UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
Commission File Number 0-21177
NETSMART TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3680154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
146 Nassau Avenue, Islip, NY 11751
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 968-2000
Securities registered pursuant to Section 12(b) of the Act: ____
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Outstanding shares as of March 20, 1997
------------------- ---------------------------------------
Common Stock, par value
.01 per share 6,798,203
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X_ No__
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S - K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business
Introduction
Netsmart Technologies, Inc. ("Netsmart") develops, markets and supports computer
software designed to enable organizations to provide a range of services in a
network computing environment. A network computing environment is a computer
system that provides multiple users with access to a common database and
functions. A network system can be a local system, such as a local area network,
known as a LAN, which operates within an office or facility, or a distributed
system which provides simultaneous access to a common data base to many users at
multiple locations.
There are typically three parties in Netsmart's network system - the sponsor
(the party that maintains the data base, and may be a managed care organization,
a university or a financial institution), the users (the users are the
individuals who use the system, and may be the subscribers of a managed care
organization, the students at a university or the bank care or credit card
holders of a financial network) and the service providers (the service providers
are those who provide goods or services to the users, and may be physicians,
pharmacies, banks and merchants who provide goods, services or funds to bank
card or credit card holders).
Netsmart has developed proprietary network technology utilizing smart cards
which it markets in the health care, financial and education fields as the
CarteSmart System.
A smart card is a plastic card about the size of a standard credit card which
contains a single embedded microprocessor chip with both data storage and
computing capabilities. The smart card software provides access to the
information stored in the chip, the ability to update stored information and
includes security elements to restrict unauthorized access to or modification of
certain information stored on the card utilizing a smart card reader system. The
smart card reader system and the software provides the ability to include
information on both the smart card and the organization's computer system.
Netsmart also supplies network applications which use telecommunications rather
that than smart cards to obtain access to and manage data.
Substantially all of Netsmart's revenue through December 31, 1995 and 77%
through December 31, 1996 was generated by its health information systems and
related services which are marketed by it's subsidiary Creative Socio-Medics
Corp. ("CSM"). CSM was acquired by Carte Medical Holdings, Inc. ("Holdings")
from a nonaffiliated party in June 1994 and transferred by Holdings to Netsmart
in September 1995.
Netsmart is a Delaware Corporation formed in September 1992 under the name
Medical Services Corp. The name was changed to Carte Medical Corporation in
October 1993, CSMC in June 1995 and Netsmart Technologies, Inc. in February
1996. References to Netsmart include both the Company, its former and present
subsidiaries, including CSM from June 16, 1994. The Company's executive offices
are located at 146 Nassau Avenue, Islip, New York 11751, telephone (516) 968-
2000. In October 1993, Medical Services Corp. merged its subsidiary into itself
and changed its name to Carte Medical Corporation. In June 1995, Carte Medical
Corporation's name was changed to CSMC Corporation, and in February 1996 CSMC
Corporation's name was changed to Netsmart Technologies, Inc.
Health Information Systems and Services
Since the June 1994 acquisition of CSM, Netsmart has offered its customers a
range of products and services principally based upon the health information
systems which were developed and marketed by CSM prior to the acquisition. Users
typically purchase one of the health information systems, in the form of a
perpetual license to use the system, as well as contract services, maintenance
and third party hardware and software which Netsmart offers pursuant to
arrangements with the hardware and
1
software vendors. The contract services include project management, training,
consulting and software development services, which are provided either on a
time and material basis or pursuant to a fixed-price contract. The software
development services may require CSM to adapt one of its health information
systems to meet the specific requirements of the customer.
Although the health information systems constituted the basis of CSM's business,
revenue from the license of such systems has not represented a major component
of its revenues. The typical price for a license for CSM's health information
systems ranges from $10,000 to $30,000. During the years ended December 31,
1996, 1995 and 1994, CSM installed health information systems licensing of such
systems represented approximately $329,000, $162,000 and $375,000, in the years
ended December 31, 1996, 1995 and 1994, respectively, accounting for
approximately 3.9%, 2.2% and 7.4% of revenue for such periods.
A customer's purchase order may also include third party hardware or software.
For the years ended December 31, 1996, 1995 and 1994, revenue from hardware and
third party software accounted for approximately $1.1 million, $2.1 million and
$552,000, representing 13%, 29.1% and 18.9%, respectively, of revenues in such
periods.
In addition to its health information systems and related services, CSM offers
specialty care facilities a data center, at which its personnel perform data
entry and data processing and produce operations reports. These services are
typically provided to smaller substance-abuse clinics. During the years ended
December 31, 1996, 1995 and 1994, CSM's service bureau operation generated
revenue of approximately $2.2 million, $1.7 million and $884,000, respectively,
representing approximately 25.8%, 23.6% and 30.2% of CSM's revenues for such
periods. The largest user of the service bureau is the State of New York Office
of Alcohol and Substance Abuse Services, which uses CSM's service bureau to
maintain its statewide database of methadone maintenance patients, however, such
customer accounted for less than 4% of CSM's revenues in the years ended
December 31, 1996, 1995 and 1994. Netsmart intends to augment the marketing
effort for the service bureaus, although no assurance can be given that such
operations will continue to be profitable.
Maintenance services have generated increasing revenue and are becoming a more
significant portion of CSM's business. Since purchasers of health information
system licenses typically purchase maintenance service. Maintenance revenue
increases as new customers obtain licenses for its health information services.
Under its maintenance contracts, which are executed on an annual basis, CSM
maintains its software and provides certain upgrades. Its obligations under the
maintenance contract may require CSM to make any modifications necessary to meet
new Federal reporting requirements. CSM does not maintain the hardware and third
party software sold to its customers.
The CarteSmart System
Netsmart's CarteSmart System software was designed to operate on
industry-standard computer networks and smart cards. A smart card is a plastic
card the size of a standard credit card which contains an embedded
microprocessor chip. The card has data storage and computing capabilities and
the smart card software includes security elements to restrict unauthorized
access to or modification of certain information contained on the card. A smart
card may also include a magnetic stripe to allow it to be used in networks that
do not include smart card functionality. The smart cards are designed to be
issued only by the sponsor organization, such as a managed care organization,
specialty care facility, administrator of an entitlement program or other
similar organization, a university or a bank or credit card organization.
The CarteSmart software consists of components which allow Netsmart to develop
network applications for sponsors with less effort than would be required if
those network applications were developed from scratch. The CarteSmart software
consists of an Application Program Interface ("API") and an API Generator which
shows fast customization of the API for specific network applications. The API
is a set of software modules that provide the common functions required to
support a computer network using smart cards. By using the API, Netsmart or a
sponsor may develop network systems more quickly than if all of the software
necessary to Implement the network
2
were custom written for a particular network application. The API Generator is a
tool developed by Netsmart that it designed to allow Netsmart or a network
sponsor to develop a custom API for a particular network and reduce the effort
required to build network systems.
The CarteSmart System is designed to operate on file servers and personal
computers which utilize the DOS, Windows 3.1, Windows 95, Windows MT or UNIX
operating systems, depending upon the application. The software used in the
smart card can be used or adapted for use in most commercially available smart
CarteSmart cards generally meet international standards and are considered
commodity products, although each manufacturer has its own software to interface
with a computer. Accordingly, Netsmart believes that a manufacturer would
provide any necessary assistance in order to market its cards.
Although Netsmart's CarteSmart System software has general applications, its
experience with its CarteSmart clients reflects a need to customize the software
to meet the specific need of the client. Although the customization need not be
significant, each user has its unique requirements that must be met. These
requirements may include the need to enable the CarteSmart System to interface
with the client's existing systems to the development of a range of software
products to meet needs which are not presently being served.
Netsmart's initial applications were designed to meet the needs of managed care
organizations and entitlement programs and Netsmart developed a smart card
interface to its health management systems. Each time a patient visits a
participating health care provider, the health care provider adds to the
patient's data base information concerning the visit, including the date,
procedures performed and diagnosis. At the time of the first visit to a
participating physician, the physician enters information relating to the
diagnosis and treatment given on that visit together with such information
relating to chronic conditions, such as allergies and medication, as the
physician deems important. Netsmart does not anticipate that the health care
provider will be expected to include information relating to earlier diagnosis
or treatment; however, the organization which provides the smart card may
require additional information to be input at the initial visit. This
information is input into the patient's smart card and may also be transmitted
to the managed care organization's central data base, where, unless
dissemination of such information has been restricted by the patient other
health care providers will have access to the information. The health care
provider can read information from, and write information onto the smart card
through a card interface device, which is standard computer peripheral equipment
readily available from composer outlets and can be easily connected to a
personal computer. The information transferred to the smart card is first input
by the health care provider on a computer and includes the date of service,
diagnosis, treatment including any prescribed medication, and any other
information which the health care provider determines.
At the time of the visit, the health care provider inputs the standard codes for
use diagnosis and procedures performed. Errors in inputting the diagnosis and
the procedure code delay payment or affect the amount of payment. The SmartCard
System can be integrated with the health care provider's existing practice
management system, without incurring any additional personnel. The CarteSmart
System software has integrated within it an easy to use diagnosis and procedure
code look-up capability, as well as error checking and other safeguards which
assist the health care provider in inputting the proper codes based upon normal
medical terminology.
The smart card stores only a limited amount of information, and is intended to
reflect current medical conditions and not a record of medical treatment from
birth. When the storage capacity of the card, which is equivalent to
approximately ten typed pages, is reached, items are deleted on a chronological
basis, with the earliest items being deleted first, although there is an
override procedure by which certain crucial medical information, such as
allergies and chronic conditions, can be retained, regardless of the date when
the patient was diagnosed or treated for the condition. The card also includes
information on each prescription which the patient is taking. A smart card is
different from a magnetic stripe card, such as is used at Virginia Commonwealth
University ("VCU"), in that it has an updatable data storage capacity, which a
magnetic stripe card does not.
3
To date, Netsmart has licensed its CarteSmart software in conjunction with a
pilot project for San Diego County, which involved the issuance of smart cards
to approximately 1,200 mental health patients participating in the California
Medical Managed Care Initiative. Netsmart is presently contracted to develop a
plan for an expansion of the program to include substance abuse and acute care
as well as mental health for the county's total health care population. Netsmart
is also marketing its CarteSmart System to other entitlement programs and
managed care organizations; however, except for the pilot project in San Diego
County, Netsmart has not entered into any agreements with any such
organizations, and no assurance can be given that Netsmart will enter into any
such agreements.
During 1995, Netsmart commenced marketing its CarteSmart based products to
markets other than the health care field. In July 1995, Netsmart entered into an
agreement pursuant to which it installed a magnetic stripe identification system
which uses CarteSmart technology to provide for the centralized issuance of a
single card to all persons allowed access to the facility and its services. The
card contains the individual's name, photo, signature and unique card
identification number, which defines the holder's entitlement to food service
and library services. Approximately 20,000 students are using the system.
Netsmart is negotiating with respect to an agreement to expand the program to
support additional services, however, no assurance can be given that the program
will be expanded. A magnetic card differs from a smart card since it does not
have an independent updatable data storage capability. Netsmart believes that a
major market for its smart card technology is the financial services industry,
including banks and credit card issuers. Commencing in May 1995, Netsmart
entered into a series of letter agreements with IBN for services and CarteSmart
software licenses for the implementation of a satellite based distributed
network of automatic teller machines and off-line point of sale terminals using
smart cards for the former Soviet Union. Netsmart entered into a definitive
agreement to develop the system and license the system to IBN. IBN is a New
York-based company which has rights to install such systems in the former Soviet
Union. Netsmart's agreement with IBN is not contingent upon the success of IBN's
installations in the former Soviet Union, although the extent of its revenues
from royalties will be based on the number of cards issued and may be adversely
affected by political developments in the former Soviet Union. The system being
delivered to IBN includes Oasis Technologies IST/Share Financial Transaction
System software and other third party software which Netsmart is integrating
with its CarteSmart software to complete the IBN system.
In developing the CarteSmart System for the financial services industry,
Netsmart is using networking technologies that use telecommunications networks
as well as smart cards. In addition, Netsmart, through a subsidiary, purchased
the SATC Software, which processes retail plastic card transactions and merchant
transactions. The purchase price is $650,000, of which $325,000 was paid by
Netsmart and the remaining $325,000 was paid by Oasis. The SATC Software is
designed to perform functions required by credit card issuers, including
applications processing and tracking credit evaluations, credit authorization
and the printing of statements. Netsmart has an agreement with Oasis pursuant to
which the subsidiary will become a joint venture corporation owned 50% by
Netsmart and 50% by Oasis and/or its principals.
Markets and Marketing
Although the market for smart card systems includes numerous applications where
a secure distributed data base processing system in important, CSM's initial
marketing efforts were directed to the health and human services market,
including managed care organizations and entitlement programs. In the United
States alone, CSM believes that there are presently more than 75 million persons
who participate in managed care programs, which are sponsored by almost 600
organizations or health insurers. Because of the relationship between the
organization and the participating medical care providers and patients, the
organization can institute a smart card system without the need for CSM to
conduct a separate marketing effort directed at the medical care providers.
Although independent health insurers which do not operate a managed care
organization may, in the future, be a market for a smart card system, because
the relationship between the insurer and the medical care provider is different
from that of the managed care organization and its participating medical care
4
providers, CSM is not treating independent insurance companies as a market for
the CarteSmart System, an no assurance can be given that it will ever become a
market for the system.
The market for CSM's health information systems and related services is
comprised of various providers of specialty care involving long-term treatment
of a repetitive nature rather than short-term critical care, such as medical and
surgical hospitals or clinics. CSM believes that there are approximately 15,000
providers of such treatment programs in the United States, including public and
private hospitals, private and community-based residential facilities and
Federal, state and local governmental agencies. Of these facilities,
approximately 200 are customers of CSM.
Netsmart's health information systems are marketed principally to specialty care
facilities, many of which are operated by government entities and include
entitlement programs. During the years ended December 31, 1996, 1995 and 1994,
approximately 31%, 54% and 47%, respectively, of revenues was generated from
contracts with government agencies. Contracts with government agencies generally
include provisions which permit the contracting agency to cancel the contract at
its convenience.
For the year ended December 31, 1996, one customer accounted for more than 10%
of Netsmart's revenue. IBN Limited generated revenue of approximately $1.9
million representing 22% of Netsmart's revenue.
For the year ended December 31, 1995, one customer accounted for more than 10%
of Netsmart's revenue. The State of Colorado generated revenue of approximately
$1.4 million, representing 18.5% of revenue for the year. CSM's largest customer
for 1994 was Cuyahoga County (Cleveland) Ohio, from which CSM recognized revenue
of $250,000, or 7.0% of revenue.
Netsmart believes that the CarteSmart software has applications beyond the
health and human services market and is seeking to market the software to
educational institutions and in the financial services industry. In April, 1995,
Netsmart entered into a joint marketing agreement with Oasis, pursuant to which
each company markets the software of the other company. Oasis, an independent
software developer, has developed and markets a transaction processing system,
known as IST/Share, designed for high volume users in the financial services
industry. Mr. Storm R. Morgan, a director of and consultant to Netsmart, is an
officer of, and has an equity interest in Oasis. Netsmart believes that its
agreement with Oasis will enhance its ability to market and introduce its
product to the financial services industry where Oasis has an existing client
base.
Netsmart may enter into negotiations with other companies which have business,
product lines or products which are compatible with Netsmart's business
objectives. However, no assurance can be given as to the ability of Netsmart to
enter into any agreement with such a company or that any agreement will result
in licenses of the CarteSmart System.
At December 31, 1996 and 1995, Netsmart had a backlog of orders, including
ongoing maintenance and data center contracts, in the aggregate amount of $3.7
million and $4.2 million respectively. Substantially all of the backlog at
December 31, 1996 is expected to be filled during 1997. Such orders and
contracts relate substantially to health information sales and services.
Netsmart's sales force is comprised of three full-time sales representatives, as
well as Mr. Leonard M. Luttinger, chief operating officer, John F. Phillips,
president of CSM, and Storm R. Morgan, a consultant to Netsmart. Mr. Storm R.
Morgan's services include activities relating to the marketing of the CarteSmart
System to industries outside of the medical field. His present efforts are
devoted principally to the financial services industry. In addition Mr.
Luttinger and other members of Netsmart's technical staff are available to
assist in market support, especially for proposals which contemplate the use of
smart card transaction processing networks.
Product Development
5
During 1996 the Company did not incur any research and development expenses,
since the personnel who had been engaged in such activities were reassigned to
work on the IBN contract and the development of Smart Card products. As a
result, their salaries and related expenses were included as costs of revenue
with respect to their work on the Smart Card product. As a result of such
product development the Company incurred $279,000 in capitalized software costs.
Netsmart intends to develop a product based on both the SATC Software and its
own technologies including the CarteSmart System, and to develop a network
support tool for the financial services industry. The proposed enhancements
include an increased language capability so that it can be multilingual, an
interface with the CarteSmart System and an interface with Oasis' IST/Share,
which is a transaction processing system for high volume users in the financial
services industry. During 1995 and 1994 Netsmart developed and enhanced the
CarteSmart System, and six of its employees were engaged in such activities. For
the year ended December 31, 1995 and the year ended December 31, 1994, research
and development expenses were $699,000 and $367,000, respectively, representing
a 90.4% increase. The increase reflects research and development for smart card
and related products and the graphical interface for Netsmart's health
information systems.
Competition
Netsmart is in the business of licensing software to entitlement programs and
managed care organizations, specialty care institutions and other major computer
users who have a need for access to a distributed data network and marketing
health information systems software to specialty care organizations. The
software industry in general is highly competitive, in addition, with
technological developments in the communications industry, it is possible that
communications as well as computer and software companies may offer similar or
compatible services. Although Netsmart believes that it can provide a health
care facility or managed care organization with software to enable it to perform
its services more effectively, other companies, including major computer and
communications companies have the staff and resources to develop competitive
systems, and users, such as insurance companies, have the ability to develop
software systems in house. Because of the large subscriber base participating in
the major managed care organizations, the inability of Netsmart to license any
such organizations could have a materially adverse effect upon its business.
Furthermore, various companies have offered smart card programs, by which a
person can have his medical records stored and software vendors and insurance
companies have developed software to enable a physician or other medical care
provider to have direct access to the insurer's computer and other software
designed to maintain patient health and/or medication records. The market is
very cost sensitive. In marketing systems such as the CarteSmart System,
Netsmart must be able to demonstrate the ability of the network sponsor to
provide enhanced services at lower effective cost. Major systems and consulting
vendors, such as Unisys, AT&T Corp. and Andersen Worldwide may offer packages
which include smart cards and other network services. No assurance can be given
that Netsmart will be able to compete successfully with such competitors.
Netsmart believes the health insurance industry is developing switching software
to be used in transmitting claims from health care providers to the insurers,
and insurers or managed care organizations may also develop or license or
purchase from others the software to process such claims, which would compete
with certain functions of the CarteSmart System. The health information systems
business is highly competitive, and is serviced by a number of major companies
and a larger number of smaller companies, many of which are better capitalized,
better known and have better marketing staffs than Netsmart, and no assurance
can be given that Netsmart will be able to compete effectively with such
companies. Major vendors of health information systems include Shared Medical
Systems Corp. And HBO Corp. Netsmart believes that price competition is a
significant factor in its ability to market its health information systems and
services.
Netsmart also faces intense competition as it seeks to enter the education and
financial services markets. Competition for the education market includes not
only major and minor software developers, but credit card issuers and
telecommunications companies. In marketing its CarteSmartbased products to
educational institutions, Netsmart can focus on the benefits to the university
of providing an all-purpose card to ease administration and reduce costs.
6
Major credit card issuers and communications companies, such as American
Express, AT&T and MCI, can offer similar services by permitting the university
to link their cards with the university's services. Such organizations can also
use these marketing efforts so a part of their overall corporate marketing
strategy to familiarize the students with their particular cards and services in
hopes of attracting the students with their particular cards and services in
hopes of attracting the students as a long-term user of their cards and
services. As part of a marketing plan, rather than a profit center, such card
issuers may be able to offer the universities services similar to Netsmart, but
at a lower cost to the university. In this context, it is possible that, unless
Netsmart can enter into a marketing arrangement with a major card issuer or
telecommunications company, Netsmart may not be able to compete successfully in
marketing its CarteSmart products to educational institutions.
The financial services industry is served by numerous software vendors. In
addition, major banks, credit card issuers and other financial services
companies have the resources to develop networking software in house. At
present, most financial institutions use magnetic stripe cards rather than smart
cards. Netsmart believes that its CarteSmart System together with the SATC
Software and its joint marketing agreement with Oasis, which presently serves
the financial services industry, will assist Netsmart in selling and licensing
its products and services in the financial services industry. However, to the
extent that smart cards become more important in the financial services
industry, more companies in the financial services industry, as well as the
major computer and software companies, all of whom are better known and
substantially better capitalized than Netsmart, and numerous smaller software
developers, are expected to play an increasingly active role in developing and
marketing smart card based products. No assurance can be given as to the ability
of Netsmart to compete in this industry.
Government Regulations
The Federal and State governments have adopted numerous regulations relating to
the health care industry, including regulations relating to the payments to
health care providers for various services. The adoption of new regulations can
have a significant effect upon the operations of health care providers and
insurance companies. Although Netsmart's business is aimed at meeting certain of
the problems resulting from government regulations and from efforts to reduce
the cost of health care, the effect of future regulations by governments and
payment practices by government agencies or health insurers, including
reductions in the funding for or scope of entitlement programs, cannot be
predicted. Any change in, the structure of health care in the United States can
have a material effect on companies providing services, including those
providing software. Although Netsmart believes that one likely direction which
may result from the current study of the health care industry would be an
increased trend to managed care programs, which is the market to which Netsmart
is seeking to license its CarteSmart System. No assurance can be given that
Netsmart's business will benefit from any changes in the industry structure.
Even if the industry does evolve toward more health care being provided by
managed care organizations, it is possible that there will be substantial
concentration in a few very large organizations, which may seek to develop their
own software or obtain software from other sources. To the extent that the
health care industry evolves with greater government sponsored programs and less
privately run organizations, Netsmart's business may be adversely affected.
Furthermore, to the extant that each state changes its own regulations in the
health care field, it may be necessary for Netsmart to modify its health
information systems to meet any new record-keeping or other requirements imposed
by changes in regulations, an no assurance can be given that Netsmart will be
able to generate revenues sufficient to cover the costs of developing the
modifications.
A substantial percentage of CSM's business has been with government agencies,
including specialized care facilities operated by, or under contract with,
government agencies. The decision on the part of a government agency to enter
into a contract is dependent upon a number of factors, including economic and
budgetary problems affecting the local area, and government procurement
regulations, which may include the need for approval by more than one agency
before a contract is signed. In addition, contracts with government agencies
generally include provisions which permit the contracting agency to cancel the
contract at its convenience.
7
Intellectual Property Rights
The CarteSmart System is a proprietary system developed by Netsmart. Netsmart
has no patent rights for the CarteSmart System or health information system
software, but it relies upon nondisclosure and secrecy agreements with its
employees and third parties to whom Netsmart discloses information. No assurance
can be given that Netsmart will be able to protect its proprietary rights to its
system or that any third party will not claim rights in the system. Disclosure
of the codes used in the CarteSmart System or in any proprietary product,
whether or not in violation of a nondisclosure agreement, could have a
materially adverse affect upon Netsmart, even if Netsmart is successful in
obtaining injunctive relief. Furthermore, Netsmart may not be able to enforce
its rights in the CarteSmart System in certain foreign countries.
Source of Supply
Since Netsmart does not provide any of the hardware or the smart cards it is the
responsibility of the licensee to obtain the hardware smart cards and other
supplies. Netsmart's software operates on computer hardware and smart cards
manufactured by a number of suppliers.
Employees
As of December 31, 1996, Netsmart had 71 employees, including five executive,
five marketing and marketing support, 54 technical and seven clerical and
administrative employees. The chief executive officer and the president of
Netsmart devote only a portion of their time to the business of Netsmart.
Item 2. Property
The Company's executive offices and facilities are located in approximately
18,000 square feet of space at 146 Nassau Avenue, Islip, New York, pursuant to a
lease which terminates on February 28, 1999, at a minimum annual rental of
$248,000. This lease provides for fixed annual increases ranging from 4% to 5%.
The Company believes that such space is adequate for its immediate needs.
The Company also leases approximately 1,800 square feet of office space at 7590
Fay Avenue, La Jolla, California, pursuant to a lease which terminates on March
31, 1999, at a minimum annual rental of $31,000. This lease provides for fixed
annual increases of 4%.
The company occupies, on a month to month basis, approximately 1,500 square feet
of office space in Wethersfield, Conneticut, at a monthly rental of $2,000.
The Company believes that its space is adequate for its immediate needs and
that, if additional space is required, it would be readily available on
commercially reasonable rates.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders for a vote during the three months
ended December 31, 1996.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's shares of Common Stock is traded on the Nasdaq Market under the
symbol NTST. Set forth below is the reported high and low bid prices of the
shares of Common Stock for the transition period listed.
8
Quarter Ending High Bid Low Bid
September 30, 1996 $13.25 $12.50
December 31, 1996 3.38 3.00
As of December 31, 1996 there were approximately 347 holders of record of the
Company's common stock.
No cash dividends have been paid to the holders of the shares of Common Stock
during the years ended December 31, 1996 and 1995 and 1994.
9
Item 6. Selected Financial Data
Year Ended
----------
1996 1995 1994 1993
---- ---- ---- ----
(in 000's except per share data)
Selected Statements
of Operations Data:
Revenues $ 8,541 $ 7,382 $ 2,924 $ 57
Income (Loss) from
Operations (4,151) (1,433) (1,491) (339)
Net Income (Loss) 1&2(6,579) 3(2,850) (1,751) (433)
Net Income (Loss)
per Common Share $ (1.29) $ (.59) $ (.36) $ (.10)
Weighted average number
of shares outstanding 5,149 4,822 4,822 4,763
Selected Balance
Sheet Data:
Working Capital (deficiency) 477 (2,562) (4,037) (938)
Total Assets 8,251 6,390 7,193 585
Total Liabilities 3,836 5,887 6,342 938
Redeemable Preferred Stock -- 96 96 96
Accumulated Deficit (11,726) (5,147) (2,297) (546)
Stockholders' Equity
(deficiency) 4,415 407 755 (449)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Years Ended December 31, 1996 and 1995.
The Company's revenue for 1996 was $8.5 million, an increase of $1.1 million, or
15% from the revenue for 1995 which was $7.4 million. Approximately $1,550,000
of the increase in revenue was generated pursuant
- - --------
1Includes $3,492 of non cash compensation charges arising out of the
issuance by the Company of warrants and options having exercises prices which
were less than the market value of the Common Stock at the date of approval by
the board of directors.
2 Includes $1,692 of non cash costs associated with the issuance of
500,000 common shares to certain noteholders and 25,000 shares of common stock
to the Company's asset based lender.
3Includes financing costs of $460 representing the write-off of deferred
financing costs relating to a proposed public offering scheduled for early 1995
but cancelled.
10
to the Company's agreement with IBN. IBN represented the Company's most
significant customer for 1996, accounting for approximately 22% of revenue.
Furthermore, through December 31, 1996 IBN has generated revenue of $2.4
million, or approximately 89.6% of the Company's total revenue from the
SmartCard systems during the two years ended December 31, 1996 and 1995 on a
combined basis. The revenue generated to date includes approximately $419,000 of
guaranteed royalties. As of December 31, 1996, the contract was more than 80%
complete. The Company is continuing to provide professional services to IBN,
although revenues from such services have declined substantially from the level
at the beginning of the year. The Company intends to expand its marketing effort
for its CarteSmarte System, however, at December 31, 1996, the Company did not
have any significant contracts for the CarteSmart system.
Revenue from the Company's health information systems continued to represent the
Company's principal source of revenue in 1996, accounting for $6.5 million or
76% of revenue. However, as a result of the increase of revenue from SmartCard
systems, principally from IBN, revenue from health information systems and
services declined as a percentage of total revenue. Except for revenue from the
IBN contract, the largest component of revenue in 1996 was data center (service
bureau) revenue which increased to $2,207,000 in 1996 from $1,742,000 in 1995,
reflecting an increase of 27%. The turnkey systems revenue decreased to
$1,663,000 in 1996 from $1,777,000 in 1995, reflecting a decrease of 6%.
Maintenance revenue increased to $1,226,000 in 1996 from $1,099,000 in 1995,
reflecting a 11% increase. Revenue from third party hardware and software
decreased to $1,114,000 in 1996 from $2,148,000 in 1995, a decrease of 48%.
Sales of third party hardware and software are made only in connection with the
sales of turnkey systems. License revenue increased to $329,000 in 1996 from
$162,000 in 1995. License revenue is generated as part of a sale of a turnkey
system pursuant to a contract or purchase order that includes development of a
turnkey system and maintenance. The Company believes that the increase in 1996
installations should enable the Company to increase the maintenance revenue in
future periods.
Revenue from contracts from government agencies represented 31% of revenue for
1996 . The Company believes that such contracts will continue to represent an
important part of its business, particularly its health information systems
business. In 1996, contracts from government agencies accounted for
approximately 40% of its revenue from health information systems.
Gross profit decreased to $1,332,000 in 1996 from $1,763,000 in 1995, a 24%
decrease. The decrease in the gross profit was substantially the result of costs
associated with the completion of the IBN contract. At December 31, 1996 the IBN
contract was more than 80% complete.
Selling, general and administrative expenses were $1.9 million in 1996, a
decrease of 24% from the $2.5 million in 1995. The decline was substantially the
result of a one time charge in 1995 of a write off deferred public offering
costs in the amount of $460,000 as well as a reduction in executive compensation
and a reduction in staff.
During 1996, the Company incurred non cash compensation charges of $3.5 million
arising out of the issuance by the Company of warrants and options having
exercise prices which were less than the market value of the Common Stock at the
date of approval by the board of directors. During 1996, the Company issued
500,000 common shares to certain noteholders and 25,000 common shares to the
Company's asset based lender. As a result of such issuance, the Company incurred
a financing cost charge to operations of approximately $1.7 million.
In 1996, the Company did not incur any research and development expenses, since
the personnel who had been engaged in such activities were reassigned to work on
the IBN contract and the development of SmartCard products. As s result, their
salaries and related expenses were included in costs of revenue with respect to
the work on the IBN contract and capitalized software development costs with
respect to their work on the SmartCard product. As a result of such product
development, the Company incurred $279,000 in capitalized software costs of
which $28,000 has been amortized in 1996 and charged to cost of sales. In 1995,
the Company incurred research and development expenses in the amount of
$699,000.
In 1996 the Company recognized its 50% share of its loss in its joint venture
corporation with respect to the purchase of SATC software. The amount of such
loss was $264,000.
11
Interest expense was $473,000 in 1996, a decrease of $81,000, or 15% from the
interest expense in 1995. The most significant component of the interest expense
on an ongoing basis is the interest payable to the Company's asset-based lender,
which it pays interest equal to the greater if 18% per annum or prime plus 8%
plus a fee of 1% of the face amount of the invoice.
As a result of the foregoing factors, the Company incurred a net loss of $6.6
million, or $1.29 per share in 1996 as compared with a net loss of $2.9 million,
or $.73 per share in 1995.
Years Ended December 31, 1995 and 1994
The results of the Company's operations for the year ended December 31, 1995 are
not comparable with the results of operations for 1994 since the acquisition of
CSM was effective July 1, 1994, and the results of operations for 1994 include
the CSM business only from such date.
The Company's revenue for 1995 was $7.4 million, representing an increase of
152% from the revenue of the Company for 1994 of $2.9 million. The increase
reflected the inclusion of CSM's operation for only the last six months of the
year. Revenue from health information systems and services accounted for $6.8
million, or 91.5% of total revenue for 1995 and more than 99% of pro forma
combined revenue of the Company and CSM for 1994. CarteSmart Systems revenue
accounted for the balance of the revenue for the periods. In 1994, the Company
generated CarteSmart Systems revenue of $90,000 from the pilot project in San
Diego County. In 1995, revenue from CarteSmart technology was $631,000.
The largest component of revenue for 1995 was $2.0 million from the sale of
third party hardware and software, as compared with $519,000 for 1994. Such
revenue represented 26.7% and 17.7% of revenue for 1995 and 1994, respectively.
A significant portion of revenue in 1995 represented the sale of hardware
($842,000) and software and related services ($524,000) pursuant to a purchase
order from the State of Colorado for its Department of Human Services. Revenue
from services related to turnkey systems and data center revenue accounted for
$1.8 million and $1.7 million, or 24.1% and 23.6% of revenue, respectively, for
1995, as compared with $664,000 and $884,000, or 22.7% and 30.2% of revenue,
respectively, for 1994. Maintenance revenue was $1.1 million and $500,000 in
1995 and 1994, respectively, representing 14.9% and 17% of revenue,
respectively. The Company believes that the increase in installations at
December 31, 1995 from the prior year should enable the Company to increase the
maintenance revenue in future periods. Revenue from CarteSmart Systems increased
to $631,000 in 1995, representing 8.6% of revenue, from $90,000 in 1994,
representing 3.1% of revenue. The CarteSmart System revenue reflected revenue
from IBN ($481,000), VCU ($118,000) and the San Diego pilot program ($31,000) in
1995 and the San Diego Prom ($90,000) in 1994. The overall increase in revenue
reflects the inclusion of CarteSmart Systems revenue combined with the revenue
from the Colorado agreement.
Both the increase in revenue and the change in revenue mix reflected increased
revenue resulting from an enhanced marketing effort following the June 1994
acquisition of CSM. During the second half of 1994, the Company received
significant purchase orders from the State of Colorado for its Department of
Human Services and the State of Oklahoma. The Colorado order covered the
purchase of the Company's health information system, including software,
consulting services and hardware, at a total purchase price of approximately
$1.2 million. Of the purchase price, approximately $700,000 represented the
purchase price of the software and consulting services, and the balance
represents the cost of the hardware. In July 1994, the Company received a
purchase order from a state agency of the State of Oklahoma for a health
information system which includes the graphical interface. The order called for
the installation of the system in ten hospitals for a purchase price of
approximately $430,000. The Company is continuing to market its health
information systems to entitlement programs. It believes that the inclusion of
the graphical and smart card functions, which were implemented during the second
half of 1994 and the first half of 1995, will assist it in marketing its
products to entitlement programs. It also believes that the successful pilot
project for the smart card interface in San Diego provides the Company with an
important tool in marketing this function to both new and existing clients. The
Company is commencing a marketing effort for its CarteSmart System directed at
the financial services industry and educational institutions. However, in the
industries to which the Company is marketing its products, there is typically a
long selling cycle, as a result of which the Company must continue to support
its marketing effort for a significant period before any revenue is realized.
12
Gross profit increased to $1.8 million in 1995 from $390,000 in 1994, an
increase of 352%, which reflected an increase in the gross margin to 23.9% in
1995 from 13.3% in 1994. The increase in gross profit resulted from both the
improved gross margin and the inclusion of twelve months of CSM operations in
1995 and six months of such operations in 1994. The improved margin reflects the
significant increase in CarteSmart revenue, on which the Company realized a
higher margin than on its health information systems and services. However, the
amortization of capitalized software costs of $419,000 during 1995 is reflected
as a cost of revenue, which offset the higher margin for the CarteSmart System.
During 1995, the Company changed its CarteSmart System from a DOS-based system
to a Windows-based system. The capitalized costs related to the DOS-based
system. As a result, at December 31, 1995, the Company wrote off the unamortized
software development costs, which increased cost of revenue. In addition, the
Company expensed the development of the Windows-based system, which was charged
to research and development. The gross profit for 1995 benefitted from the gross
margin for maintenance services. During 1995, the gross profit from maintenance
services increased to $356,000 from $52,000 in 1994, reflecting an increase in
the gross margin from such services to 32.4% for 1995 from 10.4% for 1994. The
increase in margin resulted from increased services performed on a time and
materials basis as well as a reduction in staff as the Company was able to
perform the same services with a smaller staff.
Selling, general and administrative expenses were $2.5 million and $1.5 million
for 1995 and 1994, respectively, representing a 65.0% increase. In 1994,
selling, general and administrative expenses included approximately $236,000 of
compensation expense arising out of the issuance of Consolidated common stock to
former officers of CSM and the grant by SISC to such persons of options to
purchase shares of the Company's Common Stock which were owned by SISC. However,
in 1995, selling, general and administrative expenses included a $200,000
increase in annualized expenses resulting from an increases in the marketing
staff, a $100,000 increase in the level of compensation for the Company's and
CSM's officers following the June 1994 acquisition of CSM, $150,000 in legal
expenses, a portion of which related to the acquisition of CSM, and $313,000 of
the amortization of customer lists resulting from the CSM acquisition.
Commencing July 1, 1994, general and administrative expenses reflects the
amortization of customer lists resulting from the CSM acquisition.
Research and development was $699,000 and $367,000 for 1995 and 1994,
respectively, representing a 90.4% increase. The increase reflects research and
development for smart card and related products and the graphical interface for
the Company's health information systems.
During 1995, the Company incurred financing costs of $863,000, representing the
write-off of deferred financing costs relating to a proposed initial public
offering which had been scheduled for early 1995, but which had been canceled.
No such expenses were incurred in 1994.
Interest expense was $554,000 and $260,000 for 1995 and 1994, reflecting a 113%
increase. The increased interest reflects (i) financing costs of $208,000
reflecting interest and fees at higher borrowing levels pursuant to the
Company's agreement with its asset-based lender and (ii) interest at 10% on an
increased average level of borrowings from SISC. The most significant component
of the interest on an ongoing basis is the interest payable to the Company's
asset-based lender, on which it pays interest equal to the greater of 18% per
annum or prime plus 8% plus a fee of 1% of the face amount of the invoice. The
debt restructure whereby at September 30, 1995, SISC exchanged more than $2
million in debt for shares of Series D Preferred Stock and the subsequent
exchange by SISC of a portion of such preferred stock for Common Stock will have
the effect of reducing the interest payable by the Company, which reduction will
be offset to some extent by dividends payable to SISC with respect to the Series
D Preferred Stock. However, the $72,700 annual dividends payable on the 1,210
shares of Series D Preferred Stock will be significantly less than the interest
paid on the debt.
As a result of the foregoing factors, the Company sustained losses of $2.9
million, or $.59 per share, for 1995, as compared with a loss of $1.8 million,
or $.36 per share. If certain additional compensation expenses were incurred
during the year, the pro forma loss would have been $3.5 million, or $.73 per
share.
In addition, at December 31, 1995 and 1994, the estimated profit included in
cost and estimated profit in excess of interim billings and interim billings in
excess of cost and estimated profit decreased substantially from approximately
$1.4 million to approximately $500,000. This decrease reflected a reduction in
the number of
13
contracts that have billing schedules which differ from revenue recognition. As
a result of a reduced number of such contracts at December 31, 1995, the
estimated profits from such contracts declined.
Liquidity and Capital Resources
On August 9, 1996 the Company closed on a public offering whereby it sold
646,875 units at a price of $8 per unit for a net proceeds of $3.8 million. Each
unit consisted of two shares of Common stock and one Series A Redeemable stock
purchase warrant. On August 21, 1996 Series B Common Stock Purchase Warrants to
purchase 800,000 shares of common stock at $2 per share were exercised and the
Company received $1.6 million in gross proceeds.
The Company's net loss for the year was $6.6 million of which $3.5 million
related to a one time non cash charge arising out of the issuance by the Company
of warrants and options having exercise prices which were less than the market
value of the Common Stock at the date of approval by the board of directors.
Also included in the 1996 loss was a one time non cash financing costs in the
amount of $1.6 million related to the issuance of 500,000 shares of common stock
to certain noteholders and 25,000 shares of common stock to the Company's asset
based lender. Both of these one time non cash charges had no impact on the
Company's working capital.
Substantially, as a result of the above, the Company's working capital deficit
of $2.6 million at December 31, 1995 was improved to a working capital surplus
of $477,000 at December 31, 1996.
Since January 1, 1995 and prior to the public offering, the Company's principal
source of funds, other than revenue, has been an accounts receivable financing
agreement and interim loans from nonaffiliated accredited investors. In February
1995, the Company entered into an accounts receivable financing agreement with
an asset based lender, pursuant to which it may borrow up to 80% of eligible
accounts receivable. As of December 31, 1996 , the outstanding borrowings under
this facility was $590,000.
In January 1996, the Company borrowed $500,000 from unaffiliated investors, and
issued its 8% note due the earlier of January 31, 1997 or five days after
completion of a public offering. These loans were repaid in August 1996.
At December 31, 1996, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $3.2 million, representing
approximately 80 days of revenue for the year ended December 31, 1996. Accounts
receivable at December 31, 1996 increased by $171,000 from $2,113,000 at
December 31, 1995 to $2,284,000 at December 31, 1996. At December 31, 1996 one
customer, IBN accounted for 21% of the total accounts receivable balance. No
other customer accounted for more than 10% of the accounts receivable balance.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data begin on page F-1 of this Form
10-K.
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure
None
14
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are as follows:
Name Age Position
Lewis S. Schiller 66 Chairman of the Board, Chief Executive
Officer & Director
James L. Conway 48 President and Director
Leonard M. Luttinger 47 Chief Operating Officer and Director
Anthony F. Grisanti 47 Chief Financial Officer, Treasurer
and Secretary
John F. Phillips 57 Director
E. Gerald Kay 55 Director
Storm R. Morgan 31 Director
Mr. Lewis S. Schiller has been chairman of the board and a director of the
Company since its organization in September 1992. Mr. Schiller is chairman of
the board and chief executive officer of Consolidated, SISC and Holdings and is
chief executive officer and/or chairman of Consolidated's operating
subsidiaries, whose operations include magnetic resonance imaging centers, three
dimensional imaging products, telecommunications and various manufacturing
operations. SISC is the sole stockholder of Holdings, the principal stockholder
of the Company, and SISC and Holdings are wholly-owned subsidiaries of
Consolidated. Mr. Schiller has held such positions for more than the past five
years. Since May 1995, Mr. Schiller has also been chairman of the board, chief
executive officer and a director of Trans Global Services, Inc. (formerly known
as Concept Technologies Group, Inc.), ("Trans Global"), a contract engineering
company, of which SISC holds a majority of the voting rights. Mr. Schiller
devotes only a portion of his time to the business of the Company. On December
11, 1989, Mr. Schiller was elected as chairman and chief executive and financial
officer of General Technologies Group, Ltd. ("GTG"), a Long Island based defense
manufacturing firm in which Consolidated was a stockholder and a major creditor.
On December 14, 1989, GTG filed for protection under Chapter 11 of the
Bankruptcy Act. Consolidated also commenced litigation against GTG, its former
chairman and chief executive officer, accountants and secured lender which was
settled out of court in 1993 and 1996. Mr. Schiller devotes a significant
portion of his time to the business of Consolidated and its other subsidiaries.
He anticipates that he will devote such amount of his time to the business of
the Company as is necessary; however, Mr. Schiller does not expect to devote
more than 10% of his time to the business of the Company.
Mr. James L. Conway has been president and a director of the Company since
January 1996. Since 1993, he has been president of S-Tech Corporation
("S-Tech"), a wholly-owned subsidiary of Consolidated which manufactures
specialty vending equipment for postal, telecommunication and other industries
and avionics products. His position as president of S-Tech Corporation is his
principal business activity. From 1990 to 1993, he was president of GTG, as
debtor in possession following its filing under Chapter 11 of the Bankruptcy
Act. Mr. Conway devotes 40% to 50% of his time to the business of the Company.
Mr. Leonard M. Luttinger has been president and a director of the Company since
its organization in September 1992 until January 1996, when he became chief
operating officer. From March 1991 to September 1992, Mr. Luttinger was vice
president of smart card systems for Onecard, a corporation engaged in the
development of smart-card technology. From June 1966 to February 1991, he was
employed at Unisys, a computer corporation, and its predecessor Burroughs
Corporation, in various capacities, including manager of semiconductor and
memory products and manager of scientific systems.
15
Mr. Anthony F. Grisanti has been treasurer of the Company since June 1994,
secretary since February 1995 and chief financial officer since January 1996. He
was chief financial officer of CSM and ACT for more than five years prior
thereto.
Mr. John Phillips has been a director of the Company and vice president of CSM
since June 1994, when CSM was acquired. He also served as vice chairman and vice
president -- marketing of the Company from June 1994 to January 1996. He was a
senior executive officer and director of CSM and ACT for more than five years
prior to June 1994. From January 1993 to June 1994, he was chairman of the Board
of CSM and ACT. From 1986 until December 1992, he was president of CSM and ACT.
Mr. Phillips is a director of ACT.
Mr. Storm R. Morgan has been a director of the Company since January 1996. Mr.
Morgan is also senior vice president of Oasis, a position he has held since
1991, and an officer and director of SMI, a position he has held since 1989.
The Company's Certificate of Incorporation includes certain provisions,
permitted under Delaware law, which provide that a director of the Company shall
not be personally liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director expect for liability (I) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for any transaction from which
the director derived an improper personal benefit, or (iv) for certain conduct
prohibited by law. The Certificate of Incorporation also contains broad
indemnification provisions. These provisions do not affect the liability of any
director under Federal or applicable state securities' laws.
The Board of Directors does not have any executive, nominating or audit
committees.
Item 11. Executive Compensation
Set forth below is information concerning the Company's chief executive officer
and the only officers who received or accrued compensation in excess of $100,000
during the years ended December 31, 1996, 1995 and 1994. Information with
respect to Messrs. Bright, Grisanti and Phillips reflects, for 1994, the
combined compensation received from the Company and Old CSM.
Annual Compensation Long Term Compensation (Awards)
Name and Principal PositioYear Salary Commissions/Bonus Restricted StocOptions/Warrants
Awards (Dollars)(Number)
Lewis S. Schiller, CEO 1996 1-- -- -- --
1995 1-- -- -- 52,500
1994 1-- -- -- --
James Conway, President 1996 $77,408 -- -- 268,750
Leonard M. Luttinger 1996 62,500 67,262 -- 156,250
Chief Operating Officer 1995 125,000 -- -- 176,768
1994 113,390 -- -- 415,000
John F. Phillips, 1996 100,000 33,906 -- 627,000
Vice Chairman 1995 123,900 -- -- 38,768
and Vice President 1994 108,416 -- 5-- 415,000
of Marketing
Anthony F. Grisanti 1996 80,000 23,500 -- 715,000
Chief Financial Officer 1995 80,000 -- -- 832,464
1994 71,500 -- 5
Storm R. Morgan 91996 -- -- -- 262,500
16
- - ------------------------
1Mr. Schiller received no compensation from the Company. Effective
December 31, 1994, Consolidated changed its fiscal year to the calendar year
from the twelve months ended July 31. During the year ended December 31, 1996
and 1995, the period from August 1, 1994 to December 31, 1994, for the fiscal
years ended July 31, 1994, the total compensation paid or accrued by
Consolidated to Mr. Schiller was $340,000, $250,000, $94,000 and $181,451
respectively. The Company has an agreement with Trinity pursuant to which it is
to pay Trinity consulting fees of $180,000 per year for the three years
commencing August 1996. The services to be rendered by Trinity include general
business and financial management services and may be rendered by officers of
Trinity, including Mr. Schiller, who is chief executive officer of both Trinity
and the Company.
2Represents warrants to purchase 100,000 shares of Common Stock at $2.00
per share and warrants to purchase 168,750 shares of Common Stock at $4 per
share.
3 Represents warrants to purchase 25,000 shares of Common Stock at $2 per
share and warrants to purchase 131,250 shares of Common Stock at $4 per share.
4In December 1994, the Company issued options to purchase 15,000 shares of
Common Stock at $5.33 per share to each of Messrs. Luttinger, Bright and
Phillips pursuant to the Company's 1993 Long-Term Incentive Plan. In January
1995, these options were canceled and new options were granted with an exercise
price of $.232 per share, which was determined by the Board of Directors to be
the fair market value per share on such date, to Messrs. Luttinger (8,058
shares), Bright (20,058 shares) and Phillips (20,058 shares).
5In June 1994 at the closing of the acquisition of CSM, SISC granted to
Messrs. Bright, Phillips and Grisanti options to purchase 66,000, 66,000 and
19,920 respectively of the Company's Common Stock owned by SISC. The options are
exercisable at an exercise price of $.232 per share during the five year period
commencing June 1994. In June 1994, at the closing of the acquisition,
Consolidated issued to such individuals an aggregate of 40,000 shares of
Consolidated common stock.
6Represents options to purchase 27,000 shares of Common Stock at $2 per
share.
7Represents options to purchase 15,000 shares of Common Stock at $2 per
share.
8Represents options to purchase 23,109 shares of Common Stock at $.232 per
share and 9,355 shares of Common Stock at $.345 per share.
9In January 1996, Mr. Storm Morgan was elected a director of the Company.
At the time of his election. He was a consultant of the Company. The Company
does not pay compensation to Mr. Morgan. During 1996 the Company operated under
a proposed agreement pursuant to which the Company paid to SMI, of which Mr.
Morgan is the sole stockholder, an officer and director, $619,700 for services
provides by Mr. Morgan from a time to time on an as needed basis and for four
persons to serve in management-level or other key positions of the Company on a
full time basis. These individuals provided marketing, support and technical
services to the Company. Mr. Morgan was not required to devote any minimum
amount of time to the business of the Company. In addition the Company during
1996 reimbursed SMI for expenses incurred by SMI staff a total of $285,524. A
substantial amount o these expenses were reimbursed to the Company by its
clients. The Company also paid SMI in 1996 a total of $11,750 in commissions and
$250,000 for services related to the Company's agreement with IBN.
In February 1997 the Company modified its agreement with SMI reducing the
monthly fees payable to $9,000.
10Represents warrants to purchase 150,000 shares of Common stock at $2 per
share and warrants to purchase 112,500 shares of Common stock at $4 per share.
17
In June 1994, at the closing of the acquisition of CSM, the Company entered into
five-year employment agreements with Messrs. Luttinger, Edward D. Bright, John
F. Phillips and Anthony F. Grisanti providing for annual base salaries of
$125,000, $125,000, 125,000 and $80,000, respectively. The agreements with
Messrs. Luttinger and Evans replaced prior agreements and increased their
compensation. The agreements provide for an annual cost of living adjustment, an
automobile allowance and a bonus of 4% of income before income taxes for Messrs.
Luttinger, Bright and Phillips and 2% of income before income taxes for Mr.
Grisanti. The maximum bonus is 300% of salary for Messrs. Luttinger, Bright and
Phillips and 200% of salary for Mr. Grisanti. The agreements provide that such
individuals will be elected as executive officers of the Company. Mr.
Luttinger's agreement also provides for payment of his relocation expenses. For
1996, Messrs. Luttinger, Phillips and Bright agreed to reduce base salaries of
$62,500, $100,000 and $100,000, with certain incentives if certain targets are
attained. The aggregate annual base salaries for 1996 under these agreements is
$442,500. In August 1996 the Company entered into a five year employment
agreement with Mr. Conway providing for an annual base salary of $125,000. The
agreement provides for an annual cost of living adjustment, an automobile
allowance and a bonus of 5% income before income taxes. The maximum bonus is
300% of salary. In addition, the Company has an agreement with Trinity pursuant
to which the Company will pay Trinity $180,000 per year during the three-year
period commencing on the first day of the month in which the Company receives
the proceeds from this Offering.
Pursuant to his employment agreement with Consolidated, Mr. Schiller
received, prior to September 1, 1996, an annual salary of $250,000 subject to a
cost of living increase, a bonus equal to 10% of Consolidated's net income
before income taxes or cash flow, whichever is greater, in excess of $350,000.
Effective September 1, 1996, Mr. Schiller's base salary was increased to
$500,000. Pursuant to his employment agreement with Consolidated, Mr. Schiller
has the right to acquire 10% of SISC's interest in its subsidiaries and
investments, including its investment in the Company, at 110% of SISC's cost.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the, as of March 14, 1997, the number and
percentage of shares of outstanding common stock owned by each person owning at
least 5% of the Company's Common Stock, each director owning stock and all
directors and officers as a group:
Common Stock
Amount and Nature
Name and of Beneficial Percent of Ownership
1Address 2Ownership Outstanding
3Lewis S. Schiller 4,699,737 62.4%
160 Broadway
New York, NY 10038
4SIS Capital Corp. 4,433,070 60.2%
and
Carte Medical Holdings, Inc.
160 Broadway
New York, NY 10038
5Leonard M. Luttinger 261,016 3.7%
6John F. Phillips 131,766 1.9%
7Storm R. Morgan 307,000 4.3%
8James L. Conway 293,750 4.2%
All Directors and Officers 5,760,653 68.2%
As a group (four individuals
owning stock) 3, 5, 6, 7, 8, 9
18
- - ------------------------
1Unless otherwise indicated, the address of each person is c/o Netsmart
Technologies, Inc., 146 Nassau Avenue, Islip, New York 11751.
2Unless otherwise indicated, each person named has the sole voting and
sole investment power and has direct beneficial ownership of the shares.
Information as to ownership of Outstanding Warrants by each person named in the
table is set forth in the footnotes.
3Includes (a) 100,000 shares of Common Stock owned by Mr. Schiller, (b)
3,122,390 shares by Holdings, of which Mr. Schiller is the chief executive
officer and has the power to vote the shares,(c) 700,000 shares of Common Stock
issued to SISC as a result of exercising $2 warrants in August 1996. (d) 565,000
shares of Common Stock issuable to SISC upon the exercise of outstanding
warrants. (e) 166,667 shares of Common Stock issuable to Mr. Schiller upon the
exercise of outstanding warrants. Includes 151,920 shares of Common Stock owned
by Holdings, subject to options granted by SISC in connection with the
acquisition of CSM. Shares owned by Mr. Schiller do not include securities owned
by DLB, which is owned by Mr. Schiller's wife and with respect to which Mr.
Schiller disclaims beneficial interest. At March 14, 1997, DLB owned 237,577
shares of Common Stock and Outstanding Warrants to purchase 70,833 shares of
Common Stock at $2.00 per share and 53,126 shares of Common Stock at $4 per
share. If the shares owned by DLB were included with Mr. Schiller's shares, the
number shares of Common Stock beneficially owned by Mr. Schiller at March 14,
1997 would be 5,061,273 or 66.1% of the outstanding shares of Common Stock at
such date.
4Includes (a) 3,122,390 shares owned by Holdings, (b) 700,000 shares of
Common Stock issued to SISC as a result of exercising $2 warrants in August 1996
and (c) 565,000 shares of Common Stock issuable to SISC upon the exercise of
outstanding warrants. The shares owned by SISC include 151,920 shares of Common
Stock owned by Holdings, subject to options granted by SISC in connection with
the acquisition of CSM.
5Includes (a) 26,766 shares of Common Stock issuable upon the exercise of
outstanding options, (b) 25,000 shares of Common Stock issuable upon the
exercise of outstanding $2 warrants, (c) 131,250 shares of Common Stock issuable
upon the exercise of outstanding $4 warrants.
6Represents 66,000 shares issuable upon exercise of an option granted by
SISC and 65,766 shares of Common Stock issuable upon exercise of outstanding
options.
7Mr. Morgan holds Outstanding Warrants to purchase 150,000 shares of
Common Stock at $2.00 per share and 112,500 shares of Common Stock at $4 per
share.
8Mr. Conway holds Outstanding Warrants to purchase 100,000 shares of
Common Stock at $2 per share and 168,750 shares of Common Stock at $4 per share.
Item 13. Certain relationships and Related Transactions
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
19
1. Financial Statements
F-3 Report of Moore Stephens, P.C. Independent Certified
Accounts
F-4 - F-6 Consolidated Balance Sheets as of December 31, 1996
and 1995
F-7 - F8 Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994
F-9 Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994
F-9 - F-12 Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994
F-13 - F-33 Notes to Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
None
4. Exhibits
20
NETSMART TECHNOLOGIES, INC.
F - 1
NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------
INDEX
- - ------------------------------------------------------------------------------
Page to Page
Independent Auditor's Report................................F-3
Balance Sheets..............................................F-4.....F-6
Statements of Operations....................................F-7.....F-8
Statements of Stockholders' Equity..........................F-9
Statements of Cash Flows....................................F-10....F-12
Notes to Financial Statements ..............................F-13....F-33
. . . . . . . . . . .
F - 2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Netsmart Technologies, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Netsmart Technologies, Inc. [formerly CSMC Corporation] and its subsidiary as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Netsmart Technologies, Inc. and its subsidiary as of December 31, 1996 and 1995
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 21, 1997, except as to note 5
for which the date is April 8, 1997
F - 3
NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- - ------------------------------------------------------------------------------
December 31,
1 9 9 6 1 9 9 5
Assets:
Current Assets:
Cash and Cash Equivalents $ 998,317 $ --
Accounts Receivable - Net 2,284,450 2,112,000
Costs and Estimated Profits in Excess
of Interim Billings 931,786 415,000
Other Current Assets 82,205 14,000
-------------- -----------
Total Current Assets 4,296,758 2,541,000
------------ -----------
Property and Equipment - Net 382,586 347,000
------------- -----------
Other Assets:
Software Development Costs 250,920 --
Investment in Joint Venture at Equity 120,546 --
Customer Lists 3,128,814 3,442,000
Other Assets 71,105 60,000
-------------- ------------
Total Other Assets 3,571,385 3,502,000
------------ ------------
Total Assets $ 8,250,729 $ 6,390,000
=========== =============
See Notes to Financial Statements.
F - 4
NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- - ------------------------------------------------------------------------------
December 31,
1 9 9 6 1 9 9 5
Liabilities and Stockholders' Equity:
Current Liabilities:
Cash Overdraft $ -- $ 95,000
Notes Payable - Bank -- 79,000
Notes Payable - Other 590,031 1,003,000
Capitalized Lease Obligations 41,449 169,000
Accounts Payable 983,156 1,186,000
Accrued Expenses 991,075 1,323,000
Interim Billings in Excess of Costs
and Estimated Profits 1,102,105 940,000
Due to Related Parties 23,542 167,000
Deferred Revenue 88,420 141,000
Total Current Liabilities - Forward 3,819,778 5,103,000
----------- ----------
Capitalized Lease Obligations - Forward 15,945 34,000
----------- -----------
Subordinated Debt - Related Party - Forward -- 750,000
------------ -----------
Commitments and Contingencies - Forward -- --
------------- ------------
Redeemable Preferred Stock:
Series B 6% Redeemable Preferred Stock; 80 Shares
Authorized, Issued and Outstanding at
December 31, 1995 [Liquidation Preference
and Redemption Price of $96,000] - Forwa -- 96,000
See Notes to Financial Statements.
F - 5
NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------
BALANCE SHEETS
- - ------------------------------------------------------------------------------
December 31,
1 9 9 6 1 9 9 5
[Consolidated] [Consolidated]
Total Current Liabilities - Forwarded $ 3,819,778 $ 5,103,000
------------- ------------
Capitalized Lease Obligations - Forwarded 15,945 34,000
---------------- ------------
Subordinated Debt - Related Party - Forwarded 750,000
----------------- ------------
Commitments and Contingencies - Forwarded --
------------------ ------------
Redeemable Preferred Stock - Forwarded 96,000
------------------ ------------
Stockholders' Equity:
Preferred Stock, $.01 Par Value; Authorized 3,000,000
Shares; Authorized, Issued and Outstanding:
Series A 4% Convertible Redeemable Preferred Stock -
$.01 Par Value 400 Shares Authorized, Issued and
Outstanding at December 31, 1995 [Liquidation
Preference of $40,000] -- --
Series D 6% Redeemable Preferred Stock -
$.01 Par Value 3,000 Shares Authorized,
1,210 and 2,210 Issued and Outstanding
[Liquidation Preference of $1,210,000 and
$2,210,000] at December 31, 1996 and
December 31, 1995, Respectively 12 --
Additional Paid-in Capital - Preferred
Stock [$40,000 - Series A; $1,209,509
- Series D at December 31, 1996, $2,210,000
- Series D at December 31, 1995] 1,209,509 2,250,000
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued and Outstanding
6,798,203 Shares at December 31, 1996,
3,011,253 Shares at December 31, 1995 67,982 30,000
Additional Paid-in Capital - Common Stock 14,863,328 3,274,000
Accumulated Deficit (11,725,825) (5,147,000)
------------ -----------
Total Stockholders' Equity 4,415,006 407,000
------------ ------------
Total Liabilities and Stockholders' Equity $ 8,250,729 $6,390,000
=========== ==========
See Notes to Financial Statements.
F - 6
NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- - ------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Consolidated] [Consolidated] [Combined]
Revenues:
Software and Related
Systems and Services:
General $ 5,108,095 $ 4,541,000 $ 1,539,000
Maintenance Contract
Services 1,225,709 1,099,000 501,000
--------- --------- -----------
Total Software and Related
Systems and Services 6,333,804 5,640,000 2,040,000
Data Center Services 2,207,155 1,742,000 884,000
--------- --------- ----------
Total Revenues 8,540,959 7,382,000 2,924,000
--------- --------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 5,114,882 3,986,000 1,669,000
Maintenance Contract
Services 595,366 743,000 449,000
------- ---------- ----------
Total Software and Related
Systems and Services 5,710,248 4,729,000 2,118,000
Data Center Services 1,220,368 889,000 416,000
--------- ---------- ----------
Total Cost of Revenues 6,930,616 5,618,000 2,534,000
--------- --------- ---------
Gross Profit 1,610,343 1,764,000 390,000
Provision for Doubtful Accounts 260,000 8,000 --
Selling, General and
Administrative Expenses 1,661,854 2,478,000 1,495,000
Related Party Administrative
Expenses 69,000 18,000 19,000
Stock Based Compensation 3,492,300 -- --
Research and Development 278,000 699,000 367,000
-------- ---------- ---------
Loss from Operations (4,150,811) (1,433,000) (1,491,000)
Financing Costs 1,692,000 863,000 --
Interest Expense 472,548 355,000 71,000
Equity in Net Loss of Joint
Venture 264,085 -- --
See Notes to Financial Statements.
F - 7
NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- - ------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Consolidated] [Consolidated] [Combined]
Related Party Interest
Expense -- 199,000 189,000
---------- --------- -----------
Net Loss $ (6,579,444) $ (2,850,000) $ (1,751,000)
============= ============= =============
Loss Per Share $ (1.28) $ (.59) $ (.36)
============= ============= =============
Number of Shares of
Common Stock 5,149,253 4,821,528 4,821,528
============= ============= =============
See Notes to Financial Statements.
F - 8
NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
- - ------------------------------------------------------------------------------
Series A Series D Additional Common Stock Additional
Preferred StockPreferred StocPaid-in $.01 Par Value Paid-in
at .01 at .01 Capital Authorized Capital Total
Par Value Par Value Preferred 15,000,000 ShareCommon Accumulate Stockholders'
Shares Amount Shares Amount Stock Shares Amount Stock Deficit Equity
Balance - December 31, 1993 400 $ -- -- $ -- $ 40,000 1,050,003 $ 11,000 $ 46,000 $(546,000) $ (449,000)
Allocated Related Party
Administrative Expenses -- -- -- -- -- -- -- 19,000 -- 19,000
Combination with CSM -- -- -- -- -- -- -- 2,936,000 -- 2,936,000
Net Loss -- -- -- -- -- -- -- -- (1,751,000)(1,751,000)
-- -- -- -- -- -- -- -- ---------- ----------
Balance - December 31, 1994
[Combined] 400 -- -- -- 40,000 1,050,003 11,000 3,001,000 (2,297,000) 755,000
Allocated Related Party
Administrative Expenses -- -- -- -- -- -- -- 18,000 -- 18,000
Common Stock Issued to Affiliate -- -- -- -- -- 825,000 8,000 (8,000) -- --
Common Stock and Preferred Stock
241,000 -- 2,462,000
Common Stock Issued to Officer for
Services -- -- -- -- -- 11,250 -- 22,000 -- 22,000
Net Loss -- -- -- -- -- -- -- -- (2,850,000)(2,850,000)
-- -- -- -- -- -- -- --------- ----------
Balance - December 31, 1995
[Consolidated] 400 4 2,210 22 2,249,505 3,011,253 30,113 3,273,968 (5,146,381) 407,221
Common Stock Issued in Exchange for
Ser D and Ser A Preferred Stock (400) (4) (1,000) (10) (1,039,996) 1,168,200 11,681 1,028,319 -- --
Allocated Related Party
Administrative Expenses -- -- -- -- -- -- -- 9,000 -- 9,000
Compensation from the Issuance of
Common Stock Warrants -- -- -- -- -- -- -- 3,492,300 -- 3,492,300
Common Stock Issued - Initial
Public Offering 1,293,750 12,938 5,162,063 5,175,001
Common Stock Issued - Exercise of
Warrants 800,000 8,000 1,592,000 1,600,000
Common Stock Issued -
Financing Costs 525,000 5,250 1,674,750 1,680,000
Costs Associated with Issuance
of Stock (1,369,072) (1,369,072)
Net Loss -- -- -- -- -- -- -- (6,579,444)(6,579,444)
------------------------------------------------------------------------------------------------
Balance - December 31, 1996
[Consolidated] -- -- 1,210 12 $1,209,509 6,798,203 $67,982 $14,863,328(11,725,82)$4,415,006
See Notes to Financial Statements.
F - 9
NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- - ------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Consolidated] [Consolidated] [Combined]
Operating Activities:
Net Loss $ (6,579,444) $ (2,850,000) $ (1,751,000)
--------------- ------------ --------------
Adjustments to Reconcile Net
Loss to Net Cash [Used
for] Provided by Operating Activities:
Depreciation and Amortization 486,566 872,00 470,000
Administrative Expenses 9,000 8,000 19,000
Additional Compensation Related to the
issuance of Equity Instruments 3,492,300 22,000 236,000
Financing Expenses related to the
issuance of Common Stock 1,680,000 -- --
Write Off of Deferred Public
Offering Costs -- 460,000 --
Equity in Net Loss of Joint Venture 264,085 21,000 15,000
Provision for Doubtful Accounts 260,000 8,000 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (431,478) (388,000) (369,000)
Costs and Estimated Profits in
Excess of Interim Billings (516,707) 87,000 (233,000)
Other Current Assets (68,810) 10,000 45,000
Other Assets (10,502) -- (3,000)
Increase [Decrease] in:
Accounts Payable (202,620) 159,000 13,000
Accrued Expenses (332,174) 935,000 199,000
Interim Billings in Excess of
Costs and Estimated Profits 160,626 (217,000) 413,000
Accrued Payroll Taxes and
Related Expenses -- -- (276,000)
Due to Related Parties (143,458) 496,000 1,629,000
Deferred Revenue (52,580) 141,000 --
-------------------- ----------- -------------------
Total Adjustments 4,594,248 2,624,000 2,158,000
--------------------- ----------- -------------------
Net Cash - Operating Activities -
Forward (1,985,196) (226,000) 407,000
--------------------- ----------- --------------------
Investing Activities:
Acquisition of Property and
Equipment (181,033) (138,000) (122,000)
Software Development Costs (278,800) (177,000)
Investment in Joint Venture (384,631) (25,000)
Cash Acquired in Combination
with CSM 31,000
Net Cash - Investing Activities -
Forward) $ (844,464) $ (138,000) $ (293,000)
See Notes to Financial Statements.
F - 10
NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- - ------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Consolidated] [Consolidated] [Combined]
Net Cash - Operating Activities -
Forwarded $ (1,985,196) $ (226,000) $ 407,000
--------------- -------------- --------------
Net Cash - Investing Activities -
Forwarded (844,464) (138,000) (293,000)
--------------- -------------- --------------
Financing Activities:
Proceeds from Short-Term Notes 500,000 831,000 200,000
Payment of Short-Term Notes 912,270) (190,000) --
Payment of Bank Note Payable 79,000) (175,000) (60,000)
Payment of Short-Term Notes
to related party 750,000) --
Payment of Capitalized Lease
Obligations 145,146) (29,000) (8,000)
Issuance of Common Stock 5,175,000 --
Proceeds from Warrant exercise 1,600,000 --
Cash Overdraft (95,536) 56,000 37,000
Redemption of Series B Preferred Stock (96,000) --
Costs associated with issuance of Stock (1,369,071)
Deferred Public Offering Costs (129,000) (283,000)
--------------- ------------ --------------
Net Cash - Financing Activities 3827,977 364,000 (114,000)
-------------- ------------ --------------
Net Increase [Decrease] in Cash 998,317 --
Cash - Beginning of Periods --
-------------- ----------- --------------
Cash - End of Periods $ 998,317 $ -- $ --
=============== ============ ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest $ 481,856 $ 349,000 $ 76,000
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During the year ended December 31, 1996, the Company had the following:
SISC exchanged 1,000 shares of Series D preferred stock for 1,125,000 shares of
common stock. As a result of this exchange the aggregate redemption price of the
Series D preferred stock was reduced to $1,210,000. The Series A preferred stock
was converted into 43,200 shares of common stock in a transaction valued at
$43,200.
Pursuant to an agreement with four accredited investors, the Company issued
250,000 units composed of two shares of common stock and one Series A Common
Stock purchase warrant. The Company incurred a one time non-cash charge of
$1,611,000.
Pursuant to a modification of an agreement with an asset based lender the
Company issued 25,000 common shares to such lender and incurred a one-time
non-cash finance charge of $81,000.
F - 11
NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- - ------------------------------------------------------------------------------
The Company granted stock options to purchase an aggregate of 242,000 shares of
common stock and recognized compensation expense of $154,800.
The Company granted 3,573,125 Series B Common Stock purchase warrants and
896,875 Series A Common Stock purchase warrants and recognized compensation
expense of $3,337,500.
During the year ended December 31, 1995, the Company had the following:
1) $388,000 of accrued interest owed to SISC was exchanged for 1,125,000
shares of common stock.
2) $2,210,000 of SISC debt was exchanged for 2,210 shares of Series D
Preferred Stock.
3) 825,000 shares of common stock were issued to Holdings as follows:
A) 750,000 shares were issued in connection with the transfer of the
Acquisition Corp. stock to CSMC.
B) 75,000 shares were issued in respect of certain indebtedness
guaranteed by Consolidated.
See Notes to Financial Statements.
F - 12
NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #1
- - ------------------------------------------------------------------------------
[1] Financial Statement Presentation, Organization and Nature of Operations
The financial statements as of December 31, 1996 and 1995 are presented on a
consolidated basis and include Netsmart Technologies, Inc. [formerly "CSMC
Corporation" and "Carte Medical Corporation"] ["Netsmart"], and its wholly-owned
subsidiary, Creative Socio-Medics Corp. ["CSM"] [collectively, the "Company"].
All intercompany transactions are eliminated in consolidation.
The financial statements as of December 31, 1994, which include Netsmart and CSM
commencing July 1, 1994, are presented on a combined basis because they are
under common control. All intercompany transactions are eliminated in
combination. The acquisition by Carte Medical Holdings, Inc. ["Holdings"], the
principal stockholder of Netsmart, of CSM occurred on June 16, 1994. The
operations of CSM from that date to June 30, 1994 were not substantial and are
not included in the combined financial statements as of December 31, 1994. The
financial statements prior to July 1, 1994 reflect the results of operations and
financial position of Netsmart.
Netsmart was incorporated on September 9, 1992 to engage in the development and
marketing of an integrated proprietary software system designed to run on
multiple systems in a distributed network environment. Netsmart's marketing
effort through December 31, 1996 was primarily directed at managed care
organizations and methadone clinics and other substance abuse facilities
throughout the United States. Netsmart's software operates on computer networks,
including networks based on personal computers, and so-called "smart cards." A
smart card is a plastic card the size of a standard credit card which combines
data storage capacity and access to information along with computing capacity
within a single embedded microprocessor chip contained in the card.
Netsmart is controlled by Consolidated Technology Group Ltd. ["Consolidated"],
a public company, through its wholly-owned subsidiary Holdings. Prior to
June 16, 1994, Netsmart's principal stockholder was SIS Capital Corp. ["SISC"],
a wholly-owned subsidiary of Consolidated. Netsmart's chairman of the board is
the chief executive officer of Consolidated.
In April 1994, Netsmart entered into an Agreement and Plan of Reorganization
[the "Purchase Agreement"] among Consolidated, Netsmart, CSM Acquisition Corp.
["Acquisition Corp."], a wholly-owned subsidiary of Consolidated, Creative
Socio-Medics ["Old CSM"], and Advanced Computer Techniques, Inc. ["ACT"], Old
CSM's parent.
Pursuant to the Purchase Agreement, in June 1994, Acquisition Corp. acquired the
assets and assumed liabilities of Old CSM in exchange for 800,000 shares of
Consolidated's common stock and $500,000 cash which was advanced by Netsmart
from a loan from SISC. The following summarizes the purchase price allocated to
acquired assets at fair value:
Cash $ 500,000
Stock of Consolidated 2,700,000
----------
Purchase Cost $ 3,200,000
------------- ===============
Allocated to:
Customer Lists $ 3,851,000
Accounts Receivable 1,363,000
Costs and Estimated Profits in Excess of
Billings 269,000
Property and Equipment 261,000
Other Assets 213,000
Liabilities Assumed (2,757,000)
----------
Total $ 3,200,000
----- ===============
F - 13
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
- - ------------------------------------------------------------------------------
[1] Financial Statement Presentation, Organization and Nature of Operations
[Continued]
The value of Consolidated stock was calculated based on the 800,000 shares of
common stock given per the acquisition agreement at the fair value of $3.375 per
share. The fair value was determined based on the average trading price of
Consolidated common stock for a period before and after the acquisition date.
The $2,700,000 is recorded as additional paid-in capital since such amount will
not be reimbursed.
In June 1994, SISC formed a wholly-owned subsidiary, Holdings, and transferred
its stock in Netsmart and Acquisition Corp. to Holdings. On September 30, 1995,
the stock of Acquisition Corp., whose name had been changed to Creative
Socio-Medics Corp. in June 1994, was transferred to the Company. At the same
time, the Company issued 825,000 shares of its common stock to Holdings, of
which 750,000 shares were issued in connection with the transfer of the
Acquisition Corp. stock and 75,000 shares were issued in respect of certain
indebtedness guaranteed by Consolidated.
At the time of the execution of the Purchase Agreement, SISC granted three
officers of Old CSM, who became officers of the Company, options to purchase an
aggregate of 151,920 shares of common stock at $.232 per share. The value of the
options is based on a fair value of approximately $.89 per share of the
Company's common stock less the exercise price of $.232 per share. The fair
value was determined based on the financial condition of the Company at the time
the options were granted. The shares subject to option are outstanding shares
which were owned by SISC and transferred to Holdings subject to the options. The
Company has granted to these individuals certain piggy back registration rights
with respect to the shares of common stock issuable upon exercise of the
options. The value of these options is approximately $100,000 and is treated as
compensation by the Company. At the closing of the purchase of Old CSM,
Consolidated transferred to such three officers an aggregate of 40,000 shares of
Consolidated common stock, which were valued at approximately $136,000. The
value of such shares is treated as compensation by the Company. The value of
Consolidated stock was determined on a consistent basis with those shares given
in the acquisition. The amounts of $100,000 and $136,000 were credited to
additional paid-in capital.
The following pro forma unaudited results assumes the acquisition of CSM had
occurred at the beginning of 1994:
Year ended
December 31,1 9 9 4
Net Revenues $ 5,050,000
=============
Net Loss $ (2,136,000)
============
Loss Per Share $ (.44)
=============
Number of Shares of Common Stock 4,821,528
=============
[2] Summary of Significant Accounting Policies
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents totaled approximately $1,000,000 at December 31, 1996.
F - 14
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- - ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Concentration of Credit Risk - The Company extends credit to customers which
results in accounts receivable arising from its normal business activities. The
Company does not require collateral from its customers. The Company routinely
assesses the financial strength of its customers and based upon factors
surrounding the credit risk of the customers believes that its accounts
receivable credit risk exposure is limited. Such estimate of the financial
strength of such customers may be subject to change in the near term.
The Company's health information systems are marketed to specialized care
facilities, many of which are operated by government entities and include
entitlement programs. During the years ended December 31, 1996, 1995 and 1994,
approximately 31%, 54% and 49% of the Company's revenues were generated from
contracts with government agencies.
During the year ended December 31, 1996 and 1995, one customer accounted for
approximately $1,879,000 and $1,400,000 or 22% and 19% respectively of revenue.
Accounts receivable of approximately $473,000 and $336,000 were due from this
customer at December 31, 1996 and 1995. No one customer accounted for more than
10% of revenues in 1994.
The Company places its cash and cash equivalents with high credit quality
financial institutions. The amount on deposit in any one institution that
exceeds federally insured limits is subject to credit risk. At December 31,
1996, cash and cash equivalent balances of $1,000,000 were held at a financial
institution in excess of federally insured limits. The Company believes no
significant concentration of credit risk exists with respect to these cash
equivalents.
Revenue Recognition - The Company anticipates that it will recognize revenue
principally from the licensing of its software, and from consulting and
maintenance services rendered in connection with such licensing activities.
Revenue from licensing will be recognized under the terms of the licenses, which
are expected to provide for a royalty, which may be payable annually, monthly or
on some other basis, based on the number of persons using smart cards pursuant
to the license agreement. Consulting revenue is recognized when the services are
rendered. No revenue is recognized prior to obtaining a binding commitment from
the customer.
Revenues from fixed price software development contracts and revenue under
license agreements which require significant modification of the software
package to the customer's specifications, are recognized on the estimated
percentage-of-completion method. Using the units-of-work performed method to
measure progress towards completion, revisions in cost estimates and recognition
of losses on these contracts are reflected in the accounting period in which the
facts become known. Contract terms provide for billing schedules that differ
from revenue recognition and give rise to costs and estimated profits in excess
of billings, and billings in excess of costs and estimated profits. It is
reasonably possible that the amount of costs and estimated profits in excess of
billing and billings in excess of costs and estimated profits may be subject to
change in the near term. Revenue from software package license agreements
without significant vendor obligations is recognized upon delivery of the
software. Information processing revenues are recognized in the period in which
the service is provided. Maintenance contract revenue is recognized on a
straight-line basis over the life of the respective contract. Software
development revenues from time-and-materials contracts are recognized as
services are performed.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance revenue, which consists solely of staff payroll, is
expensed as incurred.
F - 15
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
- - ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Direct Costs - Direct costs generally represent labor costs related to licensing
and consulting agreements.
Property and Equipment and Depreciation - Property and equipment is stated at
cost less accumulated depreciation. Depreciation of property and equipment is
computed by the straight-line method at rates adequate to allocate the cost of
applicable assets over their expected useful lives. Amortization of leasehold
improvements is computed using the shorter of the lease term or the expected
useful life of these assets.
Estimated useful lives range from 2 to 10 years as follows:
Equipment 2-5 Years
Furniture and Fixtures 5-7 Years
Leasehold Improvements 8-10 Years
Capitalized Software Development Costs - Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Technological feasibility for the Company's computer software products is
generally based upon achievement of a detail program design free of high risk
development issues. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized computer software
development costs requires considerable judgement by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technology.
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is to be provided on a product by product basis. The annual
amortization shall be the greater of the amount computed using (a) the ratio
that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported on.
During 1996, the Company assigned personnel to develop SmartCard products. As a
result, the applicable portion of cost of coding and testing subsequent
to the establishment of technological feasibility were capitalized as software
costs with respect to the work on the SmartCard product. As a result of such
product development the Company incurred $556,800 in software costs. Software
costs of $278,000 prior to technological feasibility, were recorded as
research and development expenses. Amortization, using the straight-line
method over five years of capitalized software development costs amounted to
$27,880 for the year ended December 31, 1996 and has been included in cost of
revenues.
In 1995, due to a change from a DOS based operating system to a Windows based
operating system, management determined that the estimated economic life of
previously developed computer software had expired. This has been accounted for
as a change in accounting estimate and as a result amortization increased by
$210,000 in 1995. Amortization of capitalized computer software development
costs amounted to $419,000 and $221,000 at December 31, 1995 and 1994,
respectively. Amortization expense has been included in cost of revenues for all
periods.
F - 16
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
- - ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Customer Lists - Customer lists represent a listing of customers obtained
through the acquisition of CSM to which the Company can market its products.
Customer lists are being amortized on the straight-line method.
In 1995, the amortization period of customer lists was changed from 20 years to
12 years. The change in the period of amortization reflects changes in
technology which became important in the health care industry subsequent to the
acquisition of CSM in June 1994. The development of Window-based applications,
particularly Windows 95, which had not been developed at the time of the
acquisition, together with the possibility of other changes in the software and
communications industry, represent developments that the Company feels require a
change in the amortization period to twelve years. Such change has been
accounted for as a change in accounting estimate. The effect of this change was
to increase amortization by $120,000 in 1995.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 established
accounting standards for the impairment of long-lived assets and certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. Management has determined that expected future cash flows
(undiscounted and without interest charges) exceed the carrying value of the
intangibles at December 31, 1996 and believes that no impairment of these assets
has occurred. It is at least reasonably possible that management's estimate of
expected future cash flows may change in the near term. This may result in an
accelerated amortization method or write-off of the customer lists. Customer
lists at December 31, 1996 and 1995 are as follows:
December 31,
1 9 9 6 1 9 9 5
Customer Lists $ 3,850,814 $ 3,851,000
Less: Accumulated Amortization 722,000 409,000
------------ ------------
Net $ 3,128,814 $ 3,442,000
--- ============ ============
Cost Associated With Public Offerings - In 1996, the Company completed a public
offering of its securities (See Note 10). Costs of $1,370,000 associated with
the offering were offset against total gross proceeds of $5,175,000. In early
1995, the Company withdrew a registration statement following the termination of
a previous public offering. Costs of $460,000, associated with that offering,
were expensed, and included in financing costs, in 1995.
Stock Options and Similar Equity Instruments - On January 1, 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", for stock
options and similar equity instruments (collectively,"Options") issued to
employees, however, the Company will continue to apply the intrinsic value based
method of accounting for options issued to employees prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" rather than the fair value based method of accounting prescribed by
SFAS No. 123. SFAS No. 123 also applies to transactions in which an entity
issues its equity instruments to acquire goods or services from non-employees.
Those transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.
F - 17
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
- - ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Loss Per Share - Loss per share is computed by dividing the net loss for the
period by the weighted average number of shares of common stock outstanding. For
purposes of computing weighted average number of shares of common stock
outstanding, the Company has common stock equivalents. The common stock
equivalents are assumed converted to common stock, when dilutive. During periods
of operations in which losses were incurred, common stock equivalents were
excluded from the weighted average number of common shares outstanding because
their inclusion would be anti-dilutive. In August 1993, the Company effected a
2,000-for-one common stock recapitalization, in October 1993, the Company
effected a .576-for-one reverse split in its common stock, and, in February
1996, the Company effected a three-for-four reverse split in its common stock.
In January 1996, the Company issued 1,125,000 shares of common stock in exchange
for 1,000 shares of Series D Preferred Stock. All share and per share
information in these financial statements gives effect, retroactively, to such
transactions. Dividends on preferred stock are included in the calculation of
loss per share.
Investment in Joint Venture - The Company's investment in a joint venture (See
Note 16) is accounted for under the equity method.
Allocated Related Party Administrative Expenses - During the first six months of
1996 and all of 1995 and 1994, certain administrative services were performed
for the Company by Consolidated and its subsidiaries. The fair value of such
services, approximately $9,000, $18,000 and $19,000, respectively, was charged
to related party and administrative expenses, and, since Consolidated will not
be reimbursed for such charges, credited to additional paid-in capital. (See
Note 7)
Research and Development - Expenditures for research and development costs for
the year ended December 31, 1996, 1995 and 1994 amounted to $278,000, $699,000
and $367,000, respectively.
[3] Accounts Receivable
Accounts receivable is shown net of allowance for doubtful accounts of $288,029,
$146,263 and 137,842 at December 31, 1996, 1995 and 1994 respectively. The
changes in the allowance for doubtful accounts are summarized as follows:
December 31,
1996 1995 1994
Beginning Balance $146,263 $137,842 $137,778
Provision for Doubtful Account 260,000 60,000 30,000
Recoveries -- -- --
Charge-offs (118,234) (51,579) (29,936)
Ending Balance $288,029 $146,263 $137,842
======== ======== ========
F - 18
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #7
- - ------------------------------------------------------------------------------
[4] Costs and Estimated Profits in Excess of Interim Billings and Interim
Billings in Excess of Costs and Estimated Profits
Costs, estimated profits, and billings on uncompleted contracts are summarized
as follows:
December 31,
1 9 9 6 1 9 9 5
Costs Incurred on Uncompleted Contracts $ 3,483,918 $ 2,588,000
Estimated Profits 652,749 491,000
-------------- --------------
Total 4,136,667 3,079,000
Billings to Date 4,306,986 3,604,000
------------- -------------
Net $ (170,319) $ (525,000)
--- ============= =============
Included in the accompanying balance sheet under the following captions:
Costs and estimated profits in excess of interim$ 931,786 $ 415,000
Interim billings in excess of costs and estimate (1,102,105) 940,000
------------- -------
Net $ (170,319) $ (525,000)
--- ============= =============
[5] Going Concern Considerations
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The Company has
sustained losses since inception and the accumulated deficit at December 31,
1996 is $11,725,825. The ability of the Company to continue as a going concern
is dependent upon the success of the Company's marketing effort and its access
to sufficient funding to enable it to continue operations. The Company has been
funded through December 31, 1996 through loans from principal stockholders, an
asset-based lender and others, and from the sale of stock [See Notes 7 and 8].
All these factors had raised substantial doubt about the ability of the
Company to continue as a going concern.
Such substantial doubt has been alleviated due to the Company's ability to
secure contracts, such as the agreement effective April 8, 1997 with Health
System Design Corporation,which will allow the Company to provide the "Provider
Management Information System" to the nearly 600 Provider Agencies in the State
of Ohio. Management believes that the gross profit from this contract in 1997
will range from $567,000 to $2.3 million. The Company believes that the $567,000
gross profit can be attained with the existing staff.
There can be no assurances that management's plans to reduce operating losses by
increasing revenues to fund operations will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
F - 19
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #8
- - ------------------------------------------------------------------------------
[6] Property and Equipment
Property and equipment consist of the following:
December 31,
1 9 9 6 1 9 9 5
Equipment, Furniture and Fixtures $ 538,634 $ 674,000
Leasehold Improvements 164,335 164,000
----------- -----------
Totals - At Cost 702,969 838,000
Less: Accumulated Depreciation 320,383 491,000
----------- -------
Net $ 382,586 $ 347,000
--- ========= ==========
Depreciation expense amounted to $145,686, $140,000, and $69,000, respectively
for the years ended December 31, 1996, 1995 and 1994.
[7] Related Party Transactions
[A] Issuance of Stock at Organization - In connection with the organization of
the Company in September 1992, the Company issued 824,256 shares of common stock
as follows: 582,072 shares of common stock to SISC, for $1,300, 112,584 shares
to DLB, Inc. ["DLB"] for $6,700, and 43,200 shares of common stock for nominal
consideration to each of DLB and two individuals, one of whom became a director
in June 1994. DLB is controlled by the wife of the chairman of the board who is
also the chairman of the board of Consolidated. The chairman of the board
disclaims any beneficial interest in any securities owned by DLB.
Also in connection with the organization of the Company, the Company acquired
all of the capital stock of LMT in exchange for 129,600 shares of common stock
and 400 shares of Series A 4% Convertible Redeemable preferred stock, par value
$.01 per share ["Series A preferred stock"]. The 400 shares of Series A
preferred stock are convertible into 43,200 shares of common stock [See Note
10]. LMT was a shell corporation with no operating business. The shares of
common stock issued included 60,480 to the chief operating officer of the
Company and 25,920 to the vice-president of the Company. The remaining 43,200
and all of the shares of Series A preferred stock were issued to a non-related
individual. The Company expensed the value of the Series A preferred stock
($40,000). The issuance of the common stock was treated as compensation valued
at $.01 per share. In August 1996 the Company converted its Series A Preferred
stock into 43,200 Common Shares.
[B] Loans by Related Parties - At September 30, 1995, the total indebtedness due
SISC was $2,960,000 plus interest of $388,000. As of such date, (i) the interest
was exchanged for 1,125,000 shares of common stock, (ii) $2,210,000 of the debt
was exchanged for 2,210 shares of Series D 6% preferred stock ["Series D
preferred stock"], having a liquidation price of $1.00 per share and a
redemption price of $1,000 per share, and (iii) the remaining $750,000 due SISC
is represented by the Company's 10% subordinated note due January 15, 1997 or
earlier upon the completion of the Company's initial public offering. In
conjunction with the September 30, 1995 debt restructuring, $136,000 which was
previously recorded as paid-in capital, was reclassified to debt owed to SISC.
The Series D preferred stock may be redeemed at the option of the Company
commencing October 1, 1998, and is redeemable at any time after issuance from
50% of the proceeds of any over allotment on the Company's initial public
offering or other issuance of equity securities subsequent to the completion of
the Company's initial public offering.
At December 31, 1994, SISC has advanced $2,626,000 which are in the form of
demand notes bearing interest at 10%. This amount includes a $97,000 note due to
DLB, Inc. which was purchased by SISC in April 1994. Interest expense on these
notes for the years ended December 31, 1996, 1995 and 1994 amounted to $10,125,
$199,000 and $189,000, respectively.
F - 20
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #9
- - ------------------------------------------------------------------------------
[7] Related Party Transactions - [Continued]
[B] Loans by Related Parties - [Continued]
In connection with the issuance by the Company of its Interim Notes [the
"Interim Notes"] in July and August 1993, SISC, in anticipation of the Company's
receipt of the proceeds of such loans, advanced the Company, on a non-interest
bearing basis, $79,000, which was repaid by the Company in August 1993. Such
advance was used by the Company to pay the principal on a $50,000 demand note
and interest of $2,000 and to pay normal operating expenses. In connection with
the Interim Notes, SISC transferred to the lenders an aggregate of 15,120 shares
of common stock for $.232 per share. In connection with the agreement of the
holders of the Interim Notes to extend the maturity date of the notes to the
earlier of September 30, 1994, or three days after the Company completes its
initial public offering, SISC transferred an aggregate of 9,375 shares of common
stock to such noteholders. The Company incurred a charge of $7,000 against
operations for financing costs in conjunction with the issuance of stock by
SISC. The Interim Notes were paid in full in 1996.
During the period from January to June 1994, SISC advanced an aggregate of
$330,000 to CSM. As a result of the acquisition, such obligations are included
in the principal amount of the Company's obligations to SISC, which were
approximately $2.6 million at December 31, 1994. Included in the advances by
SISC to the Company were $300,000 which was used to pay payroll taxes and
interest and $500,000 which was used in connection with the purchase of CSM.
At December 31, 1995 and 1994, ACT [the parent of Old CSM] loaned $167,000 and
$58,000 to the Company in the form of demand notes bearing interest at 10% per
annum. These loans were paid in full in 1996.
In October 1993, SISC transferred shares of common stock to two officers, who
received 17,460 and 18,000 shares, respectively, and to five employees, each of
whom received 6,000 shares. The fair value of such shares, approximately $15,000
in the aggregate, was charged to compensation.
The Company has an agreement with Consolidated and its subsidiary The Trinity
Group, Inc. ("Trinity") pursuant to which the Company will pay Trinity a monthly
fee of $15,000 for a three-year term commencing on the first day of the month in
which the Company receives the proceeds from the Offering for general business,
management and financial consulting services. Pursuant to this agreement, in
1996 the Company charged $60,000 to related party administrative expenses.
The Company entered into an agreement with SMI Corporation (SMI), pursuant to
which the company would pay SMI compensation of $25,000 to $59,000 per month for
which SMI would provide persons to serve in management-level or other key
positions for the Company. In addition, the Company is to pay SMI 6% of the
revenues generated from Smart Card and related services. The agreement would
continue until December 31, 2000. The sole stockholder of SMI, Mr. Storm Morgan
was elected as a director of the Company in January 1996. For the year ended
December 31, 1996, the Company incurred and paid, $619,700 of compensation
expense pursuant to its agreement with SMI as well as an additional $250,000 for
services. In February of 1997 the Company modified the agreement whereby the
monthly fees were reduced to $9,000 and all commission arrangements were
canceled.
[8] Notes Payable
Bank - Notes payable to bank in the amount of $79,000, at December 31,1995 were
payable on demand. The notes had a interest rate of 1-1/2% over the bank's prime
rate and were collateralized by the assets of CSM. The loan was paid in full in
1996. The prime rate at December 31, 1996 was approximately 8.25%.
F - 21
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #10
- - ------------------------------------------------------------------------------
[8] Notes Payable [Continued]
Asset-Based Lender - In February 1995, the Company entered into an accounts
receivable financing with an asset-based lender. Borrowings under this facility
were $590,000 and $707,000 at December 31, 1996 and 1995 respectively. The
Company can borrow up to 75% of eligible receivables, and it pays interest at
the greater of 18% per annum or prime plus 8% and a fee equal to 1% of the
amount of the invoice. This note is collateralized by all of the accounts and
property and equipment of the Company. In addition, the Company's obligations
under this facility are guaranteed by the chairman of the board and president of
the Company. Also, the then chief executive officer and the treasurer of the
Company have issued their limited guaranty to the lender.
In March 1996, the agreement with the asset based lender was modified to allow
borrowings up to 80% of eligible receivables to a maximum of $1,000,000 for the
period up to the public offering at which point the terms would revert to the
agreement of a maximum borrowing of $750,000. In consideration, the Company,
upon completion of the public offering paid the asset based lender a $25,000 fee
and issued it 25,000 shares of the Company's common stock. The Company incurred
a one time non-cash finance charge of approximately $81,000.
Investors - In 1994 and 1993, the Company borrowed $200,000 and $216,000,
respectively, from accredited investors and issued its 1993 Interim Notes and
December 1994 Interim Notes, respectively, to such investors. In 1994, SISC
purchased an Interim Note in the amount of $54,000 from a noteholder. In 1995,
the first payment of approximately $66,000 was paid on the December 1994 Interim
Notes. The balance of these notes were paid in full in 1996 as well as a $12,500
extension fee to the holders of the December 1994 Interim Notes. In connection
with the agreement of the holders of the 1993 Interim Notes to extend the
maturity date of the notes to the earlier of September 30, 1994, or three days
after the Company completes its initial public offering. SISC transferred an
aggregate of 9,375 shares of common stock to such noteholders. The Company
incurred a charge of $7,000 against operations for financing costs in
conjunction with the issuance of stock by SISC.
In connection with the issuance of the December 1994 Interim Notes: (i)
Consolidated issued the lender 85,000 shares of its stock, (ii) the Company
issued to SISC outstanding warrants to purchase 300,000 shares of common stock
at $2.00 per share, and (iii) the Company issued 75,000 shares of common stock
to Holdings. The Company incurred charges totaling $103,000 against operations
for financing costs in conjunction with the issuances of stock. Such charges
were recorded as intercompany charges due to SISC and Consolidated by the
Company.
Notes payable consist of the following:
December 31,
1 9 9 6 1 9 9 5
Bank - payable on demand with interest at 1-1/2% over the bank's prime rate,
which was 8.5% at December 31,
1995. $ -- $ 79,000
Investors - interest at 10%. -- 296,000
Asset-Based Lender - payable on demand with interest
at the greater of 18% per annum or prime plus 8% 590,031 707,000
Totals $ 590,03$ 1,082,000
------ =============== ==========
The weighted average interest rate on short-term borrowings outstanding as of
December 31, 1996 and 1995 amounted to approximately 22% and 17%, respectively.
F - 22
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #11
- - ------------------------------------------------------------------------------
[8] Notes Payable [Continued]
In January 1996, the Company borrowed $500,000 from four accredited investors.
In connection with such loans, the Company issued its 8% promissory notes due
January 31, 1997, which were subsequently paid from the proceeds of the
Company's initial public offering. The Company also agreed to issue and register
with the Securities Act one unit for each $2.00 principal amount of notes. The
unit issued to the noteholders mirrored the units issued in the initial public
offering which consisted of two shares of the Company's Common Stock and one
Series A Redeemable Common Stock Purchase Warrant. The Company incurred a one
time non-cash finance charge of $1,611,000 upon the issuance of these units.
[9] Income Taxes
The Company utilizes an asset and liability approach to determine the extent of
any deferred income taxes, as described in SFAS No. 109, "Accounting for Income
Taxes" of the Financial Accounting Standards Board. This method gives
consideration to the future tax consequences associated with differences between
financial statement and tax bases of assets and liabilities.
For financial reporting purposes at December 31, 1996, the Company has net
operating loss carryforwards of $8,200,000 expiring by 2011. Pursuant to Section
382 of the Internal Revenue Code regarding substantial changes in Company
ownership, utilization of these losses may be limited. Based on this and the
fact that the Company has generated operating losses through December 31, 1996,
the deferred tax asset of approximately $3,300,000 is offset by an allowance of
$3,300,000.
A deferred tax asset of approximately $1,400,000, related to stock-based
compensation awards, has been offset by a valuation allowance of $1,400,000 due
to the uncertainty of its realization.
Deferred Tax Asset
Federal and State Net Operating Loss Carryforwards $ 3,300,000
Stock Based Compensation Awards 1,400,000
Less: Valuation Allowance (4,700,000)
--------------
Net Deferred Tax Asset $ --
- - ---------------------- =================
The Valuation Allowance increased by $2,900,000 in 1996.
The provision for income taxes varies from the amount computed by applying
statutory rates for the reasons summarized below:
Provision Based on Statutory Rates 34 %
State Taxes Net of Federal Benefit 6 %
Increase in Valuation Allowance (40)%
------------
Total -- %
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
2007 $ 113,000
2008 433,000
2009 1,751,000
2010 2,850,000
2011 3,153,000
----------
$ 8,200,000
F - 23
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #12
- - ------------------------------------------------------------------------------
[10] Capital Stock
Capital Stock - The Company is authorized to issue 3,000,000 shares of preferred
stock, par value $.01 per share, and 15,000,000 shares of common stock, par
value $.01 per share. The Company's Board of Directors is authorized to issue
preferred stock from time to time without stockholder action, in one or more
distinct series. The Board of Directors is authorized to fix the following
rights and preferences, among others, for each series: (i) the rate of dividends
and whether such dividends shall be cumulative; (ii) the price at and the terms
and conditions on which shares may be redeemed; (iii) the amount payable upon
shares in the event of voluntary or involuntary liquidation; (iv) whether or not
a sinking fund shall be provided for the redemption or purchase of shares; (v)
the terms and conditions on which shares may be converted; and (vi) whether, and
in what proportion to any other series or class, a series shall have voting
rights other than required by law. The Board of Directors has authorized the
issuance of the Series A preferred stock, the Series B preferred stock and the
Series D preferred Stock.
Preferred Stock - The Series A preferred stock is 4% convertible redeemable
preferred stock. The stockholders are entitled to receive a $4.00 per share
annual dividend when and as declared by the Board of Directors. Dividends are
fully cumulative and accrue from October 1, 1992. Dividends are payable annually
on March 1. The stock is redeemable at the option of the Company at any time at
which the Company has consolidated net worth of at least $2,500,000 at a price
of $1,000 per share plus accrued dividends. Each share of Series A preferred
stock is convertible into 108 shares of common stock at the discretion of the
stockholder. In the event of involuntary or voluntary liquidation, the
stockholders are entitled to receive $100 per share and all accrued and unpaid
dividends. As of December 31, 1995, approximately $4,000 of dividends [$10 per
share] were in arrears. In August 1996 the Company converted its Series A
Preferred stock into 43,200 Common Shares.
The Series B preferred stock is 6% redeemable convertible preferred stock. The
stockholders are entitled to receive a $72.00 per share annual dividend when and
as declared by the Board of Directors. Dividends are fully cumulative and accrue
from April 1, 1993. Dividends are payable annually on March 1. The stock is
redeemable at the discretion of the Company at any time at which the Company has
consolidated net worth of at least $5,000,000 at a price of $1,200 per share
plus accrued dividends. Each share of Series B preferred stock is convertible
into 259.2 shares of common stock at the discretion of the stockholders. In the
event of involuntary or voluntary liquidation, the stockholders are entitled to
receive $1,200 per share and all accrued and unpaid dividends. Each holder of
Series B preferred stock has the right, following the Company's initial public
offering, to require the Company to redeem all of the shares of Series B
preferred stock owned by such holder at a redemption price equal to $1,200 per
share. As of December 31, 1995, approximately $11,000 [$138 per share] of
dividends were in arrears. In August 1996 the Company redeemed its Series B
Redeemable Preferred stock in the amount of $96,000.
The Series D preferred stock is 6% redeemable preferred stock. The stockholders
are entitled to receive a $60.00 per share annual dividend when and as declared
by the Board of Directors. Dividends are cumulative and accrue from October 1,
1995. Dividends are payable semi-annually on April 1 and October 1. The stock is
redeemable at the option of the Company for $1,000 per share commencing October
1, 1998. Earlier redemption is permitted under certain circumstances. In the
event of voluntary or involuntary liquidation, the stockholders are entitled to
receive $1.00 per share and all accrued and unpaid dividends.
In January 1996, SISC exchanged 1,000 shares of Series D preferred stock for
1,125,000 shares of common stock. As a result of this exchange, the aggregate
redemption price of the Series D preferred stock was reduced to $1,210,000.
The Series A, Series B and Series D preferred stock are nonvoting except as is
required by law.
F - 24
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #13
- - ------------------------------------------------------------------------------
[10] Capital Stock - [Continued]
The Company has granted to the holders of the Series A preferred stock and
Series B preferred stock and certain warrant holders, with respect to their
warrants, certain piggyback registration rights following the Company's initial
public offering, with respect to the shares of common stock issuable upon
conversion or exercise of the preferred stock or warrants.
On August 19, 1996 the Company closed on a public offering whereby it sold
646,875 units at a price of $8 per unit for net proceeds of approximately $3.8
million. Each unit consisted of two shares of common stock and one series A
Redeemable Common Stock Purchase Warrant.
On August 21, 1996 Series B Common Stock purchase warrants to purchase 800,000
shares of common stock at $2 per share were exercised and the Company received
$1,600,000 in gross and net proceeds.
See Note 7 for additional information relating to the issuance of common stock
and preferred stock in connection with the Company's organization and in
connection with certain financings.
See Note 14 for information relating to the Company's 1993 Long-Term Incentive
Plan.
[11] Capitalized Lease Obligations
Future minimum payments under capitalized lease obligations as of December 31,
1996 are as follows:
Year ending
December 31,
1997 $ 43,225
1998 16,854
------------
Total Minimum Payments 60,079
Less Amount Representing Interest at Rates Ranging from
11% to 12% Per annum 2,685
Balance $ 57,394
------- ===========
Capitalized lease obligations are collateralized by equipment which has a net
book value of $25,000 and $64,000 at December 31, 1996 and 1995, respectively.
Amortization of approximately $30,700 and $40,000 in 1996 and 1995,
respectively, has been included in depreciation expense.
[12] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted SFAS No. 107, which requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed therein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement. The following table
summarizes financial instruments by individual balance sheet accounts as of
December 31, 1996 and 1995:
F - 25
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #14
- - ------------------------------------------------------------------------------
[12] Fair Value of Financial Instruments - [Continued]
Carrying Amount Fair Value
December 31, December 31,
1996 1995 1996 1995
---- ---- ---- ----
Debt Maturing Within One Year $ 590,000 $1,082,000 $ 590,000 $1,082,000
Long-Term Debt 750,000 750,000
------------ ---------- ----------- ----------
Totals $ 590,000 $1,832,000 $ 590,000 $1,832,000
------ ========== ========== ========== ==========
For debt classified as current, it was assumed that the carrying amount
approximated fair value for these instruments because of their short maturities.
The fair value of long-term debt is based on current rates at which the Company
could borrow funds with similar remaining maturities. The carrying amount of
long-term debt approximates fair value.
[13] Commitments and Contingencies
The Company leases space for its executive offices and facilities under
noncancellable operating leases expiring March 31, 1999. The Company also leases
additional office space on a month-to-month basis.
Minimum annual rentals under noncancellable operating leases having terms of
more than one year are as follows:
Years ending
December 31,
1997 $ 280,000
1998 293,000
1999 52,000
---------
Total $ 625,000
----- ==========
Rent expense amounted to $358,000, $309,000 and $148,000 respectively, for the
years ended December 31, 1996, 1995 and 1994.
The Company has an agreement with Trinity Group, Inc. ["Trinity"], a
wholly-owned subsidiary of Consolidated, pursuant to which the Company will pay
Trinity $15,000 a month for consulting services. Neither the Company's chairman
of the board, who is the chairman of the board of Consolidated, nor any other
employee of Consolidated, Trinity or SISC receives compensation from the
Company. (See Note 7).
At the time of the acquisition of CSM, the Company entered into five-year
employment agreements with its current chief operating officer [formerly the
president] and vice president, which replaced employment agreements then in
effect, and the three individuals who had been officers of CSM. The agreements
provide for salaries of $125,000, $85,000, $125,000, $125,000 and $80,000,
respectively, subject to cost of living increases. The agreements also provide
for bonuses based upon a percentage of income before income taxes. The officers
are also provided with an automobile or an automobile allowance.
In January 1996, the vice-president's base salary was increased from $85,000 to
$100,000. Also, for 1996, the chief operating officer and two other officers,
whose base salaries were $125,000 each, agreed to reduce their base salaries to
$62,000, $100,000 and $100,000, with certain incentives if certain targets are
attained. The current president who is not one of the five individuals
previously mentioned, was compensated during 1996 at the annual rate of $52,000
prior to the public offering and $125,000 subsequent to the public offering.
F - 26
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #15
- - ------------------------------------------------------------------------------
[13] Commitments and Contingencies - [Continued]
The following presents the pro forma net loss, for all periods, using the
minimum and maximum amounts payable to SMI Corporation:
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 5 1 9 9 4
Pro Forma Net Loss after Increase in Consulting
Expense and Executive Compensation Per Agreements
with SMI Corporation at $25,000 Per Month $(3,330,000) $ (2,270,000)
=========== =============
Net Loss Per Share $ (.69) $ (.47)
=========== ==============
Pro Forma Net Loss after Increase in Consulting
Expense and Executive Compensation Per
Agreements with SMI Corporation at $59,000
Per Month $ (3,738,000) $ (2,768,000)
============= =============
Net Loss Per Share $ (.78) $ (.56)
============ ==============
The proforma disclosure is not representative of the potential impact on
proforma earnings for years since the agreement was subsequently modified (see
note 7B).
On or about September 29, 1995, an action was commenced against the Company by
the filing of a summons with notice in the Supreme Court of the State of New
York, County of New York. The action was commenced by Jacque W. Pate, Jr.,
Melvin Pierce, Herbert A. Meisler, John Gavin, Elaine Zanfini, individually and
derivatively as shareholders of Onecard Health Systems Corporation and Onecard
Corporation, which corporations are collectively referred to as "Onecard." The
named defendants include, in addition to the Company, officers and directors of
the Company, its principal stockholder and the parent of its principal
stockholder. A complaint was served on November 15, 1995. The complaint makes
broad claims respecting alleged misappropriation of Onecard's trade secrets,
corporate assets and corporate opportunities, breach of fiduciary relationship,
unfair competition, fraud, breach of trust and other similar allegations,
apparently arising at the time of, or in connection with the organization of,
the Company in September 1992. The complaint seeks injunctive relief and
damages, including punitive damages, of $130 million. In September 1996 the
above action was dismissed.
In March 1997, the plaintiff has refiled a new action with the same allegations
and stating claims that were at the basis of the original complaint. Such action
is in the amount of $130,000,000. The Company contends that the technology and
software were created from a "clean office start" and the action is without
merit and frivolous. No assessment as to any outcome can be made at this time as
the matter is in its very preliminary stages. The Company denies any allegation
of wrongdoing and intends to vigorously defend the action.
[14] Stock-Based Compensation
In July 1993, the Company adopted, by action of the board of directors and
stockholders, the 1993 Longterm Incentive Plan (the "Plan"). The Plan was
amended in October 1993, April 1994, October 1994 and February 1996. These
amendments increased the number of shares available for grant pursuant to the
plan. The Plan does not have an expiration date.
The Plan is authorized to grant options or other equity-based incentives for
511,000 shares of the common stock. If shares subject to an option under the
Plan cease to be subject to such options, or if shares awarded under the Plan
are forfeited, or otherwise terminated without a payment being made to the
participant in the form of stock, such shares will again be available for future
distribution under the Plan.
F - 27
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #16
- - ------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
Awards under the Plan may be made to key employees, including officers of and
consultants to the Company, its subsidiaries and affiliates, but may not be
granted to any director unless the director is also an employee of or consultant
to the Company or any subsidiaries or affiliates. The Plan imposes no limit on
the number of officers and other key employees to whom awards may be made;
however, no person shall be entitled to receive in any fiscal year awards which
would entitle such person to acquire more than 3% of the number of shares of
common stock outstanding on the date of grant.
In January 1995, the Board granted, to various employees, stock options to
purchase an aggregate of 252,804 shares of common stock at $.232 per share, and
in December 1995 the Board granted, to various employees, stock options to
purchase an aggregate of 104,952 shares of common stock at $.345 per share. Such
exercise prices were determined by the Board to be the fair market value per
share on the date of grant. The options become exercisable as to 50% of the
shares on the first and second anniversaries of the date of grant. These options
expire on January 31, 2000 and December 31, 2000, respectively. In connection
with certain of the January 1995 option grants, the Board canceled previously
granted options to purchase 206,250 shares at an exercise price of $5.33 per
share which were granted in 1994. In April 1996, the Company granted stock
options to purchase an aggregate of 129,500 shares of common stock at an
exercise price of $2.00 per share and recognized compensation expense of
$154,800. The options are exercisable as to 50% of the shares on the first and
second anniversaries of the date of grant and expire in April 2001.
In addition, the Company granted to the underwriter, for nominal consideration,
options to purchase 56,250 units, consisting of two common shares, and one
purchase warrant, for a four year period commencing August 13, 1997 at a price
of $5.37.
A summary of the activity under the Company's stock option plan is as follows:
1996 1995 1994
-----------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding - Beginning of
Years 357,756 $ .265 206,250 $ 5.33 $ --
Granted or During
the Years 242,000 3.57 357,756 .265 206,250 5.33
Canceled During the Years -- (206,250) 5.33 --
Expired During the Years -- -- --
Exercised During the Years -- -- --
------- ------- -------- -------- -------- ----
Outstanding - End of Ye 599,756 1.60 357,756 .265 206,250 5.33
======== ======= ======== ===== ======== =====
Exercisable - End of Ye 178,878 .265 -- -- --
======== ======= ========= ====== ========= =====
F - 28
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #17
- - ------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
1996 1995
----------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Fair Exercise Fair
Price Value Price Value
Options Issued with Exercise
Price Above Stock Price at
Date of Grant $5.37 $ .93 -- --
Options Issued with Exercise
Price Equal to Stock Price at
Date of Grant -- -- $.265 $.14
Options Issued with Exercise
Price Below Stock Price at
Date of Grant $2.00 $1.78 -- --
The following table summarizes stock option information as of December 31, 1996:
Weighted
Average Remaining Weighted Average
Range of Exercise Prices Shares Contractual Life Exercise Price
$.232 to $.345 347,756 3.4 Years $ .265
$2.00 129,500 4.3 Years 2.00
$5.37 112,500 4.7 Years 5.37
------- --------- -------
Totals 599,756 3.8 Years $ 1.60
======= ========= ======
In October 1993, the Company issued to SISC warrants to purchase 375,000 shares
of common stock at $10.00 per share, 225,000 shares at $6.67 per share and
150,000 shares of common stock at $2.67 per share and issued to SMACS warrants
to purchase 37,500 shares of common stock at $6.67 per share and 37,500 shares
at $2.67 per share. The warrants became exercisable six months from the
completion of the Company's initial public offering or earlier with the consent
of the Company and the underwriter and expire on November 30, 1998.
In February 1996, the Company issued an aggregate of 3,153,750 Series B
Warrants, of which 2,526,250 are exercisable at $2.00 per share and 637,500 are
exercisable at $5.00 per share. These warrants were issued in connection with
services rendered, which, in the case of SISC, included the guarantee of the
December 1995 Interim Notes, and, in certain instances the terms of the warrants
were revised. Although the warrants were issued prior to the three-for-four
reverse split, which was effective in February 1996, the number of shares
issuable upon exercise of the warrants, but not the exercise price, was adjusted
for the reverse split. Certain of the warrants initially had a November 1998
expiration date, which was extended to December 31, 1999, which is the
expiration date of all of the warrants.
Of the warrants issued in February 1996, 787,500 warrants exercisable at $2.00
per share and 37,500 warrants exercisable at $5.00 per share were issued to
replace 825,000 warrants previously issued in October 1993. These warrants had
exercise prices ranging from $2.67 per share to $10.00 per share.
F - 29
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #18
- - ------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
In July 1996, pursuant to a warrant exchange, (a) the holders of outstanding
warrants having a $2.00 exercise price exchanged one third of such warrants for
outstanding warrants to purchase, at an exercise price of $4.00 per share, 150%
of the number of shares of common stock issuable upon exercise of the
outstanding warrants that were exchanged, and (b) the exercise price of the
outstanding warrants have a $5.00 exercise price was reduced to $4.00. Prior to
the warrant exchange, there were outstanding warrants to purchase 2,516,250
shares of common stock at $2.00 per share and outstanding warrants to purchase
2,637,500 shares of common stock at $5.00 per share outstanding. As a result of
the warrant exchange, there are outstanding warrants to purchase 1,677,500
shares of common stock at $2.00 per share and 1,895,625 shares of common stock
at $4.00 per share. This warrants may be exercised commencing February 13, 1997
or earlier if approved by the company and the underwriter. An affiliate of the
Company, a member of the board of the directors and a Company controlled by such
directors, were given permission to exercise options in August 1996. This
individual and entities exercised warrants to purchase 800,000 shares at $2.00
per share in August 1996. All of the warrants expire on December 31, 1999. These
warrants are Series B Common Stock Purchase Warrants. The Company recorded
compensation expenses of $3,337,500 in relation to the issuance of these
warrants.
The Company issued 646,875 Series A Common Stock Purchase Warrants as a part of
its initial public offering of its securities. These warrants are exercisable
for two year period commencing August 13, 1997 at a price of $4.50.
In addition, the Company issued 250,000 Series A Common Stock Purchase Warrant
to various accredited investors (See Note 8). These warrants have the same term
as the warrants issued to the general public.
A summary of warrant activity is as follows:
1996 1995 1994
-----------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding - Beginning
of Years 825,00 $ 7.27 825,000 $ 7.27 825,000 $ 7.27
Granted or Sold During
the Years 4,470,000 3.35 -- --
Canceled During the Years (825,000 7.27 -- --
Expired During the Years -- -- --
Exercised During the Years (800,000 2.00 -- --
--------- ----- ----------------- -------- -----
Outstanding-End of Years 3,670,000 3.64 825,000 7.27 825,000 7.27
========= ===== ======= ====== ======= =====
Exercisable-End of Years -- -- 825,000 7.27 825,000 7.27
======== ====== ======= ======= ======= ======
F - 30
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #19
- - ------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
1996 1995
----------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Fair Exercise Fair
Price Value Price Value
Warrants Issued with Exercise
Price Above Stock Price at
Date of Grant $4.16 $1.04 -- --
Warrants Issued with Exercise
Price Equal to Stock Price at
Date of Grant -- -- -- --
Warrants Issued with Exercise
Price Below Stock Price at
Date of Grant $2.00 $1.78 -- --
The following table summarizes warrant information as of December 31, 1996:
Weighted
Average Remaining Weighted Average
Range of Exercise Prices Shares Contractual Life Exercise Price
$2.00 877,500 3.0 Years 2.00
$4.00 1,895,625 3.0 Years 4.00
$4.50 896,875 1.7 Years 4.50
---------- --------- -------
Total 3,670,000 2.7 Years 3.64
========= ========= =======
The Company applies accounting principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, for stock options issued
to employees in accounting for its stock options plans. Total compensation cost
recognized in income for stock based employee compensation awards was $3,492,300
If the Company had accounted for the issuance of all options and compensation
based warrants pursuant to the fair value based method of SFAS No. 123, the
Company would have recorded additional compensation expense totaling $846,000
and $50,000 for the years ended December 31, 1996 and 1995, respectively, and
the Company's net loss and net loss per share would have been as follows:
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 6 1 9 9 5
------- -------
Net Loss as Reported $ (6,579,444) $ (2,850,000)
============= =============
Pro Forma Net Loss $ (7,425,444) $ (2,900,000)
============= =============
Net Loss Per Share as Reported $ (1.28) (.59)
============= ==============
Pro Forma Net Loss Per Share $ (1.44) (.60)
============= ===============
F - 31
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #20
- - ------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
The fair value of options and warrants at date of grant was estimated using the
Black-Scholes fair value based method with the following weighted average
assumptions:
1 9 9 6 1 9 9 5
------- -------
Expected Life (Years) 2 3
Interest Rate 6.0% 6.0%
Annual Rate of Dividends 0% 0%
Volatility 67.9% 69.6%
The weighted average fair value of options and warrants at date of grant using
the fair value based method during 1996 and 1995 is estimated at $1.33 and $.14,
respectively.
[15] Industry Segments
The Company currently classifies its operations into two business segments: (1)
Software and Related Systems and Services and (2) Data Center Services. Software
and Related Systems and Services is the design, installation, implementation and
maintenance of computer information systems. Data Center Services involve
company personnel performing data entry and data processing services for
customers. Intersegment sales and sales outside the United States are not
material. Information concerning the Company's business segments is as follows:
Y e a r s e n d e d
D e c e m b e r 31,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Revenues:
Software and Related Systems
Services $ 6,333,804 $ 5,640,000 $ 2,040,000
Data Center Services 2,207,155 1,742,000 884,000
------------- ------------- ------------
Total Revenues $ 8,540,959 $ 7,382,000 $ 2,924,000
-------------- ============ ============ ============
Gross Profit:
Software and Related Systems
and Services $ 623,456 $ 911,000 $ (78,000)
Data Center Services 986,787 853,000 468,000
-------------- ------------- -------------
Total Gross Profit $ 1,610,243 $ 1,764,000 $ 390,000
------------------ ============ ============ ============
Income [Loss] From Operations:
Software and Related Systems
and Services $(4,053,006) $(1,692,000) $(1,649,000)
Data Center Services (97,805) 259,000 158,000
Total [Loss] From Operations $(4,150,811) $(1,433,000) $(1,491,000)
---------------------------- =========== =========== ===========
Depreciation and Amortization:
Software and Related Systems
and Services $ 367,984 $ 765,000 $ 401,000
Data Center Services 118,582 107,000 69,000
------------- -------------- -------------
Total Depreciation and Amortization $ 486,566 $ 872,000 $ 470,000
----------------------------------- ============ ============= ============
Capital Expenditures:
Software and Related Systems
and Services $ 165,716 $ 46,000 $ 119,000
Data Center Services 15,317 92,000 3,000
-------------- -------------- ---------------
Total Capital Expenditures $ 181,033 $ 138,000 $ 122,000
-------------------------- ============ ============ ============
Identifiable Assets:
Software and Related Systems
and Services $ 4,119,943 $ 3,625,000
Data Center Services 2,607,693 2,691,000
------------ ------------
Total Identifiable Assets $ 6,727,636 $ 6,316,000
------------------------- =========== ===========
F - 32
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #21
- - ------------------------------------------------------------------------------
[16] Joint Venture
The Company executed an agreement in February 1996 to purchase an application
software product known as the SATC Software which processes retail plastic card
transactions and merchant transactions. The purchase price for the SATC Software
is $650,000, of which $325,000 was paid in February 1996 with the remaining
balance of $325,000 due and paid in three installments during 1996.
The Company entered into a joint venture with Oasis Technology, Ltd. ["Oasis"]
pursuant to which the joint venture corporation (50% owned by the Company) will
purchase the SATC software and made an advance payment of $325,000, in January
1996, pursuant to such proposed joint venture. The Company has an agreement with
Oasis that Oasis will pay the remaining $325,000 as part of its contribution to
the joint venture. Oasis did pay the $325,000 during 1996. The Company accounts
for its interest in the Joint Venture on the equity method. During 1996 the
Company recognized $264, 085 of its share of losses related to this joint
venture and contributed an additional $59,631 in cash to fund ongoing costs.
[17] New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 125. "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". SFAS No. 125
is effective for transfers and servicing of financing assets and extinguishment
of liabilities occurring after December 31, 1996. The provision of SFAS No. 125
must be applied prospectively; retroactive application is prohibited and early
application is not allowed. SFAS No. 125 supersedes SFAS No. 77, "Reporting by
Transferors for Transfers of Receivables with Recourse". While both SFAS No.
125 and SFAS No. 77 required a surrender of "control" or financial assets to
recognize asale, the SFAS No. 125 requirements of sale are generally more
stringent. SFAS No. 125 is not expected to have a material impact on the
Company because the Company hasn't been recognizing sales under SFAS No. 77 and
will also not be under SFAS No. 125. Some provisions of SFAS No. 125, which are
unlikely to apply to the Company, have been deferred by the FASB.
The FASB has issued SFAS No. 128 "Earnings Per Share" and SFAS 129 "Disclosure
of Information About Capital Structure". Both are effective for financial
statements issued for periods ending after December 15, 1997. SFAS No. 128
simplifies the computation of earning per share by replacing the presentation of
primary earnings per share with a presentation of basic earnings per share. The
statement requires dual presentation of basic and diluted earnings per share by
entities with complex capital structures. Basic earnings per share includes no
dilution an is computed by dividing income available to common stockholders by
the weighted average number of shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity similar to fully diluted earnings per share.
While the Company has not analyzed SFAS No. 128 sufficiently to determine its
long-term impact on per share reported amounts, SFAS No. 128 should not have a
significant effect on historically reported per share loss amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
F - 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NETSMART TECHNOLOGIES, INC.
Date: April 11, 1997 /S/ Lewis S. Schiller
---------------------
Lewis S. Schiller
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ Lewis S. Schiller Chief Executive Officer April 11, 1997
- - ----------------------------
Lewis S. Schiller
/S/ Anthony F. Grisanti Chief Financial Officer April 11, 1997
Anthony F. Grisanti
/S/ James Conway President April 11, 1997
James Conway
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - CALCULATION OF EARNINGS PER SHARE
- - ------------------------------------------------------------------------------
Years ended Years ended
December 31, 1996 December 31,
Primary EPS Fully Diluted EPS 1 9 9 5 1 9 9 4
----------- ----------------- ------- -------
Net Loss - Historical $(6,579,444) $(6,579,444) $(2,850,000)$ (433,000)
============ ==========
Adjustments Per Modified Treasury
Stock Method 325,389 323,715
---------- ----------
Adjusted Net Loss - Primary $(6,254,055)
Adjusted Net Loss - Fully Diluted $(6,255,729)
===========
Loss Per Share:
Loss Per Share - Note 1 $ (.75) $ (.30 $ (.03)
========== =========== ==========
Loss Per Share - Assuming Full
Dilution - Note 2 $ (.75) $ (.30) $ (.03)
========== =========== ==========
Note 1: Computed by dividing net loss by the weighted average number of
common shares (4,136,253) for the years ended December 31, 1996, 1995
and 1994 respectively adjusting it by items (i) to (vi) below using the
modified treasury stock method of calculating earnings per share.
(i) Assumes that 357,756 1995 Stock Incentive Plan stock options
outstanding at December 31, 1996 were exercised at the beginning of
the period and that the proceeds were used to purchase treasury
stock at the average market price of the Company's common stock for
the period as quoted on the NASDAQ, retire debt redeem preferred
stock and to invest the balance.
(ii)Assumes that 129,500 1995 Stock Incentive Plan stock options
outstanding at December 31, 1996 were exercised at the beginning of
the period and that the proceeds were used to purchase treasury
stock at the market price of the Company's common stock at December
31, 1996 as quoted on the NASDAQ, retire debt and to invest the
balance.
(iiiAssumes that 112,500 stock options outstanding at December 31, 1996
were exercised at the beginning of the period and that the proceeds
were used to purchase treasury stock at the market price of the
Company's common stock at December 31, 1996 as quoted on the NASDAQ,
retire debt, redeem preferred stock and to invest the balance.
(vi)Assumes Series B common stock purchase warrants to purchase and
aggregate of 877,500 common shares were exercised at the beginning
of the period and that the proceeds were used to purchase treasury
stock at the average market price of the Company's common stock for
the period as quoted on the NASDAQ, retire debt, redeem preferred
stock and to invest the balance.
(v) Assumes common stock purchase warrants to purchase an aggregate of
1,895,625 shares were exercised at the beginning of the period and
that the proceeds were used to purchase treasury stock at the
average market price of the Company's common stock for the period as
quoted on the NASDAQ, retire debt, redeem preferred stock and to
invest the balance.
(vi)Assumes that common stock purchase warrants to purchase 896,875
shares were exercised at the beginning of the period and that the
proceeds were used to purchase treasury stock at the average market
price of the Company's common stock for the period as quoted on the
NASDAQ , retire debt redeem, preferred stock and to invest the
balance.
The proceeds received from the above transactions would then be used to purchase
treasury stock up to 20%, retire debt redeem preferred stock and the remaining
balance invested. See Schedule 1.
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - COMPUTATION OF EARNINGS PER SHARE [CONTINUED]
- - ------------------------------------------------------------------------------
Note 2: Computed by dividing net loss by the weighted average number of
common shares (4,136,253) for the years ended December 31, 1996, 1995
and 1994 respectively adjusting it by items (i) to (v) below using the
modified treasury stock method of calculating earnings per share.
(i) Assumes that 357,756 1995 Stock Incentive Plan stock options
outstanding at December 31, 1996 were exercised at the beginning of
the period and that the proceeds were used to purchase treasury
stock at the market price of the Company's common stock at December
31, 1996 as quoted on the NASDAQ, retire debt redeem preferred stock
and to invest the balance.
(ii)Assumes that 129,500 1995 Stock Incentive Plan stock options
outstanding at December 31, 1996 were exercised at the beginning of
the period and that the proceeds were used to purchase treasury
stock at the market price of the Company's common stock at December
31, 1996 as quoted on the NASDAQ, retire debt and to invest the
balance.
(iiiAssumes that 112,500 stock options outstanding at December 31, 1996
were exercised at the beginning of the period and that the proceeds
were used to purchase treasury stock at the market price of the
Company's common stock at December 31, 1996 as quoted on the NASDAQ,
retire debt, redeem preferred stock and to invest the balance.
(iv)Assumes Series B common stock purchase warrants to purchase and
aggregate of 877,500 common shares were exercised at the beginning
of the period and that the proceeds were used to purchase treasury
stock at the market price of the Company's common stock at December
31, 1996 as quoted on the NASDAQ, retire debt, redeem preferred
stock and to invest the balance.
(v) Assumes Series B common stock purchase warrants to purchase an
aggregate of 1,895,625 shares were exercised at the beginning of the
period and that the proceeds were used to purchase treasury stock at
the market price of the Company's common stock at December 31, 1996
as quoted on the NASDAQ, retire debt, redeem preferred stock and to
invest the balance.
(vi)Assumes that stock options to purchase 896,875 shares were exercised
at the beginning of the period and that the proceeds were used to
purchase treasury stock at the market price of the Company's common
stock at December 31, 1996 as quoted on the NASDAQ , retire debt,
redeem preferred stock and to invest the balance.
The proceeds received from the above transactions would then be used to purchase
treasury stock up to 20%, retire debt redeem preferred stock and the remaining
balance invested. See Schedule 2.
Note: This calculation is submitted in accordance with the Securities Act of
1934 Release No. 9083 although it is contrary to Para. 40 of APB 15 because it
may produce an anti-dillutive result.
SCHEDULE 1
PRIMARY EARNINGS PER SHARE - DECEMBER 31, 1996
- - ------------------------------------------------------------------------------
Weighted average # of shares o/s 12/31/96 5,149,253
Total issuable warrants and options
Options pursuant to 1995 Stock Incentive Plan 252,804
Options pursuant to 1995 Stock Incentive Plan 104,952
Options pursuant to 1995 Stock Incentive Plan 129,500
Options to purchase stock 112,500
Series B Common Stock Purchase Warrants 877,500
Series B Common Stock Purchase Warrants 1,896,625
Series A Common Stock Purchase Warrants 896,875
----------
Total issuable 4,269,756
Total that can be reacquired:
(5,149,253 x 20%) 1,029,851
----------
Issued not reacquired 3,239,905
Proceeds Price # of shares
Options pursuant to 1995 Stock Incentive Plan $ .232 252,804 58,651
Options pursuant to 1995 Stock Incentive Pla .345 104,952 36,208
Options pursuant to 1995 Stock Incentive Plan 2.00 129,500 259,000
Options to purchase stock 5.37 112,500 604,125
Series B Common Stock Purchase Warrants 2.00 877,500 1,755,000
Series B Common Stock Purchase Warrants 4.00 1,895,625 7,582,500
Series A Common Stock Purchase Warrants 4.50 896,875 4,035,938
---------
14,331,422
Limitation
1,029,851 shares x 3.25 (avg FMV) 3,347,016
---------
Total proceeds remaining to retire debt, redeem preferred stock and
interest 10,984,406
Outstanding debt and preferred stock redemption
- - - A/P and accrued expenses 1,974,231
- - - Note payable 590,031
- - - Capitalized lease obligation 57,394
- - - Due to related parties 23,542
- - - Preferred stock redemption 1,210,000
----------
3,855,198
Remaining proceeds for cash 7,129,208
Net income effects of debt retirement at 7/1/96 interest expense per P&L=
472,548 for a fully year retired 7/1/96 - net interest expense 236,274
Cash invested in money market fund @ 2.5% interest for 6 months
7,129,208 @ 2.5% /2 89,115
SCHEDULE 1
PRIMARY EARNINGS PER SHARE - DECEMBER 31, 1996
[continued]
- - ------------------------------------------------------------------------------
P&L impact
Reduction of interest expense236,274
Additional interest income 89,115
325,389
Weighted average # of shares o/s 12/31/96 5,149,253
Options and warrants not reacquired 3,239,905
Total 8,389,158
December 31, 1996 Net income per F/S (6,579,444)
Adjustment per modified treasury stock method 325,389
Adjusted net loss (6,254,055)
Primary EPS (6,254,055)/8,389,158= (.74549258)
($.75)
Total reacquired
Options pursuant to 1995 Stock Incentive Plan 3.25 252,804 821,613
Options pursuant to 1995 Stock Incentive Plan 3.25 104,952 341,094
Options pursuant to 1995 Stock Incentive Plan 3.25 129,500 420,875
Options to purchase stock 3.25 112,500 365,625
Series B Common Stock Purchase Warrants 3.25 877,500 2,851,875
Series B Common Stock Purchase Warrants 3.25 1,895,625 6,160,781
Series A Common Stock Purchase Warrants 3.25 896,875 2,914,844
---------
13,876,707
SCHEDULE 2
PRIMARY EARNINGS PER SHARE - DECEMBER 31, 1996
- - ------------------------------------------------------------------------------
Weighted average # of shares o/s 12/31/96 5,149,253
Total issuable warrants and options
Options pursuant to 1995 Stock Incentive Plan 252,804
Options pursuant to 1995 Stock Incentive Plan 104,952
Options pursuant to 1995 Stock Incentive Plan 129,500
Options to purchase stock 112,500
Series B Common Stock Purchase Warrants 877,500
Series B Common Stock Purchase Warrants 1,896,625
Series A Common Stock Purchase Warrants 896,875
----------
Total issuable 4,269,756
Total that can be reacquired:
(5,149,253 x 20%) 1,029,851
----------
Issued not reacquired 3,239,905
Proceeds Price # of shares
Options pursuant to 1995 Stock Incentive Plan $ .232 252,804 58,651
Options pursuant to 1995 Stock Incentive Plan .345 104,952 36,208
Options pursuant to 1995 Stock Incentive Plan 2.00 129,500 259,000
Options to purchase stock 5.37 112,500 604,125
Series B Common Stock Purchase Warrants 2.00 877,500 1,755,000
Series B Common Stock Purchase Warrants 4.00 1,895,625 7,582,500
Series A Common Stock Purchase Warrants 4.50 896,875 4,035,938
--------
14,331,422
Limitation
1,029,851 shares x 3.38 (FMV at 12/31/96) 3,480,896
---------
Total proceeds remaining to retire debt, redeem preferred stock and in
10,850,526
Outstanding debt and preferred stock redemption
- - - A/P and accrued expenses 1,974,231
- - - Note payable 590,031
- - - Capitalized lease obligation 57,394
- - - Due to related parties 23,542
- - - Preferred stock redemption 1,210,000
----------
3,855,198
Remaining proceeds for cash 6,995,328
Net income effects of debt retirement at 7/1/96 interest expense per P&L =
472,548 for a fully year retired 7/1/96 - net interest expense 236,274
Cash invested in money market fund @ 2.5% interest for 6 months
6,995,328 @ 2.5% /2 87,441
SCHEDULE 2
PRIMARY EARNINGS PER SHARE - DECEMBER 31, 1996
[continued]
- - ------------------------------------------------------------------------------
P&L impact
Reduction of interest expense236,274
Additional interest income 87,441
323,715
Weighted average # of shares o/s 12/31/96 5,149,253
Options and warrants not reacquired 3,239,905
Total 8,389,158
December 31, 1996 Net income per F/S (6,579,444)
Adjustment per modified treasury stock method 323,715
Adjusted net loss (6,255,729)
Fully Diluted EPS (6,255,729)/8,389,158= (.74569211)
($.75)
Total reacquired
Options pursuant to 1995 Stock Incentive Plan 3.38 252,804 854,428
Options pursuant to 1995 Stock Incentive Plan 3.38 104,952 354,738
Options pursuant to 1995 Stock Incentive Plan 3.38 129,500 437,710
Options to purchase stock 3.38 112,500 380,250
Series B Common Stock Purchase Warrants 3.38 877,500 2,965,950
Series B Common Stock Purchase Warrants 3.38 1,895,625 6,407,213
Series A Common Stock Purchase Warrants 3.38 896,875 3,031,438
---------
14,431,777