taken.
(3) The steps referred to in paragraph (2) are: (a) the Company's board
of directors shall have approved the entering into of the warrant agreement and
the issuance of the shares of Common Stock provided for by the warrant; (b) the
warrant shall have been duly exercised in accordance with its terms; and (c) the
shares issued upon exercise of the warrant shall have been paid for in
accordance with the terms of the warrant.
We are members of the bar of the State of New York. In rendering the
foregoing opinion, we express no opinion as to laws other than the laws of the
State of New York and the Federal laws of the United States.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to our firm under "Legal
Matters" in the prospectus constituting part of the Registration Statement. In
giving such consent, we do not hereby admit that we are within the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Securities and Exchange Commission.
Very truly yours,
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Registration Statement on Form SB-2 of
our report dated August 28, 1997 on the consolidated financial statements of
Mediware Information Systems, Inc. and Subsidiaries as of June 30, 1997 and for
each of the years in the two-year period then ended. We also consent to the
reference to our firm under the caption "Experts" in the Prospectus.
/s/ Richard A. Eisner & Company, LLP
New York, New York
December 18, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of
Mediware Information Systems, Inc. (the "Company") constitutes and appoints
Lawrence Auriana and Les Dace, and each of them, singly or jointly, as such
person's true and lawful attorney-in-fact and agent, with full power of
substitution, to act for him in any and all capacities, including as director,
principal executive officer, principal financial officer and/or controller or
principal accounting officer of the Company, to sign on his behalf the
Registration Statement on Form SB-2 and any and all amendments or supplements
thereto, and to file the same with all exhibits thereto with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or their substitute or substitutes may do or cause to
be done by virtue hereof.
Dated: December 18, 1997 /s/ Les N. Dace
--------------------------
Les N. Dace
/s/ George J. Barry
--------------------------
George J. Barry
/s/ Lawrence Auriana
--------------------------
Lawrence Auriana
/s/ Jonathan Churchill
--------------------------
Jonathan Churchill
/s/ Roger Clark
--------------------------
Roger Clark
--------------------------
Joseph Delario
/s/ John C. Frieberg
--------------------------
John C. Frieberg
/s/ Walter Kowsh, Jr.
--------------------------
Walter Kowsh, Jr.
/s/ Hans Utsch
--------------------------
Hans Utsch
/s/ Clinton G. Weiman
--------------------------
Clinton G. Weiman
