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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended JUNE 30, 1995
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1943 [No Fee Required]
For the transition period from . . . . to . . . . . . . .
Commission file number 0-17478
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WISMER*MARTIN, INC.
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(Name of small business issuer in its charter)
Washington 91-1196514
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
N. 12828 Newport Highway, Mead, Washington 99021
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (509) 466-0396
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common stock par value $0.001 None
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Securities registered under Section 12(g) of the Exchange Act:
NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X
No ___ ---
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year were $10,482,215
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock, as of
September 26, 1995 is $4,137,666.
The number of shares outstanding of common equity, as of September 26, 1995 is
15,337,361.
DOCUMENTS INCORPORATED BY REFERENCE NONE
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Transitional Small Business Disclosure Format (check one):Yes ; No X
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PART I
ITEM 1. BUSINESS
Wismer*Martin develops, markets, and supports computer systems which
automate physician offices, group practices, hospitals, and managed care
organizations. The Company believes that it is one of the leading providers of
practice management systems and healthcare information networks. The Company's
SM*RT Net suite of products is designed to provide connectivity utilizing
industry standard data formats for all network participants, including
physicians, hospitals, labs, imaging centers, IPA's, PPO's, HMO's, employers,
third party payors, suppliers and other entities. The Company's SM*RT Practice
product, is designed to manage the financial, administrative and practice
management requirements of group medical practices, and is fully-integrated with
SM*RT Net. In addition, the Company's hospital information system solution,
sold under the name ADDvantage, is designed to provide a complete integrated
application to automate the small to mid-size hospital. These three product
solutions provide the Company's clients with the necessary technology
infrastructure to meet the demands of today's rapidly changing healthcare
environment. The Company also sells hardware, training and installation
support, forms and supplies, and software and hardware maintenance services.
Wismer*Martin, Inc. ("Wismer Martin" or the "Company") was formed to
develop, market and support microcomputer practice management systems and
related services designed for the medical and dental professions. The Company
was founded as a sole proprietorship in February of 1980 and was incorporated on
November 29, 1982 under the laws of the State of Washington as Professional
Software Associates, Inc. The Company changed its name to Wismer*Martin, Inc.
effective August 1, 1985. The Company's principal executive offices are located
at N. 12828 Newport Highway, Mead, Washington, 99021. Its telephone number at
that location is (509) 466-0396.
On September 12, 1991, National Healthtech Corporation (National
Healthtech) acquired 1,714,286 shares of the Company's common stock from the
founders of the Company, Glen and Judith Martin (the Martins). On January 31,
1992, National Healthtech acquired the remaining 2,868,414 shares of common
stock held by the Martins at that time.
On June 10, 1993, National Healthtech sold 4,582,700 shares of common stock
of Wismer Martin to Ronald L. Holden, a former director and stockholder of
National Healthtech. At June 30, 1994, Mr. Holden owned of record 4,582,700
shares of common stock. Mr. Holden is the Chairman of the Board of Directors of
Wismer Martin.
On February 10, 1994, the Company acquired all of the outstanding shares of
common stock of Integrated Health Systems, Inc., a California corporation (IHS).
IHS is in the business of developing and licensing software programs for
hospitals and related entities. The Company issued convertible subordinated
debentures having a face value of $2,500,000 in exchange for the shares of
common stock. IHS's major stockholder was Mr. Ronald L. Holden, who is also a
major stockholder of the Company (see "Security Ownership of Certain Beneficial
Owners and Management").
PRODUCTS AND SERVICES
PRACTICE MANAGEMENT SYSTEMS
SM*RT [REGISTERED MARK] PRACTICE SYSTEM
Historically, Wismer Martin's core product has been its practice management
software, SM*RT Practice. The SM*RT Practice System includes software
applications which automate the financial, administrative, practice management,
and clinical information requirements of medical group practices. The System is
modular to facilitate the addition of new applications. The SM*RT Practice
system modules are designed to collect process, report and electronically
transmit data. To meet the needs of different size practices, the SM*RT Practice
System operates on Novell PC-based LANS which support the latest in Intel Dual
Pentium file servers capable of serving up to hundreds of physicians in a single
group practice. Smaller practices utilize the Intel 486 technology for
processing.
Management believes the SM*RT Practice System meets the information
requirements of the vast majority of all medical specialties and practices in
the United States. The price of the SM*RT Practice System
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depends upon a number of factors, including size of physician practice and
number of system users, and ranges from approximately $12,000 to $500,000. The
SM*RT Practice System includes a software license, hardware, installation and
training, and a limited warranty on hardware through the manufacturer's warranty
and 1 year free on-site maintenance included in the price of the hardware.
The SM*RT Practice software includes basic business applications modules as
standard features, as well as advanced application modules for an additional
fee. The modules include:
SM*RT Practice Modules Capabilities
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FINANCIAL APPLICATIONS
Insurance Billing............... Process and prints insurance claim forms.
Tracks aging of all claims and provides re-bill
options for delinquent claims. Coordinates
billings for supplemental carriers.
Patient Billing................. Process and prints patient statements.
Supports true cycle billing. Family,
individual patient, and open item statement
billing.
Managed Care Tracking........... Tracks expected reimbursement and risk pools;
provides the information to evaluate
profitability of managed care contracts.
Collections..................... Allows for automated collections letters,
statement dunning messages, and full range of
collection reports and audits.
PlanForm Enables custom designing of statements, labels
and specialty forms.
ADMINISTRATIVE APPLICATIONS
Word Processing Integration..... Provides linkage to industry standard word
processors for correspondence.
Notes & Attributes.............. Tracks and reports patient notes and user
defined data elements.
Patient Recall.................. Tracks, reports and sends reminders for patient
exams.
PRACTICE MANAGEMENT APPLICATIONS
Referral Tracking............... SM*RT tracks referring doctors or other
sources. Complies with regulatory requirements
for claim data. Tracks patient and dollar
value of referred patient by source.
Filter - Report Generator....... Enables the practice to customize reports
beyond the standard reports.
System Reporting................ System reporting includes; accounting,
transactional, clinical, recall, referral,
trend analysis, management, and graphical.
ADVANCED FEATURES
Electronic Linkage.............. Custom HIS interfaces.
AutoPost........................ Electronic claim remittance. Takes carrier
data for paid claim and post to the patient
account in a open item format automatically.
Appointment Scheduler........... Eliminates the appointment book and gives
immediate access to the healthcare providers
daily, weekly, and monthly schedules. Tracks
appointment cancellations and provides full
reporting.
Dr. Dialer...................... An automated appointment reminder system which
dials patients at home using a digitized voice
system and patient input/response via touch-
tone keys.
Dr. Chart....................... Electronic patient medical record system.
Tracks patient histories, lab results, health
maintenance, medications, and encounter
information. Available through third party
relationship.
EZ-CAP.......................... Provides complete management of capitated
reimbursement contracts for group practice or
IPA. Provides projected, actual, and variance
reports for management. Transmits claims to
carriers or via EMC. Integrated with SM*RT
Practice. Available through third party
relationship.
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Electronic Media Claims (EMC)... EMC will edit the claims for data elements and
electronically submit edited claims to carriers
or to electronic clearing houses. The Company
utilizes Equifax as the national clearing house
for all client EMC.
NEW PRACTICE MANAGEMENT PRODUCT DEVELOPMENT
The Company expects to release in January of 1996 a completely new module,
called SM*RT Care. SM*RT Care is an on line medical record completely integrated
with the current SM*RT Practice and Net Suite products. SM*RT Care is being
developed using client server technology and will run either on a Intel based PC
or Digital Equipment Corp. Alpha minicomputer. SM*RT Care will operate as a
front end to SM*RT Practice and will provide the single physician or large group
practice with a graphical user interface to input and access all patient data
for a latitudinal and longitudinal medical record.
HEALTH INFORMATION NETWORK SYSTEMS
SM*RT NET SUITE
In the past two years the Company has developed and implemented a new
product line now marketed under the name of SM*RT Net. The SM*RT Net Suite was
designed to address the need for electronic exchange of information across the
network. Its objective is to streamline common, intra-organization communication
practices and processes. Specifically, the product suite enables organizations
such as, but not limited to, physician practices, hospitals, payors and allied
care providers to electronically exchange a common and standardized set of
information transactions related to the approval and delivery of patient care.
The breadth of information transactions exchanged are dependent upon the type
and variety of organizations participating in the network. The product is
completely scaleable from small local networks with dozens of participants to
state-wide networks which service thousands of providers and multiple payors.
Wismer Martin's SM*RT Link provides a true interactive interface for all
networked participants, including physicians, hospitals, labs, imaging centers,
IPA's, PPO's, HMO's, employers, third party payors, supplies and other entities.
The distributed hub strategy facilitating this communication capability uses a
distributed processing platform to permit economical incremental growth without
degradation of communication performance. Strict adherence to HL7 (Health Level
7) protocols ensures compatibility, as well as efficient and swift integration
with other healthcare products supporting this clinical communication standard.
The various modules of the SM*RT Net Suite include:
SM*RT Net Modules Capabilities
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SM*RT Net Hub................... SM*RT Net Hub provides a true interactive
electronic interface between all participants
in a Healthcare Information Network (HIN),
including physicians, hospitals, laboratories,
imaging centers, IPA's, PPO's, HMOs, employers,
third party payors, suppliers and other
entities. Practices can transmit patient
referrals and demographics and receive
admit/discharge data, scheduling information,
lab and test results, pre-authorizations and
claims status, as examples. The HUB computer
facilitating this communication capability
utilizes a distributed processing platform to
permit economical incremental growth without
degradation of communications performance. The
HUB supports a variety of communication links
and protocols, including TCP/IP, LU6.2, and
SNA. Strict adherence to HL7 (Health Level 7)
protocols ensures compatibility, as well as
efficient and swift integration's with other
healthcare products supporting this clinical
communication. The Net Hub modules currently
supports a wide range of financial, clinical
and other transaction types.
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SM*RT Net Link ................. The SM*RT Net Link module is a Netware loadable
software module which manages the sending and
receiving of messages between a HUB running
SM*RT Net Hub software and a single SM*RT Link
workstation. This module includes a full CUI
user interface.
SM*RT Lan Link ................. The SM*RT Net Lan Link module is a Netware
loadable software module which manages the
sending and receiving of messages between a HUB
running SM*RT Net Hub software and Novell File
Server. This module includes a full CUI user
interface and sends and receives messages
directly to the individual user workstation.
SM*RT IS Link .................. The SM*RT Net Lan Link module is a Netware
loadable software module which manages the
sending and receiving of messages between a HUB
running SM*RT Net Hub software and a
minicomputer or mainframe running a third party
application.
SM*RT Link IDK ................. The SM*RT Link IDK module is a set of C
Language routines which are provided to 3rd
party vendors for use in integrating their
application with the SM*RT Net Suite.
SM*RT Net Hub's development is driven by the strategy for creating
successful fee-for-service and managed care hospital-physician network feeder
systems, it goes well beyond the scope of a system interface engine or platform.
Capabilities include data distribution protocols, security and patient referral
tracking capability. This built-in marketing "intelligence" will provide the
capability of tracking all referral transactions: i.e. understanding who the
true referral source of the patient is.
SM*RT Net Hub is completely integrated with SM*RT Practice, permitting ease
of operation with consistent menu driven screens and the automatic updating of
practice computer files. Without this specific programming integration, the
transfer of information among providers merely generates a print/text file,
which normally must be re-keyed into the practice computer system files. This
integration is obviously crucial in creating a seamless network.
NEW SM*RT NET SUITE PRODUCT DEVELOPMENTS
SM*RT Net Hub development plans include full integration with the SM*RT
Care product to be completed this year. The next product release for SM*RT Net
Suite is scheduled for July of 1995. Included in that release is Patient
Activity Index module which will permit accessing patient financial, clinical,
and other information from all points of the network as if the data was
contained in a single database.
HOSPITAL INFORMATION SYSTEMS
The ADDvantage Hospital Information System provides a comprehensive, fully
integrated application including financial, administrative, clinical, and
managed care modules to support the needs of the hospital from 50-300 beds. The
System has been developed, enhanced, and expanded over the past 12 years and
operates on the fastest selling minicomputer system ever developed; the IBM
AS/400. The System is completely modular but is usually purchased in core
groups. The ADDvantage System is designed to work for a single hospital or in a
multi-hospital setting where certain administrative functions, such as medical
records are shared between institutions.
ADDvantage System Modules Capabilities
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FINANCIAL APPLICATIONS
Patient Billing .................. Complete insurance billing module including
payor logs and managed care processing.
Accounts Receivable .............. Statement processing and Collections follow-
up. Payment and adjustment posting with full
account inquiry.
Accounts Payable ................. Controls vendor invoices and payments. In-
cludes master file maintenance, transaction
processing and reporting.
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General Ledger .................. Provides flexible financial management in-
cluding user defined reporting based on cur-
rent year, current budget, and historical
data.
Patient Registration ............. One process manages all types of patient
registrations, from pre-admission to dis-
charge.
Materials Management ............. Manages purchasing, receipts, requisitions,
transfers, Cart/Par level, lost charges,
vendors statistics, physical inventory, and
reporting.
Payroll/Personnel ................ Provides complete management of payroll,
personnel, benefits administration, payroll
budgeting, licensure tracking and education
administration.
DRG OptiMiser .................... Operates in tandem with Medical Record Ab-
stracting Module to optimize DRG assignment
for each patient encounter to ensure data
quality and optimum allowable reimbursement.
Cost Accounting .................. Provides complete cost tracking utilizing
step down methodology by use of RVU's or
actual costs. Provides cost accounting in-
formation at multiple levels of the organiza-
tion.
Fixed Assets ..................... Complete property management modules with
automatic depreciation calculation via ARSC
or MACRS. Maintains three tax books; inter-
nal, state, and federal.
CLINICAL APPLICATIONS
Clinical Information System ...... Provides a GUI based view of all clinical
data in the IHS Clinical Modules via numeric
and graphical representation.
Quality Utilization/Management ... Complete Quality Utilization management,
physicians maintenance, infection control,
and risk management capabilities.
Radiology Management ............. Departmental management module including
orders, scheduling, result reporting, film
tracking, and management statistics.
Pharmacy Management .............. Departmental management module including
orders, medication administration, drug in-
teractions, and patient profile.
Laboratory Management ............ Departmental management module including
orders, result entry, on line instrument
interfaces for all laboratory departments.
Clinical Documentation System .... Multi-disciplinary module which supports
assessments, care plans, flowsheets, and
progress notes. Provides standard care plans
and clinical pathways.
ADMINISTRATIVE APPLICATIONS
Resource Scheduling .............. Complete multi-resource scheduler for hospi-
tal and clinic departments.
Executive Information System ..... GUI based executive decision support module
which presents in graphical form all relevant
key indicators for hospital operations with a
focus on managed care indicators.
Order Communications ............. Hospital wide order entry module with direct
data entry or menu selection. Includes com-
plete order explosion capability.
Medical Records .................. Complete departmental module including pa-
tient index, abstracting, DRG/Case mix re-
porting, chart deficiency, and chart locator.
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NEW ADDVANTAGE SYSTEM PRODUCT DEVELOPMENTS
In the past year the Company has begun a major technology shift away from
terminal based applications to client server applications utilizing the IBM
AS/400 as a database server with a PC Lan as a front end providing clients with
a GUI interface. The first two applications marketed using this new technology
are the Clinical Information System and Radiology Management System completed
during this fiscal year. In the next fiscal year it is planned to extend this
technology to the Clinical Documentation System.
PRODUCT RESEARCH, DEVELOPMENT AND ENHANCEMENT
The computer industry is characterized by rapid technological change in
computer hardware, operating systems and software. To keep pace with this
change, Wismer Martin maintains an aggressive program of new product develop-
ment. The Company dedicates considerable resources to further enhance its
existing products and to create new products and technologies. For the fiscal
years ended June 30, 1995, 1994 and 1993, the Company expended $2,407,242,
$1,270,656 and $678,972, respectively, on product research, development and
enhancements. Of the expended amounts, $1,820,379, $1,018,308 and $652,357
related to enhancements which were capitalized during the fiscal years ended
June 30, 1995, 1994 and 1993, respectively. These capitalized costs represent
amounts expended after a product's technological feasibility has been estab-
lished and before the product is ready for sale. The Company anticipates that
future product research and development will approximate 15% of product sales,
provided that the Company has the necessary liquidity to fund these development
efforts.
MARKETING AND SALES
The Company's products are currently distributed nationally through a
direct sales force of 5 sales representatives with an additional 5 employees
dedicated to inside sales to existing clients. Products typically are installed
on a turnkey basis, which includes installation of a respective software
application customized to the needs of the end-user practitioner's specialty and
practice, proper hardware configuration, patient account conversion, classroom
training, customer support and hardware/software system maintenance. The
Company services its distribution network from corporate headquarters in Mead
(Spokane), Washington; and from branch offices located in Seattle, Washington;
and La Jolla, California.
The Company's revenues are derived primarily from the sale of healthcare
information systems, from the licensing of proprietary software to purchasers of
these systems, from the provision of software and hardware maintenance services
and from the sale of paper forms and related supplies. Sales are made nation-
wide. Under the terms of the Company's current licensing arrangements, end-
users of its proprietary software pay an annual software maintenance fee.
Additional maintenance fees are imposed for added work stations or additional
data bases. End-users may also elect to purchase software upgrading, technical
support and toll free customer support service from the Company. The Company
also provides end-users with hardware maintenance service, which is charged
separately. Revenue from the licensing of fixed fee multi-site license
arrangements which provide the customer with the right to reproduce additional
copies of the software and for which the Company has insignificant future
obligations are recognized upon delivery of the master copy of the software.
Revenue from the granting of exclusivity arrangements is recognized over the
period covered by the agreement. Installation revenues on long-term installa-
tion contracts are recognized under the percentage-of-completion method of
accounting whereby revenues earned and related costs are recorded based upon the
relationship that total costs incurred bear to total estimated contract costs.
Services and other revenues are recognized pro rata over the period in which the
service is to be provided. (See Note 1 to the Consolidated Financial State-
ments)
CUSTOMERS
The Company has installed more than 1600 physician practice management
systems, serving over 3700 physicians in more than 30 medical specialties
ranging in practice size from one to more than 30 physicians. The Company
markets its product to substantially all major specialties including family
practice, orthopedics, obstetrics and gynecology, internal medicine and
cardiology. Company has installed its hospital systems in 66 hospitals ranging
in size from 20 beds to 400 beds. The Company's hospital system has been shown
to meet the needs of the small rural community hospital as well as the large
urban medical center. The Company has installed its HIN products in three state
wide networks, sponsored by Blue Cross of Washington, Blue Cross of Alaska, and
Blue Shield of Eastern Washington, which encompass Washington and Alaska and
which have 370 client participants. The Company is in the process of installa-
tion of its HIN products for two hospitals on the east coast which will link
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multiple hospitals, payors, and hundreds of physicians. The Company believes
that an increasing portion of its sales are likely to be made to hospitals and
other large healthcare providers and has refocused its sales efforts to address
this market opportunity. 70% of the installed client base is located in eight
states. Blue Cross of Washington and Alaska accounted for 22% of the Company's
total revenues for the year ended June 30, 1995.
STRATEGY
Wismer Martin's objective is to be the leading provider of healthcare
information networks with associated hospital and physician applications. Wismer
Martin's products and services are designed to improve the ability of integrated
delivery networks to manage data and achieve success in their market area under
the demands of managed care. The Company's strategy includes the following key
elements:
- PROVIDE ELECTRONIC LINKAGES FOR EMERGING INTEGRATED NETWORKS OF HEALTH
CARE DELIVERY ORGANIZATIONS. The Company's strategy is to provide a
comprehensive technology platform for the integration of diverse
information systems into a unified network which supports the acquisi-
tion, transfer, and security of financial, clinical, and, messaging
data over a geographic area served by a health care delivery organiza-
tion. In addition, the Company will provide business services solu-
tions including, marketing, affiliation, design, and planning services
which enable the client to develop and implement a communication
network which mirrors their business objectives and organization.
- PROVIDE SOPHISTICATED, COMPREHENSIVE APPLICATION SYSTEMS FOR THE
PHYSICIAN GROUP PRACTICE AND SMALL HOSPITAL SETTINGS. The Company's
strategy is to provide easy-to-use yet comprehensive medical practice
management and hospital software which provides a full range of
administrative, financial, clinical, and managed care functionality to
meets the needs of the U.S. market. The Company believes these
applications address the needs of patients, physicians, hospitals, and
payors to increase efficiency and reduce overall costs.
- LEVERAGE EXISTING CUSTOMER BASE. The Company's strategy is to
maximize revenues from its existing customers. In 1994, system
upgrades, add-on software and hardware, software and hardware mainte-
nance, forms and supplies and other services to existing customers
accounted for approximately 40% of total new revenues. The Company
believes through more sophisticated marketing, new support programs,
and partnerships with other suppliers that this may be increased to
more than 50% of future revenues. In addition, the Company believes
that the existing customer base will be the first and best market for
the new Smart Care product, when it is available.
- IMPROVE DIRECT SALES ORGANIZATION. The Company believes a direct
sales organization, whether in at the individual client level or in
concert with a strategic partner is the most effective way to market
its products and services. The Company's strategy is to improve its
direct sales organization to be able to market to larger of health
care organizations, payors, and consultant firms. The Company current-
ly has separate groups within each business unit which focus on new
systems sales, sales to existing clients, and sales to hospital and
other large healthcare providers.
- MARKET THROUGH STRATEGIC PARTNERSHIPS. The Company believes that,
even with an improved direct sales force, many opportunities may not
be available to the Company simply due to our size, location, or lack
of penetration within a given market area. To remove this obstacle to
growth it is necessary to establish strategic partners such as
hardware vendors, software vendors, system integrators, and telecommu-
nications vendors who have wide market penetration, relationships, and
the financial resources to fund marketing and implementation efforts
in pilot programs to establish a presence in certain markets. The
Company already has such relationships established with its hardware
vendors, Digital Equipment Corporation and IBM, and is working to
establish such relationships with systems integrators and telecommuni-
cations firms.
- EXPAND MARKET PENETRATION THROUGH NEW PRODUCT OFFERINGS. The
Company's strategy to expand market share and penetration is based on
expansion both vertically within the existing client base and horizon-
tally in other vendor client bases by the development and sales of new
product offerings which either complement our current offerings or
fill needs not satisfied by other vendors. In the highly competitive
and technology driven market the Company operates in, new product
development historically has driven
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growth and the demand for new products and technology is accelerating
with the market forces present due to managed care. In this area, the
Smart Net suite of products and the Smart Care product will provide
the means to increase its client base and improve its position in the
market for the foreseeable future. In addition, the Company will
continue to add new modules to its Smart Practice product to keep its
functionality current and competitive.
STRATEGIC PARTNERS
In order to provide access to an increasing number of larger opportunities
it will be necessary for the Company to exploit to the greatest extent its
partnerships with other providers who have sales coverage on a national basis.
In addition, such partners can assist the Company with opportunities where our
relatively small size might be a barrier to obtaining the business. The Company
currently has established relationships with IBM, Digital Equipment Corp., and
Microsoft. The Company has signed a letter of intent with GTE to exchange
information for the purpose of analyzing the potential alignment between the two
firms to jointly market and implement large scale Healthcare Information
Networks on a national basis. GTE has completed its technical due diligence
of the Companies product.
Specifically our relationships with IBM, Digital Equipment Corp. and
Microsoft have been based on a reseller relationship. In the case of IBM this
relationship is referred to as a "Business Partner", for Digital a "Goldkey
Partner" and Microsoft a "Solutions Provider." These relationships provide the
firm with discounts on equipment and software for resale to our clients and for
our internal use. Our partners extend us various advantageous credit terms for
the purchase of their equipment and software. In addition, we receive advance
information as to new products and access to and training on those products for
inclusion with our product offerings. We are provided with special support
assistance from our partners for technical, configuration, and pricing informa-
tion required. We have obtained marketing assistance both in dollars and
services from these partnerships and we receive sales leads from their direct
sales forces. We also are invited to various conferences and sessions sponsored
by these partners where we have the opportunity to exhibit our products. We are
included in directories published by each partner which detail our offerings.
Such directories are used by the partners direct sales force to generate leads
for the company as well as distributed widely to end users of our partners
equipment and software. We are allowed by each partner to use their logo and
name in printed materials and advertisements to publicize our special relation-
ship with our partners. We are certified by each partner and are allowed to
advertise our certification as a legitimate and knowledgeable supplier of their
equipment and software. We have, where appropriate, jointly bid with our
partners on new business.
NEW ACCOUNT SALES
In the past the Company has focused primarily on the single or small group
practice and on the small rural hospital market. Our plan going forward is to
sell to larger organizations with an emphasis on selling "bundles" of products
and services to these larger organizations including geographic site licenses.
These organizations include:
- INSURANCE PAYORS
- SPECIALTY MSO'S
- PHO'S
- LARGE GROUP PRACTICES
- HOSPITAL CHAINS
- STRATEGIC PARTNERS
In order to maximize these sales opportunities, which often require six
months to a year to close, it will be necessary to increase the quality of our
sales staff. Initial creation of opportunities will be driven by direct mail and
call prospecting with additional opportunities to come from the effect of the
marketing plan detailed above. The Company will continue to market its products
to the single physician or small group practice but will only do so when the
cost of sales can be kept low through remote demos or referrals.
EXISTING CLIENT SALES
It is expected that the current inside sales staff will be sufficient to
cover the installed client base and deliver the revenues needed to grow the
business. This group will receive additional training in telemarketing in the
coming months to improve their success rate. This group will sell add-on modules
and system upgrades and
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services into the 1600 physician practices and 66 hospital client base. At the
present 500 of the 1600 SM*RT Practice clients have upgraded leaving 1100 or
approximately $2,500,000 in upgrade revenues to be obtained through continuing
sales efforts for Version 5.0. The major physician client base add-on opportuni-
ties are Dr. Dialer, Scheduler, and Electronic Claims. The major hospital client
base opportunities are clinical applications including the new client server
Radiology Management System. The activities of this group are supported by user
groups held throughout the country as well as direct mail campaigns conducted
both via invoice "stuffers" as well as separate mailings.
PRODUCTION
Production of the Company's software products involves duplication of disks
and tapes and printed user manuals. The purchase of blank disks and transfer of
the software programs onto these media for distribution to customers is
performed by the Company. Media for the Company's products include 5 1/4"
floppy disks, 3 1/2" micro-diskettes and magnetic tape are available from
multiple sources. User manuals for the Company's products and the packaging
materials are produced to the Company's specifications by outside sources. To
date, the Company has not experienced any material difficulties or delays in
production of its software and documentation.
The Company is not engaged in the business of manufacturing the hardware
components of its practice management systems, but purchases such components
from reputable third-party manufacturers. To date, the Company has not
experienced any material difficulties or delays purchasing hardware components.
The Company does not carry significant inventories of paper products.
Under existing arrangements with its paper products suppliers, the Company
places advance orders for such products and is invoiced upon delivery.
EMPLOYEES
As of September 15, 1995, the Company and its subsidiary had 113 employees,
of whom 38 were in software design and development, 12 in marketing and sales,
33 in customer support, 10 in installation, and 20 in administration. The
Company believes that its future success is dependent in part upon its ability
to continue to attract and retain highly skilled technical, marketing and
management personnel.
None of the Company's employees is subject to a collective bargaining
agreement and the Company has never experienced a work stoppage.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are housed in a 17,500 square foot Company-owned
building in Mead (Spokane), Washington. Additionally, the Company leases office
space in the following cities:
<TABLE>
<CAPTION>
Monthly Lease
Location Rental Expiration Date
-------- ------ ---------------
<S> <C> <C>
N. 10220 Nevada Spokane, Washington $1,890 September 30, 1995
6912 - 220th S.W.
Mountlake Terrace, Washington $4,184 July 30, 1997
7007-220th St. S.W.
Portland, Oregon $1,303 November 30, 1995
ARCO Center, 300 Oceangate
Long Beach, California $4,481(1)(2) October 1, 1995
4275 Executive Square
La Jolla, California $6,707(1) June 30, 1998
<FN>
(1) The monthly lease amount is shown net of sublease income.
(2) This lease will not be renewed.
</TABLE>
Management believes that these existing facilities are adequate for present
and future operating needs. Management intends to extend the lease that expires
September 30, 1995.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings, nor
is any of its property subject to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year through solicitation of proxies or otherwise.
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is traded in the over-the-counter market.
The following table sets forth the price range of the high and low bid
quotations per share of the Common Stock for the periods indicated, as reported
by Spokane Quotation System, Inc., Spokane, Washington. The prices reported
reflect inter-dealer prices, without regard to retail mark-ups, mark-downs or
commissions, and do not necessarily represent actual transactions. The bid and
asked prices per share of the Common Stock at Sept. 26, 1995 were $0.45 and
$0.62, respectively. At such date, 15,337,361 shares of Common Stock were
issued and outstanding.
<TABLE>
<CAPTION>
Fiscal Year High Low
-------------------- ----- -----
<S> <C> <C>
1995 Fourth Quarter $1.00 $0.50
Third Quarter $2.25 $0.75
Second Quarter $2.50 $1.50
First Quarter $2.25 $1.50
1994 Fourth Quarter $2.25 $1.75
Third Quarter $3.25 $2.50
Second Quarter $2.00 $1.50
First Quarter $0.50 $0.32
1993 Fourth Quarter $0.50 $0.28
Third Quarter $0.50 $0.28
Second Quarter $0.63 $0.38
First Quarter $0.63 $0.50
</TABLE>
As of June 30, 1995, there were approximately 1,000 holders of record of
the Company's Common Stock.
The Company has never declared or paid any dividend on its Common Stock and
does not anticipate paying any cash dividends on the Common Stock in the
foreseeable future. The Company currently intends to retain future earnings to
fund the development and growth of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Wismer*Martin, Inc. ("Wismer Martin" or the "Company") was formed to
develop, market, install and support microcomputer practice management systems
and related services designed for the medical and dental professions. The
Company was founded as a sole proprietorship in February of 1980 and was
incorporated on November 29, 1982 under the laws of the State of Washington as
Professional Software Associates, Inc. The Company changed its name to
Wismer*Martin, Inc. effective August 1, 1985. The Company's principal executive
offices are located at N. 12828 Newport Highway, Mead, Washington, 99021.
The Company derives revenue from systems sales and maintenance, forms and
other services. systems sales include sales of physician practice management
systems, health information networks, and hospital information systems to new
customers and sales of system upgrades and add-ons to existing customers.
Systems sales to new customers include software licensing, hardware,
installation, training, and support contracts for software and hardware
maintenance. System upgrades include hardware, installation, software licensing
and training. System add-ons include additional peripheral hardware and
installation and software licensing.
10
<PAGE>
Maintenance, forms and other services revenues include software and
hardware maintenance contracts and sales of forms and supplies. Other services
revenues include sales of the Company's EDI services which are processed through
Equifax and installation, training and support not otherwise covered under
maintenance contracts. Software maintenance represents revenues derived from
maintenance agreements providing customers with updates and enhancements
developed by the Company and access to the Company's toll-free telephone support
service. Hardware maintenance represents revenues derived from maintenance
agreements serviced by Digital Equipment Corp. for repairs and preventative
maintenance to the hardware. Both hardware and software maintenance are optional
to the customer. The Company provides software maintenance to more than 90% of
its customers and hardware maintenance to more than 20% of its customers under
software and hardware maintenance contracts. In 1994, system upgrades, add-on
software, software and hardware maintenance, forms and supplies and other
services accounted for approximately 40% of total net revenues.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the amounts in
the Company's consolidated statement of operations.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Years Ended June 30,
--------------------------------------------------
1995 1994 1993
--------------------------------------------------
<S> <C> <C> <C>
Net sales:
Software license fees $2,679,118 $5,547,487 $2,631,978
Equipment, software and supplies sales 2,368,380 2,829,889 2,967,502
Software & hardware maintenance contracts 3,886,640 3,513,831 2,638,019
Service revenue 3,003,854 3,777,885 993,995
Discounts (1,455,777) (1,271,842) (920,437)
---------------------------------------------------
Net sales 10,482,215 14,397,250 8,311,057
------------------------------------------------------
Operating expenses:
Cost of software license fees 623,019 567,058 324,633
Cost of equipment, software and supplies 1,737,406 2,542,421 2,516,856
Cost of support and operations 2,779,142 3,965,059 2,100,261
Selling and marketing 2,334,115 1,994,340 1,195,663
Product research, development & enhancements 2,407,242 1,270,656 678,972
Less: amount capitalized related to enhancements (1,830,279) (1,018,308) (652,357)
General and administrative 3,780,249 3,921,134 2,018,322
----------- -----------------------------------
Total operating expenses 11,830,894 13,242,360 8,182,350
----------- -----------------------------------
Operating income (loss) (1,348,679) 1,154,890 128,707
----------- -----------------------------------
Other income (expense):
Interest income 28,299 28,180 35,140
Interest expense (398,307) (192,407) (147,339)
----------- -----------------------------------
Income (loss) before income taxes & cumulative effect
of change in accounting principle (1,718,687) 990,663 16,508
Income tax provision (benefit) (341,841) 265,107 12,191
----------- -----------------------------------
Income (loss) before cumulative effect of change
in accounting principle (1,376,846) 725,556 4,317
Cumulative effect of change in accounting principle - 27,479 -
----------- -----------------------------------
Net income (loss) $(1,376,846) $ 698,077 $ 4,317
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
On February 10, 1994, the Company acquired all of the outstanding shares of
common stock of Integrated Health Systems, Inc., a California corporation (IHS).
IHS is in the business of developing and licensing software
11
<PAGE>
programs for hospitals and related entities. The Company issued convertible
subordinated debentures having a face value of $2,500,000 in exchange for the
shares of common stock. IHS's major stockholder was Mr. Ronald Holden, who is
also a major stockholder of the Company. Due to Mr. Holden's common control of
both companies, the acquisition has been accounted for as a combination of
entities under common control, similar to a pooling of interests. The financial
statements have been retroactively restated to present Wismer*Martin, Inc. and
Integrated Health Systems, Inc. on a combined basis effective as of June 10,
1993, the date on which Mr. Holden initially had common control of both
companies. As a result of including IHS as of June 10, 1993 rather than July 1,
1992, many of the increases between 1993 and 1994 are the result of the
inclusion of IHS for the entire fiscal year 1994, while only being included for
20 days in 1993.
At the date of acquisition, the purchase price of $2,500,000 exceeded the
historical cost basis of the net assets of IHS by $2,533,308. Due to the common
control of the companies, the excess purchase price was recorded as a reduction
of stockholders' equity. The results of operations of IHS are included in the
consolidated financial statements since June 10, 1993, the date common control
by Mr. Holden began.
NET SALES
Software license fees decreased by $2,868,000. Of this amount,
approximately $1,425,000 resulted from fewer PHN "network" sales during the
fiscal year ended June 30, 1995 ("1995") as compared to the fiscal year ended
June 30, 1994 ("1994"). The remaining $1,443,000 decrease was the result of
fewer software license fee transactions for hospital information systems during
1995 as compared to 1994.
Equipment, software and supplies sales decreased by $462,000, or about 16%,
due to a decrease in the volume of sales of personal computer hardware
("equipment").
Software and hardware maintenance contract revenue increased by $373,000
primarily due to an increase in the number of the Company's customers who signed
support contracts during 1995.
Service revenue decreased by $774,000. Network marketing services provided
to customers increased by approximately $272,000, while the Company experienced
a decrease ($1,046,000) in the volume of custom modifications and installation
services provided to hospital customers. This latter decrease coincides with
the volume decrease in new software license fee sales to hospital customers.
Discounts increased by $184,000 due to discounts required as a result of
the master licenses sold to two network customers in 1994 (see discussion below
"Fiscal Year Ended June 30, 1994 Compared to Fiscal Year Ended June 30, 1993"
for Software License Fees). Since the Company distributes copies of the
software on behalf of its network customers who have purchased master licenses,
the Company records a sale for the list price of the software, and a
corresponding amount as a discount (since no additional license fees are due to
the Company).
OPERATING EXPENSES
Cost of software license fees represents amortization of capitalized
software development costs for products which are available for general release
to customers. The amortization of capitalized software development costs
increased by 10% from 1994 to 1995, which resulted from additional enhancements
which were completed during 1995.
The cost of equipment, software and supplies sold decreased by $805,000
(32%). Approximately 10% of the decrease represents a volume decrease, while
the balance of the decrease (22%) resulted from the Company's ability to
negotiate better discounts on computer hardware (equipment) from wholesale
distributors than it was previously able to obtain directly from the
manufacturer. Wholesalers, able to obtain greater volume discounts than the
Company, are willing to pass on a large enough discount to enable the Company to
purchase computer equipment at a lower price than the Company can obtain direct
from the manufacturer.
Cost of support and operations includes: non-technical personnel who answer
customer support calls, the cost of third-party hardware maintenance contracts,
technical personnel who load Company and third-party software on computer
systems and assist with technical issues associated with customer support, and
personnel who perform consulting services for customers. Cost of support and
operations decreased by $1,186,000 (30%) from 1994 to 1995. This is the result
of a decrease of approximately 20 employees in this area. Of the 20 employees,
approximately 5
12
<PAGE>
were transferred to "Product research, development and enhancements." The rest
of the reductions came through attrition, and were not replaced. Many of the
employees that left were technical personnel who are no longer needed due to:
(1) a reduction in new sales of software license contracts (and thus a reduction
in the number of personnel required for installation), and (2) product
improvements which have reduced the need for technical personnel to assist with
software support.
Selling and marketing expenses increased by $340,000 or 17% from 1994 to
1995. This increase in expense was due to the addition of personnel in the
sales and marketing area, which occurred during the first six months of the
fiscal year. A significant number of these employees were subject to
termination in January, 1995 as part of the Company's cost reduction efforts
(see "Liquidity" below). Based on these terminations, and voluntary
resignations, future selling and marketing expenses are expected to decline from
the level established during 1995.
Product research, development and enhancement costs represent costs
associated with enhancements to, and maintenance of, existing software and
research and development expenses. These costs which relate to enhancement of
technologically feasible products are capitalized and amortized beginning when
the product is available for general release to the customer on a straight-line
basis over the remaining economic life of the products, which is estimated to be
five (5) years. Product research, development and enhancement costs increased
$1,137,000, or 89%, from 1994 to 1995. This is the result of adding
approximately 20 employees to new product development efforts. The Company
expects the new products being developed will be ready for release between July
1995 and January 1996.
The amount of product research, development and enhancement expenses
capitalized for 1995 increased by $812,000 as compared to 1994.This is a 80%
increase over the prior year, and is approximately 60% of the increased
expenditures noted above as "Product research, development and enhancement
expenses." The increase in capitalized software development costs results from
the increase in personnel (noted above under "Product research development and
enhancement costs") performing product development.
The increase in product, research and enhancement expenses as well as the
increase in capitalized software development costs reflects the Company's
commitment to the continuing development of SM*RT Link and its integration with
SM*RT Practice as well as the enhancement of the IHS product line. The Company
is currently developing SM*RT Care, a second-generation software product in
which the patient is the core element of the system. SM*RT Care will
incorporate patient demographics, insurance information, managed care
capabilities as well as a seamless SM*RT Link interface. The Company is nearing
completion in its development of Radiology, Clinical and Nursing Information
Systems, which are part of the Integrated Health Systems product line being
offered to hospitals. These products have been developed utilizing a
"client/server" architecture running on local PC networks, which the Company
expects to increase the marketability of the entire Integrated Health Systems
product line.
General and administrative expenses decreased by $141,000, or 4%. This
reduction reflects the commencement of the Company's efforts to control overhead
expenses such as executive salaries and rent expense as specifically identified
in the section "Financial Condition and Liquidity." General and administrative
expenses are expected to continue to decline in 1996.
Interest expense has increased $206,000 from 1994 to 1995. The increase in
interest expense resulted from (1) the issuance of $2,500,000 in convertible
subordinated debentures on February 10, 1994 and (2) increased borrowings on the
Company's line of credit (notes payable to bank).
During 1995, the Company reported an income tax benefit of approximately
$342,000 as compared to an income tax provision of $265,000 in 1994. The 1995
benefit is primarily due to the creation of net operating loss carryforwards
resulting from the 1995 net operating loss which the Company believes will be
available to offset the future reversal of temporary differences created by
software development costs and other items which give rise to deferred tax
liabilities. The remaining net deferred tax asset is offset 100% by a valuation
allowance as management could not determine that it was more likely than not
that this asset would be realized.
13
<PAGE>
The factors discussed above resulted in a net loss of approximately
$1,377,000 during 1995, as compared to net income of $698,000 during 1994.
FISCAL YEAR ENDED JUNE 30, 1994 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1993
NET SALES
Software license fees increased by $2,916,000 during the fiscal year ended
June 30, 1994 ("1994") as compared to the year ended June 30, 1993 ("1993").
The primary reason for the increase was the signing of two regional "network"
contracts which generated approximately $1,675,000 in additional software
license fee revenues for the Company. These contracts gave the customers
(insurance providers) unlimited use of certain of the Company's software
products within specified geographical regions of Washington and Alaska. The
remaining $1,241,000 is the result of the inclusion of IHS in the results of
operations for the full fiscal year 1994, as compared to only 20 days (June 10,
1993 - the date common control was established between W*M and IHS - to June 30,
1993) for fiscal year 1993.
Equipment, software and supplies sales decreased by $138,000, or about 5%,
due to a decrease in the prices the Company was able to charge for personal
computer hardware ("equipment").
Software and hardware maintenance contract revenue increased by $876,000,
or 33% primarily due to an increase in the number of the Company's customers who
signed support contracts during 1994.
Service revenue increased by $2,784,000. Network marketing services
provided to customers increased by approximately $920,000, while the inclusion
of IHS for the full fiscal year 1994 added $1,864,000 in additional service
revenues.
Discounts increased by $351,000 due to discounts required as a result of
the master licenses sold to two large customers, noted above under "Software
license fees." Since the Company distributes copies of the software on behalf
of its network customers who have purchased master licenses, the Company records
a sale for the list price of the software, and a corresponding amount as a
discount (since no additional license fees are due to the Company).
OPERATING EXPENSES
Cost of software license fees represents the amortization of capitalized
software development costs. The amortization of capitalized software
development costs increased by $242,000 from 1993 to 1994. This increase is the
result of additional enhancements that were completed during 1994. Of the total
increase, $212,000 came from new products being developed to add to the IHS
product line.
Cost of equipment, software and supplies sold increased by $26,000 or 1%
from 1993 to 1994 as a result of a slight increase in the volume of hardware
sales.
Cost of support and operations increased $1,865,000 from 1993 to 1994. Of
this increase $1,796,000 is the result of the additional cost of support and
operations for IHS for a full year (1994) as compared to only 20 days of expense
in 1993. Cost of support and operations for W*M only increased $69,000 or 4%
(as a percentage of W*M-only expenses), during this period.
Selling and marketing expenses increased by $799,000 or 67% from 1993 to
1994. $384,000 of this increase is the result of the additional cost of support
and operations for IHS for a full year (1994) as compared to only 20 days of
expense in 1993. The increase in selling and marketing expenses for W*M
($415,000 or 36% of W*M-only expenses) is due to an increase in sales staff from
the prior year.
Product research, development, and enhancement expenses increased by
$592,000 from 1993 to 1994. $354,000 of this increase is the result of the
additional cost of support and operations for IHS for a full year (1994) as
compared to only 20 days of expense in 1993. The increase in expenses for W*M
were $238,000 or 35% (as a percentage of W*M-only expenses), and is due to an
increase in the number of technical personnel recruited for product development
and enhancement. The Company has increased the number of staff to concentrate
on
14
<PAGE>
enhancing existing products to take advantage of the technological changes in
computer hardware as well as significantly enhancing the functionality of its
software products.
The costs capitalized for software enhancements increased by $351,000 or
54% from 1993 to 1994. $267,000 of this increase is the result of the inclusion
of capitalized development and enhancements for IHS 1994 (IHS had no capitalized
research, development and enhancement expenses in 1993). The increase in
expenses capitalized for W*M were $84,000 or 13% (as a percentage of W*M-only
expenses), and is due to the Company's increased efforts in enhancing the SM*RT
Link product and its SM*RT Practice product. Costs associated with enhancements
are capitalized and amortized over three to five years. Research and
development costs are expensed as incurred.
General and administrative expenses increased by $1,888,000 or 94% from
1993 to 1994. $1,762,000 of this increase is the result of the additional cost
of general and administrative expenses for IHS for a full year (1994) as
compared to only 20 days of expense in 1993. W*M's expenses only increased 6.7%
during the same period.
Interest expense increased by approximately 31% from $147,339 in fiscal
1993 to $192,407 in fiscal 1994. This increase was a result of the interest
incurred on the subordinated convertible debentures which were outstanding from
February 10, 1994 through June 30, 1994.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), effective July
1, 1993. The cumulative effect of adopting SFAS No. 109 in fiscal 1994 was a
charge to operations of $27,479. SFAS No. 109 requires a company to recognize
deferred tax assets and liabilities for the expected future income tax
consequences of events that have been recognized in a company's financial
statements. Under this method, deferred tax liabilities and assets are
determined based on the temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the temporary differences are expected to
reverse. During the fiscal year ended June 30, 1993, the Company accounted for
income taxes as required by Statement of Financial Accounting Standards No. 96.
The income tax provision increased from $12,191 in fiscal 1993 to $265,107 as a
result of the increase in income from operations.
The various factors discussed above resulted in net income of approximately
$698,000 during 1994 compared to net income of approximately $4,000 during 1993.
FINANCIAL CONDITION AND LIQUIDITY
GENERAL
During the year ended June 30, 1995, cash and cash equivalents decreased
approximately $497,000. The single largest use of the Company's cash during
1995 was to invest in the Company's software development efforts. This overall
decrease in the Company's cash position was the result of cash provided by
operating activities of $1,217,000; cash used in investing activities of
$2,320,000 and cash provided by financing activities of $616,000. The
significant components of cash provided by operating activities include the net
loss for the year of $1,377,000 (adjusted for noncash items including
depreciation and amortization of $1,267,000, provision for bad debts of
$272,000, and deferred income tax benefit of $342,000); a decrease in trade
receivables of $1,681,000, a decrease in inventories of $440,000, a decrease in
deferred revenues of $309,000 and a decrease in accrued expenses of $493,000.
Significant components of cash used in investing activities included the
purchase of $329,000 of new equipment and $1,820,000 invested in software
development costs. Cash provided by financing activities primarily represents
$122,000 received through the issuance of common stock and $584,000 borrowed
under the Company's operating line of credit.
During the year ended June 30, 1994, cash and cash equivalents increased
approximately $386,000. The single largest use of the Company's cash during
1994 was to invest in the Company's software development efforts. This overall
increase in the Company's cash position was the result of cash provided by
operating activities of $1,776,000; cash used in investing activities of
$1,775,000 and cash provided by financing activities of $385,000. The
significant components of cash provided by operating activities include the
fiscal 1994 net income of $698,000 (adjusted for noncash items including
depreciation and amortization of $948,000, provision for bad debts of $115,000,
and deferred income tax provision of $229,000); a decrease in unbilled costs and
expenses of $544,000, an increase in inventories of $314,000, and a decrease in
deferred revenues of $617,000. Significant
15
<PAGE>
components of cash used in investing activities included the purchase of
$737,000 of new equipment and $1,018,000 invested in software development costs.
Cash provided by financing activities primarily represented $191,000 received
through the issuance of long term debt, $500,000 received through the issuance
of subordinated debentures and a net repayment of $358,000 on the Company's
operating line of credit.
During the year ended June 30, 1993, cash and cash equivalents increased
approximately $141,000. The single largest use of the Company's cash during
1993 was to invest in the Company's software development efforts. This overall
increase in the Company's cash position was the result of cash provided by
operating activities of $967,000; cash used in investing activities of $615,000
and cash used in financing activities of $211,000. The significant components
of cash provided by operating activities include the fiscal 1993 net income of
$4,000 (adjusted for noncash items including depreciation and amortization of
$633,000 and the provision for bad debts of $391,000); an increase in trade
receivables of $438,000, an increase in accounts payable of $323,000, a decrease
in accrued expenses of $225,000 and an increase in deferred revenues of
$165,000. Significant components of cash used in investing activities included
the purchase of $145,000 of new equipment, $652,000 invested in software
development costs and $182,000 cash obtained through the acquisition of IHS.
Cash used in financing activities primarily represented a net repayment of
$169,000 on the Company's operating line of credit.
To date, the Company's primary sources of liquidity have been internally
generated funds, the sale of the subordinated convertible debentures and its
operating line of credit, of which $472,000 was outstanding at June 30, 1995.
On a short-term basis, the Company's liquidity is dependent on the success of
its recent stock offering, continued availability of the line of credit with the
bank (see below), software and hardware maintenance contracts which provide over
$300,000 in monthly revenues, and continued sales to new customers as well as
upgrade sales to existing customers. See the discussion of the Company's
contingency plans below. On a long-term basis, liquidity will also be enhanced
by the successful completion of the offering (the Company will no longer be
required to make interest payments on the debentures and will not have to use
its cash to pay off these notes in the next four years). Other long-term
measures being considered to further develop liquidity are: the sale or
refinancing of the Company's office building in Spokane, Washington (having
equity of approximately $800,000) and discussions with GTE indicate a possible
alliance between the two firms which would provide increased opportunities for
future sales. the development of strategic alliances and joint venture partners
(see "Sales and Marketing Plans -- Strategic Partners"), and potential funding
of future software development efforts.
During fiscal 1995, management realigned the Company's organization and
instituted a cost reduction program which included the closing of non-essential
field offices and a reduction in personnel that were in place to support a
higher level of sales which were not achieved. Additionally, management is
concentrating its efforts on moving the Company away from its initial focus on
small regional physician practices to a focus on large group practices,
hospitals and other healthcare providers and payors who are developing networks.
The Company intends to fund these efforts by forming strategic alliances with
the large users of the Company's software products and with monies raised from
the Company's stock offering (see below, and "Notes to Consolidated Financial
Statements," Notes 2 and 14). Management believes that with this reduced cost
structure, highly centralized operations, and increased focus on growth market
areas (particularly Hospitals, Physicians Hospital Organizations (PHO's),
Medical Services Organizations (MSO's) and Payors, the Company can return to
profitability.
The savings achieved from the above restructuring program are as follows:
1. Laid-off 30 employees in mid-January, eliminating over $70,000 in
salaries and benefits per month.
2. Fourteen employees have voluntarily left the Company between March and
June 1995, and will not be replaced, eliminating over $55,000 per
month in salaries and benefits.
3. Five senior management terminations resulted in the elimination of
$35,000 per month in salaries and benefits.
4. Sub-leased 5,000 square feet of the Company's leased office space in
La Jolla, resulting in $8,000 in monthly sub-rent income.
5. Closed three branch offices, eliminating $5,800 in monthly rent
expense.
Although the Company believes that its operating plan and efforts to obtain
other financing sources will be adequate to meet its fiscal 1996 working capital
needs, there can be no assurance that the Company may not experience liquidity
problems because of adverse market conditions or other unfavorable events. The
measures
16
<PAGE>
noted above, if successful as a whole, should be adequate for the Company's
short-term and long-term liquidity needs.
If, however, the Company is unsuccessful in its efforts to raise sufficient
capital and reduce debt through the successful completion of the offering,
alternative measures will have to be taken by the Company in order to ensure
that the remaining sources of liquidity are not exceeded by cash requirements.
Alternative measures that would be considered would rely heavily on further
expense reductions, principally in the form of salaries and benefits, in the
areas of product development and enhancements, and network (PHN) sales staff.
While many of these expenditures enhance the Company's long-term growth
potential, they do not provide short-term liquidity. The Company would also look
to reduce overhead expenses while seeking to preserve the customer base which
provides software and hardware maintenance contracts (a source of high-margin
revenues). Management believes that, should they become necessary, these cost-
reduction efforts will be successful in reducing expenditures to match the
Company's reduced availability of liquidity until the Company has the
opportunity to take advantage of its long-term liquidity opportunities. See
specific discussions below regarding the "Line of Credit" and the "Public
Offering."
LINE OF CREDIT
Pursuant to the terms of an amended credit agreement with Seattle First
National Bank (Seafirst), the Company has an available line of credit of
$500,000 at June 30, 1995. Advances received under the line of credit, which
totaled $472,324 at June 30, 1995 bear interest at the bank's prime rate plus 3%
(12% at June 30, 1995) and are collateralized by the Company's trade
receivables, inventory and office building. The credit facility is available to
the Company through June 30, 1996, provided that the Company converts
$1,000,000 of its convertible subordinated debentures to equity and raises an
additional $1,000,000 of equity prior to August 31, 1995 (see Note 14). The
Company has complied with this covenant.
The credit agreement contains various other restrictive covenants, which
are to be measured commencing on September 30, 1995. On September 14, 1995,
Seafirst modified these covenants. In return for the modification, the
Company agreed to repay the entire balance owing to Seafirst under a
long-term obligation (see Note 6) by September 30, 1995 and agreed to
permanent reductions in the line of credit in the amount of $50,000 on
January 1, 1996, and again on April 1, 1996.
PUBLIC OFFERING
As part of management's efforts to provide additional liquidity for the
Company, and as requested by the bank (see above), the Board of Directors
authorized the sale of 6,066,667 shares of the Company's common stock in a
public offering; the registration statement was declared effective by the
Securities and Exchange Commission on August 15, 1995. As of September 26,
1995, 5.5 million shares have been sold (see Note 14). Consideration received
includes $2.5 million of convertable debentures and approximately $794,000 of
cash.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 13 of this report for information with respect to the financial
statements filed as a part hereof, including financial statements filed pursuant
to the requirements of this Item.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
CHANGE OF ACCOUNTANTS:
Coopers & Lybrand, LLP, was engaged to perform the audit of the Company's
financial statements for the fiscal years ended June 30, 1993 and June 30,
1994. Without prior discussion with the Company, Coopers & Lybrand, LLP
("Coopers") informed the Company on March 28, 1995 that the client-auditor
relationship between the Company and their firm had ceased as of that date and
that Coopers would not consent to the use of the audit reports issued by Coopers
for the fiscal years ended June 30, 1993 and June 30, 1994 in any future filings
with the Securities and Exchange Commission. The Board of Directors of the
Company had not considered or contemplated any decision to change accountants;
in fact, the shareholders of the Company, at the Company's request, had ratified
the selection of Coopers as independent public accountants for the fiscal year
ended June 30, 1995 at the Annual Meeting of Shareholders held March 21, 1995.
The Company does not believe that there were any disagreements with Coopers
concerning any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures. Coopers,
17
<PAGE>
however, advised the Company on April 10, 1995 that, events should have been
reported by the Company on Form 8-K pursuant to Item 304(a)(1)(iv)(B)(3) of
Regulation SB. Although its reports on the June 30, 1994 and June 30, 1993
financial statements were not modified or qualified, Coopers stated that, if its
1994 report had been reissued, consideration would be given to the Company's
ability to continue as a going concern which could result in a modification of
the 1994 report. Coopers said that it had not carried out sufficient procedures
prior to its resignation to conclude as to whether a modification of the 1994
report would be required. Coopers also noted that it had made certain inquiries
in connection with the issuance of the Form 10-QSB for the quarter ended
December 31, 1994, particularly as to the realizability of the deferred tax
asset recorded at December 31, 1994 in view of the significant loss recorded for
the quarter and six months then ended. There were no other items identified by
Coopers which would have caused them to refuse to reissue their reports on the
financial statement for the fiscal years ended June 30, 1994 and June 30, 1993.
The Company and Coopers agree that Coopers had not been requested to perform,
nor had it performed, any procedures which might have assisted the Company in
reaching an appropriate conclusion regarding the Form 10-QSB.
On April 26, 1995, the Company engaged BDO Seidman, LLP as its independent
public accountants. No discussions regarding the opinion of BDO Seidman, LLP on
accounting matters or financial reporting issues occurred prior to their
engagement as the Company's independent certified public accountants.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The current directors of the Company are listed below:
Name Age Term Served and Experience
- ---- --- --------------------------
Ronald L. Holden 49 Director of the Company since October 18,
1991 and Chairman of the Board of Directors
since February 13, 1992. Chief Executive
Officer of the Company since January 4, 1995.
President and a member of the Board of
Directors of National Healthtech Corporation
from 1990 to 1993.
Glen E. Martin 51 Director of the Company since November 1982.
Co-founder of the Company. Chairman and Vice-
President of August Systems, Inc. since
November, 1992. Executive Vice President
from May, 1988 to October, 1992.
Clarence H. Barnes, Ph.D. 53 Director of the Company since November, 1989.
Dean, School of Business Administration,
Gonzaga University, Spokane, Washington,
1980-Present.
Larry R. Eidemiller, M.D. 54 Director of the Company since November, 1989.
Partner, Surgical Associates, Portland,
Oregon, 1980-Present. Chief of Surgery, Good
Samaritan Hospital, Portland, Oregon, 1985-
Present.
John F. Perez 47 Director of the Company since July 13, 1993.
President of the Company since March 15,
1995. Chief Executive Officer of Integrated
Health Systems, Inc., a subsidiary of the
Company from July 1993 until Present. Chief
Executive Officer of Software Technology
Services from June, 1990 to June, 1993.
William D. Engel 60 Director of the Company since March 15, 1995.
President and Chief Executive Officer of
Logica, Inc. (the U.S. subsidiary of Logica
plc) since September 1993. Prior to that
date, Mr. Engel was a division executive at
Dynatech Corporation.
Each director is elected annually for a one-year term, to serve until the
next annual meeting of shareholders and until their respective successors are
elected and qualified, or their earlier resignation or removal.
The Audit Committee consists of Messrs. Holden and Barnes. The Audit
Committee's principal functions are to review the audited financial statements
and recommend the selection of auditors to the Board of Directors.
18
<PAGE>
The Compensation Committee consists of Messrs. Holden, Perez, Barnes and
Eidemiller. The Compensation Committee's principal functions are to make
recommendations to the Board of Directors concerning executive management's
compensation program.
The Board of Directors does not maintain a Nominating Committee or a
committee performing similar functions.
DIRECTOR COMPENSATION
Currently, non-employee directors receive $1,000 per Board meeting
attended, or Committee meeting attended that is not held as an adjunct to a
Board meeting and are reimbursed for travel expenses actually incurred in
attending such meetings. The Company does not pay any other cash compensation
to directors for serving in such capacity. Each non-employee director also has
received a warrant for the purchase of 5,000 shares of Common Stock. See
"Security Ownership of Certain Beneficial Owners and Management."
EXECUTIVE OFFICERS
The current executive officers of the Company are listed below:
Name Age Position and Term Served
- ---- --- --------------------------
Ronald L. Holden 49 Chief Executive Officer since January 4,
1995. He has been Chairman of the Board of
Directors since February 13, 1992. He was
President and a member of the Board of
Directors of National Healthtech Corporation
from 1990 to 1993.
John F. Perez 47 President and Chief Operating Officer since
March 15, 1995. Chief Executive Officer of
Integrated Health Systems, Inc., a subsidiary
of Wismer*Martin, from July, 1993 until
present. Prior to that he was CEO of
Software Technology Services providing
programming and product development in the
healthcare industry
William E. Campbell III 41 Executive Vice President - Corporate
Development since January 4, 1995. Mr.
Campbell was a senior associate for Booz,
Allen & Hamilton for several years providing
operational and technology consultation to
healthcare organizations before becoming an
employee of the Company on April 1, 1994
Douglas A. Willford 39 Chief Financial Officer since January 4,
1995. Mr. Willford has served as CFO of
Integrated Health Systems, Inc. (a subsidiary
of Wismer*Martin) since July, 1993. Prior to
that date, served as CFO for a hospital and
two healthcare management organizations.
Officers serve at the discretion of the Board of Directors.
19
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents information regarding the aggregate
compensation for the fiscal years ended June 30, 1995, 1994 and 1993 paid or
accrued for (i) the Chief Executive Officer of the Company and (ii) the three
other most highly paid executive officers of the Company.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Annual Compensation
Fiscal ------------------------------------------------ Long Term
Year Ended Other Compensation
Name and Principal Position June 30, Salary Bonus Compensation Awards Options
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ronald L. Holden: 1995 (1)$140,000 $ -0- (1)$60,000 -0-
Chairman of the Board 1994 $ 54,250 $ -0- (1)$60,000 -0-
Chief Executive Officer 1993 $ -0- $ -0- $ -0- -0-
- ----------------------------------------------------------------------------------------------------------------------------
John F. Perez:(2) 1995 $120,000 $ -0- $ -0- 200,000
President & Chief Operating Officer 1994 $ 46,600 $ -0- $ -0- -0-
1993 $ -0- $ -0- $ -0- -0-
- ----------------------------------------------------------------------------------------------------------------------------
William E. Campbell III(3) 1995 $ 95,000 $ -0- $ -0- 200,000
Executive Vice President 1994 $ 23,750 $ -0- $ -0- -0-
Corporate Development 1993 $ -0- $ -0- $ -0- -0-
- ----------------------------------------------------------------------------------------------------------------------------
Douglas A. Willford(4) 1995 $ 90,000 $ -0- $ -0- 100,000
Executive Vice President 1994 $ 36,890 $ -0- $ -0- -0-
Chief Financial Officer 1993 $ -0- $ -0- $ -0- -0-
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The compensation for Mr. Holden for 1994 represents compensation received
from Integrated Health Systems, Inc. from the date of acquisition, February
10, 1994, through the fiscal year ending June 30, 1994. The other
compensation represents consulting fees received from the Company for the
fiscal year ending June 30, 1994. Mr. Holden was engaged by the Company
beginning July 1, 1993. Mr. Holden became the Chief Executive Officer of
the Company on January 4, 1995.
(2) The compensation for Mr. Perez for 1994 represents compensation received
from Integrated Health Systems, Inc. from the date of acquisition, February
10, 1994, through the fiscal year ending June 30, 1994. Mr. Perez became
the President and Chief Operating Officer of the Company on March 15, 1995.
(3) The compensation for Mr. Campbell for 1994 represents compensation received
from Integrated Health Systems, Inc. from April 1, 1994, through the fiscal
year ending June 30, 1994. Mr. Campbell became an Executive Vice President
of the Company on January 4, 1995.
(4) The compensation for Mr. Willford for 1994 represents compensation received
from Integrated Health Systems, Inc. from the date of acquisition, February
10, 1994, through the fiscal year ending June 30, 1994. Mr. Willford
became the Vice President and Chief Financial Officer of the Company on
January 4, 1995.
</TABLE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table presents the stock options granted during the fiscal
year ended June 30, 1995. No stock options were granted during the fiscal
year ended June 30, 1994.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Number of % of Total Potential Realized Value at
Securities Options Assumed Annual Rates of
Underlying Granted to Exercise Stock Price Appreciation
Name and Principal Options Employees Price for Option Term
Position Granted in 1995 ($/Sh) Expiration Date 5% 10%
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John F. Perez, 200,000 38.10% $0.79 March 18, 1998 $15,644 $41,650
President and COO
- ------------------------------------------------------------------------------------------------------------------
William E. Campbell, 200,000 38.10% $0.79 March 18, 1998 $15,644 $41,650
Executive V.P.
- ------------------------------------------------------------------------------------------------------------------
Douglas A. Willford, 100,000 19.05% $0.79 March 18, 1998 $7,822 $20,825
Chief Financial Officer
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table presents stock options exercised by the Company's Chief
Executive Officer and the Company's executive officers during fiscal year 1995,
and the value of all unexercised options at year-end. The value of "in-the-
money" options refers to options having an exercise price which is less than the
market price of the Company's stock on June 30, 1995. Options granted to Steven
G. Anderson expired following his termination in 1995 and are not included.
20
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Value of Unexercised In-
Unexercised Options at the-Money Options at
Fiscal Year End Fiscal Year End ($)
Shares Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John F. Perez -0- -0- 200,000 / -0- -0- / $ -0-
- ------------------------------------------------------------------------------------------------------------------------------------
William E. Campbell, III -0- -0- 200,000 / -0- -0- / $ -0-
- ------------------------------------------------------------------------------------------------------------------------------------
Douglas A. Willford -0- -0- 100,000 / -0- -0- / $ -0-
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The options are generally exercisable for a three-year period and expire:
i) immediately upon termination of the employee for cause, ii) sixty days after
termination without cause, or iii) ninety days after death or disability of the
employee.
BENEFIT PLANS
The Board of Directors of the Company, in their discretion, may grant
options to purchase shares of common stock of the Company to key employees. The
number of shares covered by the option is determined by the directors. The
exercise price is set by the directors at not less than the fair market value of
the shares on the date at which the option is granted.
The Company does not have any other stated compensatory employee benefit
plans.
21
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 26,
1995, (a) by each person who is known by the Company to beneficially own more
than five percent of the Common Stock, (b) by each executive officer named in
the Summary Compensation table and each director of the Company, and (c) by all
executive officers and directors of the Company as a group. Shares not
outstanding but deemed beneficially owned by virtue of the right of an
individual or group to acquire them within 60 days are treated as outstanding
only when determining the amount and percentage owned by such individual or
group. Unless otherwise noted, each person or group identified has sole voting
and investment power with respect to the shares shown. Common Stock is the only
class of shares issued by the Company.
<TABLE>
<CAPTION>
Number of Shares
Name and Address Beneficially Owned Percent
---------------- ------------------ ---------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Ronald Holden (1)
N. 12828 Newport Highway 8,324,367 54.3%
Mead, WA 99021
Clarence H. Barnes, Ph.D. (2)
W. 614 17th Street 32,000 Less than 1%
Spokane, Washington 99203
Glen E. Martin (3)
West 1406 Elmwood Court 368,333 2.4%
Spokane, Washington 99218
Larry R. Eidemiller, M.D. (4)
5051 S.W. Downs View Court 5,000 Less than 1%
Portland, Oregon 97221
John Perez (5)
1124 E. Plateau Rd. 642,000 4.2%
Spokane, Washington 99203
William E. Campbell III (6)
1336 98th Ave. N.E. 206,000 1.3%
Bellevue, Washington 98004
Douglas A. Willford (7)
5816 N. Drumheller 200,000 1.3%
Spokane, Washington 99205
All executive officers and directors as a group 9,772,700 63.7%
OTHER HOLDERS OF MORE THAN FIVE PERCENT
Stanley T. Hatch
North 1619 Westpoint Road 958,500 6.2%
Spokane, Washington 99201
<FN>
(1) Mr. Holden's ownership is based upon the total outstanding stock at
September 26, 1995 of 15,337,361.
(2) Dr. Barnes holds a stock purchase warrant that allows him to purchase 5,000
shares of the Company's common stock. The shares reflected above include
27,000 shares currently held plus the 5,000 shares for which Dr. Barnes is
deemed to be the beneficial owner. Dr. Barnes' ownership is based upon the
total outstanding stock at September 26, 1995 of 15,337,361 plus the 5,000
shares assumed to be exercised by Dr. Barnes.
(3) Mr. Martin purchased a debenture in the amount of $200,000 on August 26,
1993. The debenture can be converted to common stock at a conversion price
of $.60 per share. Mr. Martin holds a stock purchase warrant that allows
him to purchase 5,000 shares of the Company's common stock. If the
debenture was converted and the stock purchase warrant was exercised, Mr.
Martin would be entitled to 338,333 shares of common stock in addition to
his current holdings of 30,000 shares of common stock. The shares
22
<PAGE>
reflected above include the 30,000 shares currently held plus the 338,333
shares for which Mr. Martin is deemed to be the beneficial owner. The
percentages reflect the percentage ownership based upon the total
outstanding stock at September 26, 1995 of 15,337,361 plus the 338,333
shares assumed to be exercised by Mr. Martin.
(4) Dr. Eidemiller holds a stock purchase warrant that allows him to purchase
5,000 shares of the Company's common stock. The shares reflected above
reflect the 5,000 shares for which Dr. Eidemiller is deemed to be the
beneficial owner. Dr. Eidemiller's ownership is based upon the total
outstanding stock at September 26, 1995 of 15,337,361 plus the 5,000 shares
assumed to be exercised by Dr. Eidemiller.
(5) Mr. Perez holds current stock options that allow him to purchase 200,000
additional shares of the Company's common stock. If the stock option were
exercised, Mr. Perez would be entitled to 200,000 shares of common stock in
addition to his current holdings of 442,000 shares. The shares reflected
above include the 442,000 shares currently held plus the 200,000 shares for
which Mr. Perez is deemed to be the beneficial owner. Mr. Perez's
ownership is based upon the total outstanding stock at September 26, 1995
of 15,337,361 plus the 200,000 shares assumed to be exercised by Mr. Perez.
(6) Mr. Campbell holds current stock options that allows him to purchase
200,000 additional shares of the Company's common stock. The shares
reflected above include the 5,000 shares currently held plus the 200,000
shares for which Mr. Campbell is deemed to be the beneficial owner. Mr.
Campbell's ownership is based upon the total outstanding stock at September
26, 1995 of 15,337,361 plus the 200,000 shares assumed to be exercised by
Mr. Campbell.
(7) Mr. Willford holds current stock options that allow him to purchase 100,000
additional shares of the Company's common stock. If the stock option were
exercised, Mr. Willford would be entitled to 100,000 shares of common stock
in addition to his current holdings of 100,000 shares. The shares
reflected above include the 100,000 shares currently held plus the 100,000
shares for which Mr. Willford is deemed to be the beneficial owner. Mr.
Willford's ownership is based upon the total outstanding stock at September
26, 1995 of 15,337,361 plus the 100,000 shares assumed to be exercised by
Mr. Willford.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 1995 and 1994, the Company had sales of
approximately $92,000 and $71,000 to related parties. The Company purchased
medical insurance for the benefit of its employees from a related party. Medical
insurance payments totaled approximately $149,000 per year for each of the years
ended June 30, 1995 and 1994. See Note 13 of Notes to Financial Statements for a
summary of significant transactions with related persons.
23
<PAGE>
PART III
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
See Index to Financial Statements on page F-1
(a) (2) Exhibits
See Exhibit Index on page 25 and 26
(b) Reports on Form 8-K
A report on Form 8-K was filed on April 11, 1995 disclosing
Coopers & Lybrand, LLP's (C&L) letter to the Company, dated
April 10, 1995, as called for under Item 304 of Regulation SB.
On April 28, 1995, a report on Form 8-K was filed disclosing
the appointment of BDO Seidman as the independent public
accountants for the Company for the fiscal year ending June 30,
1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized September , 1995.
---
WISMER*MARTIN, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
- --------------------------------------- -----------------------------------------
Ronald L. Holden Date John F. Perez Date
Chief Executive Officer, President, Chief Operating Officer,
Chairman of the Board and Director and Director
- --------------------------------------- -----------------------------------------
Douglas A. Willford Date Clarence H. Barnes, Ph.D. Date
Chief Financial Officer Director
(Principal Financial and Accounting Officer)
- --------------------------------------- -----------------------------------------
Larry R. Eidemiller, M.D. Date William D. Engel Date
Director Director
- ---------------------------------------
Glen E. Martin Date
Director
</TABLE>
24
<PAGE>
WISMER-MARTIN, INC.
FORM 10-KSB
June 30, 1995
---------
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.1* Copy of Certificate of Incorporation of Registrant
3.2* Copy of Bylaws of Registrant
10.1* Copy of Term Note and Financing Statement dated July 14, 1988
between Registrant and U.S. Bank of Washington, N.A.
10.2* Copy of Business Loan Agreement dated April 27, 1988 and Note
and Security Agreement dated April 28, 1988 between Registrant
and U.S. Bank of Washington, N.A.
10.3* Copy of Term Note, Security Agreement and Financing Statement
dated April 28, 1988 between Registrant and U.S. Bank of
Washington, N.A.
10.4* Copy of Lease Agreement dated February 26, 1988 between
Registrant and Technology Park/Atlanta, Inc.
10.5* Copy of Vendor Agreement dated April 27, 1988 between Registrant
and Electronic Information Corporation
10.6* Copy of Deed of Trust Note dated July 23, 1987 between Registrant
and Dorothy Duprie, Joseph W. Duprie, Jr., John Duprie and
Robert E. Duprie
10.7* Copy of Agreement for Authorized Dealers and Industry Remarketers
dated July 20, 1988 between Registrant and International Business
Machines Corporation
10.8* Copy of Software Agreement dated December 3, 1987 between
Registrant and Sacred Heart Medical Center
10.9* Copy of Letter Agreement dated December 20, 1988 between
Registrant and Interstate/Johnson Lane Corporation
10.10* Copy of Amended and Restated Non-Qualified Stock Option Plan of
Registrant
25
<PAGE>
WISMER-MARTIN, INC.
FORM 10-KSB
June 30, 1995
---------
INDEX TO EXHIBITS, CONTINUED
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.11* Copy of Restricted Stock Bonus Plan of Registrant
10.12* Agreement of Merger dated August 26, 1987 between Registrant and
Nova Systems, Inc.
10.13* Asset Purchase Agreement dated November 1, 1987 between Registrant
and Curtis 1000, Inc.
10.14 Copy of Business Loan Agreement dated December 7, 1990 and
Promissory Note and Security Agreement dated December 7, 1990
between Registrant and U.S. Bank of Washington, N.A.
10.15 Copy of Business Loan Agreement dated July 21, 1992 between
Registrant and Seattle-First National Bank
10.16 Stock and Stock Option Purchase Agreement dated February 10,
1994 (including form of convertible Subordinated Debenture
amount Wismer-Martin, Inc. and various other parties
* All documents have been previously filed with the Company's Form 10, File
No. 0-17478.
26
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants . . . . . . . . . . . F-2
Consolidated Balance Sheets at June 30, 1995 and June 30, 1994 . . . . . F-3
Consolidated Statements of Operations for the years ended June 30, 1995,
1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for
the years ended June 30, 1995, 1994 and 1993 . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1995,
1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F-7
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Wismer*Martin, Inc.
Mead, Washington
We have audited the accompanying consolidated balance sheets of
Wismer*Martin, Inc. as of June 30, 1995 and June 30, 1994, and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for each of the three years in the period ended June 30, 1995.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wismer
Martin, Inc. as of June 30, 1995 and June 30, 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in fiscal 1994.
BDO SEIDMAN, LLP
Spokane, Washington
September 26, 1995
F-2
<PAGE>
WISMER*MARTIN, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 91,225 $ 588,349
Trade receivables, net of allowance for doubtful
accounts of $255,647 and $176,362 (Note 5) 854,474 2,807,368
Unbilled costs and expenses 37,800 166,354
Inventories (Note 3 and 5) 184,803 625,018
Prepaids and other assets 148,066 199,152
------------- -------------
Total current assets 1,316,368 4,386,241
Property, plant and equipment, net (Notes 4, 5 and 6) 1,802,139 1,962,445
Software development costs, net of accumulated amortization
of $1,491,918 and $878,999 2,879,421 1,672,161
Other assets, net of accumulated amortization
of $206,637 and $75,836 249,235 209,282
Deferred income taxes (Note 8) - 248,044
------------- -------------
Total assets $ 6,247,163 $ 8,478,173
------------- -------------
------------- -------------
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Notes payable to bank (Note 5) $ 583,964 $ -
Accounts payable 863,110 1,097,500
Accrued wages and related taxes 351,562 524,455
Other accrued liabilities 184,516 330,449
Deferred revenue 1,922,539 2,231,801
Long-term debt, due within one year (Note 6) 70,335 64,465
Obligations under capital leases, due within one year (Note 7) 30,500 20,164
------------- -------------
Total current liabilities 4,006,526 4,268,834
Other liabilities 86,984 138,740
Long-term debt, due after one year (Note 6) 879,662 949,617
Convertible subordinated debentures (Note 9) 3,000,000 3,000,000
Obligations under capital leases, due after one year (Note 7) 67,615 69,625
Deferred income taxes (Note 8) - 589,885
------------- -------------
Total liabilities 8,040,787 9,016,701
------------- -------------
Commitments (Note 11)
Capital deficit: (Notes 2, 9 and 10)
Common stock, $.001 par value 20,000,000 shares authorized:
9,847,625 and 9,362,625 shares issued and outstanding 9,848 9,363
Additional paid-in capital 1,203,809 1,082,544
Excess purchase price of acquired subsidiary (Note 1) (2,533,308) (2,533,308)
Retained earnings (deficit) (473,973) 902,873
------------- -------------
Capital deficit (1,793,624) (538,528)
------------- -------------
Total liabilities and capital deficit $ 6,247,163 $ 8,478,173
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
WISMER*MARTIN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Net sales
Software license fees $ 2,679,118 $ 5,547,487 $ 2,631,978
Equipment, software and supplies sales 2,368,380 2,829,889 2,967,502
Software and hardware maintenance contracts 3,886,640 3,513,831 2,638,019
Service revenue 3,003,854 3,777,885 993,995
Discounts (1,455,777) (1,271,842) (920,437)
------------ ------------ ------------
Net sales 10,482,215 14,397,250 8,311,057
------------ ------------ ------------
Operating expenses:
Cost of software license fees 623,019 567,058 324,633
Cost of equipment, software and supplies sold 1,737,406 2,542,421 2,516,856
Cost of support and operations 2,779,142 3,965,059 2,100,261
Selling and marketing 2,334,115 1,994,340 1,195,663
Product research, development and enhancements 2,407,242 1,270,656 678,972
Less: amount capitalized related to enhancements (1,830,279) (1,018,308) (652,357)
General and administrative 3,780,249 3,921,134 2,018,322
------------ ------------ ------------
Total operating expenses 11,830,894 13,242,360 8,182,350
------------ ------------ ------------
Operating income (loss) (1,348,679) 1,154,890 128,707
Other income (expense):
Interest income 28,299 28,180 35,140
Interest expense (398,307) (192,407) (147,339)
------------ ------------ ------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (1,718,687) 990,663 16,508
Income tax expense (benefit) (Note 8) (341,841) 265,107 12,191
------------ ------------ ------------
Income (loss) before cumulative
effect of change in accounting principle (1,376,846) 725,556 4,317
Cumulative effect of change in accounting
principle (Note 8) - 27,479 -
------------ ------------ ------------
Net income (loss) $ (1,376,846) $ 698,077 $ 4,317
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per share:
Income (loss) before cumulative
effect of change in accounting principle $ (0.14) $ 0.07 Nil
Cumulative effect of change in accounting principle - Nil -
------------ ------------ ------------
Net income (loss) per share $ (0.14) $ 0.07 Nil
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding 9,726,365 9,797,049 9,198,191
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
WISMER*MARTIN, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Excess
Common Stock Additional Purchase Price Retained
------------------------ Paid-In of Acquired Earnings
Shares Amount Capital Subsidiary (Deficit) Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at July 1, 1992 9,039,293 $ 9,039 $ 986,518 $ - $ 167,171 $ 1,162,728
Issuances of common stock for
exercise of stock options 16,667 17 4,150 4,167
Net income 4,317 4,317
--------- ------------ ------------ ------------ ---------- ------------
Balances at June 30, 1993 9,055,960 9,056 990,668 - 171,488 1,171,212
Issuances of common stock for
exercise of stock options,
after tax effect 306,665 307 91,876 92,183
Issuance of convertible
subordinated debentures for
common stock of acquired subsidiary (2,500,000) (2,500,000)
Retained deficit of acquired
subsidiary at acquisition (33,308) 33,308 -
Net income 698,077 698,077
--------- ------------ ------------ ------------ ---------- ------------
Balances at June 30, 1994 9,362,625 9,363 1,082,544 (2,533,308) 902,873 (538,528)
Issuances of common stock for
exercise of stock options,
after tax effect 485,000 485 121,265 121,750
Net loss (1,376,846) (1,376,846)
--------- ------------ ------------ ------------ ---------- ------------
Balances at June 30, 1995 9,847,625 $ 9,848 $ 1,203,809 $ (2,533,308) $ (473,973) $ (1,793,624)
--------- ------------ ------------ ------------ ---------- ------------
--------- ------------ ------------ ------------ ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WISMER*MARTIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,376,846) $ 698,077 $ 4,317
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,276,908 948,219 633,041
Provision for bad debts 271,510 115,113 391,293
Loss on property, plant and equipment disposal 330 19,090 -
Cumulative effect of accounting change - 27,479 -
Deferred income taxes (341,841) 229,286 27,836
Change in operating assets and liabilities, net of acquired business:
Trade receivables 1,681,384 (62,938) (438,247)
Unbilled costs and expenses 128,554 543,809 102,700
Inventories 440,215 (314,319) 88,033
Prepaids and other assets 51,086 (51,956) (33,222)
Income tax receivable - 32,804 -
Accounts payable (59,612) 86,265 323,049
Accrued wages and related taxes (172,893) 118,582 (125,930)
Other accrued liabilities (320,711) (34,727) (99,744)
Income taxes payable - - (71,000)
Deferred revenue (309,262) (617,328) 164,905
Other liabilities (51,756) 38,740 -
------------- ------------- -------------
Net cash provided by operating activities 1,217,066 1,776,196 967,031
------------- ------------- -------------
Cash flows from investing activities
Cash acquired from purchase of subsidiary - - 181,970
Proceeds from disposition of property, plant and equipment - 2,500 -
Purchase of property, plant and equipment (329,408) (737,172) (144,971)
Additions to software development costs (1,830,279) (1,018,308) (652,357)
Purchase of other assets (170,753) (22,099) -
------------- ------------- -------------
Net cash used in investing activities (2,330,440) (1,775,079) (615,358)
------------- ------------- -------------
Cash flows from financing activities
Payment of long-term debt (64,085) (31,419) (28,353)
Proceeds from issuance of common stock 121,750 92,183 4,167
Proceeds from long term debt - 191,099 -
Proceeds from subordinated debentures - 500,000 -
Payments under capital lease obligations (25,379) (9,959) (16,944)
Net proceeds (payments) on notes payable to bank 583,964 (357,327) (169,361)
------------- ------------- -------------
Net cash provided (used) by financing activities 616,250 384,577 (210,491)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (497,124) 385,694 141,182
Cash and cash equivalents at beginning of year 588,349 202,655 61,473
------------- ------------- -------------
Cash and cash equivalents at end of year $ 91,225 $ 588,349 $ 202,655
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 388,687 $ 97,380 $ 127,037
Income taxes $ - $ 33,800 $ 50,000
------------- ------------- -------------
------------- ------------- -------------
Noncash financing activities:
Equipment acquired under capital lease $ 33,705 $ 70,850
------------- -------------
------------- -------------
Issuance of subordinated debentures for acquisition of
Integrated Health Systems, Inc. $ 2,500,000
-------------
-------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND CONSOLIDATION
Wismer Martin, Inc. ("the Company") develops and markets healthcare
computer systems and related services. The consolidated financial
statements include the accounts of the Company and its subsidiary. All
significant intercompany accounts and transactions have been eliminated.
On September 12, 1991, National Healthtech Corporation (National
Healthtech) acquired 1,714,286 shares of the Company's common stock from
the founders of the Company. On January 31, 1992, National Healthtech
acquired the remaining 2,868,414 shares of common stock held by the
founders of the Company. On June 10, 1993, National Healthtech sold all of
its ownership of common stock to Mr. Ronald Holden. Mr. Holden is the
Chairman of the Board of Directors of the Company and, until June 30, 1993,
was a director and stockholder of National Healthtech.
On February 10, 1994, the Company acquired all of the outstanding shares of
common stock of Integrated Health Systems, Inc., a California corporation
(IHS). IHS is in the business of developing and licensing software
programs for hospitals and related entities. The Company issued
convertible subordinated debentures having a face value of $2,500,000 in
exchange for the shares of common stock (see Note 9). IHS's major
stockholder was Mr. Ronald Holden, who is also a major stockholder of the
Company. Due to Mr. Holden's common control of both companies, the
acquisition was accounted for as a combination of entities under common
control whereby balance sheet amounts were recorded at their historical
bases and the results of IHS's operations and cash flows have been
included from June 10, 1993, the date on which Mr. Holden initially had
common control of both companies.
At the date of acquisition, the purchase price of $2,500,000 exceeded the
historical cost basis of the net assets of IHS by $2,533,308. Due to the
common control of the companies, the excess purchase price was recorded as
a reduction of stockholders' equity.
CASH EQUIVALENTS
Investments with remaining maturities at purchase of three months or less
are considered to be cash equivalents for purposes of the consolidated
statements of cash flows.
CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and trade
receivables. The Company places its cash and temporary cash investments
with high credit worthy institutions. At times such investments may be in
excess of the FDIC insurance limit. The Company develops and sells its
products exclusively to enterprises in the health care industry. These
enterprises include physician practice groups, hospitals, insurance payors
and joint ventures between some or all of these entities (often known as
HMO's, PPO's, IPA's and HIN's). Trade receivables are primarily from
customers in the health care industry. For the years ended June 30, 1995
and 1994, the Company had sales of approximately $1,920,000 and $1,980,000
to one customer (an insurance payor). For the fiscal year ended June 30,
1993, no single customer accounted for more than 10% of the Company's
revenues. Approximately $250,000 and $855,000 of these respective amounts
are included in trade receivables at June 30, 1995 and 1994.
INVENTORIES
Inventories are carried at the lower of first-in, first-out (FIFO) cost or
net realizable value.
F-7
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation and
amortization, which includes the amortization of assets recorded under
capital leases, are provided over the lesser of the estimated useful lives
of the respective assets or the lease term (including extensions in the
case of leased assets and leasehold improvements), using the straight-line
method.
SOFTWARE DEVELOPMENT COSTS
Computer software development costs incurred subsequent to establishing
technological feasibility of the resulting product or enhancement and until
the product is available for general release to customers are capitalized
and recorded at the lower of unamortized cost or net realizable value. Net
realizable value is determined based on estimates of future revenues to be
derived from the sale of the software product reduced by costs of
completing and disposing of that product. Capitalized costs are amortized
based on current and anticipated future revenues for each product or
enhancement with an annual minimum equal to straight-line amortization over
the remaining estimated economic life of the product or enhancement (five
years). For the years ended June 30, 1995, 1994 and 1993, amortization of
software development costs was $623,019, $567,058 and $324,633.
Amortization of capitalized software development costs are included in the
Consolidated Statements of Operations in the line item "Cost of software
license fees."
OTHER ASSETS
Other assets, consisting primarily of goodwill and deferred financing fees,
are carried at cost. Financing fees are amortized over the respective term
of the loan agreement using the interest method. Goodwill represents the
excess of cost over the fair value of the net assets acquired and is being
amortized on a straight-line basis over three years.
REVENUE RECOGNITION
SOFTWARE LICENSE FEES
The Company has established its revenue recognition policy in accordance
with the provisions of the American Institute of Certified Public
Accountants' Statement of Position 91-1 "Software Revenue Recognition."
Revenue from the sale of internally-developed software is recognized when
the software has been delivered to the customer and collection is deemed
probable. In some cases, customers are sold fixed-price, multi-site
licenses which permit the marketing or use of multiple copies of the
Company's software for a single fee (usually limited geographically). In
these cases, the software license fee is recognized as revenue when the
master copy of the software is delivered to the customer and is not
contractually tied to subsequent sales by the licensee and is not
refundable. The cost to distribute additional copies of the software is
insignificant.
Software license agreements may include the sale of hardware, third-party
software and supplies, as well as support services and installation and
training. Each of these are separately stated and priced in the contract,
and the revenues from these are separately accounted for under the
financial captions of "Equipment, software and supplies sales," "Software
and hardware maintenance contracts," and "Service revenue," respectively.
Service obligations are separately stated and priced in each contract and
the Company accounts for these service obligations separately (see "Service
revenue" below). Any remaining vendor obligations at the time the software
is delivered are insignificant, and the revenues associated with any
remaining obliga-
F-8
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
tions are deferred until those obligations have been satisfied. Support
contracts begin immediately after installation. Cost of sales associated
with the sale of internally-developed software consists of the
amortization of software development costs, which is included in the income
statement under the caption "Cost of software license fees."
Deposits received for software license fees from customers in advance of
revenue recognition are included in the balance sheet under the caption
"Deferred revenue." Amounts that have been recognized as revenue, but are
not yet due are included in the balance sheet caption "Unbilled costs and
expenses."
EQUIPMENT, SOFTWARE AND SUPPLIES SALES
Revenues from third-party hardware (personal computers and peripherals),
third-party software (popular networking and word processing software) and
supplies (forms and envelopes for billing purposes) are separately stated
in contracts for the license of the Company's software products, and are
recognized when the related hardware, software and supplies are delivered
to the customer. The cost of equipment, third-party software and supplies
sales are included in the income statement under the caption "Cost of
equipment, software and supplies sold."
Deposits received for equipment, third-party software and supplies from
customers in advance of delivery are included in the balance sheet caption
"Deferred revenue" and are recognized upon delivery.
SOFTWARE AND HARDWARE MAINTENANCE CONTRACTS
Fees for software support are separately stated and priced in each customer
contract. The revenues from these contracts are deferred and recognized on
a straight-line basis over the period covered by the contract (payments are
typically made either quarterly or annually).
Maintenance contracts for hardware outside of the original manufacturer's
warranty are written between the customer and the Company and are priced at
market rates. The Company then sub-contracts with a third-party vendor (at
a discount from market rates) specializing in on-site hardware maintenance
for the same coverage as the Company has contracted with its customers.
Revenues and the corresponding third-party contract expenses are deferred
and amortized on a straight-line basis over the term of the contract
(usually one year). The cost of the third-party maintenance contracts is
included in the income statement under the caption "Cost of support and
operations."
The Company invoices customers in advance for software and hardware
maintenance contracts. The unamortized balance of amounts invoiced for
software and hardware maintenance contracts are included in the balance
sheet caption "Deferred revenue," while the unamortized cost of third-party
hardware maintenance contracts is included in the caption "Prepaids and
other assets."
SERVICE REVENUE
Revenues resulting from Company personnel providing installation, training,
custom modification programming, and network consulting services are
recorded as "Service revenue." These services are not essential to the
functionality of any other element of the transaction and are separately
stated and priced such that the total contracts price will vary based on
whether or not these services are purchased from the Company. When
collectibility is deemed probable, the revenue from these services is
deferred and recognized as the services are performed. In some cases,
installation and training services are contracted on a fixed-fee basis. In
these cases, the revenues are deferred and recognized under the percentage-
of-completion method. Any losses on these type of contracts are recorded
as soon as they are foreseen.
F-9
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
Contracts for service revenue frequently permit billings to customers (and
payments to be received by the Company) in advance of the services being
rendered (this is always the case in fixed-fee installation contracts).
These unearned service revenues are included in the caption "Deferred
revenue."
Cost of support and operations includes: non-technical personnel who answer
customer support calls, the cost of third-party hardware maintenance
contracts, technical personnel who load Company and third-party software on
computer systems and assist with technical issues associated with customer
support, and personnel who perform consulting services for customers.
DISCOUNTS
Discounts are determined at the time of contract signing and are recorded
concurrently with the recording of revenue. Any cost associated with
returns and exchanges are insignificant and are recorded as incurred. The
Company provides no warranties which are not supported by third-party
contracts or software support contracts.
FEDERAL INCOME TAXES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), effective
July 1, 1993. The cumulative effect of adopting SFAS No. 109 in fiscal
1994 was a charge to operations of $27,479. SFAS No. 109 requires a
company to recognize deferred tax assets and liabilities for the expected
future income tax consequences of events that have been recognized in a
company's financial statements. Under this method, deferred tax
liabilities and assets are determined based on the temporary differences
between the financial statement carrying amounts and tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
temporary differences are expected to reverse. During the fiscal year
ended June 30, 1993, the Company accounted for income taxes as required by
Statement of Financial Accounting Standards No. 96.
NET INCOME (LOSS) PER SHARE
The computation of net income (loss) per share in each period is based on
the weighted average number of common shares outstanding. When dilutive
stock options, debentures and warrants are included as share equivalents
using the treasury stock method, fully diluted net income (loss) per common
share is not materially different from primary net income (loss) per common
share.
2. FINANCIAL CONDITION AND LIQUIDITY:
As shown in the accompanying consolidated financial statements at June 30,
1995, the Company has a capital deficit of $1.8 million, negative working
capital of $2.7 million and incurred a significant net loss of $1.4 million
for the year then ended. Additionally, the Company has modified its credit
agreement as a result of covenant violations (See Note 5).
During fiscal 1995, management realigned the Company's organization and
instituted a cost reduction program which included the closing of non-
essential field offices and a reduction in personnel that were in place to
support a higher level of sales which were not achieved. Additionally,
management is concentrating its efforts on moving the Company away from its
initial focus on small regional physician practices to a focus on large
group practices, hospitals and other healthcare providers and payors who
are developing networks. Management believes that with this reduced cost
structure, highly centralized operations, and
F-10
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
increased focus on growth market areas (particularly Hospitals, Physicians
Hospital Organizations (PHO's), Medical Services Organizations (MSO's) and
Payors, the Company can return to profitability.
As discussed in Note 14, part of management's plan to fund these efforts
and provide additional liquidity for the Company includes the sale of
additional shares of the Company's common stock. As of September 26, 1995,
the Company has sold approximately 5.5 million shares for approximately
$3.3 million without using an underwriter, broker, dealer or finder.
Consideration received includes $2.5 million of convertable debentures
and approximately $794,000 of cash.
Should future markets for the Company's product not develop as projected,
the Company may be unable to meet its short term debt requirements and not
be in compliance with covenants contained within its credit agreement (see
Note 5). Should the Company fail to comply with these covenants or be
unable to renegotiate the terms of the agreement, the Company is at risk
that the bank will foreclose on the Company's office building in order to
satisfy the outstanding obligation. In the event that the offering is
inadequate to meet the Company's cash flow needs, management believes the
short term liquidity needs of the Company can be satisfied by reducing or
ceasing costs associated with new product development and attempting to
refinance the debt encumbering the Company's office building. On a longer
term basis, management intends to continue to seek the sale of the
Company's office building and to enter into joint venture arrangements with
strategic alliance partners who can provide additional capital required for
new product development.
Although the Company believes that its operating plan and efforts to obtain
other financing sources will be adequate to meet its fiscal 1996 working
capital needs, there can be no assurance that the Company may not
experience liquidity problems because of adverse market conditions or other
unfavorable events.
3. INVENTORIES:
Inventories at June 30, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Hardware held for sale . . . . . . . . . . $164,079 $591,298
Software . . . . . . . . . . . . . . . . . 11,902 20,222
Supplies . . . . . . . . . . . . . . . . . 8,822 13,498
-------- --------
$184,803 $625,018
-------- --------
-------- --------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at June 30, 1995 and 1994 is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Land and site improvements . . . . . . . . $ 248,020 $ 248,020
Building and building improvements . . . . 649,551 649,551
Furniture and fixtures . . . . . . . . . . 536,535 497,177
Computer systems and related equipment . . 2,302,457 1,959,905
Leasehold improvements . . . . . . . . . . 15,175 51,307
Equipment under capital lease . . . . . . 146,251 172,546
---------- ----------
3,897,989 3,578,506
Accumulated depreciation and amortization. (2,095,850) (1,616,061)
---------- ----------
$1,802,139 $1,962,445
---------- ----------
---------- ----------
</TABLE>
F-11
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
Accumulated amortization of the telephone and computer equipment under
capital lease amounted to $52,199 and $80,372 at June 30, 1995 and 1994.
5. NOTES PAYABLE TO BANK:
Pursuant to the terms of an amended credit agreement with Seattle First
National Bank (Seafirst), the Company has an available line of credit of
$500,000 at June 30, 1995. Advances received under the line of credit,
which totaled $472,324 at June 30, 1995 bear interest at the bank's prime
rate plus 3% (12% at June 30, 1995) and are collateralized by the Company's
trade receivables, inventory and office building. The credit facility is
available to the Company through June 30, 1996, provided that the Company
converts $1,000,000 of its convertible subordinated debentures to equity
and raises an additional $1,000,000 of equity prior to August 31, 1995
(see Note 14). The Company has complied with this covenant.
The credit agreement contains various other restrictive covenants, which
are to be measured commencing on September 30, 1995. On September 14,
1995, Seafirst modified these covenants. In return for the modification,
the Company agreed to repay the entire balance owing to Seafirst under a
long-term obligation (see Note 6) by September 30, 1995 and agreed to
permanent reductions in the line of credit in the amount of $50,000 on
January 1, 1996, and again on April 1, 1996.
Also included in notes payable at June 30, 1995 is $61,640 owed by IHS to
Seafirst pursuant to terms of a promissory note, in the original amount of
$185,000. The promissory note requires monthly principal payments of
$15,420 plus interest based on Seafirst's prime rate plus 2.5% (11.5% at
June 30, 1995) and is secured by accounts receivable. The note matures in
October, 1995.
6. LONG-TERM DEBT:
Long-term debt at June 30, 1995 and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Mortgage payable to U.S. Bancorp Mortgage Company in monthly
installments of $4,536, including interest at 3.0% over
the average discount rate of 26-week U.S. Treasury bills
(adjusted semi-annually - 9.0% at June 30, 1995), maturing
in November, 1998 (A) $ 423,146 $ 438,721
Note payable to the Greater Spokane Business Development
Association and the Small Business Administration in monthly
installments of $4,162, including interest at 9.896%, maturing
in October, 2008 (B) 350,704 362,799
Escrow contract payable to Adept Escrow, Inc. in annual
installments of $6,000, including interest at 9.0%, and
maturing in July, 1998, collateralized by land 17,948 21,995
Note payable to Seattle First National Bank in monthly
installments of $3,912, including interest at 8.25%, and
maturing in May, 1999, collateralized by telephone system (C) 156,295 188,663
Other 1,904 1,904
---------- ----------
949,997 1,014,082
Less amount due within one year 70,335 64,465
---------- ----------
Amount due after one year $ 879,662 $ 949,617
---------- ----------
---------- ----------
</TABLE>
F-12
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
(A) This mortgage payable is collateralized by a deed of trust on the
Company's headquarters land and building, and is personally guaranteed
by a director and a shareholder.
(B) This note payable is collateralized by substantially all the Company's
property, plant and equipment, subordinated to the first position of
U.S. Bancorp Mortgage Company and Seattle First National Bank, and is
personally guaranteed by a director and a shareholder.
(C) As discussed in Note 5, the Company agreed to repay this note in full
on or before September 30, 1995 in connection with modifications to
the line of credit. On September 19, 1995, the Company, with the
bank's approval, entered into a lease arrangement with Regal ProFund,
whereby the new lessor purchased the equipment from the Company for
the remaining balance owing to the bank, and executed a new lease with
the Company. The new lease has a term of 5 years with an effective
interest rate of approximately 12%. Since the Company has been able
to re-finance the debt on terms similar to the original note, only the
portion of the principal which would otherwise be due within the
twelve months following June 30, 1995 has been classified as a current
liability.
Principal payments on long-term debt as contractually committed at June 30,
1995 are due as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
--------------------
<S> <C>
1996 $ 70,335
1997 78,299
1998 83,566
1999 429,354
2000 19,795
Thereafter 268,648
-------
$ 949,997
----------
----------
</TABLE>
7. OBLIGATIONS UNDER CAPITAL LEASES:
The Company has entered into various lease contracts for computer
equipment, which are accounted for as capital leases. The capital lease
obligations are payable in monthly installments. The future annual minimum
lease payments required under these capital leases are as follows:
<TABLE>
<CAPTION>
Year Ending June 30,
--------------------
<S> <C>
1996 $ 40,634
1997 31,418
1998 30,437
1999 22,763
----------
125,252
Less amount representing interest (27,137)
----------
Present value of net minimum lease payments 98,115
Less amount due within one year (30,500)
----------
Amount due after one year $ 67,615
----------
----------
</TABLE>
F-13
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
8. INCOME TAXES:
For the years ended June 30, 1995, 1994 and 1993 the major components of
the Company's income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current:
State $ - $ 3,690 $ 965
Federal - 32,131 (16,610)
Deferred:
Federal (341,841) 229,286 27,836
--------- --------- ---------
$(341,841) $ 265,107 $ 12,191
--------- --------- ---------
--------- --------- ---------
</TABLE>
The annual tax provision (benefit) is different from the amount which would
be provided by applying the statutory federal income tax rate to the
Company's income before income tax expense (benefit). The reasons for
these differences are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------------------------------------------------------
% Amount % Amount %
- ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Amount
Provision (benefit) at the ------
federal statutory rate $(584,354) (34.0) $336,825 34.0 $5,613 34.0
Provision for state income taxes - - 3,690 0.4 965 5.8
Amortization of intangibles 28,981 1.7 3,584 0.4 2,999 18.2
Research and development
tax credit (41,517) (2.4) (68,780) (6.8) (419) (2.5)
Effects of alternative minimum
tax rate differential and
surtax exemption - - (17,776) (1.8) 2,501 15.2
Change in valuation allowance 256,954 14.9 (27,441) (2.7) - -
Other, net (1,905) (0.1) 35,005 3.2 532 3.1
---------------------------------------------------------------------------------
Income tax provision (benefit) $(341,841) (19.9) $265,107 26.7 $12,191 73.8
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
The components of the deferred tax provision (benefit) for the years ended
June 30, 1995, 1994 and 1993 are due to the following temporary differences
as offset by the utilization of net operating loss carryforwards and
research and development credits:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Software development costs $ 410,468 $ 201,764 $ 110,612
Depreciation 28,638 (2,535) (251)
Accrued vacation pay (39,360) (12,696) 6,900
Inventory obsolescence reserve (7,047) 17,716 (35,779)
Change in valuation allowance 256,954 6,559 -
Other (20,945) (10,712) (4,470)
--------- --------- ---------
628,708 200,096 77,012
Utilization (benefit) of net operating loss
carryforwards and credits (970,549) 29,190 (49,176)
--------- --------- ---------
$ (341,841) $ 229,286 $ 27,836
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities at June 30, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Current:
--------
Allowance for doubtful accounts $ 87,073 $ 43,420
Inventory obsolescence reserve 23,554 30,601
Accrued liabilities 73,658 34,298
Net operating loss carryforwards - 95,827
Tax credit carryforwards - 77,898
Valuation allowance (184,285) (34,000)
---------- ----------
$ - $ 248,044
---------- ----------
---------- ----------
Non-current:
------------
Capitalized software development costs $ (979,003) $ (568,535)
Property, plant and equipment (136,727) (108,089)
Accrued liabilities 44,125 52,739
Amortization of intangibles 34,000 34,000
Net operating loss carryforwards 1,023,535 -
Tax credit carryforwards 120,739 -
Valuation allowance (106,669) -
---------- ----------
$ - $ (589,885)
---------- ----------
---------- ----------
</TABLE>
The Company has recorded a 100% valuation allowance on the net deferred tax
asset since management could not determine that it would be more likely
than not that its net operating losses and credits in excess of deferred
tax liabilities would be realized. The valuation allowance related to the
deferred tax assets increased by $257,000 and $34,000 during the year ended
June 30, 1995 and 1994.
At June 30, 1995 and 1994, for income tax purposes, the Company had net
operating loss carryforwards of approximately $3,210,000 and $2,488,000
available to offset regular and alternative minimum taxable income,
respectively. For financial statement purposes, these net operating losses
were used to the extent necessary to offset temporary differences and
reduce deferred tax liabilities. The net operating loss carryforwards
expire principally in 2009.
At June 30, 1995, for income tax and financial statement purposes, the
Company had research and development tax credit carryforwards of
approximately $121,000 available to offset future income taxes payable.
The tax credit carryforwards begin to expire in 2006.
During the year ended June 30, 1994, for income tax purposes, the Company
deducted approximately $101,000 associated with the exercise of certain
non-qualified stock options. For financial statement purposes, the tax
benefit of $14,850 associated with the non-qualified options deduction has
been recorded as additional paid-in capital.
9. CONVERTIBLE SUBORDINATED DEBENTURES:
On August 26, 1993, the Company issued convertible subordinated debentures
with a face value of $500,000 in exchange for cash. The debentures are due
August 31, 1998. Interest accrues on the outstanding principal of the
debenture at the rate of 7% per annum and is payable semi-annually on
February
F-15
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
28 and August 31 during the term of the debenture. The debenture allows
the holder to convert in whole or part the outstanding balance into shares
of the Company's common stock at any time during the term of the debenture
at a fixed conversion price of $.60 per common share. The Company may, at
its option, call the outstanding principal amount of the debentures for
redemption at any time after December 31, 1993. As of September 26, 1995,
holders of convertible subordinated debentures with face values totaling
$300,000 have converted their debentures into common stock, utilizing the
conversion feature of their debentures (these conversions are not a part of
the public offering discussed below). See Note 14.
On February 10, 1994, the Company issued convertible subordinated
debentures with a face value of $2,500,000 in exchange for all the
outstanding stock of IHS (see Note 1). The debentures are due January 31,
1999. Interest accrues on the outstanding principal of the debenture at
the rate of 7% per annum and is payable semi-annually on January 31 and
July 31 during the term of the debenture. The debenture allows the holder
to convert in whole or part the outstanding balance into shares of the
Company's common stock at any time during the term of the debenture at a
fixed conversion price of $3.23 per common share.
The above conversion rates are subject to adjustment if (a) the Company
pays a dividend or makes a distribution of common shares (b) the Company
consolidates or merges into another corporation or (c) sells any common
shares (excluding existing stock bonus and option plans) for less than the
conversion price if the cumulative value of these transactions exceeds
$100,000. On August 15, 1995 the company's Form SB-2 Registration of
approximately 6 million shares of common stock for sale to the public
became effective with the Securities and Exchange Commission. The Board of
Directors of the Company set the price to the public at $0.60 per share.
As of September 26, 1995, the holders of all convertible debentures due
1999 have canceled their debentures in exchange for common stock being
offered through the public offering discussed above (at $0.60 per share).
See Note 14.
10. COMMON STOCK:
a. STOCK OPTION PLAN
The Company has a non-qualified stock option plan for the granting of
options to certain key employees. The option exercise price, which is
determined by the Board of Directors, is generally based on the fair
market value at the date granted.
F-16
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
Outstanding options granted pursuant to the non-qualified stock option
plan are as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares ($) Per Share
--------- -------------
<S> <C> <C>
Outstanding, July 1, 1992 1,371,667 .25 - .75
Granted 200,000 .50
Exercised (16,667) .25
Canceled (110,000) .25
---------
Outstanding, June 30, 1993 1,445,000 .25 - .75
Exercised (306,665) .25 - .35
Canceled (73,333) .25 - .50
---------
Outstanding, June 30, 1994 1,065,002 .25 - .75
Granted 525,000 .79 - 1.75
Exercised (485,000) .25 - .35
Canceled (290,001) .25 - .75
---------
Outstanding, June 30, 1995 815,001 .25 - 1.75
---------
Exercisable, June 30, 1995 795,001 .25 - 1.75
---------
</TABLE>
These options generally expire (i) immediately upon termination of the
employee for cause, (ii) sixty days after termination without cause,
or (iii) ninety days after death or disability of the employee. All
options expire three years from the date they become exercisable.
b. RESTRICTED STOCK BONUS PLAN
The Company also has a restricted stock bonus plan for employees under
which shares of common stock may be granted to employees at the
discretion of the Board of Directors. Shares issued pursuant to this
plan are restricted for three years from the date of grant and, in the
event of termination, the Company may repurchase these shares at the
greater of (i) the book value of said shares as of the purchase date
or (ii) the repurchase value of said shares as determined by the Board
of Directors at the time said shares were issued. This restriction
feature results in unearned stock compensation when the shares are
granted. The shares are earned by the employee over a three-year
period from the date of grant. The Company amortizes this unearned
compensation over the restrictive period. No shares were issued under
this plan during the years ended June 30, 1995, 1994 and 1993.
c. COMMON STOCK PURCHASE WARRANTS
During fiscal 1994, the Company issued warrants to purchase up to
15,000 shares of common stock. The warrants were issued to three
directors of the Company. The warrants may be exercised at any time
prior to February 9, 1996. The exercise price of the warrants is
$3.23 per share of common stock.
11. COMMITMENTS:
The Company leases certain buildings and office space under noncancellable
operating leases which expire at various dates through June 1998, with
options to renew through June 2003. Additionally, the Company subleases an
office building to an unrelated third party. The Company also maintains a
lease
F-17
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
where a free rent period was granted. The accompanying statements of
income reflect rent expense on a straight-line basis over the term of the
lease. An obligation of approximately $111,853 representing pro rata
future payments is reflected in the accompanying balance sheet at June 30,
1995. Total rent expense for the years ended June 30, 1995, 1994 and 1993
was $327,242, $183,373 and $167,786, respectively.
Future minimum lease payments, net of sublease income, required under
operating leases are as follows:
<TABLE>
<CAPTION>
Year ending June 30,
--------------------
<S> <C>
1996 $281,801
1997 251,692
1998 201,484
--------
$734,977
--------
--------
</TABLE>
12. EMPLOYEE BENEFIT PLAN:
Substantially all of the employees of IHS are covered by a 401(k) defined
contribution benefit plan. The plan provides for employee tax-deferred
contributions of up to 15% of eligible compensation. IHS matches 50% of
employee contributions with a maximum contribution of 3% of the employees'
eligible compensation. For the years ended June 30, 1995 and 1994, IHS
made contributions to the benefit plan of approximately $19,000 and
$21,000.
Effective July 1, 1995, the Company established a new 401(k) plan to cover
all employees of the Company. The assets and participants in the IHS plan
will be transferred to the new plan, which will have no impact on their
vested and non-vested account balances. The new plan will be essentially
the same as the IHS plan with the exception that the Company will initially
make no matching contributions to the plan. The plan permits matching
contributions by the Company, if and when they are approved by the Board of
Directors.
13. RELATED PARTY TRANSACTIONS:
Subsequent to year end, the company entered into a consulting agreement
with August Systems, to provide programming assistance in connection with
the SM*RT Practice system and current releases. The Company pays an hourly
rate for actual hours worked at a rate commensurate with that which would
be paid for non-affiliated persons with similar background and experience.
During the year ended June 30, 1995 and 1994, the Company had sales of
approximately $92,000 and $71,000 to related parties. The Company purchased
medical insurance for the benefit of it's employees from a related party.
Medical insurance payments totaled approximately $149,000 per year for
each of the years ended June 30, 1995 and 1994.
The Chairman of the Board and Chief Executive Officer has received in
addition to his salary, a consulting fee in the amount of $60,000 and
$55,000 for the years ended June 30, 1995 and 1994.
F-18
<PAGE>
WISMER*MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----
14. SUBSEQUENT EVENTS:
On August 15, 1995, the Company's Form SB-2 Registration of $6,066,667
shares of common stock for the sale to the public became effective with the
Securities and Exchange Commission. The Board of Directors set the offering
price at $0.60 per share on August 21, 1995. As of September 26, 1995, the
Company has sold approximately 5.5 million shares. Consideration received
includes $2.5 million of convertible debentures and approximately $794,000
of cash.
As of September 26, 1995, holders of $300,000 worth of convertible
subordinated debentures due 1998 have elected to convert their debentures
into common stock, pursuant to the conversion priveledge contained in
their debentures (see Note 9).
The following schedule presents, on a pro-forma basis, a condensed
consolidated balance sheet at June 30, 1995, giving effect to the results
of public stock offering as of September 26, 1995, and the conversion of
$300,000 of convertible subordinated debentures discussed above, as if
these events would have occurred on that date.
<TABLE>
<CAPTION>
Condensed Condensed
Consolidated Consolidated
Historical Pro-Forma Pro-Forma
June 30, 1995 Adjustment June 30, 1995
----------------------------------------------
----------------------------------------------
<S> <C> <C> <C>
Cash $ 91,225 $ 793,842 $ 855,067
Other current assets 1,225,143 - 1,225,143
---------- ---------- ----------
Total current assets 1,316,368 793,842 2,110,210
Non-current assets 4,930,795 (100,000) 4,830,795
---------- ---------- ----------
Total Assets $6,247,163 $ 693,842 $6,941,005
---------- ---------- ----------
---------- ---------- ----------
Total current liabilities $4,006,526 $ - $4,006,526
Convertible subordinated
debentures 3,000,000 (2,800,000) 200,000
Other non-current
liabilities 1,034,261 - 1,034,261
---------- --------- ----------
Total liabilities 8,040,787 (2,800,000) 5,240,787
Stockholders' equity
(deficit) (1,793,624) 3,493,842 1,700,218
---------- ----------- ----------
Total liabilities and
stockholders' equity (deficit) $6,247,163 $ 693,842 $6,941,005
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
The pro-forma adjustment shows the consideration received by the Company
in exchange for the common stock.
Non-current assets (historical basis) at June 30, 1995 include $100,000
of deferred offering costs which are reclassified to stockholders' equity
upon completion of the offering.
The pro-forma effects of the stock offering on the company's results of
operations for the year ended June 30, 1995, assuming the offering had
occurred on July 1, 1994, would be a $196,000 decrease to the reported
net loss due to the forgone interest expense on the converted debentures.
The 1995 loss per share on a pro-forma basis would be $.07 per share.
F-19
