U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 - [Fee Required]
For the fiscal year ended June 30, 1996, due on September 28, 1996, actually
filed on October 15, 1996.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]
For the transition period from
Commission file number 33-80944-LA
NATIONAL SPECIALTY NETWORKS, INC.
(Name of small business issuer in its charter)
California 33-0403505
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
451 W. Lambert Rd., Suite 216
Brea, California 92821-3920
(Address of principal executive offices)
Issuer's telephone number (714) 256 9654
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check if disclosure of delinquent filers in response to Item 405 od Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuers' revenues for its most recent fiscal year: $0.00
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within the past 60 days. As of August 15, 1996 -
$0
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 15, 1996 - 1,225,534
shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1. Description of Business.
National Specialty Networks, Inc., ("NSN"), received an order from the US
Securities and Exchange Commission for its registration statement on Form SB-2
granting effectiveness on August 16, 1996.
NSN is a healthcare management company organized in July 1989 to develop
Specialty Preferred Provider Organizations (SPPOs) throughout the United States.
NSN's SPPOs will be networks of healthcare providers (hospitals), referred to by
NSN as Centers of Excellence or "COEs". These hospitals will be selected for
membership in a SPPO because of demonstrated excellence in a particular,
high-cost medical specialty (e.g., cardiac surgery, lithotripsy, neurosurgery,
etc.), and will be able to provide such services at lower prices through the
adoption of cost-control techniques known as Standard Treatment Protocols
(STPs).
The business concept for NSN was developed by Ronald D. Osborne and Philip
L. Ronning in 1988 in response to what they perceived were major inadequacies of
preferred provider organizations (PPOs) and health maintenance organizations
(HMOs) for reducing or containing healthcare costs. SPPOs can be integrated with
existing HMO, PPO and other employer-sponsored managed care programs to enable
them to more effectively manage higher cost services, like open-heart surgery,
neurosurgery, oncology, etc., where the greatest potential for cost reduction
exists.
A Specialty Preferred Provider Organization (SPPO) is a single service
network of hospitals selected for excellence in that particular service. The
selection of hospitals or Centers of Excellence (COEs) is more stringent than
for current HMOs and PPOs and involves reviewing quality outcome data for all
hospitals within each geographic region of a state to select the one which has
consistently produced the best results. NSN will contract with that hospital at
a rate lower than that hospital offers to conventional managed care programs in
return for assurance that the COE will have exclusivity for patients of NSN's
customers for that region. Of course, hospitals which are selected as NSN
Centers of Excellence for one or more specialty services can still be
full-service hospitals for non-SPPO patients, so that participation in a SPPO
should represent a net gain in business for each Center of Excellence.
A Standard Treatment Protocol (STP) consists of consensus-based conventions
of the medical staff, nurses and clinical departments of a hospital associated
with a single clinical service (e.g., open-heart surgery, gastroenterology,
neurosurgery, oncology, organ transplantation, etc.) as to the best means of
providing the service to a "typical patient" at a higher level of quality for a
lower price.
"Typical patients" are those patients under the age of 65 who are being
treated for a single disease or specific problem, and who have no significant
co-morbidities (i.e., no additional complicating diseases or disease states).
This allows the course of treatment for a typical patient to be relatively
predictable, standard and similar in resource consumption (as reflected in the
number and the type of diagnostic tests, days of stay, drug therapies, etc.).
"Atypical patients" are patients who are over 65 years of age or who have
co-morbidities (e.g., a patient requiring open-heart surgery who is also
diabetic or who has had the same surgery previously) and are at higher risk due
to well-documented risk factors (e.g., morbid obesity, age, smoking history,
etc.).
It is the goal of hospitals using STPs to have as many patients as possible
treated using Standard Treatment Protocols. STPs are typically written for the
average patient in a category. Although atypical patients do not necessarily
completely follow the STPs developed to standardize the healthcare provided to
typical patients, they are subject to the protocol to the extent reasonable for
each such atypical patient, and can often follow much of the protocol before
"falling out" due to co-morbidities.
Therefore, just because a patient is not "typical" does not necessarily
mean that he or she will not be a "protocol patient" or that the protocol will
not have an impact on his or her clinical course. Of course, there are some
patients who, due to their clinical condition, will never be able to conform to
the protocol, although this number is usually a very
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small percentage of the total. Additionally, many diagnostic categories are
subdivided into natural subcategories, and specific protocols are written for
each subdivided category instead of using a single protocol for the entire
category. Subdivision of patients makes protocols more specific as well as
increasing the percentage of typical patients in each category.
Every category of patient that has STPs developed for it will feature a
different percentage of "typical or average" patients, based upon the relative
homogeneity of the patients, the surgical procedure involved (if any), and many
other factors. This is no different from the mix of patients treated in
hospitals today. The goal of the STP is to cover as many patients in a category
that makes clinical "sense". Based on its experience in designing and
implementing STPs, Ronning Management Group, Inc. has found that approximately
75% of each category of patients can be classified as "typical" or "average."
STPs have been developed to improve productivity while preserving the
better aspects of physician independence. At the same time, STPs are designed to
reduce variations and deviations in medical treatments, and to significantly
reduce unnecessary resource expenditures. The STP development process creates a
hospital-sponsored, physician-centered forum for scrutinizing prevailing
practice patterns, eliminating wasteful resource consumption, and formulating a
"blueprint" for the optimum means of treating typical patients. NSN's STP
process also includes developing monitoring systems to assure adherence to
standardized protocols adopted by each hospital.
As NSN has not commenced operations, Ronning Management Group, Inc. (RMG)
has assisted NSN with the research and development of its STP program and has
performed beta-site testing of NSN's STPs using RMG personnel and resources. RMG
has entered into an agreement with NSN which provides that after NSN receives at
least the minimum proceeds from this Offering, RMG will transfer its STP
technology and contracts to NSN, and NSN will extend employment offers to RMG's
STP staff.
In addition to providing NSN's customers with cost containment services,
SPPOs are designed to address three major problems in the healthcare industry.
First, many healthcare professionals, and a large percentage of the public,
believe that the healthcare system in the United States is in a cost crisis and
current cost containment efforts are not working. For example, the annual cost
for health coverage for each employed person in the United States is currently
$4,000, and according to a study by A. Foster Higgins & Co., could be $20,000 or
more by the year 2000. SPPOs are designed to reduce and contain healthcare costs
to employers and hospitals.
The second major healthcare problem that SPPOs are designed to address is
the substantial duplication of high- cost tertiary care hospital services at the
community level. In order to compete for patients in the healthcare market
today, hospitals attract physicians, and the resulting patient referrals, by
duplicating and attempting to surpass competing hospitals in terms of depth and
breadth of state-of-the-art medical equipment, technology and services.
Therefore, scarce and expensive medical resources are being wasted due to
duplication of expensive equipment and services (such as CAT scans) at each
hospital in a community. Competition among hospitals, fueled by conventional
managed care programs which seek full-service hospitals and "one-stop-shopping"
for their clients, drives hospitals deeper into costly duplication.
Management believes that SPPOs can have a significant impact in reducing
healthcare costs because of the potential of SPPOs for significantly reducing or
eliminating the duplication of high-cost tertiary care services which is
currently prevalent in virtually every population center in the United States.
The third major healthcare problem, in management's opinion, is that
current private sector managed care programs, such as HMOs, PPOs and Medicare,
target and manage hospitals' prices for healthcare rather than hospitals' costs
of providing healthcare. HMOs, PPO-related insurance programs and Medicare
reimburse hospitals for inpatient care at rates which, in most cases, are lower
than what it costs the hospitals to deliver care. Accordingly, most hospitals
try to recover these losses by raising prices to non-managed care inpatients and
to outpatients. This practice, called "cost shifting", resulted in almost $35
billion in additional costs in 1992 for non-managed care inpatients and all
outpatients (including managed care outpatients), according to Richard L. Clark,
President of the Healthcare Financial Management Association.
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The Healthcare Industry
For many employers, the cost of providing employee medical care is their
single fastest growing operating expense. To cope with ever increasing medical
costs, many large employers have altered employee benefit plans, thereby
effectively reducing both the quantity and quality of employer-paid medical
care. Many payers and providers currently believe that the healthcare delivery
system in the United States is in a crisis, and that new and radically different
solutions to this crisis must be found.
Hospitals are experiencing declining revenues as the result of the federal
government's system of Medicare reimbursements, state government policies
regarding Medicaid payments, and private sector managed healthcare programs. As
a result, most hospitals are trying to recover these losses through cost
shifting, which is raising prices to non-managed care inpatients and to
outpatients.
As a direct result of cost shifting, much of the effort to contain
healthcare costs made by private sector payers during the past ten years by
enrolling in HMOs and PPOs has proven fruitless in reducing the overall cost of
healthcare. In spite of cost shifting, hospital costs have continued to escalate
and hospital profits have continued to decline. Additionally, many hospitals now
find that the majority of their business is subject to fixed-price
reimbursements and that they are less able to cost shift to make up revenue
shortfalls than they were in the past.
Hospitals are also finding revenues and profitability reduced because
health benefits providers are shopping for the best package prices they can
negotiate for high-tech, complex medical procedures such as open heart surgery,
coronary angioplasty and organ transplantation, among others. Consumers have
also become increasingly sophisticated about quality-of-care issues and are
demanding superior services in their communities.
There are several divergent viewpoints held by members of the medical
industry and politicians regarding various types of managed healthcare plans and
healthcare in general. Currently there is considerable attention being given to
some form of national health insurance by the healthcare industry, including
physicians, hospitals and insurance companies, and by certain politicians who
have introduced legislation designed to implement various types of healthcare
reform and national health insurance.
The current disagreement concerns which reforms, methods and systems should
be introduced to "fix" the American healthcare system. Among the concerns being
discussed in attempting to implement a workable and affordable American
healthcare system are maintaining a high quality of healthcare for all patients,
the escalating costs of healthcare coupled with the desire to contain healthcare
costs to an affordable and reasonable level, patient convenience and promptness
of treatment, the possible rationing of expensive healthcare procedures and
tests, disincentives towards the development of new, high-cost medical
technologies and tests, issues regarding liability and malpractice, and the
continued ability of individual physicians to determine modes of treatment for
their respective patients.
Oregon and Hawaii have adopted comprehensive healthcare systems which are
being examined by both federal and state politicians, regulators and others in
the healthcare industry. The Canadian healthcare system has also been cited as
an example of the direction in which the American healthcare system should move,
although there remain serious concerns regarding the rationing and time delays
involved in obtaining certain expensive healthcare procedures, which have
resulted in certain wealthier Canadians travelling to the United States for
prompt treatment of certain medical conditions for which they would have had to
wait to be treated for in Canada.
While these and other possible healthcare systems are currently being
examined and discussed, no unified approach to resolving the concerns and
problems facing the American healthcare system has been adopted or implemented
as of the date of this Prospectus. Accordingly, there can be no assurance as to
which of the numerous competing healthcare plans will be adopted in the future,
if any. Management believes that regardless of the level of healthcare reform or
national healthcare coverage adopted, the healthcare industry will continue to
need a method for controlling healthcare costs and the quality of healthcare
service.
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The current situation regarding increasing hospital costs and declining
profits is being exacerbated because hospitals rely principally on physicians to
make the majority of resource expenditure decisions. Approximately 80% of the
variable costs experienced by a hospital are controlled by physicians, yet most
of these physicians are not employed by the hospitals and are not under the
direct control of hospital management. Due to divergent education, training and
experience, physicians bring widely disparate approaches to the diagnosis and
treatment of patients, even within the same clinical specialty.
Physicians are obligated to practice medicine to the best of their ability
and to exercise their best judgment in all aspects of patient care. While this
has contributed in large measure to the evolution of the most
technically-capable healthcare system in the world, an undesirable outcome has
been the uncontrolled consumption of expensive resources. Physicians often
demand high-tech equipment and devices to perform state-of-the-art diagnosis and
treatment, which requires a sizable investment by hospitals, and as hospitals
are increasingly in competition for high-quality physicians around whom strong
clinical programs can be built, hospitals must provide these physicians with
state-of-the-art, costly medical equipment if they wish to attract and retain
their services.
In order to continue to do business, hospitals must provide a product which
is priced affordably enough to attract patient business, is of a sufficiently
high quality and technical currency to attract both patients and physicians, and
yet is produced at a cost which yields a profit sufficient to operate the
institution profitably and fund future growth requirements. Cost containment and
operating procedures must be implemented so that hospitals realize a reasonable
profit from each service performed. Management believes that this goal can be
met through structuring a managed care program which rewards excellence in
medical care and cost control efforts by guaranteeing substantial referrals to
selected hospitals.
Competition
NSN is new and unseasoned, and thus it will have inherent difficulties
seeking to enter its field. There are numerous firms, such as commercial
insurance companies, which have not yet chosen to offer centers of excellence or
SPPO services to their insureds, but which could if they made the decision to do
so. For instance, Travelers Insurance Company is presently experimenting with a
center of excellence (COE) program for cardiovascular services, and has issued a
request-for-proposal (RFP) to a number of hospitals and some selected COEs.
There are other companies with greater financial, management and marketing
resources than NSN which may choose to engage in the Company's business and
compete directly with the Company in the future. One such competitive
organization is Health Star, a large national PPO which claims to provide health
coverage for over one million people. Another such company is Healthcare
Networks of America, Inc. (HNA). HNA has issued an RFP to an undisclosed number
of hospitals and their medical staffs requesting bids to join one or more of
what is planned to be 26 different specialty networks. None of the planned
networks actually exists presently; all are still in the planning stage. The
management of NSN is unaware of other potential competition which has a service
comparable to, or competitive with NSN's proposed services, although others may
exist.
The principal competitive factors in the SPPO or COE market are: price of
each tertiary service offered by each COE, management and data systems offered
by each COE, the extent to which each COE has streamlined and standardized its
service, and the extent to which each COE understands and convinces payers it
can offer a higher level of customer group service.
NSN is unaware of any company, other that Ronning Management Group, Inc.
(RMG), an affiliate of NSN, which is currently offering a healthcare management
service comparable to, or competitive with, the scope of the Standard Treatment
Protocols (STPs) which NSN plans to provide. However, there may be current
competitors of whom NSN is unaware.
The American Hospital Association (AHA), in response to growing interest on
the part of hospitals, recently conducted two seminars on the subject of
tertiary centers of excellence. NSN was requested by the AHA to assist in
identifying employers and insurers which may be planning to offer COE or SPPO
networks to their beneficiaries. NSN
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was able to secure representatives from five of these companies to serve as
speakers at the AHA seminars.
To date, there have been attempts by groups of non-competing hospitals,
spread over large geographic regions, to develop cardiovascular SPPO or COE
networks. One such network has recently been developed in California and is
currently being marketed to payers within the State. Another cardiovascular
network has been developed nationwide by a group of non-competing cardiologists
which has selected hospitals for participation based on their existing clinical
reputations. To NSN's knowledge, these networks have not employed stringent
selection standards such as low cost (without cost-shifting), demonstrated
quality outcomes, or enhanced customers servicing capabilities to qualify
participating hospitals as COEs. NSN intends to require these features of
hospitals desiring to be in NSN's COE networks.
The American Hospital Association (AHA) recently endorsed the development
of standard treatment protocols to reduce hospital costs and enhance quality
outcomes. This is a generic endorsement and does not apply specifically to the
Company's STPs which encompass a more comprehensive approach to standardization.
However, management believes this endorsement will encourage competition.
Standardization of Healthcare
Individual hospitals that wish to participate in a SPPO network must
concentrate on providing those medical services which they are best equipped to
provide on a high-quality, low-cost basis. NSN has developed what management
believes is an innovative methodology for hospitals to accomplish this by
managing high-cost healthcare services while rewarding hospitals with
significantly greater volumes of patients for their selected clinical services.
However, to date, no hospital has yet executed an agreement with the Company as
an SPPO member and that the lower rates to SPPO members can not yet be assured.
Standard Treatment Protocols (STPs) are developed for major surgical and
medical services. STPs produce high-quality, controlled-cost medical services
for hospitals, and have the additional advantage of being developed in each
participating hospital by the professionals who are actually providing
healthcare services (i.e., the physicians, nurses and healthcare staff).
STPs are developed in each hospital by using Clinical Paths (CPs), which
outline the entire course of care provided to a typical patient. Clinical Paths
standardize tests, procedures, therapies, etc. given to a patient during an
entire hospital stay. The goal of the CP is to improve productivity by providing
a "blueprint" for resource consumption and allocation and a treatment protocol
for the care of the patient. The CP is designed to document the specific
practices that are the most resource efficient and clinically appropriate and
which result in the shortest appropriate length of stay. NSN facilitates the
development of CPs through the involvement of appropriate hospital personnel.
Cost models are constructed for each STP category to reflect the total
costs of the resources typically consumed by the patients in this category. A
sample of discharged patients' bills is used to construct a model that is
chargeable line-item specific as a baseline starting point or average prior to
implementing the STP. Through financial modeling, it is possible to calculate
the typical amount of resources used in a specific STP category and the
appropriate cost of each item charged to the patient. Most hospitals have this
information available on a per-patient basis.
The cost model aggregates those patients' bills and, through computer
modeling, creates a typical patient's bill. If fully-allocated costs (direct
costs plus indirect/overhead allocations) are available through an information
system, they are used. If no cost accounting system is present, these
calculations are performed through research. Once completed and validated, the
baseline model had four repetitions of a diagnostic test, but the STP specifies
only two repetitions of the same test. Thus it is possible to calculate the
resource consumption and total cost to be expected for a patient treated in
accordance with Standard Treatment Protocols.
The key to the development of STPs is the designation of multi-disciplinary
teams of selected physicians, nurses and other caregivers who are brought
together in a process designed to create the protocols (standards) and to
identify system problems and opportunities. It is important to recognize that
for physicians to act to decrease costs and
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enhance quality, they, not consultants, must be responsible for developing the
standards.
NSN will coordinate the process and will provide the methodology for the
analysis and discussion of clinical and economic issues. NSN will not make
recommendations for change; rather, the participants in the process will make
the recommendations for change. Based on RMG's experience, adoption and
implementation of STPs requires approximately 180 days or less, depending upon
the surgical or medical specialty and the particular circumstances in each
hospital.
There are two primary benefits to a hospital that develops a STP. The first
is reduction in costs. Costs are reduced by reducing the consumption of
resources, attaining enhanced medical quality through standardization of
hundreds of individual tasks, a decreased average length of hospital confinement
for patients, and enhanced communications between caregivers.
The NSN healthcare model is designed to work by enabling a payer (a large
or medium-sized self-insured employer, HMO, PPO or insurance company) to
unbundle its healthcare benefit program by NSN developing a Specialty Preferred
Provider Organization (SPPO) network for each of the highest-cost tertiary
medical services. Depending on the extent to which the payer needs to cut its
costs and is willing to risk alienating employees by limiting the choice of
hospitals, the employer may carve out anywhere from one to fifteen services for
which employees are directed to the SPPO network for medical care.
Possible healthcare services to be included in SPPO networks are open heart
surgery, neurosurgery, orthopedic surgery, oncology, head and spinal cord injury
rehabilitation, gastroenterology, lithotripsy, ophthalmology, high-risk
obstetrics, mental health, organ transplantation, and four other services to be
selected by NSN from payer data. The SPPO network member hospitals will pay NSN
to perform Standard Treatment Protocols for each of these services which they
provide to a SPPO network.
The payer then contracts with NSN to do the following on its behalf:
Identify, through a rigorous screening process, the highest-quality
hospital in the payer's geographic area for each selected medical service.
In this regard, NSN has developed a Request for Proposal (RFP) which is
submitted to each tertiary care hospital in a designated community or area, and
which includes quality measurement criteria for each clinical service provided.
Hospitals interested in participating then submit performance data, proposed
rates, and letters agreeing to reduce the hospitals' costs for the selected
services below the proposed contract rate within twelve months through the
implementation of Standard Treatment Protocols (STPs) for each such service
provided.
Select the COE for each service, negotiate a contract with each COE, and
initiate STP development consulting services with the contracted hospitals.
Assist the payer in modifying its benefit plan to assure that patients
exclusively use only NSN's COEs.
Assist the payer in renegotiating all previously held hospital contracts to
carve out the tertiary care services to be handled by NSN's COEs. NSN expects
the residual rates from these hospitals will go down considerably due to the
removal of catastrophic risk normally associated with the carved-out tertiary
care services.
The outcome of these steps, if they work as described, should be higher
quality of tertiary care (due to the rigorous process for selection of
providers), overall significant cost reduction (due to hospital implementation
of STPs), elimination of the need for NSN's contract hospitals to cost shift
(due to STP implementation and the hospitals' agreement to reduce costs below
contract rates), and significant reduction of duplication of high-cost tertiary
services within each community (due to significantly-reduced tertiary patient
volume in hospitals that cannot produce performance outcome data sufficient to
be selected as a COE).
NSN expects hospitals to be motivated to participate and to propose their lowest
rates (1) because of the stature
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associated with being a center of excellence (COE) for one or more services and
(2) because they stand to receive an increased volume of patients. NSN will
require each payer to modify its benefit plan to assure that all its patients
for the contract services use only NSN's centers of excellence, and NSN's
hospital agreement requires the hospital each COE to give NSN's SPPO members a
rate that is at least 10% lower than is provided to any other payer. As NSN has
not yet executed participation agreements with hospitals, there can be no
guarantee that hospitals will provide the lower rates that NSN stipulates in its
standard hospital participation agreement.
The Company's pricing strategies for both one-time and ongoing fees have
been designed not to exceed the resistance points of either payers or providers.
Management believes that NSN's fee structure is such that providers (hospitals)
will rapidly recover the cost of implementing STPs, taking into account the fees
paid to NSN as well as other direct and indirect costs incurred by the hospital
in the implementation process.
Management believes that some of the benefits of using the CP/STP approach
to patient care management include the reduced consumption of resources, the
attainment of enhanced medical quality through the standardization of hundreds
of individual tasks performed in major medical procedures, a decreased average
length of hospital confinement for patients, and enhanced communications between
all caregivers.
To date, RMG has completed the development of twenty one STPs and has
commenced the development of seven more STPs. RMG is also marketing STP
implementation nationwide, and has a list of over eighteen hospitals considering
implementation of STPs (i.e., each hospital has either received an STP proposal
which it has requested and which it is evaluating, or has requested and received
an STP presentation, or has requested and been sent STP evaluation information).
RMG has agreed that if this Offering is successful, RMG will immediately
transfer all STP rights and technology to NSN and will not compete with NSN, and
NSN will extend offers of employment to RMG's STP staff.
Due to the recent endorsement of the American Hospital Association for
standardizing care as an effective means of achieving cost reduction and quality
improvement, the response rate to limited mailings of STP marketing literature,
and approximately eighteen hospitals currently discussing STP contracts with
NSN's affiliate, Ronning Management Group, management believes that in the next
five years, many hospitals will seriously consider developing STPs, for which
they will need a consultant or STP vendor. (note: The American Hospital
Association has not endorsed the Company's STPs.)
Each hospital offers unique problems and opportunities for change. An
example of the changes that resulted from RMG's STP implementation in one
hospital's cardiovascular department include: modified requirements for pre-
admission testing; revision of physician standing orders for pre- and post-
catheterization and PTCA; decreases in the average number of diagnostic tests
such as ECG, chest x-ray, arterial blood gases, etc.; establishment of new
laboratory test panels to delete excessive and unnecessary tests and decrease
costs; changes in procedures for cardiovascular surgery and catheterization to
increase efficiency and control costs; establishment of appropriateness criteria
to screen candidates for surgery and other procedures; creation of means for
surgeon/cardiologist collaboration to determine the appropriateness of surgery
versus non-surgical alternatives; and length-of-stay decreases through system
efficiencies and changes in clinical practices.
These are examples of positive, cost-effective changes which can be
achieved through the protocol development process. Increased efficiency,
enhanced quality and decreased case cost allow hospitals to price their services
competitively while maintaining a reasonable profit margin. Importantly, costs
are not "cost shifted", but truly reduced.
Whether a provider operates in an environment which is heavily weighted
towards managed healthcare or in a traditional fee-for-service structure,
management believes that NSN will offer a process which yields high-quality
healthcare services at a reduced cost to the hospital, and which enables the
hospital to obtain better financial results from existing market share and to
compete successfully for new business.
NSN's payer and provider network participants will meet regularly to review
issues of cost, quality and volume. Providers are expected to provide cost and
quality data so that adherence to STPs can be audited by NSN. NSN
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manages the process and retains the right to expel any provider that fails to
remedy deficiencies in expected levels of medical care or which has attempted to
cost shift from the SPPO network.
Ronning Management Group, Inc., an affiliate of the Company, guarantees its
STP clients that RMG will identify cost reduction opportunities which will equal
or exceed RMG's STP fee payable by the STP clients to RMG. NSN intends to
continue this practice once the Company acquires RMG's STP business.
Item 2. Description of Property.
The Company does not own any real property.
Item 3. Legal Proceedings.
The Company is not a party to any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters to a vote of security holders during the
fourth quarter.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
There is currently no public trading market for the Company's common stock.
Item 6. Management's Discussion and Analysis or Plan of Operation.
After the completion of its Offering, management intends to begin hiring
employees necessary to establish a STP consulting division, and to hire
qualified personnel for marketing, provider development, accounting, and systems
and administration. NSN does not currently employ any paid staff. In addition to
the current non-paid employees receiving appropriate salaries once the Company
is funded, management intends to initially hire approximately ten or fifteen new
employees to fill the required positions.
NSN has already developed systems for the operations of the Company, and
after the closing of its Offering, NSN plans to promptly complete the final
development of the financial systems and administrative procedures which will be
needed to operate the Company on the scale envisioned.
Management believes that should NSN realize at least the minimum proceeds
from its Offering, the Company will not need to seek any further funding for the
twelve-month period following the completion of its Offering. NSN believes that
the Company will meet future financial requirements through revenue from
operations.
NSN does not anticipate the need for any immediate further research
regarding of the basic STP program or SPPO networks. Management believes that
the STP program is sufficiently developed to commence STP operations immediately
without any further development. Once the Company is funded, one of its
principal objectives is the development of its initial SPPO networks, which are
not yet developed.
NSN does not intend to purchase any operating facilities for at least
twelve months after the completion of its Offering. NSN currently uses office
space free of charge pursuant to an informal month-to-month lease arrangement
with Medworth Futures, Inc., an affiliate of the Company. The Company intends to
lease new, larger facilities once full operations have commenced. NSN also
intends to purchase or lease a computer system and other office equipment should
the Company receive the maximum proceeds from its Offering.
9
<PAGE>
Once the required personnel are hired and other initial objectives are
attained, management intends to notify the California hospitals which previously
responded to NSN's Request for Proposal program, and which indicated an interest
in becoming Centers of Excellence, that NSN has completed its Offering and will
be contacting them soon regarding the development of NSN's California SPPO
network.
NSN then intends to notify the HMOs, PPOs, insurance companies and large
self-insured employers which have previously expressed an interest in the NSN
model that NSN will contact them in the near future regarding possible
participation in NSN's California SPPO network. NSN intends to concurrently
contact similar West Michigan organizations regarding the future development of
a West Michigan SPPO network.
Management anticipates that the Company will then complete the selection
process for the Centers of Excellence in California. Once Centers of Excellence
have been contracted, NSN will begin STP development at those COE hospitals and
will commence negotiations between COEs, payers and NSN to form the California
SPPO network. NSN also anticipates beginning similar activities with respect to
the establishment and development of the West Michigan SPPO network.
Using a carefully designed and rigorous selection process, NSN intends to
identify the highest quality hospital in each community for each of fifteen
high-cost services experienced by employers and insurers, to designate each such
hospital as a Center of Excellence (COE), and to require each COE to implement
at least one STP in order to cut costs and avoid cost shifting. NSN will then
contract with each hospital at rates lower than the hospital currently offers in
conventional HMOs and PPOs, enabled by the hospital's improved profit margin
afforded by its STP development and implementation.
Providers will pay a $120,000 fee for assistance in developing and
implementing STPs for a major medical specialty (such as coronary bypass
surgery) and a $1,500 monthly fee for ongoing network support. NSN will receive
a one-time fee of $75,000 from payers (such as HMOs, PPOs, and large
self-insured companies) for membership in, and the development of, each SPPO
network, and the Company will also receive a monthly access fee calculated on
either a per-employee-per-month basis or a twenty-five-percent-of-savings basis.
For example, using the per-employee- per-month basis, at a per-employee cost of
$2.20, a payer with 10,000 employees would pay NSN a total monthly access fee of
$22,000.
Management estimates that there are at least 15,000 companies and other
payers which are suitable prospects for joining NSN's SPPOs in the next four
years. This estimate is based on the number of employers with over 1,000
employees, as reported in Ward's Business Directory of U.S. Private and Public
Companies 1993 and in the Statistical Abstract of the United States 1992.
Management based these estimated fees on the actual experience of certain
Officers of NSN with respect to SPPOs, and also from actual statistics and the
results of the performance of contracted services by Ronning Management Group,
Inc. (RMG), an affiliate of NSN, which will fully transfer its STP business to
NSN once the Company commences operations.
NSN's plan of operation for the next several years includes the development
of SPPO networks for selected population centers throughout the United States
for fifteen high-cost tertiary healthcare services, and to sell access to these
SPPO networks to HMOs, PPOs and employer-sponsored managed care programs for
integration with their existing networks. However, only four entities (and a
benefits consulting company) have expressed any interest in membership in the
Company's SPPO networks since the Company was found in 1989. One of the
Company's priorities in the future will most certainly be its need to sell
access to its SPPOs to payers.
Management projects that NSN's potential for market acceptance and success
will be based on the Company's ability to convince its target customers,
employers who self insure or purchase healthcare benefits that are managed by
HMOs or PPOs that : (1) the conventional HMO/PPO approach to encouraging all
hospital networks to generalize and provide the full spectrum of services,
including high-cost tertiary services, breeds wasteful duplication, mediocrity
of performance in the services which are most difficult to perform, and minimal
opportunity to generate constructive
10
<PAGE>
competition on a service-by-service basis; (2) its SPPOs, when integrated with
conventional HMO/PPO networks, will reduce duplication and unnecessary capacity
by using fewer hospitals to perform each specialty service; (3) its SPPOs will
improve the quality of specialty care by selecting Centers of Excellence based
on demonstrated excellence; (4) its SPPOs will improve specialty service cost
performance beyond the reduction of duplication noted above through implementing
STPs in each COE hospital; and (5) its SPPOs, when integrated with conventional
HMO/PPO networks, will provide lower prices, less cost-shifting, and overall
reduced healthcare costs.
Management projects that the key capabilities NSN will need to develop and
sell SPPOs are (1) an experienced managed care and provider relations staff; (2)
an experienced managed care marketing/sales staff; (3) an efficacious process
for selecting COEs which is respected by both employers and providers; (4) a
process for developing STPS that is proven to reduce costs; (5) a means of
providing assistance to employers, HMOs and PPOs in conveniently directing
patients to COEs and in modifying their existing networks to accommodate SPPOs;
(6) a means of providing assistance to COE hospitals in developing patient
friendly administrative and clinical service so that patients learn to accept
some travel inconvenience; (7) management information systems that enable the
effective collection of payer and provider data and (8) the administrative
support of staff in the field and in main office; and an effective management
team.
The following chart describes the extent to which the above listed
capabilities have been developed as of the date of this Prospectus:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Capability Extent Developed Comments/Basis
1. Managed care and Partial. Remainder to be recruited CEO, Senior Vice President are
provider relations staff after receipt of proceeds. experienced (see "Management").
2. Managed care Need to be recruited. Will commence hiring upon receipt
marketing/sales staff of proceeds.
3. COE selection process RFP document with selection RFP was generally well received
criteria have been developed. by hospitals. Process will be
Selection process initiated in continued upon receipt of proceeds.
California and terminated
(midway) in 1991 due to lack of
funding.
4. STP process Fully developed and tested in 21 Initial cost reduction results
hospital programs. indicate that STP are successful in
reducing costs.
5. Assistance to employers Fully developed. Available for review upon request.
6. Assistance to providers Fully Developed Available for review upon request.
7. Information systems Not developed. Will be acquired after receipt of
proceeds.
8. Management team Partially hired. Remainder to be recruited after
receipt of proceeds.
</TABLE>
Item 7. Financial Statements.
Attached as Exhibit 1.
11
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors and Executive Officers of the Registrant.
Ronald D. Osborne - President, CEO and Chairman of the Board of Directors
Douglas E. Wells - Senior Vice President, Chief Financial Officer and Director
Thomas J Gannon - Senior Vice President - Provider Relations
Kenia Casarreal, PhD. - Vice President - Organization Development
Phillip L. Ronning - Director
Item 10. Management Remuneration and Transactions.
No remuneration for any management members was paid during the preceeding fiscal
year.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Ronald D. Osborne - owns 379,817 shares
Douglas E. Wells - owns 122,521 shares
Thomas J Gannon - owns 102,622 shares
Kenia Casarreal, PhD. - owns 24,505 shares
Phillip L. Ronning - owns 238,880 shares
John W. Meyer - owns 122,521 shares
Charles W. Frac - owns 122,521 shares
Item 12. Management Transactions.
There were no management transactions to report during the last fiscal year.
PART IV
Item 13. Exhibits and Reports on Form 8-K and 8-K/A.
During the last fiscal year the Company did not file any reports on Form 8-K.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amended registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: October 10, 1996
NATIONAL SPECIALTY NETWORKS, INC.
a California Corporation
By: /s/ Ronald D. Osborne
Ronald D. Osborne
President, CEO and Chairman of the Board
By: /s/ Douglas E. Wells
Douglas E. Wells
Senior Vice President and Chief
Financial Officer
By: /s/ Thomas J. Gannon
Thomas J. Gannon
Senior Vice President
By: /s/ Phillip L. Ronning
Phillip L. Ronning
Director
13
<PAGE>
EXHIBIT 1
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors...............................................F-2
Balance Sheets...............................................................F-3
Statements of Operations.....................................................F-4
Statements of Stockholders' Equity...........................................F-5
Statements of Cash Flows.....................................................F-6
Notes to Financial Statements................................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To: The Board of Directors
National Specialty Networks, Inc.
(A Development Stage Enterprise)
Brea, California
We have audited the accompanying balance sheets of National Specialty Networks,
Inc., (a development stage enterprise), (the "Company") as of June 30, 1995 and
1996, and the related statements of operations, stockholders' equity and cash
flows for each of the two years then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of June 30, 1995
and 1996 and the results of its operations and its cash flows for each of the
two years then ended in conformity with generally accepted accounting
principles.
Durland & Company, CPAs, P.A.
Palm Beach, Florida
September 17, 1996
F-2
<PAGE>
NATIONAL SPECIALTY NETWORKS, INC.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 1995 June 30, 1996
------------------ ------------------
ASSETS
CURRENT ASSETS
Cash $ 143 2,043
------------------ ------------------
Total current assets 143 2,043
------------------ ------------------
OTHER ASSETS
Deferred income tax asset (note 3) 0 0
------------------ ------------------
Total other assets 0 0
------------------ ------------------
Total Assets $ 143 2,043
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Notes payable (notes 4, 6) $ 42,285 50,215
Accrued interest 3,748 7,336
------------------ ------------------
Total liabilities 46,033 57,551
------------------ ------------------
STOCKHOLDERS' EQUITY
Common stock, no par value, authorized 15,000,000
shares; 1,225,534 issued and outstanding. (note 5) 23,693 23,693
Preferred stock, Series A, no par value ($1 stated value);
authorized 2,000,000 shares; 915,714 shares issued and
outstanding. (note 4) 915,714 915,714
Treasury stock (note 6) (1,633) (1,633)
Deficit accumulated during the development stage (983,664) (993,282)
------------------ ------------------
Total Stockholders' Equity (45,890) (55,508)
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 143 2,043
================== ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
NATIONAL SPECIALTY NETWORKS, INC.
(A Development Stage Enterprise)
Statements of Operations
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Period from
July 14, 1989
Years ended June 30, (Inception) to
1995 1996 June 30, 1996
REVENUE
Expense re-imbursement $ 0 0 848
Interest 0 0 1,315
--------------- -------------- -----------------
Total revenue 0 0 2,163
--------------- -------------- -----------------
EXPENSES
Human resources:
NSN officers (note 5) 0 0 340,178
RMG employees 0 0 97,014
Others 0 0 40,550
Consultants:
NSN officers 0 0 109,167
Others 0 1,000 19,638
Professional fees 13,956 195 66,690
Bad debt 0 0 454
Bank charges 23 48 71
Communications 0 0 17,485
Office rent and overhead 0 0 120,089
Office expenses 115 2,603 18,202
Public offering expense 0 2,185 2,185
Travel 0 0 133,952
Interest 2,930 3,587 23,709
Miscellaneous 52 0 6,061
--------------- -------------- -----------------
Total expenses 17,076 9,618 995,445
--------------- -------------- -----------------
Net loss before tax benefit (17,076) (9,618) (993,282)
--------------- -------------- -----------------
Income tax benefit (note 3) 0 0 0
--------------- -------------- -----------------
Net loss $ (17,076) (9,618) (993,282)
=============== ============== =================
Weighted avg # of shares
outstanding 1,225,534 1,225,534 1,225,534
=============== ============== =================
Net loss per share $ (0.01) (0.01) (0.81)
=============== ============== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
NATIONAL SPECIALTY NETWORKS, INC.
(A Development Stage Enterprise)
Statements of Stockholder's Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total
Common Preferred Treasury Accumulated Stockholders'
Stock Stock Stock Deficit Equity
BALANCE, June 30, 1992 $ 9,900 0 0 (920,511) (910,611)
Capital investment: 0 915,714 0 0 915,714
9,600 0 0 0 9,600
Net loss 0 0 0 (21,272) (21,272)
-------------- ------------- ------------- --------------- ----------------
BALANCE, June 30, 1993 19,500 915,714 0 (941,783) (6,569)
Capital transaction: 0 0 (1,633) 0 (1,633)
4,193 0 0 0 4,193
Net loss 0 0 0 (24,805) (24,805)
-------------- ------------- ------------- --------------- ----------------
BALANCE, June 30, 1994 23,693 915,714 (1,633) (966,588) (28,814)
Net loss 0 0 0 (17,076) (17,076)
-------------- ------------- ------------- --------------- ----------------
BALANCE, June 30, 1995 23,693 915,714 (1,633) (983,664) (45,890)
Net loss 0 0 0 (9,618) (9,618)
-------------- ------------- ------------- --------------- ----------------
BALANCE, June 30, 1996 $ 23,693 915,714 (1,633) (993,282) (55,508)
============== ============= ============= =============== ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
NATIONAL SPECIALTY NETWORKS, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C>
Period from
July 14, 1989
Years ended June 30, (Inception) to
1995 1996 June 30, 1996
CASH FLOWS FROM DEVELOPMENT ACTIVITIES:
Net loss $ (17,076) (9,618) (993,282)
Adjustments to reconcile net loss to net cash used for
development activities:
Stock issued for services rendered 0 0 23,000
Increase in interest payable 2,930 3,588 7,336
(Increase) decrease in interest receivable 0 0 0
-------------- -------------- --------------
Net cash used for development activities (14,146) (6,030) (962,946)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of fixed assets 0 0 6,000
-------------- -------------- --------------
Net cash provided by investing activities 0 0 6,000
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued for cash 0 0 693
Notes payable under third-party development agreements
(note 2) 0 0 899,315
Cash received for notes payable 16,034 7,930 62,728
Cash used to reduce notes payable (1,860) 0 (3,747)
-------------- -------------- --------------
Net cash provided by financing activities 14,174 7,930 958,989
-------------- -------------- --------------
(Decrease) increase in cash 28 1,900 2,043
-------------- -------------- --------------
CASH, beginning of period 115 143 0
-------------- -------------- --------------
CASH, end of period $ 143 2,043 2,043
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid in cash $ 0 0 837
============== ============== ==============
Preferred stock issued for notes payable $ 0 0 915,714
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
NATIONAL SPECIALTY NETWORKS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
(1) Summary of Significant Accounting Policies
The Company. National Specialty Networks, Inc. is a California chartered
development stage corporation which conducts business from its headquarters in
Brea, California and was incorporated on July 14, 1989.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the statements of
financial condition and revenues and expenses for the years then ended. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant change in the near-term relate to
the book-tax difference of accounting for the development expenses. (see note
(3)).
The following summarize the more significant accounting and reporting
policies and practices of the Company:
a) Furniture and equipment Furniture and equipment was carried at cost
during the development process. In March 1992 NSN sold all of its furniture and
equipment. At that time the cost was removed from the accounts and the resulting
loss reflected in the development expenses.
The Company expects that future expenditures for furniture and equipment
will be capitalized, and depreciated over the estimated useful life of the
assets. Expenditures for maintenance and repairs will be charged to operations
as incurred.
b) Notes payable The Company issued notes payable to various parties
pursuant to third-party development agreements (note (2)). Interest on the notes
was capitalized into the principal balance of the notes during the development
process pursuant to the third-party development agreements.
c) Net loss per share Net loss per share is computed by dividing the net
loss by the number of shares outstanding during the period.
(2) Development expenses The Company entered into third-party agreements
with two companies and two individuals in January 1990 for the development of
its Standard Treatment Protocols (STP) concept, the Specialty Preferred Provider
Organization (SPPO) concept and the search for funding from independent third
parties.
The two contracted companies (whose principals are founders and
stockholders of NSN) are independent health care consulting companies which are
currently expected to remain in their primary businesses subsequent to the
initial public offering. The principals of one of the companies, Ronning
Management Group, Inc. (RMG), will be involved in the operations of NSN on a
part-time basis. The principal of the other company, Medworth Futures, Inc., and
the two individuals will be involved in the operations of NSN full-time upon
funding of the company.
Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards 2 (SFAS 2) requires that all internally generated
development costs be charged to expense when incurred. SFAS 68 requires that a
company which is obligated to repay another for development costs under a
funding agreement must record a liability to the extent of its obligation and
charge the costs to expense as incurred. Accordingly, NSN charged its
development costs to expense as incurred, and recorded the liability incurred
under the third- party agreements. 100% of the cumulative total development
expenses relate to the development of the STP concept, the development of the
SPPO concept and NSN's search for funding from independent third parties to
allow NSN to begin marketing both the STP and SPPO concepts.
F-7
<PAGE>
NATIONAL SPECIALTY NETWORKS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements, continued
(3) Income taxes The Company recorded the development costs as expenses in
the period when incurred for financial statement purposes, per note 2 above.
However, for state income tax purposes, the development costs were recorded as
an intangible asset to be amortized over future years. The primary purpose for
this treatment for tax purposes is to retain the tax benefit of the development
costs. California tax law does not recognize operating loss carry-forwards as
the Federal tax code does. Therefore, by capitalizing and amortizing these
costs, the tax benefit of the development costs is retained for state tax
purposes rather than being lost forever, (which immediate expensing would
cause). This treatment will require a longer time before the tax benefit of the
costs is realized, but will increase the tax benefit realized over time.
California tax law was changed for tax years beginning after January 1,
1994. California tax law now recognizes net operating loss carryforwards on the
same basis as the federal tax code. The amounts recorded as deferred income tax
assets at June 30, 1995 and 1996, $293,100 and $291,032 respectively, represent
the amount of tax benefit of loss carry-forwards. The Company has established a
$291,032 valuation allowance against this asset, as currently it is not more
likely than not to be realized through the generation of sufficient future
taxable income within the carry-forward period.
(4) Exchange of notes payable for preferred stock On September 30, 1992,
the board of directors of the Company authorized the Company to issue 2,000,000
shares of no par value preferred stock. The Company then entered into an
agreement with the parties holding the notes payable to exchange the balance of
the notes for an equal amount of preferred stock of the Company. This issuance
of preferred is referred to as Series A, carries a $1 per share stated value and
a cumulative dividend rate of 6%, payable from earnings on or after January 1,
1995, to the extent cash is available and the board of directors declare such
payment. The remaining balance of preferred shares are to remain unissued for
possible future use.
(5) Stockholders' equity The Company has authorized 1,666,666 shares of no
par value common stock. In December 1990, the Company issued 11,000 shares to
the founders in exchange for $198 in cash. In April 1991, the Company issued
27,500 shares to the founders in exchange for $495 in cash. In June 1991, the
Company issued 511,500 shares to the founders in exchange for services valued at
$9,207. These services were valued at 50% of current full-time employment
consideration.
On September 30, 1992, the board of directors authorized an increase of
authorized shares from 100,000 shares to 1,666,666 by splitting the existing
shares 1 share for 16.66666 shares. On October 2, 1992, the board of directors
authorized the issuance of 533,333 additional shares of the Company's common
stock to the founding shareholders in consideration of past services to the
corporation with the same basis as their previously held shares, or 1.8 cents
per share. On December 20, 1993, the board of directors and stockholders of the
Company voted to increase the authorized number of shares of common stock of the
Company to 2,000,000 shares.
On December 31, 1993, the board of directors authorized the issuance of
130,000 additional shares of the Company's common stock to the founding
shareholders in consideration of past services to the corporation with the same
basis as their previously held shares, or 1.8 cents per share. In February 1994,
the Company sold 102,939 shares of the Company's common stock for $1,853 in
services rendered to the Company. These shares were valued by the board at 1.8
cents per share. On May 31, 1994, the board of directors and stockholders of the
Company increased the authorized number of shares of the Company to 15,000,000
shares.
(6) Repurchase of a founders stock for a note payable In August 1993, the
Company entered into an agreement to repurchase all the common stock held by one
of the founders pursuant to the Company's Founders Shareholder Agreement. The
90,738 shares were repurchased as treasury stock at a price of $0.018 per share,
for a total of $1,633.28. The Company issued a note payable to the stockholder
for this sum. This note carries a stated interest rate of 5.23%.
F-8
<PAGE>
NATIONAL SPECIALTY NETWORKS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements, continued
(7) Common stock public offering The board of directors authorized the
Company to sell up to 500,000 shares of the Company's common stock in a
"self-underwritten" public offering pursuant to a Registration Statement on Form
SB-2 under the Securities Act of 1933. This offering is being made with a 90,000
share minimum, and is effective for one year from the effective date of the
registration, August 16, 1996. On December 31, 1993 the board of directors voted
to increase the number of shares to be sold to the public from 500,000 to
675,000.
On October 13, 1995, the Department of Corporations of the State of
California issued an effective order for the sale of the Company's securities in
the State of California. This order imposes certain financial qualifications on
California resident purchasers of the Company's securities.
(8) Completion of Concept Development The Company completed the development
stages of the STP and SPPO concepts and RMG completed the beta site testing of
the STP concept as of September 30, 1992. The Company is still classified as a
development stage enterprise as it is still in the process of raising the funds
to begin operations, and it has not yet begun its intended operations.
The Company has entered into an agreement with Ronning Management Group,
Inc. (RMG) whereby RMG has begun the marketing of STPs. RMG has entered into and
completed several contracts for STP development for third parties. The major
provisions of this agreement are:
a) As soon as NSN receives at least the minimum proceeds under the common
stock public offering (see note (7)) RMG will transfer the STP technology (i.e.,
methodologies, processes, data base, charge cost model, etc.) and the rights to
develop STPs to NSN. NSN expects to extend employment offers to those RMG staff
members currently working on STPs.
b) RMG will also assign any existing STP contracts in progress to NSN.
Should any third party to an existing STP contract refuse to allow RMG to assign
such contract to NSN, RMG will subcontract the completion of the contract to
NSN, and remit 80% of the remaining contract revenue to NSN.
c) NSN will pay RMG a marketing royalty of 20% of NSN's receipts on any STP
contract assigned under b) above, as well as on the first 7 contracts NSN enters
into.
d) The three principals of RMG will become part-time consultants to NSN for
a period of 5 years. RMG will bill NSN for the hours worked by these individuals
for NSN at approximately 80% of RMG's normal billing rates. Annual billings by
RMG to NSN for these services are limited to the lesser of $420,000 or 33% of
NSN's STP contract revenues.
e) RMG and its principals agree not to compete with NSN in the provision of
consulting services to develop STPs for third parties.
f) The Company and RMG have developed cross-referral fee schedules, as well
as cross right of first refusal agreements pursuant to medical consulting
services requested by third parties during other engagements. The minimum cross
referral fees are set at 10% of revenues received by the other company.
g) NSN expects to develop a sales commission schedule for employees as well
as a separate schedule for third party brokers for the sale of STP contracts.
RMG and its employees will be covered by the schedule developed for third party
brokers.
F-9
<PAGE>
NATIONAL SPECIALTY NETWORKS, INC.
(A Development Stage Enterprise)
Notes to Financial Statements, continued
(8) Completion of Concept Development, continued The Company has also
entered into an agreement with Medworth Futures, Inc. which provides the
following:
a) MFI and its principal agree not to compete with NSN in either the
provision of specialty managed care or consulting services to develop STPs.
b) NSN expects to develop a sales commission schedule for employees as well
as a separate schedule for third party brokers for the sale of STP contracts.
NSN and its employees will be covered by the schedule developed for third party
brokers.
(9) Related party transactions The Company currently occupies office space
in MFI's offices on a rent-free basis. MFI allows this because the President and
sole stockholder of MFI is a stockholder in the Company, and the Company's
current principal activities at this stage are primarily related to its common
stock public offering.
F-10
