Wismer Martin Prospectus Omits Mention Of Lawsuit Prospective Investors Weren’t Told About Potential Liability

Along with its other headaches, Wismer Martin Corp. is encumbered by a lawsuit that could further strain the finances of the struggling company.

But the Spokane software manufacturer failed to make that information available to potential investors and to the Securities and Exchange Commission in a recently-issued prospectus related to a proposed stock offering.

“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,” the prospectus states.

But Integrated Health Services Inc., Wismer Martin’s wholly owned subsidiary, is being sued by Cook-Fort Worth Children’s Medical Center in an action that potentially could cost the company more than $1 million.

“Absolutely, this lawsuit is still active,” E. Glen Johnson, Cook’s attorney, said from his Fort Worth office Wednesday.

Doug Willford, Wismer Martin’s chief financial officer, said the lawsuit was not disclosed because the company doesn’t consider it significant.

“We have a couple of normal recurring disputes like those that crop up from time to time with any business,” Willford said Friday. “And there’s nothing material about that litigation. That means we do not believe there is any significant exposure to the company in that lawsuit.”

When Wismer Martin bought California-based IHS last year, it acquired in the bargain the dispute between IHS and Cook, one of IHS’s major clients.

On March 7, that dispute boiled over when the prestigious Texas hospital sued IHS for failure to perform on its contract to provide software services.

On June 12, Wismer Martin filed a registration statement with the SEC for the offering of 2 million shares of common stock. Seafirst Bank, with whom Wismer Martin holds a line of credit, ordered the company earlier this year to raise capital and reduce its debt. The offering is designed to do both.

Coincidentally, June 12 also was the deadline for IHS to respond to the lawsuit brought against it by Cook. That deadline was originally in May, but Tarrant County court records show that IHS’s attorney, Thomas J. Crane, asked the court for to extend the response deadline to June 12 “in light of the continuing settlement discussions …”

Hospital attorneys agreed to grant the extension. But as of Wednesday, court files in Fort Worth did not indicate that a settlement had occurred, or that IHS had met the new response deadline. Johnson was unwilling to comment on the status of any settlement negotiations.

In any case, the prospectus information offered potential investors and the SEC gives no hint of the existence of the suit, the settlement negotiations, or what they might cost in terms of Wismer Martin’s shaky bottom line.

“I think we’ve been charitable with (IHS) in trying to resolve this thing,” Johnson said in an April interview.

“We’re trying to run an outfit here that does a damn good job of taking care of children over a wide area that doesn’t have another facility like this,” Johnson added. “And this hospital has had a hell of a time trying to make something out of this mess. It has cost them a fortune.”

In June 1992, IHS entered into an agreement with Cook to license, install and service all the hospital’s computer software. The software was to run all the hospital’s administrative functions, and some clinical functions as well.

The contract called for Cook to pay IHS almost $800,000 for software licensing fees, more than $500,000 in installation fees, and almost $100,000 annually in support services fees.

But, according to the lawsuit, “IHS completely failed to perform within the scheduled production use dates … IHS also failed to service the software, to install the software, and to solve problems resulting from missing features represented to be contained in the software.”

The suit states that IHS missed deadlines to put the software system into operation in March, August and November of 1993. Finally, in the summer and fall of 1994, the hospital hired third-party consultants to “provide support services for IHS’s software and to assist in necessary modifications to that software.”

When the contract was signed in June of 1992, IHS and 52 percent of Wismer Martin’s stock were owned by National HealthTech Inc., a California-based holding company whose principal shareholder was Richard Montgomery. A minority partner in National HealthTech was Ronald L. Holden.

By June of 1993, when Cook says IHS was failing to perform on its contract, struggling National HealthTech was being dismantled and sold. Holden signed a promissory note for $100,000 and obtained both IHS and National HealthTech’s Wismer Martin stock. He became Wismer Martin’s board chairman.

In February 1994, when Cook was turning to third-party consultants to get its system working, Holden sold IHS to Wismer Martin for $2.5 million, representing it as a thriving company with bright prospects.

IHS’s losses since that sale have contributed significantly to Wismer Martin’s ongoing financial dilemma.

Information in the prospectus on Wismer Martin’s proposed stock offering shows just how extensive those financial problems have become.

The company has put its headquarters facility in north Spokane up for sale as part of its efforts to raise cash. Where the company’s operations might be relocated is uncertain.

The prospectus says that as of March 31, the company had a capital deficit of $1.9 million, negative working capital of $2.5 million and a net loss of $1.5 million for the first three quarters of the fiscal year.

The Cook lawsuit threatens to dig that financial pit even deeper.

Cook and IHS argued for a couple of years over the problems the hospital was experiencing with the IHS contract. Apparently Cook would have been satisfied just to get its software system working and let its relationship with IHS drop. But IHS threatened to sue the hospital for bringing in the third-party consultants.

“The verbal exchanges between IHS and my clients had pretty much focused in that direction,” Johnson said. “The issue that IHS is making out of all this is that somehow by the use of those consultants, their very valuable secrets have been compromised.

“But in order to get this thing to work at all,” he added, “the hospital had to spend an unbelievable amount of money on outside consultants.”

So in response to IHS’s threats, Cook’s board of directors instructed Johnson to file suit.

The suit asks the Texas court to declare that Children’s Medical Center is entitled to use third party consultants, and to declare that the perpetual software license granted the hospital by IHS remains in effect.

It seeks damages for IHS’s breach of contract, and compensation for attorneys fees and other costs of the lawsuit.

Johnson would not say how much in damages the hospital would ask for. But the contract between IHS and the hospital limits the amount of damages to the value of the contract, which is at least $1.3 million.

The suit was filed in March with an April 3 deadline for IHS to respond. The company did not show up to defend the suit, and Cook was granted a default judgement against IHS on April 24.

But a problem in notification of the lawsuit to IHS prompted Johnson to ask the Texas court to set aside that default judgment while he went through the notification process again. According to the court file, IHS’s California offices, along with Holden and Perez, were properly notified as of May 5.

Under the rules of the Texas court, IHS would be in jeopardy of another default judgement if it did not respond to the suit within 20 days of proper notification.

But at Crane’s request, that deadline was extended.

, DataTimes