Ihs Acquisition Left Wismer Financially Vulnerable Purchase Decision Relied On Sales, Profit Projections That Were Overly Optimistic

In 1994, Wismer Martin Corp. was viewed by its management team as a company that could double, even triple, in revenues over the course of a few years.

Today, the company is battling for its financial life. And much of the blame is being focused on a southern California company called Integrated Health System, (IHS) which Wismer Martin acquired from its largest shareholder in February 1994.

But Ronald L. Holden says if IHS did not turn out to be the company Wismer Martin’s board of directors thought it was buying in February of 1994, the fault is not his.

And another executive who came to Wismer Martin from IHS says Wismer’s previous management team is to blame for all the problems.

“In the first half of this fiscal year, Wismer Martin suffered a significant reversal of its fortunes due to poor management,” Wismer Martin President John Perez wrote in a letter to The Spokesman-Review Thursday.

“Sales were down and costs were rising with virtually no management controls in place… A new management team was put into place and has been working over the past few months to stabilize the business and move it back to profitability. The business is now stabilized and we are moving back towards profitability.

“During this time Wismer Martin has not lost a single client and has in fact been winning new clients every month.”

Yet, the company reported Thursday its losses would be $800,000 for the quarter ended March 31, but predicted a return to profitability in the next quarter.

Members of Wismer’s past management group say the company’s problems were created by IHS’s failure to live up to its billing.

Holden, who owned IHS and was Wismer Martin’s board chairman and principal shareholder at the time IHS was acquired, says that because he would profit from the transaction, he kept at an arms-length throughout the entire IHS acquisition process.

“I didn’t vote on that deal,” Holden said last week. “That deal was proposed by the (other members) of Wismer Martin’s board of directors.”

In an interview earlier this year, Holden said, “The then-existing management proposed the transaction to the board of directors.”

But at least one member of the board that approved the IHS acquisition disputes Holden’s account of his role in the transaction.

“Holden came to management and said it would be a good thing for Wismer Martin to acquire IHS,” Stan Hatch, former president, CEO and board member of Wismer Martin, said in an interview last week.

Holden succeeded Hatch as CEO when Hatch resigned in March. At the time of Wismer Martin’s acquisition of the company, Holden was chairman of IHS and his CEO at IHS was John Perez, who is now president of Wismer Martin.

Hatch pointed out that as owner and chief executive officer of the company, Holden and Perez should have known better than anybody all the details of IHS’s fiscal condition.

“Based on the revenue and profit projections of IHS offered by Perez for the fiscal year ending June 30 of 1994, and beyond,” Hatch said, “the decision by the Wismer Martin board of directors to acquire IHS was a good one.”

The question then becomes whether those figures were based in reality.

A document on the financial condition of IHS presented by Perez to the Wismer Martin board in February 1994, projected IHS’s revenues through June 1994 as $3 million. Perez projected a net income for that time period of $864,000.

“… Mr. Perez stated that he was comfortable with the estimated cash flow for IHS for the next 12 months …” the minutes of Wismer Martin’s February board meeting state.

But those projections didn’t come to pass.

Instead, IHS sales were only $1.7 million, according to Wismer Martin documents, and the company lost $142,000 during that time period.

The IHS controversy

From 1991 to June 1993, Wismer Martin, IHS and another Southern California company called Montgomery Ryland Inc. were all owned by California-based National Healthtech Corp., of which Holden was president. All three companies were involved in computer-related aspects of the health care industry, as was Wismer Martin.

People who were insiders at the companies say IHS losses were draining National Healthtech, and it had to draw cash from its healthiest company, Montgomery Ryland, to pay the bills. By 1993, the sources indicate, Montgomery Ryland was drained of cash. Vendors were going unpaid. Payment of employee expenses was delayed. At times, meeting payroll was a uncertainty.

Holden disputes that problems at IHS created any kind of a financial crisis for National Healthtech. He does concede though that, “Wismer Martin and IHS were both marginal operations that were losing money,” at the time he acquired them.

“I know that over the period National Healthtech owned them they had lost money,” Holden added.

Only eight months after Holden acquired IHS, though, Perez presented his report that painted IHS as a prosperous, healthy company.

Wismer Martin’s board approved the acquisition without any further due diligence investigation, and without the customary independent “fairness opinion” on the deal.

That doesn’t surprise many of the former National Healthtech insiders who worked with Holden there.

“There’s no big mystery about all that,” one former National Healthtech employee said on the condition of anonymity. “Ron Holden could sell ice cubes to Eskimos. He’ll probably end up selling IHS to someone else down the road.”

Wismer’s up-and-down history

Wismer Martin’s financial skid over the past six months isn’t the first time the company has flirted with insolvency. But the current problems are a sharp contrast to a stable financial performance over the previous three years.

Wismer Martin was founded in 1980 by Glen and Judy Martin. The company was based on a software product designed by Glen Martin that allowed the computerization of doctors’ practices.

The company earned modest profits in its early years, until an acquisition went sour and produced significant losses.

The Martins hired Stan Hatch - a software industry veteran with a background in medical service products - as president and chief executive officer of the company in 1989. Hatch nurtured the company back to profitability by 1990 with earnings of $113,000 for that fiscal year.

The company earned $213,000 in fiscal 1991, and $515,000 in fiscal 1992. Earnings dipped to only $27,000 on sales of $7.9 million in fiscal 1993, but rebounded with earnings of $600,000 on revenue of $11.5 million for the fiscal year ended June 30, 1994.

Fiscal 1995 has been disastrous, though, with earnings of $41,000 in the first quarter and a $700,000 loss in the second quarter, ended Dec. 31, 1994. Holden said in March that the third quarter would produce about a $500,000 loss.

And the gloom that has settled over the company is in sharp contrast to the optimism that marked the end of fiscal 1994 when Hatch, convinced that a promising new health care information network product would catapult the company forward, predicted the company could go to $20 million or $30 million in revenues, and beyond.

“The potential is staggering,” Hatch said in early 1994. “We could be in for quite a ride here.”

How the deal came together

Like several other home-grown companies before it, Wismer Martin fell into the control of outside investors when local owners had to look beyond the Spokane investment community for cash.

Seeking to get some of their money out of the company, the Martins sold 4.5 million shares of Wismer Martin stock in 1991 to National Healthtech, owned principally by Richard A. Montgomery, for $1.7 million. Holden was a minority shareholder in National Healthtech.

After it encountered financial problems, Montgomery sold National Healthtech to a Dallas company in June 1993. As a spinoff of that transaction, Holden signed a promissory note for $100,000 and got all of IHS, and 52 percent of Wismer Martin’s stock.

His next move was to sell IHS to Wismer Martin. Because of their conflict of interest, Holden and Perez did not vote on the acquisition of IHS by Wismer Martin in February 1994.

Usually, to be sure the interests of minority shareholders are protected - and particularly in cases where one of the board members stands to profit from the transaction - an objective third party is hired to conduct an investigation and offer a “fairness opinion” concerning a proposed sale, acquisition or merger.

Board members raised that issue at the February meeting, but the board meeting minutes show that the board’s attorney, Larry Small, “stated that he did not believe that it was necessary to obtain a fairness opinion for the transaction from a third party.”

“Legal counsel was at the table,” says board member Larry Eidemiller, a Portland physician. “Questions were raised by the board’s outside members (Eidemiller and Clarence Barnes), ‘Has due diligence been done?’ Legal counsel said yes.”

Barnes, who is dean of Gonzaga University’s School of Business, concurred with Eidemiller’s recollection.

“I did advise the board that in my opinion Wismer Martin had conducted significant due diligence upon which the directors were entitled to rely,” Small said last week.

He said he did not wish to expand on his comments in the minutes regarding the fairness opinion.

Holden says the fairness opinion was waived because $2.5 million for IHS was such a bargain. He also says that IHS did not meet its performance projections because the whole industry turned sour as customers waited for an outcome to national health care reform debates, and stopped buying.

Individuals who have followed IHS, Wismer Martin and the rest of the health care-computer services industry during the past two years, though, say $2.5 million was an inflated price for the company. They also question whether the sales and earnings figures projected in the Perez report were realistic.

The sources, who spoke under condition of anonymity, also pointed out that figures relating to sales and company value can be given various different interpretations.

The management change

Hatch remains Wismer Martin’s second-largest individual shareholder with about 1 million shares of stock, some of which he purchased with the exercise of options following the IHS acquisition. He would not comment further on his dealings with Holden at Wismer Martin.

But other former Wismer Martin executives say Hatch and members of his management group challenged Holden on IHS when it began to bleed Wismer Martin. In December, Steve Anderson, Wismer Martin’s vice president of finance at the time, sent a memorandum to Bob Wilson, the company’s chief financial officer, raising alarms about the effect IHS was having. Wilson relayed those concerns to the board.

As of Dec. 9, 1994, Anderson’s memo states, Wismer Martin had provided or guaranteed $632,000 to prop up IHS. And from that date through February 1995, Anderson said Wismer Martin would have to come up with $506,228 more to meet IHS’s commitments.

“When considering Wismer Martin’s internal cash requirements and exiting bank lines, the IHS additional cash needs of $506,228 cannot be met,” Anderson’s memo says.

And Anderson raised another alarm.

“IHS’s growing cash dependency on Wismer Martin could jeopardize the prior management representations to the auditors,” Anderson’s memo states.

During the audit for fiscal 1994, Anderson says, the company represented to its auditor, Coopers & Lybrand, that IHS was a “going concern” and that “we believed that IHS would be able to make sales to generate a self sufficient cash flow.”

Those representations were based on “A Business Plan for Integrated Health Systems,” prepared by John Perez, the same report Perez offered Wismer Martin’s board at the time of the IHS acquisition.

“Based upon IHS’s cash forecast,” Anderson’s memo concludes, “these prior representations made today would not be correct.”

xxxx