File No. 333-18277
As filed with the Securities and Exchange Commission on March 24, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 2 on Form SB-2/A to
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 Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
No.)
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
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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. |_|
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<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
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<S> <C> <C> <C> <C>
Common Stock 2,089,255 shares $3.50* $7,312,392.50* $2,522**
==================================================================================================================================
* 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, 1996.
** Previously paid.
- ---------------------
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.
</TABLE>
<PAGE>
SUBJECT TO COMPLETION
PROSPECTUS
2,089,255
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 exercise of warrants and options to purchase Common Stock and (ii) the
purchase of such Common Stock in a private placement in June 1996.
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 March 17, 1997 was $3.625 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 _____________________, 1997
<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
RISK FACTORS....................................................... 3
THE COMPANY........................................................ 6
USE OF PROCEEDS.................................................... 8
CAPITALIZATION..................................................... 8
DIVIDEND POLICY.................................................... 8
DESCRIPTION OF THE BUSINESS........................................ 8
PROPERTIES......................................................... 15
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................ 15
DESCRIPTION OF CAPITAL STOCK....................................... 19
MARKET FOR REGISTRANT'S COMMON
EQUITY........................................................... 20
SECURITY OWNERSHIP................................................. 21
DIRECTORS.......................................................... 24
EXECUTIVE OFFICERS................................................. 27
EXECUTIVE COMPENSATION............................................. 28
SHARES ELIGIBLE FOR FUTURE SALE.................................... 30
CERTAIN TRANSACTIONS............................................... 31
INDEMNIFICATION OF OFFICERS
AND DIRECTORS.................................................... 32
PLAN OF DISTRIBUTION............................................... 32
LEGAL MATTERS...................................................... 33
EXPERTS .......................................................... 34
FINANCIAL STATEMENTS............................................... 35
<PAGE>
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.
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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, 1996 and
1995, the Company has operating revenues of $10,432,000 and $8,079,000,
respectively, and a net loss of $3,491,000 and net income of $90,000,
respectively. The Company had net earnings in only two 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.
Working Capital Deficiency; Restrictive Covenants. In connection with
the Acquisition (described more fully herein, see "The Company" and "Description
of the Business"), the Company issued a promissory note to the seller of the
acquired divisions, which, as amended, is due August 1, 1997. As a result, the
Company has a working capital deficiency on December 31, 1996 of $2,994,000. The
Company will require additional sources of liquidity to fund the balance of up
to $4.6 million due August 1, 1997 on this note, as well as the $1,179,000
balance due on the promissory notes due August 1, 1997 which were issued in
bridge financings. The promissory note issued in connection with the Acquisition
is collateralized by all of the issued and outstanding capital stock of
Digimedics and JAC, subsidiaries of the Company engaged in its pharmaceutical
information business, and all of the assets of Digimedics. The note is also
guaranteed by the Company and restricts numerous corporate activities of the
Company. See "Description of Capital Stock".
Variability of Operating Results. The Company expects its revenues and
profitability 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, variability of hospital decision cycles and the availability to hospitals
of funding for capital expenditures.
Hospital Purchase Procedures. Under hospital financial procurement
procedures, the Company's 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.
Possible Delisting. The Board of Directors of The Nasdaq Stock Market
has announced changes to its maintenance standards for listing that, if approved
by the SEC in the form proposed, would include a net tangible assets test which
would become effective at the end of a phase-in period. The Company would not be
able to meet the proposed test without the infusion of significant additional
capital. The Pacific Stock Exchange, on which the common stock also is listed,
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has imposed new listing maintenance criteria based on net worth and tangible net
assets . The Company does not meet the new criteria; however, The Pacific Stock
Exchange has granted the Company a phase-in compliance period until the end of
1997. If the Company does not meet the new criteria after the extended
compliance period, it is subject to being delisted. If such listings are
terminated, the liquidity for the Company's common stock will be severely
impaired in the absence of the development of a meaningful alternative to The
Nasdaq Stock Market.
Acquisition. The realization of the benefits anticipated by management
from the acquisition of the Pharmakon and JAC divisions in June 1996 described
in "The Company -Pharmacy Division - Digimedics and Pharmakon" and "Description
of the Business - Products -Pharmacy Division - Digimedics and Pharmakon" is
subject to the acceptance of the Company by the acquired company's customers,
the integration of the acquired products and personnel and other risks typical
of business acquisitions. Furthermore, as the Company does not have experience
doing business in the United Kingdom, the realization of the benefits from JAC
could initially be affected.
Competition. Competition in the hospital computer software industry is
intense. In sales of the Hemocare system, the Company currently competes
principally with one other specialty vendor of stand-alone blood bank systems
(which is of comparable size) and two substantially larger vendors of laboratory
information systems that contain a blood bank subsystem. The Pharmacy Division
competes with numerous companies, including some of the leading vendors of
healthcare information systems. The competitors of Surgiware 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; 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. The Company's pharmacy division has introduced a
new client server pharmacy system, WORx, the market acceptance of which by new
and existing customers will be important to the Company.
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,
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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. 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. Any of
the Company's 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.
No Dividends. The Company 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 Company's 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;
and (c) inability to share in the assets of the Company upon liquidation until
satisfaction of liquidation preferences of preferred stock.
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Forward-Looking Statements. Certain statements made in or incorporating
this Prospectus are forward-looking statements, including those which are
expressed or implied in the discussion of the Company's products and its goals
for a new pharmacy product (WORx) and the Pharmakon and JAC Acquisition. 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 "Working Capital Deficiency; Restrictive
Covenants", "Variability of Operating Results", Hospital Purchase Procedures",
"Acquisition", "Competition", "Technological Obsolescence; Marketing and
Acceptance of New Products", "Product Protection" 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. With the
completion of the Acquisition referred to below the installed base of clinical
information systems has increased to approximately 825 clients.
The Company was incorporated in 1980. The Company's headquarters are
located at 1121 Walt Whitman Road, Melville, New York 11747, telephone (516)
423-7800.
HEMOCARE
The Company's cornerstone product is one of North America's leading
blood bank information systems, and is sold either "stand-alone" or as part of
an integrated "LAB/Blood Bank" system. The system was designed in collaboration
with Memorial Sloan-Kettering Cancer Center in New York City. Hemocare's
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 250 hospitals which range in size from 100 beds to over 1,600
beds.
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PHARMACY DIVISION - DIGIMEDICS AND PHARMAKON
In May of 1990, the Company acquired Digimedics Corporation, one of the
country's leading vendors in information management systems for hospital
pharmacies. Digimedics had been developing and selling products and services to
hospital pharmacies since 1976. In the mid-1980's, 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
130 Digimedics systems have been installed at 121 hospitals (some hospitals have
separate systems for inpatient and outpatient pharmacies).
At the end of 1996, Digimedics introduced a new client server pharmacy
system called "Digimedics/WORx", which will have a complete Microsoft Windows
based graphical user interface, which the Company feels will increase the
attractiveness of the system.
The Acquisition. On June 17, 1996, Digimedics Corporation acquired
certain assets 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. (the "Acquisition"), which are
being incorporated into the Company's Digimedics operation. The addition of
Pharmakon and its client base has increased the Company's installed base of
clinical information systems to approximately 825 (over 500 of which are
pharmacy system installations). This places the Company in the position of
providing the largest number of stand-alone pharmacy information systems in the
country. The Acquisition also provides the Company with an international
presence; JAC has approximately 180 pharmacy information systems installed in
the United Kingdom.
SURGIWARE
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 patient's treatment, including
pre-operative and post-operative control.
The Company's 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.
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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 December 31, 1996:
Short-term debt.....................................
6,113,000
---------
Long-term debt .....................................
35,000
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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,
4,945,179 shares issued and outstanding (1)... 495,000
Additional paid-in capital......................... 13,440,000
Cumulative foreign currency
translation adjustment......................... 24,000
(Deficit).......................................... (8,558,000)
-----------
Total shareholders' equity....................... 5,401,000
----------
Total Capitalization ............................... $11,549,000
============
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(1)
Does not include (a) up to 722,854 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 Stock Option Plan for Non-Employee Directors
or (b) up to an aggregate of 674,695 shares issuable upon exercise of
outstanding warrants, each number as of December 31, 1996. See "Executive
Compensation," "Directors Compensation of Directors". See also "Certain
Transactions".
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 Company's
business. The Company is prohibited from paying dividends so long as the
promissory note issued to Continental in the Acquisition remains outstanding.
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DESCRIPTION OF THE BUSINESS
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. With the
completion of the Acquisition referred to below the installed base of clinical
information systems has increased to approximately 825 clients. The Company's
operations are within one industry segment.
Products
HEMOCARE - The Company's cornerstone product is one of North America's
leading blood bank information systems, and is sold either "stand-alone" or as
part of an integrated "LAB/Blood Bank" system. The system was designed in
collaboration with Memorial Sloan-Kettering Cancer Center in New York City.
Hemocare's 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 has been the first to attempt to
market innovative product enhancements such as Validation Templates, Video
Validation, Standard Integration Module and Mock Regulatory Inspection. At this
time Hemocare is the only blood banker to offer these 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., Dynacor, Inc., Keane, Inc., NLFC, Inc. and Shared Medical
Systems, Inc.
The Hemocare system is installed in approximately 250 hospitals which
range in size from 100 beds to over 1,600 beds.
PHARMACY DIVISION - DIGIMEDICS AND PHARMAKON - In May of 1990, the
Company acquired Digimedics Corporation, one of the country's leading vendors in
information management systems for hospital pharmacies. Digimedics had been
developing and selling products and services to hospital pharmacies since 1976.
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In the mid-1980's, Digimedics introduced the first open systems version of a
comprehensive pharmacy information management system. Digimedics Corporation is
a wholly owned subsidiary of the Company.
The benefits of Digimedics include (a) potential customer savings
through the automation of drug formulary and perpetual inventory; (b) potential
enhanced revenues through more accurate and complete patient billing; (c)
improved patient care by more accurate drug dispensing, automatic checking of
adverse drug-drug interactions and automatic checking of previously recorded
drug allergies; and (d) interfacing with other hospital information systems,
drug wholesalers, and various dispensing machines, such as PYXIS and the
automated Pharmacy System robotics devices.
The current version of Digimedics, called "Digimedics XA for Windows,"
is based on the UNIX operating system, the "C" programming language, and the
UNIFY relational database management system. Although largely a "character
based" application, certain Microsoft Windows features have been included,
offering the Company certain sales advantages by providing customers and
prospective customers with the type of graphical user interface they prefer.
At the end of 1996, Digimedics introduced a new client server pharmacy
system called "Digimedics/WORx". WORx (Windows, Open, Rx) will have a complete
Microsoft Windows based graphical user interface, which the Company feels will
increase the attractiveness of the system. Also, new technologies include
integration features such as the Informix relational database management system,
point and click Windows based ad-hoc report writing, and an integrated
inpatient/outpatient database.
Other WORx features will include:
o Support of clinical pathways.
o A clinical database and drug monographs.
o Incorporation of an extensive array of clinical drug alerts concerning
allergy, diagnosis, dose, food, IV incompatibility, interaction and
therapeutic duplication.
o Foreign-language patient education monographs.
o Customization to meet community standards.
By taking advantage of its open architecture, WORx is capable of
linking with expert systems, decision-support software and clinical databases.
WORx will act as the central hub of information in the pharmacy and will provide
specialized tools for all aspects of pharmaceutical care including order entry,
distribution, outcomes, billing, utilization evaluation, education, critical
pathways, purchasing and research.
WORx can adapt into a diversity of hardware and networking
environments. Utilizing technologies such as the UNIX operation system, C++
programming language, Informix, and Microsoft Windows 95, WORx is positioned as
a state of the art client/server solution.
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Over 130 Digimedics systems have been installed at 121 hospitals (some
hospitals have separate systems for inpatient and outpatient pharmacies),
including the University of California Medical Center, San Francisco; University
Medical Center, Las Vegas; Columbia-Presbyterian Medical Center, New York City;
Shands Hospital at the University of Florida, Gainesville; University of Kansas
Medical Center, Kansas City; and the University of Michigan Hospitals and
Clinics, Ann Arbor.
As noted above, on June 17, 1996, the Company acquired certain assets
of the U.S. based Pharmakon division and the U.K. based JAC from Continental
Healthcare Systems, Inc. ("Continental"), which are being incorporated into the
Company's Digimedics operation. The addition of Pharmakon and its client base
has increased the Company's installed base of clinical information systems to
approximately 825 (over 500 of which are pharmacy system installations). This
places the Company in the position of providing the largest number of
stand-alone pharmacy information systems in the country. The Acquisition also
provides the Company with an international presence; JAC has approximately 180
pharmacy information systems installed in the United Kingdom.
Pharmakon and JAC, which generated sales and service of approximately
$8.4 million in the fiscal year ended November 30, 1995, markets a management
information system for hospital pharmacies. The Acquisition has added
approximately 415 hospital systems and 235 hospitals to the Company's customer
base in the United States and an additional 180 customers in the United Kingdom.
Pharmakon had been providing pharmacy systems for almost twenty years.
Management has begun its efforts to convert Pharmakon's U.S. customers to the
Digimedics WORx system. Pending this conversion, the Company has assumed the
existing support and maintenance contracts and expects to generate approximately
$3.4 million per year in service revenues by continuing to service the newly
acquired customers. Through the Acquisition, the Company will also acquire
certain technologies which are currently under development and are expected to
be integrated into future systems offerings of Digimedics.
The Company's management team believes there exists strong parallels
between its current Digimedics customer base and that of Pharmakon, both of
which include not only large university hospitals and multi-site acute care
facilities, but also progressive community, municipal, and long-term care
facilities. Management has retained approximately 43 of Pharmakon's 75 employees
in the U.S.
SURGIWARE - 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
11
<PAGE>
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 patient's treatment, including
pre-operative and post-operative control.
The benefits of a fully-implemented system include (a) improvement in
the efficiency and output of operating rooms; (b) improvement 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 the surgical suite usually 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.
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 Company's 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.
In 1992, the licensor of Surgiware commenced an arbitration against the
Company which, in late 1994, led to a decision in favor of the Company which
confirmed the Company's license for the Surgiware product, including
improvements developed by the licensor. The arbitral panel confirmed the
Company's right to retain exclusivity for the Surgiware product and to license
another generic hospital scheduling software product developed by the licensor
upon the payment of additional royalties. The Company determined in early 1995
that the benefits of exclusivity and the generic hospital product did not
justify the required additional royalty payments. The Company has initiated
negotiations with the licensor of the Surgiware system to replace the existing
royalty arrangement with a fully paid-up license, requiring additional royalty
payments only in the case of a simultaneous sale by the Company of multiple
sublicenses. In the course of these negotiations the licensor has asserted that
the Company has breached the existing license agreement. The Company believes
that this assertion is meritless and is being made for negotiating purposes
only.
12
<PAGE>
Sales and Marketing
The Company's three products are sold directly by ten 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. The
Company continues an on-going, in-house lead generation program that generates
numerous sales leads. Sales leads and support are received from certain hardware
manufacturers, especially IBM Corporation and Data General Corporation, whose
products the Company sells as a Value Added Reseller ("VAR"). The Company's
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. and Shared
Medical Systems, 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 Company's
customers enter into software support agreements with either the Company or its
resellers which are renewed either annually or at longer intervals but, 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 fee subject to cancellation
after a specified notice period. Some of the Company's customers have also
entered into agreements for hardware maintenance, which the Company generally
subcontracts to hardware manufacturers. As of June 30, 1996, the Company had
software support and hardware maintenance agreements providing for periodic
payments totaling approximately $7.94 million on an annualized basis, including
the revenues of Pharmakon.
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 Company's products.
HEMOCARE -- The Company currently competes principally with one other
specialty vendor of stand-alone blood bank systems (Western Star, Inc.), which
is a company of comparable size, and with two vendors (Cerner Corporation and
Sunquest Information Systems, Inc.) of laboratory information systems ("LIS")
that contain a blood bank subsystem. The LIS vendors are much larger companies
13
<PAGE>
with greater technical, marketing, financial and other resources than the
Company, and have established reputations for success in developing and selling
hospital information systems.
PHARMACY DIVISION -- The Company currently competes with numerous
companies, including some of the leading vendors of healthcare information
systems. As a result of 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 Pharmacy Division 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 system are believed to be Serving Software
Incorporated, a wholly owned subsidiary of HBO and 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 system are covered by a patent held by the licensor.
Government Regulation
The hospitals that comprise the primary market for the Company's
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. Legislation has been introduced
in Congress seeking to expand the jurisdiction of the FDA, and the FDA 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 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. Any of the Company's other activities could also
14
<PAGE>
become subject to Congressional or governmental agency efforts to establish or
expand governmental agency jurisdiction.
Miscellaneous
The Company's software development expenditures were as follows: during
fiscal 1996 -- $1,438,000; during fiscal 1995 -- $1,387,000; and during fiscal
1994 -- $1,791,000. These expenditures included write-downs and amortization of
software development costs. In addition, software costs of $496,000, $356,000
and $367,000, respectively, were capitalized in each year. In addition, the
Company purchased $3,891,000 of research and development in the Acquisition of
Pharmakon and JAC, which upon acquisition were charged to operations.
The Company's business is not dependent on a single customer or a few
customers. The Company considers that its market area and customer base is the
United States and Canada. However, the Company intends to market its products in
the United Kingdom in fiscal 1997 through JAC.
Employees
As of June 30, 1996, the Company had 138 full-time employees and 12
part-time employees, including 27 in sales and marketing, 92 in customer support
and product development, and 19 in administration. No employees are represented
by a labor union and the Company considers its employee relations to be good.
PROPERTIES
The Company's 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. The Digimedics division is headquartered in Scotts Valley,
California, where the Company occupies approximately 11,646 square feet under a
lease expiring on May 1, 2001. The Pharmakon Division is headquartered in
Overland Park, Kansas, where the company occupies approximately 13,683 square
feet under a lease expiring on 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 on 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Internal and External Sources of 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
15
<PAGE>
Continental. 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 paid in the form of a promissory note issued
to Continental bearing interest at Citibank N.A.'s base rate due November 30,
1996. On October 28, 1996, the promissory note was amended to provide for an
extension of the due date to August 1, 1997. The amendment provides for a
payment of $1.0 million for principal reduction and monthly payments thereafter
of $100,000 for principal and interest and an increase in the interest rate to
15% on approximately $3,763,000 of the note (with the original rate remaining on
$l,237,000). At December 31, 1996, the outstanding balance of this liability,
$4.9 million (after the $1.0 million payment), is classified as current. In
October 1996 the Company paid to Continental the $1.0 million payment to reduce
outstanding principal and made the monthly payments of $100,000 on November 30,
1996, December 31, 1996 , January 31, 1997 and February 28, 1997. The Company
will require additional sources of liquidity to fund a net balance of up to $4.6
million of debt due August 1, 1997.
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 $5,500,002.
The Company had a working capital deficiency of $2,994,000 at December
31, 1996, reflecting the purchase money note due in August 1997 issued in June
1996 to Continental in partial payment for the Acquisition.
During fiscal year 1996 the Company repaid $120,000 of outstanding
bridge loans, leaving a balance of $1,179,000 due August 1, 1997. As noted in
the third preceding paragraph the Company will require additional sources of
liquidity to fund this balance due. In May of 1996 certain holders exercised
warrants for 495,025 shares for a total of $247,512.
The Company has acquired a credit facility of $75,000 from its bank in
New York. As of December 31, 1996, the facility has $75,000 available. The
Company currently is seeking additional sources of credit and equity in order to
fund the reduction of its obligations under the above mentioned note. However,
it cannot be assured at this time that it will be successful. If the Company is
unable to obtain financing or extend the due date of the obligation, such could
result in a materially adverse effect on the Company.
Material Changes in Results of Operations: Six Months Ended December
31, 1996 vs. Six Months Ended December 31, 1995:
16
<PAGE>
System Sales Revenue increased $377,000 or 12% for the six months ended
December 31, 1996 to $3,401,000 compared to $3,024,000 for the comparable period
a year earlier. $701,000 of this increase was due to System Sales Revenue of
Pharmakon and JAC .
Service Revenues increased by $3,632,000 or 182% to $5,630,000 for the
six months ended December 31, 1996 compared to $1,998,000 for the comparable
period in 1995. 86% of the increase is a result of Service Revenues contributed
by Pharmakon and JAC. The Hemocare product center contributed the remaining
revenue from increased software maintenance from new system implementations.
Cost of Systems increased by $321,000 to $1,088,000 or 42% for the six
months ended December 31, 1996 compared to $767,000 for the comparable period in
1995. This this increase was due to Systems Costs of Pharmakon and JAC.
Cost of Services increased by $717,000 to $1,608,000 or 80% for the six
months ended December 31, 1996 compared to $891,000 for the same period in 1995.
The increase was substantially due to service costs from the Pharmakon and JAC
product centers.
Software Development costs increased by $380,000 or 50% to $1,136,000
for the six months ended December 31, 1996 as compared to the comparable period
17
<PAGE>
in 1995. The Pharmakon product center and JAC were responsible for this
increase .
Selling, General and Administrative costs for the six months ended
December 31, 1996 increased by $1,810,000 or 92% to $3,780,000 as compared to
$1,970,000 for the same period in 1995. The addition of the Pharmakon and JAC
divisions accounted for 61% of the increase while increased commissions and
employee incentive bonus expense from Hemocare and Digimedics accounted for the
remainder of the increase.
Interest Expense increased by $246,000 to $354,000 for the six months
ended December 31, 1996 as compared to $108,000 for the same period the year
before. This increase was due to interest paid against the outstanding note in
the acquisition of Pharmakon and JAC from Continental.
Net earnings for the six months ended December 31, 1996 were $1,071,000
compared to $527,000 for the comparable period last year. The increased earnings
were due to profits produced by the Pharmakon and JAC product centers.
Material Changes in Results of Operations: Fiscal 1996 vs. Fiscal 1995:
Total revenues increased by $2,353,000, or 29%, to $10,432,000 in
fiscal 1996 from $8,079,000 in fiscal 1995. Approximately 80% of this increase
was due to the improved performance of the Hemocare product center.
System Sales increased by $1,957,000, or 51%, to $5,781,000 in fiscal
1996 from $3,824,000 in fiscal 1995. Almost 80% of this increase was
attributable to increased sales of new systems by the Hemocare product center in
conjunction with its remarketers and an aggressive upgrade program which took
advantage of the pressure on hospitals to consolidate onto current product
revisions.
Service Revenues increased by $396,000, or 9%, to $4,651,000 in fiscal
1996 from $4,255,000 in fiscal 1995. Approximately 60% of this increase was due
to increases in service revenues from newly installed systems and additional
modules added to existing customer's systems. The remainder of the increase was
provided by Pharmakon.
Cost of Systems increased by $787,000, or 64%, to $2,023,000 in fiscal
1996 from $1,236,000 in fiscal 1995. Of this increase, 66% was due to the
increase in the cost of sales by the Hemocare product center that included sales
of hardware and 25% was due to an increase in system costs at Digimedics.
18
<PAGE>
Cost of Services increased by $163,000, or 13%, to $1,403,000 in fiscal
1996 from $1,240,000 in fiscal 1995. Almost all of this increase is due to
additional personnel and other related costs of providing customer services,
specifically in the Hemocare product center.
Software Development costs increased by $51,000, or 4%, to $1,438,000
in fiscal 1996 from $1,387,000 in fiscal 1995, due to an increase in software
engineering personnel and development costs from Pharmakon.
Selling, General and Administrative increased by $830,000, or 20%, to
$4,966,000 in fiscal 1996 from $4,136,000 in fiscal 1995. Each of the product
centers had increased costs due to product marketing, product consulting and
incentive commission payout. Approximately 64% of these increases was provided
by the Hemocare product center.
Interest Expense of $216,000 for fiscal 1996, decreased by $33,000, or
13%, as compared to interest expense of $249,000 in fiscal 1995. The decrease is
primarily due to the fact that fiscal 1996 did not include a debt discount as
did fiscal 1995, coupled with interest incurred in fiscal 1996 on outstanding
loans.
The Company had a net loss of $3,491,000 in fiscal 1996, or $1.24 per
share, as compared to net earnings of $90,000 in fiscal 1995, or $.04 per share,
which reflects the charge to operations of acquired research and development of
$3,891,000 from the Pharmakon Acquisition. If this charge were excluded,
however, net income would result in $400,000, or $.12 and $.11 per share on a
primary and fully diluted basis, respectively, in fiscal 1996. The fiscal 1996
loss of the Surgiware division was comparable to that in fiscal 1995.
Material Changes in Results of Operations: Fiscal 1995 vs. Fiscal 1994:
Total revenues decreased by $198,000, or 2%, to $8,079,000 in fiscal
1995 from $8,277,000 in fiscal 1994. This decrease was due to the sales of more
software-only systems and to slower sales of the Surgiware Product, reflecting
uncertainties resulting from an arbitration that concluded in fiscal 1995 (as
described in "Description of the Business", above).
System Sales decreased by $906,000, or 19%, to $3,824,000 in fiscal
1995 from $4,730,000 in fiscal 1994. This was due to a decrease of sales of
hardware as a system component and a larger number of software only systems
sold, and decreases in Surgiware's sales due to the arbitration, which caused
uncertainties in the marketplace in fiscal 1995.
Service Revenues increased by $708,000, or 20%, to $4,255,000 in fiscal
1995 from $3,547,000 in fiscal 1994. This was due primarily to product
maintenance increases relating to an increased installed base.
Cost of Systems decreased by $858,000, or 41%, to $1,236,000 in fiscal
1995 from $2,094,000 in fiscal 1994. This decrease was due primarily to a larger
number of software-only systems in fiscal 1995 as compared to sales software and
hardware in fiscal 1994.
19
<PAGE>
Cost of Services increased by $151,000, or 14%, to $1,240,000 in fiscal
1995 from $1,089,000 in fiscal 1994, as the Company had increased the number of
personnel and other related costs of the customer support organization.
Software Development costs decreased by $404,000, or 23%, to $1,387,000
in fiscal 1995 from $1,791,000 in fiscal 1994. The decrease is primarily due to
a decrease in Surgiware development and the result of the write-off of $242,000
of capitalized software in fiscal 1994.
Selling, General and Administrative increased by $277,000, or 7%, to
$4,136,000 in 1995 from $3,859,000 in 1994. The increase is due primarily to
increased payroll and travel expenses, commissions, professional fees and
employee health insurance claims.
The Company expensed costs of $1,222,000 in connection with the
arbitration in fiscal 1994. Such costs included $208,000, which the Company
intended to pay the licensor to retain exclusivity; the balance was principally
legal fees and expenses in connection with the arbitration. During fiscal 1995
the Company, after review of the then current circumstances, decided not to
elect to make the payments required to maintain exclusivity. Accordingly, the
$208,000 accrued expense recorded in the prior year was eliminated, resulting in
increased income.
Interest Expense of $249,000, including approximately $100,000 in debt
discount, for fiscal 1995 was incurred on the interim financing from investors
referred to above and the loans to the Company from the chairman of the board.
The Company had a net profit of $90,000 for fiscal 1995, or $.04 per
share, compared to a net loss of $1,902,000, or $.75 per share, in fiscal 1994.
The net profit is due to the elimination of arbitration costs in fiscal 1995 and
the improvement in gross profits.
In February 1997 the Financial Accounting Standards Board issued a new
accounting standard concerning earnings per share. This statement, when adopted
for the year ending June 30, 1998), will require all prior period earnings per
share data to be restated, and will exclude dilution in the basic earnings per
share calculation.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 12,000,000 shares of Common Stock,
par value $.10 per share, of which 4,945,179 shares of Common Stock were issued
and outstanding as of December 31, 1996, held of record by approximately 246
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.
20
<PAGE>
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 of 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.
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 is not aware of any effort to
accumulate its Common Stock or obtain control of the Company by a tender offer,
proxy contest or otherwise, and the Company has no present intention of using
shares of preferred stock for anti-takeover purposes.
As discussed elsewhere herein (see "Management's 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 Company's
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 of assets; the making of
investments; guarantees; and the creation of subsidiaries.
MARKET FOR REGISTRANT'S COMMON EQUITY
The Company's Common Stock is traded and quoted on The Nasdaq SmallCap
Market under the symbol MEDW. Prior to August 1991, there was no established
trading market for the Company's Common Stock. The table below indicates the
high and low of quoted bid market prices as reported by Nasdaq for the Company's
Common Stock for each quarter during the fiscal years ended June 30, 1995 and
21
<PAGE>
1996, and the first two quarters of fiscal 1997.
<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 1997 4 1/8 3 3/4 4 5/8 3 1/8 4 3/4 3 3/8*
Fiscal 1996 1 1/8 5/8 1 1/2 7/8 3 5/8 7/8 4 1/4 3
Fiscal 1995 1 3/8 11/16 1 3/8 11/16 1 9/16 13/16 1 1/4 13/16
* Through March 17, 1997
</TABLE>
Such over-the-counter quotations reflect inter-dealers prices, without
retail mark-ups, mark downs or commissions, and may not represent actual
transactions. The reported trading volume is low.
The Board of Directors of The Nasdaq Stock Market has announced changes
to its maintenance standards for listing which, if approved by the SEC in the
form proposed, would include a net tangible assets test which would become
effective at the end of a phase-in period. The Company would not be able to meet
the proposed test without the infusion of significant additional capital. The
Pacific Stock Exchange, on which the Common Stock also is listed, has imposed
new listing maintenance criteria based on net worth and tangible net assets .
The Company does not meet the new criteria; however, The Pacific Stock Exchange
has granted the Company a phase-in compliance period until the end of 1997. If
the Company does not meet the new criteria after the extended compliance period,
it is subject to being delisted. If such listings are terminated, the liquidity
for the Company's Common Stock will be severely impaired in the absence of the
development of a meaningful alternative to The Nasdaq Stock Market.
SECURITY OWNERSHIP
The following tables set forth the beneficial ownership of the
Company's Common Stock as of October 31, 1996, by (i) each Selling Shareholder,
(ii) each person who is known by the Company to own beneficially more than 5% of
the Company's 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:
22
<PAGE>
<TABLE>
<CAPTION>
Share Ownership by Selling Shareholders
Shares Beneficially Shares Shares Beneficially
Owned Prior to Sale of Being Owned if Registered
Registered Shares Registered Shares are Sold
----------------------------- ------------------------
---------------
Name Number %<F1> Number %<F1>
---- ------ -- ------ --
<S> <C> <C> <C> <C> <C>
Oracle Partners, L.P. 575,000 11.6 575,000 0 0
Oracle Institutional Partners, L.P. 93,000 1.9 93,000 0 0
GSAM Oracle Fund, Inc. 449,736 9.1 449,736 0 0
Medcap I Corp. 123,077 2.5 123,077 0 0
Promed Partners, L.P. 30,769 * 30,769 0 0
The Travelers Insurance 236,110 4.8 236,110 0 0
Company
Soditic Asset Management, 30,769 * 30,769 0 0
S.A.
Bruce Brewster 125,000 2.5 50,000 75,000 1.5
Stephen Gardos and Barbara Gardos 54,835 1.1 25,025 29,810 *
Chandra Panchmia and 50,000 1.0 50,000 0 0
Sushila Panchmia
Clarion Capital Corp. 100,000 2.0 100,000 0 0
Joseph Delario<F2> 167,685<F3> 3.4 157,769<F4> 84,916 1.7
Douglas N. Thompson 106,819 2.2 50,000 56,819 1.2
Robert Sargenti 63,970 1.3 20,000 43,970 *
James E. Lineberger 54,910 1.1 25,000 29,910 *
Leon Lebensbaum 25,051 * 25,000 51 *
Barbara Delario 40,000 * 40,000 0 0
Mary K. Cabala 10,000 * 5,000 5,000 *
Helen Richards 4,600 * 3,000 1,600 *
- ----------------------------
<FN>
<F1> Based on the number of shares outstanding at October 31, 1996, plus, for
each person or group, shares acquirable within 60 days of October 31,
1996.
<F2> Mr. Delario is a director of the Company.
<F3> Includes 8,197 shares which may be acquired upon exercise of options
granted pursuant to the Plan which are exercisable within 60 days of
October 31, 1996. Does not include 75,000 shares which may be acquired
upon exercise of an option granted in November 1996. See "Certain
Transactions."
<F4> Includes the 75,000 shares referred to in note 3 above.
* Represents less than 1% of the Company's outstanding common stock.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Share Ownership by Principal Shareholders, Directors, Named Executive
Officers and Directors and Executive Officers as a Group
Number of Such Shares
Total Number of Acquirable within Percentage of
Names<F1> and Addresses<F2> Shares Beneficially Owned<F3> 60 Days<F4> Class Owned<F5>
- --------------------- -------------------------- ------------------- -------------
<S> <C> <C> <C>
Oracle Partners, L.P., 1,117,736 0 22.6%
Oracle Institutional
Partners, L.P.,
GSAM Oracle Fund, Inc.
Lawrence Auriana<F6> 993,281 712,199<F7> 17.6%
Jonathan H. Churchill 25,221 8,197 *
Roger Clark 18,702 10,002 *
Les N. Dace 57,500 57,500 1.2%
John Frieberg 40,278 37,778 *
Walter Kowsh, Jr. 39,249 10,002 *
Hans Utsch 106,452 10,002 2.2%
Clinton G. Weiman 834 834 *
John Esposito 51,100 50,000 1.0%
Thomas Mulstay 50,000 50,000 1.0%
All Directors and Executive
Officers as a group 1,552,802 954,711 26.3%
(12 persons)
- ------------------------
<FN>
<F1> For share ownership of Joseph Delario, a director of the Company, see
previous chart.
<F2> Addresses of directors and officers 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: 1600 Green Hills Road, #105,
Scotts Valley, CA 95066. Joseph Delario: 77 Independence Way North,
Edgewater, NJ 07020. John Frieberg: 4402 South St. Andrew's 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.
<F3> Includes shares which may be acquired by the shareholders upon exercise of
options and warrants which are exercisable within 60 days of October 31,
1996 and does not include directors' options vesting after December 1,
1996. See "Directors - Compensation of Directors".
<F4> Reflects the shares which may be acquired by the shareholders upon
exercise of options and warrants which are exercisable within 60 days of
October 31, 1996 and does not include directors' options vesting after
December 1, 1996. See "Directors - Compensation of Directors".
<F5> Based on the number of shares outstanding at October 31, 1996, plus, for
each person or group, shares acquirable within 60 days of October 31,
1996.
<F6> Mr. Auriana is also Chairman of the Board, Treasurer and Secretary of the
Company.
<F7> 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 Company's outstanding common stock.
[/FN]
</TABLE>
24
<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 52, 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 Co-Manager 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 64, has been a practicing attorney in
New York City since 1958 and is currently Counsel at Winthrop, Stimson, Putnam &
Roberts. Mr. Churchill was a partner of Boulanger, Hicks, & Churchill, P.C.,
from January 1990 to May 1996. Boulanger, Hicks, & Churchill P.C. and 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 71, 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 62, 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
micro-computer consultant and programmer. Mr. Clark is the author of seven books
on micro-computing and a director of The Kaufmann Fund.
25
<PAGE>
Hans Utsch, age 58, has been a 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 Co-Manager 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 50, was appointed President and C.E.O. in July
1995. He joined the Company in November 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.
Class II Directors
(Term Expires at the Annual Meeting Following
the 1999 Fiscal Year)
Joseph Delario, age 62, 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 provided
financial advisory services to the Company during the Company's last fiscal
year, and the Company proposes to retain such services in the future. See
"Certain Transactions". Mr. Delario received a B.A. degree from Fairleigh
Dickenson University in 1956.
Walter Kowsh, Jr., age 47, 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 62, 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 Caelus, 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.
26
<PAGE>
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 Company's 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 Company's 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.
Compensation of Directors
It has been the Company's 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
Non-Employee Directors (the "Plan") was adopted. Under the Plan, options to
purchase 1,667 shares are granted annually on July 1 of each year until 1997 to
each non-employee director of the Company (except for the Chairman, who is to
receive options to purchase 5,000 shares). Options will be exercisable at 100%
of fair market value of the Company's Common Stock on the date of grant, and
payment may be in cash, the Company's Common Stock, or a combination thereof. An
aggregate of 150,000 shares of Common Stock are subject to the Plan. Options
granted under the Plan are not intended to qualify under Section 422 of the
Code.
Pursuant to the Plan, each director in office on July 1, 1995,
received for services as director during the ensuing 1996 fiscal year a grant of
1,667 options (5,000 shares in the case of the Chairman) exercisable at $1.00,
which was the fair market value of the Company's Common Stock on June 30, 1995.
These options vested and became exercisable in equal monthly installments during
fiscal 1996. Also, each director in office on July 1, 1996, received for
services as director for the 1997 fiscal year a grant of 1,667 options (5,000
shares in the case of the Chairman) exercisable at $3.625, which was the fair
market value of the Company's Common Stock on July 1, 1996. These options vest
27
<PAGE>
and become exercisable in equal monthly installments during fiscal 1997. The
table entitled "Share Ownership by Principal Shareholders, Directors, Named
Executive Officers and Directors and Executive Officers as a Group" in "Security
Ownership" above is dated as of October 31, 1996 and does not reflect options
vesting after December 1, 1996.
Each director in office on July 1, 1995 also became entitled to
receive a total of 2,500 shares of Common Stock (7,500 in the case of the
Chairman), issuable on July 1, 1996, for his services during fiscal 1996.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
Name Age Position
Lawrence Auriana.............52 Chairman of the Board and Secretary
Les Dace.....................50 President, CEO, CFO and General Manager
- Surgiware
Rodger Wilson................46 Vice President and General Manager
- Pharmacy Division
Thomas Mulstay...............44 Vice President and General Manager
- Hemocare
John Esposito................37 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 Co-Manager 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 July 1995. He
joined the Company in November 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.
Rodger P. Wilson joined the Company on June 30, 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 an M.S. degree from the University
of Colorado Graduate School of Pharmacy.
28
<PAGE>
Thomas Mulstay joined the Company as Vice President 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.
John Esposito joined the Company as Vice President - Sales in
June 1990. From May 1986 to June 1990, he was employed in various sales
positions by the Healthcare Division of Data General Corporation. He is a
two-time member of Data General's Million Dollar Club, and was recognized in May
1990 as Data General's 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 $100,000 for the
fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards Payouts
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Name and Principal Fiscal Salary Bonus sation Awards Options Payouts sation
Positions<F1> Year ($) ($) ($) ($) SARs (#) ($) ($)
- ---------------------------- ------ --------- --------- --------- ---------- --------- ----------- -----
<S> <C> <C> <C> <C> <C>
Les N. Dace 1996 110,000 52,560 -- -- 50,000 -- 262
President, CEO and CFO 1995 75,000 60,731 -- -- -- -- 262
1994 75,000 34,426 -- -- 30,000 -- 262
John Esposito 1996 70,000 71,795 -- -- -- -- 262
Vice President, Sales 1995 70,000 50,595 -- -- -- -- 250
1994 70,000 36,183 -- -- 30,000 -- 241
Thomas Mulstay 1996 75,000 130,313 -- -- -- -- 232
Vice President & General 1995 75,000 90,662 -- -- -- -- 215
Manager, Hemocare 1994 75,000 59,011 -- -- 30,000 -- 205
- ------------------------
<FN>
<F1> The amount of salary and bonus for fiscal 1996 for the other executive
officers did not meet the threshold reporting requirement under the
rules of the Commission.
</FN>
</TABLE>
29
<PAGE>
Option/SAR Grants in Last Fiscal Year
The following table sets forth certain information concerning
options to purchase Common Stock in fiscal 1996 granted to the individuals named
in the Summary Compensation Table. No stock appreciation rights were granted in
fiscal 1996.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options
Underlying Granted to
Options Employees in Exercise Expiration
Name Granted Fiscal Year Base Price Date
<S> <C> <C> <C> <C>
Les Dace 50,000<F1> 100% $1.00 July 1, 2005
John Esposito -- -- -- --
Thomas Mulstay -- -- -- --
- ------------------------
<FN>
<F1> Options are exercisable 25%, 50%, 75% and 100% on July 1, 1996, July 1,
1997, July 1, 1998 and July 1, 1999, respectively.
</FN>
</TABLE>
Fiscal 1996 Option/SAR Exercises and Value
of Outstanding Options at June 30, 1996
The following table sets forth options exercised by the named
executive officers during fiscal 1996 and the number and value of options held
by them at June 30, 1996. No stock appreciation rights were granted and there
were no outstanding stock appreciation rights at June 30, 1996. The fair market
value on such date was $3.75 per share.
<TABLE>
<CAPTION>
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 -- -- 45,000 50,000 $112,350 $137,500
John Esposito -- -- 50,000 0 122,300 0
Thomas Mulstay -- -- 50,000 0 122,300 0
</TABLE>
Employment Agreements
Messrs. Dace, Esposito and Mulstay have employment agreements
or understandings with the Company providing for minimum compensation levels of
$110,000, $70,000 and $75,000, respectively, plus bonuses based on percentages
of 5%, 2% and 1%, respectively, of defined gross profits (of the Hemocare
Division in the case of Mr. Mulstay). Additionally, Mr. Mulstay's agreement
provides for additional bonuses based on percentages of additional measures of
performance, such as net profits, gross profit on new sales and reseller
30
<PAGE>
sales. Mr. Esposito and Mr. Mulstay's agreements have non-compete and
confidentiality covenants. All three agreements also provide for grants of stock
options and for three months' (two months' in the case of Mr. Esposito)
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 three-year period, with each installment remaining
exercisable for a five-year 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. The
expiration of certain options previously granted under this Plan whose terms
would have ended in fiscal 1996 have been suspended pending the satisfaction of
legal requirements preventing their exercise.
1992 Equity Incentive Plan
Awards granted under the 1992 Equity Incentive Plan (the
"Equity Incentive Plan") include a wide range of Common Stock-based 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 Company's 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 Company's 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.
Stock Option Plan for Non-Employee Directors
The Stock Option Plan for Non-Employee Directors is 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 5,020,179 shares of Common Stock outstanding. Of these
shares, the 2,089,255 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 three years ago. A person who
has not been an affiliate of the Company for at least the three months
31
<PAGE>
immediately preceding a sale and who has beneficially owned shares of Common
Stock for at least three years is entitled to sell such shares under Rule 144
without regard to the volume limitations described below.
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 two years 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 two-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 Company's ability to raise capital through the sale of its equity
securities.
CERTAIN TRANSACTIONS
On November 11, 1996, the Board of Directors of the Company adopted an
arrangement whereby Joseph Delario received options to purchase 75,000 shares of
Common Stock, which was approved at the 1996 annual meeting of shareholders. The
options will vest and become exercisable as follows: Options to purchase 25,000
shares will vest on November 1, 1997, options to purchase an additional 25,000
shares will vest on November 1, 1998, and options to purchase the final 25,000
shares will vest on November 1, 1999. The options will remain exercisable until
November 1, 2001, unless earlier terminated. The exercise price is $3.50 per
share, the closing market price of shares of Common Stock on November 8, 1996.
In the event of a transaction constituting a change of control of the Company
(including a change of control occurring within six months of termination of
management and financial services or twelve months of death or incapacity), all
outstanding options would become exercisable.
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, and with Mr. Delario, who became a director of the Company
in 1992, that such firm and Mr. Delario 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 their 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. In connection with the Acquisition by Digimedics
32
<PAGE>
Corporation, a wholly owned subsidiary of the Company, from Continental of
Continental's Pharmakon division and JAC for a consideration of $10,000,000, and
the related financing, Mr. Delario became entitled to a fee of $150,000, which
he agreed at the Company's request to accept in the form of 46,153 shares of the
Company's Common Stock. Bowling Green waived payment of any fee. Mr. Delario has
terminated his future participation in this agreement in light of the
arrangements specified in the previous paragraph. See also "Plan of
Distribution."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
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.
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.
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 of the shareholders
who have received, or who will receive, shares of the Common Stock as described
in the following two paragraphs.
In 1995 and 1994, in connection with bridge financings
utilized by the Company to finance its operations, the Company issued promissory
notes to several persons, including directors of the Company. 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 warrants to purchase
129,695 shares of common stock for $1.25 per share, exercisable through
September 30, 2004, which the Company agreed to register under the Act. During
May 1996, 495,025 of the $0.50 warrants were exercised for 495,025 shares of
Common Stock (including warrants held by a director of the Company). 445,025 of
such shares are included in this Registration Statement. In November 1996, the
33
<PAGE>
Company issued options to purchase 75,000 shares of Common Stock to Joseph
Delario, a director of the Company. See "Certain Transactions." All of the
shares issuable upon exercise of such options are also included in this
Registration Statement.
At the time of the financing of the Acquisition on June 17,
1996, whereby a wholly owned subsidiary of the Company acquired JAC and certain
assets of Pharmakon from Continental Healthcare Systems, Inc., the Company
issued an aggregate of 1,692,308 shares of Common Stock to nine persons
(including the Chairman of the Company, who purchased 138,462 of these shares)
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.
In connection with the Acquisition and the related financing, the Company also
issued 61,537 shares of Common Stock as fees, which the Company agreed to
register under the Act. 1,569,230 of such shares are included in this
Registration Statement.
The Company's 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 The Nasdaq SmallCap Market 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 Registrant's 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 17,024 shares of Common Stock and
options to purchase 9,030 shares of Common Stock.
34
<PAGE>
EXPERTS
The audited consolidated balance sheet of Mediware Information
Systems, Inc. and subsidiaries as at June 30, 1996 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, 1996, and the audited statements
of operations and cash flows of Continental Healthcare Systems, Inc. - Pharmakon
Division for each of the years in the two-year period ended November 30, 1995,
included in this Prospectus, have been audited by the firm of Richard A. Eisner
& Company, LLP, independent auditors, as set forth in their reports appearing
herein, and are included herein in reliance upon the reports of said firm given
upon their authority as experts in accounting and auditing.
The financial statements of JAC Computer Services Limited (a
United Kingdom corporation) as of November 30, 1995 and 1994 and for each of the
two years in the period ended November 30, 1995 included in this Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
35
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
PAGE
NUMBER
REPORT OF INDEPENDENT AUDITORS F-1
CONSOLIDATED BALANCE SHEET AS AT
JUNE 30, 1996 F-2
CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE YEARS ENDED
JUNE 30, 1996 AND JUNE 30, 1995 F-3
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY FOR THE YEARS
ENDED JUNE 30, 1996 AND JUNE 30,
1995 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND
JUNE 30, 1995 F-5
NOTES TO FINANCIAL STATEMENTS F-6
SIX MONTHS ENDED DECEMBER 31, 1996 (UNAUDITED):
CONDENSED CONSOLIDATED BALANCE SHEET AS AT
DECEEMBER 31, 1996 (UNAUDITED) F-17
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995 F-18
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE SIX MONTHS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995 F-19
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) F-21
36
<PAGE>
CONTINENTAL HEALTHCARE SYSTEMS, INC. - PHARMAKON DIVISION
REPORT OF INDEPENDENT AUDITORS F-22
STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED NOVEMBER 30, 1995 AND NOVEMBER
30, 1994 F-23
STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED NOVEMBER 30, 1995 AND NOVEMBER
30, 1994 F-24
NOTES TO FINANCIAL STATEMENTS F-25
THE PERIODS BEGINNING DECEMBER 1, 1995
THROUGH JUNE 17, 1996 (UNAUDITED) AND
DECEMBER 1, 1994 THROUGH MAY 31, 1995
(UNAUDITED):
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE PERIODS BEGINNING
DECEMBER 1, 1995 THROUGH JUNE 17, 1996
AND DECEMBER 1, 1994 THROUGH MAY 31, 1995 F-28
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE PERIODS BEGINNING
DECEMBER 1, 1995 THROUGH JUNE 17, 1996
AND DECEMBER 1, 1994 THROUGH MAY 31, 1995 F-29
JAC COMPUTER SERVICES LIMITED
REPORT OF INDEPENDENT ACCOUNTANTS F-30
BALANCE SHEET AS OF NOVEMBER 30, 1995
AND NOVEMBER 30, 1994 F-31
STATEMENT OF OPERATIONS AND RETAINED
EARNINGS FOR THE YEARS ENDED NOVEMBER 30,
1995 AND NOVEMBER 30, 1994 F-32
STATEMENT OF CASH FLOWS FOR THE YEARS
ENDED NOVEMBER 30, 1995 AND NOVEMBER
30, 1994 F-33
37
<PAGE>
NOTES TO FINANCIAL STATEMENTS F-34
THE PERIODS BEGINNING DECEMBER 1, 1995
THROUGH JUNE 17, 1996 (UNAUDITED) AND
DECEMBER 1, 1994 THROUGH MAY 31, 1995
(UNAUDITED):
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE PERIODS DECEMBER 1, 1995
THROUGH JUNE 17, 1996 AND DECEMBER 1,
1994 THROUGH MAY 31, 1995 F-35
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE PERIODS BEGINNING
DECEMBER 1, 1995 THROUGH JUNE 17, 1996
AND DECEMBER 1, 1994 THROUGH MAY 31, 1995 F-36
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF
OPERATIONS (UNAUDITED) FOR THE YEAR
ENDED JUNE 30, 1996 F-40
CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF
OPERATIONS (UNAUDITED) FOR THE SIX MONTHS
ENDED DECEMBER 31, 1995 F-41
NOTES TO CONDENSED CONSOLIDATED PRO FORMA
STATEMENTS OF OPERATIONS (UNAUDITED) F-42
38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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 at June 30, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period ended June 30, 1996. 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 at June 30, 1996 and the
results of their operations and their cash flows for each of the years in the
two-year period ended June 30, 1996 in conformity with generally accepted
accounting principles.
/s/ Richard A. Eisner & Company, LLP
- -------------------------------------
New York, New York
August 23, 1996
With respect to Note E(1)
October 28, 1996
F-1
<PAGE>
<TABLE>
<CAPTION>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT JUNE 30, 1996
A S S E T S
(Note E)
Current assets:
<S> <C>
Cash and cash equivalents (Note G) .......................................... $ 2,504,000
Accounts receivable, less estimated doubtful accounts
of $188,000 (Note A) ...................................................... 3,509,000
Current portion of contract installment receivable
(Note A)................................................................... 252,000
Inventories (Note A)......................................................... 208,000
Prepaid expenses and other current assets ................................... 166,000
-----------------
Total current assets ................................................. 6,639,000
Long-term contract installments receivable, less current
portion (Note A)............................................................. 155,000
Fixed assets, at cost, less accumulated depreciation of
$1,364,000 (Notes A and C)................................................... 576,000
Capitalized software costs (Notes A and D)...................................... 1,012,000
Excess of cost over fair value of net assets acquired,
net of accumulated amortization of $372,000
(Notes A and B) ............................................................. 6,737,000
Other assets ................................................................... 38,000
-----------------
T O T A L............................................................. $ 15,157,000
=================
L I A B I L I T I E S
Current liabilities:
Accounts payable............................................................. $ 483,000
Accrued expenses and other current liabilities (Note F)...................... 1,775,000
Advances from customers (Note A)............................................. 1,379,000
Current portion of capital leases payable ................................... 15,000
Notes payable (Note E)....................................................... 1,451,000
-----------------
Total current liabilities............................................. 5,103,000
Notes payable, less current portion (Note E)................................... 5,728,000
Capital leases payable, less current portion ................................... 43,000
-----------------
Total liabilities..................................................... 10,874,000
-----------------
Commitments and contingencies (Note H)
STOCKHOLDERS' EQUITY
(Note G)
Common stock - $.10 par value; authorized 12,000,000
shares; 4,931,320 shares issued and outstanding ............................. 493,000
Additional paid-in capital ..................................................... 13,419,000
(Deficit)...................................................................... (9,629,000)
-----------------
Total stockholders' equity ........................................... 4,283,000
-----------------
T O T A L............................................................. $ 15,157,000
=================
The accompanying notes to financial
statements are an integral part
hereof.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
1996 1995
Revenues:
<S> <C> <C>
System sales................................................................. $ 5,781,000 $ 3,824,000
Services..................................................................... 4,651,000 4,255,000
--------------- -------------
Total revenues........................................................ 10,432,000 8,079,000
---------------- -------------
Costs and expenses:
Cost of systems.............................................................. 2,023,000 1,236,000
Cost of services............................................................. 1,403,000 1,240,000
Purchased research and development
(Note B)................................................................... 3,891,000
Software development costs................................................... 1,438,000 1,387,000
Selling, general and administrative.......................................... 4,966,000 4,136,000
Arbitration (income) (Note H)................................................ (208,000)
--------------- -------------
13,721,000 7,791,000
Earnings (loss) before interest income
and expense.................................................................. (3,289,000) 288,000
Interest income................................................................. 14,000 51,000
Interest (expense)............................................................. (216,000) (249,000)
--------------- -------------
NET EARNINGS (LOSS)............................................................. $ (3,491,000) $ 90,000
=============== =============
Earnings (loss) per share (Note A).............................................. $ (1.24) $ .04
=============== =============
Weighted average number of common and common
equivalent shares............................................................ 2,817,405 2,569,447
=============== =============
The accompanying notes to financial
statements are an integral part
hereof.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Paid-in
Capital
Common Stock
Shares Amount (Deficit) Total
Balance - July 1,
<S> <C> <C> <C> <C> <C>
1994........................ 2,521,743 $ 252,000 $ 8,083,000 $ (6,228,000) $ 2,107,000
Release of escrow
shares...................... 74,667 8,000 43,000 51,000
Issuance of
warrants.................... 21,000 21,000
Net earnings................... 90,000 90,000
------------ ------------ -------------- -------------- --------------
Balance - June 30,
1995........................ 2,596,410 260,000 8,147,000 (6,138,000) 2,269,000
Shares issued to
nonemployee
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
============ ============ ============== ============== ==============
The accompanying notes to financial
statements are an integral part
hereof.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
1996 1995
Cash flows from operating activities:
<S> <C> <C>
Net earnings (loss)............................................................ $ (3,491,000) $ 90,000
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Shares issued to nonemployee directors..................................... 95,000
Provision for doubtful accounts............................................ 162,000 128,000
Depreciation and amortization.............................................. 709,000 735,000
Purchased research and development......................................... 3,891,000
Proceeds from contract installments receivable............................. 20,000 7,000
Changes in operating assets and liabilities, net of effects from purchase
of Pharmakon & JAC:
(Increase) in accounts receivable...................................... (640,000) (314,000)
(Increase) in inventories.............................................. (53,000) (13,000)
(Increase) decrease in prepaid and other assets........................ (28,000) 14,000
Increase (decrease) in accounts payable,
accrued expenses and customer advances............................... 665,000 (406,000)
--------------- ----------------
Net cash provided by operating activities............................ 1,330,000 241,000
--------------- ----------------
Cash flows from investing activities:
Acquisitions of fixed assets................................................... (127,000) (101,000)
Capitalized software costs..................................................... (496,000) (356,000)
Purchase of Pharmakon and JAC, net of cash acquired............................ (3,893,000)
---------------
Net cash (used in) investing activities.............................. (4,516,000) (457,000)
--------------- ----------------
Cash flows from financing activities:
Proceeds from note payable and warrants........................................ 334,000
Repayment of debt.............................................................. (129,000) (23,000)
Proceeds from exercise of warrants............................................. 247,000
Proceeds from private placement................................................ 5,063,000
---------------
Net cash provided by financing activities............................ 5,181,000 311,000
--------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,995,000 95,000
Cash and cash equivalents - beginning of period................................... 509,000 414,000
--------------- ----------------
CASH AND CASH EQUIVALENTS - END OF PERIOD......................................... $ 2,504,000 $ 509,000
=============== ================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest................................................................... $ 64,000 $ 47,000
Income taxes............................................................... 6,000 3,000
Noncash transactions:
Shares released from escrow, recorded as additional
purchase price........................................................... 51,000
Equipment acquired with capital leases..................................... 41,000
The Company made acquisitions for $3,893,000 of cash in the year ended June
30, 1996. The purchase price was allocated to the assets acquired and
liabilities assumed based on their fair value as
indicated in Note B........................................................ 10,004,000
Less cash acquired........................................................... (11,000)
Promissory note issued....................................................... (6,000,000)
Common stock issued.......................................................... (100,000)
---------------
$ 3,893,000
The accompanying notes to financial
statements are an integral part
hereof.
</TABLE>
F-5
<PAGE>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(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.
As discussed in Note E, the Company has $5,728,000 of long-term debt which is
due on August 1, 1997. The Company will have to refinance this indebtedness.
There is no assurance that it will be able to do so on acceptable terms.
[1] Cash equivalents:
The Company considers all highly liquid short-term investments
with a maturity of three months or less to be cash equivalents.
[2] Revenue recognition:
Revenue from the sale of systems is recognized upon delivery,
although payment may be due upon completion of other contractual obligations.
Service revenue is recognized on a straight-line basis over the life of the
service agreements.
[3] Long-term contract installments receivable:
Contract installments receivable arising from sales of systems
with extended payment terms bear interest at rates from 7% to 16% and are due in
monthly installments through 1999.
[4] Inventories:
Inventories, which consist of equipment purchased for resale,
are valued at the lower of cost or market. Cost is determined by the specific
identification method.
[5] 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.
F-6
<PAGE>
(NOTE A) - The Company and its Significant Accounting Policies:
(continued)
[6] 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.
Costs to maintain developed programs and other development
costs incurred prior to achievement of technical feasibility are expensed as
incurred. Such costs were $956,000 and $951,000 for the years ended June 30,
1996 and June 30, 1995, respectively. Software development costs reported on the
consolidated statements of operations include amortization (Note D).
[7] Excess of cost over the fair value of net assets acquired:
The excess of cost over the fair value of net assets acquired,
which arose from the 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: management's plans for future products and operations, market
position and continual acceptance, recent operating results and projected
undiscounted cash flows.
[8] 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.
[9] Earnings (loss) per share:
Earnings (loss) per share are based on the weighted average
number of shares outstanding during each year.
Earnings per share are computed on a primary basis since the
fully diluted basis does not result in further dilution.
F-7
<PAGE>
(NOTE A) - The Company and its Significant Accounting Policies:
(continued)
[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.
[11] Change in accounting principle and recently issued accounting
pronouncements:
In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, " Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), and Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 121 requires, among
other things, that entities identify events or changes in circumstances which
indicate that the carrying amount of an asset may not be recoverable. SFAS 123
requires, among other things, that companies establish a fair value based method
of accounting or disclosure for stock-based compensation plans. These statements
are effective for the Company's fiscal year commencing July 1, 1996. The Company
believes that adoption of SFAS 121 and SFAS 123 will not have a material impact
on its financial statements. The Company expects to continue to account for
employee stock-based compensation in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," using intrinsic
values with appropriate disclosures using the fair value based method. The
Company has not elected to adopt SFAS 123 early.
(NOTE B) - Acquisitions:
On June 17, 1996, Digimedics and Information Handling Services Group, Inc.
("IHS") and its wholly owned subsidiary, Continental Healthcare Systems, Inc.
("Continental"), entered into an Asset Purchase Agreement whereby Digimedics
purchased from Continental its Pharmakon division ("Pharmakon"). Also 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 (Note E) for both acquisitions. Digimedics also incurred
acquisition costs of $238,000 in cash (of which approximately $26,000 was to a
related party) and issued 30,769 shares of common stock as a fee valued at
$100,000 to related parties.
F-8
<PAGE>
(NOTE B) - Acquisitions: (continued)
The purchase price has been allocated to the assets acquired, including cash of
$11,000, and liabilities assumed based on their fair values as follows:
Purchase price:
Cash....................................... $ 3,666,000
Note payable............................... 6,000,000
Costs of acquisition....................... 338,000
------------------
T o t a l........................... $ 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.
As a result of the above-mentioned purchase, the Company has $2,017,000 of
assets in the United Kingdom. The balance of the assets are in the United
States.
Pro forma summary of consolidated operations, based on the original agreement,
assuming the acquisition of Pharmakon and JAC has taken place on July 1, 1994:
Year Ended June 30,
1996 1995
-------------------- ------------
(Unaudited)
Revenue............... $ 18,965,000 $ 17,526,000
==================== ====================
Net income............ $ 26,000 $ 37,000
==================== ====================
Earnings per share.... $ .01 $ .01
==================== ====================
F-9
<PAGE>
(NOTE B) - Acquisitions: (continued)
Digimedics entered into an agreement with Continental to perform Continental's
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
is to be paid approximately $1,237,000 plus 30% of amounts collected for
performing the foregoing services.
(NOTE C) - Fixed Assets:
Fixed assets consist of the following as at June 30, 1996:
Computer, machinery, and office
equipment.............................. $ 1,614,000
Furniture...................................... 310,000
Leasehold improvements........................ 16,000
------------
T o t a l............................. 1,940,000
Less accumulated depreciation................... 1,364,000
-----------
B a l a n c e......................... $ 576,000
===========
(NOTE D) - Capitalized Software Costs:
June 30,
1996 1995
Balance, beginning of year
(net of accumulated amortization).....$ 998,000 $ 1,079,000
Additions................................ 496,000 356,000
Amortization............................. (482,000) (437,000)
--------------- ---------------
Balance, end of year (net of
accumulated amortization).............$ 1,012,000 $ 998,000
=============== ================
F-10
<PAGE>
(NOTE E) - Notes Payable:
At June 30, 1996 the Company has outstanding notes payable as follows:
Promissory note issued in connection with the acquisition of Pharmakon
and JAC (the "Acquisition Note") (Note B) bearing interest at
Citibank N.A.'s base rate 8.25% at June 30, 1996 payable monthly
commencing July 31, 1996, due on or before November 30, 1996,
collateralized by substantially all 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)....................$ 6,000,000
Notes issued during the years ended June 30, 1995 and June 30, 1994,
bearing interest at 12% per annum, due on or before August 1, 1997,
collateralized by the trade accounts receivable of Digimedics which
has a balance at June 30, 1996 of $1,069,000, net of estimated
doubtful accounts of $66,000, (including $804,000 issued to
directors) (2)..................... 1,179,000
-----------------
7,179,000
Less current maturities.................. 1,451,000
-----------------
$5,728,000
===================
(1) On October 28, 1996 the promissory note was amended to provide for an
extension of the due date to August 1, 1997. The extension agreement
provides for an immediate payment of $1 million and monthly payments of
$100,000 for principal and interest. In addition, the interest rate was
increased to 15% on approximately $3,763,000 with the original rate
remaining for $1,237,000. The agreement provides for the monthly
payments to be first applied to the interest on the portion of the loan
subject to the original rate. The remainder is to be applied to the
interest, then principal, of the loan subject to 15%. As a result of
this amendment, $4,549,000 of this liability is classified as long-term
debt.
F-11
<PAGE>
(NOTE E) - Notes Payable: (continued)
(2) These notes are subordinated to the acquisition note. In conjunction
with the issuance of these notes the Company issued warrants to
purchase 1,040,025 shares of common stock for $0.50 per share and
129,695 shares for $1.25 per share, exercisable through September 30,
2004. The Company recorded debt discount and additional paid-in
capital. The debt discount was expensed in prior years since the notes
were initially due prior to the current fiscal year. During May 1996,
495,025 of the $0.50 warrants were exercised.
(NOTE F) - Accrued Expenses and Other Current Liabilities:
Accrued expenses and other current liabilities consist of the following at June
30, 1996:
Wages and related benefits......................................... $ 562,000
Private placement costs............................................ 282,000
Interest........................................................... 312,000
Acquisition costs.................................................. 133,000
Other.............................................................. 486,000
------------
T o t a l................................................. $ 1,775,000
============
(NOTE G) - Stockholders' Equity:
[1] Stock options and warrants:
Pursuant to the Company's Stock Option Plan (the "Plan") the
number of shares reserved for issuance is equal to the lower of twenty percent
of the outstanding shares of common stock or 500,000 shares. 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 107,772
additional options may be issued under this plan.
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 and 60,685 additional options may be granted under 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.
F-12
<PAGE>
(NOTE G) - Stockholders' Equity: (continued)
[1] Stock options and warrants: (continued)
The following table sets forth summarized information
concerning the Company's stock options:
Number of
Shares Exercise Price
Outstanding - July 1, 1994................... 622,266 $1.00 - $5.25
Options granted.............................. 35,004 $1.00 - $1.19
Options canceled............................. (78,705) $1.00 - $1.76
----------
Outstanding - June 30, 1995................. 578,565 $1.00 - $5.25
Options granted............................. 80,002 $1.00 - $1.76
Options canceled............................ (56,893) $1.00 - $1.76
----------
Outstanding - June 30, 1996................. 601,674 $1.00 - $5.25
==========
Exercisable................................. 438,060 $1.00 - $5.25
==========
The Company had outstanding warrants for the purchase of
87,000 shares of its common stock at $5.775 per share which expired on August 5,
1996. The Company also 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).
[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 net proceeds of approximately $5,063,000 after expenses
totaling approximately $437,000 (of which approximately $65,000 was to a related
party). The Company also issued 30,768 shares to related parties as a placement
fee valued at $100,000.
F-13
<PAGE>
(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,
1997 . . . . . . . . . . . . . . . . $ 477,000
1998 . . . . . . . . . . . . . . . . 487,000
1999 . . . . . . . . . . . . . . . . 228,000
2000 . . . . . . . . . . . . . . . . 174,000
2001 . . . . . . . . . . . . . . . . 153,000
Thereafter . . . . . . . . . . . . . 101,000
-----------
T o t a l. . . . . . . . . $1,620,000
==========
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 June 30, 1996 and June 30, 1995
aggregated $213,000 and $212,000, respectively.
[2] Software license agreement:
In September 1990, the Company entered into an agreement to
acquire a perpetual exclusive license for a computerized information system for
hospital operating rooms for $750,000. In addition to the purchase price, the
Company was required to pay royalties of 5% to 15% of sales of the product. To
maintain exclusivity, the Company was required to pay cumulative royalty
payments of $675,000, by September 1995 ($375,000 by September 1994 and an
additional $300,000 by September 1995).
Subsequently, the licensor asserted a variety of breach of
contract and other violations of the agreement and commenced an arbitration
proceeding in June 1992. On November 7, 1994 the arbitral panel rendered an
award confirming the Company's exclusivity for its Surgiware product, and its
license for another hospital scheduling software product developed by the
licensor. The award also established December 31, 1994 as the due date for the
Company to make the payment of $375,000 due September 1994 to retain its
exclusivity.
F-14
<PAGE>
(NOTE H) - Commitments and Contingencies: (continued)
[2] Software license agreement: (continued)
During the fourth quarter of the year ended June 30, 1994 the
Company expensed costs of $1,222,000 in connection with the arbitration. Such
costs included $208,000 which the Company intended to pay to the licensor to
retain exclusivity; the balance is principally legal fees and expenses in
connection with the arbitration. During the year ended June 30, 1995 the Company
elected not to make the payments required to maintain exclusivity. Accordingly,
the liability recorded in the prior year was reversed.
[3] Release of common shares held in escrow:
On November 10, 1994 the Company was informed by the Superior
Court of California that it would be required to release 74,667 shares of its
common stock, which were being held in escrow, to former stockholders of
Digimedics Corporation, a wholly owned subsidiary. Upon releasing the shares the
Company increased its number of common shares outstanding and, accordingly,
recorded additional capital and increased the excess of cost over fair value of
net assets acquired, by approximately $51,000 which is being amortized over the
remaining life of such asset.
[4] Other matters:
Substantially all of the Company's cash is on deposit at a
major metropolitan bank.
(NOTE I) - Income Taxes:
At June 30, 1996 the Company has available net operating loss
carryforwards to reduce future federal taxable income of approximately
$7,500,000 which is limited as to the amount which may be used in any one year.
At June 30, 1996 the Company also has available general business tax credit
carryforwards to reduce future current federal income tax expense of
approximately $321,000. The net operating loss carryforwards and business tax
credit carryforwards expire in various amounts through 2009 and 2011,
respectively.
SFAS 109 requires the recognition of deferred tax assets and
liabilities for both the expected future tax impact of differences between the
financial statements and tax basis of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. SFAS 109 additionally requires the establishment of a valuation
allowance to reflect the likelihood of realization of deferred tax assets. At
June 30, 1996 the Company has total deferred tax liabilities of approximately
$396,000 and total deferred tax assets of approximately $5,034,000. The Company
has recorded a valuation allowance for the amount by which deferred tax assets
exceed deferred tax liabilities and, as a result, the Company has not reported
any liability or asset for deferred taxes at June 30, 1996.
F-15
<PAGE>
(NOTE I) - Income Taxes: (continued)
The major deferred tax asset (liability) items at June 30,
1996 are as follows:
Net operating loss carryforwards.............. $ 3,019,000
Business tax credit carryforwards............. 321,000
Software cost capitalization.................. (396,000)
Purchased research and development............ 1,551,000
Other......................................... 143,000
--------------
4,638,000
Valuation allowance............................................. (4,638,000)
--------------
$ - 0 -
===============
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:
Year Ended June 30,
1996 1995
Income tax provision (benefit) -
statutory rate................................ $(1,187,000) $ 30,000
Provision for state income taxes
(benefit) - net of federal
benefit (expense)............................. (187,000) 7,000
(Reduction) increase in valuation
allowance on deferred tax assets.............. 1,374,000 (37,000)
----------- -----------
$ - 0 - $ - 0 -
=========== ===========
F-16
<PAGE>
MEDIWARE INFORMATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 1996
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,372,000
Accounts receivable, less estimated doubtful
accounts of $274,000 5,587,000
Current portion of contract installment receivable 226,000
Inventories 155,000
Prepaid expenses and other current assets 225,000
------------
Total current assets 7,565,000
Long-term contract installments receivable, less current portion 59,000
Fixed assets, at cost, less accumulated depreciation of $1,479,000 653,000
Capitalized software costs 1,104,000
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $550,000 6,559,000
Other assets 55,000
------------
TOTAL $15,995,000
============
LIABILITIES
Current liabilities:
Accounts payable $573,000
Accrued expenses and other current liabilities 1,557,000
Advances from customers 2,316,000
Current portion of capital leases payable 19,000
Notes payable 6,094,000
------------
Total current liabilities 10,559,000
Capital leases payable, less current portion 35,000
------------
Total liabilities 10,594,000
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;
4,945,179 issued and outstanding shares 495,000
Additional paid-in capital 13,440,000
Cumulative foreign currency translation adjustment 24,000
(Deficit) (8,558,000)
------------
Total stockholders' equity 5,401,000
------------
TOTAL $15,995,000
============
F-17
<PAGE>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Six Months Ended December 31,
-------------------------------
1996 1995
Revenues:
System sales $ 3,401,000 $ 3,024,000
Services 5,630,000 1,998,000
-------------------------------
Total revenues 9,031,000 5,022,000
Costs and expenses:
Cost of systems 1,088,000 767,000
Cost of services 1,608,000 891,000
Software development costs 1,136,000 756,000
Selling, general and administrative 3,780,000 1,970,000
-------------------------------
7,612,000 4,384,000
Earnings before interest income, interest 1,419,000 638,000
Interest income 46,000 -
Interest (expense) (354,000) (108,000)
-------------------------------
Earnings before income taxes 1,111,000 530,000
Income tax (40,000) (3,000)
-------------------------------
NET EARNINGS $ 1,071,000 $ 527,000
===============================
Earnings per share $ 0.18 $ 0.16
Weighted average number of common
and common equivalent shares 5,858,000 3,888,000
F-18
<PAGE>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
--------------------------
Dec-31 Dec-31
1996 1995
--------------------------
Cash flows from operating activities:
Net earnings $1,071,000 $527,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for doubtful accounts 86,000 30,000
Depreciation and amortization 520,000 325,000
Proceeds from contract installments receivable 122,000 3,000
Changes in operating assets and liabilities:
(Increase) in accounts receivable (2,164,000) (526,000)
Decrease (Increase) in inventory 53,000 (4,000)
(Increase) in prepaid and other assets (76,000) (150,000)
Increase in accounts payable, accrued expenses 805,000 328,000
and customer advances -------------------------
Net cash provided by operating activities 417,000 533,000
Cash flows from investing activities:
Acquisitions of fixed assets (192,000) (94,000)
Capitalized software costs (320,000) (208,000)
-------------------------
Net cash (used in) investing (512,000) (302,000)
activities
Cash flows from financing activities:
Common stock issued 23,000 64,000
Repayment of long-term debt (1,084,000) (100,000)
-------------------------
Net cash used in financing activities (1,061,000) (36,000)
Effect of exchange rate changes on cash and cash 24,000
equivalents
NET (DECREASE) INCREASE IN CASH AND CASH (1,132,000) 195,000
EQUIVALENTS
Cash and cash equivalents, beginning of period 2,504,000 509,000
-------------------------
F-19
<PAGE>
CASH AND CASH EQUIVALENTS, END OF $1,372,000 $704,000
PERIOD
=========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $283,000 $22,000
Income taxes $8,000 $3,000
F-20
<PAGE>
MEDIWARE INFORMATION SYSTEMS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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 statements 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 Company's audited financial statements for the year ended June 30, 1996
included in the Company's annual report filed on Form 10-KSB and elsewhere
herein.
The results of operations for the six months ended December 31, 1996 are
not necessarily indicative of the results to be expected for the entire fiscal
year.
2. Earnings (Loss) Per Share:
Earnings per share are computed on the basis of the weighted average
number of common shares outstanding during each period. Common share equivalents
relating to shares issuable upon exercise of stock options and warrants are
included in the computation when the results are dilutive. In addition, net
earnings are adjusted under the modified treasury stock method where
appropriate.
3. Income Taxes:
The tax expense is minimal due to the carry forward benefit from the net
operating loss.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Mediware Information Systems, Inc.
Melville, New York
We have audited the accompanying statements of operations and cash
flows of Continental Healthcare Systems, Inc. - Pharmakon Division for the years
ended November 30, 1995 and November 30, 1994. These financial statements are
the responsibility of the management of Continental Healthcare Systems, Inc.
("Continental"). 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 results of operations and cash flows of
Continental Healthcare Systems, Inc. - Pharmakon Division for the years ended
November 30, 1995 and November 30, 1994 in conformity with generally accepted
accounting principles.
/s/ Richard A. Eisner & Company, LLP
- ------------------------------------
Richard A. Eisner & Company, LLP
New York, New York
May 8, 1996
F-22
<PAGE>
CONTINENTAL HEALTHCARE SYSTEMS, INC. - PHARMAKON DIVISION
STATEMENTS OF OPERATIONS
Year Ended November 30,
1995 1994
Revenues:
System sales (Note A).............................. $3,632,000 $4,592,000
Services........................................... 3,298,000 2,897,000
---------- ----------
Total revenues............................... 6,930,000 7,489,000
---------- ----------
Costs and expenses:
Cost of systems.................................... 1,876,000 2,118,000
Cost of services................................... 964,000 981,000
Software development costs......................... 1,354,000 1,241,000
Selling, general and administrative................ 2,147,000 2,542,000
---------- ----------
Total costs and expenses (Note A)........... 6,341,000 6,882,000
---------- ----------
Earnings before provision for income taxes........... 589,000 607,000
Provision for income taxes (Notes A and C)............ 236,000 243,000
---------- ---------
NET EARNINGS.......................................... $ 353,000 $ 364,000
========== ==========
The accompanying notes to
financial statements are an
integral part hereof.
F-23
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL HEALTHCARE SYSTEMS, INC. - PHARMAKON DIVISION
STATEMENTS OF CASH FLOWS
Year Ended November 30,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . . . $ 353,000 $ 364,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation........................................ 35,000 31,000
Amortization of capitalized software
costs............................................ 145,000 98,000
Proceeds from contract installments
receivable....................................... 119,000 64,000
Changes in operating assets and
liabilities:
Decrease in accounts receivable.............. 259,000 68,000
Decrease (increase) in inventories........... 52,000 (139,000)
Increase (decrease) in accounts
payable, accrued expenses and other
current liabilities....................... 130,000 (153,000)
Increase (decrease) in advances from
customers................................. 180,000 (39,000)
---------- ----------
Net cash provided by operating
activities.......................... 1,273,000 294,000
---------- ---------
Cash flows from investing activities:
Acquisitions of fixed assets (51,000) (58,000)
Capitalized software costs................................. (340,000) (204,000)
----------- ----------
Net cash (used in) investing
activities............................ (391,000) (262,000)
----------- ----------
Cash flows from financing activities:
(Decrease) in interdivisional account. (882,000) (32,000)
----------- ----------
NET CHANGE IN CASH................................................. $ - 0 - $ - 0 -
=========== ========
</TABLE>
The accompanying notes to
financial statements are an
integral part hereof.
F-24
<PAGE>
CONTINTENTAL HEALTHCARE SYSTEMS, INC. - PHARMAKON DIVISION
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company and its Significant Accounting Policies:
Continental Healthcare Systems, Inc. - Pharmakon Division
("Pharmakon"), a division of Continental Healthcare Systems, Inc.
("Continental"), develops, installs and maintains computerized information
systems for hospital pharmacies.
Pharmakon is dependent upon Continental for financial support
in the conduct of its operations. The financial statements may not necessarily
be indicative of the results of operations had Pharmakon operated without the
financial support of Continental.
Certain costs and expenses which are common to Pharmakon and
the other operations of Continental have been recorded in the financial
statements of Pharmakon based upon either the proportionate share of revenue or
the proportionate number of employees, as determined by management. Such costs
and expenses allocated to Pharmakon aggregated $1,438,000 and $1,767,000 for the
years ended November 30, 1995 and November 30, 1994, respectively. In the
opinion of management, these allocations to Pharmakon are reasonable and
necessary to reflect all of the costs of doing business as if it were a
stand-alone company.
Interest expense on interdivisional advances has been
excluded.
Continental also sells Pharmakon software in the United
Kingdom through its affiliate, JAC Computer Services Limited ("JAC"). Sales of
Pharmakon software to JAC amounted to $26,000 and $7,000 for the years ended
November 30, 1995 and November 30, 1994, respectively.
In May 1996 Continental and a wholly owned subsidiary of
Mediware Information Systems, Inc. ("Mediware") signed a letter of intent
whereby substantially all operating assets of Pharmakon excluding accounts
receivable will be sold to Mediware.
[1] Revenue recognition:
Revenue from the sale of software systems is recognized upon
delivery. Installation, training and other systems sales revenues are recognized
over the duration of the related effort. Service revenue is recognized ratably
over the term of related service agreements.
[2] Software development costs:
In accordance with Statement of Financial Accounting Standards
No. 86, Pharmakon capitalizes certain costs associated with the development of
computer software.
F-25
<PAGE>
(NOTE A) - The Company and its Significant Accounting Policies:
(continued)
Such costs, in addition to costs of purchased software, are amortized over the
software'sestimated useful life of five years. Management periodically evaluates
the recoverability of capitalized software development costs and write-downs are
taken if required. Costs tomaintain developed programs and other development
costs incurred prior to achievement of technical feasibility are expensed as
incurred. Such costs were $1,209,000 and $1,143,000 for the years ended November
30, 1995 and November 30, 1994, respectively. Software development costs on the
statement of operations include amortization (Note B).
[3] Income taxes:
Pharmakon's operations have historically been included in the
consolidated income tax returns filed by Continental's parent company. Income
tax expense in the accompanying financial statements has been computed on a
stand-alone basis with the related taxes payable reflected as an adjustment to
the interdivisional account.
[4] 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.
(NOTE B) - Amortization of Capitalized Software Costs:
November 30,
----------------------------------
1995 1994
---------- ------------
Balance, beginning of year (net
of accumulated amortization)............. $ 617,000 $ 511,000
Additions................................. 340,000 204,000
Amortization.............................. (145,000) (98,000)
----------- -----------
Balance, end of year (net of
accumulated amortization)................. $ 812,000 $ 617,000
========== ==========
F-26
<PAGE>
(NOTE C) - Income Taxes:
The provision for income taxes on a stand-alone basis consists of the
following:
Year Ended
November 30,
------------------------------------------
1995 1994
------------------ ------------------
Federal........................ $ 194,000 $ 199,000
State.......................... 42,000 44,000
T o t a l............. $ 236,000 $ 243,000
================== ==================
(NOTE D) - Interdivisional Account:
A summary of the interdivisional account is as follows:
Year Ended
November 30,
------------------------------------------
1995 1994
------------------ ------------------
Balance, beginning of year..... $ 4,872,000 $ 4,540,000
Net earnings................... 353,000 364,000
Net decrease................... (882,000) (32,000)
------------------ ------------------
T o t a l............ $ 4,343,000 $ 4,872,000
================== ==================
F-27
<PAGE>
CONTINENTAL HEALTHCARE SYSTEMS, INC. - PHARMAKON DIVISION
CONDENSED STATEMENTS OF OPERATIONS
AND CASH FLOWS
(UNAUDITED)
In the opinion of management, the accompanying unaudited, condensed
statements of operations and cash flows contains all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the results of
operations of Pharmakon for the interim period presented (consistent with
Pharmakon's fiscal reporting period). The statement of operations has 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 audited financial statements of Continental
Healthcare Systems, Inc. - Pharmakon Division and notes thereto contained
elsewhere herein. The results of the interim period are not necessarily
indicative of the results for the full fiscal year.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
December 1, December 1,
1995 through 1994 through
June 17, 1996 May 31, 1995
------------- -------------
Revenue :
System sales $ 1,446,000 $ 1,176,000
Services 1,981,000 1,611,000
------------- -------------
Total revenues 3,427,000 2,787,000
------------- -------------
Costs and Expenses
Cost of systems 1,029,000 669,000
Cost of services 528,000 419,000
Software development 809,000 780,000
Selling, general & administrative 1,097,000 975,000
------------- -------------
Total costs and expenses 3,463,000 2,843,000
------------- -------------
NET (LOSS) $ (36,000) $ (56,000)
============== =============
F-28
<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL HEALTHCARE SYSTEMS, INC. - PHARMAKON DIVISION
CONDENSED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
December 1, December 1,
1995 through 1994 through
June 17, 1996 May 31, 1995
============= ============
<S> <C> <C>
Cash flows from operating activities:
Net (loss)..................................................... $ (36,000) $ (56,000)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation............................................ 17,000 19,000
Amortization of capitalized software costs.............. 70,000 83,000
Changes in contract installments receivable............. (66,000) 66,000
Changes in operating assets and liabilities:
Decrease in accounts receivable..................... 143,000 129,000
Decrease in inventories............................. 130,000 26,000
(Decrease) increase in accounts payable,
accrued expenses and other current (293,000) 65,000
liabilities....................................
(Decrease) increase in advances
from customers................................. (140,000) 83,000
-------------- --------------
Net cash (used in) provided by operating (175,000) 415,000
activities.........................................................
-------------- --------------
Cash flows from investing activities:
Acquisitions of fixed assets................................... (53,000) (26,000)
Capitalized software costs..................................... (16,000) (180,000)
-------------- --------------
Net cash (used in) investing activities............. (69,000) (206,000)
-------------- --------------
Cash flows from financing activities:
Increase (decrease) in interdivisional control account......... 244,000 (209,000)
-------------- --------------
NET INCREASE IN CASH............................................... $ 0 $ 0
============== ==============
</TABLE>
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
JAC Computer Services Limited
In our opinion, the accompanying balance sheet and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of JAC Computer Services Limited (a
United Kingdom corporation) at November 30, 1995 and 1994, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
June 17, 1996
F-30
<PAGE>
<TABLE>
<CAPTION>
JAC Computer Services Limited (a United Kingdom corporation)
Balance Sheet
November 30, 1995 and 1994
(Dollars in 000's)
1995 1994
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 515 $ 558
Accounts receivable 223 267
Inventories 43 34
Prepaids and other current assets 78 83
Income taxes recoverable 33
--------
Total current assets 892 942
------- -------
Properties, net (Note 2) 52 77
Intangibles 151 8
Goodwill, net (Note 1) 817 897
Total assets $1,912 $1,924
Liabilities and stockholder's equity Current liabilities:
Accounts payable $ 129 $ 123
Accrued expenses and other current 124 143
liabilities
Deferred revenue 505 426
Income taxes payable 72
Deferred income taxes 49
--------
Total current liabilities 807 764
------- -------
Stockholder's equity:
Common stock; par value (1 pound)
100,000 shares authorized, 30,000 47 47
shares issued and outstanding
Additional paid-in capital 1,054 1,054
Retained earnings 26 63
Cumulative foreign currency (22) (4)
-------- --------
translation adjustment
Total stockholder's equity 1,105 1,160
------- ------
Commitment (Note 3)
Total liabilities and stockholder's $1,912 $1,924
equity
</TABLE>
See accompanying notes to financial statements
F-31
<PAGE>
JAC Computer Services Limited (a United Kingdom corporation) Statement of
Operations and Retained Earnings For the years ended November 30, 1995 and 1994
(Dollars in 000's)
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Sales 1,444 $ 1,593
Cost of goods sold 880 947
------- ------
Gross profit 564 646
Selling, general and administrative 608 516
------- -------
expenses
Income (loss) from operations (44) 130
Other income, net 24 9
------- --------
Income (loss) before income taxes (20) 139
------ -------
Provision for income taxes 17 82
------- -------
Net income (loss) (37) 57
Retained earnings, beginning of year 63 6
------ --------
Retained earnings, end of year $ 26 $ 63
</TABLE>
See accompanying notes to financial statements
F-32
<PAGE>
JAC Computer Services Limited (a United Kingdom corporation) Statement of Cash
Flows For the years ended November 30, 1995 and 1994 (Dollars in 000's)
1995 1994
Cash flows - operating activities:
Net income (loss) $ (37) $ 57
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 114 122
Changes in assets and liabilities:
Accounts receivable 41 24
Inventories (9) 5
Prepaids and other current assets 1 2
Accounts payable 8 70
Accrued expenses and other
liabilities(16) 37
Deferred revenue 87 6
Deferred income taxes/income
taxes payable (54) 66
---- ------
Net cash provided by
operating activities 135 389
------ ------
Cash flows - investing activities:
Purchase of property and equipment (22) (49)
Increase in intangible assets (147)
------
Net cash used in
investing activities (169) (49)
------ -------
Effect of exchange rate changes on
cash and cash equivalents (9) 18
------- -------
Net increase (decrease) in cash
and equivalents (43) 358
------- ------
Cash and cash equivalents at
beginning of year 558 200
------ ------
Cash and cash equivalents at
end of year $ 515 $ 558
See accompanying notes to financial statements.
F-33
<PAGE>
JAC Computer Services Limited (a United Kingdom corporation)
Notes to Financial Statements
November 30, 1995 and 1994
(Dollars in 000's)
1. The Company and significant accounting policies
JAC Computer Services Limited (JAC) is a hospital pharmacy software
vendor which conducts business primarily in the United Kingdom. JAC is
an indirect, wholly-owned subsidiary of TBG Holdings NV (TBG).
JAC is headquartered in the United Kingdom and transacts its business
and maintains its accounting records in pounds sterling. The
accompanying financial statements have been presented in United States
dollars as translated as described below for reporting its results to
its United States parent which is also wholly-owned by TBG.
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.
Cash and cash equivalents
Cash and cash equivalents include all balances and highly liquid
investments with an original maturity of three months or less.
Properties, net
Deprecation and amortization are computed using the straight-line
method over the estimated useful lives of the respective assets ranging
from three to five years.
Inventories
Inventories, which consist of components and various computer parts,
are recorded at the lower of cost or market. Cost is determined using a
first-in, first-out (FIFO) method.
Intangibles
Intangibles consist of unamortized capitalized software development
costs. Software development costs are capitalized in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Software development costs will be amortized on a straight-line basis
over their estimated economic life, commencing when each product is
available for general release.
Goodwill
Goodwill represents the excess of consideration paid for JAC in May
1993 over the fair value of net assets acquired. Goodwill amortization
is computed over the estimated
F-34
<PAGE>
benefit life which is 15 years. Accumulated amortization of goodwill
was $165 and $100 at November 30, 1995 and 1994, respectively.
Translation of foreign currency
Assets and liabilities of the Company are translated into U.S. dollars
at the exchange rates in effect at the end of the period. Revenue and
expense accounts are translated at a weighted average of exchange rates
which were in effect during the year. Translation adjustments that
arise from translating assets and liabilities from local currency to
U.S. dollars are accumulated in a separate component of stockholder's
equity. Transaction gains and losses that arise from exchange rate
changes on transactions denominated in a currency other than local
currency are included in results of operations as incurred.
Revenue recognition
Revenue is recognized when the software products are shipped to the
customer. Revenue from postcontract support (PCS) arrangements is
deferred and recognized over the period of the PCS.
Income taxes
The Company utilizes the liability method of accounting for income
taxes. Under the liability method, deferred taxes are determined based
on the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. The Company's only
significant temporary difference is the intangible assets recorded
related to capitalized software. The primary difference between the
Company's effective tax rate and the foreign statutory tax rate (33%)
is the effect of goodwill amortization of $68. The Company paid income
taxes of $74 and $11 during the years ended November 30, 1995 and 1994,
respectively.
2. Properties, net
Properties and equipment consist of the following at December 31:
1995 1994
Computer equipment $ 123 $ 117
Office equipment 43 30
Motor vehicles 19 19
------ ------
185 166
Less accumulated
depreciation and
amortization 133 89
----- ------
$ 52 $ 77
F-35
<PAGE>
3. Lease commitments
JAC leases its office space under an operating lease agreement which
expires in 2004. Annual lease rental expense under this lease in $32
per year.
4. Subsequent event
A dividend of $249 was paid on April 11, 1996.
F-36
<PAGE>
JAC COMPUTER SERVICES LIMITED
CONDENSED STATEMENTS OF OPERATIONS AND CASH FLOWS
(UNAUDITED)
In the opinion of management, the accompanying unaudited, condensed
statement of operations and cash flows contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the results of
operations and cash flows of JAC Computer Services Limited (a United Kingdom
corporation) (JAC) for the interim periods presented. Such financial statements
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 audited financial statements of JAC and
notes thereto contained elsewhere herein. On June 17, 1996, JAC was purchased by
Mediware Information Systems, Inc. These financial statements reflect the
results of operations and cash flows through the acquisition date. The results
of the interim period are not necessarily indicative of the results for the full
fiscal year.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in 000's)
December 1, 1995 December 1, 1994
through through
June 17, 1996 May 31, 1995
----------------- -----------------
Sales $ 883 $ 724
Cost of goods sold 575 435
----------------- -----------------
Gross profit 308 289
Selling, general and administrative
expenses 344 320
----------------- -----------------
(Loss) from operations (36) (31)
Other income, net 11 12
----------------- -----------------
(Loss) before taxes (25) (19)
Provision for income taxes 4 5
----------------- -----------------
Net (Loss) $ (29) $ (24)
================= =================
F-37
<PAGE>
<TABLE>
<CAPTION>
JAC COMPUTER SERVICES LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in 000's)
December 1, 1995 December 1, 1994
through through
June 17, 1996 May 31, 1995
----------------- ----------------
<S> <C> <C>
Cash flows - operating activities:
Net (loss)..................................................... $ (29) $ (24)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization........................ 57 55
Changes in assets and liabilities:
Accounts Receivable.............................. 36 93
Inventories...................................... (65) 17
Prepaids and other
current assets................................. 18 19
Accounts payable, accrued
expenses and other liabilities............... (36) (40)
Deferred revenue................................. (190 ) (161)
Deferred income taxes/income
taxes payable 3 (52)
--------------- ---------------------
Net cash (used in) operating activities.......... (206) (93)
--------------- ---------------------
Cash flows - investing activities:
Purchase of property and equipment............................. (15) (20)
Increase in intangible assets.................................. (46) (60)
--------------- ---------------------
Net cash (used in) investing activities........... (61) (80)
--------------- ---------------------
Cash flows - financing activities:
Dividends paid................................................. (249)
--------------- ---------------------
Effect of exchange rate changes on cash
and cash equivalents............................................ 12 58
--------------- ---------------------
(Decrease) in cash and cash equivalents............................ (504) (115)
--------------- ---------------------
Cash and cash equivalents at the beginning
of the period................................................... 515 558
--------------- ---------------------
Cash and cash equivalents at the end of period..................... $ 11 $ 443
=============== =====================
</TABLE>
F-38
<PAGE>
MEDIWARE INFORMATION SYSTEMS, INC. & SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following pro forma financial information gives effect to the
acquisition of Continental Healthcare Systems, Inc. - Pharmakon Division
(Pharmakon) and JAC Computer Services Limited (JAC). The consolidated pro forma
statement of operations for the fiscal year ended June 30, 1996 combines the
audited consolidated statement of operations of Mediware for the fiscal year
ended June 30, 1996 with the unaudited statements of operations of Pharmakon and
JAC for the period beginning July 1, 1995 through June 17, 1996 as if the
acquisitions and the private placement by Mediware of 1,352,000 shares of its
common stock had occurred on July 1, 1995. The consolidated pro forma statement
of operations for the six-months ended December 31, 1995 combines the unaudited
condensed consolidated statement of operations of Mediware for the six months
ended December 31, 1995 with the unaudited condensed statements of operations of
Pharmakon and JAC for the six-months ended November 30, 1995 (the historical
six-month period of the acquired business) as if the acquisitions and the
private placement referred to above occurred on July 1, 1995. The transactions
were accounted for as a purchase in accordance with Accounting Principles Board
Opinion No. 16.
The consolidated pro forma statements of operations should be read
in conjunction with the notes thereto and the audited and unaudited financial
statements and notes thereto contained elsewhere herein. The consolidated pro
forma statements of operations are not necessarily indicative of what the
results of operations would have been had the transaction occurred earlier, nor
do they purport to represent the future results of operations of Mediware.
F-39
<PAGE>
<TABLE>
<CAPTION>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
(UNAUDITED)
Historical Pro Forma Pro Forma
Adjustments Consolidated
Mediware JAC Pharmakon
----------- ----------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenue
System Sales $ 5,781,000 $ 3,631,000 $ 9,412,000
Services 4,651,000 3,423,000 8,074,000
Sales - U.K. $1,479,000 1,479,000
----------- ----------- ------------ ============
------------
Total revenues 10,432,000 1,479,000 7,054,000 18,965,000
----------- ----------- ------------
------------
Costs and Expenses:
Cost of systems 2,023,000 2,158,000 4,181,000
Cost of services 1,403,000 949,000 2,352,000
Cost of sales - U.K. 943,000 943,000
Purchased research and development 3,891,000 $(3,891,000)(a) 0
Software Development 1,438,000 1,400,000 2,838,000
294,000(b)
Selling, general & administrative 4,966,000 612,000 2,163,000 (71,000)(c) 7,964,000
----------- ----------- ------------ ---------------
------------
Total costs and expenses 13,721,000 1,555,000 6,670,000 (3,668,000) 18,278,000
----------- ----------- ------------ ---------------
-----------
Earnings (loss) before interest income, (3,289,000) (76,000) 384,000 (3,668,000) 687,000
interest expense and provision
for income taxes
Interest income 14,000 22,000 36,000
(495,000)(d)
Interest (expense) (216,000) 18,000(e) (693,000)
------------ ----------- ------------ ---------------
------------
Earnings before provision for income (3,491,000) (54,000) 384,000 3,191,000 30,000
taxes
Provision for income taxes 4,000 154,000 (154,000)(f) 4,000
------------ ----------- ------------ ---------------
-----------
NET EARNINGS $(3,491,000) $ (58,000) $230,000 $3,345,000 $ 26,000
============ =========== ============ ============== ============
------------
Pro forma earnings per share $ 0.01
------------
Pro forma weighted average number of
common and common equivalent
shares (g) 4,550,000
============
</TABLE>
F-40
<PAGE>
<TABLE>
<CAPTION>
MEDIWARE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995
(UNAUDITED)
Historical
---------------------------------------------------------------------
Six Months Ended
12/31/95 11/30/95 11/30/95 Pro Forma Pro Forma
-------------- ------------ ------------
Mediware JAC Pharmakon Adjustments Consolidated
-------------- ------------ ------------ ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenue:
System Sales $ 3,024,000 $ 2,456,000 $ 5,480,000
Services 1,998,000 1,687,000 3,685,000
Sales - U.K. 720,000 720,000
-------------- ------------ ------------ ----------------
Total revenues 5,022,000 720,000 4,143,000 9,885,000
-------------- ------------ ------------
Costs and Expenses:
Cost of Systems 767,000 1,207,000 1,974,000
Cost of Services 891,000 545,000 1,436,000
Cost of Sales -U.K. 445,000 445,000
Software 756,000 574,000 1,330,000
Development 148,000(b)
Selling, general &
administrative 1,970,000 288,000 1,172,000 (32,000)(c) 3,546,000
-------------- ------------ ------------ ------------ -----------------
4,384,000 733,000 3,498,000 116,000 8,731,000
-------------- ------------ ------------ ------------ -----------------
Earnings (loss) before
interest income,
interest expense and
provision for income
taxes 638,000 (13,000) 645,000 (116,000) 1,154,000
========
Interest income 12,000 12,000
Interest (expense) (108,000) (248,000)(d) (356,000)
-------------- ------------ ------------ ------------ -----------------
Earnings before provision
for income taxes 530,000 (1,000) 645,000 (364,000) 810,000
Provision for income taxes 3,000 12,000 236,000 (223,000)(f) 28,000
-------------- ------------ ------------ ------------ ------------------
NET EARNINGS $ 527,000 $ (13,000) $ 409,000 (141,000) $ 782,000
============== ============ ============ ============ ==================
Pro forma earnings
per share $ 0.15
==================
Pro forma weighted
average number of
common and common
equivalent shares (g) 5,240,000
==================
</TABLE>
F-41
<PAGE>
MEDIWARE INFORMATION SYSTEMS, INC. & SUBSIDIARIES
NOTES TO PRO FORMA CONSENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
The consolidated pro forma statement of operations includes historical results
of Pharmakon and JAC for the six months ended November 30, 1995 and have been
recast for the twelve months ended June 30, 1996 based on the following
adjustments and assumptions:
(a) To eliminate the charge for purchased research and development.
(b) To record the amortization of goodwill over a 20 year life.
(c) To add back amortization of goodwill included in JAC's and Mediware's
statements of operations.
(d) To record interest expense on the $6,000,000 promissory note, issued in
connection with the acquisition of Pharmakon and JAC, at 8.25%. In October 1996
the promissory note was amended to provide for an extension of the due date to
August 1, 1997. The extension agreement provides for an immediate payment of $1
million and monthly payments of $100,000 for principal and interest. In
addition, the interest rate was increased to 15% on approximately $3,763,000
with the original rate remaining for $1,237,000. Interest expense under the
extended loan agreement would be approximately $260,000 and $130,000 higher than
reflected in the June 30, 1996 and December 31, 1995 pro formas respectively.
(e) To add back interest on the above mentioned note also included in Mediware's
statements of operations.
(f) To eliminate income tax expense for Pharmakon to give effect to the pro
forma adjustments above and the reporting of income for tax purposes on a
consolidated basis which will reflect the utilization of Mediware's net
operating loss carryforwards. Further, a reduction in the valuation allowance
for a deferred tax asset has not been recorded, since utilization of net
operating loss carryforwards is uncertain.
(g) Pro forma weighted average shares reflect an increase in weighted average
shares by 1,352,000 for shares issued to raise funds for the acquisition and
381,000 additional shares for the June 30, 1996 pro forma as a result of common
stock equivalents being dilutive for pro forma purposes.
F-42
<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 ....................... $ 2,522
Printing and engraving ............................................... 5,000
Legal Services ....................................................... 29,000
Accounting Services .................................................. 18,000
Miscellaneous ........................................................ 5,478
Total(1) ............................................................. $60,000
- ---------------------
(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.
Between December 13, 1993 and March 2, 1994, in connection with a
bridge financing utilized by the Company to finance its operations, the Company
issued promissory notes in the aggregate principal amount of $495,025 to ten
individuals, including a director of the Company, accompanied by warrants to
purchase 495,025 shares of Common Stock for $0.50 per share. From July 15, 1993
through August 22, 1994, also in connection with the bridge financing, the
Company issued promissory notes in the aggregate principal amount of $545,000 to
the Chairman of the Company, accompanied by warrants to purchase 545,000 shares
of common stock for $0.50 per share, and on February 15 and May 11 of 1995, in
connection with a second bridge financing, the Company issued promissory notes
in the aggregate principal amount of $259,390 to the Chairman, accompanied by
warrants to purchase 129,695 shares of common stock for $1.25 per share. All of
the above warrants are exercisable through September 30, 2004. All of such
issuances were exempt from registration pursuant to Section 4(2) under the
Securities Act of 1933.
On May 8, 1996, the Company issued 495,025 shares of Common Stock
pursuant to the exercise by warrantholders of 495,025 of the above-mentioned
warrants at $0.50 per share. Total proceeds to the Company were $247,512. 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 $5,063,000. Smith Barney Inc. was paid a
placement fee of $300,000. Also on June 17, 1996, in connection with such
acquisition 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.
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:
II-2
<PAGE>
(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
(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 Amendment No. 2
to the Registration Statement to be signed on its behalf by the undersigned, in
the City of Scotts Valley and State of California, on the 24th day of March,
1997.
MEDIWARE INFORMATION SYSTEMS, INC.
By:/s/ Les Dace
------------
Les N. Dace
President and CEO
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- -----
/s/ Les Dace President, CFO & CEO March 24, 1997
- ------------ Director (Principal Executive
Les Dace Officer, Principal Financial
Officer and Principal
Accounting Officer)
/s/ Lawrence Auriana Chairman of the Board and March 24, 1997
- -------------------- Director
(Lawrence Auriana)
* Jonathan H. Churchill Director March 24, 1997
- -------------------------
(Jonathan H. Churchill)
* Roger Clark Director March 24, 1997
- ---------------
(Roger Clark)
* Joseph Delario Director March 24, 1997
- ------------------
(Joseph Delario)
* John C. Frieberg Director March 24. 1997
- --------------------
(John C. Frieberg)
Director
- --------------------
(Walter Kowsh, Jr.)
II-4
<PAGE>
/s/ Hans Utsch Director March 24, 1997
- --------------
(Hans Utsch)
* Clinton Weiman Director March 24, 1997
- ------------------
(Clinton Weiman)
/s/ Lawrence Auriana
- --------------------
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- -------- -----------
3.1 Restated Certificate of Incorporation Incorporated by
Reference to Exhibit
No. 4 to the
Registration Statement
(the "1996
Registration
Statement") 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 Amended and Restated Secured Promissory *
Note of Digimedics Corporation dated October
28, 1996 in the principal amount of
$5,000,000 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.
10.3.7 Guaranty dated June 17, 1996 by Mediware in ***
favor of Continental Healthcare Systems, Inc.
II-6
<PAGE>
10.7 Letters outlining terms of engagement for Les *
Dace, Thomas Mulstay, and John Esposito
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 Company's Proxy
Statement dated
December 17, 1991
10.14 Stock Option Plan for Non-Employee Incorporated by
Directors 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
Form of Note for Interim Financing *
10.16.1
10.16.2 Form of Warrant for Interim Financing *
10.17 Form of Stock Option Agreement for Joseph ****
Delario
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
23.3 Consent of Price Waterhouse LLP
24 Powers of Attorney ****
- ------------------------
* 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
1991 Registration Statement.
*** Incorporated by reference to Exhibits 2(a), 2(b), 2(c), 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.
**** Previously filed.
II-7
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Amendment No. 2 to the Registration
Statement on Form SB-2 of our report dated August 23, 1996 (October 28, 1996
with respect to Note E[1]) on the consolidated financial statements of Mediware
Information Systems, Inc. and subsidiaries as of June 30, 1996 and for each of
the years in the two-year periodthen ended and our report dated May 8, 1996
relating to the financial statements of Continental Healthcare Systems Inc. -
Pharmakon Division for each of the years in the two-year period ended November
30, 1995. 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
March 19, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form SB-2 of our report dated June 17, 1996
relating to the financial statements of JAC Computer Services Limited (a United
Kingdom corporation), which appears in such Prospectus. We also consent to the
reference to us under the heading
"Experts" in such Prospectus.
/s/ Price Waterhouse LLP
- ------------------------
Kansas City, Missouri
March 19 , 1997
<PAGE>
