<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WISMER*MARTIN, INC.
(Name of small business issuer in its charter)
WASHINGTON 7373 91-1196514
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
N. 12828 NEWPORT HIGHWAY
MEAD, WASHINGTON 99021
(509) 466-0396
(Address and telephone number of principal executive offers)
N. 12828 NEWPORT HIGHWAY
MEAD, WASHINGTON 99021
(Address of principal place of business or intended principal place of business)
RONALD L. HOLDEN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
WISMER*MARTIN, INC.
N. 12828 NEWPORT HIGHWAY
MEAD, WASHINGTON 99021
(509) 466-0396
(Name, address and telephone number of agent for service)
----------------------------
COPY TO:
LAWRENCE R. SMALL
PAINE, HAMBLEN, COFFIN, BROOKE & MILLER
717 WEST SPRAGUE AVENUE, SUITE 1200
SPOKANE, WASHINGTON 99204-0464
(509) 455-6000
----------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after
this Registration Statement becomes effective.
----------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF DOLLAR AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE
UNIT(1) PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par $2,500,000 $1.25 $2,500,000 $750
value per share.......
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
Subject to Completion
_______________, 1995
2,000,000 SHARES
WISMER*MARTIN, INC.
COMMON STOCK
Of the 2,000,000 shares of Common Stock offered hereby, 1,000,000
shares (the "Cash Shares") are being sold by Wismer*Martin, Inc. (the "Company")
to the public for cash and 1,000,000 shares (the "Conversion Shares") are being
offered by the Company to the holders of its Convertible Subordinated Debentures
due 1998 and Convertible Subordinated Debentures due 1999 (collectively, the
"Debentures") for issuance upon conversion of the Debentures in accordance with
the respective provisions of the Debentures. See "Conversion of Convertible
Subordinated Debentures." The Company will not receive any cash proceeds from
the issuance of the Conversion Shares. Prior to this offering, there has been
only a limited public market for the Common Stock of the Company. It is
currently estimated that the public offering price will be $1.25 per share for
the Cash Shares. The Conversion price for the Debentures will be the public
offering price per share. See "Determination of Offering Price" for the factors
considered in determining the public offering price.
Following this offering, the current executive officers and directors
of the Company will beneficially own or have voting control over approximately
50% of the Common Stock. See "Risk Factors--Concentration of Ownership" and
"Security Ownership of Certain Beneficial Owners and Management."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRICE UNDERWRITING DISCOUNTS PROCEEDS
TO AND COMMISSIONS(2) TO
PUBLIC(1) COMPANY(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share. . . $1.25 $-0- $1.25
- --------------------------------------------------------------------------------
Total . . . . $1,250,000 $-0- $1,250,000
- --------------------------------------------------------------------------------
Total Minimum(1) $ 500,000 $-0- $ 500,000
- --------------------------------------------------------------------------------
Total Maximum $1,250,000 $-0- $1,250,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<FN>
(1) Excludes Conversion Shares.
(2) The services of an underwriter, broker, dealer or finder have not been
engaged for the offering and the Cash Shares will be sold directly to the
public by the Company and the Conversion Shares will be offered to the
Debenture holders directly by the Company. No discounts, commissions or
fees for such services will be incurred in connection with the offering.
(3) Before deducting expenses of the offering estimated at $120,000 for audit
and legal fees.
</TABLE>
THE DATE OF THIS PROSPECTUS IS ______________, 1995.
1
<PAGE>
THE COMPANY HAS FILED A REGISTRATION STATEMENT ON FORM SB-2 UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), WITH RESPECT TO THE
SHARES OF COMMON STOCK OFFERED HEREBY WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "COMMISSION"), IN WASHINGTON, D.C. THIS PROSPECTUS DOES NOT
CONTAIN ALL OF THE INFORMATION SET FORTH IN THE REGISTRATION STATEMENT AND THE
EXHIBITS AND SCHEDULES THERETO. FOR FURTHER INFORMATION WITH RESPECT TO THE
COMPANY AND THE COMMON STOCK OFFERED HEREBY, REFERENCE IS MADE TO THE
REGISTRATION STATEMENT AND THE EXHIBITS AND SCHEDULES FILED HEREWITH.
STATEMENTS CONTAINED IN THIS PROSPECTUS AS TO THE CONTENTS OF ANY CONTRACT OR
ANY OTHER DOCUMENT REFERRED TO ARE NOT NECESSARILY COMPLETE, AND IN EACH
INSTANCE REFERENCE IS MADE TO THE COMPANY OF SUCH CONTRACT OR OTHER DOCUMENT
FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT, EACH SUCH STATEMENT BEING
QUALIFIED IN ALL RESPECTS BY SUCH REFERENCE. A COPY OF THE REGISTRATION
STATEMENT MAY BE INSPECTED WITHOUT CHARGE AT THE OFFICES OF THE COMMISSION IN
WASHINGTON, D.C. 20549, AND COPIES OF ALL OR ANY PART OF THE REGISTRATION
STATEMENT MAY BE OBTAINED FROM THE PUBLIC REFERENCE SECTION OF THE COMMISSION AT
450 FIFTH STREET, N.W., WASHINGTON, D.C. 20549, AND AT 5757 WILSHIRE BOULEVARD,
SUITE 500 EAST, LOS ANGELES, CALIFORNIA 90036, UPON THE PAYMENT OF THE FEES
PRESCRIBED BY THE COMMISSION.
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), installs and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such materials can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549 upon payment of the prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference in this Prospectus: (i) the Company's Annual Report on
Form 10-K for the year ended June 30, 1994; and (ii) the Company's Annual Report
on Form 10-K for the year ended June 30, 1993.
All reports and other documents subsequently filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this Prospectus and prior to the termination of this offering
shall be deemed to be incorporated by reference herein and to be a part hereof
from the date of filing of such reports and documents. Any statement contained
or incorporated or deemed to be incorporated herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon written or oral request of such person, a copy of any or all of
the foregoing documents incorporated herein by reference (other than exhibits to
such documents, unless such exhibits are specifically incorporated herein by
reference into such documents). Requests for such documents should be submitted
in writing to the Company at its principal executive offices at 12828 N. Newport
Highway, Mead, Washington 99021 or by telephone at (509) 466-0396 to the
attention of Douglas A. Willford, Chief Financial Officer.
2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
PRICE RANGE OF THE COMMON STOCK AND DIVIDEND POLICY. . . . . . . . . . . . . .11
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . .14
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . .38
CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES. . . . . . . . . . . . . . .40
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . .40
TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
SHARES ELIGIBLE FOR FUTURE SALE. . . . . . . . . . . . . . . . . . . . . . . .42
DETERMINATION OF OFFERING PRICE. . . . . . . . . . . . . . . . . . . . . . . .42
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . F-1
UNTIL JULY 30, 1995 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
Wismer Martin develops, markets, installs 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.
The Company's strategy is to offer its practice management and networking
products to physicians, hospitals, payors, and managed care organizations which
are seeking to create an integrated delivery network in their market area.
Rather than simply providing a hardware or software product, Wismer Martin
offers a complete network solution including a services component which takes
the client from the planning through implementation. The Company's hospital
strategy is to offer its HIS applications solution to the small to mid size
hospital seeking a low cost system which requires few data processing resources
to manage. The Company has installed more than 1600 practice management systems
serving over 3,800 physicians in several medical specialties ranging in practice
size from one to more than 30 physicians. The Company has installed two major
health information payor sponsored networks which span the states of Washington
and Alaska and is in the process of installing two hospital sponsored networks
in the states of Kentucky and Tennessee. The Company's hospital client base
includes more than 65 hospitals ranging in size from 50 bed rural community
hospitals to major urban medical centers with more than 400 beds.
The Company believes that, due to the ongoing pressures on healthcare providers
from managed care, the demand for healthcare information networks will increase
and continue for the next several years and that these opportunities will drive
the sales of practice management systems and hospital systems which can be
effectively linked to such networks. A major new opportunity within the
practice management market is the patient medical record which the Company is
addressing through its Smart Care product offering under development. The
Company's business strategy is to package its various product lines together
with services offerings to meet the needs of this growing market.
The Company markets its products and services through a direct sales force
consisting of 10 individuals and devotes significant resources to developing and
maintaining relationships with existing customers and practice management
consultants. In addition, the Company markets its products and services through
larger strategic partners such as hardware and communications vendors. In the
fiscal year 1994, systems upgrades, add-on software and hardware, software and
hardware maintenance services, forms and supplies, and other services to
existing customers accounted for approximately 40% of total net revenues.
As part of its business strategy, in February 1994, the Company acquired 100% of
the outstanding stock of Integrated Health Systems, Inc. (IHS), a developer of
software solutions for small to mid-size hospitals which is located in La Jolla,
California and previously related to Wismer Martin through common ownership.
The acquisition provided the Company with a healthcare provider client base,
hospital information systems expertise and enhanced services which are now
available to healthcare information network clients. IHS focuses on the
development and marketing of products which are designed for the hospital and
non-physician enterprise markets.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
RESTRUCTURING PROJECT
During the second quarter of the current fiscal year the Board of Directors
initiated significant changes in the management of the Company. The new
management has realigned the Company's organization and cost structure. The
foundation for the restructuring is a plan to more fully support the Company's
plan to transition the Company away from its historical dependence on small
practice management system sales. The Company will focus on large group
practices, hospitals and other healthcare providers and payors who are
developing networks while maintaining its existing customer base. In addition,
the Company's effort to reduce costs since the beginning of the third fiscal
quarter has resulted in an annualized reduction of over $2,000,000 from direct
overhead expense. These cost reductions were achieved by the closing of
non-essential field offices, reduction of personnel in practice management
areas which did not contribute to the direct support of existing clients, and by
reorganization of the Company to eliminate unneeded layers of management. There
are no significant restructuring costs. The Company now has three business
units; Practice Management, Healthcare Information Networks, and Hospital
Information Systems, each led by a Business Unit Manager. The sales organization
has been consolidated and centralized within each business unit. It is
anticipated that this project will continue for the next several months as each
business unit examines its operations for additional gains in efficiency. The
Company believes that with the reduced cost structure, highly centralized
operations, and increased focus on growth market areas (particularly hospitals,
PHOs, MSOs, and Payors), the Company can return to profitability in the final
quarter of this fiscal year ending June 30, 1995.
GTE RELATIONSHIP
In May of 1995 Wismer Martin and GTE Data Services executed a letter of intent
to pursue forming a teaming alliance between the two firms for the joint
offering of products and services to the healthcare market. This cooperative
working relationship would result in the development and implementation of
Healthcare Information Networks on both a regional and national basis. In this
relationship, GTE would provide clients the necessary technical infrastructure
to operate the communications network, while Wismer Martin would provide the
software and implementation services. This arrangement would provide Wismer
Martin with a partner who has a large national marketing and sales presence as
well as the financial resources to assume responsibility for large scale
projects. GTE is presently conducting its technical due diligence.
As used herein, each of the terms "Wismer Martin" and the "Company" refers to
Wismer*Martin, Inc., a Washington corporation, and its wholly-owned subsidiary,
Integrated Health Systems, Inc. The Company's executive offices are located at
12828 N. Newport Hwy., Mead, WA 99021, and its telephone number at that location
is (509) 466-0396
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
Common Stock offered by the Company for cash . . . . . . 1,000,000 shares
Common Stock offered by the Company for conversion . . . 1,000,000 shares
Common Stock to be outstanding after the offering. . . . 11,847,625 shares (1)
Use of proceeds. . . . . . . . . . . . . . . . . . . . . Working capital and
other general Corporate
purposes. See "Use of
Proceeds".
Over-the-Counter Market symbol . . . . . . . . . . . . . WSMM
(1) Based on shares issued and outstanding as of 2-01-95.
- --------------------------------------------------------------------------------
5
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Summary Consolidated Financial Data
(dollars in thousands, except per share data)
FOR THE NINE MONTHS ENDED FOR THE FISCAL YEARS ENDED JUNE 30,
------------------------- -----------------------------------
MARCH 31, 1995 1994 1993
-------------- ---- ----
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Total net revenues. . . . . . . . . . $7,830 $11,395 $7,884
Costs and expenses. . . . . . . . . . $9,373 $10,228 $7,733
Income (loss) from operations . . . . ($1,542) $1,166 $152
Net income (loss) . . . . . . . . . . ($1,482) $709 $27
Net income (loss) per share . . . . . ($0.15) $0.07 nil
At March 31, 1995
-----------------
Actual As Adjusted(2)
------ --------------
Consolidated Balance Sheet Data:
Cash and cash equivalents . . . . . . $104 $1,234
Working capital (deficit) . . . . . . ($2,463) ($1,333)
Software development costs, net . . . $2,500 $2,500
Total Assets. . . . . . . . . . . . . $7,115 $8,245
Long-term debt, less current maturities $4,070 $2,820
Stockholders' equity (deficit) (1). . ($1,899) $481
- -----------------
<FN>
(1) Includes a reduction of $2,533,308 excess purchase price of acquired subsidiary.
(2) Adjusted to reflect the issuance of 1,000,000 shares of Common Stock offered by the Company hereby and the conversion of
$1,250,000 of Convertible Subordinated Debentures, at an assumed public offering price of $1.25 per share and the application
of the net proceeds thereof.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS.
GTE PARTNERSHIP. The creation of a strategic partnership with a larger
firm with a national presence is considered a key part of the Company's overall
business strategy. Such a partnership is vital in order to move quickly to
capture market share for network business and to enable the Company to win large
scale contracts. While current discussions between the Company and GTE indicate
a working relationship could be formalized, there are no assurances that a
agreement satisfactory to the two firms can be developed or, that if such a
partnership is defined and a formal agreement signed, that the partnership will
result in new and significant revenues to the Company.
RESTRUCTURING PROJECT; FUTURE OPERATING RESULTS. The Company effected
significant cost reductions together with organizational changes designed to
improve efficiency and more effectively focus upon new market areas during the
third quarter of the current fiscal year. There can be no assurance that this
restructuring project, as it continues will not have an adverse effect upon the
Company's operations, particularly during the initial stages of the project.
LONG SALES CYCLE. The major portion of new growth over the next few years
for the Company is projected to result from new health information network
sales. The sales cycle for the Company's network products and services is
typically 6 to 12 months from initial contact to contract execution. During this
period, the Company expends substantial time, effort and funds preparing a
contract proposal and negotiating the contract. Any significant or ongoing
failure by the Company to achieve a signed contract after expending such time,
effort and funds could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON PRINCIPAL PRODUCT; MARKET ACCEPTANCE; NEW PRODUCT
DEVELOPMENT. The Company's future success and financial performance will depend
in large part on the Company's ability to continue to meet the increasingly
sophisticated needs of its customers through the timely development and
successful introduction of new and enhanced versions of its SM*RT Practice and
SM*RT Net product lines and other complementary products. Product development
focused on enhancing existing products or introducing new products, such as
SM*RT Care has inherent risks, and there can be no assurance that the Company
will be successful in its product development efforts or that the market will
continue to accept the Company's existing or new products. The Company has
historically expended a significant amount of its net revenues on product
development and believes that significant continuing product development efforts
will be required to sustain the Company's growth. There can be no assurance that
the Company will successfully develop, introduce and market new products or
product enhancements, or that products or product enhancements developed by the
Company will meet the requirements of healthcare providers and achieve market
acceptance. See "Business--Products and Services" and "--Product Development."
COMPETITION; CONSOLIDATION OF THE HEALTHCARE INDUSTRY. The market for
community-wide and enterprise-specific healthcare information systems is
intensely competitive. Many of the Company's competitors have significantly
greater financial, technical and marketing resources than the Company and can be
potentially more effective in selling to the larger sales prospect. Furthermore,
other major information management companies may enter the market in which the
Company competes. There can be no assurance that future competition will not
have a material adverse effect on the Company's business, financial condition
and results of operations. Competitive pressures and other factors, such as new
product introductions by the Company or its competitors, or the entry into new
geographic markets, may result in significant price erosion that could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Many healthcare providers are consolidating to create larger healthcare
delivery enterprises with greater regional market power. As a result, these
enterprises have greater bargaining power, which may lead to price erosion of
the Company's system. The Company's failure to maintain adequate price levels
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company believes that once
a healthcare provider has chosen a particular healthcare information system
vendor, such provider will continue to rely on that vendor for its future
information system requirements. As the
7
<PAGE>
healthcare industry undergoes further consolidation, each sale of the Company's
system assumes even greater importance to the Company's business, financial
condition and results of operations. The Company's inability to make initial
sales of its system to healthcare providers that are replacing or substantially
modifying their healthcare information systems could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Industry Background," "--Target Market," "--Sales and Marketing"
and "--Competition."
FINANCIAL CONDITION AND LIQUIDITY. At March 31, 1995, the Company has a
capital deficit of $1.9 million, negative working capital of $2.5 million and
incurred a significant net loss of $1.5 million from operations for the nine
month period then ended. Additionally, the Company has modified its credit
agreement with the bank as a result of covenant violations.
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
this offering. Management believes that with this reduced cost structure,
highly centralized operations, and increased focus on growth market areas
(particularly Hospitals, PHO's, (MSO's) and Payors, the Company can return
to profitability. Should future markets for the Company's product not develop
as projected, management intends to implement further cost reduction measures,
seek external funding from strategic alliance partners and further leverage the
Company's asset base which includes its current office facilities. 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. See
Notes to "Consolidated Financial Statements."
VARIATION IN QUARTERLY RESULTS OF OPERATIONS; HISTORY OF LOSSES. The
Company's quarterly results of operations have historically varied depending on
such factors as the timing of revenue recognition from system installations and
the variability of operating expenses. The Company's sales of additional
software and services and additional hardware have in the past fluctuated
significantly and may continue to do so in the future. These sales tend to be
unpredictable in nature and vary greatly in dollar amount. For each quarterly
period in 1993, 1994 and 1995, the components of gross margin by revenue
category have varied, and may continue to vary significantly, based on the
Company's performance on individual installation contracts, the amount of
support and maintenance services required during a particular quarter and sales
of additional hardware. A significant portion of the Company's operating
expenses are relatively fixed and are based primarily on revenue forecasts. In
particular, sales and marketing expense is based on the expectation that such
expenditures will result in revenues in future periods. To the extent revenue
targets in any particular quarter are not achieved, the Company may not be able
to adjust expenses accordingly. Fluctuations in the Company's results of
operations may significantly affect the market price of the Common Stock. Since
its incorporation in 1981, the Company has from time to time incurred annual
operating losses. Although the Company achieved profitability for the fiscal
years 1990, 1991, 1992, 1993, and 1994, profitability varied considerably during
that time period. The Company incurred a significant net loss of $1.5 million
for the nine month period ended March 31, 1995 and is expected to incur a loss
for the entire current fiscal year. This loss was sustained due to a decrease in
new network sales in tandem with increased costs incurred in anticipation of
implementation of new network clients. Therefore, there can be no assurance that
the Company will consistently be profitable. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quarterly Results of
Operations." See, also, "Consolidated Financial Statements."
DEPENDENCE ON PROPRIETARY TECHNOLOGY; INTELLECTUAL PROPERTY RIGHTS. The
Company's success is heavily dependent on its proprietary software. The
Company's software is not patented and existing copyright laws offer only
limited practical protection. The Company relies largely on its license
agreements with clients and its own security systems, confidentiality procedures
and employee nondisclosure agreements to maintain the trade secrecy of its
products. There can be no assurance, however, that the legal protections and
precautions taken by the Company will be adequate to prevent misappropriation of
the Company's technology. In addition, these protections do not prevent
independent third-party development of functionally equivalent or superior
technologies or services. The Company does not believe that its operations or
products infringe on the intellectual property rights of others. See
"Business--Intellectual Property" and "--Legal Proceedings."
DEPENDENCE ON KEY PERSONNEL. The Company depends to a significant extent
on key management and technical personnel. The Company's growth and future
success will depend in large part on its ability to attract, motivate and retain
highly qualified personnel, in particular, trained and experienced professionals
capable of developing, selling and installing complex healthcare information
systems. Competition for such personnel is intense and there can be no assurance
that the Company will be successful in hiring, motivating or retaining such
qualified personnel. The loss of key personnel or the inability to hire or
retain qualified personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. During the months of
February and March, 1995, several executive officers with sales and technical
responsibilities resigned. These resignations were anticipated by the Company
and related, in part, to the restructuring project that was being prepared.
These resignations, in the opinion of the Company, did not, nor will they, have
a material adverse effect upon the Company. The Company either replaced those
individuals or eliminated the position as part of the restructure of sales and
product development. See "Business Sales and Marketing" and "--Employees."
PRODUCT LIABILITY. The Company's system provides information that relates
to healthcare enterprise operations. Any failure by the Company's system to
provide accurate and timely information could result in
8
<PAGE>
claims against the Company. The Company maintains a $1,000,000 errors and
omissions insurance policy to protect against claims associated with the use of
its products, but there can be no assurance that its insurance coverage would
adequately cover any claim asserted against the Company. A successful claim
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's business, financial condition and
results of operations. Even unsuccessful claims could result in the Company's
expenditure of funds in litigation and management time and resources. There can
be no assurance that the Company will not be subject to product liability
claims, that such claims will not result in liability in excess of its insurance
coverages or that the Company's insurance will cover such claims or that
appropriate insurance will continue to be available to the Company in the future
at commercially reasonable rates.
UNCERTAINTY IN HEALTHCARE INDUSTRY; GOVERNMENT HEALTHCARE REFORM PROPOSALS.
The United States Food and Drug Administration (the "FDA") has promulgated a
draft policy for the regulation of certain computer products as medical devices
under the 1976 Medical Device Amendments to the Federal Food, Drug and Cosmetic
Act (the "FDC Act"). To the extent that computer software is a medical device
under the policy, the manufacturers of such products could be required,
depending on the product, to (i) register and list their products with the FDA,
(ii) notify the FDA and demonstrate substantial equivalence to other products on
the market before marketing such products, or (iii) obtain FDA approval by
demonstrating safety and effectiveness before marketing a product. In addition,
such products would be subject to the FDC Act's general controls including those
relating to good manufacturing practices and adverse experience reporting. In
the draft policy, the FDA announced that it was not aware of any computer
product that is not a component, part or accessory of another device that would
require FDA approval prior to marketing. Although it is not possible to
anticipate the final form of the FDA's policy with regard to computer software,
the Company expects that, whether or not the draft is finalized, the FDA is
likely to become increasingly active in regulating computer software that is
intended for use in healthcare settings. This may become a particular concern
as the Company's network products begin to support clinical data transactions
and our medical records product, SM*RT Care is brought to market. The FDA, if
it chooses to regulate such software, can impose extensive requirements
governing pre- and postmarket conditions such as device investigation, approval,
labeling and manufacturing. The FDA currently regulates the imaging capability
that the Company is proposing to license from a third party. See "Business -
Product Development."
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
healthcare facilities. During the past several years, the healthcare industry
has been subject to an increase in governmental regulation of, among other
things, reimbursement rates and certain capital expenditures. In addition,
increasing consolidation of healthcare entities and competition for markets is
creating pricing pressures on both healthcare facilities and their suppliers.
Healthcare facilities may react to these pressures and the uncertainty
surrounding such changes by curtailing or deferring investments, including those
for the Company's system and related services. Even if capital investments are
not curtailed or deferred, the cost containment measures that healthcare
providers are instituting in the face of uncertainty result in greater
selectivity in the allocation of capital funds. Such selectivity could have an
adverse effect on the Company's ability to sell its system and related services.
The Company cannot predict with any certainty what impact, if any, such
proposals or healthcare reforms might have on its business, financial condition
and results of operations.
CONCENTRATION OF OWNERSHIP. Following this offering, the current executive
officers and directors of the Company will beneficially own or have voting
control over approximately 50% of the Common Stock. Accordingly, these
individuals will have the ability to influence the election of the Company's
directors and effectively control most corporate actions. This concentration of
ownership may also have the effect of delaying, deterring or preventing a change
in control of the Company.
LIMITED PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this
offering, there has been a public market for the Common Stock but the number of
transactions have been limited. There can be no assurance that a more active
trading market will develop or be sustained. The public offering price will be
determined by the Board of Directors, and may not be indicative of the market
price of the Common Stock after this offering. The trading price of the Common
Stock could also be subject to significant fluctuations in response to
variations in quarterly results of operations, announcements of technological
innovations or new products by the Company or its competitors, governmental
regulatory action, other developments or disputes with respect to proprietary
rights, general trends in the industry and overall market conditions, and other
factors.
9
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE. Sales of Common Stock in the public market
after this offering could adversely affect the market price of the Common Stock.
The 2,000,000 shares to be issued in this offering will be freely tradable
without restriction. In addition to the shares offered hereby (assuming no
exercise of outstanding options under the Company's stock option plans after
March 31, 1995), approximately 1,000,000 shares will be available for immediate
sale in the public market on the date of this offering. See "Shares Eligible
for Future Sale."
ABSENCE OF DIVIDENDS; DILUTION. The Company has not paid any cash dividends
on the Common Stock and does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. See "Dividend Policy." Purchasers of the
Common Stock offered hereby will incur immediate substantial dilution in the net
tangible book value per share of Common Stock. See "Dilution."
THE COMPANY
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 Holden, who is also a
major stockholder of the Company (see "Security Ownership of Certain Beneficial
Owners and Management").
10
<PAGE>
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of the 1,000,000 Cash
Shares of Common Stock offered by the Company, after deducting estimated
offering expenses, are estimated to be approximately $1,130,000, assuming an
initial public offering price of $1.25 per share. The principal reasons for this
offering are to obtain additional equity capital to finance the Company's
current liquidity needs and ongoing operations and to convert $1,250,000 of
convertible debentures to relieve the Company's debt burden. The Company has a
line of credit with Seafirst Bank with a borrowing limit of $500,000. The
interest rate is the Bank's prime rate plus 3%. The line of credit expires June
30, 1996 and the Company intends to use proceeds from this offering to repay the
indebtedness. The amount of the indebtedness on June 7, 1995 was approximately
$310,000. The Company expects to use the balance of the net proceeds received
from the Cash Shares for general corporate purposes, including working capital.
The net proceeds of this offering will be invested in short term,
investment-grade, interest bearing securities until required to meet the
Company's financial requirements. If only the minimum number of Cash Shares are
sold, the Company will be able still to meet its financial requirements.
The Company will not receive any cash proceeds from the issuance of the
Conversion Shares.
PRICE RANGE OF THE COMMON STOCK AND DIVIDEND POLICY
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 June 6, 1995 were $0.55 and $0.85,
respectively. At such date, shares of Common Stock were issued and outstanding.
<TABLE>
<CAPTION>
Fiscal Year High Low
--------------- ----- -----
<C> <S> <C> <C>
1995 First Quarter $2.25 $1.50
Second Quarter $2.50 $1.50
Third Quarter $2.25 $ .75
1994 First Quarter $ .50 $ .32
Second Quarter 2.00 1.50
Third Quarter 3.25 2.50
Fourth Quarter 2.25 1.75
1993 First Quarter $ .63 $ .50
Second Quarter .63 .38
Third Quarter .50 .28
Fourth Quarter .50 .28
</TABLE>
As of 2/1/95, there were 287 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.
11
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company as
of March 31, 1995, and (ii) such balances as adjusted to give effect to the
issuance and sale of 1,000,000 shares of Common Stock by the Company and
conversion of $1,250,000 in convertible subordinated debentures in the offering
made hereby at an assumed offering price of $1.25 per share.
<TABLE>
<CAPTION>
March 31, 1995
---------------------------------------------
Actual As Adjusted
---------------------------------------------
<S> <C> <C>
Long-term liabilities $4,069,668 $2,819,668
Stockholders' equity
Common Stock, $.001 par value 20,000,000 shares
authorized; 9,847,625 shares issued and outstanding;
11,847,625 outstanding as adjusted 9,848 11,848
Additional paid in capital 1,203,809 3,581,809
Excess purchase price of acquired subsidiary (2,533,308) (2,533,308)
Retained earnings (deficit) (578,928) (578,928)
---------------------------------------------
Total Stockholders' equity (deficit) (1,898,579) 481,421
---------------------------------------------
Total Capitalization $2,171,089 $3,371,089
---------------------------------------------
---------------------------------------------
</TABLE>
12
<PAGE>
DILUTION
The net tangible book value of the Company's Common Stock as of March 31,
1995 was approximately ($4,570,654) or ($0.46) per share. Net tangible book
value per share represents the Company's total tangible assets less total
liabilities, divided by the total number of shares of Common Stock outstanding.
Net tangible book value dilution per share represents the difference
between the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after completion of the offering. After giving effect
to the sale of the 2,000,000 shares of Common Stock offered by the Company
hereby at an assumed public offering price of $1.25 per share and the
application of the estimated net proceeds therefrom, the pro forma net tangible
book value of the Company as of March 31, 1995 would have been approximately
($2,190,654) or ($0.18) per share. This represents an immediate increase in net
tangible book value of $0.28 per share to existing shareholders and an immediate
decrease in net tangible book value of $1.43 per share to purchasers of Common
Stock in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share. . . . . . . . . . . . . . $1.25
Net tangible book value per share as of March 31, 1995. . . . ($0.46)
Increase per share attributable to new investors . . . . . . . $0.28
Pro forma net tangible book value per share after the offering . . ($0.18)
Net tangible book value dilution per share to new investors . . . $1.43
</TABLE>
The following table sets forth as of March 31, 1995 the difference between
the existing shareholders and the purchasers of shares in this offering (at an
assumed initial public offering price of $1.25 per share) with respect to the
number of shares purchased from the Company, the total consideration paid to the
Company, and the average consideration per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------- ------------------- -------
NUMBER PERCENT AMOUNT PERCENT CONSIDERATION
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
EXISTING SHAREHOLDERS 9,847,625 83.1% $1,213,657 32.7% $0.123
NEW INVESTORS 2,000,000 16.9% $2,500,000 67.3% $1.25
---------- ----- ---------- ------
TOTAL 11,847,625 100.0% $3,713,657 100.0%
---------- ----- ---------- ------
---------- ----- ---------- ------
</TABLE>
PLAN OF DISTRIBUTION
The Company has not engaged an underwriter. The offering will be conducted
solely by executive officers of the Company. Officers will not receive any
additional compensation for performing these services. Employees of the Company
and existing shareholders will be provided with a Prospectus and the Company
anticipates that a significant number of the Cash Shares will be purchased by
employees and shareholders. A specific number of shares will not be reserved
for employee purchasers. Conversion Shares not issued to converting holders of
Debentures will not be sold to the public.
An account will be established with Seafirst Bank, pursuant to an escrow
agreement, into which proceeds from Cash Shares will be deposited until the
minimum amount of $500,000 has been received by the Company.
13
<PAGE>
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.
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.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues represented by certain items reflected in the Company's consolidated
statement of operations.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1994 1993
---- ----
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Operating expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 26.0 36.1
Cost of support and operations. . . . . . . . . . . . . . . 21.8 23.0
Selling and marketing . . . . . . . . . . . . . . . . . . . 15.5 14.7
Product research, development and enhancements . . . . . . 11.1 8.6
Less: amount capitalized related to enhancements. . . . . . (8.9) (8.2)
General and administrative. . . . . . . . . . . . . . . . . 24.2 23.9
---- ----
Total operating expenses . . . . . . . . . . . . . . . . . . 89.7 98.1
---- ----
Operating income . . . . . . . . . . . . . . . . . . . . . . 10.3 1.9
Interest income. . . . . . . . . . . . . . . . . . . . . . . .2 .4
Interest expense . . . . . . . . . . . . . . . . . . . . . . (1.7) (1.9)
----- -----
Income before income taxes and cumulative effect
of change in accounting principle . . . . . . . . . . . . 8.8 .4
Income tax provision . . . . . . . . . . . . . . . . . . . (2.3) (.1)
------ -----
Income before cumulative effect of change in accounting
in accounting principle. . . . . . . . . . . . . . . . . . 6.5 .3
Cumulative effect of change in accounting principle. . . . . (.3)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . 6.2% .3%
---- ---
- --------------------------------------------------------------------------------
</TABLE>
FISCAL YEAR ENDED JUNE 30, 1994 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1993
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 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.
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 February 10, 1994.
Net sales increased approximately 45% to $11,395,000 in fiscal 1994 from
$7,884,000 in fiscal 1993. The increase was due to sales revenue from IHS and
an increase in sales revenue principally from a contract signed with Blue Cross
of Washington and Alaska. The contract with Blue Cross of Washington and Alaska
requires the Company to provide SM*RT Practice and SM*RT Link software and
ongoing consultation to develop a healthcare information network for Alaska and
Washington. The Company recognized approximately $1,978,000 of revenue
associated with this contract. The Company anticipates that additional revenues
will be recognized in the future from this relationship with Blue Cross of
Washington and Alaska revenue.
Cost of systems sold increased approximately 4% to $2,967,000 in fiscal
1994 from $2,844,000 in fiscal 1993. Cost of systems sold increased
disproportionately as compared with the increase in net sales because the
Company's product mix changed from prior years with additional revenue being
realized from software sales. Software sales revenue has a much lower cost than
hardware sales revenue.
15
<PAGE>
Cost of support and operations was $2,489,000 in fiscal 1994 as compared to
$1,818,000 in fiscal 1993 and represents a 37% increase. This increase was
principally due to the additional cost of support and operations for IHS for the
period from its acquisition date to the end of the fiscal year.
Selling and marketing expenses were $1,762,000 in fiscal 1994 as compared
to $1,163,000 in fiscal 1993 and represents a 52% increase. This increase was a
result of increased expenses from IHS and an increase in sales staff from the
prior year.
Product research, development, and enhancement expenses increased by 86%
from $679,000 in fiscal 1993 to $1,265,000 in fiscal 1994. The increase was due
to 1) product research, development, and enhancement expenses attributable to
IHS and 2) expenses related to an increase in the number of development and
enhancement projects. The Company has increased the number of staff to
concentrate on 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 56% from $652,000 in fiscal 1993 to $1,018,000 in
fiscal 1994 due to 1) the Company's increased efforts in enhancing the SM*RT
Link product and its SM*RT Practice product as well as the hospital information
system software products from IHS. Costs associated with enhancements are
capitalized and amortized over 5 years. Research and development costs are
expensed as incurred.
General and administrative expenses increased by 47% to $2,762,000 in
fiscal 1994 from $1,882,000 in 1993. The increase was primarily a result of the
general and administrative expenses from IHS for the period from acquisition to
the end of the fiscal year.
Interest expense increased by approximately 31% from $147,000 in fiscal
1993 to $192,000 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 $264,307 as a
result of the increase in income from operations.
The various factors discussed above resulted in net income of approximately
$709,000 during 1994 compared to net income of approximately $27,000 during
1993.
16
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended March 31, 1995 Compared with Nine Months Ended March 31, 1994
-------------------------------------------------------------------------------
Nine Months Ended March 31,
---------------------------
1995 1994
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Operating expenses:
Cost of software license fees 5.9% 4.8%
Cost of equipment, software and supplies sold 17.8% 17.8%
Cost of support and operations 28.1% 26.6%
Selling and marketing 24.2% 16.7%
Product research, development and enhancements 24.1% 11.9%
Less: amount capitalized related to enhancements (16.4%) (6.8%)
General and administration 36.0% 22.7%
----- -----
Total operating expense 119.7% 93.9%
------ -----
Operating income (loss) (19.7%) 6.1%
Other income (expense):
Interest income 0.2% 0.3%
Interest expense (3.9%) (1.6%)
------ ------
Income (loss) before income taxes and cumulative effect of change in
accounting principle. (23.4%) 4.8%
Income tax expense (benefit) (4.2%) 1.1%
------ -----
Income (loss) before cumulative effect of change in accounting principle (19.2%) 3.7%
Cumulative effect of change in accounting principle 0.0% 0.4%
----- -----
Net income (loss) (19.2%) 3.3%
------- -----
------- -----
</TABLE>
During the nine months ended March 31, 1995 ("1995"), sales were approximately
$7,830,000, representing an increase of $577,000 from the sales of $7,253,000
for the nine months ended March 31, 1994 ("1994"). This increase was due to (1)
the inclusion of approximately $1,054,000 of revenue from Integrated Health
Systems, Inc.("IHS"), which was acquired as a wholly-owned subsidiary on
February 10, 1994 (see above), and (2) a decrease in Wismer-Martin, Inc.'s
("W-M") revenue of $477,000.
The cost of software license fees increased from $349,700 in 1994 to $459,600 in
1995. This increase of $109,900 was the result of an increase in the
amortization of software development costs.
The cost of equipment, software and supplies sold increased from $1,301,600 in
1994 to $1,401,000 in 1995. This increase of $99,400 was due primarily to the
increase in the cost of equipment and supplies sold.
The cost of support and operations increased from $1,931,900 for the nine month
period ended March 31, 1994 as compared to $2,197,600 for the nine month period
ended March 31, 1995. This increase of $265,700 was due to (1) the inclusion of
$203,500 in cost of support and services from IHS and (2) an increase in W-M's
expense of $62,200.
Selling and marketing expenses increased by $686,700, or 57%, for the nine
months ended March 31, 1995 as compared to the same period in 1994. This change
resulted primarily from an increase in the number of sales and marketing
personnel assigned to the Blue Cross of Washington and Alaska contract.
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 enhancements 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.
17
<PAGE>
Product research, development and enhancement costs increased $1,025,100, or
119%, for 1995 as compared to 1994. The increase in the expense was due to (1)
the inclusion of $682,000 of research, development and enhancement costs in 1995
from IHS and (2) an increase in costs of $343,100 from W-M. Both W-M and IHS
increased the number of personnel associated with the Company's product
research, development and enhancement projects. The Company expects research
and development expenses to remain at the current quarter's expense level for
the remainder of the fiscal year ending June 30, 1995.
The amount of product research, development and enhancement expenses capitalized
for 1995 increased by $794,700 as compared to 1994. The increase in capitalized
software development costs was due to (1) the inclusion IHS's capitalized
software development costs in the amount of $270,800 and (2) an increase in the
amount of software development costs from W-M in the amount of $523,900. The
increase for W-M and IHS was due to an increase in the amount of time and
expenses devoted to enhancing the Company's products. A larger number of staff
have been assigned to product enhancements during 1995 as compared to 1994.
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 increased from $1,649,500 for 1994 to
$2,819,300 for 1995. The increase in expenses of $1,169,800, or 71% was due to
(1) the inclusion of $366,600 of general and administrative expenses from IHS
and (2) an increase in the general and administrative expenses for W-M of
$803,200. The increase in W-M's general and administrative expenses are the
result of an increase in the number and cost of personnel, an increase in bad
debt expense, depreciation and office operating expenses.
Interest expense has increased $184,400 from 1994 to 1995. The increase in
interest expense has resulted from (1) the issuance of $2,500,000 in convertible
subordinated debentures on February 10, 1994, which increased interest expense
by approximately $110,000 for the nine months ended March 31, 1995 as compared
to the same period for 1994; and (2) increased borrowings on the Company's line
of credit (notes payable to bank).
Effective July 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). The cumulative effect of this change was $27,479. During the six month
period ended December 31, 1993, changes in the tax law were made. The effect of
these changes to the Company was (1) to increase the effective federal tax rate
to 34% and (2) to retroactively reinstate the research and development tax
credit for the fiscal year ended June 30, 1993. The Company recorded a $80,900
tax expense during the nine months ended March 31, 1994 based on income before
tax for the nine months of approximately $346,000. An income tax benefit of
$341,800 was recorded for the nine month period ended March 31, 1995 due to the
loss incurred for the period.
The factors discussed above resulted in a net loss of approximately $1,481,800,
or ($0.15) per share, during 1995, as compared to net income of $238,100, or
$0.03 per share, during 1994.
FINANCIAL CONDITION AND LIQUIDITY
At March 31, 1995, total assets and stockholders' deficit were approximately
$7,115,000 and $1,899,000, respectively, compared to $8,478,000 and $539,000,
respectively at June 30, 1994. The decrease in total assets is principally due
to a decrease in the accounts receivable at March 31, 1995. The decrease in the
stockholders' deficit is the result of the loss incurred during the second and
third quarters.
Cash and cash equivalents decreased by $484,300 from June 30, 1994 to March 31,
1995. In addition to the $188,200 of cash provided by operations, cash was
provided by the sale of stock in the amount of $121,800, and $958,900 from the
Company's line of credit. The major uses of cash were $324,800 for the purchase
of property,
18
<PAGE>
plant and equipment, $1,287,900 for additional capitalized software and
development costs and $ 69,500 for payment of debt and capital lease
obligations.
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 $958,900 was outstanding at March 31, 1995.
The credit agreement related to the note payable to bank includes various
restrictive covenants, the most significant of which relate to limits on capital
expenditures, maintenance of a minimum working capital ratio and maintenance of
a maximum debt to equity ratio. As of December 31, 1994, the Company was not in
compliance with certain covenants. As a result, the Company and the bank
entered into a Third Amended Business Loan Agreement which extended the time to
cure the default to June 30, 1995 and subsequently obtained a waiver from the
bank extending the date to 8/31/95. The modified revolving line of credit
is as follows: (1) $500,000 of the amount outstanding was converted to a term
loan due June 30, 1995 (which was paid by the Company on April 21, 1995), and
(2) the revolving line of credit was reduced to $500,000, the balance is
approximately $310,000 as of June 7, 1995. This commitment expires on June 30,
1996. The line of credit is collateralized by the Company's accounts
receivable, inventories, property and equipment. The financial covenants are to
be measured as of August 11, 1995, and include provisions relating to conversion
of not less than $1,000,000 of debt to equity and raising additional capital
through the sale of equity securities or internally generated funds of at least
$1,000,000.
In order to increase internally generated funds, management has implemented
several changes in the operations of the Company. Some of the changes made were
(a) as of January 31, 1995, the Company reduced its workforce and shifted
resources to concentrate on the healthcare information network (HIN) market
leading to an expense reduction as well as a positive impact on the sales and
service levels of the Company, (b) a continued emphasis on the elimination or
reduction of nonessential expenses, (c) a reduction in the number of remote
branch offices of the Company which will yield reduced office operating expenses
in the coming months, (d) a corporate management reorganization to maximize the
efficiencies and effectiveness of the Company, and (e) an increased emphasis on
generating sales and revenues for the Company. Management believes the changes
will have a positive impact on the financial condition and operations of the
Company during the remaining months of the fiscal year ending June 30, 1995.
In order to continue the growth and expansion of the Company, the Company's
management is continuing to seek additional funds and joint venture
opportunities. The Company is currently pursuing the sale of its building in
Spokane, Washington, in which the Company estimates that it has nearly $1
million in equity. In addition, discussions with GTE indicate a possible
alliance between the two firms which would provide increased opportunities for
future sales. See Note 2 to "Consolidated Financial Statements."
BUSINESS
Wismer Martin is engaged in the business of developing, marketing,
installing and supporting practice management systems, hospital information
systems and products supporting Healthcare Information Networks (HINs). Rather
than simply providing a hardware or software product, Wismer Martin offers a
complete network information system which is a primary component in managed
competition healthcare distribution systems and community health information
networks. The Company believes that it is one of the nation's leading providers
of physician practice management systems, both in terms of revenues and number
of physicians served. In addition, the Company has implemented two of the
largest HIN projects in the country with networks installed which span the
states of Washington and Alaska. The Company's hospital information system is
installed in more than 65 hospitals across the country and is the only IBM
AS/400 solution available which provides a fully integrated financial, clinical,
and administrative application for the small to mid-size hospital. The Company
also sells hardware, peripherals, training and installation support, forms and
supplies, and software and hardware maintenance services. The Company's product
offerings provide the flexibility required to support the single physician
office to large group practices, the small community hospital to the large
urban medical center, the small rural PHO network to a state-wide HIN linking
thousands of participants.
INDUSTRY BACKGROUND
The Company estimates that there are over 570,000 physicians in private
practice and approximately 196,000 medical practices in the United States. In
addition, there are approximately 6500 hospitals of which approximately 1/3 are
chained owned or operated and 100 major HMO's and insurance payors. The economic
pressures and
19
<PAGE>
information demands upon physicians, hospitals, and payors have increased
significantly during the past decade. At the same time, the increased power and
decreased cost of computers have made computers an effective information
processing solution for a broader range of clients. Approximately 70% of
physician practices and over 95% of hospitals now use computers or computer
services for at least some of their information processing requirements.
The demand for more comprehensive and accurate information processing
solutions is expected to continue. Healthcare cost containment efforts have
greatly increased the amount and complexity of required information. At the
same time, increased competition has resulted in a greater focus on
demonstrating the quality of care delivered to patients. The Company's
proprietary practice management, hospital, and network systems help providers,
suppliers, and payors reduce the costs and improve the quality of delivering
healthcare services by automating patient care and administrative processes,
ensuring timely access to relevant information, streamlining the storage and
retrieval of information, and matching patient needs with available resources.
The ongoing pressure to contain healthcare costs is also changing the
structure of healthcare providers and their system requirements. In the private
sector, managed care techniques such as HMOs and PPOs have become significant
components of the healthcare system. In addition, the number of third-party
payor organizations has increased. At the same time, federal and state
governments, which are estimated to be responsible for approximately 30% of
physician claims for patient charges as a result of Medicare, Medicaid and other
programs, have imposed pricing and reimbursement regulations that significantly
complicate billing procedures and increase the information that a medical
practice or hospital must maintain with respect to their patients. Furthermore,
healthcare payors are increasingly transferring the economic risk of healthcare
delivery to providers by shifting from the traditional fee-for-service
reimbursement model to managed care reimbursement models, such as payment based
on capitation. Under capitation, providers are paid an annual fixed fee per
individual to deliver all healthcare services required by that individual. This
reimbursement model encourages healthcare providers to modify their emphasis
from not only treating illness, but also to maintaining wellness. The expansion
in the number of managed care and third-party payors organizations, as well as
additional governmental regulation and changes in reimbursement models, has
greatly increased the complexity of financial management and clinical methods
impacting physicians and hospitals.
Other factors also are increasing the demand for more comprehensive and
accurate information systems. The growing administrative burdens placed on
physician offices and hospitals have caused physicians to join together in group
practices and hospitals to merge with chains or other hospitals to share
administrative costs and achieve economies of scale. The Company believes that
the movement to group practices, hospital chains or alliances, and the
combination of hospitals and physicians into PHOs has accelerated the trend
toward automation as these larger scale organizations require the greater
efficiency and productivity of an automated system. Not only has there been a
movement toward group practices, more recently group practices have been
combining to form larger group practices. In addition, hospital are buying
and/or managing physicians practices and networking them into one common system.
The general increase in the size and complexity of healthcare provider
organizations has also resulted in a greater need for analysis of data and
production of timely management information reports which allow physicians and
other healthcare providers to reach informed conclusions regarding the quality
and appropriateness of various procedures and practices.
Technological advances have made more comprehensive, cost-effective
computer solutions available. While early systems concentrated principally on
patient billing and collection activities with clinical systems seen primarily
only in the mid-size to large hospital, systems are now available which record
and store clinical information, automate the processing of insurance and third-
party claims, and integrate the operations of physician practices with larger
healthcare organizations such as hospitals, HMOs and MSOs. The Company believes
that these various factors will cause medical practices and hospitals to seek
additional and more comprehensive computer-based solutions to their information
processing needs.
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:
20
<PAGE>
- - 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 acquisition,
transfer, and security of financial, clinical, and, messaging data over a
geographic area served by a health care delivery organization. In addition,
the Company will provide business services solutions 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 maintenance, 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 currently 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 telecommunications 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 telecommunications 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 horizontally 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 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.
SALES AND MARKETING PLANS
MARKETING
As a part of the Company restructuring project, Sales and Marketing plans
were realigned to be consistent with the Company strategy to focus on marketing
to larger healthcare organizations. Currently the Company has little
21
<PAGE>
presence or name recognition outside of those areas where direct sales
activities have resulted in concentrations of installed clients, principally in
the west and southeast. In order to promote market awareness of the Company's
products and services on a national basis, formal and consistent effort needs to
be conducted on a number of fronts. To develop and conduct this strategy the
Company will recruit and hire an experienced Director of Marketing who will
utilize a combination of inside and outside resources to accomplish the plan.
Each business unit will own dedicated resource(s) who will execute strategies
under the direction of the Director of Marketing with specialized skills such as
graphic design and video production obtained from outside the Company. The
Director of Marketing will also establish and manage programs with its strategic
partners. Various activities will be encompassed in the marketing effort to
increase its presence in the marketplace including: advertisements, magazine
articles, conventions, seminars, consultants, direct mail, newsletters, and
joint marketing with strategic partners. The purpose of these activities will be
threefold; increase market awareness of Wismer Martin products and services on a
national basis, develop feeder sources for new business, and retain existing
clients by involving them in Wismer Martin activities.
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 just 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 is presently conducting its technical due
diligence.
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 MSOs
- PHOs
- 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 services into the 1600 physician practices and 66
hospital client base. At the present 300 of the 1600 SM*RT Practice clients have
upgraded leaving 1300 or approximately $3,000,000 in upgrade revenues to be
obtained through continuing sales efforts for Version 5.0. The major physician
client base add-on opportunities 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.
22
<PAGE>
PRODUCTS AND SERVICES
PRACTICE MANAGEMENT SYSTEMS
SM*RT-Registered Trademark-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 depends upon a number
of factors, include 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 include 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
---------------------- ------------
FINANCIAL APPLICATIONS
Insurance Billing . . . . . . . . . . Process and prints insurance claim
forms. Tracks aging of all claims
and provides a rebill 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 define 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 include;
accounting, transactional,
clinical, recall, referral, trend
analysis, management, and
graphical.
ADVANCED FEATURES
23
<PAGE>
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
touchtone 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.
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 scalable 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:
24
<PAGE>
SM*RT NET MODULES CAPABILITIES
- ----------------- ------------
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, IPAs, PPOs, 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
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.
25
<PAGE>
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
------------------------- ------------
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. Includes master file
maintenance, transaction processing
and reporting.
General Ledger . . . . . . . . . . . . . Provides flexible financial
management including user defined
reporting based on current year,
current budget, and historical data
Patient Registration . . . . . . . . . . One process manages all types of
patient registrations, from pre-
admission to discharge.
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 Abstracting 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 RVUs or actual costs.
Provides cost accounting
information at multiple levels of
the organization.
Fixed Assets . . . . . . . . . . . . . . Complete property management
modules with automatic depreciation
calculation via ARSC or MARCS.
Maintains three tax books;
internal, state, and federal.
CLINICAL APPLICATIONS
26
<PAGE>
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 interactions,
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 hospital 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 complete order
explosion capability.
Medical Records. . . . . . . . . . . . . Complete departmental module
including patient index,
abstracting, DRG/Case mix
reporting, chart deficiency, and
chart locator.
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
development. The Company dedicates considerable resources to further enhance
its existing products and to create new products and technologies. For the nine
months ended March 31, 1995 and for the fiscal years ended June 30, 1994 and
1993, the Company expended $1,887,622, $1,265,464 and $678,972, respectively, on
product research, development and enhancements. Of the expended amounts,
$1,287,927, $1,018,308 and $652,357 related to enhancements which were
capitalized during the nine months ended March 31, 1995 and for the years ended
June 30, 1994 and 1993, respectively. The Company anticipates that future
product research and development will approximate 15% of product sales. Only
those enhancement expenses which qualify under SFAS No. 86 are capitalized. All
research and development costs incurred before technological feasibility of the
related product is established are expensed as incurred.
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
27
<PAGE>
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
nationwide. 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
installation 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
Statements)
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
installation of its HIN products for two hospitals on the east coast which will
link 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 period ended March 31, 1995.
28
<PAGE>
Not shown but to be included as an exhibit on page 29 of the printed prospectus
will be a map of the continental United States which shows a total by state of
the number of Wismer Martin practice management, hospital, hospital network, and
payor network clients by those categories. These categories are abbreviated and
shown in a legend as P=Practice Management, H=Hospital, PN=Payor Network, HN=
Hospital Network. The data presented for each state on the map is as follows:
Alaska P=54 Ohio P=9, H=1
Alabama P=31 Oklahoma P=21
Arkansas P=3 Oregon P=95, H=3
Arizona P=50, H=1 Pennsylvania P=19, H=1
California P=98, H=24 South Carolina P=6
Colorado P=2, H=2 South Dakota P=5
Connecticut P=1, H=2 Tennessee P=55, H=1, HN=12
Wash, D.C. P=2 Texas P=15, H=1
Florida P=35, H=4 Utah P=39
Georgia P=55 Virginia P=15
Hawaii P=2 Washington P=594, H=4, PN=285
Iowa P=1 West Virginia P=8
Idaho P=103, H=1 Wyoming P=1
Illinois P=11, H=3
Indiana P=10, H=8
Kansas P=1
Kentucky P=122, H=1, HN=12
Louisiana P=17, H=2
Maine P=1
Maryland P=9, H=1
Michigan P=7, H=4
Minnesota P=1, H=1
Missouri P=16, H=1
Mississippi P=20
Montana P=16, H=1
North Carolina P=10
New Jersey P=8
New Mexico P=8, H=1
Nevada P=3, H=2
New York P=1
29
<PAGE>
SUPPORT SERVICES
As of May 31, 1995, the Company had approximately 60 employees providing
hardware and software maintenance, systems installation, training and support.
Support teams assist customers throughout the course of their relationship with
the Company, providing services which include installation planning,
installation, ongoing training and support.
The Company provides software maintenance to over 90% of its customers and
hardware maintenance to more than 20% of its customers under software and
hardware maintenance contracts. These services include software enhancements,
phone support, hardware repair, and field support.
The Company believes that support is critical to the successful
installation and ongoing operation of its systems and it has dedicated
substantial resources to customer support. The Company's hotline telephone
services are available seven days per week. Hotline services personnel answer
general questions about the system and solve operational difficulties. In-house
technical and research and development staff support the hotline staff on
operational questions which are more complex and require additional technical
expertise.
HARDWARE AND PERIPHERALS
As part of its complete product offerings, the Company sell computers,
terminals, printers, modems and other peripherals. Many clients require
additional peripherals or other upgrades to their hardware configurations as
their needs grow. The ADDvantage system operates on the IBM AS/400 minicomputer
and the SM*RT product lines operate on PC technology utilizing Intel processors.
The Company maintains VAR relationships with IBM and Digital Equipment
Corporation for resales of their equipment. The Company typically purchases
hardware under agreements which expire annually. These agreements are typically
renewed in the ordinary course of business and the Company has no reason to
believe that the agreements will not be renewed. The Company believes that its
relationships with its vendors are good. The Company generally seeks to
maintain a minimum amount of inventory and places order with its vendors upon
receipt of a firm order from a client. The Company is currently seeking to
outsource all sales, installation, and support of hardware sold with its
software offerings to its vendor partners.
FORMS AND SUPPLIES
The Company currently maintains relationships with two forms companies,
Printed Systems, Inc. and Data Documents, Inc. which provide standard and custom
forms to our clients. In 1994, sales of forms and supplies represented
approximately 5% of revenues for the Company. The Company plans to outsource
the sales of forms and supplies to our outside partners including the billing
process in the next few months.
ELECTRONIC CLAIMS CLEARING HOUSE
The Company currently maintains a relationship with Equifax for electronic
transmission and clearing of insurance claims for our clients on a national
basis. The Company receives a percentage of the revenues collected by Equifax
which were approximately 2% of total revenues.
PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies primarily on a
combination of copyrights and trade secret laws to establish its proprietary
interest and maintain the confidentiality of its software products.
The Company has copyrighted its software programs and has a trademark with
respect to the ADDvantage and "SM*RT" symbols used in the promotion and
marketing of its systems. The Company has no patents or patents pending, nor
has it filed any patent applications with respect to its practice management
systems. Based upon management's own assessment, the Company does not believe
it is in violation of any existing patents, patents pending or copyrights with
respect to its systems.
The Company retains ownership rights to all software it develops. All
software is licensed to users and provided in object code pursuant to executed
license agreements. These agreements contain restrictions on disclosure and
transferability.
30
<PAGE>
COMPETITION
The market for the Company's systems and services is highly competitive.
The Company believes that the principal competitive factors in this market are
ongoing system service and support, flexibility, price, ease-of-use and
compatibility of the system, the potential for product enhancements, customer
satisfaction, vendor reputation and financial stability. The industry is
fragmented and includes numerous competitors, none of which the Company believes
dominates the overall markets for the Company's product and services offerings.
The Company believes its principal competitive advantages are the features and
capabilities of its products and services, the high level of customer support
and its pricing methods.
The Company's principal competitors include other practice management
companies, hospital information systems companies, and HIN companies where
price competition is a significant factor. In addition, the Company believes a
significant and growing factor are those competitors which have greater
financial, development, technical, marketing and sales resources than the
Company. These larger competitors have a distinct advantage in pursuing the
larger contracts which are resulting as a part of the ongoing consolidation of
healthcare providers. In addition, as the market for the Company's product and
services develops, additional competitors may enter the market and competition
will intensify. There can be no assurance that the Company will be able to
compete successfully with its competitors in the future. See "Risk Factors --
Competition".
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 May 31, 1995, the Company and its subsidiary had 120 employees, of
whom 33 were in software design and development, 14 in marketing and sales, 45
in customer support, 15 in installation, and 13 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.
31
<PAGE>
PROPERTIES
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:
Monthly Lease
Location Rental Expiration Date
-------- ------ ---------------
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.
Mountlake Terrace, Washington $ 157(2) June 30, 1995
3030 S.W. Moody
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
(1) The monthly lease amount is shown net of sublease income.
(2) This lease will not be renewed.
Management believes that these existing facilities are adequate for present
and future operating needs.
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.
32
<PAGE>
MANAGEMENT
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.
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
33
<PAGE>
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.
OTHER SIGNIFICANT EMPLOYEES
Name Age Position and Term Served
- ---- --- ------------------------
Richard J. Williams 38 Vice President, Practice Management
since April 1, 1995. Employed by the
Company since September 1990 in a
variety of roles including Director of
Client Sales, Manager of Sales Support,
and Support Representative.
Susan Orchanian 29 Vice President, Hospital Information
Systems since April 1, 1995. Ms.
Orchanian previously served as the
Director of Client Services for
Integrated Health Systems and as the
Director of Product Management from
February 1992 until March of 1995. Prior
to that date, Ms. Orchanian was employed
by Meditech, Inc. as an Applications
Consultant from 1988 until 1992.
Gary J. Peterson 38 Vice President, HIN Products since
March 15, 1995. Employed by the Company
since October 1991 as Product Manager of
HIN Products. Prior to his employment at
Wismer, Mr. Peterson served as Director
of Programming and Development for
Cascade Software from 1986 until 1991.
34
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents information regarding the aggregate compensation
for the fiscal years ended June 30, 1993 and 1994 paid or accrued for (i) the
Chief Executive Officer of the Company and (ii) the four other most highly paid
executive officers of the Company. Projected compensation for the current
fiscal year is included.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Name and Principal Fiscal Annual Compensation Long Term
Position Year Compensation
Ended Salary Bonus Other Awards Options
June 30, Compensation
- -----------------------------------------------------------------------------------------------------------------
<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 1994 $ 46,600 $ -0- $ -0- -0-
Operating Officer 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
Vice President 1994 $ 36,890 $ -0- $ -0- -0-
Chief Financial Officer 1993 $ -0- $ -0- $ -0- -0-
- -----------------------------------------------------------------------------------------------------------------
Stanley T. Hatch:(5) 1995 $ -0- $ -0- $ -0- -0-
1994 $ 73,164 $108,900 (9)$79,200 -0-
1993 $ 70,350 $ -0- $ -0- -0-
- -----------------------------------------------------------------------------------------------------------------
Robert M. Wilson:(6) 1995 $ -0- $ -0- $ -0- -0-
1994 $ 65,520 $ 62,000 $ -0- -0-
1993 $ 63,000 $ -0- $ -0- -0-
- -----------------------------------------------------------------------------------------------------------------
Beverly J. Hatch:(7) 1995 $ -0- $ -0- -0- -0-
1994 $ 56,784 $ 69,000 (9)$ 6,600 -0-
1993 $ 54,600 $ -0- $ -0- -0-
- -----------------------------------------------------------------------------------------------------------------
Michael J. Magliaro, Jr.:(8) 1995 $ -0- $ -0- $ -0- -0-
1994 $ 74,880 $ 49,400 $ -0- -0-
1993 $ 42,000 $ -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. The compensation for Mr. Holden for 1995
represents his actual projected salary for the entire fiscal year.
(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.
The compensation for Mr. Perez for 1995 represents his actual projected
salary for the entire fiscal year.
35
<PAGE>
(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. The compensation for Mr. Campbell for
1995 represents his actual projected salary for the entire fiscal year.
(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. The compensation for Mr. Willford for 1995 represents his
actual projected salary for the entire fiscal year.
(5) Mr. Hatch is no longer an executive officer, director or employee of the
Company. Mr. Hatch resigned as a director on January 4, 1995. Mr. Hatch
was an executive officer and employee of the Company until March 15, 1995.
(6) Mr. Wilson is no longer an executive officer of the Company. Mr. Wilson
was an executive officer and employee of the Company until May 4, 1995.
(7) Ms. Hatch is no longer an executive officer or employee of the Company.
Ms. Hatch was an executive officer and employee of the Company until March
15, 1995. Ms. Hatch is the spouse of Mr. Hatch.
(8) Mr. Magliaro is no longer an executive officer or employee of the Company.
Mr. Magliaro was employed by the Company from December 1, 1992 until March
15, 1995.
(9) Represents the amount of compensation attributable to the exercise of stock
options. The amount represents the difference between the fair market
value of the common stock and the exercise price paid for the common stock.
</TABLE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted during the fiscal year ended June 30, 1994.
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 1994,
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, 1994. Options granted to Robert
M. Wilson and Michael J. Magliaro, Jr. expired following their termination in
1995 and are not included.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Name Shares Acquired on Value Number of Unexercised Value of Unexercised
Exercise (#) Realized($) Options at Fiscal Year In-the-Money
End (#) Options at Fiscal
Year End ($) Exer-
cisable/Unexercisable
<S> <C> <C> <C> <C>
Stanley T. Hatch 240,000 $360,000 480,000 / -0- $720,000/ $ -0-
- ----------------------------------------------------------------------------------------------------------------------------------
Beverly J. Hatch 20,000 $ 30,000 80,000 / -0- $100,000/ $ -0-
- ----------------------------------------------------------------------------------------------------------------------------------
Steven G. Anderson 33,333 $ 50,000 83,334 / -0- $125,001/ $ -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.
36
<PAGE>
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.
CERTAIN TRANSACTIONS
1994 CONVERTIBLE SUBORDINATED DEBENTURES.
On February 10, 1994, the Company acquired all of the outstanding shares of
Common Stock of Integrated Health Systems, Inc., a California corporation
("IHS"). The business of IHS has been described in the section of this
prospectus entitled "Business" and is included in the discussion set forth in
"Management's Discussion and Analysis." The acquisition price was comprised
entirely of the issuance by the Company of Convertible Subordinated Debentures
having a face value of Two Million Five Hundred Thousand Dollars ($2,500,000).
The amount of the consideration for the transaction was determined by
negotiation between the parties. The Debentures are due January 31, 1999, with
interest accruing at the rate of seven percent (7%) per annum. The holder of
the Debenture has a right of conversion. See "Conversion of Subordinated
Convertible Debentures."
500 shares of IHS were issued and outstanding at the time of the transaction.
Ronald L. Holden, a director and now Chief Executive Officer of the Company
owned 377 shares of record and beneficially. The remaining 123 shares were
owned of record by him but were subject to option granted by him to key
employees of IHS. Mr. Holden received a Debenture having a face amount of One
Million Eight Hundred Eighty-Five Thousand Dollars ($1,885,000) in exchange for
the 377 shares. Mr. John F. Perez, a director and now President of the Company,
following the exercise of the option issued to him by Mr. Holden for 50 shares
received a Debenture in the face amount of Two Hundred Fifty Thousand Dollars
($250,000). Mr. Douglas A. Willford, now the Executive Vice President and Chief
Financial Officer of the Company, following the exercise of the option to
purchase 12 shares issued to him by Mr. Holden, was issued a Debenture in the
amount of Sixty Thousand Dollars ($60,000). The remaining outstanding shares of
Common Stock of IHS were subject to options issued by Mr. Holden to persons who
are not directors or executive officers of the Company. The total amount of
Debentures issued by the Company to those persons is Three Hundred Five Thousand
Dollars ($305,000).
37
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 31, 1995, and as
adjusted to reflect the sale of shares offered hereby (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 Percent Percent
Name and Address Beneficially Owned Before Offering After Offering
---------------- ------------------ --------------- --------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Ronald Holden 6,090,700(1) 53.64%(1) 45.60%(1)
N. 12828 Newport Highway
Mead, WA 99021
Clarence H. Barnes, Ph.D. 27,000(2) Less than 1% Less than 1%
W. 614 17th Street
Spokane, Washington 99203
Glen E. Martin 368,333(3) 3.62%(3) 3.02%(3)
West 1406 Elmwood Court
Spokane, Washington 99218
Larry R. Eidemiller, M.D. 5,000(4) Less than 1% Less than 1%
5051 S.W. Downs View Court
Portland, Oregon 97221
John Perez 400,000(5) 3.90%(5) 3.27%(5)
4275 Executive Square, Suite 550
LaJolla, CA 92037
William E. Campbell III 201,000(6) 2.00%(6) 1.67%(6)
1336 98th Ave. N.E.
Bellevue, Washington 98004
Douglas A. Willford 148,000(7) 1.48%(7) 1.23%(7)
5015 Nighthawk Way
Oceanside, California 92056
All executive officers and directors 7,240,033 58.14% 50.14%
as a group
OTHER HOLDERS OF MORE THAN FIVE PERCENT
Stanley T. Hatch 958,500 9.73% 8.09%
North 1619 Westpoint Road
Spokane, Washington 99201
<FN>
(1) Mr. Holden received a debenture in the amount of $1,885,000 on February 10,
1994. The debenture can be converted to common stock at a conversion price
of $1.25 per share, after this offering. If the total debenture were
converted, Mr. Holden would be entitled to 1,508,000 shares of common stock
in addition to his current holdings of 4,582,700 shares of common stock.
The shares reflected above include the 4,582,700 shares currently held plus
the 1,508,000 shares for which Mr. Holden is deemed to be the beneficial
owner. The percentages reflect the percentage ownership based upon the
total outstanding stock at March 31, 1995 of 9,847,625 plus the 1,508,000
shares assumed to be converted by Mr. Holden.
38
<PAGE>
(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
22,000 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 March 31, 1995 of 9,847,625 plus the 5,000
shares assumed to be exercised by Dr. Barnes and yields a percentage of
less than one percent.
(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
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 March 31, 1995 of 9,847,625 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 March 31, 1995 of 9,847,625 plus the 5,000 shares
assumed to be exercised by Dr. Eidemiller and yields a percentage less than
one percent.
(5) Mr. Perez received a debenture in the amount of $250,000 on February 10,
1994. The debenture can be converted to common stock at a conversion price
of $1.25 per share, after this offering. If the total debenture were
converted, Mr. Perez would be entitled to 200,000 shares of common stock.
Mr. Perez also holds current stock options that allow him to purchase
200,000 additional shares of the Company's common stock. The shares
reflected above include the 400,000 shares for which Mr. Perez is deemed to
be the beneficial owner for the assumed conversion of the debenture and the
exercise of Mr. Perez's stock options. Mr. Perez's ownership is based upon
the total outstanding stock at March 31, 1995 of 9,847,625 plus the 400,000
shares assumed to be converted 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. If the stock
option were exercised, Mr. Campbell would be entitled to 200,000 shares of
common stock in addition to his current holdings of 1,000 shares. The
shares reflected above include the 1,000 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 March
31, 1995 of 9,847,625 plus the 201,000 shares assumed to be exercised by
Mr. Campbell.
(7) Mr. Willford received a debenture in the amount of $60,000 on February 10,
1994. The debenture can be converted to common stock at a conversion price
of $1.25 per share, after this offering. If the total debenture were
converted, Mr. Willford would be entitled to 48,000 shares of common stock.
Mr. Willford also holds current stock options that allow him to purchase
100,000 additional shares of the Company's common stock. The shares
reflected above include the 148,000 shares for which Mr. Willford is deemed
to be the beneficial owner for the assumed conversion of the debenture and
the exercise of Mr. Willford's stock options. Mr. Willford's ownership is
based upon the total outstanding stock at March 31, 1995 of 9,847,625 plus
the 148,000 shares assumed to be converted by Mr. Willford.
</TABLE>
39
<PAGE>
CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES
In August of 1993 and February of 1994, the Company issued convertible
subordinated debentures in the amounts of $500,000 and $2,500,000 respectively.
The 1993 debentures were issued for cash and the 1994 debentures were issued for
shares of Integrated Health Systems, Inc. The 1993 debentures are due on August
31, 1998 and the principal amount bears an interest rate of seven percent. The
holders of these debentures include Glen E. Martin a director of the Company.
The 1993 debentures are convertible into the Company's Common Stock at a
conversion price of $.60. Although the terms of the debentures include an anti-
dilution provision, that provision will not be triggered by this offering.
The principal amount of the 1994 debentures is due on January 31, 1999
and bears an interest rate of seven percent per annum. The holders of these
debentures include Ronald L. Holden, John F. Perez and Douglas A. Willford. See
"Security Ownership of Certain Beneficial Owners and Management." The 1994
debentures are convertible into the Company's Common Stock at a conversion price
of $3.23 per share which would entitle the 1994 debenture holders to convert
their 1994 debentures for an aggregate of 774,000 shares of Common Stock.
However, the 1994 debentures contain an anti-dilution provision which provides
that if the Company issues or sells Common Stock in excess of $100,000 for a per
share price that is less than the conversion price in effect immediately prior
to the time of such issue or sale, then the conversion price shall be adjusted
downwards to a new conversion price which is equal to the average per common
share sale price of such sale. Since this offering will be at a price per share
of $1.25 which is less than the initial $3.23 conversion price of the 1994
debentures, the anti-dilution provision will be triggered by this offering with
the following result: the new conversion price of the 1994 debentures will be
$1.25 which will entitle the 1994 debenture holders to convert their 1994
debentures into 2,000,000 shares of Common Stock. The triggering of this anti-
dilution provision will have a dilutive effect on the existing shareholders of
the Company and the purchasers of Common Stock in this offering. See
"Dilution." In addition, because of this anti-dilution provision, Ronald L.
Holden, John F. Perez and Douglas A. Willford would receive more shares upon
conversion than if conversion had occurred at the initially stated conversion
price. See "Security Ownership of Certain Beneficial Owners and Management."
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $.001 per share. The following summary description
of the Common Stock is qualified in its entirety by reference to the Company's
Articles of Incorporation, as amended (the "Articles") and Bylaws, copies of
which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part.
As of February 1, 1995, there were 9,847,625 shares of Common Stock
outstanding, held of record by 287 shareholders. Holders of Common Stock are
entitled to one vote per share on all matters submitted to a vote of
shareholders, to the extent a vote of shareholders is required or permitted
under the Washington Business Corporation Act. Holders of Common Stock are not
entitled to cumulative voting in the election of directors. Holders of Common
Stock are entitled to receive ratably such dividends as may be declared by the
Board of Directors out of funds legally available therefor. In the event of the
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. All the outstanding shares of Common Stock are,
and all shares of Common Stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
ANTI-TAKEOVER PROVISIONS
The Company is subject to the Washington Business Corporation Act, which
contains provisions that have the effect of discouraging non-negotiated takeover
attempts. Section 23B.19 of the Act (Chapter 23B.19 RCW) generally prohibits
any "significant business transaction" within five years of the date a person
acquired ten percent or more of the outstanding voting shares of a company,
unless the transaction first receives the approval of a majority of the
disinterested directors prior to the time the ten percent ownership threshold is
crossed. Also, pursuant to Section 23B.17 of the Act, Washington imposes a
"fair price" restriction on corporations with
40
<PAGE>
300 or more record holders of its shares. This statute provides, subject to
certain exceptions, that specified change-of-control transactions between a
company subject to its provisions (which include the Company) and an "interested
shareholder" (defined as a person or affiliated group beneficially owning twenty
percent or more of the Company's outstanding voting stock) will be prohibited
unless a majority of disinterested directors determine the price offered by the
interested shareholder to be fair, or unless two-thirds of the shareholders of
each voting group entitled to vote separately on the transaction (not including
the interested shareholder) approve such change-of-control transaction.
The Company's articles of incorporation and bylaws do not contain any
similar provisions which may have the effect of discouraging non-negotiated
takeover attempts by delaying or preventing changes-in-control of management of
the Company.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Company's Articles contain provisions indemnifying directors and
officers of the Company to the fullest extent permitted by law. The Company has
also entered into indemnification agreements pursuant to which it has agreed,
among other things, to advance funds to a director for the payment of expenses
incurred in litigation. In addition, the Articles contain provisions limiting
the personal liability of directors to the Company or its shareholders to the
fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing provisions, the
Company is aware that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock is
TranSecurities International, Inc., 2510 N. Pines, Spokane, Washington 99206-
7624.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been only a limited public market for the
Common Stock. Future sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices.
Upon completion of this Offering for the maximum number of shares, the
Company will have 11,847,625 shares of Common Stock outstanding (assuming no
exercise after March 31, 1995 of any outstanding options granted under the
Company's stock option plan, no exercise after March 31, 1995 of any outstanding
warrants granted to the Company's non-employee directors, and no conversion
after the completion of the Offering of any remaining outstanding Debentures).
Of these shares, the 2,000,000 shares sold in this Offering will be freely
tradable without restriction, except for any shares purchased by an existing
"affiliate" of the Company or by an individual or entity subject to a
contractual restriction on resale. The number of shares eligible for immediate
sale in the public market on the date of this Offering without restriction
cannot be determined.
Restricted securities and securities held by affiliates may be sold only if
registered under the Securities Act of 1933 or if they qualify for an exemption,
including an exemption pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), who has beneficially owned restricted securities
within the meaning of Rule 144 for at least two years, including the holding
period of any prior owner except an affiliate, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i) 1%
of the then-outstanding shares of Common Stock and (ii) the average weekly
trading volume of the Common Stock in the over-the-counter market during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Commission. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days preceding a sale, and who owns restricted securities
that were purchased from the Company (or any affiliate) at least three years
previously, will be entitled to sell such shares under Rule 144(k) without
regard to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.
DETERMINATION OF OFFERING PRICE
The public offering price for the shares of Common Stock being offered has
been determined by the Board of Directors. Prior to this offering, however,
there has been only a limited public market for the Common Stock of the Company.
The Board of Directors considered the market price for the Common Stock during
the first five months of 1995 prevailing conditions in the securities markets,
the Company's position in the industry, and the Company's current financial
position.
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby and certain
legal matters relating to the Offering have been passed upon for the Company by
Paine, Hamblen, Coffin, Brooke & Miller, Spokane, Washington.
EXPERTS
The consolidated financial statements of the Company and subsidiary as of
March 31, 1995 and June 30, 1994 and for the nine months ended March 31, 1995
and years ended June 30, 1994 and 1993 included in this Prospectus and in the
Registration Statement, have been audited by BDO Seidman, independent certified
public accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report,
given upon the authority of said firm as experts in accounting and auditing.
CHANGE OF ACCOUNTANTS:
Coopers & Lybrand, L.L.P., was engaged to perform the audit of the
Company's financial statements for the fiscal years ended June 30, 1988 and each
fiscal year thereafter, including the fiscal year ended June 30, 1994. Without
prior notice to the Company, Coopers & Lybrand, L.L.P. informed the Company on
March 28,
42
<PAGE>
1995 that the client-auditor relationship between the Company and their firm had
ceased as of that date and that the Company would not be permitted to use the
audit opinion issued by Coopers & Lybrand, L.L.P. for the fiscal years ended
June 30, 1993 and June 30, 1994. 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 & Lybrand, L.L.P 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
& Lybrand, L.L.P. concerning any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures. Coopers,
however, advised the Company on April 10, 1995 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
admitted 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 a 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. 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 as its independent
certified public accountants. No discussions regarding the opinion of BDO
Seidman on accounting matters or financial reporting issues occurred prior to
their engagement as the Company's independent certified public accountants.
43
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants . . . . . . . . . . F-2
Consolidated Balance Sheets at March 31, 1995 and June 30, 1994. . . . F-3
Consolidated Statements of Operations for the nine months ended
March 31, 1995 and for the years ended June 30, 1994 and 1993. . . . . F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
for the nine months ended March 31, 1995 and for the years ended
June 30, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the nine months ended
March 31, 1995 and for the Years Ended June 30, 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 March 31, 1995 and June 30, 1994, and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and cash flows for the nine month period ended March 31, 1995 and the years
ended June 30, 1994 and 1993. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Wismer Martin,
Inc. as of March 31, 1995 and June 30, 1994, and the results of their operations
and their cash flows for the nine month period ended March 31, 1995 and the
years ended June 30, 1994 and 1993 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.
/s/
-----------------------------
BDO Seidman
Spokane, Washington
June 2, 1995
F-2
<PAGE>
WISMER*MARTIN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1995 June 30, 1994
---------------- ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 104,081 $ 588,349
Trade receivables, net of allowance for doubtful
accounts of $278,074 and $176,362 (Note 5) 1,732,537 2,807,368
Unbilled costs and expenses 190,251 166,354
Inventories (Note 3) 267,370 625,018
Prepaids and other assets 186,988 199,152
---------------- ---------------
Total current assets 2,481,227 4,386,241
Property, plant and equipment, net (Notes 4, 5 and 6) 1,948,528 1,962,445
Software development costs, net of accumulated amortization
of $1,338,617 and $878,999 2,500,469 1,672,161
Other assets, net of accumulated amortization
of $171,468 and $75,836 184,606 209,282
Deferred income taxes (Note 8) - 248,044
---------------- ---------------
Total assets $ 7,114,830 $ 8,478,173
---------------- ---------------
---------------- ---------------
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
Notes payable to bank (Note 5) $ 958,949 $ -
Accounts payable 1,082,117 1,097,500
Accrued wages and related taxes 341,358 524,455
Other accrued liabilities 151,268 330,449
Deferred revenue 2,318,510 2,231,801
Long-term debt, due within one year (Note 6) 62,234 64,465
Obligations under capital leases, due within one year (Note 7) 29,305 20,164
---------------- ---------------
Total current liabilities 4,943,741 4,268,834
Other liabilities 93,201 138,740
Long-term debt, due after one year (Note 6) 900,746 949,617
Convertible subordinated debentures (Note 9) 3,000,000 3,000,000
Obligations under capital leases, due after one year (Note 7) 75,721 69,625
Deferred income taxes (Note 8) - 589,885
---------------- ---------------
Total liabilities 9,013,409 9,016,701
Capital deficit: (Notes 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) (578,928) 902,873
---------------- ---------------
Capital deficit (1,898,579) (538,528)
---------------- ---------------
Total liabilities and capital deficit $ 7,114,830 $ 8,478,173
---------------- ---------------
---------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WISMER*MARTIN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Fiscal Years Ended
Ended June 30,
March 31, ----------------------------
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales:
Software license fees $ 2,149,057 $ 4,429,060 2,385,846
Equipment, software and supplies sales 1,920,152 2,829,889 2,967,502
Software and hardware maintenance contracts 2,879,754 2,979,752 2,586,612
Service revenue 2,154,972 2,428,032 864,913
Discounts (1,273,462) (1,271,842) (920,437)
-------------- -------------- --------------
Net sales 7,830,473 11,394,891 7,884,436
-------------- -------------- --------------
Operating expenses:
Cost of software license fees 459,619 424,885 327,028
Cost of equipment, software and supplies sold 1,401,011 2,542,421 2,516,856
Cost of support and operations 2,197,585 2,489,069 1,817,939
Selling and marketing 1,895,603 1,762,458 1,162,546
Product research, development and enhancements 1,887,622 1,265,464 678,972
Less: amount capitalized related to enhancements (1,287,927) (1,018,308) (652,357)
General and administration 2,819,313 2,762,492 1,881,909
-------------- -------------- --------------
Total operating expense 9,372,826 10,228,481 7,732,893
-------------- -------------- --------------
Operating income (loss) (1,542,353) 1,166,410 151,543
Other income (expense):
Interest income 20,295 26,332 35,140
Interest expense (301,584) (192,407) (147,339)
-------------- -------------- --------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (1,823,642) 1,000,335 39,344
Income tax expense (benefit) (Note 8) (341,841) 264,307 12,191
-------------- -------------- --------------
Income (loss) before cumulative
effect of change in accounting principle (1,481,801) 736,028 27,153
Cumulative effect of change in accounting principle
(Note 8) - 27,479 -
-------------- -------------- --------------
Net income (loss) $ (1,481,801) $ 708,549 $ 27,153
-------------- -------------- --------------
-------------- -------------- --------------
Net income (loss) per share:
Income (loss) before cumulative
effect of change in accounting principle $ (0.15) $ 0.07 Nil
Cumulative effect of change in accounting principle - Nil -
-------------- -------------- --------------
Net income (loss) per share $ (0.15) $ 0.07 Nil
-------------- -------------- --------------
-------------- -------------- --------------
Weighted average common shares outstanding 9,685,500 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 NINE MONTHS ENDED MARCH 31, 1995 AND THE YEARS ENDED
JUNE 30, 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 27,153 27,153
---------- ---------- ------------- ---------------- -------------- -------------
Balances at June 30, 1993 9,055,960 9,056 990,668 194,324 1,194,048
Issuances of common stock for
exercise of stock options after tax effect 306,665 307 91,876 92,183
Tax benefit associated with the exercise of
non-qualified stock options 14,850 14,850
Excess purchase price of acquired subsidiary (2,533,308) (2,533,308)
Net income 708,549 708,549
---------- ---------- ------------- ---------------- -------------- -------------
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 (1,481,801) (1,481,801)
---------- ---------- ------------- ---------------- -------------- -------------
Balances at March 31, 1995 9,847,625 $ 9,848 $ 1,203,809 $ (2,533,308) $ (578,928) $ (1,898,579)
---------- ---------- ------------- ---------------- -------------- -------------
---------- ---------- ------------- ---------------- -------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WISMER*MARTIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
Nine Months Ended --------------------------------
March 31, 1995 1994 1993
------------------- --------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,481,801) $ 708,549 $ 27,153
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 927,624 827,556 614,301
Provision for bad debts 254,656 92,807 391,293
Loss on property, plant and equipment disposal - 19,090 -
Cumulative effect of accounting change - 27,479 -
Deferred income tax benefit (341,841) 229,286 27,836
Change in operating assets and liabilities, net of acquired business:
Trade receivables 820,175 (836,366) (183,715)
Unbilled costs and expenses (23,897) 182,707 -
Inventories 357,648 (314,319) 88,033
Prepaids and other assets 12,164 (44,690) (33,222)
Income tax receivable - 32,804 -
Accounts payable (15,383) 305,070 219,284
Accrued wages and related taxes (183,097) 172,857 (125,930)
Other accrued expenses (179,181) 140,723 (99,744)
Income taxes payable - (965) (71,000)
Deposits - - -
Deferred revenue 86,709 (65,460) 179,773
Other liabilities (45,539) (16,150) -
------------------- --------------- ----------------
Net cash provided by operating activities 188,237 1,460,978 1,034,062
------------------- --------------- ----------------
Cash flows from investing activities:
Cash acquired from purchase of subsidiary - 374,805 -
Proceeds from disposition of property, plant and equipment - 2,500 -
Purchase of property, plant and equipment (324,752) (688,402) (144,971)
Additions to software development costs (1,287,926) (1,018,308) (652,357)
Purchase of other assets (70,956) (22,099) -
Payments received on notes receivable - 6,581 -
------------------- --------------- ----------------
Net cash used in investing activities (1,683,634) (1,344,923) (797,328)
------------------- --------------- ----------------
Cash flows from financing activities
Payment of debt obligations (51,102) (31,419) (28,353)
Proceeds from issuance of common stock 121,750 92,183 4,167
Proceeds from long term debt - 191,100 -
Proceeds from subordinated debentures - 500,000 -
Payments under capital lease obligations (18,468) (9,959) (16,944)
Net proceeds (payments) on note payable to bank 958,949 (357,327) (169,361)
------------------- --------------- ----------------
Net cash provided (used) by financing activities 1,011,129 384,578 (210,491)
------------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (484,268) 500,633 26,243
Cash and cash equivalents at beginning of period 588,349 87,716 61,473
------------------- --------------- ----------------
Cash and cash equivalents at end of period $ 104,081 $ 588,349 $ 87,716
------------------- --------------- ----------------
------------------- --------------- ----------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 351,078 $ 97,380 $ 127,037
------------------- --------------- ----------------
------------------- --------------- ----------------
Income taxes $ - $ 33,000 $ 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 from 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 operations were recorded beginning on the date of combination.
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 February 10, 1994.
The following unaudited pro forma summary presents the consolidated results
of operations of the Company as if the acquisition had occurred at the
beginning of the fiscal year:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Net sales $14,397,250 $12,658,839
Net income (loss) 571,575 (2,446,544)
Net income (loss) per share $ .06 $ (.27)
</TABLE>
The pro forma results are not necessarily indicative of ongoing operations
of the Company.
F-7
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CASH EQUIVALENTS
Investments with remaining maturities at purchase of three months or less
are considered to be cash equivalents for purposes of the statement of cash
flows.
CONCENTRATION OF CREDIT RISK
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. Trade receivables are primarily from
customers in the health care industry. For the nine month period ended
March 31, 1995 and the year ended June 30, 1994, the Company had sales of
$1,720,486 and $1,978,386 to one customer. At March 31, 1995 and June 30,
1994 , $841,806 and $855,000 of these respective amounts are included in
accounts receivable.
INVENTORIES
Inventories are carried at the lower of first-in, first-out (FIFO) cost or
net realizable value.
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. 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. For the nine month period ended
March 31, 1995 and the years ended June 30, 1994 and 1993, amortization of
software development costs was $459,618, $424,885 and $327,028.
F-8
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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
The Company recognizes revenue from the sale of internally developed
software when products are delivered to the customer. The Company's
revenue recognition policy is in compliance with the provisions of the
American Institute of Certified Public Accountants' Statement of Position
91-1, "Software Revenue Recognition".
Installation revenues on long-term installation 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.
Certain of the Company's contracts, including service contracts, allow for
billings and payments to be made to the Company in advance of the
commencement or completion of work. Such amounts are classified as
"Deferred revenue" in the accompanying balance sheets, and are recognized
as income when earned.
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 software support and hardware maintenance contracts is
recognized on a pro rata basis over the period of the maintenance
agreement. Revenue from the granting of exclusivity arrangements is
recognized over the period covered by the agreement. Services and other
revenues are recognized pro rata over the period in which the service is to
be provided.
The Company does not separately account for the incremental costs and
expenses associated with software support and hardware maintenance
contracts. These incremental costs, which are not significant, are
included in operating expenses.
F-9
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
1. COMPANY ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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. At March 31, 1995, the Company had options outstanding to purchase
270,001, shares of its common stock, which were considered dilutive.
RECLASSIFICATIONS
Certain consolidated financial statement amounts for 1994 and 1993 have
been reclassified to conform to the 1995 presentation. These
reclassifications had no effect on the net income or retained earnings as
previously reported.
2. FINANCIAL CONDITION AND LIQUIDITY
As shown in the accompanying consolidated financial statements at March 31,
1995, the Company has a capital deficit of $1.9 million, negative working
capital of $2.5 million and incurred a significant net loss of $1.5 million
from operations for the nine month period then ended. Additionally, the
Company has modified its credit agreement with the bank 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. 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 proposed stock offering
(See Note 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
F-10
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
2. FINANCIAL CONDITION AND LIQUIDITY
Company can return to profitability. Should future markets for the
Company's product not develop as projected, management intends to implement
further cost reduction measures, seek external funding from strategic
alliance partners and further leverage the Company's asset base which
includes its current office facilities. 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 March 31, 1995 and June 30, 1994 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Hardware held for sale $240,941 $591,298
Software 12,859 20,222
Supplies 13,570 13,498
-------- --------
$267,370 $625,018
-------- --------
-------- --------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at March 31, 1995 and June 30, 1994 is
summarized as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Building and building improvements $ 649,551 $ 649,551
Furniture and fixtures 536,536 497,177
Computer systems and related equipment 2,298,686 1,959,905
Land and site improvements 248,020 248,020
Leasehold improvements 57,920 51,307
Equipment under capital lease 146,250 172,546
---------- ----------
3,936,963 3,578,506
Accumulated depreciation and amortization (1,988,435) (1,616,061)
---------- ----------
$1,948,528 $1,962,445
---------- ----------
---------- ----------
</TABLE>
Accumulated amortization of the telephone and computer equipment under
capital lease amounted to $45,368 and $80,372 at March 31, 1995 and
June 30, 1994.
F-11
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
5. NOTES PAYABLE TO BANK:
Pursuant to the terms of an amended credit agreement with Seattle First
National Bank (Seafirst), the Company had a line of credit with a maximum
availability of $1,200,000 at March 31, 1995. Advances received under the
line of credit, which totaled $851,049 at March 31, 1995 bear interest at
the bank's prime rate plus 2% (11% at March 31, 1995) and are
collateralized by the Company's accounts receivable and inventories. The
credit agreement contains various restrictive covenants. At March 31,
1995, the Company was not in compliance with the minimum tangible net worth
requirements, the debt to equity ratios, and the minimum trading capital
requirements and ratios.
On April 11, 1995, the Company entered into a modification of the amended
credit agreement. Under the terms of the amended credit agreement are as
follows: (1) $500,000 of the amount outstanding was converted to a term
loan due June 30, 1995 (which was paid by the Company on April 21, 1995),
and (2) the maximum availability under the credit agreement was reduced to
$500,000 ($347,931 outstanding at May 31, 1995). This commitment expires
on June 30, 1996. The modification agreement also provided that the
interest rate for advances was changed to the bank's prime rate plus 3%,
compliance with the financial covenants was waived until August 31, 1995,
and the line of credit agreement was further collateralized by the
Company's office building. In addition, the modification requires the
Company to raise cash of $1,000,000 and convert $1,000,000 of convertible
subordinated debt to equity by August 31, 1995 (See Note 14).
Also included in notes payable at March 31, 1995 is $107,900 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
March 31, 1995) and is secured by accounts receivable. The note matures in
October, 1995.
6. LONG-TERM DEBT:
Long-term debt at March 31, 1995 and June 30, 1994 is summarized as
follows:
<TABLE>
<CAPTION>
March 31, June 30,
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 March 31, 1995), maturing in November, 1998 (A) $ 427,173 $ 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) 353,814 362,799
</TABLE>
F-12
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
6. LONG-TERM DEBT, CONTINUED:
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
-------- --------
<S> <C> <C>
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 17,975 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 162,114 188,663
Other 1,904 1,904
--------- ---------
962,980 1,014,082
Less amount due within one year 62,234 64,465
--------- ---------
Amount due after one year $ 900,746 $ 949,617
--------- ---------
--------- ---------
<FN>
(A) This mortgage payable is collateralized by a deed of trust on the
Company's headquarters land and building, and is personally guaranteed
by Glen and Judith Martin.
(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 Glen and Judith Martin.
</TABLE>
Principal payments on long-term debt as contractually committed at March
31, 1995 are due as follows:
<TABLE>
<CAPTION>
Year Ending March 31,
---------------------
<S> <C>
1996 $ 62,234
1997 76,313
1998 81,396
1999 86,771
2000 50,407
Thereafter 605,859
--------
$962,980
--------
--------
</TABLE>
F-13
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
____
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 March 31,
---------------------
<S> <C>
1996 $ 44,820
1997 36,341
1998 32,101
1999 25,565
2000 2,402
--------
141,229
Less amount representing interest (36,203)
--------
Present value of net minimum lease payments 105,026
Less amount due within one year (29,305)
--------
Amount due after one year $ 75,721
--------
--------
</TABLE>
8. INCOME TAXES:
For the nine month period ended March 31, 1995 and the years ended June 30,
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 $ - $ 2,890 $ 965
Federal - 32,131 (16,610)
Deferred:
Federal (341,841) 229,286 27,836
-------- -------- --------
$(341,841) $ 264,307 $ 12,191
-------- -------- --------
-------- -------- --------
</TABLE>
F-14
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
8. INCOME TAXES, CONTINUED:
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 % Amount %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit) at the
federal statutory rate $(620,038) (34.0) $340,114 34.0 $13,377 34.0
Provision for state income taxes - - 2,890 .3 965 2.5
Amortization of intangibles 23,644 1.3 3,584 .3 2,999 7.6
Research and development
tax credit - - (68,780) (6.9) (419) (1.1)
Effects of alternative minimum
tax rate differential and
surtax exemption - - (17,776) (1.8) 2,501 5.4
Change in valuation
allowance 287,104 15.7 (27,441) (2.6)
Other, net (32,551) (1.7) 31,716 3.1 (7,232) (17.4)
---------------------------------------------------------------------
Income tax provision (benefit) $(341,841) (18.7) $264,307 26.4 $12,191 31.0
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
The components of the deferred tax provision (benefit) for the nine month
period ended March 31, 1995 and the years ended June 30, 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>
Deferred Method Liability Method
-------------------------- -----------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Software development costs $281,624 $201,764 $110,612
Depreciation 14,448 (2,535) (251)
Accrued vacation pay (44,352) (12,696) 6,900
Inventory obsolescence reserve 8,174 17,716 (35,779)
Change in valuation allowance 287,104 6,559 -
Other (31,052) (10,712) (4,470)
-------- -------- --------
515,946 200,096 77,012
Utilization (benefit) of net operating
loss and credits (857,787) 64,211 (49,176)
-------- -------- --------
$ (341,841) $ 264,307 $ 27,836
-------- -------- --------
-------- -------- --------
</TABLE>
F-15
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
8. INCOME TAXES, CONTINUED:
Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities at March 31, 1995 and June 30, 1994 were as follows:
<TABLE>
<CAPTION>
March 31, June 30,
1995 1994
-------- -------
<S> <C> <C>
CURRENT:
Allowance for doubtful accounts $ 94,546 $ 43,420
Inventory obsolescence reserve 22,427 30,601
Accrued liabilities 78,650 34,298
Net operating loss carryforwards - 95,827
Tax credit carryforwards - 77,898
Valuation allowance (195,623) (34,000)
--------- ---------
$ - $ 248,044
--------- ---------
--------- ---------
NONCURRENT:
Capitalized software development costs $(850,159) $(568,535)
Property, plant and equipment (122,537) (108,089)
Accrued liabilities 32,665 52,739
Amortization of intangibles 34,000 34,000
Net operating loss carryforwards 923,681 -
Tax credit carryforwards 107,831 -
--------- ---------
125,481 (589,885)
Valuation allowance (125,481) -
--------- ---------
$ - $(589,885)
--------- ---------
--------- ---------
</TABLE>
The Company has recorded a 100% valuation allowance 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
$287,000 and $34,000 during the nine month period ended March 31, 1995 and
the year ended June 30, 1994.
At March 31, 1995, for income tax purposes, the Company had net operating
loss carryforwards of approximately $3,002,000 and $2,488,000 available to
offset regular and alternative minimum taxable income, respectively. For
financial statement purposes, net operating losses were used to the extent
necessary to offset temporary differences and reduce deferred tax
liabilities. The net operating loss carryforwards expire in 2009.
At March 31, 1995, for income tax and financial statement purposes, the
Company had research and development tax credit carryforwards of
approximately $108,000 available to offset future income taxes payable.
The tax credit carryforwards begin to expire in 2006.
F-16
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
8. INCOME TAXES, CONTINUED:
During the year ended June 30, 1994, for income tax purposes, the Company
deducted approximately $101,000 associated with the exercise of certain
nonqualified stock options. For financial statement purposes, the tax
benefit of $14,850 associated with the nonqualified options deduction has
been recorded as additional paid-in capital.
9. SUBORDINATED CONVERTIBLE 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 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.
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.
10. COMMON STOCK:
a. STOCK OPTION PLAN
The Company has a nonqualified 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-17
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
10. COMMON STOCK, CONTINUED:
Outstanding options granted pursuant to the nonqualified 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 1.60 - 1.75
Exercised (485,000) .25 - .35
Canceled (290,001) .25 - .75
--------
Outstanding, March 31, 1995 815,001 .25 - 1.75
-------
-------
Exercisable, March 31, 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 nine month period ended March, 31, 1995 or the
years ended June 30, 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.
F-18
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
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 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 $118,070 representing pro rata
future payments is reflected in the accompanying balance sheet at March 31,
1995. Total rent expense for the nine month period ended March 31, 1995
and the years ended June 30, 1994 and 1993 was $254,654, $183,373 and
$167,786, respectively.
Future minimum lease payments, net of sublease rent income, required under
all operating leases are as follows:
<TABLE>
<CAPTION>
Year ending March 31,
---------------------
<S> <C>
1996 $297,048
1997 251,770
1998 201,530
--------
$750,348
--------
--------
</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 nine month period ended March 31, 1995 and
the year ended June 30, 1994, IHS made contributions to the benefit plan of
approximately $18,000 and $21,000.
13. RELATED PARTY TRANSACTIONS:
On September 17, 1990, the Company entered into an agreement with August
Systems, Inc. (ASI), which is owned and operated by Judith Martin, a
stockholder of the Company. Pursuant to this agreement, the Company has
agreed to provide ASI a perpetual right to sublicense the source copy of
SM*RT Practice, the Company's practice management software, including all
of its related modules and user/technical documentation. Additionally, ASI
agrees to pay the Company a 10% royalty on sales of ASI's Patient
Accounting System product up to a maximum royalty of $100,000. During the
nine month period ended March 31, 1995 and the years ended June 30, 1994
and 1993, the Company did not make any sales or receive any royalty
payments from ASI.
During the year ended June 30, 1994, the Company had sales of approximately
$71,254 to a stockholder.
F-19
<PAGE>
WISMER MARTIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
_____
13. RELATED PARTY TRANSACTIONS:
The Chairman of the Board and Chief Executive Officer has received in
addition to his salary a consulting fee in the amount of $45,000 for the
nine month period ended March 31, 1995, and $55,000 for the year ended
June 30, 1994.
14. PROPOSED STOCK OFFERING:
The Company intends to file a registration statement with the Securities
and Exchange Commission to register approximately 2,000,000 shares of the
Company's stock. Of the shares being registered 1,000,000 are being
offered by the Company with expected net proceeds to the Company
approximating $1.1 million and 1,000,000 shares will be offered to holders
of the Company's Convertible Subordinated Debentures to convert these
debentures to common stock (See Note 9).
F-20
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has entered into indemnification agreements with each of its
directors in which the Company agrees to indemnify and hold harmless the
director to the fullest extent permitted by applicable law against any and all
reasonable attorney's fees and all other reasonable expense, cost, liability and
loss paid or reasonably incurred by such director or on his or her behalf in
connection with any threatened, pending or completed action, suit or proceeding,
or any inquiry or investigation not initiated by the director that he or she
believes in good faith might lead to the institution of any such action, suit or
proceeding (each such threatened, pending or completed action, suit, proceeding,
inquiry or investigation, a "proceeding"), relating to any event or occurrence
relating to the fact the director is or was a director, officer, employee or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee, trustee, agent or fiduciary of another corporation,
or by reason of any action or inaction by the director in such capacity. The
Company is required to reimburse a director for expenses incurred within two
days following the receipt of a written request for reimbursement, provided that
the director agrees to repay any amount paid or advanced to the extent that it
is ultimately determined that the director is not entitled to such
reimbursement. The Company must indemnify a director for other amounts for
which a director may be responsible, defined as "resolution costs" in the
agreement, within 30 days of a written request from a director unless, within
that 30-day period, the Board of Directors, by a majority vote of a quorum
consisting of directors who are not parties to a proceeding as defined in the
agreement, determines that the director is not entitled to indemnification or
the Board of Directors refers the indemnification request to independent legal
counsel. If reference is made to an independent legal counsel, then such
counsel must advise the Company within 45 days whether indemnification should be
allowed.
(i) in the case of conduct in his own capacity with the Company, he
reasonably believed his conduct to be in the Company's best interests, or
(ii) in all other cases, he reasonably believed his conduct to be at least not
opposed to the Company's best interests. Article X of the Bylaws further
provides a procedure for indemnification pursuant to which indemnification shall
be made if a director meets the standard of conduct set forth in Article X and
there is a determination by a majority vote of a quorum of the Board of
Directors (not parties to such proceeding) to authorize indemnification, or by
majority vote of a committee of the Board of Directors consisting solely of two
or more directors not at the time parties to such proceeding, or by a written
opinion by independent legal counsel, or by the Shareholders.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article X of the Company's Bylaws (Exhibit 3.2 hereto)
provides that the Company shall indemnify its directors to the maximum extent
permitted by applicable law, and that the Company may indemnify its directors to
the full extent permitted by applicable law, or to such lesser extent as the
Company's Board of Directors may determine.
Section 23B.08.320 of the Washington Business Corporation Act authorizes a
corporation to limit a director's personal liability to the corporation or its
shareholders for monetary damages for conduct as a director, except in certain
circumstances involving intentional misconduct, a knowing violation of law, self
dealing, illegal corporate loans or distributions or any transaction from which
the director personally
II-1
<PAGE>
received a benefit in money, property or services to which the director is not
legally entitled. Article XIV of the Company's Amended Articles of
Incorporation (Exhibit 3.1 hereto) contains provisions implementing, to the
fullest extent permitted by Washington law, such limitations on a director's
liability to the Company and its shareholders.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the
Company in connection with the sale of the shares of Common Stock being
registered hereby. All the amounts shown are estimated, except the SEC
registration fee.
SEC registration fee . . . . . . . . . . $ 750
Blue Sky fees and expenses . . . . . . . 3,000
Printing and engraving expenses. . . . . 12,000
EDGAR filing expenses. . . . . . . . . . 800
Legal fees and expenses. . . . . . . . . 35,000
Auditors' accounting fees and expenses . 85,000
Transfer Agent and Registrar fees. . . . 1,000
Miscellaneous expenses . . . . . . . . . 10,000
-------
Total. . . . . . . . . . . . . . . . $147,550
-------
-------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the period March 31, 1992 through March 31, 1995, the Company has
issued the following unregistered securities:
# OF PRICE SALE
DATE TITLE SHARES PER SHARE AMOUNT
---- ----- ------ --------- ------
6/9/92 Common stock 16,667 $ 0.25 $ 4,166.75
8/8/92 Common stock 16,667 0.25 4,166.75
8/8/92 Common stock 33,333 0.25 8,333.25
6/30/94 Common stock 240,000 0.25 60,000.00
6/30/94 Common stock 33,333 0.25 8,333.25
6/30/94 Common stock 20,000 0.25 5,000.00
6/30/94 Common stock 6,666 0.35 2,333.10
6/30/94 Common stock 3,333 0.25 833.25
6/30/94 Common stock 3,333 0.25 833.25
9/30/94 Common stock 480,000 0.25 120,000.00
10/10/94 Common stock 5,000 0.35 1,750.00
------- -----------
858,332 $215,749.60
------- -----------
------- -----------
No underwriters were engaged in connection with the foregoing sales of
securities. Such sales were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933.
ITEM 27. EXHIBITS
II-2
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Amended and Restated Articles of Incorporation of Professional
Software Associates, Inc. filed as Exhibit 3.1 of Small Business
Issuer's Form 10 filed as of May 19, 1989, is incorporated by
reference.
3.2 Articles of Amendment of the Articles of Incorporation of
Professional Software Associates, Inc., filed as Exhibit 3.1 of
Small Business Issuer's Form 10 is incorporated herein by
reference.
3.3 Articles of Amendment of Wismer-Martin, Inc. filed as Exhibit
3.2 of Small Business Issuer's Form 10 is incorporated herein by
reference.
3.4 Bylaws of the Company as currently in effect, filed as Exhibit
3.2 of Small Business Issuer's Form 10-K for the quarter ended
June 30, 1993, is incorporated herein by reference.
4.1* 1993 Debenture Purchase Agreement between Wismer*Martin, Inc.
and Glen and Judy Martin.
4.2* 1993 Debenture Purchase Agreement between Wismer*Martin, Inc.
and Gertrude L. Holden.
4.3* 1993 Debenture Purchase Agreement between Wismer*Martin, Inc.
and MSC Services Corporation.
4.4* 1993 Debenture Purchase Agreement between Wismer*Martin, Inc.
and Specialists Associates Profit-Sharing Trusts (Segregated
Account - William Knapp, M.D.).
4.5* 1993 Debenture Purchase Agreement between Wismer*Martin, Inc.
and Thomas E. Holden.
4.6* 1993 Debenture Purchase Agreement between Wismer*Martin, Inc.
and Harry Holden.
4.7 1994 Stock and Stock Option Purchase Agreement between Ronald L.
Holden, The Independent Investment Company, PLC, John Perez and
Mary B. Perez, Doug Willford and Jennifer B. Willford, Susan
Orchanian, Mike Barnes and
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
Melinda Barnes, Bob Heckmann, Carolyne J. Walton and Integrated
Health Systems, Inc., filed as Exhibit 2 to Small Business
Issuer's Form 8-K dated as of February 10, 1994, is incorporated
herein by reference.
4.8 1994 Specimen Convertible Subordinated Debenture, filed as
EXHIBIT 2 to Small Business Issuer's FORM 8-K, dated February
10, 1994, is incorporated herein by reference.
5.1 Opinion of Paine, Hamblen, Coffin, Brooke & Miller.
10.1* Master Services Agreement, License Agreement and Software
Support and Update Agreement between Wismer*Martin, Inc. and
Blue Cross of Washington and Alaska.
10.2* Debenture Purchase Agreements (contained in Exhibits 4.1, 4.2,
4.3, 4.4, 4.5, and 4.6.).
10.3 1994 Stock and Stock Option Purchase Agreement (contained in
Exhibit 4.7).
10.4 Specimen Non-Qualified Stock Option Plan of Small Business
Issuer, filed as Exhibit 10.10 of Small Business Issuer's Form
10-K for the quarter ended June 30, 1993, is incorporated herein
by reference.
11.1 Statement re: Computation of earnings per share (contained in
Accounting Policies Statement footnote on page F-10 hereto).
16.1 Letter on changes in certifying accountant filed as the sole
Exhibit to Small Business Issuer's Form 8-K dated as of April
12, 1995 is incorporated herein by reference.
21.1 Subsidiaries of Small Business Issuer.
23.1 Consents of Experts and Counsel.
24.1 Power of Attorney
27.1 Financial Data Schedule
- ------------------
* To be filed by Amendment
ITEM 28. UNDERTAKINGS
The Company hereby undertakes as follows:
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Spokane, State of Washington, on the 9th day of
June, 1995.
WISMER*MARTIN, INC.
By: /s/
-------------------------------------------------
Ronald L. Holden
Chairman of the Board and Chief Executive Officer
Small Business Issuer
By Power of Attorney
SIGNATURE TITLE DATE
--------- ----- ----
/s/
- ------------------------ Chairman of the board, June 9, 1995
Ronald L. Holden Chief Executive Officer
by Power of Attorney and Director (Principal
Executive Officer)
/s/
- ------------------------ President and Director June 9, 1995
John F. Perez
by Power of Attorney
/s/
- ------------------------ Executive Vice President June 9, 1995
Douglas A. Willford and Chief Financial
Officer (Principal
Financial Officer and
Principal Accounting
Officer)
/s/
- ------------------------ Director June 9, 1995
Glen E. Martin
by Power of Attorney
/s/
- ------------------------ Director June 9, 1995
Clarence H. Barnes, Ph.D.
by Power of Attorney
/s/
- ------------------------ Director June 9, 1995
Larry R. Eidemiller, M.D.
by Power of Attorney
/s/
- ------------------------ Director June 9, 1995
William D. Engel
by Power of Attorney
II-6
<PAGE>
EXHIBIT 5.1
[PAINE, HAMBLEN, COFFIN, BROOKE & MILLER LETTERHEAD]
LAW OFFICES OF
PAINE, HAMBLEN, COFFIN, BROOKE & MILLER
717 WEST SPRAGUE AVENUE, SUITE 1200
SPOKANE, WASHINGTON 99204-0464
(509) 455-6000
FAX (509) 838-0007
__________
816 SHERMAN AVENUE 7601 WEST CLEARWATER
POST OFFICE BOX E KENNEWICK, WA 99336
COEUR D'ALENE, ID 83816-0328 (509) 582-4060
(208) 664-8115
FAX (208) 664-6338
June 8, 1995
Board of Directors
Wismer*Martin, Inc.
12828 N. Newport Highway
Mead, Washington 99021
RE: Opinion Regarding Legality of the Securities Being Registered
Gentlemen:
We have been requested to furnish you an opinion concerning the shares of
common stock proposed to be issued by Wismer*Martin, Inc. (the "Company")
pursuant to the terms of a Registration Statement prepared and filed with the
Securities and Exchange Commission in accordance with the provisions of Form
SB-2, as promulgated pursuant to the Securities Act of 1933, and such state
securities divisions or commissions as may be appropriate. In acting as counsel
for the Company in connection with the proposed issuance of the securities, we
have examined the Articles of Incorporation, all amendments thereto, and the
Bylaws of the Company and such other records and documents as we have deemed
necessary for the purposes of the opinion expressed herein. We have assumed the
genuineness of those instruments and all signatures appearing thereon.
Based upon and subject to the foregoing, it is our opinion that:
1. Wismer*Martin, Inc. has been duly incorporated, is validly existing as
a corporation, and is in good standing under the laws of the State of
Washington.
<PAGE>
2. The authorized capital stock of Wismer*Martin, Inc. consists of
20,000,000 shares of common stock, having a par value of $.001 per share. The
shares of common stock to be offered to the investors in this offering have been
duly authorized for issuance by the directors and, if issued in accordance with
the provisions of the Registration Statement and the Prospectus included
therein, will be validly issued, fully paid, and nonassessable.
Very truly yours,
PAINE, HAMBLEN, COFFIN,
BROOKE & MILLER
/s/
-----------------------------------
Lawrence R. Small
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF SMALL BUSINESS ISSUER
Integrated Health Systems, Inc., incorporated in California
<PAGE>
EXHIBIT 23.1
[PAINE, HAMBLEN, COFFIN, BROOKE & MILLER LETTERHEAD]
LAW OFFICES OF
PAINE, HAMBLEN, COFFIN, BROOKE & MILLER
717 WEST SPRAGUE AVENUE, SUITE 1200
SPOKANE, WASHINGTON 99204-0464
(509) 455-6000
FAX (509) 838-0007
__________
816 SHERMAN AVENUE 7601 WEST CLEARWATER
POST OFFICE BOX E KENNEWICK, WA 99336
COEUR D'ALENE, ID 83816-0328 (509) 582-4060
(208) 664-8115
FAX (208) 664-6338
June 7, 1995
Board of Directors
Wismer*Martin, Inc.
12828 N. Newport Highway
Mead, Washington 99021
Gentlemen:
We hereby consent to our name being disclosed in the Registration Statement
to be filed in connection with the issuance of two million shares of Common
Stock by the Company as filed on Form SB-2 with the Securities and Exchange
Commission and appropriate state securities divisions or commissions.
Very truly yours,
PAINE, HAMBLEN, COFFIN,
BROOKE & MILLER
/s/
-----------------------------------
Lawrence R. Small
Counsel for Issuer
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Wismer*Martin, Inc.
Mead, Washington
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated June 2, 1995, relating to the
consolidated financial statements of Wismer*Martin, Inc., which is contained in
that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/
------------------------------
BDO SEIDMAN
Spokane, Washington
June 9, 1995
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
We, the undersigned directors and officers of Wismer*Martin, Inc. ("the
Company"), do hereby constitute and appoint Ronald L. Holden and Douglas A.
Willford, or any of them, our true and lawful attorneys and agents to sign a
Registration Statement on Form SB-2 to be filed with the Securities and Exchange
Commission, and with applicable State securities divisions in such form as may
be required, and to do any and all acts and things and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorneys and agents, or any one of them, may deem necessary or advisable
to enable the Company to comply with the Securities Act of 1933, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, and applicable State securities laws, in connection with such
Registration Statement, including specifically, but without limitation, power
and authority to sign for us or any of us in our names and in the capacities
indicated below, any and all amendments (including post-effective amendments)
hereto; and we do hereby ratify and confirm all that the said attorneys and
agents, or any of them, shall do or cause to be done by virtue of this power of
attorney.
Executed below by the following persons in the capacities and on the dates
indicated:
Signature Title Date
--------- ----- ----
/s/
- ------------------------- Chairman of the Board, Chief _________, 1995
Ronald L. Holden Executive Officer and Director
/s/
- -------------------------
John F. Perez President and Director _________, 1995
- ------------------------- Executive Vice President and
Douglas A. Willford Chief Financial Officer _________, 1995
/s/
- -------------------------
Glen E. Martin Director _________, 1995
/s/
- -------------------------
Clarence H. Barnes, PhD. Director _________, 1995
/s/
- -------------------------
Larry R. Eidemiller, M.D. Director _________, 1995
/s/
- -------------------------
William D. Engel Director _________, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1995 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED MARCH 31, 1995 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 104,081
<SECURITIES> 0
<RECEIVABLES> 2,010,611
<ALLOWANCES> (278,074)
<INVENTORY> 267,370
<CURRENT-ASSETS> 2,481,227
<PP&E> 3,936,962
<DEPRECIATION> (1,988,434)
<TOTAL-ASSETS> 7,114,830
<CURRENT-LIABILITIES> 4,943,741
<BONDS> 3,976,467
<COMMON> 9,848
0
0
<OTHER-SE> (1,908,427)
<TOTAL-LIABILITY-AND-EQUITY> 7,114,830
<SALES> 1,920,152
<TOTAL-REVENUES> 7,830,473
<CGS> 1,401,011
<TOTAL-COSTS> 4,058,215
<OTHER-EXPENSES> 5,314,611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 301,584
<INCOME-PRETAX> (1,823,642)
<INCOME-TAX> 341,841
<INCOME-CONTINUING> (1,481,801)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,481,801)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0
</TABLE>
