**FORM 10-K**

 

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 
| **ý**                                          | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|-----------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
|                                                |       |                                                                                                |
| **For the fiscal year ended October 31, 2004** |
|                                                |       |                                                                                                |
| **o**                                               | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(D) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition periodfrom                   to                   **

 

**Commission file****number 0-23598**

 

**NWH, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                               | ** ** | **13-3735316**                    |
|----------------------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of incorporation)                             |       | (IRS Employer Identification No.) |
|                                                                       |       |                              |
| **156 West 56th Street, Suite 2001, New  York, New York 10019**            |
| (Address of principal executive offices and zip  code)                     |
|                                                                       |       |                              |
| **(212) 582-1212**                                                         |
| (Registrant’s telephone number, including area code)                  |
|                                                                       |       |                              |
| Securities registered pursuant to section 12(b)  of the Act: **None** |
|                                                                       |       |                              |
| Securities registered pursuant to section 12(g)  of the Act:          |
| **Common Stock, $.01 Par Value**                                           |
| Rights to Purchase Series A Junior Preferred Stock                         |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ý   No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

 

Theaggregate market value of the voting stock held by non-affiliates of theregistrant was approximately $8,555,000 as of January 27, 2005, based uponthe last sales price per share of the Registrant’s Common Stock, as reported onthe Nasdaq National Market on such date. As of January 27, 2005, 2,924,631 shares of Common Stock, $.01 parvalue, of the Registrant were outstanding.

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

Yes  o   No  ý

 

DOCUMENTS INCORPORATED BY REFERENCE

 

PartIII of this Form 10-K is incorporated by reference to the proxy statement forthe annual meeting of stockholders of the registrant to be filed on or before February 28,2005.

 

 

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NWH, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED OCTOBER 31,2004

 
| PART I      | 2                                                                           |
|-------------|-----------------------------------------------------------------------------|
|        |                                                                        |
| ITEM 1.     | BUSINESS                                                                    | 2 |
|        |                                                                        |   |
| ITEM 2.     | PROPERTIES                                                                  | 13 |
|        |                                                                        |
| ITEM 3.     | LEGAL PROCEEDINGS                                                           | 13 |
|        |                                                                        |   |
| ITEM 4.     | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                        | 13 |
|        |                                                                        |
| **PART II** | 13                                                                          |
|        |                                                                        |
| ITEM 5.     | MARKET FOR REGISTRANT’S COMMON EQUITY AND  RELATED STOCKHOLDER MATTERS | 13 |
|        |                                                                        |
| ITEM 6.     | SELECTED FINANCIAL DATA                                                     | 14 |
|        |                                                                        |
| ITEM 7.     | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL                     | 16 |
|        |                                                                        |
| ITEM 7A     | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                 | 28 |
|        |                                                                        |
| ITEM 8.     | CONSOLIDATED FINANCIAL STATEMENTS                                           | 29 |
|        |                                                                        |
| ITEM 9.     | CHANGES IN AND DISAGREEMENTS ON ACCOUNTING  AND FINANCIAL DISCLOSURE        | 29 |
|        |                                                                        |
| ITEM 9A.    | CONTROLS AND PROCEDURES                                                     | 29 |
|        |                                                                        |
| PART  III   |                                                                        | 29 |
|        |                                                                        |
| ITEM 10.    | DIRECTORS AND EXECUTIVE OFFICERS OF THE  REGISTRANT                         | 29 |
|        |                                                                        |
| ITEM 11.    | EXECUTIVE COMPENSATION                                                      | 30 |
|        |                                                                        |
| ITEM 12.    | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT             | 30 |
|        |                                                                        |
| ITEM 13.    | CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                             | 30 |
|        |                                                                        |
| ITEM 14.    | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 30 |
|        |                                                                        |
| **PART IV** | 30                                                                          |
|        |                                                                        |
| ITEM 15.    | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND  REPORTS ON FORM 8-K            | 30 |

 

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PART I

 

ITEM1.                                       BUSINESS

 

**The Company**

 

NWH, Inc. (“NWH” or the “Company”, formerly NationalWireless Holdings Inc.) owns and operates Electronic Network Systems, Inc. (“ENS”),a payer services organization that connects healthcare payers and providersusing state of the art proprietary software and telecommunications services formost healthcare payment and insurance validation transactions. The Companyfocuses its efforts on the development of ENS’ business and continues itsbusiness of acquiring and disposing of interests in healthcare and other businessareas.

 

The Company was organized in Delaware on August 31,1993.  The Company’s executive officesare located at 156 West 56th Street, Suite 2001, New York, New York 10019,telephone: (212) 582-1212.

 

**Electronic Network Systems, Inc.**

 

*General*

 

NWH manages ENS and owns 94% of ENS’ outstandingstock.

 

*National Healthcare Communications Company.*

* *

ENS is a payer services organization that connects payers (i.e., insurancecompanies and third party administrators) and providers (i.e., doctors, grouppractices and other healthcare providers) using state of the art proprietarysoftware and telecommunications services for most healthcare payment andinsurance validation transactions.  ENSprovides a state of the art technology platform for web based graphical userinterfaces on a national basis, which enables its clients, both payers andproviders, to comply fully with applicable regulatory requirements such asthose imposed by HIPAA (as discussed in *Industry*below).  ENS’ service offerings addressthe full array of evolving industry needs in this focused area with a completecycle of services from a single point of entry (a personal computer in theclient’s office) for both providers and payers, compatible with multiple systemand database operating environments. These services include an Internet transactions portal, payertransactions hosting, electronic data interchange, Pre-adjudication softwareservices (PASStm), scanning, opticalcharacter recognition and data entry of paper claims and correspondence andmailroom services. ENS generates revenue through recurring subscriptions, flator per transaction fees and revenue sharing.

 

Over 42,000 providers are connected to ENS’e-commerce and Internet services and, through payer arrangements,ENS also currently conducts daily paper to e-commerce claim conversion foranother 185,000 healthcare providers.  Asof January 20, 2005, ENS was connected to over 1,200 payers, includingcommercial healthcare plans, managed care organizations, Blue Cross/Blue Shieldplans, Medicare, Medicaid and CHAMPUS.

 

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*Strategies*

 

## ENS’ primary strategy is to provide solutions andservices in healthcare transaction processing that eliminate paper and manualprocesses and to enable real-time analysis of the transactions, therebyincreasing the speed and efficiency of communications between healthcare payersand providers.  These service offeringsmust be updated continually to enable existing clients to meet changinglegislative compliance requirements, as well as matching competitive offerings.  To enable efficient handling of payers’claims, ENS focuses on converting the provider’s claims to an electronic formatat the earliest stage and consequently markets directly to providers.  Early and accurate conversion of papertransactions to an electronic format at the providers’ site savesadministrative dollars for both the payers and providers.  Early conversion to electronic format alsoenables provider e-commerce connectivity, processing and “cleaning” of claimsfor auto-adjudication by the payers, and facilitates the payers’ compliancewith regulatory electronic transaction requirements, for instance, under HIPAA.

##  

## Federal and state regulatory actions have contributedto the growth in the need for payer service organizations, with some HIPAAregulations having gone into effect in 2003 and 2004 and new standards andregulations going into effect in 2005. ENS is continually developing its service offerings to meet theseregulatory needs.

##  

## In addition to enhancing its service objectives, ENShas sought to control its costs and maintain a stable employee base. From 2001through early 2003, ENS restructured its operations to improve internalefficiency and profitability while ensuring better performance through bettertraining and incentives for its personnel.

##  

### Healthcare communications is a dynamic area and ENScontinually upgrades its service offerings. Key components of continuing product development include:

###  

### (a)                                      eliminating additional papersteps in healthcare transaction processing through electronic and automaticsignature features and further edits and services in compliance with existingcommercial and governmental requirements.

###  

### (b)                                     providing “accurate transactions,” going beyond ENS’ historical “clean claim” services as definitions ofwhat is accurate are redefined by clients, primarily the payers;

###  

### (c)                                      providing an information exchange hub enabling any payer tocommunicate with any provider to exchange any required information through marketing ENS’ Health-e Network® (see *ENS Services* below). ENS will continue to enhance informationreporting capabilities with additional specialties such as DME (durable medicalequipment)**,** dental, and pharmacy information, andincreasing integration with physician management software vendors; and

###  

### (d)                                     co-marketing its web basedservices with payers and vendors in order to reach a much wider audience ofproviders.

###  

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*Key elements of ENSservices*

 

ENS developed a full national payer and vendorprogram based on HIPAA-compliant transaction architecture and Internet portalinfrastructure.  ENS was the firstindustry electronic data interchange clearinghouse to go live with a nationalpayer for all provider-initiated HIPAA compliant transactions, including:

 

•                 Healthcare Claims (ANSI 837)

•                 Eligibility (ANSI 270/271)

•                 Claims Status Inquiry (ANSI 276/277)

•                 Referrals and Authorizations (ANSI 278)

•                 Patient Statements (via the Internet)

•                 Electronic Remittance Advice (ANSI 835)

 

ENSwas also the first clearinghouse to go live with all transactions in a web-hostedenvironment for a national payer.  Recently, ENS underwent stress testing of its new real-time transactionsengine, and, based on the testing, management believes ENS has the currentcapacity to process in excess of 3 million transactions a day.

 

ENS hasfocused on developing HIPAA compliance testing and payer implementations thatsatisfy not only the HIPAA regulations that went into effect in 2003 and 2004 butalso the new standards and regulations which will take effect in 2005.   Because its services meet HIPAA standards,ENS has contracts with 18 of the top 20 national payers and is currently indiscussions with the remaining two of the top 20 payers.

 

ENS has also focused on the stability of its systemenvironment and began rolling out its new integrated provider solutions throughits Software Developer’s Kit (SDK).  As aresult, ENS’ provider site sales increased by 36.7% in fiscal 2004 as comparedto the previous fiscal year.

 

*ENS Services - Health-e Network**â*

 

ENS’ Health-e Networkâ suite of services addresses all of thehealthcare industry’s administrative transaction processing needs, bothe-commerce and paper.  As a provider of afull-cycle payer and provider e-commerce services, ENS enhances the providers’and payers’ administrative efficiency. The service offerings range from a front-end data capture/transmissionsoftware, to advanced pre-adjudication software, to simple mailroomservices.  ENS currently provides e-commerceconnectivity to over 1,200 payers for the e-commerce claims component ofHealth-e Networkâ and provides several payers withconnectivity for the entire suite of HIPAA-mandated administrative transactionsbetween payers and providers.

 

Health-e Networkâ includes the following:

 

•                  **Healthcare e-CommerceTransactions Processing** ENSdelivers multiple applications that enable healthcare providers to conduct keyhealthcare transactions easily with many payers.  ENS provides these e-commerce applicationsthrough the Internet and on multiple operating systems.  ENS also delivers transaction processingcapabilities to strategic partners, such as physician management softwarevendors which, with their own software, access payers to conduct electronicbusiness transactions via use of ENS’ Software Developer’s Kit (SDK).

 

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ENS currently processes and routes medical andhospital claims, eligibility requests and responses, claims status, claimstracking, claim payment remittance information, reporting, referral andauthorization transactions.  ENS servicessupport all of the HIPAA-defined transactions and deliver to providers variousmethods of conducting those transactions with payers.

 

•                  **Provider Connectivity (XpediteTM )** enables ENS to identify the paper and manualtransaction volumes of a payer’s provider groups, target high paper submitters,track internal progress, and market specifically to selected healthcaretransaction submitters.  Based on payerspecific criteria, ENS assigns different levels of internal resources toconvert these providers to electronic business processes with the payer. TheXpediteä conversion program then goes beyond thesales process and combines efforts of all ENS internal departments.  The purpose of Xpediteä is to connect providers on behalf of payerorganizations to make the participants more efficient through e-commerce.

 

•                  **Automated Document Services****Ô****(ADS****Ô****)** provides payersthe complete front-end handling and conversion (imaging/scanning) of paperclaims forms to an e-commerce format. Paper claims still constitute from 55-60%of provider claims volume industry-wide to commercial payers.  As the claims are converted to an electronicformat, ENS captures the names of all paper-submitting providers in order toconvert them for other e-commerce services with the payer’s support.  Utilization of Health-e Networkâ (which includes ADS**Ô**) provides a payer with the opportunity tohave 100% e-commerce claims receipts. With ENS as their partner and core e-commerce strategy implementer,payers can increase e-commerce transactions from their provider constituency.

 

•                  **Pre-Adjudication Software System****Ô****(PASS****Ô****)** provides a single,HIPAA-compliant connectivity entry point to a payer for all claimstransactions, including transactions received via the Internet, through privatee-commerce networks, and received on paper. PASSä channels the claims by utilizing customizedand algorithm-based logic, and conducts the vital claims processing function ofprovider and member matching, including real-time eligibility verification, acritical payer requirement for increased claims paying accuracy and efficiency.ENS’ PASSÔ is an open, flexible solution that is usedwith the vast majority of today’s payer operating environments.

 

•                  **HIPAA Payer Portal and Hosting (Health-eXchange****Ô****)**ENS’transactions infrastructure receives data from providers in virtually any fileformat and translates to any healthcare Payers’ file specifications,facilitating HIPAA transactions compliance. ENS delivers transactions compliance for Providers, Payers, and ApplicationService Providers.  ENS providescompliance, connectivity, and routing on all HIPAA-defined administrativehealthcare transactions with a participating Payer including: healthcare claimsor encounter information; health plan eligibility; healthcare claim status;referral certification and authorization; healthcare payment and remittanceadvice; health plan enrollments; and health plan premium payments.

 

ENS also provides transaction hosting for Payersso they can outsource their transaction processing needs.  ENS’ transaction hosting capabilities providefor compliance, connectivity, routing, and processing of the transaction forthe Payer on the following HIPAA-defined administrative healthcaretransactions: health plan eligibility; healthcare claim status; referralcertification and authorization

 

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•                  **Eligibility** is an ENS service that provides physicianpractices with immediate access to participating payers plus various regionaland governmental payers for determining member plan eligibility.  This service is delivered over the Internetand receives constant updating.

 

•                  **Electronic Claims Tracking (ECT****Ô****)** provides immediateInternet-based tracking of both e-commerce claims and, for those payers utilizingHealth-e Networkâ, up-dated status on the paper claims thathave been converted to an e-commerce format. ENS believes that this is thefirst tool that affords providers the opportunity to utilize an Internetapplication to track claims forwarded to payers electronically.

 

•                  **Direct-Payer e-Commerce**provides network connectivity forHIPAA-defined transactions to and from payer organizations from existingphysicians and gateways.

 

•                  **Customer Service.**  As anadjunct to its transaction processing services, we maintain customer servicefacilities with help desks for real-time customer inquiries. We offer on-lineand personal technical support.  Clientsupport employs a modern call tracking and response system that is directlyconnected to the processing center.

 

As of January 20, 2005, in excess of 42,000physicians were actively submitting electronic healthcare transactions viaHealth-e Networkâ suite of services with over an additional 430contracted provider sites scheduled to be installed in 2005.

 

**Advisory Board.**

 

TheCompany has assembled an Advisory Board consisting of executives with knowledgeof the medical data processing industry and general business trends in order tohelp the Company and ENS anticipate industry trends and develop strategies tomeet the challenges of ENS’ business.  They will be compensated out of the incentive bonus program describedlater in this section.

 

*Industry*

 

AlthoughENS faces competition from other industry players, none provide ourcomplete-cycle proven solution that addresses all provider claim activity whileenabling HIPAA required transactions, combined with a proven strategy ofconnecting providers and enabling them to do business electronically withhealthcare payers. Additionally, within today’s healthcare environment, veryfew competitors are focused on an all-payer electronic solution for providers.

 

Webelieve that healthcare information services will continue to be one of thefastest growing segments within the healthcare industry, and the use ofe-commerce and the Internet will dramatically increase over the next 3 to 5years as a major component of daily operations for healthcare industryparticipants.

 

Demand for our services is driven by threefactors.  First, payer organizations,both commercial and governmental, continue to tighten their budgets and lowerreimbursements to providers. Payers must secure outsourcing services that bringthem greater efficiencies and support higher levels of electronic transactionprocessing between them and their respective provider networks. Second, thepayer community is focusing on decreasing operating costs and increasing profitmargins. Payers have an incentive to increase the use of e-commerce and theInternet because electronic transactions cost payers less to administer.  By contracting with ENS for utilization ofour services, payers have an opportunity for fixed cost pricing and significantlevels of overhead reduction. Third, government and industry legislation andrulemaking,

 

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especially the Health Insurance Portability andAccountability Act (HIPAA), the Joint Commission on Accreditation of HealthcareOrganizations (JCAHO), industry accreditation groups such as the NationalCommittee for Quality Assurance (NCQA) and organized lobbies representingprovider groups are requiring the use of standard transactions, standardidentifiers, security and other standards and requirements for the transmissionof certain electronic health information. These regulations, which went into effect in 2003, are also driving thedevelopment and standardization of many other electronic healthcare transactiontypes for additional administrative simplification.  As a result, payers are moving to outsource manyprimary transactions processing functions (i.e. paper claims, imaging/scanning,e-commerce implementation, pre-adjudication, mailroom services, etc.) to reducetheir internal information technology staffing costs, meet governmentregulations, as well as partnering to achieve increased levels of providerconnectivity.

 

Growing interest inelectronic healthcare administrative and financial transactions has resultedfrom the anticipated lower costs of adopting and utilizing the Internet. Thehealthcare industry’s continuing reliance on paper and manual processing iscostly and inefficient, a status making it a prime target for many of thelatest workflow technologies. The promise of the Internet has been met with aflurry of companies offering all levels of new Internet—based services to thehealthcare industry. Although technically the efficiencies are clearlyavailable, healthcare as an industry moves slowly and adoption and integrationof these offerings into daily practice has so far been at a very low level.

 

The Administration Simplification Act, Section Fof HIPAA, requires the adoption of eight standard financial and administrativeformats to enable health information to be exchanged electronically, thusimproving the efficiency and effectiveness of the health care system.  HIPAA-AS should accelerate the number ofelectronic claims, and related transactions, such as eligibility, enrollmentsand disenrollments, etc.  As payers mustdevelop the capacity to accept or send HIPAA-AS mandated transaction sets,payers can look to third parties such as ENS’ Health-e Networkâ to accept, send, host, and processtransaction information on their behalf. In addition, ENS management believes that the combination of HIPAA,NCQA, and other healthcare lobbying groups should drive the growth of batch(medical) claims, real-time transactions, and claims outsourcing processes.

 

*Competition*

 

The healthcare industry continues tosuffer from outdated paper and manual processing. Although technically theefficiencies from use of the internet and other e-commerce tools are clearlyavailable, healthcare remains today less technically sophisticated for most ofits transaction processing.  Manycompetitors, such as WedMD, ProxyMed and others, offer all levels of newInternet-based services to the healthcare industry. To date, adoption andintegration into daily practice of these offerings has been at a very lowlevel.  ENS expects increasing levels ofe-commerce application adoption by the healthcare industry’s primaryparticipants over the next three to five years. ENS competes against traditional claims clearinghouses, such as WebMD,McKesson/HBOC, Per-Se Technologies, ProxyMed, and others. ENS has in the pastcompeted with legacy practice management systems vendors offering a claimsprocessing component.  However, in thepast year, ENS began partnering with many new vendors by offering back-endprocessing, integrated and co-brandable solutions.

 

Factors influencing competition in the healthcaremarket include (i) compatibility with the provider’s software and inclusion inpractice management products and (ii) relationships with third-party payers,including managed care organizations. ENS believes that the most significantfactors in developing and maintaining relationships with its customers are thebreadth, price and

 

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quality of ENS’ services, provider level support and ENS’ ability to addressits customers’ current needs effectively while facilitating the transition tohigh levels of utilization of Internet and HIPAA supported transactionstandards applications.  We continue toestablish a predictable recurring revenue stream by entering into multi-yearagreements.

 

*Sales and Marketing*

 

ENS develops and maintains payer, provider andvendor relationships through our sales and marketing personnel located in fivegeographic regions. Our sales and marketing strategy focuses on selling ourservices to providers directly through sales representatives and throughorganizations, such as healthcare finance consulting firms, practice managementsoftware firms, application service providers, and health care planadministrators, that have relationships with or access to a large number ofproviders. ENS develops long-term relationships with systems vendors, thirdparty payers and other large submitters of healthcare transactions.  In addition, we work closely with practicemanagement system vendors to provide an integrated solution to providers.

 

Some of our payer clients co-sponsor marketinginitiatives with healthcare provider groups to educate and help initiate theadoption of healthcare e-commerce utilizing ENS services.  These initiatives have proven to be effectivein driving the e-commerce connectivity of payer organizations with their providerbase via ENS.

 

*Customers*

 

Our principal customers consist of healthcareproviders, such as physicians, hospitals, clinics and billing services, andthird-party payers, such as indemnity insurers, managed care organizations,preferred provider organizations, claims submitters and state/federalgovernmental agencies.  In addition, ENSmarkets its services indirectly to providers and payers through third partyadministrators, aggregators, consultants and accountants.  Benesight and its affiliates HarringtonBenefits and Fiserv accounted for an aggregate of 39% of total revenues duringfiscal 2003 and 42% of total revenues during fiscal 2004.  One former significant customer— Lifeguard— wasconserved under receivership by the California State Department of ManagedHealth Care Operations (DMCO) during fiscal 2002 and ordered to wind down itsmembership business by December 31, 2002, thereafter ceasing to be asignificant customer. As a result, Benesight in combination with its sisterorganization, Harrington, has accounted for a higher percentage of our revenuesin fiscal 2003 and fiscal 2004.  Duringfiscal 2003, ENS entered into multi-year agreements with Pacificare HealthSystems and Aetna, two of the largest national consumer health organizations.

 

We typically provide real-time services to customersunder contracts that are not exclusive and generally do not guarantee aspecific transaction volume or revenue stream. The pricing of our services bothon a monthly and per-claim basis is set under contracts typically having termsof one to seven years, subject to a variety of early cancellation arrangements.

 

We enter into contracts with providers, payers andother claim submitters, such as third party administrators, practice managementsystem vendors, clearinghouses and billing services.Our claim submitter contracts often containexclusivity provisions whereby the submitter agrees to process all claimsthrough ENS, provided that ENS has network access to the payer.

 

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*Operations*

 

We deliver our services via a state-of-the-artnetwork comprised of multiple servers, a mixture of commercial and Health-eNetworkâ proprietary software, high-speed Ethernetconnections, and dial-up and private-line connections to/from customers.

 

Our computer network provides for multi-path hostaccess with a high degree of accuracy and integrity.  It was designed to operate continuously andwas constructed and engineered with fault tolerance and redundancy in mind.  Servers are typically configured withredundant hard drives, multiple power supplies, and multiple processors.  Power is provided via uninterruptible powersupply systems.  The software and relateddata files that are maintained and processed on the network are backed upnightly and stored off-site from the data center.  We outsource some of the data entry andprogramming functions.  Recently, ENSunderwent stress testing of our new real-time transaction engine and we believeENS has the current capacity to process in excess of 3 million transactions aday.

 

Our communications network consists of redundantconnections to the Internet as well as private, direct connections to payersranging from DSO’s to full T-1’s. The communications network also includesexpansive facilities for analog transfer of data to and from providers.  The entire network is designed to facilitatesecure, electronic, real-time communications among payers, providers and otherusers, of critical and sensitive healthcare information.

 

*Proprietary**Rights*

 

We own certain of the software and systems designsthat we use and have a limited, perpetual, nonexclusive, royalty-free licenseto use other software and systems designs. We also license certain othersoftware from third parties.

 

Our success is dependent in part upon electronictransaction processing technology developed by us. We have not sought patentsor copyright protection for any of our software or related technology.  A combination of trade secrets, service markand contract protection is used to establish and protect that technology.  There can be no assurance that these legalprotections and the precautions will be adequate to prevent misappropriation oftechnology used by us. Furthermore, the legal protections do not preventindependent third-party development of competitive technology.

 

*Government Regulation and Healthcare Reform*

 

The healthcare industry is highly regulated andsubject to changing political, economic and regulatory influences that mayaffect the procurement practices and operation of healthcare organizations. Ourservices are designed to function within the structure of the healthcarefinancing and reimbursement system currently being used in the UnitedStates.  Changes in such systems couldresult in the need for unplanned product enhancements, delays or cancellations oforders, or the revocation of endorsement of our services by hospitalassociations or other customers.  Any ofsuch occurrences could have a materially adverse effect on our business,financial condition and results of operations.

 

During the past several years, the United States ofAmerica’s healthcare industry has been subject to an increase in governmentalregulation of, among other things, reimbursement rates.  Certain proposals to reform the U.S.healthcare system are periodically considered by Congress and certain statelegislatures.  These programs may containproposals to increase governmental involvement in healthcare or otherwisechange the operating environment for our

 

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current and potential customers. Healthcare organizations may react to these proposals and theuncertainty surrounding such proposals by curtailing or deferring investments,including those for our services.  On theother hand, changes in the regulatory environment have increased and maycontinue to increase the needs of healthcare organizations for cost-effectiveinformation management and thereby enhance the marketability of our services.

 

We cannot predict with any certainty what impact, ifany, such proposals or reforms might have on ENS’ business, results ofoperations and financial condition.  Inaddition, many providers are consolidating to create integrated healthcaredelivery systems with greater regional market power.  As a result, these emerging systems couldhave greater bargaining power, which may lead to price erosion of ourservices.  The failure of ENS to maintainadequate price levels would have a materially adverse effect on our business,financial condition and results of operations. Other legislative or market-driven reforms could have unpredictableeffects on our business, financial condition and results of operations.

 

Recent government and industry legislation andrulemaking, especially the Health Insurance Portability and Accountability Act(HIPAA), the Joint Commission on Accreditation of Healthcare Organizations(JCAHO), industry accreditation groups such as the National Committee forQuality Assurance (NCQA) and organized lobbies representing physician groupsare requiring the use of standard transactions, standard identifiers, securityand other standards and requirements for the transmission of certain electronichealth information. HIPAA should accelerate the number of electronic claims andrelated real-time transactions, such as eligibility, verification, enrollment,etc. A section of HIPAA, the Administrative Simplification Act, requirespayers to use eight standardized real-time transactions, includingeligibility.  On August 17, 2000,the U.S. Department of Health and Human Services published final regulations togovern these eight standardized real-time transactions involving healthinformation, which required compliance by October 16, 2002 and which laterallowed for an amendment to be filed extending compliance until October 16,2003.  Payers have been able to meetthese requirements by outsourcing the claims processing function to thirdparties such as Health-e Networkâ.

 

The United States Food and Drug Administration (FDA)is responsible for assuring the safety andeffectiveness of medical devices under the Federal Food, Drug and CosmeticAct.  Computer products and services aresubject to regulation when they are used or are intended to be used in thediagnosis of disease or other conditions, or in the cure, mitigation, treatmentor prevention of disease, or are intended to affect the structure or functionof the body.  The FDA could determine inthe future that any predictive aspects of our services make them clinicaldecision tools subject to FDA regulation. Compliance with these regulations could be burdensome, time-consumingand expensive. We also could become subject to future legislation andregulations concerning the development and marketing of healthcare softwaresystems.  These could increase the costand time necessary to market new services and could affect us in other respectsnot presently foreseeable. We cannot predict the effect of possible futurelegislation and regulation.

 

The confidentiality of patient records and thecircumstances under which such records may be released for inclusion in ourdatabases are subject to substantial regulation by state and federalgovernments.  These state laws andregulations govern both the disclosure and the use of confidential patientmedical record information.  Althoughcompliance with these laws and regulations is at present principally theresponsibility of the hospital, physician or other provider, regulationsgoverning patient confidentiality rights are evolving rapidly.  Additional legislation governing thedissemination of medical record information has been proposed at both the stateand federal level.  This legislation mayrequire holders of such information to implement security measures that mayrequire substantial expenditures by ENS.  There can be no assurance that

 

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changes to state or federal laws will not materially restrict the ability ofproviders to submit information from patient records using our services.

 

*Facilities*

 

ENS’ executive and corporate offices are located inColorado Springs, Colorado in approximately 20,000 square feet of office spaceunder a lease that expires June 14, 2006. ENS has a processing center inPueblo, Colorado that occupies approximately 11,000 square feet.  We believe that our facilities are adequatefor our current operations.

 

*Employees*

 

As of January 20, 2005, ENS had 212 employees,including 107 salaried and 105 hourly employees (including temporaryemployees).  None of these employees isrepresented by a union or other collective bargaining group.  ENS believes its relationship with itsemployees is good.

 

*Incentive bonus program*

 

In January 2003, the Company adopted anincentive bonus plan for executives and consultants of ENS and members of theAdvisory Board providing for payment of approximately 5% of any gain to theCompany in the event of a sale of ENS or a public offering by ENS.

 

*Litigation*

 

ENS is not currently party to any materiallitigation.

 

**Telecommunications**

 

We have sold or otherwise disposed of all ourtelecommunications assets, but we may continue to seek acquisitions in thearea.  Management believes that the pricesof telecommunications businesses have been too volatile recently to presentattractive opportunities. Some of our former telecommunications operations aredescribed below.

 

*Wireless Cable*

 

* *In June 1997 the Company completed the sale of its subsidiary,South Florida Television Inc., which held its rights to provide wireless cabletelevision service in Miami, to BellSouth Corporation (NYSE: BLS) for 1,048,321shares of BellSouth common stock, based on a $48 million purchase price.  We do not currently own any wireless cablesystems or channels, and, while we continue to seek and review opportunities inthis area, we have no specific agreements or understandings to acquire any suchassets.

 

*TLC Productions*

 

InApril 2001, we closed the operations of our subsidiary TLC Productions,Inc. (“TLC”), a teleport and uplink facility located in North Miami, Florida,that provided satellite uplink services to clients who then are able to rebroadcastsignals to video programming distributors.

 

11

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**Other Operations**

 

In addition to ENS, the Company continues itsbusiness of acquiring or disposing of interests in healthcare and other businessareas. The Companycurrently has no specific agreements or arrangements to acquire or dispose ofany such businesses.

 

*Developing Technology*

 

 TheCompany is reviewing on a preliminary basis acquisitionsof healthcare, telecommunications and strategically linked companies.

 

*Anagram InternationalCommunications Ltd*.

 

AnagramInternational Communications Ltd. (“Anagram”) was organized in 1995 to engagein, among other things, the business of acquiring television programming fordistribution in the United States and abroad. The Company invested an aggregate of $636,875 in Anagram.  Anagram wound down most of its business in2000 and is currently inactive.

 

**Other Events**

 

OnJanuary 23, 2002, we changed the Company’s name from National WirelessHoldings Inc. to NWH, Inc., reflecting its expansion as a holding company intohealthcare e-commerce and its interest in acquisitions in other areas.

 

Ourboard of directors authorized the repurchase of up to 20% of our common sharesbecause we believe, under current market conditions, that repurchase is afavorable investment.  The repurchasedshares will also be available for sale upon exercise of outstandingoptions.  In fiscal 2001, we purchased anaggregate of 16,500 shares for an aggregate of $192,995.  In fiscal 2002, we repurchased an aggregateof 371,900 shares for an aggregate cost of $4,529,075.  In fiscal 2003 we repurchased an aggregate of 29,200shares for an aggregate cost of $369,564. We did not repurchase any additionalshares during fiscal 2004 or during the period November 30, 2004 to January31, 2005.

 

**Special Note RegardingForward-Looking Statements**

 

Certainstatements contained in this Annual Report on Form 10-K, including, withoutlimitation, statements containing the words “believes,” “anticipates,” “expects”and words of similar import, constitute “forward-looking statements” as definedin the Private Securities Litigation Reform Act of 1995 or by the Securitiesand Exchange Commission in its rules, regulations and releases, regarding theCompany’s financial and business prospects and capital requirements.  Such forward-looking statements involve knownand unknown risks, uncertainties and other factors that may cause the actualresults, performance or achievements of the Company, or industry results, to bematerially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements.  Such factors include, among others, thefollowing: the limited nature of the Company’s operations and the risk of theCompany’s failure to acquire additional businesses; the uncertain acceptance ofHealth-e Networkâ; competition; existing governmentregulations and changes in, or the failure to comply with, governmentregulations; the ability of the Company to sustain, manage or forecast itsgrowth; dependence on significant customers and the potential loss thereof; theability to attract and retain qualified personnel; risk of technologicalobsolescence, and other factors referenced in this Annual Report on Form 10-K.  Certain of these factors are discussed inmore detail elsewhere in this Annual Report on Form 10-K, including, withoutlimitation, under the captions “Selected Financial Data,” “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”, “Business”and Exhibit 99.1 hereto.  Given these

 

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uncertainties, undue reliance should not be placed on suchforward-looking statements.  The Companydisclaims any obligation to update any such factors or to publicly announce theresult of any revisions to any of the forward-looking statements contained orincorporated by reference herein to reflect future events or developments.

 

ITEM 2.                                       PROPERTIES

 

TheCompany generally leases the real estate where its business and offices arelocated.  The Company leases office spacefor its offices in New York pursuant to a lease expiring January 31, 2007,at a rate per month of $14,917 plus escalation charges.  ENS leases approximately 20,000 square feetof office space in Colorado Springs, Colorado under a lease that expires June 14,2006.  ENS also maintains an office inPueblo, CO.  The Company’s total leaseexpense for the year ended October 31, 2004 was approximately $637,000(net of $36,000 of rental income) as compared to approximately $628,000 (net of$36,000 of rental income) for the year ended October 31, 2003.  The Company believes its properties areadequate for its current needs.

 

ITEM3.                                       LEGAL PROCEEDINGS

 

TheCompany is a party to various claims in the ordinary course of business.  Management believes that the aggregate impactof such claims, if any, will not have a material impact on the financialposition, results of operations, or liquidity of the Company.

 

ITEM 4.                                       SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

 

PartII, Item 4 of the Company’s Form 10-Q for the fiscal quarter ended April 30,2004 is incorporated by reference.

 

**PART II**

 

ITEM5.                                       MARKET FOR REGISTRANT’S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS

 

The Company’s Common Stock, $.01 par value, is traded on the NasdaqNational Market (“Nasdaq”) under the symbol “NWIR”.  The following table sets forth the range ofhigh and low sale price information for the Common Stock for each full fiscalquarterly period for the last two years as reported by Nasdaq.

 

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| ** **  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| **Quarter** | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
|        |       |     |       |     |       |   |   |   |   |
| First       |       | 22.15    |       | 19.07    |       | 15.37 |   | 11.80 |   |
| Second      |       | 20.42    |       | 18.95    |       | 16.99 |   | 14.70 |   |
| Third       |       | 19.50    |       | 17.00    |       | 19.00 |   | 15.53 |   |
| Fourth      |       | 17.68    |       | 16.22    |       | 19.62 |   | 18.16 |   |
|        |       |     |       |     |       |   |   |   |   |

 

Asof January 27, 2005, there were approximately 1,000 beneficial holders ofCommon Stock.

 

InJune 2003, the Company announced a policy of paying regular quarterlydividends of $.30 per share.  In February,May, August and November 2004, the Company paid the $.30 regulardividend and a special dividend of $.20 per share.  In November 2004, the Company declaredits $.30 regular dividend and a $.20 special dividend, payable in February 2005,and expects to continue paying cash dividends on the Common Stock in theforeseeable future.  The payment of cashdividends on shares of Common Stock will be within the discretion of theCompany’s Board of Directors and will depend upon the earnings of the Company,the Company’s capital requirements and other financial factors which areconsidered relevant by the Company’s Board of Directors.

 
| **Plan Category**                                           | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available  for future issuance  equity compensation  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                |       |                                                                               |       |                                                                                                                                     |       |
| ** **                                                  | ** ** | **(a)**                                                                                             | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                  | ** ** |
| Equity Compensation Plans Approved by Security  Holders     |       | 205,769                                                                                             |       | $  16.01                                                                 |       | 75,000                                                                                                                                   |       |
|                                                        |       |                                                                                                |       |                                                                               |       |                                                                                                                                     |       |
| Equity Compensation Plans Not Approved by Security  Holders |       | 0                                                                                                   |       | N/A                                                                                |       | N/A                                                                                                                                      |       |

 

ITEM 6.                                       SELECTEDFINANCIAL DATA

 

The selected historicalfinancial data for the Company presented below under the captions “OperatingData” and “Balance Sheet Data” as of October 31, 2000, 2001, 2002, 2003and 2004, and for the years ended October 31, 2000, 2001, 2002, 2003 and2004 are derived from the Company’s consolidated financial statements.  The selected financial data should be read inconjunction with “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS.”

 

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| ** **                                                      | ** ** | **Year Ended  October 31,  2004** | ** ** | **Year Ended  October 31,  2003** | ** ** | **Year Ended  October 31,  2002** | ** ** | **Year Ended  October 31,  2001** | ** ** | **Year Ended  October 31,  2000** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Operating Data:                                                 |       |                                   |       |                                   |       |                                   |       |                                   |       |                                   |       |
| Services Revenue                                                |       | $                                      | 17,462,554 |                                   | $          | 13,396,673                             |       | $                                      | 11,930,646 |                                   | $          | 12,183,824 |   | $ | 9,031,402 |   |
| Loss from operations                                            |       | 482,837                                |       | 996,583                                |       | 581,217                                |       | 3,720,613                              |       | 4,314,026                              |       |
| Other Income (Loss) (1)                                         |       | 1,663,499                              |       | 2,112,612                              |       | 6,066,925                              |       | 10,785,052                             |       | 6,147,638                              |       |
| Net Income (Loss) (2)                                           |       | 800,662                                |       | 440,029                                |       | 4,185,708                              |       | 2,152,439                              |       | 1,782,612                              |       |
| Net Income (Loss) per common share- Basic (3)                   |       | 0.27                                   |       | 0.15                                   |       | 1.35                                   |       | 0.65                                   |       | 0.53                                   |       |
| Weighted average number of common Shares  outstanding-Basic (3) |       | 2,924,631                              |       | 2,921,830                              |       | 3,094,724                              |       | 3,333,000                              |       | 3,333,000                              |       |
|                                                            |       |                                   |       |                                   |       |                                   |       |                                   |       |                                   |       |
| Balance Sheet Data:                                             |       |                                   |       |                                   |       |                                   |       |                                   |       |                                   |       |
| Cash and cash equivalents                                       |       | $                                      | 12,137,155 |                                   | $          | 29,309,192                             |       | $                                      | 31,498,217 |                                   | $          | 19,231,683 |   | $ | 11,520,876 |   |
| Marketable securities                                           |       | 14,926,737                             |       | 9,777,901                              |       | 13,954,738                             |       | 34,794,641                             |       | 51,476,079                             |       |
| Total assets                                                    |       | 38,294,607                             |       | 49,876,573                             |       | 56,266,369                             |       | 64,019,330                             |       | 72,549,284                             |       |
| Long-term obligations                                           |       | 832,792                                |       | 980,231                                |       | 675,431                                |       | 838,662                                |       | 620,658                                |       |
| Total liabilities                                               |       | 4,829,709                              |       | 10,523,443                             |       | 13,885,244                             |       | 17,099,510                             |       | 25,262,484                             |       |
| Total stockholders’ equity                                 |       | 33,464,898                             |       | 39,353,130                             |       | 42,381,125                             |       | 46,919,820                             |       | 47,286,800                             |       |
| Cash dividends declared per Common share                        |       | $                                      | 2.00       |                                   | $          | 1.00                                   |       | 0                                      |       | 0                                      |       | 0 |   |

 

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(1)          IncludesGain (Loss) on Securities transactions, net, interest income, dividend income,interest expense and other income.

(2)          Duringthe fiscal year ended October 31, 2001, the Company adopted the provisionsof SFAS 133 (Accounting for Derivative Instruments and Hedging Activities).  See Note 2 to Consolidated FinancialStatements.

(3)          SeeNotes 2 and 13 to Consolidated Financial Statements

 

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ITEM 7.                                       MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

NWH, Inc. (“NWH” or the “Company”) owns and operatesElectronic Network Systems, Inc. (“ENS”), a payer services organization thatconnects healthcare payers and providers using state of the art proprietarysoftware and telecommunications services for most healthcare payment andinsurance validation transactions. The Company focuses its efforts on thedevelopment of ENS’ business and continues its business of acquiring anddisposing of interests in healthcare and other business areas.

 

The Company’s fiscal year ends on October 31.  ENS’ fiscal year ends on September 30.

 

Certain statements contained in this Annual Reporton Form 10-K constitute “forward-looking statements” as defined in the PrivateSecurities Litigation Reform Act of 1995 or by the Securities and ExchangeCommission in its rules, regulations and releases, regarding the Company’sfinancial and business prospects and capital requirements.  Such forward-looking statements involve knownand unknown risks, uncertainties and other factors as described in Exhibit 99to this Annual Report on Form 10-K that may cause the actual results,performance or achievements of the Company, or industry results, to bematerially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements. Given theseuncertainties, prospective investors are cautioned not to place undue relianceon such forward-looking statements. See “Business—Special Note RegardingForward-Looking Statements”.

 

**Critical AccountingPolicies and Estimates**

 

Our discussionand analysis of our financial condition and results of operations are basedupon our Consolidated Financial Statements and Notes to Consolidated FinancialStatements, which were prepared in conformity with accounting principlesgenerally accepted in the United States. The preparation of the consolidatedfinancial statements requires us to make estimates and assumptions that affectthe amounts reported in the consolidated financial statements. We base ourestimates on historical experience, current business factors, and various otherassumptions that we believe are necessary to form a basis for making judgmentsabout the carrying values of assets and liabilities and disclosure ofcontingent assets and liabilities. Actual results could differ from theseestimates.

 

We evaluateour estimates on an ongoing basis, including those related to revenuerecognition, short-term and long-term investments, deferred tax assets, incometaxes, collectibility of customer receivables, long-lived assets including impairmentof goodwill, certain accrued expenses, and contingencies and litigation.

 

We believe thefollowing reflect our critical accounting policies and our more significantjudgments and estimates used in the preparation of our consolidated financialstatements:

 

***Revenue*** —Our revenue recognition policies for ENS are asfollows:

 

Servicerevenue and revenue associated with electronic transactions to and fromproviders and payers is recognized as earned in the period the services are provided.  Installation revenue and the related costsare deferred when received or incurred and recognized over a twelve (12) month

 

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period corresponding with the term of the service contract.  Development fees and the related costs aredeferred when received and recognized over the period corresponding with a termof the related contract (one to seven years).

 

***Long-LivedAssets*** — The Companyapplies the provisions of Statement of Financials Accounting Standards (“SFAS”)No. 144 (FAS 144), Accounting for the Impairment or Disposal of Long LivedAssets for Asset Impairments*. *This statement provides guidanceon the recognition of impairment losses on long-lived assets to be held andused or to be disposed of and also broadens the definition of what constitutesa discontinued operation and how the results of a discontinued operation are tohe measured and presented. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to future new cashflows expected to be generated by the asset. If such assets are impaired, the impairment to be recognized is measuredby the amount by which the carrying amount of the asset exceeds the fair valueof the assets.

 

Our long-lived assets consist of property andequipment, goodwill and internally developed software costs. Goodwill arisesfrom the acquisitions we have made.   Ourlong-lived assets, excluding goodwill, are amortized over their estimateduseful lives, which we determined based on the consideration of several factorsincluding the period of time the asset is expected to remain in service. Weevaluate the carrying value and remaining useful lives of long-lived assets,excluding goodwill, whenever indicators of impairment are present. We evaluatethe carrying value of goodwill annually. We compared the EBITDA multiplesrepresented by the market capitalizations of similar public companies todetermine the fair value of goodwill. The Company periodically assesses thecarrying value of goodwill.  There was noimpairment of goodwill noted as a result of our impairment testing in 2004 or2003.

 

***InternallyDeveloped Software*** — The Company capitalizespurchased software which is ready for service and development costs for softwareincurred from the time the preliminary project stage is completed until thesoftware is ready for use.  The Companycapitalizes costs associated with software developed or obtained for internaluse when both the preliminary project state is completed and the Companymanagement has authorized further funding for the project which it deemsprobable will be completed and used to perform the function intended.  Capitalized costs include only (1) externaldirect costs of materials and services consumed in developing or obtaininginternal-use software, (2) payroll and payroll-related costs for employees whoare directly associated with and who devote time to the internal-use softwareproject, and (3) interest costs incurred, when material, while developing internal-usesoftware.  Capitalization of such costsceases no later than the point at which the project is substantially completeand ready for its intended purpose.

 

Research and development costs and computersoftware maintenance costs related to software development are expensed asincurred.  Capitalized softwaredevelopment costs are amortized using the straight-line method generally overfour years, not to exceed the expected life of the product.  The carrying value of capitalized softwaredevelopment costs is regularly reviewed by the Company, and a loss isrecognized if the value of estimated undiscounted cash flows benefit related tothe asset falls below the unamortized costs.

 

***Marketable Securities*—**TheCompany’s investments in a United States Treasury bill are valued at amortizedcost which is adjusted for amortization from the date of purchase tomaturity.  The value of BellSouth commonstock is measured at fair value on the balance sheet.  Investment income or loss including realizedgains and losses on investments, interest and dividends is included in the Statementof Income.  Unrealized gains and lossesfor the BellSouth common stock are recorded, net of tax, as a separatecomponent of stockholders’ equity.

 

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***Call Options*—**TheCompany’s written call options are measured at fair value on the balance sheetwith unrealized gains and losses recognized in the statement of income.

 

1)              RESULTS OF OPERATIONS

 

The following sets forth results of operationsfor the Company.  See below for a moredetailed discussion of ENS results of operations.

 

*Fiscal year ended October 31, 2004 as compared to fiscal yearended October 31, 2003:*

 

ServicesRevenue:

Services revenue increased from $13,396,673 forthe fiscal year ended October 31, 2003 to $17,462,554 for the fiscal yearended October 31, 2004, primarily reflecting ENS’ increased sales.

 

Costof Services:

Costof services increased from $6,889,251 for the fiscal year ended October 31,2003 to $9,051,276 for the fiscal year ended October 31, 2004, reflectingcosts related to increased sales at ENS and related increased amortization ofcapitalized software for revenue producing projects of ENS.  See below for a discussion of ENS results ofoperations.

 

ProfessionalFees:

Professionalfees increased from $827,682 in the fiscal year ended October 31, 2003 to$933,630 in the fiscal year ended October 31, 2004 as a result of higherlevels of transaction activity and higher compliance and governance expensesrelated to the Sarbanes Oxley Act of 2002. The professional fees relating to the Company, independent of ENS’business, decreased from $721,332 in the fiscal year ended October 31,2003 to $699,880 in the fiscal year ended October 31, 2004, reflectinglower levels of transaction activity.

 

Generaland Administrative:

Generaland administrative expense increased from $6,360,109 in the fiscal year ended October 31,2003 to $7,650,727 in the fiscal year ended October 31, 2004, reflectingbusiness growth at ENS and increased marketing costs on the provider and payerside of ENS’ business.  The general andadministrative expense relating to operations of the Company, independent ofENS’ business, decreased from $1,433,627 in the fiscal year ended October 31,2003 to $1,398,536 in the fiscal year ended October 31, 2004.

 

Depreciationand Amortization:

Depreciationand amortization decreased slightly from $316,214 in the fiscal year ended October 31,2003 to $309,758 in the fiscal year ended October 31, 2004, primarily dueto fully depreciated assets being replaced with assets for less cost.

 

Lossfrom Operations:

As a result of theforegoing events, loss from operations decreased from ($996,583) for the fiscalyear ended October 31, 2003 to ($482,837) for the fiscal year ended October 31,2004.

 

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Gain on SecuritiesTransactions, net:

Gainon securities transactions, net, increased from a gain of $1,002,793 for thefiscal year ended October 31, 2003 to a gain of $1,250,303 for the fiscalyear ended October 31, 2004, representing the net results of written calloption and short sale liabilities and settlements and realized gains from thesale of BellSouth common stock.  UnderFinancial Accounting Standards Board Statement No. 133 “Accounting forDerivative Instruments and Hedging Activities,” unrealized gains and lossesrelated to written call options and short sales are recorded in the Statementof Income.  Further, unrealized gains andlosses on BellSouth common stock, are recorded through Other Comprehensive (Loss)Income and are only recorded in the Statement of Income when realized uponultimate sale. The realized and unrealized gain on derivative transactionsdecreased from $583,687 for the fiscal year ended October 31, 2003 to aloss of $228,897 for the fiscal year ended October 31, 2004.  All of the Company’s remaining BellSouthcommon stock was sold in the fiscal year ended October 31, 2004.  The unrealized gain on BellSouth commonstock, reflected in Other Comprehensive Income, net of income taxes, for thefiscal year ended October 31, 2003 was $39,246 as compared to anunrealized gain of $136,640 for the fiscal year ended October 31, 2004.

 

Interestand Dividend Income:

Interestincome decreased from $324,696 for the fiscal year ended October 31, 2003to $318,085 for the fiscal year ended October 31, 2004, primarily due toreduced cash investments, payment of dividends and changes in cash levelsrelating to written call option and short positions on BellSouth common stock.Dividend income decreased from $412,329 in the fiscal year ended October 31,2003 to $156,971 in the fiscal year ended October 31, 2004, due to thesale of the BellSouth common stock.

 

InterestExpense:

Interestexpense increased from $48,459 in the fiscal year ended October 31, 2003to $61,860 in the fiscal year ended October 31, 2004 ($50,206 of which wasincurred by ENS), primarily due to state tax adjustments of NWH and higherinterest rates despite a small decrease in the average amount of debtoutstanding at ENS during the period.  Capitallease obligations increased during the period but were offset by a decrease inother debt.

 

IncomeBefore Provision for Income Taxes:

Werealized income before provision for income taxes of $1,116,029  for the fiscal year ended October 31,2003, as compared to income before provision for income taxes of $1,180,662 forthe fiscal year ended October 31, 2004, primarily as a result of thedecrease in the (Loss) from Operations and the increased gains on securitiestransactions, net, and despite the decreased dividend and interest income, as describedabove.

 

Provisionfor Income Taxes:

Provisionfor income taxes was $676,000 for the fiscal year ended October 31, 2003,as compared to a provision for income taxes of $380,000 for the fiscal yearended October 31, 2004.

 

NetIncome:

Netincome increased from $440,029 for the fiscal year ended October 31, 2003to $800,662 for the fiscal year ended October 31, 2004, as a result of theforegoing events.

 

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*2003 as compared to 2002:*

 

ServicesRevenue:

Services revenue increased from $11,930,646 forthe fiscal year ended October 31, 2002 to $13,396,673 for the fiscal yearended October 31, 2003, primarily reflecting ENS’ increased sales.

 

Costof Services:

Costof services increased from $5,600,431 for the fiscal year ended October 31,2002 to $6,889,251 for the fiscal year ended October 31, 2003 as a resultof higher costs related to increased sales at ENS and higher levels ofamortization relating to research and development costs and computer softwaremaintenance costs of ENS.  Cost of salesincreased at a greater percentage than related sales due to contractimplementation costs of ENS.

 

ProfessionalFees:

Professionalfees increased from $693,110 in the fiscal year ended October 31, 2002 to$827,682 in the fiscal year ended October 31, 2003 as a result of higherlevels of transaction activity and greater attention to compliance reviews andcorporate matters related to the Sarbanes Oxley Act of 2002.  The professional fees relating to the Company,independent of ENS’ business, increased from $598,660 in the fiscal year ended October 31,2002 to $699,880 in the fiscal year ended October 31, 2003, reflectinghigher levels of transaction activity.

 

Generaland Administrative:

Generaland administrative expense increased from $5,875,099 in the fiscal year ended October 31,2002 to $6,360,109 in the fiscal year ended October 31, 2003, reflectingincreased marketing costs on the provider and payer side of ENS’ business.  The general and administrative expenserelating to operations of the Company, independent of ENS’ business, increasedfrom $1,250,126 in the fiscal year ended October 31, 2002 to $1,433,627 inthe fiscal year ended October 31, 2003.

 

Depreciationand Amortization:

Depreciationand amortization decreased from $343,223 in the fiscal year ended October 31,2002 to $316,214 in the fiscal year ended October 31, 2003, primarily dueto fully depreciated assets being replaced with assets for less cost.

 

Lossfrom Operations:

Asa result of the foregoing events, loss from operations increased from($581,217) for the fiscal year ended October 31, 2002 to ($996,583) forthe fiscal year ended October 31, 2003.

 

Gain on SecuritiesTransactions, net:

Gainon securities transactions, net, decreased from gain of $5,322,634 for thefiscal year ended October 31, 2002 to gain of $1,002,793 for the fiscalyear ended October 31, 2003, representing the net results of written calloption and short sale liabilities and settlements and realized gains from thesale of BellSouth common stock.  UnderFinancial Accounting Standards Board Statement No. 133 “Accounting forDerivative Instruments and Hedging Activities,” unrealized gains and lossesrelated to written call options and short sales are recorded in the Statement ofOperations.  Further, unrealized gainsand losses on BellSouth common stock, are recorded

 

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through Other Comprehensive Income (Loss) and are only recorded in theStatement of Operations when realized upon ultimate sale. The realized andunrealized gain on derivative transactions decreased from $4,757,675 for thefiscal year ended October 31, 2002 to a gain of 583,687 for the fiscalyear ended October 31, 2003.  Theunrealized loss on BellSouth common stock, reflected in Other ComprehensiveIncome (Loss), net of income taxes, for the fiscal year ended October 31,2002 was ($3,909,775) as compared to an unrealized gain of $39,246 for thefiscal year ended October 31, 2003.

 

Interestand Dividend Income:

Interestincome decreased from $438,263 for the fiscal year ended October 31, 2002to $324,696 for the fiscal year ended October 31, 2003, primarily becausehigh yielding investments matured and were reinvested at lower market interestrates.  In addition, we reduced our cashinvestments because of the repurchase of our common stock, payment of dividendsand changes in cash levels relating to written call option and short positionson BellSouth common stock.  Dividendincome increased from $403,841 in the fiscal year ended October 31, 2002to $412,329 in the fiscal year ended October 31, 2003, due to higherdividends received on BellSouth common stock, and a lower short positionmaintained during the year.

 

InterestExpense:

Interestexpense decreased from $97,813 in the fiscal year ended October 31, 2002to $48,459 in the fiscal year ended October 31, 2003, primarily due tolower interest rates despite a small increase in the average amount of debtoutstanding at ENS during the period. Capital lease obligations decreased during the period but were offset byan increase in other debt.

 

IncomeBefore Provision for Income Taxes:

Werealized income before provision for income taxes of $5,485,708 for the fiscalyear ended October 31, 2002, as compared to income before provision forincome taxes of $1,116,029 for the fiscal year ended October 31, 2003,primarily as a result of the increase in the (Loss) from Operations and thelower gains on options and short positions and sales and decreased interestincome, as described above.

 

Provisionfor Income Taxes:

Provisionfor income taxes was $1,300,000 for the fiscal year ended October 31,2002, as compared to a provision for income taxes of $676,000 for the fiscalyear ended October 31, 2003.

 

NetIncome:

Netincome decreased from $4,185,708 for the fiscal year ended October 31,2002 to $440,029 for the fiscal year ended October 31, 2003 as a result ofthe foregoing events.

 

***ENS—Results of Operations:***

 

SeeNote 17 to the Consolidated Financial Statements for segment informationconcerning ENS.

 

*ENS - fiscal year ended September 30, 2004 as compared to fiscalyear ended September 30, 2003:*

 

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ServicesRevenue:

Servicesrevenue increased from $13,396,673 for the fiscal year ended September 30,2003 to $17,462,554 for the fiscal year ended September 30, 2004 (orapproximately 30.3%), primarily reflecting growth in sales to new and existingproviders and related payer income, revenues from new customers, and thecompletion of the implementation of two significant additions to an existingmulti-service contract in the quarter ended September 30, 2003.   ENShas increased its number of direct provider connections by 36.7% and increasedits number of direct e-commerce connections with payers from September 30,2003 to September 30, 2004.

 

Costof Services:

Costof services increased from $6,889,251 in the fiscal year ended September 30,2003 to $9,051,273 in the fiscal year ended September 30, 2004 (orapproximately 31.4%), as a result of additional costs associated withincreased use of outsourcing to process claims, increased EDI and significantadditions to an existing multi-service contract.  Included in cost of servicesfor the fiscal year ended September 30, 2003 and September 30, 2004is amortization of research and development costs, computer softwaremaintenance costs and proprietary software related to specific customers, anddepreciation of furniture and equipment, of $926,370 and $1,276,141respectively.

 

Generaland Administrative:

Generaland administrative expense increased from $3,723,383 in the fiscal year ended September 30,2003 to $4,432,715 in the fiscal year ended September 30, 2004 (orapproximately 19.1%) as a result of business growth and implementations combinedwith cost containment measures.  Thisamount excludes selling and advertising in the amount of $1,309,449 and$2,053,229 and includes professional fees (accounting expenses and legalexpenses) of $106,350 and $233,750 as of September 30, 2003 and 2004,respectively.  Selling and advertisingincreased 56.8% due to the increased use of vendors with whom we have revenuesharing arrangements related to provider revenues.  Professional fees increased 119.8% asa result of mediation proceedings and increases in accounting fees.

 

Depreciationand Amortization:

Depreciationand amortization decreased from $313,191 in the fiscal year ended September 30,2003 to $308,323 in the fiscal year ended September 30, 2004 (orapproximately 1.6%), primarily due to assets which became fullydepreciated in the current year being replaced with assets with a lowerdepreciable base, primarily computer equipment.

 

Incomefrom Operations:

Asa result of the foregoing, income from operations increased from $1,161,399 forthe fiscal year ended September 30, 2003 to $1,617,014 for the fiscal yearended September 30, 2004.

 

InterestExpense:

Interestexpense, exclusive of interest payable to NWH, increased from $48,459 in thefiscal year ended September 30, 2003 to $50,206 in the fiscal year ended September 30,2004 (or approximately 3.6%), primarily due to an increase in theaverage outstanding liability balances associated with capital leases of ENSduring the period.  For the fiscal year ended September 30,2004, $322,886 of interest expense was recognized by ENS as payable to NWH andwas eliminated in consolidation.

 

22

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EBITDA:

EBITDAincreased from $2,400,960 for the fiscal year ended September 30, 2003 to$3,201,478 for the fiscal year ended September 30, 2004 primarily as aresult of the rise in services revenue and overall gain from operations, asdiscussed above.  We provide EBITDA(earnings before interest, taxes, depreciation and amortization) information asa guide to the operating performance of ENS. EBITDA, which is not a term recognized under generally acceptedaccounting principles, is calculated as the income from operations plusdepreciation and amortization. Included in depreciation and amortization forthe purpose of calculating EBITDA is depreciation of equipment and amortizationof software costs, which is included in cost of services.  EBITDA as calculated by the Company may notbe comparable to calculations of similarly titled items reported by othercompanies.

 

*ENS - fiscal year ended September 30, 2003 as compared to fiscalyear ended September 30, 2002:*

 

ServicesRevenue:

Servicesrevenue increased from $11,930,646 for the fiscal year ended September 30,2002 to $13,396,673 for the fiscal year ended September 30, 2003 (orapproximately 12.3%), primarily reflecting growth in sales to providers andrelated payer income and revenues from new customers.  During the fiscal year ended September 30,2003, ENS entered into claim service agreements with PacifiCare and Aetna andbegan implementations of two significant additions to an existing multi-servicecontract which replaces the revenues lost from Lifeguard and Caterpillar.  While the loss in 2002 of these two largecustomers temporarily reduced the amount of paper claims submitted, ENS hasincreased its number of direct e-commerce connections with payers and increasedits number of direct provider connections by 36.9% from September 30, 2002to September 30, 2003.

 

Costof Services:

Costof services increased from $5,600,431 in the fiscal year ended September 30,2002 to $6,889,251 in the fiscal year ended September 30, 2003 (orapproximately 23.0%), as a result of increased business levels of ENS and thecontinuing implementations of two significant additions to an existingmulti-service contract.  Included in costof services for the fiscal year ended September 30, 2002 and September 30,2003 is amortization of research and development costs, computer softwaremaintenance costs and proprietary software related to specific customers anddepreciation of equipment of $819,156 and $926,370 respectively.

 

Generaland Administrative:

Generaland administrative expense increased from $3,677,097 in the fiscal year ended September 30,2002 to $3,723,383 in the fiscal year ended September 30, 2003 (orapproximately 1.3%) as a result of business growth and implementations combinedwith cost containment measures.  Thisamount excludes selling and advertising in the amount of $1,042,326 and$1,309,449 and includes professional fees of $94,450 and $106,350 as of September 30,2002 and 2003, respectively.

 

Depreciationand Amortization:

Depreciationand amortization decreased from $334,201 in the fiscal year ended September 30,2002 to $313,191 in the fiscal year ended September 30, 2003 (orapproximately 6.3%),

 

23

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primarily due to increasing levels of fixed assetsbeing fully depreciated during the year, because of full depreciation ofcertain fixed assets.

 

Income(Loss) from Operations:

Asa result of the foregoing, income from operations decreased from $1,276,591 forthe fiscal year ended September 30, 2002 to $1,161,399 for the fiscal yearended September 30, 2003.

InterestExpense:

Interestexpense, exclusive of interest payable to NWH, decreased from $97,813 in thefiscal year ended September 30, 2002 to $48,459 in the fiscal year ended September 30,2003 (or approximately 50.5%), primarily due to a decrease in the averagecapital lease balances at ENS during the period.  For the fiscal year ended September 30,2003, $316,647 of interest expense was payable by ENS to NWH and was eliminatedin consolidation.

 

EBITDA:

EBITDAdecreased from $2,429,948 for the fiscal year ended September 30, 2002 to$2,400,960 for the fiscal year ended September 30, 2003 as a result ofhigher costs as a percent of revenue, as discussed above.  We provide EBITDA (earnings before interest,taxes, depreciation and amortization) information as a guide to the operatingperformance of ENS.  EBITDA, which is nota term recognized under generally accepted accounting principles, is calculatedas the income from operations plus depreciation and amortization. Included indepreciation and amortization for the purpose of calculating EBITDA isdepreciation of equipment and amortization of software costs, which is includedin cost of services.  EBITDA ascalculated by the Company may not be comparable to calculations of similarlytitled items reported by other companies.

 

**Use of Non-GAAP Financial Measures:**

 

Certaindisclosures in this document include *“non-GAAP GenerallyAccepted Accounting Principles) financial measures.”*  A non-GAAP financial measure is defined as anumerical measure of a company’s financial performance that excludes orincludes amounts so as to be different than the most directly comparablemeasure calculated and presented in accordance with GAAP in the ConsolidatedStatements of Income, Balance Sheets or Statements of Cash Flows of theCompany.  As required by the SEC’srecently issued Regulation G, a reconciliation of EBITDA (earnings beforeinterest, taxes, depreciation and amortization) with the most directlycomparable GAAP measure follows:

 

EBITDA:

Wedefine EBITDA as earnings from operations before extraordinary items, beforenet interest and related expenses (primarily amortization of debt issuancecosts), income taxes, depreciation and amortization.  We believe that the most directly comparableGAAP financial measure to EBITDA is income from operations.  In the discussion of ENS’ EBITDA above, thedifference between EBITDA and ENS’ income from operations (which does notinclude provision for taxes) for the fiscal year ended September 30, 2004($3,201,478 and $1,617,014, respectively) consisted primarily of $1,276,141 ofamortization of software costs and depreciation of equipment included in costsof services and $308,323 of depreciation and amortization.

 

EBITDAis presented as additional information because we believe it is a usefulindicator of an entity’s debt capacity and its ability to service itsdebt.  EBITDA is not a substitute foroperating income, net earnings or cash flows from operating activities, asdetermined in accordance with

 

24

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generally accepted accounting principles.  EBITDA is not a complete net cash flowmeasure because it is a financial performance measure that does not includereductions for cash payments for an entity’s obligation to service its debt,fund its working capital and capital expenditures, and pay its incometaxes.  EBITDA is not a complete measureof an entity’s profitability because it does not include costs and expenses forinterest and income taxes and depreciation and amortization.  Rather EBITDA is a potential indicator of anentity’s ability to fund these cash requirements.  EBITDA, as we define it may differ fromsimilarly named measures used by other entities and, consequently, could bemisleading unless all entities calculate and define EBITDA in the same manner.

 

2)                                      LIQUIDITY AND CAPITAL RESOURCES

 

Asof October 31, 2004, we had approximately $27.06 million in cash andmarketable securities, as well as our interest in ENS.  Our assets have been used for, and arecurrently reserved to fund development of our healthcare e-commerce businessand development and acquisition of new technologies and businesses in otherareas.  Such amount, with earningsthereon including proceeds from sale of BellSouth common stock and relatedderivatives, is expected to be sufficient to implement this business plan throughOctober 2005, or for a shorter period if wedetermine to invest a substantial portion of our assets in major acquisitions,equity investments or stock repurchases. We actively seek to acquire or invest in healthcare e-commerce and otherbusinesses in telecommunications, media or in unrelated areas.  We may also dispose of assets from time totime.  We have no specific arrangementswith respect to any such acquisitions, dispositions or investments at thepresent time.  There can be no assurancethat any such acquisitions, dispositions or investments will be made.

 

Ourboard of directors authorized the repurchase of up to 20% of our common stockbecause we believe, under current market conditions,the repurchase is a favorable investment. The repurchased shares will also be available for issuance upon exerciseof outstanding options.  As of October 31,2004, we repurchased 417,600 shares for an aggregate cost of $5,091,634.  These shares were purchased during the fiscalyears ended October 31, 2001, 2002 and 2003.

 

Duringthe fiscal year ended October 31, 2004, we settled our option liabilitieson BellSouth common stock, sold our remaining holdings of BellSouth commonstock and invested cash in U.S. government treasury bills.

 

Ineach of the four quarters of fiscal year 2004 and the last two quarters offiscal year 2003, theBoard of Directors of the Company declared a quarterly dividend of $0.30 pershare plus a special dividend of $0.20 per share, with each such dividend beingpaid in cash to all holders of record as of the close of business on a specificdate.  On November 8, 2004, theBoard of Directors of the Company declared a quarterly dividend of $0.30 pershare plus a special dividend of $0.20 per share.  The dividend, aggregating $0.50 per share,will be payable in cash on February 4, 2005, to holders of record at theclose of business on January 28, 2005. The Company reviews its dividend policy on a quarterly basis.

 

Interest receivable by the Company from ENS was$27,344 at October 31, 2004, while $1,258,985 of previously accruedinterest has been converted to principal and is due December 31, 2005, fora total outstanding loan to the Company of $6,466,329, including accruedinterest.   The outstanding balance underthis loan agreement including interest has been eliminated from

 

25

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the consolidated Financial Statements. On December 3, 2004, $500,000 of the amount owed by ENS to theCompany under the loan was paid following the conclusion of fiscal year2004.  During fiscal year 2004, theCompany spent $1,172,085 on fixed assets, including $764,293 for internallydeveloped software and $407,742 for computer and office equipment required forincreased claims processing, new payer contracts and other business growth.

 

Operatingoverhead costs of ENS have increased at a slower rate than revenue as a resultof cost cutting measures and production efficiencies gained. We anticipateincreased revenues in the near future. The combination of these factors going forward will improve overallprofitability, allowing ENS to sustain itself on cash flows from its operationswithout further investment from NWH.

 

***ENS - Liquidity and Capital Resources:***

 

ENS’ historical losses were financed principallythrough equity investments by the Company and loans from the Company,and these loans totalled $6,438,985 through September 30, 2004 (includingpreviously accrued interest of $1,258,985 that had been converted to principaland excluding $27,344 of interest for the period October 1 to October 31,2004 referred to above).  On December 3,2004 and January 17, 2005, $500,000 and $200,000, respectively, of theamount owed by ENS to the Company under these loans was paid following theconclusion of fiscal year 2004.  ENSplans additional investment in its technology enhancements, including furtherdevelopment and implementation of XpediteTM, its full contactmanagement operating system; its Internet claims processing system; hosting ofnew HIPAA transactions;  ECT, an Internetbased full claims tracking system; additional payer connectivity; andenhancements to broaden the transactions processing infrastructure.

 

Although we believe that ENS may need to obtainadditional financing to accelerate its strategic business plan based uponexisting contracts with physicians, other providers, payers and managementcompanies and current expense levels, management expects ENS to continueprofitable operations, established in the third quarter of fiscal 2001, throughfiscal 2005.

 

3)                                      INFLATION

 

In the opinion ofmanagement, inflation has not had a material effect on the operations of theCompany.

 

4)                                      RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS

 

InDecember, 2004, the FASB issued FASB statement No. 123R, “Share-Based Payment”(FAS 123R), a revision of FASB statement No. 123, “Accounting for Stock-BasedCompensation” which addresses financial accounting and reporting for costsaccounted with stock-based compensation. FAS 123R addresses all forms of share-based payment (“SBP”) awards,including shares issued under employee stock purchase plans, stock options,restricted stock and stock appreciation rights. FAS 123R requires the Company to adopt the new accounting provisionsbeginning in our fourth quarter of 2005. Under the Modified Prospective Method, we do not anticipate recordingany compensation expense at time of adoption since all options granted werefully vested.

 

26

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InMarch 2004, the EITF reached consensus on Issue 03-01 (EITF 03-01), TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments*. *EITF03-01 includes new guidance for evaluating and recording impairment losses ondebt and equity investments, as well as new disclosure requirements for investmentsthat are deemed to be temporarily impaired. The accounting guidance of EITF 03-01 is effective for fiscal yearsbeginning after June 15, 2004m, while the disclosure requirements are effectivefor fiscal years ending after June 15, 2004.  The company does not believe that theadoption of EITF 03-01 will have a material impact on its consolidatedfinancial position, results of operations or cash flows.

 

InDecember 2003, the FASB issued FASB Interpretation No. 46R*,*Consolidation of Variable Interest Entities anInterpretation of ARB No. 51 (FIN 46R). This Interpretation, which replaces FASB Interpretation No. 46Consolidation of Variable Interest Entities, clarifies the application ofAccounting Research Bulletin No. 51, Consolidated Financial Statements, tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport.  Application of FIN 46R isrequired in financial statements of public entities that have interests invariable interest entities or potential variable interest entities commonlyreferred to as special-purpose entities for periods ending after December 15,2003.  Application by public entities(other than small business issuers) for all other types of entities is requiredin financial statements for periods ending after March 15, 2004.  The Company’s adoption of FIN 46R did nothave a material impact on its consolidated financial position and results ofoperations.

 

InDecember 2003, the Staff of the Securities of Exchange Commission (“SEC”)issued Staff Accounting Bulletin No. 104 (“SAB 104”), Revenue Recognition,which supersedes SAB 101, Revenue Recognition in Financial Statements.  SAB 104’s primary purpose is to rescindaccounting guidance contained in SAB 101 related to multiple-element revenuearrangements and to rescind the SEC’s Revenue Recognition in FinancialStatements Frequently Asked Questions and Answer (“FAQ”) issued with SAB101.  Selected portions of the FAQ havebeen incorporated in SAB 104.  Theadoption of SAB 104 did not have a significant impact on the Company’s revenuerecognition policies.

 

OffBalance Sheet Arrangements

 

TheCompany does not have any off-balance sheet arrangements.

 

27

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5)TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

 
| ** **                                                                               | ** ** | **Payments due by period** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Contractual  Obligations**                                                             | ** ** | **Total**                  | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
| Long-Term Debt Obligations                                                               |       | —                     |       | — |   | — |   | — |   | — |   |
| Capital Lease Obligations                                                                |       | $                          | 11,494     |   | $ | 11,494 |   | — |   | — |   | — |   |
| Operating Lease Obligations                                                              |       | $                          | 743,271    |   | $ | 393,011 |   | $ | 350,260 |   | — |   | — |   |
| Purchase Obligations                                                                     |       | —                     |       | — |   | — |   | — |   | — |   |
| Other Long-Term Liabilities Reflected on the  Registrant’s Balance Sheet under GAAP |       | —                     |       | — |   | — |   | — |   | — |   |
|                                                                                     |       |                       |       |   |   |   |   |   |   |   |   |
| Total                                                                                    |       | $                          | 894,765    |   | $ | 404,505 |   | $ | 490,260 |   | — |   | — |   |
|                                                                                          |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

ITEM 7A                                              QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

Theprimary objective of our investment activities, other than activities relatingto ENS and potential acquisitions, is to preserve principal and maintainliquidity, while at the same time maximizing the yield we receive from ourinvestment portfolio.

 

Changesin prevailing interest rates will cause the yield on our investments and thecosts of shorts and options to fluctuate. To minimize this risk, we maintain our portfolio of cash equivalents,short-term investments and marketable securities in commercial paper,non-government debt securities, money market funds, highly liquid U.S. Treasurynotes and federal agency notes and other low risk investments.  We view these high grade securities withinour portfolio as having similar market risk characteristics. Theweighted-average interest rate of the portfolio was .9% at October 31,2004.

 

Currentlyalmost all our revenues and expenses are denominated in U.S. dollars and, as aresult, we have experienced no significant foreign exchange gains and losses todate.  We conduct only limitedtransactions in foreign currencies, and we do not anticipate that foreignexchange gains or losses will be significant in the foreseeable future.  We have not engaged in foreign currencyhedging activities to date.

 

28

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ITEM 8.                                                     CONSOLIDATEDFINANCIAL STATEMENTS

 

Information with respect to this item is containedin the financial statements appearing in Item 15 of this report.  Such information is incorporated byreference.

 

ITEM 9.                                                     CHANGESIN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Not applicable.

 

ITEM9A.                                           CONTROLS AND PROCEDURES

 

As of October 31, 2004, an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures was carried out under the supervision and with the participation ofthe Company’s management.  Based on thatevaluation, management has concluded that the Company’s disclosure controls andprocedures are effective to ensure that material information relating to theCompany and its consolidated subsidiaries is made known to them as of October 31,2004.  There have been no changes in theCompany’s internal control over financial reporting during the fiscal yearended October 31, 2004 that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

**PART III**

** **

ITEM10.                                               DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT

 

Informationconcerning the directors of the Company will be set forth in the section entitled“Election of Directors” in the Proxy Statement of the Company for the AnnualMeeting of Stockholders to be held in April, 2005, which section isincorporated herein by reference.  Informationconcerning the officers of the Company will be set forth in the section entitled“Executive Officers of the Company” in the Proxy statement for the AnnualMeeting of Stockholders to be filed by February 28, 2005.  Information concerning compliance with Section 16(a)of the Exchange Act will be set forth in the section entitled “Section 16(a)Beneficial Ownership Reporting Compliance” in the Proxy Statement of theCompany for the Annual Meeting of Stockholders to be filed by February 28,2005, which section is incorporated by reference.  The information concerning the Code of Ethicsof the Company will be set forth in the section entitled “Code of Ethics”in the Proxy Statement of the Company for the Annual Meeting of Stockholders tobe filed by February 28, 2005, which section is incorporated byreference.

 

29

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ITEM 11.                                               EXECUTIVECOMPENSATION

 

Information for this item will be set forth in the section entitled“Executive Officers of the Company” in the Proxy Statement of the Company forthe Annual Meeting of Stockholders to be filed by February 28, 2005, whichsection is incorporated herein by reference.

 

ITEM 12.                                               SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Information for this item will be set forth in the section entitled“Security Ownership of Officers, Directors and 5% Owners” in the ProxyStatement of the Company for the Annual Meeting of Stockholders to be filed by February 28,2005, which section is incorporated herein by reference.

 

ITEM 13.                                               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

Information for this item will be set forth in the section entitled“Certain Relationships and Related Transactions” in the Proxy Statement of theCompany for the Annual Meeting of Stockholders to be filed by February 28,2005, which section is incorporated herein by reference.

 

ITEM 14.                                               PRINCIPALACCOUNTANT FEES AND SERVICES

 

Information for this itemwill be set forth in the section entitled “Ratification of the Company’sSelection of its Auditors” in the Proxy Statement of the Company for the Annual Meeting ofStockholders to be filed by February 28, 2005, which section isincorporated herein by reference.

 

**PART IV**

 

ITEM 15.                                               EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

(a)                                  The following documents are filed as part ofthis report:

 

1.                                       The financial statements:

 

The consolidated financial statementsincluded in this item are indexed on page F - 1 “Index toFinancial Statements”.

 

2.                                       Financial Statement schedules:

 

None

 

3.                                       Exhibit list.

 

The following exhibits were previously filed asindicated or are filed herewith.

 

3.1(a)(1)                                                     Certificate of Incorporation and By-laws ofCompany.

 

30

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3.1(b)(5)                                                    Amendment to Certificate of Incorporation,dated June 10, 1997.

3.2(a)(3)                                                     Amendment, dated June 29, 1995, to theCompany’s By-Laws.

3.1(b)(5)                                                    Amendment to Company’s By-laws, dated June 10,1997.

3.1(c)(7)                                                     Amendment to Company’s By-laws, dated June 2,2000.

3.1(d)(14)                                            Amendment to Company’s By-laws, dated March 31,2003.

4(4)                                                                              Rights Agreement, dated as of December 12,1996, between National Wireless Holdings Inc. and Continental Stock Transferand Trust Company, as Rights Agent, which includes as Exhibit A the Form ofCertificate of Designations designating the relative rights, preferences andlimitations of the Series A Junior Preferred Stock, as Exhibit B the Form ofRight Certificate, and as Exhibit C the Summary of Rights to Purchase PreferredShares.

4(a)(7)                                                              Amendment to Rights Agreement, dated as of December 12,1996.

4.1(2)                                                                   Specimen of Common Stock Certificate.

10.1(8)                                                             Restated and Amended Employment Agreementwith Terrence S. Cassidy, dated June 26, 2000

10.40(5)                                                       Form of Director Indemnification Agreement.

10.42(5)                                                       1997 Equity Incentive Plan.

10.47                                                                       Loan Documentation relating to the ENS CreditFacility.

(a) Restated Loan Agreement(6).

(b)Note(6).

(c) Bridge Note(9).

(d) Additional Note(12).

(e) Amendment No 8(15).

10.48                                                                     2000 Non Employee Directors Stock Option Plan(11).

21                                                                                    Subsidiaries of the registrant(16).

31                                                                                    Certification Pursuant to Section 302 ofthe Sarbanes-Oxley Act of 2002(16).

32                                                                                    Certification Pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002(16).

99.1                                                                                         Factors That May Affect Future Results of Operation(16).

 

(b)                                                         Reports on Form 8-K: Not applicable.

 

___________________________

 

(1) - Filed with the initialfiling of the Company’s Registration Statement on Form S-1,File No. 33-7914.

(2)- Filed with Amendment No. 3 to the Company’s Registration Statement.

(3)- Filed with Form 10-Q for the Quarter ended July 31, 1995.

(4)- Filed with Form 8-K dated February 26, 1997.

(7)- Filed with Form 10-Q for the Quarter ended April 30, 1997.

(5)- Filed with Form 10-Q for the Quarter ended July 31, 1997.

(6)- Filed with Form 10-Q for the Quarter ended April 30, 1999.

(7)- Filed with Form 10-Q for the Quarter ended April 30, 2000.

(8)- Filed with Form 10-Q for the Quarter ended July 31, 2000.

(9)- Filed with Form 10-K for the Year ended October 31, 2000

(10)-Filedwith Form 10-K for the Year ended October 31, 2001.

(11)-Filed with Schedule 14A dated May 26, 2000.

 

31

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(12)_Filed with Form 10-Q for the Quarter ended January 31, 2001.

(13)_Filed with Form 10-Q for the Quarter ended July 31, 2002.

(14)-Filed with Form 10-Q for the Quarter ended April 30, 2003.

(15)-Filed with Form 10-K for the Year ended October 31, 2003.

(16)_Filedherewith.

 

32

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**NWH, Inc.**

**Index**

**October 31, 2004 and 2003**

 
|                                                      | **Page(s)**   |
|-----------------------------------------------------------|---------------|
|                                                      | ** **    |
| Reports  of Independent Registered Public Accounting Firm | F-2           |
|                                                      |          |
| **Consolidated  Financial Statements**                    | ** **    |
|                                                      |          |
| Consolidated Balance Sheets                               | F-3           |
|                                                      |          |
| Consolidated  Statements of Income                        | F-4           |
|                                                      |          |
| Consolidated  Statements of Comprehensive (Loss) Income   | F-5           |
|                                                      |          |
| Consolidated  Statements of Stockholders’ Equity     | F-6           |
|                                                      |          |
| Consolidated  Statements of Cash Flows                    | F-7           |
|                                                      |          |
| Notes to  Consolidated Financial Statements               | F-8–F-23 |

 

F-1

----

 

**Report of Independent Registered Public AccountingFirm**

** **

To the Board of Directors and Shareholdersof NWH, Inc.

 

 

Inour opinion, the consolidated financial statements listed in the indexappearing under Item 15 (a)(1) present fairly, in allmaterial respects, the financial position of NWH, Inc. and its subsidiaries at October 31,2004 and 2003, and the results of their operations and their cash flows foreach of the three years in the period ended October 31, 2004 in conformitywith accounting principles generally accepted in the United States ofAmerica.  These financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|

PricewaterhouseCoopersLLPNew York, New YorkJanuary 26, 2005

 

F-2

----

 

**NWH, Inc.**

**Consolidated BalanceSheets**

**October 31, 2004 and 2003**

 
| ** **                                                                                                                                                                  | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                                                                                                                                        |       |       |       |       |       |
| **Assets**                                                                                                                                                                  |       |       |       |       |       |
| Cash and cash equivalents                                                                                                                                                   |       | $          | 12,137,155 |       | $          | 29,309,192 |   |
| Marketable securities                                                                                                                                                       |       | 14,926,737 |       | 9,777,901  |       |
| Trade and other receivables, net of allowance of  $40,000 as of October 31, 2004 and 2003, respectively                                                                |       | 2,862,921  |       | 2,419,797  |       |
| Prepaid expenses and other current assets                                                                                                                                   |       | 475,895    |       | 456,794    |       |
| Total current assets                                                                                                                                                        |       | 30,402,708 |       | 41,963,684 |       |
| Property and equipment, net of accumulated  depreciation and amortization of $3,054,359 and $2,865,039 as of October 31,  2004 and October 31, 2003, respectively |       | 750,474    |       | 703,739    |       |
| Internally developed software, net of accumulated  amortization of $2,195,888 and $1,238,812, as of October 31, 2004 and October 31,  2003, respectively          |       | 2,313,785  |       | 2,489,215  |       |
| Goodwill                                                                                                                                                                    |       | 3,762,187  |       | 3,762,187  |       |
| Other assets                                                                                                                                                                |       | 1,065,453  |       | 957,748    |       |
| Total assets                                                                                                                                                                |       | $          | 38,294,607 |       | $          | 49,876,573 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                                               |       |       |       |       |       |
| Accounts payable and accrued expenses                                                                                                                                       |       | $          | 2,376,072  |       | $          | 2,116,881 |   |
| Call options written, at fair value                                                                                                                                         |       | —     |       | 2,148,928  |       |
| Current portion of long-term debt                                                                                                                                           |       | 11,494     |       | 71,078     |       |
| Current income taxes                                                                                                                                                        |       | 147,035    |       | 970,426    |       |
| Deferred income taxes, net                                                                                                                                                  |       | —     |       | 2,773,583  |       |
| Dividends payable                                                                                                                                                           |       | 1,462,316  |       | 1,462,316  |       |
| Total current liabilities                                                                                                                                                   |       | 3,996,917  |       | 9,543,212  |       |
| Notes payable                                                                                                                                                               |       | 140,000    |       | 140,000    |       |
| Long-term debt                                                                                                                                                              |       | —     |       | 15,022     |       |
| Deferred income taxes, net                                                                                                                                                  |       | 692,792    |       | 825,209    |       |
| Total liabilities                                                                                                                                                           |       | 4,829,709  |       | 10,523,443 |       |
| Commitments and contingencies (Note 9)                                                                                                                                      |       |       |       |       |       |
| **Stockholders’ Equity**                                                                                                                                               |       |       |       |       |       |
| Preferred stock, $.01 par value; 1,000,000 shares  authorized; no shares issued or outstanding                                                                              |       | —     |       | —     |       |
| Common stock, $.01 par value: 20,000,000 shares  authorized; 3,342,231 shares issued                                                                                        |       | 33,422     |       | 33,422     |       |
| Additional paid-in capital                                                                                                                                                  |       | 23,195,991 |       | 23,195,991 |       |
| Retained earnings                                                                                                                                                           |       | 15,327,119 |       | 20,375,719 |       |
| Accumulated other comprehensive income                                                                                                                                      |       | —     |       | 839,632    |       |
| Treasury stock, 417,600 shares at cost                                                                                                                                      |       | (5,091,634 | )          | (5,091,634 | )          |
| Total stockholders’ equity                                                                                                                                             |       | 33,464,898 |       | 39,353,130 |       |
| Total liabilities and stockholders’ equity                                                                                                                             |       | $          | 38,294,607 |       | $          | 49,876,573 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

F-3

----

 

**NWH, Inc.**

**Consolidated Statementsof Income**

**October 31, 2004, 2003 and 2002**

 
| ** **                                             | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                                   |       |       |       |       |       |       |       |
| **Service  revenue**                                   |       | $          | 17,462,554 |       | $          | 13,396,673 |       | $ | 11,930,646 |   |
| Cost of services                                       |       | 9,051,276  |       | 6,889,251  |       | 5,600,431  |       |
| Professional fees                                      |       | 933,630    |       | 827,682    |       | 693,110    |       |
| General and administrative                             |       | 7,650,727  |       | 6,360,109  |       | 5,875,099  |       |
| Depreciation and amortization                          |       | 309,758    |       | 316,214    |       | 343,223    |       |
| Total expenses                                         |       | 17,945,391 |       | 14,393,256 |       | 12,511,863 |       |
| Loss from operations                                   |       | (482,837   | )          | (996,583   | )          | (581,217   | )          |
| **Other income (expense)**                             |       |       |       |       |       |       |       |
| Gain on securities transactions, net                   |       | 1,250,303  |       | 1,002,793  |       | 5,322,634  |       |
| Dividend income                                        |       | 156,971    |       | 412,329    |       | 403,841    |       |
| Interest income                                        |       | 318,085    |       | 324,696    |       | 438,263    |       |
| Interest expense                                       |       | (61,860    | )          | (48,459    | )          | (97,813    | )          |
| Other income                                           |       | —     |       | 421,253    |       | —     |       |
|                                                   |       | 1,663,499  |       | 2,112,612  |       | 6,066,925  |       |
| Income before provision for income taxes               |       | 1,180,662  |       | 1,116,029  |       | 5,485,708  |       |
| Provision for income taxes                             |       | 380,000    |       | 676,000    |       | 1,300,000  |       |
| Net income                                             |       | $          | 800,662    |       | $          | 440,029    |       | $ | 4,185,708 |   |
| **Net income per common share**                        |       |       |       |       |       |       |       |
| Basic                                                  |       | $          | 0.27       |       | $          | 0.15       |       | $ | 1.35 |   |
| Diluted                                                |       | $          | 0.27       |       | $          | 0.15       |       | $ | 1.35 |   |
| Weighted average number of common shares  outstanding: |       |       |       |       |       |       |       |
| Basic                                                  |       | 2,924,631  |       | 2,921,830  |       | 3,094,724  |       |
| Diluted                                                |       | 2,955,312  |       | 2,938,396  |       | 3,094,724  |       |

 

The accompanyingnotes are an integral part of these financial statements.

 

F-4

----

 

**NWH, Inc.**

**Consolidated Statements ofComprehensive (Loss) Income**

**October 31,2004 and 2003**

 
| ** **                                                                                                                                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| **Net income**                                                                                                                                                           |       | $        | 800,662    |     | $          | 440,029    |       | $ | 4,185,708 |   |
| Other comprehensive loss, net of tax:                                                                                                                                    |       |     |       |     |       |       |       |
| Net unrealized holding gain (loss) on marketable  securities arising during the year, net of income taxes (benefit) of $72,938,  $20,217, and $(2,146,240), respectively |       | 136,640  |       | 39,246   |       | (3,909,775 | )          |
| Reclassification adjustment for losses recognized in  net income, net of income tax benefit of $(502,928), $(190,227), and  ($153,760), respectively                     |       | (976,272 | )          | (337,286 | )          | (285,553   | )          |
| Other comprehensive loss                                                                                                                                                 |       | (839,632 | )          | (298,040 | )          | (4,195,328 | )          |
| Comprehensive (loss) income                                                                                                                                              |       | $        | (38,970    | )        | $          | 141,989    |       | $ | (9,620 | ) |

 

The accompanying notes are an integral part ofthese financial statements.

 

F-5

----

 

**NWH, Inc.**

**Consolidated Statements ofStockholders’ Equity**

**YearEnded October 31, 2004, 2003 and 2002**

 
| ** **                                          | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Treasury  Stock** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|---------------------|------------|------------|------------|
|                                                |       |              |       |                             |       |                   |       |                                          |       |                |       |       |       |
| **Balance, October 31, 2001**                  |       | $                 | 33,330     |                             | $          | 23,071,872             |       | $                                             | 18,674,613 |                | $          | 5,333,000  |       | $ | (192,995 | ) | $ | 46,919,820 |   |
| Net income                                          |       | —            |       | —                           |       | 4,185,708              |       | —                                        |       | —              |       | 4,185,708  |       |
| Treasury stock, at cost                             |       | —            |       | —                           |       | —                 |       | —                                        |       | (4,529,075          | )          | (4,529,075 | )          |
| Unrealized loss on marketable securities, net       |       | —            |       | —                           |       | —                 |       | (4,195,328                                    | )          | —              |       | (4,195,328 | )          |
| **Balance, October 31, 2002**                  |       | 33,330            |       | 23,071,872                       |       | 22,860,321             |       | 1,137,672                                     |       | (4,722,070          | )          | 42,381,125 |       |
| Net income                                          |       | —            |       | —                           |       | 440,029                |       | —                                        |       | —              |       | 440,029    |       |
| Common stocks issued from exercise of stock options |       | 92                |       | 124,119                          |       | —                 |       | —                                        |       | —              |       | 124,211    |       |
| Treasury stock, at cost                             |       | —            |       | —                           |       | —                 |       | —                                        |       | (369,564            | )          | (369,564   | )          |
| Dividends declared                                  |       | —            |       | —                           |       | (2,924,631             | )          | —                                        |       | —              |       | (2,924,631 | )          |
| Unrealized loss on marketable securities, net       |       | —            |       | —                           |       | —                 |       | (298,040                                      | )          | —              |       | (298,040   | )          |
| **Balance, October 31, 2003**                  |       | 33,422            |       | 23,195,991                       |       | 20,375,719             |       | 839,632                                       |       | (5,091,634          | )          | 39,353,130 |       |
| Net income                                          |       | —            |       | —                           |       | 800,662                |       | —                                        |       | —              |       | 800,662    |       |
| Dividends declared                                  |       | —            |       | —                           |       | (5,849,262             | )          | —                                        |       | —              |       | (5,849,262 | )          |
| Unrealized loss on marketable securities, net       |       | —            |       | —                           |       | —                 |       | (839,632                                      | )          | —              |       | (839,632   | )          |
| **Balance, October 31, 2004**                  |       | $                 | 33,422     |                             | $          | 23,195,991             |       | $                                             | 15,327,119 |                | $          | —     |       | $ | (5,091,634 | ) | $ | 33,464,898 |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-6

----

 

**NWH, Inc.**

**Consolidated Statements of CashFlows**

**YearEnded October 31, 2004, 2003 and 2002**

 
| ** **                                                                    | ** ** | **2004**    | ** ** | **2003**    | ** ** | **2002**    | ** ** |
|-------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|                                                                          |       |        |       |        |       |        |       |
| **Cash flows from operating activities**                                      |       |        |       |        |       |        |       |
| Net income                                                                    |       | $           | 800,662    |        | $          | 440,029     |       | $ | 4,185,708 |   |
| Adjustments to reconcile net income to net cash used  in operating activities |       |        |       |        |       |        |       |
| Depreciation and amortization                                                 |       | 1,585,899   |       | 1,242,584   |       | 1,162,379   |       |
| Gain on sale of partnership investment                                        |       | —      |       | (421,253    | )          | —      |       |
| Accretion of interest                                                         |       | (53,771     | )          | —      |       | (8,562      | )          |
| Gain on securities transactions, net                                          |       | (1,250,303  | )          | (1,591,397  | )          | (5,691,462  | )          |
| Unrealized loss on securities transactions, net                               |       | —      |       | 588,604     |       | 368,828     |       |
| Deferred income taxes                                                         |       | (2,476,010  | )          | (977,000    | )          | (1,100,000  | )          |
| Bad debt expense                                                              |       | 35,850      |       | 48,920      |       | 28,843      |       |
| Trade and other receivables                                                   |       | (478,974    | )          | (385,064    | )          | 133,396     |       |
| Refundable income taxes                                                       |       | —      |       | —      |       | —      |       |
| Prepaid expenses and other current assets                                     |       | (19,101     | )          | (180,019    | )          | (38,724     | )          |
| Investments and other assets                                                  |       | (244,304    | )          | (229,335    | )          | (163,550    | )          |
| Accounts payable and accrued expenses                                         |       | 259,191     |       | 322,438     |       | (260,788    | )          |
| Current income taxes payable                                                  |       | (823,391    | )          | 12,296      |       | 900,000     |       |
| Deferred revenue                                                              |       | —      |       | —      |       | —      |       |
| Net cash used in operating activities                                         |       | (2,664,252  | )          | (1,129,197  | )          | (483,932    | )          |
| **Cash flows from investing activities**                                      |       |        |       |        |       |        |       |
| Acquisition of property and equipment                                         |       | (407,792    | )          | (396,562    | )          | (169,101    | )          |
| Increase in internally developed software                                     |       | (764,293    | )          | (1,066,121  | )          | (983,581    | )          |
| Proceeds from sale of marketable securities                                   |       | 9,987,480   |       | 4,127,894   |       | 14,918,097  |       |
| Proceeds from sale of marketable equity securities -  short sale              |       | —      |       | 1,309,805   |       | 2,006,967   |       |
| Acquisition of marketable securities                                          |       | (14,872,966 | )          | —      |       | —      |       |
| Acquisition of marketable securities - short sale                             |       | —      |       | (2,566,701  | )          | (3,966,003  | )          |
| Acquisition of written call options                                           |       | (4,572,825  | )          | (13,595,055 | )          | (10,735,427 | )          |
| Proceeds from sale of written call options                                    |       | 2,195,000   |       | 11,684,140  |       | 17,254,771  |       |
| Acquisition of common stock of ENS                                            |       | —      |       | —      |       | (790,070    | )          |
| Proceeds from sale of partnership investment                                  |       | —      |       | 1,421,253   |       | —      |       |
| Net cash (used in) provided by investing activities                           |       | (8,435,396  | )          | 918,653     |       | 17,535,653  |       |
| **Cash flows from financing activities**                                      |       |        |       |        |       |        |       |
| Borrowing of short-term and long-term debt                                    |       | 100,000     |       | 100,000     |       | 100,000     |       |
| Acquisition of treasury stock                                                 |       | —      |       | (369,564    | )          | (4,529,075  | )          |
| Dividends paid                                                                |       | (5,849,262  | )          | (1,462,315  | )          | —      |       |
| Principal payments of short-term and long-term debt                           |       | (117,664    | )          | (134,134    | )          | (128,698    | )          |
| Principal payments of capital leases                                          |       | (205,463    | )          | (236,679    | )          | (227,415    | )          |
| Proceeds from exercise of stock options                                       |       | —      |       | 124,211     |       | —      |       |
| Net cash used in financing activities                                         |       | (6,072,389  | )          | (1,978,481  | )          | (4,785,188  | )          |
| Net (decrease) increase in cash and cash equivalents                          |       | (17,172,037 | )          | (2,189,025  | )          | 12,266,534  |       |
| **Cash and cash equivalents**                                                 |       |        |       |        |       |        |       |
| Beginning of year                                                             |       | 29,309,192  |       | 31,498,217  |       | 19,231,683  |       |
| End of year                                                                   |       | $           | 12,137,155 |        | $          | 29,309,192  |       | $ | 31,498,217 |   |
| **Supplemental disclosure of cash flow**                                      |       |        |       |        |       |        |       |
| Cash paid for interest                                                        |       | $           | 61,860     |        | $          | 48,459      |       | $ | 97,813 |   |
| Cash paid for taxes                                                           |       | 1,957,479   |       | 1,640,704   |       | 1,500,000   |       |
| Capital lease assets acquired and obligations  incurred                       |       | 148,521     |       | —      |       | 13,686      |       |
| Dividends declared but unpaid                                                 |       | 1,462,316   |       | 1,462,316   |       | —      |       |

 

The accompanyingnotes are an integral part of these financial statements.

 

F-7

----

 

**NWH, Inc.**

**Notes to Consolidated FinancialStatements**

**October 31,2004**

 

**1.**                           **Company Operations**

 

NWH,Inc. (“the Company”) formerly known as National Wireless Holdings Inc., aDelaware corporation organized on August 31, 1993, is an electroniccommerce and communications company.  TheCompany currently owns substantially all of Electronic Network Systems Inc., (“ENS”)formerly known as Electronic Data Submission Systems, Inc., a payer servicesorganization that connects healthcare payers and providers using state of theart proprietary software and telecommunications services for most healthcarepayment and insurance validation transactions. In addition to this business, the Company continues to pursueacquisitions of interests in healthcare and other strategically linkedareas.  The Company may acquire or investin other businesses.  In June 1997,the Company sold its wireless cable assets in Miami, Florida in exchange forcommon stock of BellSouth Corporation.

 

**2.**                           **Summary of Significant Accounting Policies**

 

**Basis of Consolidation**

 

Theconsolidated financial statements include the accounts of the Company and itsmajority-owned subsidiaries.  Allsignificant intercompany transactions and balances have been eliminated inconsolidation.  ENS’ fiscal year end is September 30, and as such elimination of intercompany transactionswere made accordingly.

 

**Cash and Cash Equivalents**

 

Cashand cash equivalents include all highly liquid investments with originalmaturities of three months or less and are readily convertible to cash.  The Company routinely invests all surplusoperating funds in various money market funds. These funds generally invest in highly liquid U.S. government and agencyobligations.

 

**Marketable Securities**

 

Marketablesecurities at October 31, 2004 consist of investments in United Statestreasury bills and at October 31, 2003 in Bell South Corporation (“BellSouth”) common stock.  The U.S. treasurybills are classified as held to maturity and are valued at amortized cost,which is adjusted for amortization from the date of purchase to maturity.  The Bell South common stock is classified asavailable for sale, and is measured at fair value on the balance sheet.  The Company liquidated its investment in BellSouth common stock in September 2004. Investment income or loss including realized gains and losses oninvestments, interest and dividends is included in the statement ofincome.  Unrealized gains and losses forthe Bell South common stock are recorded, net of tax, as a separate componentof stockholders’ equity.  Gains andlosses on securities sold are determined based on the specific identificationmethod.

 

TheCompany utilized written call options to protect its position in BellSouthcommon stock, preserve its tax basis and reduce equity price risk.

 

EffectiveNovember 1, 2001, the Company adopted Statements of Financial AccountingStandards (“SFAS”) No. 133, Accounting for Derivative Instruments and HedgingActivities.  Under the pronouncement,written call options are measured at fair value on the balance sheet withunrealized gains and losses recognized in the statement of income.

 

F-8

----

 

**Trade and Other Receivables**

 

Tradeaccounts receivable are recorded at their invoiced amount.  The Company maintains an allowance fordoubtful accounts for estimated losses resulting from the inability of itscustomers to make payments when due or within a reasonable period of timethereafter.  Estimates are based onexperience, current trends, credit policy and a percentage of accountsreceivable by aging category.  If thefinancial condition of the Company’s customers were to deteriorate, resultingin an impairment of their ability to make required payments, additionalallowances may be required.  The Companydoes not have any off-balance sheet credit exposure

 

**Property and Equipment**

 

Propertyand equipment purchases are recorded at cost. Depreciation is provided using the straight-line method over theestimated useful lives of the related assets as follows:

 
| Computer equipment                 | 3 years |
|------------------------------------|---------|
| Furniture, fixtures and  equipment | 5 years |
| Scanning equipment                 | 5 years |

 

Leaseholdimprovements are recorded at cost. Amortization is provided using the straight-line method over the shorterof the life of the improvements or the related lease term.

 

Whenassets are retired or disposed, the loss and accumulated depreciation andamortization are eliminated and the resulting profit or loss is recognized inthe statement of income.

 

**Internally Developed Software**

 

TheCompany capitalizes purchased software which is ready for service anddevelopment costs for software incurred from the time the preliminary projectstage is completed until the software is ready for use.  Under the provisions of Statement of Position98-1, “Accounting for the Costs of Computer Software Developed or Obtained forInternal Use” (SOP 98-1), the Company capitalizes costs associated withsoftware developed or obtained for internal use when both the preliminaryproject state is completed and the Company management has authorized furtherfunding for the project which it deems probable will be completed and used toperform the function intended. Capitalized costs include only (1) external direct costs of materialsand services consumed in developing or obtaining internal-use software, (2)payroll and payroll-related costs for employees who are directly associatedwith and who devote time to the internal-use software project, and (3) interestcosts incurred, when material, while developing internal-use software.  Capitalization of such costs ceases no laterthan the point at which the project is substantially complete and ready for itsintended purpose.

 

Researchand development costs and computer software maintenance costs related tosoftware development are expensed as incurred. Capitalized software development costs are amortized using thestraight-line method generally over four years, not to exceed the expected lifeof the product.  The carrying value ofcapitalized software development costs is regularly reviewed by the Company,and a loss is recognized if the value of estimated undiscounted cash flowsrelated to the asset falls below the unamortized costs.  Amortization expense relating to research anddevelopment costs and computer software maintenance costs was $957,076,$586,405 and $410,763 for the years ended October 31, 2004, 2003 and 2002,respectively.

 

F-9

----

 

TheCompany also capitalizes software development costs in connection with ENSproprietary software related to specific customers, which are classified inother assets.  Amortization associatedwith such costs amounted to $136,599 and $25,841 for 2004 and 2003.

 

**Impairment of Long-Lived Assets**

 

TheCompany investigates potential impairments of its long-lived assets whenevidence exists that events or changes in circumstances may have made recoveryof an asset’s carrying value unlikely. An impairment loss is recognized when the sum of the expectedundiscounted future net cash flows is less than the carrying amount of theasset.  No such losses have beenidentified.

 

TheCompany applies the provisions of SFAS No. 144, “Accounting for the Impairmentor Disposal of Long Lived Assets”.  Thisstatement provides guidance on the recognition of impairment losses onlong-lived assets to be held and used or to be disposed of and also broadensthe definition of what constitutes a discounted operation and how the resultsof a discontinued operation are to be measured and presented.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to future newcash flows expected to be generated by the asset.  If such assets are impaired, the impairmentto be recognized is measured by the amount by which the carrying amount of theasset exceeds the fair value of the assets.

 

**Goodwill**

 

Goodwillrepresents the excess of the purchase price over the net assets of acquiredcompanies.  Effective November 1,2001, the Company adopted SFAS No. 141, “Business Combinations” and SFAS No.142, “Goodwill and Other Intangible Assets.” Under the new pronouncements, goodwill and intangible assets that havean indefinite life will no longer be amortized, but will be subject to at leastan annual impairment test in accordance with the statement.  Other intangible assets that have finiteuseful lives will continue to be amortized over their useful life.  Prior to adoption, goodwill was amortized onthe straight-line method over 15 years.

 

Asrequired by SFAS No. 142, the Company assessed the carrying value of goodwillas of October 31, 2004 and 2003 and did not record an impairment charge asa result.

 

**Concentration of Credit Risk**

 

Financialinstruments which potentially subject the Company to concentrations of creditrisk include cash and cash equivalents and accounts receivable.  The Company holds no collateral for accountsreceivable.  Cash is placed into financialinstitutions with high credit ratings. Concentration of risks with respect to receivables is mitigated based onthe number of customers and ongoing credit evaluations of existingcustomers.  The Company has deposits onhand that exceed the limits of the Federal Deposit Insurance Corporation.

 

**Fair Value of Financial Instruments**

 

Cashequivalents comprise money market funds whose carrying amounts approximate fairvalue due to the short-term maturity of the instruments.

 

Long-termdebt relates principally to equipment lease obligations and a note payable to aformer related party.  Interest rates onthe debt approximate the rates available at October 31, 2004 and 2003 andthe Company believes that the carrying value of debt at October 31, 2004approximates fair value.

 

F-10

----

 

**Revenue Recognition**

 

Servicerevenue and revenue associated with electronic transactions to and fromphysicians, hospital networks and health insurance carriers is recognized asearned in the period the services are provided. Installation revenue and the related costs are deferred when received orincurred and recognized over a twelve month period corresponding with the termof the service contract.  Developmentfees and the related costs are deferred when received and recognized over theperiod corresponding with the term of the related contract (four to sevenyears).

 

Duringfiscal 2004, the Company had one customer that made up 42% of service revenuesand 49% of trade and other receivables as of October 31, 2004,respectively.  During fiscal 2003, theCompany had the same customer that made up 39% of service revenues and 42% oftrade and other receivables, as of October 31, 2003, respectively.  During fiscal 2002, the Company had twocustomers that made up 31% and 11% of service revenues.

 

Duringfiscal 2002, the Company amended its service agreement with the largestcustomer noted above.  The amendmentincreases the potential revenue by providing services to an entity related tothat customer.  Also during fiscal 2002,two payer contracts, one of which was the second largest customer in fiscal2002, were terminated during the first quarter of fiscal 2003.  These terminations were completed during thefirst and second quarters of fiscal 2003. The combination of these changes has resulted in an increased relianceby the Company on its largest customer.

 

**Income Taxes**

 

Deferredtax assets and liabilities are recognized for the expected future taxconsequences of events that have been included in the financial statements ortax returns.  Under this method, deferredtax assets and liabilities are determined based on the difference between thefinancial reporting and tax bases of assets and liabilities using enacted taxrates in effect for the year in which the differences are expected to reverse.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amounts expected to be realized.

 

**Stock-Based Compensation**

 

AtOctober 31, 2004, the Company has stock-based compensation plans, whichare described more fully in Note 14.  TheCompany adopted the disclosure-only provisions of SFAS No. 148, “Accounting forStock-Based Compensation Transition and Disclosure an amendment of FAS 123.”  This statement encourages, but does notrequire, companies to adopt a fair value based method for determining expenserelated to stock-based compensation.  TheCompany continues to account for stock-based compensation using the intrinsicvalue method as prescribed under Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related Interpretations.  Accordingly, no compensation cost has beenrecognized with regard to options granted under the Plan in the accompanyingfinancial statements.  The followingtable illustrates the effect on net income and earnings per share if the Companyhad applied the fair value recognition provisions of FAS 123 to stock-basedemployee compensation.

 

F-11

----

 
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |     |       |
| **Net income**                                  |       |     |       |     |       |     |       |
| As reported                                     |       | $        | 800,662    |     | $          | 440,029  |       | $ | 4,185,708 |   |
| Deduct: stock option expense, net of tax effect |       | $        | (41,220    | )        | $          | (127,985 | )          | $ | (466,575 | ) |
| Pro forma                                       |       | $        | 759,442    |     | $          | 312,044  |       | $ | 3,719,133 |   |
| **Earnings per share**                          |       |     |       |     |       |     |       |
| Basic - as reported                             |       | $        | 0.27       |     | $          | 0.15     |       | $ | 1.35 |   |
| Basic - pro forma                               |       | $        | 0.26       |     | $          | 0.11     |       | $ | 1.20 |   |
| Diluted - as reported                           |       | $        | 0.27       |     | $          | 0.15     |       | $ | 1.35 |   |
| Diluted - pro forma                             |       | $        | 0.26       |     | $          | 0.11     |       | $ | 1.20 |   |

 

Thesepro forma adjustments to net income and net income per common share assume fairvalues of each option grant estimated using the Black-Scholes option pricingformula.  The more significantassumptions underlying the determination of such fair value for options granted2004, 2003 and 2002, respectively include: (i) weighted average risk-free interest rates of 2.93%, 2.93% and 2.93%;(ii) weighted average expected option life of 5 years; (iii) an expectedvolatility of 45%, 45% and 45%, and (iv) an expected dividend yield of 11.5%,0% and 0%.  The per share weightedaverage fair value at the dates of grant for options awarded for the year endedOctober 31, 2004 was $2.17 and the weighted average exercise price was$16.01.

 

**Earnings Per Share**

 

Basic earnings per share is computed by dividing net income by the weighted average number ofcommon shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the sumof the weighted average number of common shares outstanding plus the dilutivepotential common shares.

 

**Use of Estimates**

 

Thepresentation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires the Company’smanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements, and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.

 

**Recently Issued Accounts Pronouncements**

 

InDecember 2004, the Financial Accounting Standards Board (FASB) issued FASBstatement No. 123R, “Share-Based Payment” (“FAS 123R”), a revision of FASBstatement No. 123, “Accounting for Stock-Based Compensation”, which addressesfinancial accounting and reporting for costs associated with stock-based compensation.  FAS 123R addresses all forms of share-basedpayment (“SBP”) awards, including shares issued under employee stock purchaseplans, stock options, restricted stock and stock appreciation rights.  FAS 123R requires the Company to adopt thenew accounting provisions beginning in our fourth quarter of 2005.  Under the Modified Prospective Method, theCompany does not anticipate recording any compensation expense at time ofadoption since all options granted were fully vested.

 

F-12

----

 

InMarch 2004, the EITF reached consensus on Issue 03-01 (“EITF 03-01”), “TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments”.  EITF 03-01 includes newguidance for evaluating and recording impairment losses on debt and equityinvestments, as well as new disclosure requirements for investments that aredeemed to be temporarily impaired.  Theaccounting guidance of EITF 03-01 is effective for fiscal years beginning afterJune 15, 2004, while the disclosure requirements are effective for fiscalyears ending after June 15, 2004. The Company does not believe that the adoption of EITF 03-01 will have amaterial impact on its consolidated financial position, results of operationsor cash flows.

 

InDecember 2003, the FASB issued FASB Interpretation No. 46R, “Consolidationof Variable Interest Entities an Interpretation of ARB No. 51” (“FIN 46R”).  This Interpretation, which replaces FASBInterpretation No, 46 Consolidation of Variable Interest Entities, clarifiesthe application of Accounting Research Bulletin No. 51, Consolidated FinancialStatements, to certain entities in which equity investors do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support. Application of FIN 46R is required in financial statements of publicentities that have interests in variable interest entities or potentialvariable interest entities commonly referred to as special-purpose entities forperiods ending after December 15, 2003. Application by public entities (other than small business issuers) forall other types of entities is required in financial statements for periodsending after March 15, 2004.  TheCompany’s adoption of FIN 46R did not have a material impact on itsconsolidated financial position and results of operations.

 

InDecember 2003, the Staff of the Securities and Exchange Commission (“SEC”)issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition”,which supersedes SAB 101, Revenue Recognition in Financial Statements.  SAB 104’s primary purpose is to rescindaccounting guidance contained in SAB 101 related to multiple-element revenuearrangements and to rescind the SEC’s Revenue Recognition in FinancialStatements Frequently Asked Questions and Answer (“FAQ”) issued with SAB101.  Selected portions of the FAQ havebeen incorporated into SAB 104.  Theadoption of SAB 104 did not have a significant impact on the Company’s revenuerecognition policies.

 

**Reclassifications**

 

Certainprior year amounts have been reclassified to conform to current yearpresentation, with no effect on consolidated earnings.

 

**3.**                           **ENS**

 

In1996, the Company acquired a controlling interest in ENS and, by July 1998,the Company increased its interest in ENS from 50% to 58% of the outstandingcommon stock and, with additional voting rights, 82% control of ENS, all for anaggregate investment of $3,837,420 (including $1,749,920 paid to astockholder).  In July 1999, theCompany purchased from a stockholder an additional 6.4% of the common stock for$513,450.  In a capital call on October 20,2000, the Company purchased from ENS $1,000,000 of common stock, which whencombined with its existing share ownership represented 80% of the outstandingcommon stock and, with additional voting rights, 97% control of ENS.  In August 2001, the Company purchased anadditional 2.8% of the common stock of ENS for $513,450 from a stockholder.

 

F-13

----

 

Theacquisitions have been accounted for under the purchase method of accountingand the results of operations from the date of purchase have been reflected inthe consolidated statement of operations. The purchase price in excess of the fair value of the assets acquiredand liabilities assumed has been allocated to goodwill.

 

OnDecember 7, 2001, the Company acquired 1,774,333 shares of the votingcommon stock of ENS from a stockholder for $500,000 in cash and $200,000 in theform of a contingent note, payable only in the event of sale of ENS.  This increased the Company’s ownership to 91%of the outstanding common stock (assuming conversion of its preferred stock),and with additional voting rights, 98.5% control of ENS.

 

OnJune 27, 2002, the Company acquired 586,000 shares of the voting commonstock of ENS from two shareholders for a total of $290,070 in cash.  This increases the Company’s ownership to 94%of the outstanding common stock (assuming conversion of its preferred stock),and with additional voting rights, 99% control of ENS.

 

OnSeptember 30, 2003, ENS amended its Loan Agreement with the Company toamend the repayment terms such that all balances outstanding will become dueand payable on December 31, 2005. The Company had outstanding loans to ENS of $6,466,329, includingaccrued interest, as of October 31, 2004 and 2003, respectively.  These balances are eliminated uponconsolidation.  ENS repaid $500,000 ofsuch borrowings on December 3, 2004.

 

InJanuary 2003, the Company adopted an incentive bonus plan for executivesand consultants of ENS and members of the Advisory Board providing for paymentof approximately 5% of any gain to the Company in the event of a sale of ENS ora public offering by ENS.

 

**4.**                           **Marketable Securities**

 

Marketablesecurities consist of the following:

 
| ** **                      | ** ** | **Cost**   | ** ** | **Unrealized  Holding Gains** | ** ** | **Fair  Value** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------|------------|-----------------|------------|
| ** **                      | ** ** | ** ** | ** ** | ** **                    | ** ** | ** **      | ** ** |
| **As of October 31, 2004** |       |       |       |                          |       |            |       |
| United States treasury bill     |       | $          | 14,926,737 |                          | $          | —          |       | $ | 14,926,737 |   |
| **As of October 31, 2003** |       |       |       |                          |       |            |       |
| BellSouth common stock          |       | $          | 8,508,279  |                          | $          | 1,269,622       |       | $ | 9,777,901 |   |

 

Includedon the balance sheet at October 31, 2004 is a United States treasury billwhich will mature on February 17, 2005.

 

Includedon the balance sheet at October 31, 2003 are call options written onBellSouth, common stock at a fair value of $2,148,928 reflecting contracts for367,500 shares with a weighted average price of $5.85 and exercise ranges of November 19,2003 to January 20, 2004.

 

F-14

----

 

**5.**                           **Property and Equipment and Internally DevelopedSoftware**

 
| ** **                                                     | ** ** | **October 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                     | ** ** | **2004**             | ** ** | **2003** | ** ** |
| **Property and Equipment**                                     |       |                 |       |   |   |
| Computer equipment                                             |       | $                    | 2,525,348  |   | $ | 2,244,044 |   |
| Scanning equipment                                             |       | 689,169              |       | 747,251 |   |
| Leasehold improvements, office equipment and service  vehicles |       | 590,316              |       | 577,483 |   |
| Total property and equipment                                   |       | 3,804,833            |       | 3,568,778 |   |
| Less: Accumulated depreciation and amortization                |       | (3,054,359           | )          | (2,865,039 | ) |
| Total property and equipment, net                              |       | $                    | 750,474    |   | $ | 703,739 |   |
| **Internally Developed Software**                              |       |                 |       |   |   |
| Internally developed software                                  |       | $                    | 4,509,673  |   | $ | 3,728,027 |   |
| Less: Accumulated amortization                                 |       | (2,195,888           | )          | (1,238,812 | ) |
| Total internally developed software, net                       |       | $                    | 2,313,785  |   | $ | 2,489,215 |   |

 

**6.**                           **Long-Term Debt**

 

TheCompany’s long-term debt is comprised of capital lease obligations of $11,494with interest rates ranging from 10.5% to 8.9%, expiring through 2005.  Included in property and equipment, net, areassets held under capital leases of $19,353, which collateralizes the relatedcapital lease obligation.

 

TheCompany has a $100,000 revolving line of credit agreement with a bank whichexpires on April 30, 2005 and is collateralized by cash of the Company,which is included in other assets. Borrowings under the line bear interest at the one month reserveadjusted London Interbank Offered Rate (1.84% at September 30, 2004) plus1.5%.  There were no borrowingsoutstanding under this line at October 31, 2004.

 

F-15

----

 

**7.**                           **Income Taxes**

 

Deferredtaxes are comprised of the following:

 
| ** **                                             | ** ** | **2004** | ** ** | **2003**   | ** ** |
|--------------------------------------------------------|------------|----------|------------|------------|------------|
|                                                   |       |     |       |       |       |
| **Deferred tax assets**                                |       |     |       |       |       |
| Net operating loss carryforwards                       |       | $        | 714,000    |       | $          | 506,000 |   |
| Depreciable assets                                     |       | —   |       | 27,024     |       |
| Allowance for doubtful accounts                        |       | 13,600   |       | —     |       |
| Accrued expenses                                       |       | 31,311   |       | 9,520      |       |
| Total deferred tax assets                              |       | 758,911  |       | 542,544    |       |
| **Deferred tax liabilities**                           |       |     |       |       |       |
| Capitalized software                                   |       | $        | (889,419   | )          | $          | (852,233 | ) |
| Depreciable assets                                     |       | (62,284  | )          | —     |       |
| Marketable securities and call options                 |       | —   |       | (2,783,103 | )          |
| Other                                                  |       | —   |       | —     |       |
| Total deferred tax liabilities                         |       | (951,703 | )          | (3,635,336 | )          |
| Net deferred tax liability before valuation  allowance |       | (192,792 | )          | (3,092,792 | )          |
| Valuation allowance                                    |       | (500,000 | )          | (506,000   | )          |
| Net deferred income tax liability                      |       | (692,792 | )          | (3,598,792 | )          |
| Less: current portion                                  |       | —   |       | (2,773,219 | )          |
|                                                   |       | $        | (692,792   | )          | $          | (825,209 | ) |

 

Asof October 31, 2004, there are approximately$1,490,000 of federal net operating loss carryforwards for tax purposes.  These net operating losses will expirebetween 2011 and 2019.  Due to thefederal consolidated returns regulations, the separate Company net operatingloss carryforwards of ENS are not anticipated to be utilized by the group forfederal income tax purposes and therefore a valuation allowance has beenrecorded.

 

Theprovision (benefit) for income taxes comprises:

 
| ** **          | ** ** | **2004**   | ** ** | **2003** | ** ** | **2002**   | ** ** |
|---------------------|------------|------------|------------|----------|------------|------------|------------|
|                |       |       |       |     |       |       |       |
| **Federal**         |       |       |       |     |       |       |       |
| Current             |       | $          | 2,662,000  |     | $          | 1,529,000  |       | $ | 2,350,000 |   |
| Deferred            |       | (2,223,000 | )          | (977,000 | )          | (1,100,000 | )          |
| **State and local** |       |       |       |     |       |       |       |
| Current             |       | 103,000    |       | 124,000  |       | 50,000     |       |
| Deferred            |       | (162,000   | )          | —   |       | —     |       |
|                |       | $          | 380,000    |     | $          | 676,000    |       | $ | 1,300,000 |   |

 

F-16

----

 

Reconciliationof the statutory federal income tax rate to the Company’s effective tax rate isas follows:

 
| ** **                                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |     |       |
| US statutory rate                                      |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State taxes, net of federal benefit                    |       | 5.8      |       | 7.3      |       | 0.9      |       |
| Goodwill amortization and other permanent  differences |       | 0.5      |       | 2.7      |       | (5.5     | )          |
| Utilization of net operating loss carryforward other   |       | —   |       | —   |       | (5.7     | )          |
| Reversal of Valuation Allowance                        |       | (8.1     | )          |     |       |     |       |
| Revision of prior year tax estimates                   |       | —   |       | 16.6     |       | —   |       |
| Effective tax rate                                     |       | 32.2     | %          | 60.6     | %          | 23.7     | %          |

 

 

**8.**                           **Dividends Payable**

 

OnNovember 5, 2004, the Board of Directors of the Company declared aquarterly dividend of $0.30 per share, plus a special dividend of $0.20 pershare.  The dividend, aggregating $0.50per share, payable in cash on February 4, 2005, to stockholders of record at the close of business on January 28, 2005.

 

OnAugust 5, 2004, the Board of Directors of the Company declared a quarterlydividend of $0.30 per share, plus a special dividend of $0.20 per share.  The dividend, aggregating $0.50 per share,payable in cash on November 5, 2004 to stockholders of record at the closeof business on October 29, 2004.

 

**9.**                           **Commitments and Contingencies**

 

TheCompany leases administrative facilities and office equipment under operatingleases that expire between 2005 and 2007. Certain of the leases contain escalation clauses providing for increasedrentals based on operating expenses or the consumer price index.  Rent expense, net of rental income, underoperating leases was approximately $637,000, $628,000 and $685,000 for theyears ended October 31, 2004, 2003 and 2002, respectively.

 

Futureannual minimum rental payments as of October 31, 2004 under noncancellableoperating leases for the next three years are as follows:

 
| **Year ending  October 31,** | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2005                              |       | $          | 393,011    |   |
| 2006                              |       | 305,509    |       |
| 2007                              |       | 44,751     |       |
|                              |       | $          | 743,271    |   |

 

TheCompany is a party to various claims in the ordinary course of business.  Management believes that the aggregateimpact, if any, of such claims, will not have a material impact on thefinancial position, results of operations, or cash flows of the Company.

 

F-17

----

 

**10.****                   ****Capital Stock**

 

TheCompany is authorized to issue 1,000,000 shares of Serial Preferred Stock, parvalue $.01 per share with dividend and liquidation preferences over the CommonStock.  Stockholders of the Company havethe right to purchase Serial Preferred Stock upon certain changes in theCompany’s ownership.

 

TheCompany did not acquire any of its common shares during the year ended October 2004.

 

TheCompany acquired 29,200 and 371,900, shares of its common stock for $369,564 and$4,529,075 during the years ended October 31, 2003 and 2002, respectively,under a plan that permits the acquisition of up to 20% of the Company’s stock.

 

**11.****                   ****Sale of PartnershipInvestment**

 

Duringthe year ended October 31, 2003, the Company sold its partnershipinvestment for cash proceeds of $1,421,283 and recognized a gain of $421,253,which is included in other income.

 

**12.****                   ****Employment Agreement**

 

OnJune 26, 2000, the Company amended its employment agreement with TerrenceS. Cassidy, President and Chief Executive Officer of the Company, to increasehis compensation to $260,000 per year, with a 15% increase to such amount aftertwo years, and to provide for an initial term of three years, commencing as of June 26,2000, with automatic extensions at the end of each year for additional one-yearperiods unless either party gives notice of termination prior to the end ofsuch year.

 

**13.****                   ****Earnings PerShare**

 

Basicand diluted earnings per share are calculated based on the following:

 
| ** **                                     | ** ** | **Years Ended October 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **2004**                         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                           |       |                             |       |   |   |   |   |
| **Weighted average common shares outstanding** |       |                             |       |   |   |   |   |
| Basic                                          |       | 2,924,631                        |       | 2,921,830 |   | 3,094,724 |   |
| Dilutive effect of stock options               |       | 30,681                           |       | 16,566 |   | — |   |
| Diluted                                        |       | 2,955,312                        |       | 2,938,396 |   | 3,094,724 |   |

 

Certainoptions to purchase 15,000 and 75,000 shares of common stock, outstandingduring the year ended October 31, 2004 and 2003, respectively, were notincluded in the computation of diluted earnings per share since the exerciseprice of these options was greater than the average market price of the Company’scommon shares during the respective periods. As a result their inclusion in the computation would have beenantidilutive.  Consequently, theseoptions are excluded from the computation of earnings per share.

 

F-18

----

 

**14.****                   ****Stock Option Plans**

 

The1993 Stock Option Plans, as amended, and the 1997 Equity Incentive Plan(collectively, the “Plans”) have participants which include key employees(including officers), directors, advisors, and independent consultants to theCompany or to any of its subsidiaries. The Company has authorized 80,000 and 170,000 shares of Common Stock foroptions under the 1993 and 1997 Plans, respectively.  Options granted to employees may be designatedas incentive stock options (“ISO’s”) or non-qualified stock options (“NQSO’s”),as defined by the Internal Revenue Service. Options granted to independent consultants and other non-employees mayonly be designated NQSO’s.

 

Theexercise price of options granted under the Plans may not be less than 100% ofthe fair market value of the Common Stock on the date of grant.  Generally, options will be exercisable for aterm that will not exceed ten years from the date of grant.

 

During2004 and 2003, the Company granted 15,000 and 10,000 options under the Plans,respectively.  These options have a fiveyear life.  The vesting period is at thediscretion of the Board of Directors. Options granted during 2003 and 2002 vested immediately.  In July 2002, 50,000 of the optionsgranted in 1997 expired.  At October 31,2004 the Company had 75,000 options available for grant.

 

InMarch 2000, the Company adopted the 2000 Director Option Plan covering anaggregate of up to 70,000 shares of Common Stock, pursuant to which the Companyshall grant 5 year options for 5,000 shares upon the appointment of an outsidedirector and 2,500 shares annually to each outside director on the date of theannual stockholders meeting.  Optionsgranted under this plan are exercisable at the fair market value of the CommonStock at the date of the grant.  Inaccordance with this plan the Company granted 10,000 options during 2003 and2002.  These options have a five yearlife.  Options granted upon appointmentvest ratably over three years beginning the grant date.  Options granted annually vest immediately.

 

Informationwith respect to shares under option is summarized below:

 

F-19

----

 
| ** **                             | ** ** | **ISO’s** | ** ** | **NQSO’s** | ** ** | **Weighted  Average Price  Per Share** | ** ** |
|----------------------------------------|------------|----------------|------------|-----------------|------------|----------------------------------------|------------|
|                                   |       |           |       |            |       |                                   |       |
| **Balance, October 31, 2001**     |       | 22,532         |       | 102,468         |       | $                                      | 17.20      |   |
| Granted                                |       | 6,729          |       | 108,271         |       | $                                      | 14.44      |   |
| Expired                                |       | (11,422        | )          | (38,578         | )          | $                                      | 17.05      |   |
| **Balance, October 31, 2002**     |       | 17,839         |       | 172,161         |       | $                                      | 15.57      |   |
| Granted                                |       | —         |       | 10,000          |       | $                                      | 17.22      |   |
| Exercised                              |       | —         |       | (9,231          | )          | $                                      | 13.37      |   |
| **Balance, October 31, 2003**     |       | 17,839         |       | 172,930         |       | $                                      | 15.76      |   |
| **Exercisable, October 31, 2003** |       | 17,839         |       | 172,930         |       | $                                      | 15.76      |   |
| Granted                                |       | —         |       | 15,000          |       | $                                      | 19.20      |   |
| **Balance, October 31, 2004**     |       | 17,839         |       | 187,930         |       | $                                      | 16.01      |   |
| **Exercisable, October 31, 2004** |       | 17,839         |       | 187,930         |       | $                                      | 16.01      |   |

 

Thefollowing table summarizes information about stock options outstanding andexercisable at October 31, 2004:

 
| **Actual  Exercise Price** | ** ** | **Number  Outstanding  at  October 31, 2004** | ** ** | **Weighted  Average Years  Remaining  Contractual  Life** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                       |       |                                               |       |                                                      |       |
| 12.06                      |       | 7,500                                              |       | 2.75                                                      |       |
| 12.75                      |       | 7,500                                              |       | 2.42                                                      |       |
| 14.50                      |       | 50,769                                             |       | 2.33                                                      |       |
| 14.86                      |       | 50,000                                             |       | 2.71                                                      |       |
| 17.22                      |       | 10,000                                             |       | 3.67                                                      |       |
| 18.00                      |       | 65,000                                             |       | 1.25                                                      |       |
| 19.00                      |       | 10,000                                             |       | 4.63                                                      |       |
| 19.59                      |       | 5,000                                              |       | 4.33                                                      |       |
|                       |       | 205,769                                            |       |                                                      |       |

 

Theremaining weighted average contractual life of options outstanding at October 31,2004 was 2.33 years.

 

**15.****                   ****Employee Benefit Plan**

 

TheCompany has a defined contribution plan under Section 401(k) of theInternal Revenue Code covering substantially all employees.  The plan allows employees to make contributionsup to a specified percentage of their compensation.  The Company’s matching of contributions isdiscretionary.  The Company contributed$35,220, $32,165 and $21, 466 to the plan during the years ended October 31,2004, 2003 and 2002, respectively.

 

F-20

----

 

**16.****                   ****Related-Party Transactions**

 

OnMarch 13, 2002, the Company loaned $200,000 to an employee of ENS under apromissory note bearing interest of 5%, due March 13, 2007.  This balance is included in other assets.

 

TheCompany also subleases office space in New York to a company owned by a formerdirector of the Company.  The sublease,which commenced December 1, 1994, is on a month-to-month basis.  Rental income related to this sublease was$36,000, $36,000 and $52,500 for the years ended October 31, 2004, 2003and 2002, respectively.

 

**17.****                   ****Operating Segments**

 

Segmentswere determined based on products and services provided by each segment.  Accounting policies of the segments are thesame as those described in the summary of significant accounting policies.  Performance of the segments is evaluated onoperating income before income taxes.

 

TheCompany currently operates in two operating segments:  the holding company, including certaininvestments which are currently not material; and its investments in ENS.

 

F-21

----

 
| ** **                                                                        | ** ** | **NWH and  Other** | ** ** | **ENS**     | ** ** | **Total**   | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------|------------|-------------|------------|-------------|------------|
|                                                                              |       |               |       |        |       |        |       |
| **Year-ended October 31, 2004**                                              |       |               |       |        |       |        |       |
| Revenues                                                                          |       |               |       |        |       |        |       |
| Service                                                                           |       | $                  | —     |        | $          | 17,462,554  |       | $ | 17,462,554 |   |
| Expenses                                                                          |       |               |       |        |       | —      |       |
| Cost of services, professional fees, and general and  administrative              |       | (2,098,416         | )          | (15,537,217 | )          | (17,635,633 | )          |
| Depreciation and amortization                                                     |       | (1,435             | )          | (308,323    | )          | (309,758    | )          |
| (Loss) income from operations                                                     |       | (2,099,851         | )          | 1,617,014   |       | (482,837    | )          |
| Total assets                                                                      |       | $                  | 27,014,852 |        | $          | 11,279,755  |       | $ | 38,294,607 |   |
| Capital expenditure for property and equipment and  internally developed software |       | $                  | —     |        | $          | 1,172,085   |       | $ | 1,172,085 |   |
| **Year-ended October 31, 2003**                                              |       |               |       |        |       |        |       |
| Revenues                                                                          |       |               |       |        |       |        |       |
| Service                                                                           |       | $                  | —     |        | $          | 13,396,673  |       | $ | 13,396,673 |   |
| Expenses                                                                          |       |               |       |        |       | —      |       |
| Cost of services, professional fees, and general and  administrative              |       | (2,154,959         | )          | (11,922,083 | )          | (14,077,042 | )          |
| Depreciation and amortization                                                     |       | (3,023             | )          | (313,191    | )          | (316,214    | )          |
| (Loss) income from operations                                                     |       | (2,157,982         | )          | 1,161,399   |       | (996,583    | )          |
| Total assets                                                                      |       | $                  | 40,014,937 |        | $          | 9,861,636   |       | $ | 49,876,573 |   |
| Capital expenditure for property and equipment and  internally developed software |       | $                  | 33,693     |        | $          | 1,428,990   |       | $ | 1,462,683 |   |
| **Year-ended October 31, 2002**                                              |       |               |       |        |       |        |       |
| Revenues                                                                          |       |               |       |        |       |        |       |
| Service                                                                           |       | $                  | —     |        | $          | 11,930,646  |       | $ | 11,930,646 |   |
| Expenses                                                                          |       |               |       |        |       | —      |       |
| Cost of services, professional fees, and general and  administrative              |       | (1,848,786         | )          | (10,319,854 | )          | (12,168,640 | )          |
| Depreciation and amortization                                                     |       | (9,022             | )          | (334,201    | )          | (343,223    | )          |
| (Loss) income from operations                                                     |       | (1,857,808         | )          | 1,276,591   |       | (581,217    | )          |
| Total assets                                                                      |       | $                  | 47,328,605 |        | $          | 8,937,764   |       | $ | 56,266,369 |   |
| Capital expenditure for property and equipment and  internally developed software |       | $                  | 1,894      |        | $          | 1,150,788   |       | $ | 1,152,682 |   |

 

F-22

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**18.Quarterly Financial Information (Unaudited)**

 

Quarterlyinformation for 2004 and 2003 is set forth in the table below:

 
| ** **                         | ** ** | **Quarter Ended**   | ** ** |
|------------------------------------|------------|---------------------|------------|
| ** **                         | ** ** | **January 31** | ** ** | **April 30** | ** ** | **July 31** | ** ** | **October 31** | ** ** |
|                               |       |                |       |   |   |   |   |   |   |
| **2004**                           |       |                |       |   |   |   |   |   |   |
| Revenue                            |       | $                   | 4,186,310  |   | $ | 4,373,436 |   | $ | 4,480,541 |   | $ | 4,422,267 |   |
| Loss from operations               |       | (129,868            | )          | (1,008 | ) | (63,336 | ) | (288,625 | ) |
| Net (loss) income                  |       | (116,486            | )          | 529,560 |   | 209,556 |   | 178,032 |   |
| Net (loss) income per common share |       |                |       |   |   |   |   |   |   |
| Basic                              |       | (0.04               | )          | 0.18 |   | 0.07 |   | 0.06 |   |
| Diluted                            |       | (0.04               | )          | 0.18 |   | 0.07 |   | 0.06 |   |
| **2003**                           |       |                |       |   |   |   |   |   |   |
| Revenue                            |       | $                   | 3,046,090  |   | $ | 2,890,901 |   | $ | 3,498,567 |   | $ | 3,961,115 |   |
| Loss from operations               |       | (146,942            | )          | (417,182 | ) | (306,071 | ) | (126,388 | ) |
| Net income (loss)                  |       | 1,484,201           |       | (679,072 | ) | (82,724 | ) | (282,376 | ) |
| Net income (loss) per common share |       |                |       |   |   |   |   |   |   |
| Basic                              |       | 0.51                |       | (0.23 | ) | (0.03 | ) | (0.10 | ) |
| Diluted                            |       | 0.51                |       | (0.23 | ) | (0.03 | ) | (0.10 | ) |

 

Thesum of the quarterly net (loss) income per common share amounts do notnecessarily equal the amount for the fiscal year primarily because the earningsper share for each quarter is computed using the weighted-average number ofshares outstanding during that quarter, while earnings per share for the fiscalyear is computed using the weighted-average number of shares outstanding duringthe year.

 

F-23

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| **NWH, INC.**               |
|-----------------------------|
| (Registrant)                |
|                        |   |   |
|                        |   |   |
| Date: January 31, 2005 | By: | /s/ Terrence S. Cassidy |   |
|                        | Terrence S. Cassidy, Principal Executive Officer, Principal  Financial Officer and Principal Accounting Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Signature**               | ** ** | **Title** | ** ** | **Date** | ** **            |
|-----------------------------|------------|-----------|------------|----------|-----------------------|
|                        |       |      |       |     |                  |
| /s/ Terrence S. Cassidy     |       |      | Director   |     | January 31, 2005 |   |
| Terrence S. Cassidy         |       |      |       |     |                  |
|                        |       |      |       |     |                  |
| /s/ Thomas R. DiBenedetto   |       |      | Director   |     | January 31, 2005 |   |
| Thomas R. DiBenedetto       |       |      |       |     |                  |
|                        |       |      |       |     |                  |
| /s/ Paul J. Tobin           |       |      | Director   |     | January 31, 2005 |   |
| Paul J. Tobin               |       |      |       |     |                  |
|                        |       |      |       |     |                  |
| /s/ Michael A. McManus, Jr. |       |      | Director   |     | January 31, 2005 |   |
| Michael A. McManus, Jr.     |       |      |       |     |                  |
|                        |       |      |       |     |                  |
| /s/ Vincent Tese            |       |      | Director   |     | January 31, 2005 |   |
| Vincent Tese                |       |      |       |     |                  |
|                             |            |           |            |          |                       |  |  |  |  |  |

 

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