| MEDIWARE INFORMATION SYSTEMS INC Item 1A Risk Factors |
| This Annual Report on Form 10-K contains forward-looking statements |
| Statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act |
| The words “believes,” “anticipates,” “plans,” “seeks,” “expects,” “intends” and similar expressions identify some of our forward-looking statements |
| Forward-looking statements are not guarantees of performance or future results and involve risks, uncertainties and assumptions |
| Factors discussed elsewhere in this Form 10-K could also cause actual results to differ materially |
| Set forth below are some of the risks and uncertainties that, if they were to occur, could materially adversely affect our business or that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make |
| We undertake no obligation to publicly update or revise any forward-looking statements |
| The changing members of our senior management team create special risks for us |
| Our senior management team has recently undergone significant changes |
| Our chief executive officer, James Burgess, joined Mediware in October 2005 |
| We also hired Paul O’Toole in January 2006 as general manger for our Perioperative Management Division |
| On February 2006, Mary Truvillion was hired as vice president of human resources, a new position expected to centralize HR functions for the Company |
| Also in February 2006, John Van Blaricum was hired as vice president of marketing and communications to centralize Mediware’s marketing activities |
| In March 2006, John Damgaard was promoted to general manager of the Blood Management Division after serving as the Division’s chief operating officer for the preceding three years |
| Kevin Ketzel, who joined Mediware in October 2005, became the general manager of our Medication Management Division in April 2006 |
| Ketzel’s promotion enabled the planned transition of Mike Crabtree, who led the Medication Management Division for 5 years, to transition to a consulting role focused on establishing growth oriented strategic partnerships |
| On June 30, 2006, the Company’s CFO, Jill Suppes, resigned |
| The Company has commenced a search for a new Chief Financial Officer |
| Mark Williams, the Company’s controller, is acting as the Company’s principal accounting and financial officer until a replacement is found |
| As the new management team gains an understanding of our business and products and new roles in the Company are defined, our short-term and long-term direction may change and the changes may not improve our future results of operations or financial condition |
| 9 _________________________________________________________________ If we do not manage our strategic changes effectively, our financial performance could be harmed |
| We have recently made strategic changes that have placed, and will continue to place, pressures on our management, administrative and operational infrastructure as well as on our results of operations |
| Mediware has changed and added to its senior management team, added marketing infrastructure and added implementation personnel |
| We also reduced our workforce by approximately 10prca on February 17, 2006 |
| These departed employees possessed knowledge of our business, relationships with our customers and other employees and skills that were not replaced |
| These personnel changes may make it more difficult for us to ensure that we operate efficiently and effectively |
| Furthermore, we have incurred and will continue to incur expense to hire and train our new personnel even though their immediate productivity is uncertain and there is no guarantee that they will have a positive impact on our revenues, operations or results of operations |
| Our United Kingdom business is subject to risks that are different from our other businesses |
| A significant portion of the business of our Medication Management Division is based in the United Kingdom |
| These foreign operations encounter risks and uncertainties specific to the United Kingdom such as: · government spending · regulation of our products, customers and employees · uncertain contract terms and conditions · trade protection regulation · taxation · economic conditions · customer demands and payment practices and · changing competitors |
| Additionally, foreign operations expose us to foreign currency fluctuations that could impact our results of operations and financial condition based on the movements of the applicable foreign currency exchange rates in relation to the US Dollar |
| Mediware has not entered into any derivative financial instrument to manage foreign currency risk and is currently not evaluating the future use of any such financial instruments |
| 10 _________________________________________________________________ Our proprietary information could be misappropriated, and we may be subjected to costly third party intellectual property claims |
| We rely upon a combination of trade secret, copyright and trademark laws, license and marketing agreements, and nondisclosure agreements to protect our proprietary information, including our software |
| We have not historically filed patent applications covering our software |
| As a result, we may not be able to protect against the misappropriation of our intellectual property |
| Furthermore, we could be subject to claims, by third parties including competitors and creators of open-source code, that we are misappropriating or infringing intellectual property or other proprietary rights of others |
| These claims, even if not meritorious could require us to: · spend significant sums in litigation · pay damages · develop non-infringing intellectual property and · acquire costly licenses to the intellectual property that is the subject of asserted infringement |
| We may be unable to develop non-infringing products or services or obtain a license on commercially reasonable terms, or at all |
| We may also be required to indemnify our customers if they become subject to third-party claims relating to intellectual property that we license or otherwise provide to them, which could be costly |
| Termination of licenses or modifications of third party software licenses we rely upon could adversely affect our products |
| We license third-party software products that we incorporate into our own software products |
| These products may include operating systems, relational database management systems, knowledge/clinical databases and other key systems |
| The termination by any third-party vendor of our licenses to use these products, or a significant change to a relied upon product, could have a material adverse effect on our operations |
| Changes to the third-party products could cause: · our software to become inoperable · features and functions to become unavailable or · materially reduced product performance |
| Although alternate software products may be available, we could incur substantial costs if we are required to adapt our products to alternative third-party software products |
| Furthermore, adaptation would take time and initial adaptations may be imperfect and/or products may be inoperable or perform poorly as a result |
| If we are unable to enhance our relationships with our third party resellers, our ability to market products may be adversely affected |
| We currently have important relationships with third party resellers of our products |
| If we are not able to continue or enhance our current relationships or develop new relationships, our future revenues could decrease |
| Hospital networks reduce our sales opportunities and may reduce profitability |
| Many hospitals are consolidating and forming (or becoming part of) integrated healthcare delivery networks |
| The formation of these networks might reduce the number of discrete prospects we may target on a “best-of-suite” basis and could provide more negotiating leverage to our prospective customers |
| These events could reduce our sales prices, increase the length of our sales cycle and otherwise could negatively affect our revenue and income |
| 11 _________________________________________________________________ Significant competition may reduce our profit margin |
| The market for healthcare information systems is extremely competitive |
| Our competitors are Siemens AG, McKesson Corporation, Eclypsis Corporation, Misys PLC, Global Med Technologies, Inc, SCC Soft Computer, Cerner Corporation and GE Healthcare, each of which offers products that compete with certain of our offerings |
| Many of our competitors have greater financial, technical, product development, sales and marketing resources |
| A number of factors determine success or failure in our markets, including: · functionality of software products · quality of client references and the availability of client reference sites · underlying technical architecture · financial stability of the software provider · ongoing support of the system and · the quality and quantity of the sales organization |
| Our ability to maintain a positive stance in all of the above areas will affect our ability to compete successfully and maintain our profit margin |
| Our strategy in all three of our operating divisions includes licensing “best of suite” products to customers, which requires customer acceptance of our products and strategy |
| While we believe that each of our “best of suite” products is positioned to succeed in the market place, there is no assurance that customers will accept our “best of suite” strategy or accept our products to the extent that we expect |
| If our customers instead select a single-vendor, enterprise-wide system that automates all functions of the hospital, rather than the discrete functions targeted by our products, our sales will decrease |
| Our ability to generate revenue could suffer if we do not continue to update and improve our existing products and services and develop new ones |
| The pace of change in the markets we serve is rapid, and there are frequent new product and service introductions by our competitors and by vendors whose products and services we use in providing our own products and services |
| If we do not respond successfully to evolving industry standards, our products and services may become obsolete |
| We must introduce new healthcare information services and technology solutions and improve the functionality of our existing products and services in a timely manner in order to retain existing customers and attract new ones |
| However, we may not be successful in responding to technological developments and changing customer needs |
| Technological changes may also result in the offering of competitive products and services at lower prices than we are charging for our products and services, which could result in our losing sales unless we lower the prices we charge |
| Our license fee revenue will be adversely affected after June 2007 if we do not successfully implement a near-term strategy to replace the revenue derived from the migration of the Blood Management Division’s legacy products |
| Over the last few years, our Blood Management Division has experienced increased license fee revenue as a result of the migration of its customers from our legacy blood bank products to our HCLL software product, and we expect that our license fee revenues will continue to benefit from the migration through fiscal year 2007 |
| However, after June 30, 2007, Mediware will experience decreased license revenue unless we develop and implement a near-term strategy to replace that revenue |
| 12 _________________________________________________________________ Our business may be adversely affected by changing technology that may render our technology obsolete |
| Changing technology will make it necessary for some of our software products to migrate to new software platforms in the coming years, which could require significant resources, could impact future plans for such products, and could adversely affect our ability to sell and develop new and competitive software products |
| In addition, new technology not currently in the mainstream could quickly enter the market and disrupt our existing business and customers’ need for our products |
| We will try to maintain state-of-the-art products, but new technologies in the marketplace could make our technology obsolete and our products unusable or hinder future sales |
| Research and development is costly and may not produce successful new products |
| Our strategy relies on continuing to develop new software products |
| We currently intend to continue investing in research and development of new products |
| However, our investment may not produce marketable product enhancements and new products |
| If a product or group of products is not accepted in the marketplace, that could adversely affect our business, results of operations and financial condition |
| In addition, the cost of developing new healthcare information services and technology solutions is inherently difficult to estimate |
| Our development and implementation of proposed products and services may take longer than originally expected, require more testing than originally anticipated and require the acquisition of additional personnel and other resources |
| If we are unable to develop new or updated products and services on a timely basis and implement them without significant disruptions to the existing systems and processes of our customers, we may lose potential sales and harm our relationships with current or potential customers |
| Developing new products would be difficult and take longer without the expertise of software engineers and third party consultants to develop our products |
| Developing new products is a complex and difficult process |
| We rely on the development expertise of employed software engineers and third party consultants, who have significant product expertise |
| The departure of certain software engineers or the election of the consultants not to continue providing Mediware development and product services could materially impact Mediware’s software development processes and product expertise |
| In addition, because of the complex nature of software or the departure of programming personnel or consultants, we could encounter difficulties or delays in the development and implementation of new products if we lost such expertise |
| These employees and consultants generally can terminate their relationship with us at any time |
| New and changing government regulation creates compliance challenges |
| The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory and other influences |
| Existing and new laws and regulations affecting the healthcare industry could create unexpected liabilities for us, cause us to incur additional costs and could restrict our operations |
| Many healthcare laws are complex and their application to specific products and services may not be clear |
| In particular, many existing healthcare laws and regulations, when enacted, did not anticipate the healthcare information services and technology solutions that we provide |
| However, these laws and regulations may nonetheless be applied to our products and services |
| Our failure to accurately anticipate the application of these laws and regulations, or other failure to comply, could create liability for us, cause us to breach our contracts and result in adverse publicity and negatively affect our businesses |
| Increasing government regulation may increase costs and reduce profitability |
| The hospitals that comprise the primary market for the products of our Blood Management, Medication Management and Perioperative Management Divisions must comply with various US and UK national, state and local statutes and regulations |
| The decisions and actions of various governmental and regulatory bodies administering these laws may significantly influence operations of hospitals, blood banks and healthcare organizations and could have a material adverse effect on our business, results of operations or financial condition |
| In addition, our Blood Management products are regulated as medical devices by the FDA Blood bank software vendors are also subject to the FDA’s Quality Systems Regulations |
| Although we try to ensure that our internal quality system complies with federal guidelines, full compliance with existing or any future guidelines, or inspection procedures is unpredictable |
| We have dedicated substantial time and resources to comply with guidelines and regulations applicable to the products of our Blood Management Division |
| The FDA enforces compliance by using recalls, seizures, injunctions, civil fines and criminal prosecutions |
| Unsatisfactory compliance and the inability to timely remedy any non-compliance, resulting in any of the above actions, would likely have a material adverse effect on our business, financial condition and results of operations |
| If the FDA expands its scope of regulation of our Medication Management or Perioperative Management Division products, it would be costly to implement the FDA Quality Systems Regulation procedures |
| Furthermore, any new products of the Blood Management Division may not be approved by the FDA, which would diminish the value of our research and development for those products and could impair the future financial performance of the Division |
| 13 _________________________________________________________________ Recent regulations relating to patient confidentiality may increase costs and reduce profitability |
| The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) mandated significant changes in the regulatory environment governing the security and confidentiality of individually identifiable, protected health information |
| Most healthcare providers, healthcare clearinghouses and health plans (“Covered Entities”) were not required to comply with the standards adopted by the Department of Health and Human Services to implement HIPAA for security until April 21, 2005 and the standards for privacy until April 14, 2003 |
| Although we are not a Covered Entity, most of our customers are Covered Entities |
| As Covered Entities, our customers must require their service providers to meet some HIPAA obligations |
| Accordingly, we have been subjected to some of these requirements |
| In addition, we have had increased legal expenses associated with negotiating agreements with existing and new customers to implement the new HIPAA obligations |
| In light of the new obligations under HIPAA, Covered Entities may be required or may choose to reevaluate their technology solutions |
| We may be required to invest in our products and procedures to maintain compliance or lose customers |
| Furthermore, we are subject to contractual requirements arising from HIPAA that increase our liability and risks associated with the handling of individual protected health information |
| In addition, many states have passed or are evaluating local versions of HIPAA and we may not be able to comply with the terms of such new statutes |
| These provisions, however, may not be enforceable in some jurisdictions or may not adequately limit our exposure |
| We maintain product liability insurance in an amount that we believe to be adequate for our intended purpose |
| However, insurance may not cover a claim brought against us |
| A successful claim brought against us could have a material adverse effect upon our business, results of operations or financial condition |
| System errors may delay product acceptance and adversely affect our operations and profitability |
| Despite testing, software products as complex as those we offer and use in a wide range of clinical and health information systems settings contain a number of errors or “bugs”, especially early in their product life cycle |
| Our products are clinical information systems used in patient care settings where a low tolerance for bugs exists |
| Testing of products is difficult due to the wide range of environments in which the systems are installed |
| Due to these factors, the discovery of defects or errors could cause: · delays in product delivery · poor client references · payment disputes · contract cancellations · contract disputes, including warranty claims and lawsuits and/or · additional expenses and payments to rectify problems |
| 14 _________________________________________________________________ Any of these factors could delay our product sales or have an adverse effect upon our business, results of operations or financial condition |
| Our operating results can fluctuate due to irregular system sales |
| Our revenue and results of operations can fluctuate substantially from quarter to quarter |
| System sales in any fiscal year depend substantially upon our sales performance and customers’ budgeting and buying practices |
| System sales may fluctuate due to: · contract activity · demand for our products and services · lengthy and complex sales cycles · customers’ internal budgets for new technology systems, customers’ technical resources to deploy technology and · customers’ personnel availability |
| Additionally, our ability to recognize anticipated revenue may be materially affected by the terms of a final contract |
| Factors that impact contract terms and revenue include the following: · Systems contracts may include both currently deliverable and non-deliverable software products · Customer needs for services that include significant modifications, customization or complex interfaces that could delay product delivery or acceptance · Customer-specific acceptance criteria and · Payment terms that are long-term or depend upon contingencies |
| The sales for the Medication Management Division’s full suite of products involve more hospital departments and longer implementation cycles |
| This exacerbates many of the foregoing risks |
| Our stock price may be volatile due largely as a result of relatively low trading volume |
| The trading price of Mediware’s common stock may fluctuate significantly from time to time |
| Generally, Mediware’s common stock has relatively low trading volume which can cause transactions in a relatively small number of shares to significantly impact the price of the stock |