UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q




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




For the quarterly period ended March 31, 2010




OR




oTRANSITION 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 StreetLenexa, Kansas
66214(Address of principal executive offices)
(Zip Code)







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




(Former name, former address and former fiscal year, if changed since last report)







Index




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.   x Yes o No




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 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
oNon-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).   o Yes   x No




APPLICABLE ONLY TO CORPORATE ISSUERS:




As of April 19, 2010, there were 7,889,268 shares of Common Stock, $0.10 par value, of the registrant outstanding.





1




MEDIWARE INFORMATION SYSTEMS, INC.




INDEX




PagePART I
Financial InformationITEM 1.
Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and June 30, 2009
4Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) for the Three and Nine Months Ended March 31, 2010 and 2009
5Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) for the Nine Months Ended March 31, 2010
6Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended March 31, 2010 and 2009
7Notes to Unaudited Condensed Consolidated Financial Statements
8Review Report of Independent Registered Public Accounting Firm
23ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
24ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
35ITEM 4.
Controls and Procedures
36PART II
Other Information
36ITEM 1.
Legal Proceedings
36ITEM 1A.
Risk Factors
36ITEM 6.
Exhibits
37Signatures
38


3
 Index




PART I     FINANCIAL INFORMATION




1.      FINANCIAL STATEMENTS




MEDIWARE INFORMATION SYSTEMS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(Amounts in thousands except shares)





(Unaudited)

March 31,

2010


June 30,

2009ASSETSCurrent AssetsCash and cash equivalents

$
21,342


$
20,865Accounts receivable (net of allowance of $821 and $754)


10,312



8,812Inventories


331



200Deferred income taxes


622



528Prepaid expenses and other current assets


1,349



1,152Total current assets


33,956



31,557Fixed assets, net


1,470



1,792Capitalized software costs, net


12,203



13,498Goodwill, net


13,246



9,843Other intangible assets, net


5,750



3,381Other long-term assets


90



48Total Assets

$
66,715


$
60,119LIABILITIES AND STOCKHOLDERS' EQUITYCurrent LiabilitiesAccounts payable

$
1,431


$
933Advances from customers


9,974



8,769Income taxes payable


556



341Contingent consideration payable


1,403



-Accrued expenses and other current liabilities


3,873



3,241Total current liabilities


17,237



13,284Deferred income taxes


4,466



4,938Total liabilities


21,703



18,222Stockholders' EquityPreferred stock, $.01 par value; authorized 10,000,000 shares; none issued


-



-Common stock, $.10 par value; authorized 25,000,000 shares; 8,478,985 and 8,283,272 shares issued as of March 31, 2010 and June 30, 2009, respectively


848



828Additional paid-in capital


33,379



32,325Treasury stock, 589,717 shares at March 31, 2010 and June 30, 2009


(3,503
)


(3,503
)Retained earnings


14,730



12,437Accumulated other comprehensive loss


(442
)


(190
)Total stockholders' equity


45,012



41,897Total Liabilities and Stockholders' Equity

$
66,715


$
60,119





See Notes to Unaudited Condensed Consolidated Financial Statements.





4
 Index




MEDIWARE INFORMATION SYSTEMS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(LOSS)


(Amounts in thousands, except earnings per share)





(Unaudited)

Three months ended

March 31,


(Unaudited)

Nine Months ended March 31,2010


2009


2010


2009RevenueSystem sales

$
2,525


$
2,700


$
7,739


$
7,152Services


10,281



7,502



26,627



22,898Total revenue


12,806



10,202



34,366



30,050Cost and ExpensesCost of systems (1)


930



996



2,638



2,703Cost of services


3,363



2,580



8,637



7,888Amortization of capitalized software costs


1,110



1,449



3,862



4,452Software development costs


1,463



1,036



3,591



2,794Selling general and administrative


4,671



3,466



12,633



10,983Total costs and expenses


11,537



9,527



31,361



28,820Operating income


1,269



675



3,005



1,230Interest and other income


10



51



121



299Other expense


(40
)


-



(62
)


3Income before income taxes


1,239



726



3,064



1,532Income tax expense


(348
)


(243
)


(771
)


(528
)Net income


891



483



2,293



1,004Other comprehensive lossForeign currency translation adjustment


(150
)


(33
)


(252
)


(663
)Comprehensive income

$
741


$
450


$
2,041


$
341Net income per Common ShareBasic

$
0.11


$
0.06


$
0.29


$
0.13Diluted

$
0.11


$
0.06


$
0.29


$
0.13Weighted Average Common Shares OutstandingBasic


7,889



7,643



7,819



7,648Diluted


7,984



7,943



7,927



7,972(1) Excludes amortization of Capitalized Software Costs








See Notes to Unaudited Condensed Consolidated Financial Statements.





5
 Index





MEDIWARE INFORMATION SYSTEMS, INC.


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


(Amounts in thousands)





Common StockShares


Amount


Additional Paid-In

Capital


Treasury

Stock


Retained Earnings


Accumulated Other Comprehensive Income (Loss)


TotalBalance at June 30, 2009


8,283


$
828


$
32,325


$
(3,503
)

$
12,437


$
(190
)

$
41,897Exercise of stock options


126



13



458















471Issuance of common stock on vesting of restricted shares


70



7



(7
)














-Stock based compensation expense










464















464Tax benefit from exercise of stock options










139















139Foreign currency translation adjustment






















(252
)


(252
)Net income


















2,293







2,293Balance at March 31, 2010 (Unaudited)


8,479


$
848


$
33,379


$
(3,503
)

$
14,730


$
(442
)

$
45,012








See Notes to Unaudited Condensed Consolidated Financial Statements.





6
 Index





MEDIWARE INFORMATION SYSTEMS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Amounts in thousands)





(Unaudited)

Nine Months Ended

March 31,2010


2009Cash Flows From Operating ActivitiesNet income

$
2,293


$
1,004Adjustments to reconcile net income, to net cash provided by operating activities:Depreciation and amortization


5,066



5,265Gain on disposal of fixed assets


-



(24
)Stock based compensation expense


464



619Deferred tax provision


(393
)


(531
)Provision for doubtful accounts


192



232Changes in operating assets and liabilities, net of business acquired:Accounts receivable


(612
)


(1,417
)Inventories


(138
)


(193
)Prepaid expenses and other assets


(131
)


16Accounts payable, accrued expenses and advances from customers


2,197



1,922Net cash provided by operating activities


8,938



6,893Cash Flows From Investing ActivitiesAcquisition of fixed assets


(136
)


(418
)Proceeds from sale of fixed assets


-



47Capitalized software costs


(2,566
)


(2,900
)Acquisition of businesses, net of cash acquired


(6,080
)


(3,797
)Net cash used in investing activities


(8,782
)


(7,068
)Cash Flows From Financing ActivitiesRepurchase of common stock


-



(185
)Proceeds from exercise of stock options


471



67Tax benefits from exercise of stock options


139



14Net cash provided by (used in) financing activities


610



(104
)Foreign currency translation adjustments


(289
)


(1,140
)Net change in cash and cash equivalents


477



(1,419
)Cash at beginning of period


20,865



22,741Cash at end of period

$
21,342


$
21,322Supplemental disclosures of cash flow information:Cash paid during the period for:Income taxes paid

$
664


$
394








See Notes to Unaudited Condensed Consolidated Financial Statements.





7
 Index




MEDIWARE INFORMATION SYSTEMS, INC.




NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS







1.
BASIS OF PRESENTATION





In the opinion of management, the accompanying unaudited, condensed, consolidated financial statements contain all adjustments necessary to present fairly the financial position of Mediware Information Systems, Inc. (“Mediware” or the “Company”) and its results of operations and cash flows for the interim periods presented. Such financial statements have been condensed in accordance with the applicable regulations of the Securities and Exchange Commission and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with Mediware's audited financial statements for the fiscal year ended June 30, 2009, included in Mediware's Annual Report filed on Form 10-K for such fiscal year.





The results of operations for the three and nine months ended March 31, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year.








2.
EARNINGS PER SHARE





Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding, par value $0.10 (“Common Stock”), of Mediware.  For the three and nine months ended March 31, 2010 and the three and nine months ended March 31, 2009, the dilutive effect of Common Stock equivalents is included in the calculation of diluted earnings per share using the treasury stock method.








3.
TREASURY STOCK





In February 2008, the Board of Directors of the Company authorized Mediware to repurchase up to $4,000,000 of its Common Stock, at times and prices as the President and Chief Executive Officer or the Chief Financial Officer of the Company shall determine to be appropriate (the “Share Repurchase Program”). In October 2008, the Board of Directors expanded the Share Repurchase Program by $3,318,000, bringing the total amount authorized under the Share Repurchase Program to $7,318,000. The program has no expiration date, and Mediware has no obligation to purchase shares under the Share Repurchase Program.





As of March 31, 2010, the Company has repurchased a total of 589,717 shares of Common Stock at a cost of $3,503,000 under the Share Repurchase Program.  As of March 31, 2010, the Company is authorized to purchase up to an additional $3,815,000 of Common Stock under the Share Repurchase Program.





Shares of Common Stock repurchased by the Company are recorded at cost as treasury stock and result in a reduction of stockholders' equity in the accompanying consolidated balance sheets. When shares are reissued, the Company will use the weighted average cost method for determining cost. The difference between the cost of the shares and the issuance price is added or deducted from additional paid-in capital.








4.
ACQUISITIONS





Commencing July 1, 2009, the Company has accounted for business combinations under the revised accounting guidance in Accounting Standards Codification (“ASC”) 805.





8
 Index




Healthcare Automation, Inc.


On December 11, 2009, Mediware acquired all of the common stock of Healthcare Automation, Inc., a Delaware corporation (“HAI”). HAI provides medication management solutions to home infusion, specialty pharmacy and alternate care markets through integrated software solutions that address the complex work flow and patient safety needs of these markets.





Mediware believes the acquisition of HAI will expand its medication management offering by expanding its presence in the home infusion, specialty pharmacy and alternate care markets.  The Company plans to continue offering its WORx pharmacy product line to the larger acute care hospitals and behavioral health facilities, and its Ascend pharmacy products to smaller hospitals and pharmacies, while the HAI product line, along with the Ascend home infusion product line will be offered to home infusion, specialty pharmacy and alternate care markets.





The HAI products generate revenue by licensing its proprietary software, and by providing professional services and support for the product lines. Generally, HAI customers are charged an initial start-up fee along with monthly fees for the continued use and support of the proprietary software. Software license fees are recognized, when the license is initially executed, subject to the revenue recognition principles for software. Professional services and support revenues are recognized as the services are delivered.





The purchase price paid for HAI consists of an initial purchase price of $3,501,000 in cash, net of $5,000 cash acquired, at the closing, plus contingent consideration up to $946,000 based upon the achievement of certain revenue milestones through December 11, 2010. The purchase price is also subject to a working capital adjustment. The Company expects to determine the amount of the contingent consideration within sixty days after the first anniversary of the transaction. Contingent consideration is payable within three months of the anniversary date of the acquisition. Management estimated the fair value of the contingent consideration at the acquisition date to be $871,000 using a probability-weighted discounted cash flow model. This fair value is based on significant inputs not observable in the markets and thus represents a Level 3 measurement as defined in ASC 820. The Company incurred $40,000 of legal, accounting and other professional fees related to this transaction, which were expensed. The results of the HAI operations are included in the accompanying financial statements from the date of acquisition. From the date of acquisition, HAI has contributed $1.5 million in total revenue.





The Company has accounted for the HAI transaction as a business acquisition under the accounting guidance. The assets acquired and liabilities assumed of HAI were recorded as of the acquisition date, at their respective fair values. The preparation of the valuation required the use of significant assumptions and estimates. These estimates were based on assumptions that the Company believes to be reasonable.





The following summarizes the assets acquired and liabilities assumed at the acquisition date, net of cash acquired (in thousands):




Purchase Price

AllocationAccounts receivable

$
743Prepaid and other current assets


79Fixed assets


14Intangible assets subject to amortization


2,199Goodwill


1,860Accounts payable


(57
)Advances from customers


(240
)Accrued expenses and other current liabilities


(226
)Other long term liabilities – contingent consideration


(871
)Total purchase price, net of cash acquired

$
3,501





Details of acquired intangibles and goodwill are as follows (in thousands):





Amount

Assigned

Weighted

Average

Amortization

Period

Risk-Adjusted

Discount Rate

Used in Purchase Price

AllocationAmortizable Intangible AssetsPurchased technology

$
756

5.0 years


19.1
%Customer relationships


1,285

6.0 years


19.1
%Customer Backlog


158

13 months


19.1
%$
2,199Goodwill

$
1,860


9
 Index




The Company believes that the estimated tangible assets represent fair value at the date of acquisition. The fair value of an asset is defined as the amount for which an asset or liability could be bought or sold in a current transaction between knowledgeable, unrelated willing parties when neither party is acting under compulsion.





The Company valued the purchased technology using the excess earnings method of the income approach. Utilizing this approach, the Company projected revenue and related expenses. These projected income amounts were then reduced by the return on contributory assets and discounted to present value. This method requires the use of certain estimates, including revenue growth rates, technology replacement rates, customer attrition, expenses, contributory asset charges and discount rates. Based on this methodology the Company assigned the value of purchased technology at $756,000. The Company will amortize this amount over the estimated useful life of five years.





The Company valued the customer relationships and contracted backlog using the excess earnings method of the income approach. Utilizing this approach, the Company projected revenue and related expenses. These projected income amounts were then reduced by the return on contributory assets and discounted to present value. This method requires the use of certain estimates, including revenue growth rates, customer attrition, expenses, contributory asset charges and discount rates. Based on this methodology the Company assigned the value of customer relationships at $1,285,000 and contracted backlog at $158,000. The Company will amortize this amount over the estimated useful life of six years and the contracted backlog over the estimated useful life of thirteen months.





The Company intends to make an election under the Internal Revenue code section 338(h)(10).  Accordingly, goodwill is expected to be deductible for tax purposes.





Unaudited proforma information for the acquisition of HAI has not been presented as the acquisition is not significant.








Advantage Reimbursement, Inc.


On December 11, 2009, Mediware, through its newly formed wholly owned subsidiary Advantage Reimbursement, LLC, a Delaware limited liability company (“ARL”), acquired substantially all of the assets of Advantage Reimbursement, Inc., a Massachusetts corporation (“ARI”). ARI is a leading provider of billing and collection services for home infusion and alternate care enterprises.





The acquisition of ARI expands the scope of services that Mediware can provide to its current and potential home infusion, specialty pharmacy and alternate care customers.  The Company believes that over time this business will become an important differentiator that will not only contribute to its ability to make sales of its traditional software products but that will also drive revenue on as an independent business.





Mediware expects the ARL services will generate revenue by providing collection and billings services and expertise to Mediware’s home infusion, specialty pharmacy and alternate care customers and to other software providers’ customers as well. Customers are charged a percentage of the third party fees that are collected.  The Company records revenue as the third party billings are collected.





The purchase price paid for the assets of ARI consisted of an initial purchase price of $2,061,000 paid in cash at the closing, plus contingent consideration up to $546,000 based upon the achievement of certain revenue milestones measured through December 11, 2010. The purchase price is also subject to a working capital adjustment. The Company expects to determine the amount of the contingent consideration within sixty days after the first anniversary of the transaction. Payment of the contingent consideration is payable within three months of the anniversary date of the acquisition. Management estimated the fair





10
 Index




value of the contingent consideration at the acquisition date to be $498,000 using a probability-weighted discounted cash flow model. This fair value is based on significant inputs not observable in the markets and thus represents a Level 3 measurement as defined in ASC 820. The Company incurred $21,000 of legal, accounting and other professional fees related to this transaction, which were expensed. The results of the ARI operations are included in the accompanying financial statements from the date of acquisition. From the date of acquisition, ARI has contributed $1.2 million in total revenue.





The Company has accounted for the acquisition of ARI as the purchase of a business under the accounting guidance. The assets acquired and liabilities assumed of ARI were recorded as of the acquisition date, at their respective estimated fair values. The preparation of the valuation required the use of significant assumptions and estimates. These estimates were based on assumptions that the Company believes to be reasonable.





The following summarizes the assets acquired and liabilities assumed at the acquisition date (in thousands):





Purchase Price

AllocationAccounts receivable

$
522Prepaid expenses


43Fixed assets


1Intangible assets subject to amortization


763Goodwill


1,317Accounts payable


(8
)Accrued expenses and other liabilities


(79
)Contingent consideration other long term liabilities


(498
)Total Purchase Price

$
2,061





Details of acquired intangible assets and goodwill are as follows (in thousands):





Amount

Assigned

Weighted

Average

Amortization

Period

Risk-Adjusted

Discount Rate

Used in Purchase Price

AllocationAmortizable Intangible AssetsCustomer relationships


763

6.0 years


17.0
%$
763Goodwill

$
1,317





The Company believes that the estimated tangible assets represent fair value at the date of acquisition. The fair value of an asset is defined as the amount for which an asset or liability could be bought or sold in a current transaction between knowledgeable, unrelated willing parties when neither party is acting under compulsion.





The Company valued the customer relationships using the excess earnings method of the income approach. Utilizing this approach, the Company projected revenue and related expenses. These projected income amounts were then reduced by the return on contributory assets and discounted to present value. This method requires the use of certain estimates, including revenue growth rates, customer attrition, expenses, contributory asset charges and discount rates. Based on this methodology the Company assigned the value of customer relationships at $763,000. The Company will amortize this amount over the estimated useful life of six years.





Goodwill is expected to be deductible for tax purposes.





Unaudited proforma information for the acquisition of ARI has not been presented as the acquisition is not significant.





11
 Index




SciHealth, Inc.


On June 19, 2009, Mediware acquired substantially all of the assets of SciHealth, Inc., a Georgia corporation (“SciHealth”). SciHealth developed and marketed InsightTM, a business and clinical intelligences software package used to manage performance metrics. Mediware believes that this product offering will strengthen 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.





Mediware expects the SciHealth products to generate revenue by licensing its proprietary software, and by providing professional services and support for the product lines. Generally, customers are charged an initial start-up fee along with monthly fees for the continued use and support of the software. Software license fees are recognized when the license is initially executed, subject to the revenue recognition principles for software. Professional services and support revenues are recognized as the service is delivered.





The purchase price paid for the assets of SciHealth consisted of an initial purchase price of $1,702,000 paid in cash at the closing. The Company may be liable for contingent consideration of up to $6,445,000 based upon the achievement of certain revenue and contractual milestones through June 2010. During the nine months ended March 31, 2010, the Company paid an additional $400,000 relating to SciHealth attaining certain contractual milestones, which has been recorded as additional goodwill. The Company believes the likelihood of SciHealth achieving the revenue milestone resulting in payment of contingent consideration is remote. The Company incurred $71,000 of legal, accounting and other professional fees related to this transaction, which have been included in goodwill. The Company expects to finalize the purchase price in June 2010. The results of the SciHealth operations are included in the accompanying consolidated financial statements from the date of acquisition.





The Company has accounted for the acquisition of SciHealth as the purchase of a business under the accounting guidance. The assets and liabilities of SciHealth were recorded as of the acquisition date, at their respective fair values. The purchase price allocation is based on the estimated fair value of assets acquired and liabilities assumed. The preparation of the valuation required the use of significant assumptions and estimates. These estimates were based on assumptions that the Company believes to be reasonable.





The following summarizes the purchase price allocation (in thousands):





Purchase Price

AllocationAccounts receivable

$
402Fixed assets


36Intangible assets subject to amortization


983Goodwill


996Advances from customers


(244
)Total Purchase Price

$
2,173





The excess of the purchase price over the fair value of net tangible assets acquired was allocated to specific intangible asset categories as follows (in thousands):





Amount

Assigned

Weighted

Average

Amortization

Period

Risk-Adjusted

Discount Rate

Used in Purchase Price

AllocationAmortizable Intangible AssetsPurchased technology

$
232

5.0 years


20.9
%Customer relationships


751

7.0 years


20.9
%$
983Goodwill

$
996


12
 Index




The Company believes that the estimated tangible assets represent fair value at the date of acquisition. The fair value of an asset is defined as the amount for which an asset or liability could be bought or sold in a current transaction between knowledgeable, unrelated willing parties when neither party is acting under compulsion.





The Company valued the purchased technology using the cost to recreate method of the income approach. Utilizing this approach the Company estimated the cost to recreate the software. This method requires the use of certain estimates, including the fully burdened labor rates for software engineers, the amount of time and effort required to recreate the software, income tax rates and discount rates. Based on this methodology the Company assigned the value of purchased technology at $232,000. The Company will amortize this amount over the estimated useful life of five years.





The Company valued the customer relationships using the excess earnings method of the income approach. Utilizing this approach, the Company projected revenue and related expenses. These projected income amounts were then reduced by the return on contributory assets and discounted to present value. This method requires the use of certain estimates, including revenue growth rates, customer attrition, expenses, contributory asset charges and discount rates. Based on this methodology the Company assigned the value of customer relationships at $751,000. The Company will amortize this amount over the estimated useful life of seven years.





Goodwill is expected to be deductible for tax purposes.





Unaudited proforma information for the acquisition of SciHealth has not been presented as the acquisition is not significant.








Hann’s On Software, Inc.


On November 20, 2008, Mediware acquired substantially all of the assets of Hann’s On Software, Inc., a California corporation (“HOS”). HOS provided medication management solutions to the small hospital, specialty pharmacy and home infusion markets through integrated software solutions that address the complex work flow and patient safety needs of these markets.





Mediware believes it will be able to provide medication management solutions to a broader range of customers as a result of this acquisition. The Company plans to continue offering its WORx pharmacy product line to the larger acute care hospitals and behavioral health facilities, while the HOS product line will provide comprehensive solutions for the smaller hospital, specialty pharmacy and home infusion markets.





Mediware expects the HOS products to generate revenue by licensing its proprietary software, and by providing professional services and support for it product lines. Generally, HOS customers are charged an initial start-up fee along with monthly fees for the continued use and support of the software. Software license fees are recognized when the license is initially executed, subject to the revenue recognition principles for software. Professional services and support revenues are recognized as the service is delivered.





The purchase price paid for the assets of HOS has been finalized and consists of $3,500,000 paid in cash, less a working capital adjustment. The Company did not pay any contingent consideration associated with this transaction because certain revenue milestones were not achieved. The Company did, however, receive $17,000 from the seller as part of the final working capital adjustment. The Company incurred $28,000 of legal and accounting fees related to this transaction which have been included in goodwill. The results of the HOS operations are included in the accompanying financial statements from the date of acquisition.





The Company has accounted for the acquisition of HOS as the purchase of a business under the accounting guidance. The assets and liabilities of HOS were recorded as of the acquisition date, at their respective fair values. The purchase price allocation is based on the estimated fair value of assets acquired and liabilities assumed. The preparation of the valuation required the use of significant assumptions and estimates. These estimates were based on assumptions that the Company believes to be reasonable.





13
 Index




The following summarizes the final purchase price allocation (in thousands):





Purchase Price

AllocationAccounts receivable

$
187Inventories


5Prepaid and other current assets


43Fixed assets


48Intangible assets subject to amortization


1,441Goodwill


2,101Other long-term assets


9Accounts payable


(1
)Advances from customers


(263
)Accrued expenses and other current liabilities


(87
)Total Purchase Price

$
3,483




The excess of the purchase price over the fair value of net tangible assets acquired was allocated to specific intangible asset categories as follows (in thousands):





Amount

Assigned

Weighted

Average

Amortization

Period

Risk-Adjusted

Discount Rate

Used in Purchase Price

AllocationAmortizable Intangible AssetsPurchased technology

$
403

5.0 years


16.0
%Customer relationships


958

7.0 years


16.0
%Non-compete agreements


80

2.0 years


16.0
%$
1,441Goodwill

$
2,101




The Company believes that the estimated tangible assets represent fair value at the date of acquisition. The fair value of an asset is defined as the amount for which an asset or liability could be bought or sold in a current transaction between knowledgeable, unrelated willing parties when neither party is acting under compulsion.




The Company valued the purchased technology using the excess earnings method of the income approach. Utilizing this approach, the Company projected revenue and related expenses. These projected income amounts were then reduced by the return on contributory assets and discounted to present value. This method requires the use of certain estimates, including revenue growth rates, technology replacement rates, customer attrition, expenses, contributory asset charges and discount rates. Based on this methodology the Company assigned the value of purchased technology at $403,000. The Company will amortize this amount over the estimated useful life of five years.




The Company valued the customer relationships using the excess earnings method of the income approach. Utilizing this approach, the company projected revenue and related expenses. These projected income amounts were then reduced by the return on contributory assets and discounted to present value. This method requires the use of certain estimates, including revenue growth rates, customer attrition, expenses, contributory asset charges and discount rates. Based on this methodology the Company assigned the value of customer relationships at $958,000. The Company will amortize this amount over the estimated useful life of seven years.




The Company valued the non-compete agreements using the with/without method of the income approach. This methodology determines the impact on discounted net cash flow should the restricted parties decide to compete directly against the Company. This method requires the use of certain estimates, including projected cash flows, discount rates and probability factors related to the likelihood of future competition. Based on this methodology the Company assigned the





14
 Index




value of non-compete agreements at $80,000.  The Company will amortize this amount over the estimated useful life of two years.





Goodwill is expected to be deductible for tax purposes.





Unaudited proforma information for the acquisition of HOS has not been presented as the acquisition is not significant.








5.
GOODWILL AND OTHER INTANGIBLE ASSETS





Goodwill





The change in the carrying amount of goodwill during the nine-months ended March 31, 2010 is as follows (in thousands):





Carrying amount as of June 30, 2009

$
9,843Acquisition of HAI


1,860Acquisition of ARI


1,317Increase from acquisition of business - SciHealth


400Tax benefit of amortization


(174
)Carrying amount as of March 31, 2010

$
13,246








Other Intangible Assets





The carrying amount of other intangible assets as of March 31, 2010 is as follows (in thousands):





Gross Carrying

Amount


Accumulated

Amortization


Net Carrying Amount


Weighted Average

Remaining Useful Life

(in years)Purchased technology

$
1,932


$
(422
)

$
1,510



3.9Customer relationships


4,883



(740
)


4,143



5.4Backlog


158



(95
)


63



0.4Non-compete agreements


124



(90
)


34



0.5$
7,097


$
(1,347
)

$
5,750








Amortization expense for other intangible assets amounted to $282,000 and $644,000 for the three and nine months ended March 31, 2010, and $131,000 and $293,000 for the three and nine months ended March 31, 2009.  The following represents the expected amortization in future periods (in thousands):





Fiscal

Year

Expected

Amortization2010

$
3642011


1,1752012


1,1512013


1,0572014


975Thereafter


1,028$
5,750


15
 Index




6.
STOCK BASED COMPENSATION





The aggregate noncash stock based compensation expense totaled $163,000 and $185,000 for the three-months ended March 31, 2010 and 2009, respectively, and $464,000 and $619,000 for the nine-months ended March 31, 2010 and 2009, respectively.





Stock Based Plans





The Company's 2003 Equity Incentive Plan, approved by the shareholders in December 2003, provides additional compensation incentives to encourage high levels of performance and employee retention. Key employees of the Company, directors, and persons who render services to the Company as consultants, advisors or independent contractors are eligible to receive grants under this plan. The number of shares that may be issued under this plan is 2,000,000. Shares may be issued as either incentive stock options, nonqualified stock options, or restricted common stock. Options may be granted for a period of up to ten years. Restricted common stock awards may be subject to vesting restrictions and may be forfeited if certain performance factors are not maintained. The plan provides that a maximum of 1,700,000 shares may be issued as any combination of restricted stock, options and restricted stock unit awards. The additional 300,000 shares of common stock can only be granted as option awards. As of March 31, 2010, there were 1,059,000 shares available for issuance under this Plan.





The Company's 2001 Stock Option Plan, approved by the shareholders in January 2002, provides additional compensation incentives for high levels of performance and productivity by management, other key employees of the Company, directors, and persons who render services to the Company as consultants, advisors or independent contractors. Up to 900,000 shares may be issued and sold under such plan and may be issued as either incentive stock options, to eligible persons, or nonqualified stock options. Options may be granted for a period of up to ten years, with option prices not less than fair market value on the date of grant for incentive stock options, not less than 85% of fair market value for nonqualified stock options, and not less than 110% of fair market value for owners of more than 10% of the Company's outstanding voting stock. As of March 31, 2010 no options were available to be issued under this Plan.








Restricted Common Stock Awards





Beginning in fiscal 2007, the Company entered into agreements to provide long-term incentive compensation opportunities to certain key employees. Under the terms of these agreements, the Company granted employees 35,000 restricted shares of common stock (the “Time-Based Shares”). The Time-Based Shares vest over a three-year period based upon the continued employment. The Company recorded compensation expense of $2,000 and $7,000 for the three-month periods ended March 31, 2010 and 2009, respectively, and compensation expense of $8,000 and $4,000 for the nine-months ended March 31, 2010 and 2009, respectively. The nine-months ended March 31, 2009 amount includes a benefit related to the forfeiture of certain non-vested Time-Based Shares of $12,000. The Time-Based Shares will result in compensation expense in future periods of up to $5,000, representing the fair value on the date of the grant less the amount of compensation expense already recorded.




Beginning in fiscal 2007, each member of the Company’s Board of Directors received an annual grant of $10,000 of restricted common stock (the “Director Shares”) as part of their compensation for serving on the Company’s Board of Directors. The number of Director Shares granted is determined based upon the fair market value of the Company’s stock on the first trading day of each calendar year. The Director Shares vest on June 30 of each fiscal year based upon the director’s continued service on the Company’s Board of Directors. The Company recorded compensation expense related to the Director Shares of $17,500 for the three-months ended March 31, 2010 and 2009, respectively, and $53,000 for each of the nine-months ended March 31, 2010 and 2009, respectively. The Director Shares will result in compensation expense in future periods of up to $18,000, representing the fair value on the date of the grant less the amount of compensation expense already recorded.




During fiscal 2008, the Company entered into agreements to provide long-term incentive compensation opportunities to certain eligible employees. Under the terms of these agreements, the Company granted certain employees 220,000 restricted shares of common stock (the “Enhanced Performance Shares”). The Enhanced Performance Shares vest partially upon continued employment and partially upon the achievement of certain performance objectives. The Company





16
 Index




recorded compensation expense related to the Enhanced Performance Shares of $89,000 and $120,000 for the three-months ended March 31, 2010 and 2009, respectively, and $291,000 and $419,000 for the nine-months ended March 31, 2010 and 2009, respectively. The Company will continue to assess whether or not the achievement of any performance goals is probable at each reporting period, and will recognize the related expense if and when the performance conditions become probable.The Enhanced Performance Shares may result in compensation expense in future periods of up to $150,000, representing the fair value on the date of the grant less the amount of compensation expense already recorded. This amount includes $19,000 of unrecognized time-based compensation expense related to the continued employment.





Estimated future stock-based compensation expense related to time-based restricted stock is as follows (in thousands):





Fiscal Years Ending June 30,

Time-Based Shares


Enhanced Performance Shares (Time-Based Portion)


Director

Shares


Total2010

$
2


$
13


$
18


$
332011


3



6



-



9Total estimated future stock-based compensation expense

$
5


$
19


$
18


$
42








A summary of the status of the Company’s nonvested restricted common stock as of March 31, 2010, and changes during the nine-months ended March 31, 2010, is presented below (shares amounts in thousands):





Time-Based Shares


Weighted Average

Grant Date

Fair Value


Enhanced Performance Shares


Weighted Average

Grant Date

Fair ValueNonvested at June 30, 2009


5


$
7.65



158


$
6.67Granted


-



-



-



-Canceled or forfeited


-



-



(15
)


6.34Vested


(2
)


8.50



(66
)


6.69Nonvested at March 31, 2010


3


$
5.96



77


$
6.71








The fair value of the restricted shares is determined based on the average trading price of the Company’s shares on the grant date, except for the Director Shares which is determined based on the average trading price of the Company’s shares as of the first trading day of each calendar year, pursuant to the directors’ compensation plan.








Stock Option Awards





The fair value of stock options is determined at the date of grant and is charged to compensation expense over the vesting period of the options.  The fair value of options at date of grant was estimated using the Black-Scholes option pricing model utilizing the following assumptions:





For the Three Months

Ended March 31,


For the Nine Months

Ended March 31,2010


2009


2010


2009Risk-free interest rates


2.4
%

No Options granted



2.3-2.4
%


2.8
%Expected option life in years


2 – 3






2 – 3



2 – 3Expected stock price volatility


45
%


51
%


45 - 66
%


51
%Expected dividend yield


-



-



-



-


17
 Index




The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The Company uses historical data to estimate option exercise and employee and director termination within the valuation model; separate groups of employees and directors that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted represents the period of time that options granted are expected to be outstanding; the range given above results from groups of employees and directors exhibiting different behavior. Expected volatilities are based on historical volatility of the Company’s stock. The Company has not paid any dividends in the past and does not expect to pay any in the near future.




The following table sets forth summarized information concerning the Company's stock options as of March 31, 2010 (share and aggregate intrinsic value amounts in thousands):




Shares


Weighted Average Exercise Price


Weighted Average Remaining Contractual Term


Aggregate Intrinsic ValueOutstanding at June 30, 2009


913


$
8.59Granted


130



6.44Exercised


(126
)


3.73Forfeited or expired


(88
)


9.25Outstanding at March 31, 2010


829


$
8.92



3.5


$
865Expected to vest at March 31, 2010


829


$
8.92



3.5


$
865Options exercisable at March 31, 2010


588


$
9.94



2.5


$
288




The strike price of the options is determined based on the average trading price of the Company’s shares on the grant date.





Cash received from the options exercised under all stock-based payment arrangements for the nine months ended March 31, 2010 was $471,000. The aggregate intrinsic value of options exercised during the nine months ended March 31, 2010 was $353,000. The aggregate intrinsic value of options exercised during the nine-months ended March 31, 2009 was $32,000. Historically, the Company has issued new shares upon the exercise of stock options.





The weighted average fair value at date of grant for options granted during the three and nine months ended March 31, 2010 was $2.17 per option and $2.28 per option, respectively. For the three and nine months ended March 31, 2009 the weighted average fair value at date of grant for options granted was $1.32 per option and $2.15 per option, respectively. The Company recorded $54,000 and $40,000 of compensation expense for stock option plans for the three months ended March 31, 2010 and 2009, respectively, and $111,000 and $143,000 for the nine months ended March 31, 2010 and 2009, respectively.





18
 Index




Estimated future stock-based compensation expense relating to stock options is as follows (in thousands):





Fiscal Years Ending June 30,

Future

Stock Option

Compensation

Expense2010

$
612011


1552012


662013


232014


5Total estimated future stock-based compensation expense

$
310








A summary of the status of the Company’s nonvested options as of March 31, 2010, and changes during the nine months ended March 31, 2010 is presented below (share amounts in thousands):





Nonvested Options

Shares


Weighted Average

Grant Date

Fair ValueNonvested at July 1, 2009


176


$
2.15Granted


130



2.28Canceled or expired


(22
)


1.82Vested


(42
)


2.21Nonvested at March 31, 2010


242


$
2.24





The total fair value of shares vested during the nine months ended March 31, 2010 was $95,000.





The following table presents information relating to stock options at March 31, 2010 (share amounts in thousands):




Options Outstanding


Options ExercisableRange of Exercise Prices


Shares


Weighted Average Exercise Price


Weighted Average Remaining Life in Years


Shares


Weighted Average Exercise Price$
0.00 - $ 4.49



10


$
3.89



.9



3


$
3.89$
4.50 - $ 7.49



339


$
6.63



5.7



104


$
6.88$
7.50 - $ 8.99



91


$
8.10



1.6



91


$
8.10$
9.00 - $ 10.49



172


$
10.13



3.4



172


$
10.13$
10.50 - $11.99



70


$
10.89



1.2



70


$
10.89$
12.00 - $13.49



117


$
12.45



3.4



117


$
12.45$
13.50 - $14.99



30


$
13.73



5.0



30


$
13.74829











588


19
 Index




7.
INCOME TAXES





Deferred tax assets and liabilities are recognized for the expected future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using the enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.  A valuation allowance is provided against net deferred tax assets when it is not more likely than not that a tax benefit will be realized.  Income taxes include U.S. and foreign taxes.





As of March 31, 2010, as required by FIN 48, the Company’s unrecognized tax benefits totaled $371,000.  Accrued interest and penalties at March 31, 2010 amounted to $20,000.  The Company recognizes accrued interest and penalties in income tax expense.





During the three and nine month periods ended March 31, 2010, the Company recognized research and development credits applicable to its software development activities relating to fiscal year 2009 and the first six months of fiscal year 2010 resulting in effective tax rates for the three and nine month periods ended March 31, 2010 of 28.1% and 25.1 %, respectively.





The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  In general, the Company’s filed income tax returns are no longer subject to examination by the respective taxing authorities for years ending before June 30, 2006.  An examination by the Internal Revenue Service of the Company’s fiscal 2007 federal income tax returns was concluded for which the Internal Revenue Service issued a no change letter.








8.
SEGMENT INFORMATION





The Company has four distinct product lines:  Medication Management systems, Blood Management systems, Performance Management systems and Perioperative Management systems.   Based on similar economic characteristics, as well as the nature of products, production processes, customers and distribution methods, the Company has aggregated these operating divisions into one reporting segment  Revenue by product line are as follows (in thousands):





For the Three Months Ended


For the Nine Months EndedMarch 31,


March 31,2010


2009


2010


2009Medication Management Systems:System revenue

$
1,690


$
1,619


$
4,356


$
3,740Service revenue


5,420



3,572



12,904



10,6657,110



5,191



17,260



14,405Blood Management Systems:System revenue


778



1,070



3,044



3,401Service revenue


3,455



3,686



11,109



11,5734,233



4,756



14,153



14,974Performance Management SystemsSystem revenue


57



-



284



-Service revenue


265



-



842



-322



-



1,126



-Perioperative Management SystemsSystem revenue


-



11



55



11Service revenue


204



244



619



660204



255



674



671Other revenue


937



-



1,153



-Total

$
12,806


$
10,202


$
34,366


$
30,050


20
 Index




Other revenue is generated from the recently acquired business, ARI.





Selected financial information by geographic area is as follows (in thousands):





For the Three Months Ended


For the Nine Months EndedMarch 31,


March 31,2010


2009


2010


2009Revenue from Unaffiliated Customers:United States

$
10,888


$
8,719


$
29,550


$
25,808United Kingdom


1,918



1,483



4,816



4,242Total

$
12,806


$
10,202


$
34,366


$
30,050Net Income:United States

$
588


$
209


$
1,710


$
481United Kingdom


303



274



583



523Total

$
891


$
483


$
2,293


$
1,004








March 31,2010


2009Identifiable Assets:United States

$
60,123


$
53,828United Kingdom


6,592



4,927Total

$
66,715


$
58,755








9.
CONTINGENCIES





From time to time, Mediware becomes 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 such routine litigation, if adversely determined, would not have a material adverse effect on its business, financial condition, results of operations or cash flows.





21
 Index




10.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS





In June 2009, the FASB issued Accounting Standards CodificationTM (“ASC”) Topic 105,“Generally Accepted Accounting Principleswhich establishes ASC as the source of authoritative generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entitiesin the preparation offinancial statements in accordance with GAAP. All existing accounting standard documents are superseded by the Codification. However, rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. ASC Topic 105 was effective for the Company for the period ended September 30, 2009.




In December 2007, the FASB issued ASC Topic 805“Business Combinations”.ASC Topic 805 establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. ASC Topic 805 also provides guidance for recognizing and measuring the goodwill acquired in the business combination, requires that acquisition costs be expensed and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC Topic 805 was effective for acquisitions made after June 30, 2009.




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 pronouncement 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 pronouncement are effective July 1, 2010. The Company does not expect that the adoption of this pronouncement will have a material effect on its financial statements as it has no involvement in variable interest entities.




In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for the Company beginning July 1, 2010, with earlier adoption permitted. 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 new 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 is presently assessing the impact, if any, of this new guidance on its financial statements.





22
 Index




REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To The Board of Directors and Shareholders of


Mediware Information Systems, Inc.





We have reviewed the accompanying condensed consolidated balance sheet of Mediware Information Systems, Inc. and subsidiaries (the "Company") as of March 31, 2010, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three and nine-month periods ended March, 31 2010 and 2009, and cash flows for the nine-month periods ended March 31, 2010 and 2009. These interim condensed consolidated financial statements are the responsibility of the Company's management.





We conducted our reviews in accordance with standards established by the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.





Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.





We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of June 30, 2009, and the related consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated September 9, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 2009 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.








Eisner LLP


New York, New York




May 4, 2010






The  “Review Report of Independent Registered Public Accounting Firm” included above is not a ‘Report as part of Registration Statement’ prepared or certified by an independent accountant within the meanings of Section 7 and 11 of the Securities Act of 1933, and the accountants’ Section 11 liability does not extend to such report.





23
 Index




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





Forward-Looking Statements





This Quarterly Report on Form 10-Q contains forward-looking statements. Any 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,” “expects,” “intends” and similar expressions identify some of the forward-looking statements. Forward-looking statements are not guarantees of performance or future results and involve risks, uncertainties and assumptions. The factors discussed elsewhere in this Form 10-Q and in Mediware’s Form 10-K for the year ended June 30, 2009 and in subsequent Quarterly Reports on Form 10-Q, could also cause actual results to differ materially from those indicated by the Company’s forward-looking statements. Mediware undertakes no obligation to publicly update or revise any forward-looking statements.





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 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 Quarterly Report on Form 10-Q. Filings with the SEC can also be obtained at the SEC’s website, www.sec.gov.





Mediware develops, markets, licenses, implements, services and supports clinical management information solutions. The Company develops, licenses and sells its blood and biologics management solutions to hospitals and its medication management solutions to hospitals, long-term care, specialty pharmacy, home infusion, alternate care and behavioral health facilities. Mediware licenses and sells its blood donor recruitment and management solutions to blood donor and plasma donor centers through its Blood Center Technologies business group. Following the acquisition of two businesses during the quarter ended December 31, 2009, Mediware has formed an alternate care business group to market, to license and to sell its home infusion, specialty pharmacy and alternate care products and services.





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 medication management, blood management and biologics management software systems to customers on a perpetual basis. These customers 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, its MediREC software, its Ascend software, products and its recently acquired HomeCareNet 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 and additional consultation services, for additional fees which are generally billed as incurred. The performance management software is licensed on both perpetual and subscription basis. Mediware currently anticipates that over time an increased number of its systems (in all product lines) will be licensed on a 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 primarily in that market as well as Ireland and South Africa. All other operations are in the United States.





24
 Index




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” process 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, operating room suites, and other venues where adverse events occur. The Company believes this closed loop process differentiates it from the industry’s catalog and “best of breed” vendors.





Mediware’s products are designed to address the needs of the acute care hospital market, the blood center market, and following the three business acquisitions in the preceeding eighteen months, the Company has positioned itself to 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 the home infusion, specialty pharmacy and alternate care markets by leveraging its clinical and product strengths outside of the acute care setting and across alternate care settings.





By adding a performance management solution to our product offerings through an acquisition in June 2009, we believe that we further strengthened our clinical suite offerings in our existing medication management and blood and biologics markets, as well as acquired tools to broaden our customer base to include the broader healthcare market. Our new performance management software, Insight,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 our product offering in our historic market. The software can also draw information from disparate systems across a healthcare enterprise beyond Mediware’s historic blood and medication management customers.








The Healthcare Information Systems Industry





The healthcare industry, like other United States industries, has been impacted by the global economic downturn. Consequently, we believe our customers are more cautious with their capital investments than in the past. While there have been reports that the economy is improving, we believe that when health care organizations make significant investments, they will continue to be more focused on ensuring that their spending has a demonstrable return on investment or can provide clear improvements to patient safety. We believe our products provide a positive ROI and improve patient safety and are well positioned going forward.
 
 President Obama has focused significant attention on the use of information technology systems as part of his healthcare reform initiatives. The American Recovery and Reinvestment Act, which became law on February 17, 2009, includes more than $35 billion of incentives to help healthcare organizations modernize operations through the acquisition and use of information technology solutions. We are currently reviewing the Patient Protection and Affordable Care Act to determine what, if any impact, this new law will have on our business. While Mediware does not currently anticipate direct, near-term benefits from either of these new laws or the Obama administration’s policies, we believe that over time the additional government spending on healthcare and health information technology, could drive the adoption of healthcare information technology solutions and have a positive impact on the Company.





25
 Index




Mediware believes that its product strategy and offerings meet many of the needs of health care institutions and that its products will play a role in moving healthcare information technology standards forward to deliver significant results for patients and customers.




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.




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 by reducing errors, improving screening and increasing throughput and cost efficiencies. These pressures exist despite pressures across the healthcare industry to reduce costs and to address ongoing personnel shortages. Mediware's blood management software systems are intended to help hospitals and blood centers address these issues. The software is designed to reduce costs through automatic report production, decreased paperwork, and automated billing. The Company's products are also designed to improve blood supply safety through the use of user-defined truth tables, among other features.














Blood Center Technologies





To focus on the unique needs of the blood center market segment, on July 8, 2008 Mediware announced the launch of Blood Center Technologies (“BCT”). Mediware’s BCT business unit is a customer focused team intended to drive growth as Mediware expands its focus in the blood donor market. Through BCT, 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 CRM and recruiting software products and capabilities. The Insight 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. Since November 1, 2007, Mediware has been aggressively integrating software and capabilities to streamline





26
 Index




the effectiveness of blood centers, from donor recruitment, through the clinical laboratory, to hospital management.  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 expects to add additional e-learning content and technologies from an acquisition consumated in the quarter ended March 31, 2010.













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. As of March 31, 2010, BiologiCare is licensed for use at two facilities.





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. The blood management products are marketed primarily through the Company’s direct sales force, and the Company is working to develop complementary reseller relationships. In addition to its sale of software, the Company generates revenue from professional services and post-contract support. These ongoing support contracts have recently accounted for more than half of the total revenue from blood management operations and are recurring in nature.





The blood 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. We believe that stand-alone lab or blood bank vendors include Sunquest, Haemonetics and SCC Soft. The Company believes, however, that due to the functionality of the HCLL software, the Company is well-positioned in the blood bank system market and that it has a good reputation with its customers, including many of the most sophisticated healthcare systems in the United States. On the blood donor side of the business, we compete against several of the companies listed above as well as Blood Bank Computer Services Company, MAK Software and others.





Medication Management Products





The Company also supplies medication management solutions to hospitals, mental health facilities, specialty pharmacies, home infusion facilities, penal institutions 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. As of March 31, 2010, the WORx software was in productive use at approximately 175 sites. 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. Ascend added approximately 150 hospital sites to Mediware’s medication management customer base at the time of the acquisition.




27
 Index




In fiscal 2004, the Company released MediCOETMand MediMAR®. These products are fully integrated with the WORx software and provide a complete closed loop drug therapy management system with a physician order entry module (MediCOE) and nurse point of care administration and bedside documentation module (MediMAR).





The MediCOE software provides clinicians an efficient, effective method to enter medication orders and manage drug therapy.  Orders entered in the MediCOE software undergo a prospective evaluation based on the patient’s current medical profile to identify potential adverse outcomes.  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, on the other hand, serves as an electronic medication administration and bedside documentation record.  It produces a dynamic and complete representation of the patient’s medication profile, including clinician orders, medication list, allergies, notes and clinical alerts to increase patient safety. 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.





As of March 31, 2010, the MediCOE and MediMAR products have been licensed for use in 3 and 18 separate customer sites, respectively.





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 on Accreditation of Healthcare Organizations 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. At March 31, 2010, MediREC was licensed for use at seven customer sites.





The Company continues to target its large WORx software customer base and new customers with the MediCOE and MediMAR products and markets MediREC to this customer base and new customers as well. 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 and, therefore, results in substantially longer sales cycles compared to stand-alone WORx sales. This has resulted in less predictable contract closures and a need to recognize software license revenue over multiple quarters (in some cases). On the other hand, the HOS software requires substantially smaller financial commitments from customers and is priced based on a subscription pricing model. Generally, the HOS software, Ascend, is sold to smaller hospitals. Consequently, Mediware anticipates that sales of these products will be more predictable and have shorter sales cycles. The MediREC software is also being licensed to customers on a recurring, transaction basis, and Mediware expects that as the adoption of MediREC increases, the sale and implementation cycles for MediREC to be shorter than for the full suite of products.





The Company generates revenue from medication management software sales, professional services and post-contract support.  Support contracts currently account for approximately sixty one percent of the revenue from medication management operations for the nine months ended March 31, 2010.





The Company’s medication management products compete against the products of the other niche competitors’ and some of the largest providers of healthcare information technology, including Cerner, General Electric, Siemens, Eclipsys and others. These competitors often have significantly greater resources than Mediware, but the Company believes that its products are well positioned and have functionality that can lead to growth in this competitive environment. The





28
 Index





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.





Alternate Care










The Company’s Alternate Care solutions compete in a niche market against a myriad of smaller software vendors and niche providers, including FastTrack, CPR+ and CareCentric. These companies often have loyal customers, but generally have fewer resources and, we believe, 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.





JAC





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 includes an installed base of approximately 200 customer sites, representing over 100 National Health Service (“NHS”) acute hospitals or trusts in the U. K. 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 has been installed in approximately 20 U.K. customer sites as of March 31, 2010, and allows hospitals to improve patient safety relevant to medication management. The Company’s Pharmacy Management system product handles medication tracking from ordering and delivery to dispensing. The installed base includes approximately 50% of the trusts within the NHS.





The NHS in England initiated a national program to purchase healthcare information technology in 2004. The program is identified as the “Connecting for Health” program (the “National Program”). The NHS has entered into contracts to license software and services, but the National Program has experienced delays. JAC has been able to work with the integrated service providers and the government to position itself favorably as a provider of software. In July 2008, JAC was appointed to the ASCC (Additional Supply Capability and Capacity) framework contract in both the e-prescribing and pharmacy (stock control) categories. Appointment to the ASCC framework provides healthcare organizations with a contracting vehicle to work directly with JAC to procure specialist e-prescribing and/or pharmacy stock control services as an alternative to the National Program. The JAC products are marketed directly through JAC’s sales force and other marketing channels, including reseller agreements in South Africa. During the second quarter of fiscal year 2009, JAC entered into a multi-year contract in South Africa under which JAC will license its software to as many as 40 public sector hospitals for the Provincial Government of the Western Cape.





Performance Management Products





Through a business acquisition on June 18, 2009, Mediware added the InsightTM 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 March 31, 2010. 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 is designed to assist users to improve performance, better manage their financial and business obligations; and demonstrate and manage compliance with expanding regulatory mandates and requirements.





29
 Index





The Insight system complements Mediware’s medication and blood and biologics product offerings, and  we expect to market Insight to current customers to help them manage their medication and blood requirements, We also believe that Insight may help differentiate our products from other blood management and medication management systems.For instance, theCompany is currently developing integrated dashboard products for our existing applications which can be sold to our current customer base.  We believe these dashboards will provide a solid growth platformin the coming years.





The Insight system can also be marketed and sold on an enterprise-wide, stand-alone basis, which we expect will help us to gain a footprint and customer base outside of our historical blood and medication markets.





We expect that selling the Insight system coupled with our other products will have the same challenges as our other product offering sales, but we have the opportunity to take advantage of our experienced sales team and resources who have been selling and marketing products in the blood and medication management markets for years.   Selling the Insight software on an enterprise-wide basis is a complex process that requires commitments from the highest level executives within hospital organizations and, therefore, result in longer sales cycles.





The Company expects revenue from Insight software sales, professional services and post-contract support.  Support contracts accounted for a large majority of the selling entity's revenue prior to the acquisition.  If the sale of products increase, the Company expects that license fee revenue will increase and support revenue will make up a smaller portion of the Company’s revenue.





The Company’s Insight products will work in conjunction with Mediware’s other products and 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, Business Objects, Hyperion and others who we expect will begin to provide performance management solutions.  These competitors often have significantly greater resources than Mediware, but the Company believes that its products are well positioned and have functionality that can lead to growth in this competitive environment.





Use of Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related notes to financial statements. Actual results could differ from those estimates.  The Company’s significant areas of estimation include determining the allowance for uncollectible accounts, valuing certain accrued liabilities and determining whether the carrying value of goodwill and capitalized software development costs and other intangible assets is impaired.








Results of Operations for the Three Months Ended March 31, 2010 as Compared to the Three Months Ended March 31, 2009





Total revenue for the third quarter of fiscal 2010 was $12,806,000 compared to $10,202,000 in the third quarter of fiscal 2009, an increase of $2,604,000, or 26%. The increase in revenue is primarily due to revenue associated with the businesses acquired in the second quarter of fiscal 2010. Blood management products and services recorded total revenue of $4,233,000 in the third quarter of fiscal 2010, representing a decrease of $523,000, or 11%, compared to $4,756,000 in the third quarter of fiscal 2009. The decrease is a result of both lower system sales revenue and the anticipated lower service revenue, as the implementations of new HCLL systems resulting from the sunset program continues to decline. Medication management products and services (excluding JAC) recorded an increase in total revenue of $1,484,000, or 40%, from $3,708,000 in the third quarter of fiscal 2009 to $5,192,000 in the same quarter of fiscal 2010. The increase is largely a result of the incremental revenue associated with the acquired HomeCareNet product. JAC recorded total revenues of $1,918,000 in the third quarter of fiscal 2010, representing an increase of $435,000, or 29%, compared to $1,483,000 in the same quarter of fiscal 2009. The increase was driven largely by changes in the exchange rate and new sales of the businesses e-prescribing software. The improvement in the exchange rate benefited all categories of revenue for JAC. Performance management products and services, all of which come from the business acquired June 19, 2009, recorded total revenues of $322,000 in the third quarter of fiscal 2010. Our wholly-owned subsidiary, Advantage Reimbursement, LLC (“ARL”), which operates the billing and collection services business acquired in the second quarter of fiscal 2010, contributed $937,000 in total revenue for the third quarter of fiscal 2010.




30
 Index





System sales revenue, which includes proprietary software, third party software, hardware revenue and subscription revenue, amounted to $2,525,000 for the quarter ended March 31, 2010, a decrease of $175,000 or 6% compared to $2,700,000 of system sales reported in the third quarter of fiscal 2009. System revenue for the blood management products was $778,000 for the third quarter of fiscal 2010, a decrease of $292,000, or 27%, compared to $1,070,000 in the same quarter of fiscal 2009. This decrease is primarily due to fewer new HCLL system sales. System sales for the medication management products (excluding JAC) decreased from $922,000 in the third quarter of fiscal 2009 to $866,000 in fiscal 2010, representing a decrease of $56,000, or 6%. This decrease reflected slower WORx software sales offset by software sales associated with our acquired HomeCareNet products. JAC recorded system sales of $824,000 for the third quarter of fiscal 2010, representing an increase of $127,000, or 18%, compared to $697,000 reported for the same quarter in fiscal 2009. System sales revenue for performance management was $57,000 for the third quarter of fiscal 2010, which the Company expects to increase in the coming quarters.





Service revenue, which includes recurring post contract support revenues, implementation services and promotional services and services performed by ARL, increased $2,779,000, or 37%, to $10,281,000 in the third quarter of fiscal 2010 compared to $7,502,000 for the same quarter in fiscal 2009. Service revenue for the blood management products totaled $3,455,000 for the third quarter of fiscal 2010, representing a decrease of $231,000 or 6%, compared to $3,686,000 in the third quarter of fiscal 2009. The decrease primarily reflects the anticipated decrease in implementation activity related to fewer implementations of HCLL software systems resulting from the sunset program. Service revenue for the medication management products (excluding JAC) increased $1,540,000, or 55%, to $4,326,000 in the third quarter of fiscal 2010 compared to $2,786,000 for the same quarter of fiscal 2009. This increase is the result of service revenue associated with the recently acquired HomeCareNet products offset somewhat by a decrease in upgrade services for existing WORx customers that upgraded their WORx software systems to a new version of the software during fiscal 2009. We expect WORx upgrade service revenue to decline for the remainder of the year as a result of the completion of the focused WORx upgrade program that we initiated during fiscal 2009. However, we believe this decline will continue to be offset by service revenue contributions associated with the recently acquired HomeCareNet products. Service revenue for JAC increased $308,000, or 39%, to $1,094,000 in the third quarter of fiscal 2010 compared to $786,000 in the third quarter of fiscal 2009. This increase is primarily the result of an increase in support revenues denominated in U.S. dollars resulting from the increasing foreign currency exchange rates and an increase in the number of ongoing implementation projects compared to the same quarter in fiscal 2009. Service revenue for performance management products amounted to $265,000 for the third quarter of fiscal 2010. Service revenue from the ARL business was $937,000 for the third quarter of fiscal 2010.





Cost of systems includes the cost of computer hardware and sublicensed software purchased from computer and software manufacturers by Mediware as part of its complete system offering.  These costs 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 $66,000, or 7%, to $930,000 in the third quarter of fiscal 2010 as compared to $996,000 in the same quarter in fiscal 2009.  The gross margin, excluding amortization of capitalized software costs, on system sales was 63% in both the third quarter of fiscal 2010 and fiscal 2009.





Cost of services includes the salaries and direct expenses of client service personnel and the direct costs associated with providing promotional services. Cost of services increased $783,000, or 30%, to $3,363,000 in the third quarter of fiscal 2010 as compared to $2,580,000 in the same quarter of fiscal 2009. The increase in cost of services is primarily attributed to growth in the number of service personnel related to the acquired businesses. Also contributing to the increase were the promotional activities associated with the BCT services. Gross margin on service revenue was 67% for the third quarter of fiscal 2010 compared to 66% for the third quarter of fiscal 2009. Mediware anticipates that gross margins will remain consistent with the current levels for the remainder of fiscal 2010.




Amortization of capitalized software decreased $339,000 or 23%, to $1,110,000 in the third quarter of fiscal 2010 compared to $1,449,000 in the third quarter of fiscal 2009. This decrease is due to decreased amortization of capitalized software costs related to fully amortized product releases.





31
 Index





At our current level of investment in product development activities and capitalization rates we expect amortization of capitalized software to decline by a total of approximately $750,000 during all of fiscal 2010.





Software development costs include the non-capitalizable portions of salaries, consulting, documentation, office and other direct expenses incurred in product development activities. Software development costs increased $427,000, or 41%, to $1,463,000 in the third quarter of fiscal 2010 compared to $1,036,000 in the third quarter of fiscal 2009. This increase reflects a lower capitalization rate for product development activities in the third quarter of fiscal 2010 compared to the third quarter of fiscal 2009. Expenditures for software development include amounts paid for both capitalizable and non-capitalizable development projects. Total expenditures for software development were $2,190,000 in the third quarter of fiscal 2010 compared to $1,994,000 in the third quarter of fiscal 2009, an increase of $196,000, or 10%. This increase is primarily a result of slightly higher investment in the medication management products during the third quarter of fiscal 2010, development activities at JAC and the impact of the recently acquired businesses. We expect to maintain our current investment in product development in the near term.





Selling, general and administrative (“SG&A”) expenses include marketing and sales salaries, commissions, travel and advertising expenses. Also included are 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 $1,205,000, or 35%, from $3,466,000 in the third quarter of fiscal 2009 to $4,671,000 in the third quarter of fiscal 2010. This increase is primarily due to incremental costs associated with the recent acquired businesses.





Income tax expense increased from an expense of $243,000 in the third quarter of fiscal 2009 to an expense of $348,000 in the third quarter of fiscal 2010. This increase occurred due to higher income before income taxes offset to some degree by a lower effective tax rate due primarily to the recognition of research and development tax credits related to Mediware’s software development activities. During the three months ended March 31, 2010, the Company recognized research and development credits of $84,000 contributing to an effective tax rate for the three month period ended March 31, 2010 of 28.1%.





Net income for the third quarter of fiscal 2010 was $891,000, compared to $483,000 during the third quarter of fiscal 2009, resulting in an increase of $408,000.  The improvement resulted primarily from an increase in revenue related to the acquired businesses and capitalized software amortization, partially offset by an increase in software development costs and SG&A.








Results of Operations for the Nine Months Ended March 31, 2010 as Compared to the Nine Months Ended March 31, 2009





Total revenue for the nine-month period ended March 31, 2010 was $34,366,000 compared to $30,050,000 in the comparable period of fiscal 2009, an increase of $4,316,000 or 14%. The increase in revenue is largely due to service revenues associated with the recently acquired businesses which were not included in our results for fiscal 2009, partially offset by a decrease in blood management system sales and service revenue. Blood management products and services recorded total revenue of $14,153,000 during the nine-month period of fiscal 2010, representing a decrease of $821,000 or 5% compared to $14,974,000 in the same period of fiscal 2009. The decrease is a result primarily of lower service revenue. Medication management products and services (excluding JAC) recorded an increase in total revenue of $2,282,000 or 22% from $10,163,000 in the first nine months of fiscal 2009 to $12,445,000 in the same period of fiscal 2010. The increase is largely a result of the incremental revenue associated with the recently acquired HomeCareNet product. JAC recorded total revenues of $4,815,000 during the nine- month period ended March 31, 2010, representing an increase of $573,000 or 14%, compared to $4,242,000 in the same period of fiscal 2009. Performance management products and services recorded total revenues of $1,126,000 in the nine-month period ended March 31, 2010. ARL contributed $1,153,000 in total revenue for the nine-month period ended March 31, 2010.





System sales revenue amounted to $7,739,000 for the nine months ended March 31, 2010, an increase of $587,000 or 8%, from $7,152,000 in the same period in fiscal 2009.  System sales revenue for the blood management products was $3,044,000 for the first nine months of fiscal 2010, a decrease of $357,000 or 10%, compared to $3,401,000 in the same period of fiscal 2009. The decrease is primarily the result of fewer HCLL system sales partially offset by increased subscription sales revenue in BCT. System sales for the medication management products (excluding JAC) increased from $2,010,000 in the first nine months of fiscal 2009 to $2,541,000 in the same period of fiscal 2010, an increase of $531,000, or 26%. This increase resulted from the sale of the WORx Suite software to a large, new customer and the additional revenues related to the acquired HomeCareNet and Ascend products for the nine months ended March 31, 2010. JAC recorded system sales of $1,815,000 for the first nine-month period of fiscal 2010, representing an increase of $85,000, or 5%, compared to $1,730,000 reported for the same period in fiscal 2009. System revenue for performance management was $284,000for the nine months ended March 31, 2010, which the Company expects to increase in the coming quarters.




32
 Index





Service revenue increased $3,729,000, or 16%, to $26,627,000 in the first nine months of fiscal 2010 compared to $22,898,000 for the same period in fiscal 2009. Service revenue for the blood management products totaled $11,109,000 for the first nine-month period of fiscal 2010 representing a decrease of $464,000, or 4%, compared to $11,573,000 in the same period of fiscal 2009 primarily reflecting an anticipated decrease in implementation activity for the HCLL software systems. Service revenue for the medication management products (excluding JAC) increased $1,751,000 or 21% to $9,904,000 in the first nine months of fiscal 2010 compared to $8,153,000 for the same period of fiscal 2009. This increase is a result of the service revenue rebated to the HomeCareNet and Ascend products offset somewhat by fewer system implementations of WORx upgrades. Service revenue for JAC increased $488,000, or 19%, to $3,000,000 in the nine-month period of fiscal 20010 compared to $2,512,000 in the same period of fiscal 2009. This increase is primarily the result of an increase in foreign currency exchange rates and an increase by the number of ongoing implementation projects compared to the same period in fiscal 2009. Service revenue for performance management products amounted to $1,126,000 for the nine-months ended March 31, 2010. Service revenue from ARL was $1,153,000 for the nine-months ended March 31, 2010.





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 remained relatively flat decreasing from $2,703,000 during the first nine months of fiscal 2009 to $2,638,000 in the same period in fiscal 2010.  The gross margin, excluding amortization of capitalized software costs, on system sales was 66% in the nine-month period of fiscal 2010 compared to 62% in the same period in fiscal 2009.   The increase in gross margin is primarily due to an improvement in the mix of higher margin proprietary system sales relative to lower margin third party sales during the first nine months of fiscal 2010 compared to the same period in fiscal 2009.





Cost of services increased $749,000, or 9%, to $8,637,000 during the first nine months of fiscal 2010 as compared to $7,888,000 in the same period of fiscal 2009.  Gross margin on service revenue increased slightly to 68% for the nine months of fiscal 2010 compared to 66% for the same period of fiscal 2009.





Amortization of capitalized software decreased $590,000, or 13%, to $3,862,000 in the first nine months of fiscal 2010 compared to $4,452,000 in the same period of fiscal 2009.  This decrease is due to decreased amortization of capitalized software costs related to fully amortized product releases.





Software development costs increased $797,000, or 28%, to $3,591,000 in fiscal 2010 compared to $2,794,000 in the same period of fiscal 2009. Expenditures for software development include amounts paid for both capitalizable and non-capitalizable development projects. This increase reflects a lower capitalization rate for product development activities in the first nine months of fiscal 2010 compared to the same period of fiscal 2009. Total expenditures for software development were $6,158,000 in the first nine-month period of fiscal 2010 compared to $5,694,000 in the same period of fiscal 2009, an increase of $464,000, or 8%. This increase is primarily a result of slightly higher investment in the blood management products during the period, development activities at JAC and the impact of the recently acquired businesses. We expect to maintain our current investment in product development in its blood management and medication management products in the near term.





SG&A expenses increased $1,650,000, or 15%, from $10,983,000 in the first nine months of fiscal 2009 to $12,633,000 in the same period of fiscal 2010.  This increase is primarily due to incremental costs associated with the recently acquired businesses.




Income tax expense increased $243,000, or 46%, from $528,000 during the first nine months of fiscal 2009 to $771,000 in the same period of fiscal 2010.  This increase occurred due to higher income before income taxes offset to some degree primarily from the recognition of research and development tax credits related to Mediware’s





33
 Index




software development activities. During the nine months ended March 31, 2010, the Company recognized research and development credits of $374,000 contributing to an effective tax rate for the three month period ended March 31, 2010 of 25.1%.





Net income during the first nine months of fiscal 2010 was $2,293,000, compared to net income of $1,004,000 during the same period of fiscal 2009, an increase of $1,289,000, or 128%.  The improvement resulted primarily from an increase in support revenue and system sales revenue and a decrease in capitalized software amortization  partially offset by an increase in software development costs and SG&A.







Liquidity and Capital Resources




As of March 31, 2010, Mediware had cash and cash equivalents of $21,342,000 compared to $20,865,000 at June 30, 2009.  Working capital was $16,719,000 and $18,273,000 at March 31, 2010 and June 30, 2009, respectively.  The current ratio was 2.0 to 1 at March 31, 2010 compared to 2.4 to 1 at June 30, 2009.  The Company does not have any material capital lease obligations, purchase obligations or long-term liabilities other than the contingent consideration related to the second quarter of fiscal 2010.





Cash provided by operating activities was $8,905,000 during the first nine months of fiscal year 2010 compared to $6,893,000 during the same period of fiscal 2009.  The increase in cash provided by operating activities is primarily due to an increase in net income and customer advances partially offset by slower collection of accounts receivable.





Cash used in investing activities was $8,749,000 during the first nine months of fiscal 2010 compared to $7,068,000 during the same period a year ago. The increase in cash used in investing activities is primarily attributable to increased acquisition of businesses. During the first nine months of fiscal 2010, Mediware paid a total of $6,080,000 in connection with three business acquisitions during the fiscal period, one acquisition consumated in the prior fiscal year and related expenses. In the fiscal 2009 period, the Company paid $3,483,000 in connection with one business acquisition and associated expenses during the period.





Cash provided from financing activities was $610,000 during the first nine months of fiscal 2010 compared to cash used in financing activities of $104,000 during the same period of fiscal 2009. The cash provided from financing activities in the first nine months of fiscal 2010 was primarily from stock option exercises and related tax benefits. The cash used for financing activities in the 2009 period is attributable to stock repurchases under our Share Repurchase Program. There were no stock repurchases during the fiscal 2010 period.





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, contingent consideration payable for the acquired businesses, any additional stock repurchases and other strategic initiatives.





Our liquidity is influenced by our ability to execute on our strategies 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.





34
 Index




ITEM 3.
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. Mediware has observed increased volatility in market rates over the last several quarters. To date, Mediware has not entered into any derivative financial 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

March 31, 2010

($ in 000)


Effective

Interest Rate at

March 31, 2009


Effect of 1% Change

($ in 000)Cash Equivalents

$
21,342



0.2
%

$
213





At March 31, 2010, a 1% decrease in the current per annum interest rate for our cash equivalents each would result in $213,000 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 March 31, 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.








Concentrations of Credit Risk





Mediware maintains its cash and cash equivalents with financial institutions with high credit ratings.  At this time, the Company maintains deposits in federally insured financial institutions in excess of federally insured (FDIC) limits.  However, management believes that the Company is not exposed to significant credit risk.  The Company has not experienced any losses to its cash and cash equivalents.








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 15% of Mediware’s consolidated revenue for each of the three-month periods ended March 31, 2010 and 2009, and 14% for the each of the nine-month periods ended March 31, 2010 and 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. Assets and liabilities for JAC are recorded in the local currency. Any foreign currency impact from translating assets and liabilities into dollars is included as a component of stockholders’ equity. Our net income for the three and nine-months ended March 31, 2010 was negatively impacted by a $5,000 and $11,000 foreign currency movement, respectively, and was negatively impacted by a





35
 Index




$7,000 and $180,000 foreign currency movement, respectively, for the three-months and nine-months ended March 31, 2009.  These foreign currency adjustments are primarily due to the currency valuation of the British pound against the United States dollar.






ITEM 4.
CONTROLS AND PROCEDURES





Mediware’s management, under the supervision and with the participation of Mediware’s Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of Mediware’s disclosure controls and procedures as of the end of the quarter covered by this report. Disclosure controls and procedures are defined in the Securities Exchange Act as controls and other procedures of Mediware designed to ensure that information required to be disclosed by Mediware 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 Mediware in the reports that it files or submits to the SEC is accumulated and communicated to Mediware’s management, including the CEO and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on the foregoing review and evaluation, Mediware’s CEO and CFO have concluded that Mediware’s disclosure controls and procedures are effective as of March 31, 2010.





There were no material changes in Mediware’s internal controls over financial reporting that occurred during the nine months ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting. Notwithstanding the foregoing, Mediware reported the departure of Mr. Mark Williams, the Company’s former Chief Financial Officer, effective as of November 4, 2009. Mr. Robert Watkins, the Company’s controller, acted as the Company’s principal financial and accounting officer. Mr. Michael Martens became the Company Chief Financial Officer in February 2010. Inherent with any change in management is a change in understanding of the control environment and the internal controls. 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.





PART II
OTHER INFORMATION





ITEM 1.
LEGAL PROCEEDINGS





Mediware from time to time becomes 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 such routine litigation, if adversely determined, would not have a material adverse effect on its consolidated financial position, results of operations or cash flows.








Item1A.
RISK FACTORS





You should carefully considerthe risk factors disclosed in our Annual Report on Form 10-K for the year ended June 30, 2009 and Quarterly Report on Form 10-Q for the quarter ended September 30, 2009included under Item 1A “Risk Factors” in addition to the other information set forth in this report. The risks described in our Annual Report on Form 10-K and ourQuarterly Reports on Form 10-Qare not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.





36
 Index




ITEM 6.
EXHIBITS





Exhibit 10.1
Employment Agreement, effective as of February 10, 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 January 12, 2010Exhibit 10.2
Form of Stock Option Agreement Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed January 12, 2010.Exhibit 11
Schedule of Computation of Net Earnings Per ShareExhibit 15
Consent of Independent Registered Public Accounting FirmExhibit 31.1
Rule 13a-14(a)/15d-14(a) CertificationExhibit 31.2
Rule 13a-14(a)/15d-14(a) CertificationExhibit 32.1
Certification Pursuant to 18 U.S.C. 1350


37
 Index




SIGNATURES




Pursuant to the requirements 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.(Registrant)May 4, 2010
/s/   T. KELLY MANNDate
T. KELLY MANNPRESIDENT AND CHIEF EXECUTIVE OFFICERMay 4, 2010
/s/   MICHAEL MARTENSDate
MICHAEL MARTENSCHIEF FINANCIAL OFFICER






38