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EX-23 - EXHIBIT 23 - MEDIWARE INFORMATION SYSTEMS INCex23.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
FORM 10-K

(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2010
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 1-10768

MEDIWARE INFORMATION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

New York
11-2209324
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
11711 West 79th Street
Lenexa, KS
66214
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code:  (913) 307-1000

Securities registered pursuant to section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Stock, par value $ .10 per share
 
Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  
Yes o    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o    No x
 


 
 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
o
Accelerated Filer
o
       
Non-accelerated filer
o
Smaller reporting company
x
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
Yes o     No x

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sales price of its common stock on December 31, 2009 as reported on the Nasdaq Capital Market, was approximately $58,410,000.

The number of shares outstanding of the registrant's common stock, as of August 20, 2010, was 7,967,367 shares.

 
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DOCUMENTS INCORPORATED BY REFERENCE

The information required for Part III of this Annual Report on Form 10-K is incorporated by reference from the Registrant’s Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year.

PART I

Item 1.  Business.

Overview

Mediware Information Systems, Inc. (including its subsidiaries, “Mediware” or the “Company”) is a New York corporation incorporated in 1970 with its corporate headquarters at 11711 West 79th Street, Lenexa, Kansas.  The Company maintains an Internet website at www.mediware.com, at which reports filed with the Securities Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Securities Exchange Act”) can be obtained under “Investor Relations” without charge as soon as reasonably practicable after filed or furnished with the SEC.  The Company may also post at its website additional information important to its shareholders and to potential investors.  Information on or linked to the Company website is not incorporated by reference into this Annual Report on Form 10-K.  Filings with the SEC can also be obtained at the SEC’s website, www.sec.gov.

Mediware licenses, implements and supports clinical and performance management information solutions and other services to healthcare facilities.  The Company licenses its blood and biologics management solutions to hospitals. Mediware licenses its blood donor recruitment and management solutions to blood donor and plasma donor centers through its Blood Center Technologies business group, formed during its fiscal year ended June 30, 2009.  The Company’s medication management solutions are licensed to hospitals, long-term care, specialty pharmacy, home infusion, alternate care and behavioral health facilities.  The Company’s home infusion, specialty pharmacy and alternate care products and services are licensed through the Company’s Alternate Care Solutions (ACS) business group, formed during fiscal 2010.   ACS also provides billing and collection services to the home infusion market.   The Company licenses performance management software to hospitals, blood and plasma centers and alternate care facilities.

The software systems that Mediware provides to its customers typically consist of the Company's proprietary application software, third-party licensed software and third-party hardware.  Mediware generally licenses its blood management and biologics management software systems and certain of its medication management software systems to customers on a perpetual basis.  Customers that license the software on a perpetual basis typically make an up-front payment for the software license fees and payments for support services on an annual basis.     In contrast, Mediware generally provides its blood and plasma center solutions and certain of its medication management software systems and its recently acquired alternate care products on a monthly subscription or term license basis.  These customers pay Mediware an initial start-up fee and a monthly fee for use and support of Mediware’s proprietary software.  Under both payment models, customers may purchase services, including implementation and additional consultation services, for additional fees which are generally billed as incurred.  However, beginning in fiscal 2010, the Company initiated its “maintenance plus” program through which customers may pay an annual amount for additional services which historically have been paid on an as incurred basis.  The performance management software is licensed on both a perpetual and subscription basis.

Mediware markets its performance management, blood donor and its blood and biologic management products primarily in the United States.  The Company markets its medication management solutions in the United States and in the United Kingdom, with different software systems designed for the specific requirements of each market.  The Company has operations in the United Kingdom relating to the systems licensed and sold in that market as well as Ireland and South Africa.  All other operations are in the United States.

The Healthcare Information Systems Industry

The healthcare industry, like other United States industries, has been impacted by the global economic downturn.   Consequently, the Company believes its customers remain cautious with their capital investments and are focused on ensuring that any significant spending has a demonstrable return on investment, provides clear improvements to patient safety or addresses developing government or industry standards.   Mediware believes that its products are well positioned to address each of these areas.      

 
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Of specific importance to near term investment is the American Recovery and Reinvestment Act (ARRA), which became effective in 2009. This Act includes more than $38 billion of incentives to help healthcare organizations modernize operations through the acquisition and use of information technology solutions.  A part of ARRA designated the Health Information Technology for Economic and Clinical Health Act (HITECH) provides for roughly $2 billion in ‘jump start’ funding that the Department of Health and Human Services is to distribute over a two year time frame beginning in 2011.  ARRA also includes approximately $17 billion in Medicare and Medicaid incentives targeting the ‘meaningful use’ of health record systems, systems interoperability, and the submission of data related to quality improvement initiatives.

The government spending is intended to reduce inefficiencies and improve patient care through the use of technologies.  ARRA, and specifically HITECH, increases the pressure on hospitals and care providing institutions to adopt technology. HITECH provides funding for facilities to launch improvement projects associated with the ‘meaningful use’ of key information technologies. Qualifying hospitals can receive payments over a period of approximately four or five years beginning in 2011 based on their use of certified health information technology systems.   HITECH also provides financial penalties to hospitals by reducing Medicare reimbursement payments for hospitals that do not comply with certain “meaningful use” requirements by 2015.

Competition in the market for clinical information systems is intense, and increased government spending may entice more companies to enter the marketplace.  The principal competitive factors are the functionality of the system, its design and capabilities, site references, the demonstrated need, ability to install, process redesign capabilities, reputation, software platform, the potential for enhancements, price, departmental versus enterprise sales and salesmanship.  Another key factor is the strategic position the incumbent, or major healthcare information systems vendor, has in the customer site. Different dynamics and competitors, however, affect each of the Company's products and each sale.

Market Positioning

Mediware designs, develops and markets software solutions targeting specific processes within healthcare institutions. Software products are sold to hospitals, long-term care and behavioral health facilities and stand alone blood and plasma donation centers and alternate care settings. The Company believes that its competitive advantages include rich product knowledge and a long history of innovation in the areas of medication and blood software products.

Traditional healthcare environments leverage disparate information systems and manual processes throughout the care process. This results in reduced efficiency as well as increased safety risks due to the potential for human error and delayed access to patient information and records. Errors and risks associated with medications, blood, or biologics can often result in tragic consequences, a fact that can raise the awareness and priority of Mediware solutions.   

The Company’s product strategy is to address targeted clinical areas with “suites” of applications that provide clinicians one data environment for the information relating to the prescribing, preparation, and administration of drug, blood and/or biologics therapies. Mediware’s products manage each step of the therapeutic process in one system environment, including: ordering, fulfillment, administration, and documentation, to provide care providers a Closed Loop® for blood and medication therapies.   The process-centric integrated data environments provided by Mediware’s blood, biologic and medication management solutions seamlessly extend the discipline and controls of the pharmacy and blood bank to patient units and other venues where adverse events occur. The Company believes this ClosedLoop® process differentiates it from the industry’s catalog and “best of breed” vendors. 

Mediware’s products have been focused on addressing the needs of the acute care hospital market and the blood center market.  By adding medication management solutions through an acquisition in November 2008, we expanded our product offerings for the small and medium hospitals, specialty pharmacy and home infusion markets.  Following acquisitions in fiscal 2009 and 2010, the Company has positioned itself to also address the needs of the home infusion, specialty pharmacy and alternate care markets. Mediware believes that its business will be able to take advantage of these markets by leveraging its clinical and product strengths outside of the acute care setting and across alternate care settings.

 
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To focus on the unique needs of the blood center market segment, on July 8, 2008 Mediware announced the launch of Blood Center Technologies. Mediware’s Blood Center Technologies business unit is a customer focused team intended to drive growth as Mediware expands its focus in the blood and plasma donor markets.  Through two acquisitions consummated on December 11, 2009, Mediware greatly increased its presence in the alternate care market and subsequently formed the ACS business unit to capitalize on the growing strength of its product offerings in that category.

By adding a performance management solution to its product offerings through an acquisition in June 2009, Mediware believes that it further strengthened its clinical suite offerings in its existing medication management and blood and biologics markets, as well as acquired tools to broaden its customer base to include the broader healthcare market.    This performance management software can aggregate information stored in Mediware’s blood, biologics and medication management products for easy reporting and analysis at the departmental level, thereby further strengthening its product offering in its long-standing markets.  The software can also draw information from disparate systems across a healthcare enterprise beyond Mediware’s historic blood and medication management customers.  
 
Blood and Biologics Management Products

Hospital Transfusion and Donor Products

The Company supplies information and management software systems to hospital blood banks and transfusion centers.  Hospitals face pressures to manage blood inventory and improve the safety of the blood supply.  Their focus is on reducing errors, improving screening, increasing throughput and cost efficiencies and addressing an ongoing personnel shortage.  These pressures exist despite pressures across the healthcare industry to reduce costs.  Mediware's blood management software systems are intended to help hospitals and blood centers address these issues by reducing costs through automation, including report production, decreased paperwork, and billing.  The Company's products are also designed to improve blood supply safety through the use of user-defined truth tables, among other features.  

The Company’s flagship blood transfusion product is the HCLL™ transfusion software.  Mediware also provides its hospital customers its complementary HCLL™ donor software module for use in hospital-based donor centers. The HCLL software (HCLL Transfusion and HCLL Donor) addresses blood donor recruitment, blood processing and transfusion activities for hospitals and medical centers.  These systems are designed to be user intuitive, scalable, and support product management, resource management, quality control and testing.  They include advanced data mining and data management intelligence capabilities, which can be utilized by facilities of all sizes, including, small hospitals, large medical centers, multi-facility enterprises and central transfusion services.  HCLL software also can address the needs of hospitals for operating centralized transfusion services, an area that is key to controlling the rising cost of blood products. 
 
The Company is also looking to new products and markets to continue its growth in blood management.  In early fiscal year 2008, the Company announced its new BloodSafe™ suite of products.  The BloodSafe suite includes hardware and software which enable healthcare facilities to securely store, monitor, distribute and track blood products from locations removed from the hospital’s physical blood bank. Components of the BloodSafe suite include blood tracking and monitoring software, computer controlled refrigerators, and handheld point of care tools to verify accurate patient identification and document transfusion activities. BloodSafe can be integrated with Mediware’s HCLL software or operate on a stand-alone basis. 

Blood Center Technologies

The Company also provides software tools and services to large, complex blood centers for donor targeting, donor recruitment, donation management, unit testing, blood component manufacturing, inventory control, sales and distribution.  This is accomplished through a combination of the Company’s 510(k) cleared LifeTrak® software and a set of robust client relationship and recruiting software products and capabilities.  The combination of products and capabilities enable the Company to deliver an integrated software solution for blood centers to improve collections and efficiency throughout the entire process from blood donor recruitment to hospital distribution and transfusion.   The combination of the clinical capabilities of the LifeTrak software and the effective CRM technologies that enable blood centers to improve the effectiveness of coordinated blood drive campaigns provide a compelling set of solutions to our customers.  Mediware has also added additional e-learning content and certification tracking technologies through an acquisition consummated in the quarter ended March 31, 2010.

 
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Biologics Products

Hospitals are beginning to face the same pressures to manage biologic product inventory and improve safety by reducing errors, improving screening and increasing throughput and cost efficiencies as they have faced with blood products for years.  In June 2008, Mediware released BiologiCare™, the Company’s first generation bone, tissue and cellular product tracking software.  The software leverages the HCLL software platform and Mediware’s blood banking expertise to address the important needs of hospitals as they begin to manage bone, tissue, cord blood stem cells and other biologic products.  BiologiCare is designed specifically to track and manage transplantable materials in hospitals, surgery centers and other healthcare facilities. The products enable users to document donors, tissue vendors and tissue recipients and to comply with current regulations regarding transplantable materials.  With the introduction of BiologiCare, Mediware believes it is positioned to benefit from the emerging biologics market, which includes, among other things, bone, tissue and cord blood stem cells.  BiologiCare can be integrated with Mediware’s HCLL software or operate on a stand-alone basis.

The Company continues to concentrate on growing all aspects of its blood management business: hospital transfusion and donor products, biologics products and blood center technology products.  In addition to its sale of software, the Company generates revenue from professional services and post-contract support.

The blood and biologics management products are marketed primarily through the Company’s direct sales force.  The blood and biologics management products compete primarily with vendors of Laboratory Information Systems (“LIS”) providing a blood bank subsystem as a part of their laboratory product, as well as other companies that market stand-alone blood bank systems. The LIS vendors are much larger companies with greater technical, marketing, financial and other resources than the Company.  We believe these competitors include Cerner, McKesson, and Meditech.   Mediware believes that stand-alone laboratory or blood bank vendors include Sunquest, Haemonetics and SCC Soft.  On the blood donor side of the business, Mediware competes against several of the companies listed above as well as Blood Bank Computer Services Company, MAK and others.

Medication Management Products

The Company supplies medication management solutions to hospitals, mental health facilities, specialty pharmacies, home infusion facilities and other institutions that require the administration and management of medication.  The Company’s medication management solutions are designed to help customers improve patient safety while reducing costs and improving clinical documentation.  Additionally, the solutions help medical facilities comply with increasing regulatory and governmental requirements.

Hospital Pharmacy and Medication Management Products

The Company’s medication management software product for larger and medium sized hospitals and healthcare institutions is WORx®, a core pharmacy information system designed to manage inpatient and outpatient pharmacy operations.  WORx software has features and functions designed to help improve patient safety and manage pharmacy operations effectively.  The product's market acceptance encompasses multi-facility healthcare systems, university hospitals and large state behavioral health institutions.  An acquisition in November 2008 expanded Mediware’s product offering by adding Ascend, a pharmacy solution that meets the needs of small and medium size hospital facilities.  The Company currently offers the WORx product line to larger acute care hospitals and state behavioral health facilities, while offering the Ascend product line to the small and medium size hospital markets.

The Company’s MediCOE and MediMAR® products are fully integrated with the WORx software and provide a complete ClosedLoop® drug therapy management system with a physician order entry module (MediCOE) and nurse point of care administration and bedside documentation module (MediMAR).  Through MediCOE software, potential problems can be identified by the clinician at order entry and can be corrected or explained at the point of care.  The MediMAR software uses bar code, wireless, handheld, and other technologies to allow caregivers efficient and accurate methods to document patient medication administration and provide nurses additional safety measures at the point of care. 

To expand the Company’s capabilities and address a new industry mandate, the Company introduced MediREC™ in March 2007.  This medication management product assists in achieving compliance with a Joint Commission mandate, which requires hospitals to document all of a patient’s home medications when a patient is admitted or enters the emergency room, and to reconcile that list with the medications prescribed in the hospital.  That process must be repeated each time the patient is transferred within the hospital and again when the patient is discharged.

 
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The Company continues to target its large WORx software customer base and new customers with the MediCOE, MediMAR and MediREC products.  MediMAR, MediCOE and MediREC software products can provide fully integrated medication management solutions and are particularly well suited for large academic medical centers and behavioral health settings that benefit from the robust nature of the software’s functionality.

Selling the Company’s full suite of medication management products (WORx, MediMAR, MediCOE and MediREC) is a complex process involving multiple hospital departments.  On the other hand, Ascend requires substantially smaller financial commitments from customers and is priced based on a monthly pricing model.  Generally, Ascend, is sold to smaller and medium sized hospitals.

The medication management products are marketed directly through the Company’s sales force and other marketing channels, including reseller agreements with distribution partners and focused sales channels.  The Company’s medication management products compete against the products of niche competitors’ and some of the largest providers of healthcare information technology, including Cerner, General Electric, Siemens, Eclipsys and others. 

Alternate Care

Mediware’s ACS product offerings currently include: home infusion software, specialty pharmacy software, home medical equipment software, and home healthcare software, as well as billing and collections services that are focused on the alternate care markets. These offerings are largely the combination of the home infusion offering that Mediware acquired in 2008 and the home infusion, specialty pharmacy and alternate care products acquired December 11, 2009.

The Company’s ACS products compete in a niche market against a myriad of smaller software vendors and niche providers, including FastTrack, Definitive Healthcare Solutions, Inc. and CareCentric. These companies often have loyal customers, but generally have fewer resources and, the Company believes, less robust products than Mediware. Consequently, Mediware believes it is well-positioned to be very competitive in the alternate care markets. Mediware currently markets products to the alternate care market through its direct sales force.

United Kingdom

The Company's United Kingdom operating business is JAC Computer Services, Ltd. (JAC).  JAC markets and provides support for its pharmacy management and electronic prescribing systems throughout the U.K., Ireland and South Africa.  JAC’s product offering includes JAC’s Pharmacy Management system and Electronic Prescribing™ module.  The prescribing module is a medication management solution complete with physician medication order entry and nursing medication administration.  This module allows hospitals to improve patient safety relevant to medication management.   The JAC’s Pharmacy Management system product handles medication tracking from ordering and delivery to dispensing. 

JAC competes against some of the larger healthcare IT providers in the UK as well as smaller niche vendors.  Among JAC’s competitors are Ascribe, Cerner, iSoft and CIS Healthcare Ltd.  These companies often have loyal customers, but generally are not as well positioned in the marketplace as JAC. Consequently, Mediware believes JAC will continue to perform well. JAC currently markets products primarily through its direct sales force.

Performance Management Products

Through a business acquisition on June 18, 2009, Mediware added the Insight™ software system to its portfolio of products.   The software tracks performance metrics to assist healthcare managers to actively manage performance and improve the overall efficiency of their organizations.  The Insight system collects data from the disparate information systems across a hospital to create understandable graphical dashboards.  The Insight system complements Mediware’s medication and blood and biologics product offerings and Mediware believes that Insight may help differentiate our products from other blood management and medication management systems.  The Company is marketing Insight to current customers to help them manage their medication and blood requirements.  The Insight system can also be marketed and sold on an enterprise-wide, stand-alone basis, which Mediware expects will help it to gain a footprint and customer base outside of our historical blood and medication markets.

 
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When sold in conjunction with Mediware’s other products, the Company’s Insight products compete against all of the same competitors as our medication management and blood and biologics products.  On enterprise sales, the Company expects to compete against products of other small niche vendors, as well as some of the largest providers of healthcare information technology, including Cerner, McKesson, General Electric, Siemens, Eclipsys and others who we expect will begin to provide Performance Management solutions.  The Company sells its Performance Management products through a direct sales force.

Research and Development

Expenditures for software development include amounts paid for both capitalizable and non-capitalizable development projects.  Expenditures for software development for fiscal 2010, 2009 and 2008 were $8,736,000, $7,771,000 and $7,418,000, respectively.  Of the total expenditures during fiscal 2010, 2009 and 2008, $3,820,000, $3,829,000 and $3,244,000, respectively, were capitalized. The Company plans to continue to commit substantial resources to the development of its products.

Employees

As of June 30, 2010, the Company had 275 full-time employees of which 249 were employed domestically.  None of the Company's employees are covered by collective bargaining agreements. The Company believes that its employee relations are good.

The Company also relies on the services of a number of consultants to supplement its employee base.  The number of consultants varies from time to time based on the Company's needs and the various stages of its development projects. At June 30, 2010, there were 16 consultants working on various projects.

Seasonality

The Company's operations are generally not subject to seasonal fluctuations.

Segment and Geographic Information

Mediware operates one reporting segment, as further described in Note 14 Segment Information in the Notes to our Consolidated Financial Statements.

Geographic Information
                 
(Amounts in thousands)
                 
   
For Year Ended June 30,
 
   
2010
   
2009
   
2008
 
Revenue
                 
United States
 
$
41,269
   
$
34,815
   
$
33,594
 
United Kingdom
   
6,347
     
5,870
     
5,843
 
Total
 
$
47,616
   
$
40,685
   
$
39,437
 
 
   
As of June 30,
 
   
2010
   
2009
   
2008
 
Long-lived assets
                 
United States
 
$
31,833
   
$
28,024
   
$
25,648
 
United Kingdom
   
569
     
538
     
516
 
Total
 
$
32,402
   
$
28,562
   
$
26,164
 

The Company believes that the principal risks distinguishing its foreign operations are described in Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 
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Backlog

At June 30, 2010, the Company had a backlog of $23,754,000, of which $1,817,000 related to contracted software and hardware sales and $21,937,000 related to implementation, training and deferred support and maintenance services.  Software sales and services backlog consist of products and services sold under signed contracts, which have not yet been recognized as revenue.  At June 30, 2009, the Company had a backlog of $24,076,000, of which $594,000 related to contracted software and hardware sales and $23,482,000 related to implementation, training and deferred support and maintenance services.  Depending upon the individual contract, the customer may have the ability to cancel the purchase of software and services prior to delivery.

Intellectual Property

Mediware markets its software under names for which it has trademark protection.  The Company relies upon a combination of trade secret, copyright laws, license and marketing agreements, and nondisclosure agreements to protect its proprietary information, including the Company’s software.  The Company does not currently own any material patents or have any licenses that are material to the products or services that it offers.

Impact of Government Regulation and Private Oversight

The healthcare industry is highly regulated.  The industry is subject to state and federal laws and regulations and to oversight by regulatory entities.  It is also subject to oversight by peer entities.  While some of Mediware’s products are subject to government regulation and private oversight, the effect on Mediware’s customers is even more pronounced.  Knowledge of applicable regulation and oversight is therefore critical to Mediware’s business not only because of the compliance required for certain of Mediware’s products but also because it creates opportunities for Mediware to sell products and services to customers to facilitate their compliance.

FDA Regulation of Blood Products

The U.S. Food and Drug Administration (FDA) regulates blood center computer software products as medical devices. The FDA considers software products intended for the following to be medical devices: (i) use in the manufacture of blood and blood components; or (ii) maintenance of data used to evaluate the suitability of donors and the release of blood or blood components for transfusion or further manufacturing. The FDA requires blood tracking application software vendors to submit a 510(k) application for review upon product creation, modification affecting safety and soundness and certain other modifications that are not well defined.  Several of Mediware’s blood management products have obtained 510(k) clearance.  As a medical device manufacturer, Mediware is required to register with the Center for Biologics Evaluation and Research (CBER), list its medical devices, and submit a pre-market notification or application for pre-market review.  In addition, Mediware is required to follow applicable Quality System Regulations of the FDA, which include testing, control and documentation requirements.

The FDA enforces compliance by using recalls, seizures, injunctions, civil fines and criminal prosecutions. Unsatisfactory compliance and the inability to timely remedy any non-compliance could therefore have material adverse consequences.  If the FDA expands its scope of regulation to other products, it would be costly to implement the FDA Quality Systems Regulation procedures.  Furthermore, any new blood management products or modifications of existing products may not be approved by the FDA, which would diminish the value of the research and development for those products.  Mediware dedicates substantial time and resources to comply with guidelines and regulations applicable to its blood management products.

The HITECH Act

The HITECH Act provides financial incentives for hospitals and doctors that are "meaningful users" of electronic health records, which includes use of health information technology systems that are "certified" according to technical standards developed under the supervision of the Secretary of Health and Human Services. Hospitals that use certified health information technology systems may receive significant aggregate payments over a period of approximately four or five years beginning in 2011. These payments may be significant and will provide a strong incentive to many hospitals and doctors to implement certified health information technology systems. The HITECH Act also provides for financial penalties in the form of reduced Medicare reimbursement payments for hospitals and doctors that have not become "meaningful users" of these systems by 2015. Mediware is working to ensure that its relevant products meet the applicable certification standards so that our customers receive the full benefit of the HITECH Act.  If we fail to achieve the appropriate certification standards, the Company could face adverse consequences as its customers look to other certified vendors.

 
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CCHIT

The U.S. Department of Health & Human Services initiatives have, among other things, led to the creation of the private-sector Certification Commission for Health Information Technology (CCHIT), which is a recognized certification body in the United States for health information technology products. CCHIT develops a set of private sector determined criteria for electronic health record functionality, interoperability, reliability and security, and is inspecting electronic health record software to determine its performance against these criteria.  CCHIT provides certifications to those entities whose products have satisfied the criteria. CCHIT criteria will be used to assess health information technology systems for certification under the HITECH Act.   Failing to be aware of the CCHIT certification requirements and complying as appropriate, could have an adverse impact on the Company.

HIPAA

The U.S. Health Insurance Portability and Accountability Act of 1996 (HIPAA) seeks to impose national health data standards on covered entities. The HIPAA standards prescribe, among other things, transaction formats and code sets for electronic health transactions in order to protect individual privacy by limiting the uses and disclosure of individually identifiable health information. HIPAA also requires the implementation of administrative, physical and technological safeguards to ensure the confidentiality, integrity, availability and security of individually identifiable health information in electronic form.    Beginning on February 17, 2010, the HITECH provisions of the ARRA, broadened the scope of HIPAA by expanding the class of persons that are subject to HIPAA requirements to include service and product providers such as Mediware, providing breach notification requirements, restricting the instances in which personal health data may be disclosed and augmenting the enforcement provisions.  In addition, many states have passed or are evaluating local versions of HIPAA.  Evolving HIPAA-related laws or regulations could restrict the ability of customers to obtain, use or disseminate patient information.  Mediware believes that a violation of the HIPAA requirements could have a material adverse impact on its business.   Accordingly, Mediware expends substantial time and resources to address HIPAA compliance.

E-prescription

The use of Mediware’s solutions by physicians for electronic prescribing, electronic routing of prescriptions to pharmacies and dispensing is governed by state and federal law. States have differing prescription format requirements, which we have programmed into our software. In addition, in November 2005, the Department of Health and Human Services/CMS announced regulations related to “E-Prescribing and the Prescription Drug Program,” which set forth standards for the transmission of electronic prescriptions.  These E-Prescribing Regulations were mandated by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The final regulations adopted two standards effective January 2006. A second and final set of additional e-prescribing transaction standards was published on April 2, 2008 and became effective on April 1, 2009. These standards are complex and cover transactions between prescribers and dispensers for prescriptions and electronic eligibility and benefits inquiries and drug formulary and benefit coverage information.  Mediware’s efforts to provide software that assists customers to comply with these regulations is costly.  If Mediware fails to accurately adjust its software solutions or meet customer needs, there could be a material impact on its business.

Medicare/Medicaid

Some of Mediware’s medication management products and services assist customers with the submission of claims to payers.  The claims are governed by federal and state laws, including regulations relating to Medicare and Medicaid. Mediware’s solutions are capable of electronically transmitting claims for services and items rendered to certain payers for approval and reimbursement. Federal law provides civil liability to any person that knowingly submits a claim to a payer, including, for example, Medicare, Medicaid and private health plans, seeking payment for any services or items that have not been provided to the patient. Federal law may also impose criminal penalties for the submission of false claims intentionally.   Federal and state governments and regulatory authorities continue to increase scrutiny over practices involving healthcare fraud affecting healthcare providers whose services are reimbursed.   Mediware’s customers are further subject to laws and regulations on fraud and abuse which restrict remuneration and referrals.  

 
10

 

While Mediware believes that it is in compliance with applicable laws, many of the regulations applicable to our customers and that could be applicable to it, are not clear or well-defined and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could broaden their applicability to vendors or require customers to change their business or how they work with Mediware.  If such laws and regulations are determined to be applicable to Mediware and if Mediware fails to comply with any applicable laws and regulations, Mediware could be subject to sanctions or liability, including exclusion from government health programs, which could have a material adverse effect on Mediware’s business, results of operations and financial condition.

Internet Privacy

Some of our Blood Center Technologies products rely upon electronic mail and are therefore subject to laws and regulations relating to user privacy and information security.  In addition, many states have passed laws requiring notification to users when there is a security breach for personal data.  Any failure of Mediware’s products to comply with these laws may subject Mediware to significant liabilities or proceedings by governmental authorities. In addition, the interpretation of user privacy and information security laws is unclear and in a state of flux. Mediware expects to expend additional time and capital in an effort to address these evolving data security and privacy issues.  Further, any failure to protect privacy and data could result in a loss of customer or user confidence.

The Joint Commission

The Joint Commission (formerly known as the Joint Commission on Accreditation of Healthcare Organizations), is an independent non-profit organization that provides evaluation and accreditation for healthcare organizations in the United States.  The Joint Commission develops standards and protocols that are used to evaluate hospitals.  A hospital’s failure to meet Joint Commission standards could result in the loss of Medicare and Medicaid reimbursement revenue.  Satisfaction of the Joint Commission standard is a key to success for Mediware’s medication management products.  

ISBT

The American Association of Blood Banks (AABB) has adopted a global standard for the labeling of blood products collected and used throughout the United States, called ISBT (International Society of Blood Transfusion) 128, to improve the identification and processing of human blood, tissue and organ products across international borders and disparate health care systems. AABB accredited blood centers and hospital transfusion services were required to implement this standard by May 1, 2008.  Mediware’s LifeTrak and BiologiCare products support ISBT 128.

 
Item 1A.  Risk Factors.

This Annual Report on Form 10-K contains forward-looking statements.  

This Annual Report on Form 10-K contains forward-looking statements.  Statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act. The words “believes,” “anticipates,” “plans,” “seeks,” “expects,” “intends” and similar expressions identify some of our forward-looking statements.  Forward-looking statements are not guarantees of performance or future results and involve risks, uncertainties and assumptions. Factors discussed elsewhere in this Form 10-K could also cause actual results to differ materially.  Set forth below are some of the risks and uncertainties that, if they were to occur, could materially adversely affect our business or that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make. We undertake no obligation to publicly update or revise any forward-looking statements.

 
11

 

Our future growth depends in large part on customer acceptance of our new products.

Our newly acquired performance management software is Insight; our latest medication management products are HomeCareNet, Ascend, MediMAR, MediCOE and MediREC, and our newest blood and biologics management products are BiologiCare, BloodSafe and blood and plasma donor center products.  We are now targeting our existing software customer base and other potential customers for the sale of these products.  There is no assurance that the marketplace will accept our strategy or these products.  In addition, the sales for the full suite of medication management products and broader enterprise-wide sales of Insight require broad acceptance throughout the hospital and reflect changes in workflows that create longer sales cycles.  In the event that our new products are not accepted in the marketplace, our system sales would suffer, our service revenues for these products would be diminished and our investment in developing, as well as marketing, these products could be impaired.
 
Our strategy includes licensing ClosedLoop® products to customers, which requires customer acceptance of our products and strategy.

While we believe that each of our products is positioned to succeed in the market place, there is no assurance that customers will accept our ClosedLoop® strategy or accept our products to the extent that we expect. If our customers instead select a single-vendor, enterprise-wide system that automates all functions of the hospital, rather than the specific processes targeted by our products, our sales will decrease.

We may not be able to manage or successfully integrate acquired businesses and technologies.

We consummated strategic acquisitions in the past and may pursue additional strategic acquisitions in the future, and we may not be able to successfully manage our operations if we fail to successfully integrate acquired businesses and technologies.

As part of our business strategy, we may seek and complete strategic business acquisitions that are complementary to our business. During the three years ended June 30, 2010, we consummated six strategic acquisitions.  Acquisitions have inherent risks which may have a material adverse effect on our business, financial condition, operating results or prospects, including, but not limited to, the following:

 
·
failure to successfully integrate the business and financial operations, services, intellectual property, solutions or personnel of the acquired business

 
·
diversion of management’s attention from other business concerns

 
·
failure to achieve projected synergies and performance targets

 
·
loss of customers or key personnel of the acquired business

 
·
possibility that the due diligence process in any such acquisition may not completely identify material issues associated with product quality, product architecture, product development, intellectual property issues, key personnel issues or legal and financial contingencies, and

 
·
a possible write-off of software development costs and amortization of expenses related to intangible assets.

We have acquired businesses with offices in cities where we previously had no offices and with products that rely upon technology which is different than and may not be compatible with the technology of our other products. If we fail to successfully integrate any acquired business or fail to implement our business strategies with respect to these acquisitions, we may not be able to achieve projected results or support the amount of consideration paid for such acquired businesses.

 
12

 

Our United Kingdom business is subject to risks that are different from our other businesses.

Approximately 25% of total revenues for the year ended June 30, 2010 related to our medication management products and services is the result of business conducted in the United Kingdom. These foreign operations encounter risks and uncertainties specific to the United Kingdom such as:

 
·
government spending, including uncertainties relating to the impact of recent changes to the Connecting for Health

 
·
regulation of our products, customers and employees

 
·
uncertain contract terms, conditions and risks

 
·
trade protection regulation

 
·
taxation

 
·
economic conditions

 
·
customer demands and payment practices and

 
·
changing competitors.

Additionally, foreign operations expose us to foreign currency fluctuations that could impact our results of operations and financial condition based on the movements of the applicable foreign currency exchange rates in relation to the U.S. Dollar. Mediware has not entered into any derivative financial instrument to manage foreign currency risk and is currently not evaluating the future use of any such financial instruments.

Our proprietary information could be misappropriated, and we may be subjected to costly third party intellectual property claims.

We rely upon a combination of trade secret, copyright and trademark laws, license and marketing agreements, and nondisclosure agreements to protect our proprietary information, including our software. We have not historically filed patent applications covering our software. As a result, we may not be able to protect against the misappropriation of our intellectual property.  Furthermore, we could be subject to claims by third parties, including competitors (who hold patents) and creators of open-source code, that we are misappropriating or infringing patents, confidential information or other intellectual property or proprietary rights of others.  These claims, even if not meritorious, could require us to:

 
·
spend significant sums in litigation

 
·
pay damages

 
·
develop non-infringing intellectual property and

 
·
acquire costly licenses to the intellectual property that is the subject of asserted infringement.

We may be unable to develop non-infringing products or services or obtain a license on commercially reasonable terms, or at all. We may also be required to indemnify our customers if they become subject to third-party claims relating to intellectual property that we license or otherwise provide to them, which could be costly.

Termination of or modifications to third party products and technology incorporated into our product offerings could adversely affect our products or decrease our profitability.

We license or purchase intellectual property and technology such as software, hardware and content from third parties, including some competitors, and incorporate software, hardware, and/or content into or sell it in conjunction with our solutions, devices and services.  Some third party material (provided by IBM, Intersystems, FirstDataBank, Haemonetics and others) is critical to the operation and delivery of several of our products.  Most of our agreements will expire within one to five years.  If upon the expiration of our current agreements, any of the third party suppliers were to change product offerings, significantly increase prices or terminate our licenses or supply contracts, we might need to seek alternative suppliers and incur additional internal or external development costs to ensure continued performance of our solutions, devices and services. Such alternatives may not be available on attractive terms, or may not be as widely accepted or as effective as the intellectual property or technology provided by our existing suppliers. Furthermore, adaptation would take time and initial adaptations may be imperfect and/or products may be inoperable or perform poorly as a result. If the cost of licensing, purchasing or maintaining the third party intellectual property or technology significantly increases for any reason (including disputes about licensing terms or the cost of providing the products to our customers), our gross margin levels could significantly decrease. In addition, interruption in functionality of our solutions, devices and services as a result of changes in third party suppliers could adversely affect future sales or result in contract claims that could require Mediware to pay damages.

 
13

 

We may experience interruption at our data centers or client support facilities.

We offer our customers hosting services for some of our software offerings and expect to expand these offerings.  Our hosting services may include the storage of critical patient and administrative data. In addition, we provide support services to our clients through various client support facilities. Failure of generators, impairment of telecommunications lines, or any damage to the buildings, the equipment inside the buildings housing our hosting centers, the client data contained therein or the personnel trained to operate such facilities could disrupt our operations and negatively impact customers who depend on us for data center and system support services. Any interruption in operations at our data centers or client support facilities could damage our reputation, impact our expansion plans, cause us to lose existing clients, hurt our ability to obtain new clients, result in revenue loss, create potential liabilities for our clients and us and increase insurance and other operating costs.

If we are unable to enhance our relationships with our third party resellers, our ability to market products may be adversely affected.

We currently have important relationships with third party resellers of our products. If we are not able to continue or enhance our current relationships or develop new relationships, our future revenues could decrease.

Hospital networks reduce our sales opportunities and may reduce profitability.

Many hospitals are consolidating and forming (or becoming part of) integrated healthcare delivery networks. The formation of these networks might reduce the number of discrete prospects we may target on a closed loop basis and could provide more negotiating leverage to our prospective customers. These events could reduce our sales prices, increase the length of our sales cycle and otherwise could negatively affect our revenue and income.

Significant competition may reduce our profit margin.

The market for healthcare information systems is extremely competitive. Our competitors include Siemens AG, McKesson Corporation, Eclypsis Corporation, Misys PLC, Haemonetics, SCC Soft Computer, Cerner Corporation and GE Healthcare, each of which offers products that compete with certain of our offerings. Many of our competitors have greater financial, technical, product development, sales and marketing resources. A number of factors determine success or failure in our markets, including:

 
·
functionality of software products

 
·
quality of client references and the availability of client reference sites

 
·
underlying technical architecture

 
·
financial stability of the software provider

 
·
ongoing support of the system and

 
·
the quality and quantity of the sales organization.

 
14

 

Our ability to maintain a positive stance in all of the above areas will affect our ability to compete successfully and maintain our profit margin.
 
Our sales pipeline may not reflect sales that are actually achieved.

We use a “pipeline” system, a common industry practice, to forecast sales and trends in our business. Our management monitors the status of all sales opportunities, such as the date when they estimate that a client will make a purchase decision and the potential dollar amount of the sale. These estimates are aggregated periodically to generate a sales pipeline. We compare this pipeline at various points in time to evaluate trends in our business. This analysis provides guidance in business planning and forecasting, but these pipeline estimates are by their nature speculative. Our pipeline estimates are not necessarily reliable predictors of revenues in a particular quarter or over a longer period of time, partially because of changes in the pipeline and in conversion rates of the pipeline into contracts that can be very difficult to estimate. A negative variation in the expected conversion rate or timing of the pipeline into contracts, or in the pipeline itself, could cause our plan or forecast to be inaccurate and thereby adversely affect business results. For example, a slowdown in information technology spending, adverse economic conditions or a variety of other factors can cause purchasing decisions to be delayed, reduced in amount or cancelled, which would reduce the overall pipeline conversion rate in a particular period of time. Because a substantial portion of our contracts are completed in the latter part of a quarter, we may not be able to adjust our cost structure quickly enough in response to a revenue shortfall resulting from a decrease in our pipeline conversion rate in any given fiscal quarter.
 
Our ability to generate revenue could suffer if we do not continue to update and improve our existing products and services and develop new ones.

The pace of change in the markets we serve is rapid, and there are frequent new product and service introductions by our competitors and by vendors whose products and services we use in providing our own products and services. If we do not respond successfully to evolving industry standards, our products and services may become obsolete. We must introduce new healthcare information services and technology solutions and improve the functionality of our existing products and services in a timely manner in order to retain existing customers and attract new ones. However, we may not be successful in responding to technological developments and changing customer needs. Technological changes may also result in the offering of competitive products and services at lower prices than we are charging for our products and services, which could result in lost sales and lower margins.

Our business may be adversely affected by changing technology that may render our technology obsolete.

Changing technology will make it necessary for some of our software products to migrate to new software platforms in the coming years, which could require significant resources, could impact future plans for such products, and could adversely affect our ability to sell and develop new and competitive software products. In addition, new technology not currently in the mainstream could quickly enter the market and disrupt our existing business and customers’ need for our products. We will try to maintain state-of-the-art products, but new technologies in the marketplace could make our technology obsolete and our products unusable or hinder future sales.

Research and development is costly and may not produce successful new products.

Our strategy relies on continuing innovation. We currently intend to continue investing in research and development of new products. However, our investment may not produce marketable product enhancements and new products. If a product or group of products is not accepted in the marketplace that could adversely affect our business, results of operations and financial condition. In addition, the cost of developing new healthcare information services and technology solutions is inherently difficult to estimate. Our development and implementation of proposed products and services may take longer than originally expected, require more testing than originally anticipated and require the acquisition of additional personnel and other resources. If we are unable to develop new or updated products and services on a timely basis and implement them without significant disruptions to the existing systems and processes of our customers, we may lose potential sales and harm our relationships with current or potential customers.

 
15

 

Our success depends upon the recruitment and retention of key personnel and consultants.

To remain competitive in our industries, we must attract, motivate and retain highly skilled managerial, sales, marketing, consulting and technical personnel, including executives, consultants, programmers and systems architects. Competition for such personnel in our industries is intense in both the United States and abroad. Our failure to attract additional qualified personnel to meet our personnel needs could have a material adverse effect on our prospects for long-term growth. Our success is dependent to a significant degree on the continued contributions of key management, sales, marketing, consulting and technical personnel. The unexpected loss of key personnel could have a material adverse impact on our business and results of operations, and could potentially inhibit development and delivery of our solutions, devices and services and market share advances.

New and changing government regulation creates compliance challenges and may increase our costs.

The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory and other influences. For example, certain of our products may need to comply with certification requirements set forth by CCHIT, as well as certification standards under HITECH, which was passed in 2009, in order to appeal to new customers or to continue to appeal to existing customers.  Beginning on February 17, 2010, HITECH broadened the scope of HIPAA by expanding the class of persons that are subject to HIPAA requirements to include service and product providers such as Mediware, providing breach notification requirements, restricting the instances in which personal health data may be disclosed and augmenting the enforcement provisions.

Certain of our products are currently subject to regulation, including those relating to blood management products, electronic prescriptions and electronic communication.  Many healthcare laws, including those related to reimbursement by Medicare, Medicaid and other government programs, are complex and their application to specific products and services may not be clear. In particular, many existing healthcare laws and regulations, when enacted, did not anticipate the healthcare information services and technology solutions that we provide. However, these laws and regulations may nonetheless be applied to our products and services.  Certain of our blood management products are subject to FDA review upon their creation, modification affecting safety and soundness and other modifications that are not well defined  and are subject to the FDA’s on-going Quality Systems Regulation procedures.  In addition, our solutions for physicians concerning electronic prescribing, electronic routing of prescriptions to pharmacies and dispensing are governed by various state and federal “E Prescribing” laws, and our claims submission solutions are subject to different federal laws.  These laws and regulations may be applied to our products and services in a manner that we do not anticipate.  Furthermore, the laws are constantly evolving and we cannot predict the effects of future legislative and regulatory actions.

The regulatory regimes to which we are subject, and the evolving nature of the applicable laws, has several important implications for us. First, we have invested resources in conforming our products to the applicable standards and further significant investment will be required as certification standards evolve.  We are currently seeking certification of certain of our products under HITECH. Second, new customers often require that our software will be certified according to applicable standards.  Our failure to comply could result in costly contract breach and jeopardize our relationships with customers.  Third, if for some reason we are not able to comply with applicable standards in a timely fashion after their issuance, our products will be at a severe competitive disadvantage in the market.  Finally, if any of our customers fails to satisfy applicable standards, we could become involved in government investigations or legal actions.

Our business is subject to the risk of product-related liabilities.

Our products provide data for use by healthcare providers in patient care settings. Our license agreements generally contain provisions intended to limit our exposure to product-related claims. These provisions, however, may not be enforceable in some jurisdictions or may not adequately limit our exposure. We maintain product liability insurance in an amount that we believe to be adequate for our intended purpose. However, insurance may not cover a claim brought against us. A successful claim brought against us could have a material adverse effect upon our business, results of operations or financial condition.

 
16

 

System errors may delay product acceptance and adversely affect our operations and profitability.

Despite testing, software products as complex as those we offer and use in a wide range of clinical and health information systems settings contain a number of errors or “bugs,” especially early in their product life cycle. Our products are clinical information systems used in patient care settings where a low tolerance for bugs exists. Testing of products is difficult due to the wide range of environments in which the systems are installed. Due to these factors, the discovery of defects or errors could cause:

 
·
delays in product delivery

 
·
poor client references

 
·
payment disputes

 
·
contract cancellations and/or

 
·
additional expenses and payments to rectify problems.

Any of these factors could delay our product sales or have a material adverse effect upon our business, results of operations or financial condition.

Our client agreements typically provide warranties concerning material errors and other matters. Failure of our software to meet these warranties could constitute a material breach under our customer agreements, allowing in many cases the customer to terminate the agreement and possibly obtain a refund and/or damages, or might require us to incur additional expense in order to make the software solution or healthcare device meet these criteria. Our client agreements generally limit our liability arising from such claims but such limits may not be enforceable in certain jurisdictions or circumstances. A successful material claim brought against us, if uninsured or under-insured could materially harm our business, results of operations and financial condition.

Government contracting frequently requires less favorable terms.

Mediware is increasing its efforts to license its software to the United States military, behavioral health and other state and federal institutions.  While we believe these markets present opportunities, contracting with state and other government agencies frequently requires Mediware to accept less favorable contract terms and conditions, including warranties, performance obligations, cancellation rights and contracts with very limited limitation of liability provisions.

Our operating results can fluctuate due to irregular system sales.

Our revenue and results of operations can fluctuate substantially from quarter to quarter. System sales in any fiscal year depend substantially upon our sales performance and customers’ budgeting and buying practices. System sales may fluctuate due to:

 
·
contract activity

 
·
demand for our products and services

 
·
lengthy and complex sales cycles

 
·
customers’ internal budgets for new technology systems, customers’ technical resources to deploy technology and

 
·
customers’ personnel availability.

Additionally, our ability to recognize anticipated revenue may be materially affected by the terms of a final contract. Factors that impact contract terms and revenue include the following:

 
·
systems contracts may include both currently deliverable and non-deliverable software products

 
·
customer needs for services that include significant modifications, customization or complex interfaces that could delay product delivery or acceptance

 
17

 

 
·
customer-specific acceptance criteria and

 
·
payment terms that are long-term or depend upon contingencies.

The sales for the medication management ClosedLoop® products involve more hospital departments and longer implementation cycles. This exacerbates many of the foregoing risks.

Our stock price may be volatile due largely as a result of relatively low trading volume.

The trading price of Mediware’s common stock may fluctuate significantly from time to time. Generally, Mediware’s common stock has relatively low trading volume which can cause transactions in a relatively small number of shares to significantly impact the price of the stock.
 
We have two shareholders who can substantially influence the outcome of all matters voted upon by our shareholders and prevent actions which a shareholder may otherwise view favorably.

Two of our shareholders, Lawrence E. Auriana and Constellation Software Inc. ("Constellation"), reported owning or controlling, together with their affiliates, approximately 30.9% on July 9, 2010 and 22.8% on July 16, 2010, respectively of our outstanding common stock. As a result, if Mr. Auriana and Constellation were to act in concert they would be able to influence substantially all matters requiring shareholder approval, including the election of directors, the approval of significant corporate transactions, such as acquisitions, the ability to block an unsolicited tender offer and any other matter requiring a vote of shareholders. This concentration of ownership could delay, defer or prevent a change in control of Mediware or impede a merger, consolidation, takeover or other business combination which a shareholder, may otherwise view favorably.
 
 
Item 1B.  Unresolved Staff Comments.

Not applicable.

 
Item 2. Properties.

The Company's corporate headquarters are located in Lenexa, Kansas, where it occupies approximately 18,000 square feet of leased space. The Company also leases office space in Oak Brook, Illinois (approximately 16,000 square feet), Jacksonville, Florida (approximately 4,300 square feet), Santa Rosa, California (approximately 4,100 square feet), Atlanta, Georgia (approximately 3,600 square feet), Cranston, Rhode Island (approximately 4,100 square feet) and Andover, Massachusetts (approximately 11,200 square feet).  The Company's United Kingdom operations are headquartered in Basildon, Essex, where it occupies leased space totaling approximately 6,000 square feet.

 
Item 3. Legal Proceedings.

Mediware is from time to time involved in routine litigation incidental to the conduct of its business, including employment disputes and litigation alleging product defects, intellectual property infringements, violations of law and breaches of contract and warranties.  Mediware believes that no such routine litigation currently pending against it, if adversely determined, would have a material adverse effect on its consolidated financial position, results of operations or cash flows.

 
Item 4. Not applicable.

 
18

 


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company's common stock is traded on the Nasdaq Capital Market under the symbol “MEDW.”

The following table sets forth the high and low sales prices for the Company's common stock for each quarterly period of the fiscal years ended June 30, 2010 and 2009, as reported by Nasdaq.

   
2010
   
2009
 
   
High
   
Low
   
High
   
Low
 
                         
First Quarter
  $ 7.49     $ 4.80     $ 6.13     $ 5.18  
Second Quarter
  $ 7.89     $ 5.95     $ 5.76     $ 3.06  
Third Quarter
  $ 9.47     $ 6.62     $ 5.33     $ 3.97  
Fourth Quarter
  $ 9.99     $ 8.50     $ 6.15     $ 3.96  


As of August 31, 2010, there were approximately 1,191 shareholders of record of the Company's common stock. To date, the Company has not paid dividends to its shareholders.  The Company does not currently intend to pay dividends, but it may review the benefits of paying dividends in the future.

Equity Compensation Plan Information

Plan category
 
Number of securities to be issued upon exercise of outstanding options
 
(a)
   
Weighted-average exercise price of outstanding options
 
(b)
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
(c)
 
Equity compensation plans approved by security holders
    846,000     $ 8.69       967,000  
                         
Equity compensation plans not approved by security holders
    -0-       -0-       -0-  
                         
Total
    846,000     $ 8.69       967,000  

 
19

 
 
Stock Comparison Graph

The following chart compares the cumulative total shareholder return on Mediware's common stock based on the closing bid price of Mediware's common stock for the five years ended June 30, 2010, with the cumulative total returns for the Russell 2000 Index and the Nasdaq Computer & Data Processing Services Stocks Index over the same period.  The comparison assumes $100 invested in Mediware's common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any.  The stock price performance shown on the chart is not necessarily indicative of future performance.
 
 
 
      6/05       6/06       6/07       6/08       6/09       6/10  
                                                 
Mediware Information Systems, Inc.
  $ 100.00     $ 96.89     $ 72.29     $ 58.73     $ 61.75     $ 90.36  
Russell 2000
  $ 100.00     $ 114.58     $ 133.41     $ 111.80     $ 83.84     $ 101.85  
NASDAQ Computer & Data Processing
  $ 100.00     $ 103.51     $ 129.01     $ 120.59     $ 104.61     $ 112.36  
 
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
 
Item 6. Selected Financial Data.

The following table sets forth our selected consolidated financial information.  The financial information for the fiscal years ended June 30, 2010, 2009 and 2008 and as of June 30, 2010 and 2009 is derived from audited financial statements that appear elsewhere in this Annual Report on Form 10-K.  The financial information for the fiscal years ended June 30, 2007 and 2006, and as of June 30, 2008, 2007 and 2006 is derived from audited financial statements that do not appear in this Annual Report on Form 10-K.

You should read the following information in conjunction with our financial statements and notes thereto and the information set forth under “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  (All data in the following table is in thousands, except for per share data.)

 
20

 

Statements of Operations Data
For the years ended June 30,
                             
   
2010
   
2009
   
2008
   
2007
   
2006
 
Revenue
                             
System sales
  $ 10,918     $ 10,091     $ 11,612     $ 15,803     $ 12,164  
Services
    36,698       30,594       27,825       25,389       25,707  
                                         
Total revenue
    47,616       40,685       39,437       41,192       37,871  
                                         
Cost of sales
                                       
Cost of systems (1)
    3,558       3,766       3,092       2,905       2,197  
Cost of services (1)
    12,073       10,379       9,241       8,348       7,483  
                                         
Total cost of sales
    15,631       14,145       12,333       11,253       9,680  
                                         
Gross profit (1)
    31,985       26,540       27,104       29,939       28,191  
                                         
Amortization of capitalized software
    4,966       5,843       5,737       5,427       4,828  
Software development costs
    4,916       3,942       4,174       4,062       4,255  
Selling, general and administrative
    17,486       14,605       16,717       17,978       16,114  
Net interest and other income
    (41 )     (347 )     (847 )     (1,145 )     (677 )
                                         
Income before income taxes
    4,658       2,497       1,323       3,617       3,671  
                                         
Income tax expense
    (1,416 )     (923 )     (595 )     (1,291 )     (1,343 )
                                         
Net income
  $ 3,242     $ 1,574     $ 728     $ 2,326     $ 2,328  
                                         
Net income per common share
                                       
Basic
  $ 0.41     $ 0.21     $ 0.09     $ 0.29     $ 0.29  
                                         
Diluted
  $ 0.41     $ 0.20     $ 0.09     $ 0.28     $ 0.28  
                                         
Weighted average common shares outstanding
                                       
Basic
    7,838       7,651       7,961       8,122       8,009  
Diluted
    7,958       7,967       8,305       8,427       8,288  
                                         
Balance Sheet Data
                                       
As of June 30,
    2010       2009       2008       2007       2006  
                                         
Cash and cash equivalents
  $ 23,340     $ 20,865     $ 22,741     $ 22,789     $ 18,996  
Working capital
    18,726       18,273       18,995       24,334       18,095  
Total assets
    69,420       60,119       57,628       59,320       53,723  
Debt
    -       -       -       4       29  
Common stock and APIC
    34,963       33,153       32,237       31,505       30,425  
Retained Earnings
    15,679       12,437       10,863       10,413       8,087  
Total stockholders' equity
    46,700       41,897       39,891       42,031       38,501  

(1) Excludes amortization of capitalized software costs.

 
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.

Executive Overview

Mediware licenses, implements and supports clinical and performance management information solutions and other services to healthcare facilities.  We license our blood and biologics management solutions to hospitals.  We license blood donor recruitment and management solutions to blood donor and plasma donor centers through our Blood Center Technologies business group, formed during the fiscal year ended June 30, 2009.  The Company’s medication management solutions are licensed to hospitals, long-term care, specialty pharmacy, home infusion, alternate care and behavioral health facilities.  Our home infusion, specialty pharmacy and alternate care products and services are licensed through the Company’s Alternate Care Solutions (ACS) business group, formed during fiscal 2010.   ACS also provides billing and collection services to the home infusion market.   We license performance management software to hospitals, blood and plasma centers, and alternate care facilities.

We generally license our blood management and biologics management software systems and certain of our medication management software systems to customers on a perpetual basis.  The customers that license the software on a perpetual basis typically make an up-front payment for the software license fees and payments for support services on an annual basis.   In contrast, we generally provide our blood and plasma center solutions and certain of our medication management software systems and our recently acquired alternate care products on a monthly subscription basis.  These customers pay Mediware an initial start-up fee and a monthly fee for use and support of Mediware’s proprietary software.  Under both payment models, customers may purchase services, including implementation, consultation and other ad hoc services, for additional fees which are generally billed as incurred.  However, beginning in fiscal 2010, we initiated our “maintenance plus” program through which our customers pay “in advance” on an annual basis for services that had historically been purchased only on an ad hoc basis.  Performance management software is licensed on both a perpetual and subscription bases.  We currently anticipate that over time an increased number of our systems (in all product lines) will be licensed on a subscription basis.

Blood and Biologics Management Products

Our flagship blood transfusion product is the HCLL transfusion software.  We also provide our hospital customers its complementary HCLL donor software module for use in hospital-based donor centers.  In early fiscal year 2008, we announced our new BloodSafe™ suite of products.  As of June 30, 2010, BloodSafe is licensed for use at seven facilities.

In July 2008 we announced the launch of Blood Center Technologies business unit.  Blood Center Technologies is intended to drive growth as we expand our focus in the blood donor and plasma market.   Blood Center Technologies provides software tools and services to large, complex blood centers for donor targeting, donor recruitment, donation management, unit testing, blood component manufacturing, inventory control, sales and distribution.  This is accomplished through a combination of our 510(k) cleared LifeTrak® software and a set of robust CRM and recruiting software products and capabilities. These products and capabilities enable us to deliver an integrated software solution for blood centers to improve collections and efficiency throughout the entire process from blood donor recruitment to hospital distribution.  We have also added additional e-learning content and technologies, along with certification tracking tools, through an acquisition consummated in the quarter ended March 31, 2010.

In June 2008, we released BiologiCare™, our first generation bone, tissue and cellular product tracking software.   With the introduction of BiologiCare, we believe we are positioned to benefit from the emerging biologics market, which includes, among other things, bone, tissue and cord blood stem cells.  BiologiCare can be integrated with our HCLL software or operate on a stand-alone basis.  As of June 30, 2010, BiologiCare is licensed for use at two facilities.

In addition to our license of blood and biologics management software, we generate revenue from professional services and post-contract support.  These ongoing support contracts have accounted for 44.7%, 37.9%, and 37.5%, respectively, of the total revenue from blood management operations during the fiscal years ended June 30, 2010, 2009 and 2008.

Medication Management Products

Mediware’s medication management software product for larger and medium sized hospitals and healthcare institutions is WORx.  We also offer MediCOE, a physician order entry module, and MediMAR, a nurse point of care administration and bedside documentation module, that are fully integrated with the WORx software.  An acquisition in November 2008 expanded our product offering by adding Ascend, a solution that meets the needs of small and medium size hospital, specialty pharmacy and home infusion facilities.  To expand our capabilities and address a new industry mandate, we introduced MediREC in March 2007.  As of June 30, 2010, MediREC was licensed for use at seven customer sites.

 
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Selling our full suite of medication management products (WORx, MediMAR, MediCOE and MediREC) is a complex process involving multiple hospital departments.   On the other hand, Ascend requires substantially smaller financial commitments from customers and is priced based on a subscription pricing model.  Consequently, we anticipate that sales of these products will be more consistent and have shorter sales cycles.

We generate revenue from medication management software sales, professional services and post-contract support.  Support contracts accounted for approximately 50.9%, 53.4%, and 52.3%, respectively, of the revenue from medication management operations for the 2010, 2009 and 2008 fiscal years. 

Through two acquisitions consummated on December 11, 2009, Mediware greatly increased its presence in the alternate care market and formed an Alternate Care Solutions business unit to capitalize on the growing strength of its product offerings. Our product offerings currently include: home infusion software, specialty pharmacy software, home medical equipment software, and home healthcare software, as well as billing and collections services that are focused on the alternate care markets. These offerings are largely the combination of the home infusion offering that Mediware acquired in 2008 and the home infusion, specialty pharmacy and alternate care products acquired in December, 2009.

Our United Kingdom operating business is JAC.  JAC’s product offering includes Pharmacy Management system and Electronic Prescribing module.  The Electronic Prescribing module has been installed in approximately twenty U.K. customer sites as of June 30, 2010.  The installed base of the Company’s Pharmacy Management system product includes approximately 50% of the trusts within National Health Service (NHS).

The NHS in the U.K. initiated a national program to purchase healthcare information technology in 2004 (the National Program).   Since that time, JAC has worked to position itself favorably as a provider of software under the National Program.  JAC has also worked directly with hospitals and trusts to hedge against delays and changes in the National Program.  As a result of a change in government in the U.K. earlier this year, the National Program has been dramatically changed, and we are hopeful that JAC’s efforts to work directly with hospitals and trusts over the last several years will position JAC well as it works to license software and sell services directly to hospitals and trusts that are no longer subject to the limitations of the National Program requirements.

Performance Management Products

Through a business acquisition in June, 2009, Mediware added the Insight software system to its portfolio of products.  The Insight system is a business and clinical intelligence software package used in more than 100 hospitals at June 30, 2010.  We expect revenue from Insight software sales, professional services and post-contract support.  Support contracts accounted for a large majority of the Insight related software revenue prior to our acquisition and accounted for 40.8% of revenues for the year ended June 30, 2010.  If the sales of products increase, we expect that license fee revenue will increase and support revenue will make up a smaller portion of our revenue associated with this product.

Industry and Regulation

The healthcare industry, like other United States industries, has been impacted by the global economic downturn.   Consequently, the Company believes its customers remain cautious with their capital investments and are focused on ensuring that any significant spending has a demonstrable return on investment, provides clear improvements to patient safety or addresses developing government or industry standards.  Mediware believes that its products are well positioned to address each of these areas.      

Of specific importance to near term investment is ARRA, which became effective in 2009. This Act includes more than $38 billion of incentives to help healthcare organizations modernize operations through the acquisition and use of information technology solutions.  HITECH, a part of ARRA, provides roughly $2 billion in ‘jump start’ funding that the Department of Health and Human Services is to distribute over a two year time frame beginning in 2011.  ARRA also includes approximately $17 billion in Medicare and Medicaid incentives targeting the ‘meaningful use’ of health record systems, systems interoperability, and the submission of data related to quality improvement initiatives.

 
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The government spending is intended to reduce inefficiencies and improve patient care through the use of technologies. ARRA, and specifically HITECH, increases the pressure on hospitals and care providing institutions to adopt technology. HITECH provides funding for facilities to launch improvement projects associated with the ‘meaningful use’ of key information technologies. Qualifying hospitals can receive payments over a period of approximately four or five years beginning in 2011 based on their use of certified health information technology systems.   HITECH also provides financial penalties to hospitals by reducing Medicare reimbursement payments for hospitals that do not comply with certain “meaningful use” requirements by 2015.

While Mediware does not anticipate immediate benefits from these government initiatives, the Company believes that the additional government spending on healthcare information technology and other health reform legislation will stimulate spending across a broad range of healthcare information technology projects. Over time we expect these initiatives to create new opportunities, to expand the use of Mediware solutions and to have a positive impact on the Company.  We are working to ensure that its relevant products meet the applicable certification standards so that our customers receive the full benefit of the HITECH Act.  If we fail to achieve the appropriate certification standards, the Company could face adverse consequences as its customers look to other certified vendors.

We do not currently expect the Patient Protection and Affordable Care Act, passed in 2010, to have a material impact on our business.

Strategic Relationship and Acquisitions

We seek to develop strategic relationships that are complementary to our core markets and product set, and that provide a greater value proposition to the customer than could be realized without the strategic relationship. Our business strategy includes the possibility of growth through acquisitions and other corporate transactions.  We consummated three strategic acquisitions in fiscal 2010, two strategic acquisitions in fiscal 2009 and one strategic acquisition in fiscal 2008.  We believe that the acquisitions are an effective means to grow our business when existing products experience little growth.  We also believe that these acquisitions offer good return on investment.  There can be no assurance that we will be able to identify future strategic partners or reach mutually agreeable terms for a transaction if any such partners are identified.

Sales and Product Initiatives

We have developed a number of tailored programs for fiscal 2011 that are expected to provide opportunities for sales growth in fiscal 2011 or further in the future.

 
·
As noted above, we introduced our maintenance plus program in fiscal 2010.  We believe this program will provide our customers the opportunity to plan and budget for higher levels of services, increasing both customer satisfaction and spending during fiscal 2011 and future years.

 
·
We are targeting increased sales of BloodSafe by our internal sales staff during fiscal 2011. 

 
·
Since Mediware acquired the Ascend product line and business in fiscal 2009, substantially all of the business customers have utilized a precursor pharmacy software product rather than the contemporary Ascend software.  While we anticipate that the process will take time, we intend to begin transitioning customers from the older product to the latest Ascend software platform in fiscal 2011.

 
·
During fiscal 2011, Mediware intends to begin offering its full suite of products on a remotely hosted basis.  The hosting services would include installation, upgrades, patches and network configuration and repair as well as remote monitoring and help desk services.  We anticipate that these added services will make our product offerings even more attractive to many of our current and potential customers.

 
·
We have developed a number of different programs for fiscal 2011 to increase sales of our home infusion products acquired in fiscal 2009 and 2010.  We expect that these efforts will lead to growth in sales of home infusion products in fiscal 2011 and the coming years.

 
·
We have created a focused product strategy to make an entry level version of the Insight performance management software easily accessible and available to the users of our core products.  It is our expectation that after using the Insight software, our customers will see the benefit of the product and will expand their use over time.

 
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While there can be no assurance that any of these initiatives will be successful, we believe each of these programs, along with continued focus on our core business, can lead to sales growth in fiscal 2011.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses.  On an on-going basis, we evaluate these estimates, including those related to revenue recognition, capitalized software costs, goodwill, and stock-based compensation.  We base these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of the financial statements.
 
Revenue Recognition

The Company derives revenue from licensing its proprietary applications software and sublicensed software, sale of computer hardware, transaction fees from software use, and the services performed related to the installation, configuration, training, consultation and ongoing support of the software.  Software license revenue that is not subscription-based is generally recognized when evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collectability is probable, vendor-specific objective evidence of the fair value of any undelivered element exists, and no other significant obligations on the part of the Company remain.  For its subscription products, Mediware recognizes start-up fee revenue upon completion of the customer installment and configuration services associated with the fee.  Monthly subscription fees for software and maintenance are recognized ratably over the subscription period.  The Company combines the software and maintenance associated with the subscription fee into a single element for purposes of applying revenue recognition principles, as the Company does not sell software subscriptions or maintenance services on a standalone basis.  Revenue from the sale of hardware is generally recognized upon shipment.  Fees for installation, training and consultation are recognized as the services are provided.  Support and maintenance fees, typically sold on an annual renewal basis, are recognized ratably over the period of the support contract.

The Company recognizes revenue in accordance with the provisions of ASC 985-605, Software – Revenue Recognition.    If the Company enters into an arrangement with a client requiring significant customization of the software or services that are essential to the functionality of the software, the Company recognizes revenue derived from the sale of licensed software, sublicensed software, and services over the period the services are performed, in accordance with ASC 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts, as directed by ASC 985-605.

The Company considers many factors when applying accounting principles generally accepted in the United States of America related to revenue recognition.  These factors include, but are not limited to:

 
-
contract terms, such as payment terms, delivery dates, and pricing of the various product and service elements of a contract
 
-
availability of products to be delivered
 
-
time period over which services are to be performed
 
-
creditworthiness of the customer
 
-
the complexity of customizations and integrations to the Company’s software required by service contracts
 
-
discounts given for each element of a contract and
 
-
any commitments made as to project milestones

 
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Each of the relevant factors is analyzed to determine its impact, individually and collectively with other factors, on the revenue to be recognized.  Management is required to make judgments regarding the significance of each factor in applying the revenue recognition standards, as well as whether or not each factor complies with such standards.  Any misjudgment or error by management in its evaluation of the factors and the application of the standards, especially with respect to complex or new types of transactions, could have a material adverse affect on the Company’s future revenues and operating results.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts based on its estimates of collectability.  The Company bases these estimates on historical collections, performance and specific collection issues.  If actual bad debts differ from the reserves calculated, the Company records an adjustment to bad debt expense in the period in which the difference occurs.  If creditworthiness of the Company’s clients were to weaken or the Company’s collection results relative to historical experience were to decline, it could have a material adverse impact on operating results and cash flows.
 
Capitalized Software Costs

Capitalized computer software costs consist of certain costs incurred to create and develop computer software products.  The Company accounts for capitalized software costs in accordance with ASC 985-20, Accounting for the Costs of Software to be Sold, Leased or Otherwise Marketed.  As such, the Company capitalizes all software production costs incurred upon the establishment of technological feasibility for the product or enhancement, which ceases upon its general release.

Technological feasibility occurs upon the completion of the planning, designing, coding and testing activities that are necessary to establish that the product or enhancement can be produced to meet its design specifications, including its functions, features and technical performance requirements.

The Company amortizes capitalized software development costs for each product and enhancement over the estimated useful life of the product or enhancement, which ranges from five to seven years.  These estimates are based on available information, including product life cycles, past history with similar products, the market and anticipated market share for the product and other factors unique to the product.

The Company reports capitalized software costs at the lower of unamortized cost or net realizable value.  Net realizable value for capitalized software costs for each product or enhancement is determined by subtracting the estimated costs of completing and disposing of the product from the estimated future revenue of the product.  These estimates are based on available information, including product life cycles, past history and market for the products or enhancement, the market share the Company expects to achieve, current and future pricing of the products, the existing customer base, and other factors unique to each product.

The evaluation of net realizable value is inherently very subjective.  However, the Company believes its calculation of net realizable value has historically been accurate in all material respects.  Due to the size of our customer base, which generates a recurring support revenue stream, combined with anticipated system sales from our new products, the Company has not historically experienced, and does not anticipate, any significant changes to the net realizable value of our current capitalized software development costs.

Goodwill and Other Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other.  Goodwill and identifiable intangible assets are tested for impairment at least annually or more often if events and circumstances warrant.  The Company evaluates goodwill for impairment by comparing the fair value of the Company, a single reporting unit, to its carrying value including goodwill.  We used the income approach under which we calculate fair value based on the estimated discounted cash flow method as well as other generally accepted methodologies.  Our cash flow assumptions are based on historical and forecasted revenue, operating costs, and other relevant factors.  No impairment was indicated as of June 30, 2010.   Intangible assets with finite useful lives are amortized over their respective estimated useful lives and reviewed for impairment in accordance with ASC 350, Intangible - Goodwill and Other. As of June 30, 2010, management believes no such impairment has occurred.

 
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Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and intangible assets of businesses acquired. Business acquisitions involving goodwill include:

 
·
Digimedics Corporation (May 1990);
 
·
Informedics, Inc. ( September 1998);
 
·
Certain assets of Information Handling Services Group, including its Pharmakon and JAC divisions(June 1996);
 
·
Certain assets of Integrated Marketing Solutions LLC (October 2007);
 
·
Certain assets of Hann’s On Software, Inc  (November 2008);
 
·
Certain assets of SciHealth, Inc. (June 2009);
 
·
Certain assets of Advantage Reimbursement, Inc. (December 2009); and
 
·
Healthcare Automation, Inc. (December 2009).

Goodwill was reduced by the recognition of related income tax benefits.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation.    Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award.  This value is expensed ratably over the vesting period for time-based awards and when the achievement of performance goals is probable in our opinion for performance-based awards.  Determining the fair value of share-based awards at the grant date requires judgment; including volatility, expected terms, estimating the amount of share-based awards that are expected to be forfeited, and the likelihood of achieving performance or market conditions if present.  If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially impacted.

Results of Operations

Fiscal Year Ended June 30, 2010, Compared to Fiscal Year Ended June 30, 2009

Total revenue amounted to $47,616,000 for fiscal 2010 compared to $40,685,000 for fiscal 2009, an increase of $6,931,000 or 17%.   Revenue earned from medication management products and services increased $6,152,000 in fiscal year 2010, including $4,507,000 attributed to ACS products and services arising from two businesses acquired in December 2009.  Other contributors to the growth in medication management revenue were the full-year impact of Ascend systems and services from a business acquisition in November 2008, and JAC, which increased total revenue 8% over fiscal 2009.  Revenue earned from performance management systems and services was $1,671,000 more in fiscal 2010 than in fiscal 2009, as that business was established through an acquisition in June 2009.  The revenue increases in medication management and performance management were partially offset by a decline in blood and biologics management products and services revenue.  Blood and biologics management’s fiscal 2010 revenue decreased $884,000, or 4%, from the $20,212,000 recorded during fiscal 2009.  We experienced lower HCLL software sales and implementation revenue, though the decline was partially offset by system sales and service revenue attributed to our Blood Center Technologies products, which increased in fiscal 2010 over fiscal 2009.

System sales revenue, which includes revenue derived from proprietary software, third party software and hardware, totaled $10,918,000 for fiscal 2010, an increase of $827,000, or 8%, from $10,091,000 recorded in fiscal 2009.  System sales for blood and biologics management products decreased from $4,916,000 for fiscal 2009 to $4,580,000 for fiscal 2010, a 7% decrease. Increased subscription sales of our Blood Center Technologies products were offset by declines in HCLL system sales.  We anticipate that recurring revenue from Blood Center Technologies will continue to grow.  Newer products within blood and biologics management, including BloodSafe and BiologiCare, are expected to contribute more strongly to system revenues in the future, while HCLL service revenue is expected to continue to decline as our existing customers complete their implementation of HCLL.  System sales for the medication management products increased from $5,156,000 in fiscal 2009 to $5,742,000 in fiscal 2010, an increase of $586,000 or 11%.  WORx system sales increased due to a large contract entered into during fiscal 2010.   The full-year impact of the acquired Ascend product services contributed, as did ACS products and services from businesses acquired in December 2009.  JAC system sales declined, though we believe JAC continues to be well-positioned within its market.  System sales revenue for performance management was $541,000 for fiscal 2010 compared to $9,000 for fiscal 2009.  Management believes the market for its performance management systems is expanding and we hope to benefit from sales growth in fiscal 2011.
 
 
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Service revenue, which is derived from recurring software support, implementation, training services and our “maintenance plus” program increased $6,104,000, or 20%, to $36,698,000 in fiscal 2010 compared to $30,594,000 for fiscal 2009.  Service revenue for the blood and biologics management products declined $548,000, or 4%, as our customers continued to complete their implementation of our HCLL product.  The declines in HCLL services were partially offset by an increase in services for Blood Center Technologies products.  We expect further declines in HCLL service revenue due to the mature client base it serves, while Blood Center Technologies service revenues should expand.  Service revenue for the medication management products increased $5,566,000, or 39%, to $19,973,000 in fiscal 2010 compared to $14,407,000 for fiscal 2009.  This increase is a result of incremental revenues from businesses acquired in fiscal 2009 and 2010.  Service revenue from our core medication management products such as WORx were largely flat to fiscal 2009 as the impact of a mature client base was offset with service revenue derived from a contract with a large behavioral health system.  Management expects decreasing service revenues derived from its WORx products going forward.  Service revenue for JAC increased in fiscal 2010.  The Company expects service revenues to increase over the next year as JAC continues to be well positioned to make sales.

Cost of systems includes the cost of computer hardware and sublicensed software purchased from computer and software manufacturers by the Company as part of its integrated system offerings. Cost of systems can vary as the mix of revenue varies between high margin proprietary software and lower margin computer hardware and sublicensed software components.  Cost of systems decreased $208,000, or 6%, to $3,558,000 during fiscal 2010 compared to $3,766,000 in fiscal 2009.  The gross margin earned on system sales, excluding amortization of capitalized software costs, was 67% in fiscal 2010 compared to 63% in fiscal 2009.   The increase in gross margin is primarily due to a decrease in the amount of third party sales relative to the amount of high margin proprietary system sales during fiscal 2010.  We believe future gross margin percentages will remain consistent with recent periods provided system sales volumes are similar-to-higher than those achieved in fiscal 2010.

Cost of services relates to ongoing support and maintenance services and implementation services and includes the salaries of client service personnel and direct expenses of the client service departments.  Cost of services increased $1,694,000, or 16%, to $12,073,000 during fiscal 2010 as compared to $10,379,000 in fiscal 2009.  Cost of services increase is primarily attributed to personnel related to the recently acquired businesses.  Gross margin on service revenue increased nominally from 66% in fiscal 2009 to 67% in fiscal 2010. As anticipated, amortization of capitalized software decreased $877,000, or 15%, to $4,966,000 in fiscal 2010 compared to $5,843,000 in fiscal 2009.  The decrease occurred as past software development efforts became fully amortized.  We anticipate that amortization costs will remain flat or decline slightly in fiscal 2011 compared to fiscal 2010 provided Mediware’s capitalization and cash expenditures continue at substantially the same rates.
 
Expenditures for software development include both capitalizable and non-capitalizable development projects.  Total expenditures for software development were $8,736,000 in fiscal 2010 compared to $7,771,000 in fiscal 2009, an increase of $965,000, or 12%.  This increase is primarily a result of higher investment in the blood and biologics management products, development costs associated with recently acquired businesses, and development efforts in support of a medication management client.  Software development costs not subject to capitalization increased $974,000, or 25%, to $4,916,000 in fiscal 2010 compared to $3,942,000 in fiscal 2009.  The increase was due to higher spending and to a shift in the capitalization rate driven by the mix and timing of projects and the application of the capitalization rules.

Selling, general and administrative (SG&A) expenses include marketing and sales salaries, commissions, travel and advertising expenses and acquired intangibles amortization.  Mediware also includes therein bad debt expense; legal, accounting and professional fees; salaries and bonus expenses; utilities, rent, communications and other office expenses; stock-based compensation expenses and other related direct administrative expenses.  SG&A expenses increased $2,881,000, or 20%, from $14,605,000 in fiscal 2009 to $17,486,000 in fiscal 2010.  Approximately seventy-five percent of the increase in SG&A expense related to the operations and the acquired intangible amortization of the recently acquired businesses.  The remaining increase included an increase in the provision for doubtful accounts and less significant changes in items such as fixed asset depreciation, stock-based compensation expense and employee benefit expense.  As a percentage of revenue, SG&A remained relatively constant at 37% and 36% for fiscal 2010 and fiscal 2009, respectively.

 
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Interest and other income, net of interest and other expense, decreased from $347,000 in fiscal 2009 to $41,000 for fiscal 2010.  This decrease primarily resulted from a lower in interest rates reducing interest income earned on Mediware’s invested cash and imputed interest expense on contingent consideration expected to be paid to certain sellers of recent acquisitions.

Income tax expense increased $493,000, from $923,000 during fiscal 2009 to $1,416,000 in fiscal 2010.  The effective tax rate decreased from 37% for fiscal 2009 to 30% in fiscal 2010.  The decrease in the effective tax rate is primarily attributable to research and development tax credits taken during fiscal 2010.  We expect future effective tax rates to return to historical rates, and we cannot predict when and if additional research and development tax credits will be available to Mediware.

Net income during fiscal 2010 was $3,242,000, compared to $1,574,000 during fiscal 2009, resulting in an increase of net income of $1,668,000, or 106%.  The increase in net income is primarily attributable to revenue from businesses acquired in fiscal 2010 and 2009 and a decrease in capitalized software amortization, and was partially offset by decreased blood and biologics management product and service revenue due to a maturing client base.

Fiscal Year Ended June 30, 2009, Compared to Fiscal Year Ended June 30, 2008

Total revenue amounted to $40,685,000 for fiscal 2009 compared to $39,437,000 for fiscal 2008, an increase of $1,248,000 or 3%.   The increase in revenue in fiscal 2009 was primarily due to additional service revenue from implementation of medication management software.  Also contributing to the increase was revenue generated from medication management products acquired through our HOS acquisition in November 2008.  The increases were partially offset by a decline in medication management system sales.  Blood management products and services recorded total revenue of $20,212,000 during fiscal 2009, representing an increase of $374,000, or 2%, compared to $19,838,000 in the same period of fiscal 2008.  Medication management products and services (including the results from the acquired HOS business but excluding JAC) recorded an increase in total revenue of $751,000 from $12,942,000 in fiscal 2008 to $13,693,000 in fiscal 2009.  JAC recorded total revenues of $5,871,000 during fiscal 2009, representing an increase of $29,000 or 1%, compared to $5,842,000 during fiscal 2008.

System sales revenue amounted to $10,091,000 for fiscal 2009, a decrease of $1,521,000 or 13%, from $11,612,000 recorded in fiscal 2008.  System sales for the blood management products were $4,916,000 for fiscal 2009, an increase of $172,000, or 4%, compared to $4,744,000 for fiscal 2008.  This increase is primarily due to increased subscription sales of our BCT products, partially offset by an anticipated decline in HCLL system sales.  System sales for the medication management products (including the results from the acquired HOS business but excluding JAC) decreased from $4,926,000 in fiscal 2008 to $2,720,000 in fiscal 2009, representing a decrease of $2,206,000, or 45%.  This decrease primarily reflects a decline in MediMAR system sales due to a significant MediMAR contract that was signed during 2008 and, to a lesser extent, a decrease in WORx revenue and MediREC revenue.  JAC recorded system sales of $2,436,000 for fiscal 2009, representing an increase of $500,000, or 26%, compared to $1,936,000 reported for fiscal 2008.

Service revenue increased $2,769,000, or 10%, to $30,594,000 in fiscal 2009 compared to $27,825,000 for fiscal 2008.  Service revenue for the blood management products totaled $15,296,000 for fiscal 2009 representing an increase of $202,000, or 1%, compared to $15,094,000 recorded in fiscal 2008 primarily reflecting an increase in support and maintenance revenue as our customers continue to complete their implementation of our HCLL product.   Service revenue for the medication management products (including the results from the acquired HOS business but excluding JAC) increased $2,957,000, or 37%, to $10,973,000 in fiscal 2009 compared to $8,016,000 for fiscal 2008.  This increase is a result of an increase in WORx upgrade services as a Company program encouraged customers to upgrade the WORx software during the fiscal year and incremental revenues from medication management products acquired from HOS.  Service revenue for JAC decreased $471,000, or 12%, to $3,435,000 in fiscal 2009 compared to $3,906,000 in fiscal 2008.  This decrease is primarily the result of the declining foreign currency exchange rates between the British Pound and the U.S. Dollar.  In its local currency, JAC reported a 9% increase in service revenue for fiscal 2009.

 
29

 

Cost of systems increased $674,000, or 22%, to $3,766,000 during fiscal 2009 as compared to $3,092,000 in fiscal 2008.  The gross margin, excluding amortization of capitalized software costs, on system sales was 63% in fiscal 2009 compared to 73% in fiscal 2008.   The decrease in gross margin is primarily due to an increase in the amount of third party sales and the smaller amount of high margin proprietary system sales during fiscal 2009 compared to fiscal 2008.

Cost of services increased $1,138,000, or 12%, to $10,379,000 during fiscal 2009 as compared to $9,241,000 in fiscal 2008.  The increase in cost of services is primarily attributed to increases in the number of customer service personnel needed to facilitate the implementation of the HCLL projects and provide upgrade services to the existing WORx customers.  Gross margin on service revenue decreased slightly from 67% in fiscal 2008 to 66% in fiscal 2009.

Amortization of capitalized software increased $106,000, or 2%, to $5,843,000 in fiscal 2009 compared to $5,737,000 in fiscal 2008.  This increase is primarily due to increased amortization of capitalized software costs related to recent releases of the LifeTrak, HCLL and WORx products.

Software development costs decreased $232,000, or 6%, to $3,942,000 in fiscal 2009 compared to $4,174,000 in fiscal 2008.  Expenditures for software development include amounts paid for both capitalizable and non-capitalizable development projects.  Total expenditures for software development were $7,771,000 in fiscal 2009 compared to $7,418,000 in fiscal 2008, an increase of $353,000, or 5%.  This increase is primarily a result of higher investment in the blood management products during fiscal 2009 and incremental development costs associated with the acquired HOS business.

SG&A expenses decreased $2,112,000, or 13% from $16,717,000 in fiscal 2008 to $14,605,000 in fiscal 2009.  The decrease in SG&A expenses is primarily attributable to decreases in travel, legal and other professional expenses, partially offset by an increase in amortization expense associated with the intangibles from the acquisition of the HOS business during fiscal 2009.

Interest and other income for the year ended June 30, 2009 decreased $562,000, or 63%, compared to the year ended June 30, 2008 from $892,000 to $330,000.  This decrease primarily resulted from a period over period decrease in average interest rates and Mediware’s reduced average cash and cash equivalents balances during fiscal 2009.

Income tax expense increased $328,000, from $595,000 during fiscal 2008 to $923,000 in fiscal 2009.  The effective tax rate decreased from 45% for fiscal 2008 to 37% in fiscal 2009.  The decrease in the effective tax rate is primarily attributable to a $225,000 non-cash write-off of certain deferred tax assets relating to fully vested non-qualified stock options that were forfeited as a result of the departure of certain employees during fiscal 2008.

Net income during fiscal 2009 was $1,574,000, compared to $728,000 during fiscal 2008, resulting in an increase of net income of $846,000, or 116%.  The improvement resulted primarily from increased service revenue and decreased SG&A expense partially offset by a decrease in system sales revenue.

Liquidity and Capital Resources at June 30, 2010 and 2009

As of June 30, 2010, Mediware had cash and cash equivalents of $23,340,000 compared to $20,865,000 at June 30, 2009.  Working capital was $18,726,000 and $18,273,000 at June 30, 2010 and June 30, 2009, respectively.  Our current ratio was 2.0 to 1.0 at June 30, 2010 compared to 2.3 to 1.0 at June 30, 2009.  The reduction in the current ratio is attributable to timing of collection and payments activities and to $1,432,000 in contingent consideration due within one year related to certain acquisitions.  Other than deferred tax liabilities, the Company does not have material capital lease obligations, purchase obligations, or long-term liabilities.

Cash provided by operating activities was $11,801,000 during fiscal 2010 compared to $8,735,000 during fiscal 2009.  The increase in cash provided by operating activities is primarily due to an increase in advances from customers and higher net income.  These factors were partially offset by an increase in accounts receivable.

Cash used in investing activities was $10,124,000 during fiscal 2010 compared to $9,961,000 during fiscal 2009.  Cash used for acquisitions was higher in fiscal 2010 compared to fiscal 2009, though fixed asset net expenditures decreased.

 
30

 

Cash provided by financing activities was $1,095,000 during fiscal 2010 compared to cash used of $71,000 during fiscal 2009.   Proceeds from option exercises were $834,000 higher in fiscal 2010, accounting for the majority of the increase.

We currently use cash flow from operations to fund our capital expenditures and to support our working capital requirements.  We expect that future cash requirements will principally be for capital expenditures, working capital requirements, any additional stock repurchases and other strategic initiatives.  Exclusive of activities involving any future acquisitions of products or companies that complement or augment our existing line of products or any additional stock repurchases, we believe that our existing cash balances and cash flow from operations will be sufficient to meet our projected capital expenditures, working capital, and other cash requirements at least through the next twelve months.

Our liquidity is influenced by our ability to perform in a competitive industry.  Factors that may affect liquidity include our ability to penetrate the market for our products, maintain or reduce the length of the selling cycle, and collect cash from clients as systems are licensed or implemented and services completed.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company.

Tabular Disclosure of Contractual Obligations

The Company's contractual obligations at June 30, 2010 for operating leases are as follows (amounts in thousands):

Contractual Obligations
               
   
Payments Due by Fiscal Year
 
   
Total
   
2011
   
2012
   
2013
   
2014
   
2015
   
After 2015
 
Operating Lease Obligations
  $ 4,218     $ 1,477     $ 1,361     $ 623     $ 117     $ 117     $ 523  

The Company does not have any material capital lease obligations, purchase obligations or other long-term liabilities.

Recently Issued Accounting Guidance

In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for the Company beginning July 1, 2010.  Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance.  Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance.  Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method.  The guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition.  The Company expects that this new guidance will have no material impact on the Company’s consolidated financial position and results of operations.

In June 2009, the FASB finalized SFAS No. 167, Amending FASB interpretation No. 46(R), which was later superseded by the FASB Codification and included in ASC topic 810, "Consolidation." The provisions of ASC 810 provide guidance in determining whether an enterprise has a controlling financial interest in a variable interest entity. This determination identifies the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impacts the entity's economic performance, and the obligation to absorb losses or the right to receive benefits of the entity that could potentially be significant to the variable interest entity. This guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary and eliminates the quantitative approach previously required for determining the primary beneficiary. New provisions of this guidance are effective July 1, 2010.  These changes in ASC 810 are not expected to have a material impact on the Company's consolidated financial position and results of operations as the Company does not have variable interest entities.

 
31

 

In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140" ("SFAS No. 166") or Accounting Standards update No. 2009-16 (ASU 2009-16), which provides guidance to improve transparency about transfers of financial assets and a transferor's continuing involvement, if any, with transferred financial assets. SFAS No. 166, among other items, amends various provisions of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125," by removing the concept of a qualifying special-purpose entity and removes the exception from applying FIN 46(R) or Accounting Standards Update No. 2009-17, “Consolidations (Topic 810)” (ASU 2009-17) to variable interest entities that are qualifying special-purpose entities; limits the circumstances in which a transferor derecognizes a portion or component of a financial asset; defines a participating interest; requires a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and requires enhanced disclosures.  ASU 2009-16 is effective for the Company in fiscal year beginning July 1, 2010. Changes resulting from ASU 2009-16 are not expected to have a material impact on the Company's consolidated financial position and results of operations.

 
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.
 
Mediware is subject to market risks from interest rates due to the fluctuating rates paid on its cash equivalent balances and foreign currency fluctuations due to the operations of JAC.  During the last three years, Mediware has not held derivative instruments or engaged in other hedging transactions to reduce its exposure to such risks.

Interest Rate Risk

Mediware is exposed to the impact of interest rate changes because of its substantial cash equivalent balances.  These balances are not held for trading purposes.

   
Balance at
June 30, 2010
($ in 000)
 
Effective Interest Rate at
June 30, 2010
 
Effect of 1% Change
($ in 000)
 
Cash Equivalents
  $ 23,340  
<1.0%
  $ 233  

At June 30, 2010, a 1.0% point decrease in the current per annum interest rate for our cash equivalents each would result in $233,000 less interest income during the next fiscal year. The foregoing calculation assumes an instantaneous one percentage point decrease in the rates of all of our cash equivalents and that the equivalents balance is the amount outstanding as of June 30, 2010. The calculation therefore does not account for any differences in the market rates upon which the interest rates of our equivalents is based, or other possible actions, such as reinvestment in higher yielding instruments, that we might take in response to any rate decrease.

Foreign Currency Exchange Rate Risk

Operating in international markets involves exposure to the possibility of volatile movements in foreign exchange rates. The currencies in each of the countries in which JAC operates affect:

 
the results of Mediware’s international operations reported in United States dollars; and

 
the value of the net assets of JAC reported in United States dollars.

These exposures may impact future earnings or cash flows.  Revenue from JAC represented approximately 13% of Mediware’s consolidated revenue in fiscal 2010 and 14% of Mediware’s consolidated revenue in fiscal 2009.  The economic impact of foreign exchange rate movements is complex because such changes are often linked to variability in real growth, inflation, interest rates, governmental actions and other factors.  These changes, if material, could cause Mediware to adjust its financing and operating strategies.  Therefore, to isolate the effect of changes in currency does not accurately portray the effect of these other important economic factors.  As foreign exchange rates change, translation of the income statements of JAC into U.S. dollars affects year-over-year comparability of operating results.  Any foreign currency impact on translating assets and liabilities into dollars is included as a component of stockholders’ equity.  Mediware’s revenue for fiscal year 2010 was negatively impacted by approximately $337,000 foreign currency movement, primarily due to the strengthening of the United States dollar against the British pound.

 
32

 
 
Item 8. Financial Statements and Supplemental Data.

The Financial Statements and Notes required by this Item are included in this Report starting on page 40.

 
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

 
Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2010.  Disclosure controls and procedures are defined in the Securities Exchange Act as controls and other procedures of the Company designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and include controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the SEC is accumulated and communicated to the Company’s management, including the CEO and CFO, to allow timely decisions regarding required disclosure.  Based on its review and evaluation, the Company’s management has concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2010.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in the Securities Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, carried out an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2010.  The Company’s management based its evaluation on criteria set forth in the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on that assessment, management has concluded that the Company’s internal control over financial reporting was effective as of June 30, 2010.

 
33

 

This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s independent registered public accounting firm. Under Dodd-Frank Wall Street Reform and Consumer Protection Act non-accelerated filers, issuers with market capitalization of less than $75 million, receive a permanent exemption from complying with Section 404(b) of the SOX Act of 2002.

Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2010, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  Mediware believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within any company have been detected.

 
Item 9B. Other Information.

None

 
34

 

PART III

Item 10. Directors and Executive Officers and Corporate Governance.

The information concerning the Company's executive officers required by this item is incorporated by reference to the Company's Proxy Statement.

 
Item 11. Executive Compensation.

The information required by this item is incorporated by reference to the Company’s Proxy Statement.

 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is incorporated by reference to the Company’s Proxy Statement.

 
Item 13. Certain Relationships and Related Transactions and Director Independence.

The information required by this item is incorporated by reference to the Company’s Proxy Statement.

 
Item 14. Principal Accountant Fees and Services.

The information required by this item is incorporated by reference to the Company’s Proxy Statement.

 
35

 

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this Report:

1.     Consolidated Financial Statements:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at June 30, 2010 and 2009

Consolidated Statements of Operations and Comprehensive Income for the years ended June 30, 2010, 2009, and 2008

Consolidated Statements of Stockholders' Equity for the years ended June 30, 2010, 2009 and 2008

Consolidated Statements of Cash Flows for the years ended June 30, 2010, 2009 and 2008

Notes to Consolidated Financial Statements

Schedule II – Valuation and Qualification Accounts

EXHIBIT INDEX

3.1
Restated Certificate of Incorporation.
Incorporated by reference to Exhibit No. 4 to the Registration Statement on Form S-8, filed on July 3, 1996.
3.2
Certificate of Amendment of the Certificate of Incorporation.
Incorporated by reference to Exhibit No. 4.2 to the Registration Statement on Form S-8, filed on October 4, 2004.
3.3
By-laws
Incorporated by reference to Exhibit 3.15 to the Company’s Current Report on Form 8-K, filed on March 20, 2008.
10.1
Mediware Information Systems, Inc. 2001 Stock Option Plan.
Incorporated by reference to Appendix A in the Proxy Statement on Schedule 14A, filed on December 31, 2001.
10.2
Form of 2001 Mediware Information Systems, Inc. Stock Option Plan Stock Option Agreement.
Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K, filed on September 2, 2005.
10.3
Form of Amendment to 2001 Mediware Information Systems, Inc. Stock Option Plan Stock Option Agreement.
Incorporated by reference to Exhibit 10.59 to the Current Report on Form 8-K, filed on March 25, 2005.
Amended and Restated Mediware Information Systems, Inc. 2003 Equity Incentive Plan.
 
10.5
Form 2003 Mediware Information Systems, Inc. Equity Incentive Plan Stock Option Plan Agreement.
Incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K, filed on September 2, 2005.
 
 
36

 
 
10.6
Form of Amendment to 2003 Mediware Information Systems, Inc. Equity Incentive Plan Stock Option Agreement.
Incorporated by reference to Exhibit 10.58 to the Current Report on Form 8-K, filed on March 25, 2005.
10.7
Employment Agreement dated as of April 18, 2003 between Mediware Information Systems, Inc. and Robert Tysall-Blay.
Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q, filed on October 25, 2005.
10.8
Employment Agreement effective as of September 1, 2009 between Mediware Information Systems, Inc. and Alan Wittmer.
Incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K, filed on September 9, 2009.
10.9
Employment Agreement effective as of January 11, 2010 between Mediware Information Systems, Inc. and Michael Martens.
Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on January 12, 2010.
10.10
Form of Michael Martens Mediware Information System 2003 Equity Incentive Plan Stock Option Agreement.
Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on January 12, 2010.
10.11
Employment Agreement dated May 7, 2010 between Mediware Information Systems, Inc. and Thomas K. Mann.
Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on May 13, 2010.
10.12
Employment Agreement dated May 7, 2010 between Mediware Information Systems, Inc. and John M. Damgaard.
Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on May 13, 2010.
10.13
Employment Agreement dated May 7, 2010 between Mediware Information Systems, Inc. and Robert C. Weber.
Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, filed on May 13, 2010.
10.14
Amended and Restated Purchase Agreement dated December 11, 2009 among Mediware Information Systems, Inc., Advantage Reimbursement, LLC, Healthcare Automation, Inc., Kenneth J. Pereira and David A. Belhumeur.
Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K, filed on December 15, 2009.
10.15
Asset Purchase Agreement dated November 24, 2009 among Advantage Reimbursement, LLC, Advantage Reimbursement, Inc., Kenneth J. Pereira and David A. Belhumeur.
Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K, filed on November 24, 2009.
10.16
Form of Indemnification Agreement among Mediware Information Systems, Inc., Advantage Reimbursement, LLC, Healthcare Automation, Inc., Advantage Reimbursement, Inc., Kenneth J. Pereira and David A. Belhumeur.
Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K, filed on November 24, 2009.
Mediware Information Systems, Inc. and Subsidiaries Computation of Net Earnings Per Share.
 
List of Subsidiaries.
 
Consent of Eisner LLP.
 
Rule 13a-14(a)/15d-14(a) Certification.
 
Rule 13a-14(a)/15d-14(a) Certification.
 
Section 1350 Certification.
 
Section 1350 Certification.
 

 
37

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
MEDIWARE INFORMATION SYSTEMS, INC.

Date:   September 8, 2010
BY:
/s/ T. KELLY MANN
   
T. KELLY MANN
   
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
Title
     
           
/s/ T. KELLY MANN
 
President, Chief Executive Officer & Director
 
September 8, 2010
T. KELLY MANN
 
(Principal Executive Officer)
     
           
/s/ MICHAEL MARTENS
 
Chief Financial Officer
 
September 8, 2010
MICHAEL MARTENS
 
(Principal Accounting Officer)
     
           
/s/ LAWRENCE AURIANA
 
Chairman of the Board
 
September 8, 2010
LAWRENCE AURIANA
         
           
/s/ ROGER CLARK
 
Director
 
September 8, 2010
ROGER CLARK
         
           
/s/ DR. JOHN GORMAN
 
Director
 
September 8, 2010
DR. JOHN GORMAN
         
         
/s/ RICHARD GRECO
 
Director
 
September 8, 2010
THE HONORABLE RICHARD GRECO
       
           
/s/ IRA NORDLICHT
 
Director
 
September 8, 2010
IRA NORDLICHT
         
           
/s/ ROBERT SANVILLE
 
Director
 
September 8, 2010
ROBERT SANVILLE
         
           
/s/ PHILIP COELHO
 
Director
 
September 8, 2010
PHILIP COELHO
       
           

 
38

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Mediware Information Systems, Inc.

We have audited the accompanying consolidated balance sheets of Mediware Information Systems, Inc. (the “Company”) as of June 30, 2010 and 2009 and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  We were not engaged to perform an audit of the Company’s internal control over financial reporting.  Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mediware Information Systems, Inc. as of June 30, 2010 and 2009, and the consolidated results of its operations and its consolidated cash flows for each of the years in the three-year period ended June 30, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As described in Note 4 to the consolidated financial statements, the Company adopted revised accounting guidance for business combinations entered into effective July 1, 2009.

/s/ EisnerAmper LLP
New York, New York
September 8, 2010

 
39

 

MEDIWARE INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)

   
June 30,
   
June 30,
 
   
2010
   
2009
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 23,340     $ 20,865  
Accounts receivable (net of allowance of $1,090 and $754)
    11,569       8,812  
Inventories
    375       200  
Deferred income taxes
    748       528  
Prepaid expenses and other current assets
    986       1,152  
                 
Total current assets
    37,018       31,557  
                 
Fixed assets, net
    1,369       1,792  
Capitalized software costs, net
    12,352       13,498  
Goodwill, net
    13,188       9,843  
Other intangible assets, net
    5,403       3,381  
Other long-term assets
    90       48  
                 
Total Assets
  $ 69,420     $ 60,119  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities
               
Accounts payable
  $ 1,409     $ 933  
Advances from customers
    10,950       8,769  
Income taxes payable
    613       341  
Contingent consideration payable
    1,432       -  
Accrued expenses and other current liabilities
    3,888       3,241  
                 
Total current liabilities
    18,292       13,284  
                 
Deferred income taxes
    4,428       4,938  
                 
Total liabilities
    22,720       18,222  
                 
Commitments and contingencies (Note 10)
               
                 
Stockholders' Equity
               
Preferred stock, $.01 par value; authorized 10,000,000shares; none issued
    -       -  
Common stock, $.10 par value; authorized 25,000,000shares; 8,557,000 and 8,283,000 shares issued at June 30, 2010 and 2009, respectively
    855       828  
Additional paid-in capital
    34,108       32,325  
Treasury stock, 590,000 shares at June 30, 2010 and 2009
    (3,503 )     (3,503 )
Retained earnings
    15,679       12,437  
Accumulated other comprehensive (loss)
    (439 )     (190 )
Total stockholders' equity
    46,700       41,897  
                 
Total Liabilities and Stockholders' Equity
  $ 69,420     $ 60,119  

See Notes to Consolidated Financial Statements.

 
40

 

MEDIWARE INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 (in thousands, except earnings per share)

   
For the Years Ended June 30,
 
   
2010
   
2009
   
2008
 
                   
Revenue
                 
System sales
  $ 10,918     $ 10,091     $ 11,612  
Services
    36,698       30,594       27,825  
                         
Total revenue
    47,616       40,685       39,437  
                         
Cost and Expenses
                       
Cost of systems (1)
    3,558       3,766       3,092  
Cost of services (1)
    12,073       10,379       9,241  
Amortization of capitalized software costs
    4,966       5,843       5,737  
Software development costs
    4,916       3,942       4,174  
Selling, general and administrative
    17,486       14,605       16,717  
                         
Total costs and expenses
    42,999       38,535       38,961  
                         
Operating income
    4,617       2,150       476  
                         
Interest and other income
    137       330       892  
Interest and other expense
    (96 )     17       (45 )
                         
Income before income taxes
    4,658       2,497       1,323  
Income tax provision
    (1,416 )     (923 )     (595 )
                         
Net income
    3,242       1,574       728  
                         
Other comprehensive loss
                       
Foreign currency translation adjustment
    (249 )     (299 )     (4 )
                         
                         
Comprehensive income
  $ 2,993     $ 1,275     $ 724  
                         
                         
Net income per Common Share
                       
Basic
  $ 0.41     $ 0.21     $ 0.09  
Diluted
  $ 0.41     $ 0.20     $ 0.09  
                         
Weighted Average Common Shares Outstanding
                       
Basic
    7,838       7,651       7,961  
Diluted
    7,958       7,967       8,305  

(1) Excludes amortization of Capitalized Software Costs

See Notes to Consolidated Financial Statements.

 
41

 


MEDIWARE INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 2010, 2009 and 2008
(in thousands)

   
Common Stock
   
Additional Paid-In
   
Treasury
   
Retained
   
Accumulated Other Comprehensive
       
   
Shares
   
Amount
   
Capital
   
Stock
   
Earnings
   
Income (Loss)
   
Total
 
                                           
                                           
Balance at June 30, 2007
    8,151     $ 815     $ 30,690     $ -     $ 10,413     $ 113     $ 42,031  
Cumulative effect of a change in accounting principal
                                    (278 )             (278 )
Repurchase of common stock
                            (3,318 )                     (3,318 )
Stock based compensation expense
    29       3       729                               732  
Foreign currency translation adjustment
                                            (4 )     (4 )
Net income
                                    728               728  
                                                         
Balance at June 30, 2008
    8,180     $ 818     $ 31,419     $ (3,318 )   $ 10,863     $ 109     $ 39,891  
Exercise of stock options
    31       3       91                               94  
Repurchase of common stock
                            (185 )                     (185 )
Stock based compensation expense
    72       7       795                               802  
Tax benefit from exercise of stock options
                    20                               20  
Foreign currency translation adjustment
                                            (299 )     (299 )
Net income
                                    1,574               1,574  
                                                         
Balance at June 30, 2009
    8,283     $ 828     $ 32,325     $ (3,503 )   $ 12,437     $ (190 )   $ 41,897  
Exercise of stock options
    183       18       910                               928  
Stock based compensation expense
    91       9       706                               715  
Tax benefit from exercise of stock options
                    167                               167  
Foreign currency translation adjustment
                                            (249 )     (249 )
Net income
                                    3,242               3,242  
                                                         
Balance at June 30, 2010
    8,557     $ 855     $ 34,108     $ (3,503 )   $ 15,679     $ (439 )   $ 46,700  

See Notes to Consolidated Financial Statements.

 
42

 

MEDIWARE INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 
   
For the Years Ended June 30,
 
   
2010
   
2009
   
2008
 
Cash Flows From Operating Activities
                 
Net income
  $ 3,242     $ 1,574     $ 728  
Adjustments to reconcile net income, to net cash provided by operating activities:
                       
Depreciation and amortization
    6,697       6,953       6,582  
(Gain) / Loss on disposal of fixed assets
    11       (24 )     12  
Deferred tax provision
    (497 )     245       (50 )
Stock based compensation expense – employees and directors
    715       802       732  
Provision for doubtful accounts
    583       197       68  
Changes in operating assets and liabilities, net of effect of acquisitions:
                       
Accounts receivable
    (2,260 )     (1,837 )     5,047  
Inventories
    (180 )     (94 )     94  
Prepaid and other assets
    230       (188 )     (38 )
Accounts payable, accrued expenses, advances from customers and income taxes payable
    3,260       1,107       142  
Net cash provided by operating activities
    11,801       8,735       13,317  
                         
Cash Flows From Investing Activities
                       
Acquisition of fixed assets
    (223 )     (609 )     (1,271 )
Proceeds from disposal of fixed assets
    -       47       -  
Capitalized software costs
    (3,820 )     (3,829 )     (3,244 )
Acquisition of businesses, net of cash acquired
    (6,081 )     (5,570 )     (5,524 )
Net cash used in investing activities
    (10,124 )     (9,961 )     (10,039 )
                         
Cash Flows From Financing Activities
                       
Proceeds from exercise of stock options
    928       94       -  
Excess tax benefit from exercise of stock options
    167       20       -  
Repurchase of common stock
    -       (185 )     (3,318 )
Principal payments on note payable
    -       -       (4 )
Net cash provided by (used in) financing activities
    1,095       (71 )     (3,322 )
                         
Foreign currency translation adjustments
    (297 )     (579 )     (4 )
                         
Net increase (decrease) in cash and cash equivalents
    2,475       (1,876 )     (48 )
Cash at beginning of year
    20,865       22,741       22,789  
Cash at end of year
  $ 23,340     $ 20,865     $ 22,741  
                         
Supplemental disclosures of cash flow information:
                       
Cash paid during the period for:
                       
Income taxes
  $ 2,118     $ 759     $ 230  
                         
Supplemental disclosures of noncash investing and financing activities:
                       
Reduction of goodwill recorded for tax benefit of related amortization
  $ 232     $ 232     $ 232  

See Note 4 with respect to acquisition of businesses

See Notes to Consolidated Financial Statements.

 
43

 

MEDIWARE INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company
Mediware Information Systems, Inc. and subsidiaries (“Mediware” or the “Company”) develops, markets, licenses, implements and supports clinical management and performance management information software systems used primarily by hospitals, long-term care and behavioral health facilities and blood and blood plasma centers.  The Company's systems are generally designed to automate certain clinical departments of a hospital, namely, the blood bank and pharmacy, to serve blood and plasma centers and to provide performance information to hospital management.  A system consists of the Company's proprietary application software, third-party licensed software, computer