Exhibit C
TABLE OF CONTENTS
Shareholders Letter
Annual Report
Part I C-1
Part II C-10
Part III C-16
Part IV C-20
Dear Stockholders,
1999 was a pivotal year for our company. Further client expansion and improved
financial performance resulted in net earnings of $1.8 million, or $.52 per
share on a fully diluted basis. We stepped forward, validated, and enhanced our
capabilities in the behavioral health marketplace and drew the attention of the
investment professionals. Netsmart is now considered to be the leading supplier
of practice management solutions to the behavioral health care industry. Our
customer base includes more than 500 provider organizations that employ
approximately 50,000 clinicians, many of whom represent large agencies such as
state hospitals and behavioral health care networks.
The year 2000 represents a time in healthcare when the market place is seeking
accessible solutions. The Internet has emerged as the major connectivity
structure for addressing and accessing critical data. It provides information,
education, training, and communication for making complex business operations
more efficient and effective. The Internet will ultimately allow providers,
payers, and consumers to integrate in a seamless environment. As providers are
faced with the demands of external utilization management, increased regulatory
pressure, and ongoing accreditation requirements, access to validated
intervention and treatment protocols becomes more important to their daily
operation. However, as powerful as the Internet is, the real value continues to
reside with the company that is able to provide the best software functionality
and utilize the Internet as the best available delivery mechanism.
The future presents us with the ongoing opportunity to expand in the human
services market. A significant percentage of the healthcare practitioners, such
as sole practitioners and small group practices and clinics, do not effectively
use automation in the management of their clinical practice, principally because
the available systems are expensive and inaccessible. Netsmart is responding to
their requirements by integrating our enterprise-wide solutions with Internet
technology and providing scalable application service provider (ASP) solutions
that will support a full range of behavioral health practices. We also offer
clinical databases with access to industry standard libraries and decision
support systems via an ASP portal. These products significantly increase our
potential client base and can provide us with a source of ongoing revenue by
meeting the requirements of small psychiatric practices that cannot afford nor
have the staff to support traditional comprehensive client-server products.
We plan to increase market share and leverage our growth opportunities with our
full range of practice management and clinical support applications in the year
2000. The ASP solution and Internet technology further amplify our product
suite. These applications will be available to the more than 150,000 single and
small behavioral health practitioners that currently utilize manual or
incomplete computer based systems. We are offering our products on a
subscription fee basis coupled with a monthly transaction-based service charge
which is attracting increased client base by offering our proven practice
management applications to all providers. Our delivery methodology includes
client-server, ASP, and the Internet to further expand our revenues. Our
management team believes that our products' functionality, proven client base,
and technology direction will provide the essential building blocks to reward
our shareholders in the future. We have faced the challenges that small
technology companies are often confronted with, overcame them, and are now
poised to fulfill our expansion objectives.
Very truly yours,
/s/ James L. Conway
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James L. Conway
Chief Executive Officer
Netsmart Technologies, Inc.
PART I
Item 1. Business
Introduction
Netsmart Technologies, Inc. is a leader in the design, development,
implementation and licensing of management information systems for the
behavioral health care industry through our wholly-owned operating subsidiary,
Creative Socio-Medics. These products are supported under long-term maintenance
agreements. Our Windows and client server-based systems provide comprehensive
healthcare information technology solutions which include billing, patient
tracking and scheduling for inpatient and outpatient environments, as well as
clinical documentation and medical record generation and management. Our
marketing is directed primarily at such providers of behavioral health services
as state behavioral health agencies, mental health clinics, substance abuse
clinics, methadone maintenance clinics, psychiatric hospitals, and other
specialty care inpatient and outpatient providers.
We have an established nationwide customer base, including state agencies that
have responsibility for providing behavioral healthcare services in 14 states.
Revenue grew from $13.1 million in 1998 to $21.3 million in 1999, an increase of
61% , while income from continuing operations increased from $413,000 to $1.6
million.
Business Strategy
We believe that we are one of the most established suppliers of practice
management solutions to the behavioral health care industry. Our software
solutions are utilized by more than 500 provider institutions that employ
approximately 50,000 clinicians. Many of these facilities represent large
provider agencies such as state hospitals and behavioral health care networks.
We believe that a significant percentage of the mental health practitioners,
such as sole practitioners and small group practices and clinics, do not
effectively use automation in the management of their clinician practice,
principally because we believe that the available systems are expensive and are
not user-friendly.
We intend to expand our product line to integrate our enterprise-wide solutions
with Internet technology and provide application service provider solutions for
use by both large provider agencies and sole practitioners, smaller clinics and
group practices. We also plan to offer databases designed to provide all
clinicians with access to industry standard libraries via our planned
application service provider portal. We believe that these products can
significantly increase our potential client base and can provide us with a
source of ongoing revenue.
The two major segments of the behavioral healthcare marketplace that
underutilize information technologies are:
* Single to small psychiatric practices that cannot afford nor have the staff
to support traditional comprehensive client-server products.
* Clinicians who require decision support data guides to facilitate client
assessment, treatment guidelines for specific populations and documenting
patient progress and outcomes.
The Internet has emerged as the major structure for addressing and accessing new
markets, providing information, education, training and effective communication
and for making complex business operations more efficient and effective. The
behavioral healthcare marketplace is undergoing dramatic changes. The Internet
will allow the providers, payers and consumers to connect in more efficient and
cost effective ways. Providers will be faced with more complex methods and
systems of authorization management and claims processing, enhanced regulatory
and accreditation requirements, access to validated intervention and treatment
protocols and greater concern over delivery of care.
The next challenge for the Company is to increase market share and leverage this
opportunity with focus on practice management and decision support. The
application service provider solutions and Internet technology can further
expand our product suite.
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Practice Management Strategy - We plan to offer an Internet- enabled version of
its industry standard Behavioral Health Information System. This application
will be available to the more than 150,000 single and small behavioral health
practitioners that currently utilize manual or limited functionality personal
computer based systems. We plan to offer this product at a modest subscription
fee and a monthly transaction-based service charge. We believe that we can
attract an increased client base by offering:
* Our proven practice management applications to all providers, even the
single office practitioner.
* Client server, application service provider and Internet delivery
mechanisms.
Decision Support - By utilizing our client-server or web-enabled behavioral
health information system products, clinicians can access industry standard
decision support libraries. It is anticipated that initial offerings may include
applications such as:
* Treatment planning, progress notes and training curriculum.
* Outcome indicator instruments
Forward - Looking Statements
The statements in this Form 10-K Annual Report that are not descriptions of
historical facts may be forward- looking statements that are subject to risks
and uncertainties. In particular, statements in this Form 10-K Annual Report,
including any material incorporated by reference in this Form 10-K, that state
our intentions, beliefs, expectations, strategies, predictions or any other
statements relating to our future activities or other future events or
conditions are "forward-looking statements." Forward-looking statements are
subject to risks, uncertainties and other factors, including, but not limited
to, those identified under "Risk Factors," those described in Management's
Discussion and Analysis of Financial Conditions and Results of Operations and in
any other filings with the Securities and Exchange Commission, as well as
general economic conditions, any one or more of which could cause actual results
to differ materially from those stated in such statements.
Organization of the Company
We are a Delaware corporation formed in September 1992 under the name Medical
Services Corp. Our name was changed to Carte Medical Corporation in October
1993, CSMC Corporation in June 1995 and to Netsmart Technologies, Inc. in
February 1996. Our executive offices are located at 146 Nassau Avenue, Islip,
New York 11751, telephone (631) 968-2000. Reference to us and to Netsmart
include our subsidiary, Creative Socio-Medics, unless the context indicates
otherwise.
Risk Factors
If we are unable to obtain additional capital, we may not be able to develop our
business.
We had working capital of $2.0 million at December 31, 1999. We may require
additional capital in order to expand and develop our business and perform our
obligations under our agreements and purchase orders. We have no commitments
from any person to provide us with any such capital. Our business may suffer if
we do not obtain the capital when it is required.
Because we are particularly dependent upon government contracts, our business
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may be impaired by policies relating to entitlement programs.
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We market our health information systems principally to behavioral health care
facilities, many of which are operated by government entities and include
entitlement programs. During 1999, we generated 55% of our revenue from
contracts with government agencies, as compared with 52% in 1998 and 35% in
1997. Government agencies generally have the right to cancel contracts at their
convenience. In addition, we may lose business if government agencies reduce
funding for entitlement programs.
Our business is based on providing systems relating to behavioral health
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organizations, and changes in government regulation of health care industry may
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affect the market for our systems.
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C-2
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, and our systems are designed to
provide information based on these requirements. The adoption of new regulations
can have a significant effect upon the operations of health care providers,
particularly those operated by state agencies. We cannot predict the effect on
our business of future regulations by governments and payment practices by
government agencies. Furthermore, changes in regulations in the health care
field may force us to modify our health information systems to meet any new
record-keeping or other requirements. If that happens, we may not be able to
generate revenues sufficient to cover the costs of developing the modifications.
If we are not able to take advantage of technological advances, our business may
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suffer.
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Our customers require software which enables them to store, retrieve and process
very large quantities of data and to provide them with instantaneous
communications among the various data bases. Our business requires us to take
advantage of recent advances in software, computer and communications
technology. This technology has been developing at rapid rates in recent years,
and our future may be dependent upon our ability to use and develop or obtain
rights to products utilizing such technology. New technology may develop in a
manner which may make our software obsolete. Our inability to use new technology
would have a significant adverse effect upon our business.
Because of our size, we may have difficulty competing with larger companies that
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offer similar services.
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Our customers in the human services market include entitlement programs, managed
care organizations and specialty care facilities which have a need for access to
information over a distributed data network. The software industry in general,
and the health information software business in particular, are highly
competitive. Other companies have the staff and resources to develop competitive
systems. We may not be able to compete successfully with such competitors. The
health information systems business is served by a number of major companies and
a larger number of smaller companies. We believe that price competition is a
significant factor in our ability to market our health information systems and
services.
Because we are dependent on our management, the loss of key executive officers
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could harm our business.
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Our business is largely dependent upon our senior executive officers, Messrs.
James L. Conway, president and chief executive officer, Anthony F. Grisanti,
chief financial officer, John F. Philips, vice president -- marketing, and
Gerald O. Koop, vice president of the Company and chief executive officer of our
operating subsidiary, Creative Socio-Medics Corp. Although we have employment
agreements with these officers, the employment agreement do not guarantee that
the officers will continue with us. Our business may be adversely affected if
any of our key management personnel or other key employees left our employ.
Because we lack patent protection, we cannot assure you that others will not be
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able to use our proprietary information in competition with us.
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We have no patent or copyright protection for our proprietary software, and we
rely on non-disclosure agreements with our employees. Since our business is
dependent upon our proprietary products, the unauthorized use or disclosure of
this information could harm our business.
Our growth may be limited if we cannot make acquisitions.
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An important part of our growth strategy is to acquire other businesses that are
related to our current business. Such acquisitions may be made with cash or our
securities or a combination of cash and securities. To the extent that we
require cash, we may have to borrow the funds or issue equity. We have no
commitments from any financing source and we may not be able to raise any cash
necessary to complete an acquisition. If we fail to make any acquisitions, our
future growth may be limited. As of the date of this Form 10-K annual report, we
do not have any agreement or understanding, either formal or informal, as to any
acquisition.
If we make any acquisitions, they may disrupt or have a negative impact on our
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business.
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If we make acquisitions, we could have difficulty integrating the acquired
companies' personnel and operations with our own. In addition, the key personnel
of the acquired business may not be willing to work for us. We
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cannot predict the affect expansion may have on our core business. Regardless of
whether we are successful in making an acquisition, the negotiations could
disrupt our ongoing business, distract our management and employees and increase
our expenses.
We do not anticipate paying dividends on our common stock.
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We presently intend to retain future earnings, if any, in order to provide funds
for use in the operation and expansion of our business and, accordingly, we do
not anticipate paying cash dividends on our Common Stock in the foreseeable
future.
The rights of the holders of common stock may be impaired by the potential
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issuance of preferred stock.
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Our certificate of incorporation gives our board of directors the right to
create new series of preferred stock. As a result, the board of directors may,
without stockholder approval, issue Preferred Stock with voting, dividend,
conversion, liquidation or other rights which could adversely affect the voting
power and equity interest of the holders of common stock. The preferred stock,
which could be issued with the right to more than one vote per share, could be
utilized as a method of discouraging, delaying or preventing a change of
control. The possible impact on takeover attempts could adversely affect the
price of our common stock. Although we have no present intention to issue any
additional shares of preferred stock or to create any series of preferred stock,
we may issue such shares in the future. If we issue preferred stock in a manner
which dilutes the voting rights of the holders of the common stock, our listing
on The Nasdaq SmallCap Market may be impaired.
Shares may be issued pursuant to options which may affect the market price of
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our common stock.
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We may issue stock upon the exercise of options to purchase up to an aggregate
799,192 shares of common stock pursuant to our long-term incentive plans. The
exercise of these options and the sale of the underlying shares of common stock
may have an adverse effect upon the price of our stock.
Behavioral Health Information Systems and Services
We develop, market and support computer software which enables behavioral health
care organizations to provide a full range of services in a network computing
environment.
Users typically purchase one of several behavioral healthcare information
systems, in the form of a perpetual license to use the system, as well as
purchasing professional services, support, and maintenance. In addition, we
offer third party hardware and software pursuant to value added resale
arrangements with third party vendors. The professional 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 the adaptation of health
care information technology systems to meet the specific requirements of the
customer.
Our typical license for a behavioral health information system ranges from
$10,000 to $100,000 for single facility healthcare organization to $250,000 to
$1,000,000 for multi-unit and state operated health care organizations. Revenue
from license fees were approximately $2,228,000, or 10.5% of revenue, for 1999,
$2,270,000, or 17.3% of revenue for 1998 and $737,000, or 9.6% of revenue, for
1997. Our 1999 Contracts had a longer term than our 1998 Contracts resulting in
a income recognition over a longer period. A customer's purchase order may also
include third party hardware or software. Revenue from hardware and third party
software accounted for approximately $5,915,000, or 27.8% of revenue, for 1999,
$2,610,000, or 19.8% of revenue, for 1998 and $1,078,000, or 14.1% of revenue,
for 1997.
In addition to our behavioral healthcare information systems and related
services, we offer processing services to substance abuse facilities and
maintain a data center facility at which its personnel perform data entry, data
processing and produce operations reports for smaller substance abuse clinics.
Our data center revenue was approximately $1,908,000, or 9.0% of revenue, for
1999, $2,164,000 or 16.4% of revenue, for 1998 and $2,235,000, or 29.3% of
revenue, for 1997.
Maintenance services have generated increasing revenue and have become a more
significant portion of our business since most purchasers of health care
information system licenses also purchase maintenance service.
C-4
Maintenance revenue increases as existing customers purchase additional licenses
and new customers purchase their initial software licenses. By agreement with
our customers, we provide telephone help services and maintain and upgrade their
software. Maintenance contracts may require modifications to meet any new
federal and state reporting requirements which become effective during the term
of the maintenance contract. We do not maintain the hardware and third party
software sold to our customers, but we provide a telephone help line service for
certain third party software, which we license to our customers. Our maintenance
revenue was approximately $2,258,000, or 10.6% of revenue, for 1999, $1,432,000,
or 10.9% of revenue, for 1998 and $1,280,000, or 16.8% of revenue, for 1997.
Since maintenance revenues log license and implementation revenues this area
will substantially increase in 2000.
We currently offer four product modules that provide a range of core application
requirements for behavioral healthcare providers. These products consist of a
suite of complete information technology applications developed by us, together
with software provided by others which enables us to offer enterprise-wide
solutions to the behavioral health industry. The products will be offered in a
variety of delivery modes.
* Behavioral Healthcare Information System - This system is a
comprehensive solution providing patient management functions,
billing, tracking, scheduling, and reporting for inpatient treatment
facilities.
* Clinician Workstation - This workstation provides clinician with
documentation and medical record management including assessment,
care planning, progress notes and on-line medical records. The
clinician workstation is our electronic medical record system for
behavioral health, which integrates the clinical tools necessary for
an interdisciplinary approach to the delivery of human services.
* The M4 Clinical Management System - Pursuant to a joint marketing
agreement with Mallinckrodt Pharmaceutical Specialties, a division
of Mallinckrodt Inc., we offer a solution for dispensing, admissions
and medical records, counselor and reception/security specifically
for methadone clinics. M4 integrates with our other behavioral
health products.
* Managed Care Products - On January 25, 2000, we acquired the Connex
suite of managed care and employee assistance program information
systems from Behavioral Health Partners, Inc. These modules can be
installed on a personal computer, connected to a local or wide area
communications network or offered through the Internet in an
application service provider basis. The managed care and employee
assistance program modules include such features as service request
management, contact tracking (patients, providers, others), import
of eligibility information by contract, provider search by location,
specialty, contract, hospital privileges, claims adjudication and
payment.
All of these products have been accepted in the marketplace by an established
user base, and we believe that our Window-based products are Year 2000 ("Y2K")
compliant.
Markets and Marketing
The market for behavioral health information systems and related services
consists of both private and publicly operated providers offering hospital or
community-based outpatient behavioral healthcare services. These healthcare
providers require a healthcare information systems to administer their programs.
We believe that there are at least 15,000 behavioral healthcare providers in the
United States, including public and private hospitals, private and
community-based residential facilities and Federal, state and local governmental
agencies.
Many long-term behavioral healthcare facilities are operated by government
entities and include those operated as part of entitlement programs. During the
years ended December 31, 1999, 1998 and 1997, approximately 55.0%, 52.0% and
35.0%, respectively, of revenue was generated from contracts with government
agencies. Contracts with government agencies generally include provisions which
permit the contracting agency to cancel the contract for its convenience,
although we have not experienced a termination for convenience in the last five
years.
In addition to these major behavioral healthcare providers, there are a larger
number of sole practitioners, group practices and smaller clinics which may also
require behavioral healthcare facilities. We intend to market our Internet-based
systems to these potential customers.
C-5
We believe that the demand for information technology solutions is increasing as
managed care exerts pressure on healthcare providers to lower healthcare
delivery costs while expanding the availability of services. In order to remain
competitive, the behavioral health delivery networks need detailed clinical and
management information systems that enable providers within the networks to
maintain a broad scope of accurate medical and financial information, manage
costs and deliver quality care efficiently. In addition, the need to upgrade
existing systems to meet the increased demand for data processing needs of
managed care and regulatory oversight has also resulted in an increased demand
for behavioral health care information technology. These data processing needs
include analysis of patient assessments, maintenance of patient records,
administration of patient treatment plans and the overall coordination of
patient case management.
We coordinate our marketing effort with the state agencies and other major users
of our systems. Our state agency clients formed a State Systems Association,
presently consisting of state organizations or agencies from 14 states. The
association's members work with our management to assess and determine future
requirements in both patient managed care coordination and regulatory reporting.
For the year ended December 31, 1999, one customer accounted for approximately
$3.8 million or 18% of our revenue. For the year ended December 31, 1998, this
same customer accounted for $2.1 million or 16% of our revenue. No one customer
accounted for more than 10% of revenue in 1997. See "Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations.
At December 31, 1999 and 1998, we had a backlog of orders, including ongoing
maintenance and data center contracts, for our behavioral health information
systems of $14.2 million and $16.8 million, respectively. A substantial amount
of the 1999 backlog is expected to be filled during 2000.
Product Development
We incurred product development costs relating to our behavioral health
information systems of approximately $800,000 in 1999, $763,000 in 1998 and
$201,000 in 1997, all of which was company-sponsored. In 1999, we incurred
capitalized software development costs of approximately $209,000 in connection
with the development of our proposed web portal services and application service
provider solutions for healthcare providers.
Competition
The healthcare software industry is highly competitive. Although we believe that
we can provide a health care facility or managed care organization with software
to enable it to perform its services more effectively, other software companies
provide comparable systems and also have the staff and resources to develop
competitive systems.
According to independent consulting reports, healthcare information technology
is an $18.0 billion industry served by numerous vendors. The dominant health
care information technology vendors have achieved annual sales of more than $1.0
billion by focusing on solutions for large medical/surgical health care
providers, such as large hospital systems and health maintenance organizations,
and, have not focused on the behavioral healthcare industry. We believe that
most of the presently available healthcare management software does not meet the
specific needs of the behavioral healthcare industry, and that the functionality
of our information systems are designed to meet the needs of this market.
However, the behavioral health information systems business is serviced by a
number of companies, some of which are better capitalized with larger
infrastructure than Netsmart, and we may not be able to continue to compete
effectively with such companies.
We have an established customer base of more than 400 clients nationwide,
including substantial private and government providers of behavioral health care
services. During 1998 and 1999, we signed contracts to provide our healthcare
information systems to ten state agencies responsible for administering
behavioral services, bringing the total of such state agencies to 14.
Government Regulations and Contracts
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.
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Although our business is aimed at meeting certain of the problems resulting from
government regulations and from efforts to reduce the cost of health care, we
cannot predict 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. Any change in the structure of
health care in the United States can have a material effect on companies
providing services to the health care industry, including those providing
software. Although we believe that the likely direction which may result from
the current study of the health care industry would be an increased trend to
managed care programs, thereby increasing the importance of automation, our
business may not benefit from any changes in the industry structure. Even if the
industry does evolve toward more healthcare 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, our business may be adversely affected. Furthermore, to the
extent that each state changes its own regulations in the health care field, it
may be necessary for us to modify our behavioral health information systems to
meet any new record-keeping or other requirements imposed by changes in
regulations, and we may not be able to generate revenues sufficient to cover the
costs of developing the modifications.
A significant amount of our 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, government agencies generally include
provisions in their contracts which permit the contracting agency to cancel the
contract at its convenience. We have not experienced a termination for
convenience in the last five years.
Intellectual Property Rights
We have no patent rights for our behavioral health information system software,
but we rely upon copyright protection for our software, as well as
non-disclosure and secrecy agreements with our employees and third parties to
whom we disclose information. We may not be able to protect our proprietary
rights to our system and third parties may claim rights in the system.
Disclosure of the codes used in any proprietary product, whether or not in
violation of a non-disclosure agreement, could have a materially adverse affect
upon us, even if we are successful in obtaining injunctive relief. We must
continue to invest in product development, employee training, and client
support.
Employees
As of December 31, 1999, we had 138 employees, including four executive, nine
sales and marketing, 114 technical and eleven clerical and administrative
employees.
Executive Officers
Our executive officers are as follows:
Name Age Position
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Edward D. Bright 63 Chairman of the Board
James L. Conway 52 President and Chief Executive Officer
Anthony F. Grisanti 50 Chief Financial Officer, Treasurer and
Secretary
Gerald Koop 61 Chief Executive Officer of Creative
Socio-Medics
John F. Phillips 62 Vice President - Marketing
Mr. Edward D. Bright has been chairman of the board and a director of Netsmart
since April 1998. In April 1998, Mr. Bright was also elected as chairman,
secretary, treasurer and a director of Consolidated Technology Group Ltd., a
public company now known as The Sagemark Companies Ltd., which is engaged in
various lines of business, and a director of Trans Global Services, Inc., which
provides technical temporary staffing services. In April, 1999, Mr. Bright
resigned as a director of Consolidated Technology Group, Ltd.
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Mr. James L. Conway has been president and a director of Netsmart since January
1996 and chief executive officer since April 1998. From 1993 to April 1998 he
was president of S-Tech Corporation, a manufacturer of aircraft instruments for
the U.S. military and specialty vending equipment for postal, telecommunication
and other industries. Mr. Conway was previously Vice President and member of
the Board of ITT Credit Corporation, a wholly owned subsidiary of ITT. Mr.
Conway is also a director of Trans Global.
Mr. Gerald Koop has been a director of Netsmart since June 1998. He has held
management positions with our subsidiary, Creative Socio-Medics, for more than
the past five years, most recently as its chief executive officer, a position he
has held since 1996.
Mr. Anthony F. Grisanti has been treasurer of Netsmart since June 1994,
secretary since February 1995 and chief financial officer since January 1996. He
was chief financial officer of Creative Socio-Medics for more than five years
prior thereto.
Mr. John F. Phillips has been a director of Netsmart and vice president of
Creative Socio-Medics since June 1994, when Creative Socio-Medics was acquired
by us, and our vice president-marketing since 1996. He was also our vice
president -- marketing from June 1994 to January 1996. He was a senior executive
officer and director of Creative Socio-Medics and its parent company for more
than five years prior to June 1994, when it was acquired.
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Item 2. Property
We lease office space at the following locations:
Location Purpose Space Annual Rental Expiration
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146 Nassau Avenue Executive 18,000 $280,000, plus 4% 12/31/03
Islip, New York offices square feet annual increases
1335 Dublin Road Offices 3,500 $50,000 (1) 11/30/00
Columbus, Ohio square feet
18B Ledgebrook Run (2) 1,800 $21,000 (1) 10/31/02
Mansfield Center, Connecticut, square feet
7590 Fay Avenue Offices 1,800 $37,000, plus 6% 12/31/00
La Jolla, California square feet annual increases
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(1) These leases provide for an annual increase in rent for operating
expenses and real estate taxes.
(2) These offices are no longer being used by us, and the space is being
subleased at our cost.
We believe that our space is adequate for our immediate needs and that, if
additional space is required, it would be readily available on commercially
reasonable rates.
Item 3. Legal Proceedings
There are no material legal proceedings pending or threatened against us.
Item 4. Submission of Matters to a Vote of Security Holders
On November 18, 1999, we held our 1999 Annual Meeting of Stockholders.
The following individuals were elected as directors:
Name Number of Votes Broker Non Votes
Edward D. Bright 2,634,548 1,197,714
James L. Conway 2,634,548 1,197,714
John F. Phillips 2,634,548 1,197,714
Gerald O. Koop 2,634,548 1,197,714
Joseph G. Sicinski 2,633,948 1,197,714
The following proposals were approved as follows:
Broker
Votes For Votes Against Abstain Non Votes
Approval of the amendment
to the 1998 Long Term
Incentive Plan 1,346,088 297,040 7,430 1,197,714
Approval of the selection of
Richard H. Eisner & Co., LLP
as independent auditors for
1999 2,642,651 204,524 1,097 1,197,714
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on The Nasdaq SmallCap Market under the symbol NTST.
Set forth below is the reported high and low sales prices of the Common Stock
for each quarterly period during the past two years. Where applicable, the price
information has been retroactively adjusted to reflect the one-for-three reverse
stock split of our common stock which became effective September 1998.
Quarter Ending High Bid Low Bid
-------------- -------- -------
March 31, 1998 3.19 1.88
June 30, 1998 2.91 1.50
September 30, 1998 1.41 .81
December 31, 1998 3.13 .75
March 31, 1999 4.91 2.59
June 30, 1999 4.63 3.50
September 30, 1999 7.69 4.25
December 31, 1999 8.13 6.00
As of December 31, 1999, there were approximately 1,120 holders of record of our
common stock.
We have not paid any cash dividends to the holders of our common stock since our
organization.
C-10
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands except per share data)
Selected Statements
of Operations Data:
Revenue $ 21,252 $ 13,165 $ 7,635 $ 6,538 $ 6,751
Income (Loss) from Continuing
Operations before interest
and other financing costs 1,895 759 (536) (1) (3,614) (1,181)
Income (Loss) from Discontinued
Operations 180 (217) (2,615) (801) (252)
Net Income (Loss) 1,825 196 (3,459) (1&2) (6,579) (3) (2,850)
Per Share Data - Diluted:
Continuing Operations .47 .12 (.37) (3.36) (1.61)
Discontinued Operations .05 (.08) (1.10) (.47) (.16)
Net Income (loss) .52 .04 (1.47) (3.83) (1.77)
Weighted average number
of shares outstanding 3,516 2,865 2,387 1,716 1,607
Selected Balance
Sheet Data:
Working Capital (deficiency) 2,012 10 (537) 477 (2,562)
Total Assets 13,972 10,289 7,340 8,251 6,390
Total Liabilities 8,617 7,005 4,200 3,836 5,887
Redeemable Preferred Stock 96
Accumulated Deficit (13,272) (15,097) (15,293) (11,726) (5,147)
Stockholders' Equity 5,355 3,284 3,140 4,415 407
- ----------
(1)Includes $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 shares of common stock to certain noteholders and 25,000 shares of
common stock to the Company's asset based lender.
(3)Includes financing costs of $460 representing the write-off of deferred
financing costs relating to a proposed public offering scheduled for early 1995
but cancelled.
C-11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
A significant portion of our revenue is derived from fixed price software
development contracts and licenses. We recognize this revenue on the estimated
percentage of completion basis. Since the billing schedules under the contracts
differ from the recognition of revenue, at the end of any period, these contacts
generally result in either costs and estimated profits in excess of billing or
billing in excess of cost and estimated profits. During 1999, we received
contracts that are larger than in previous years and they provide for a longer
time between milestone payments. As a result, both our costs and estimated
profits in excess of billings and our billings in excess of cost and estimated
profits have increased at December 31, 1999. The largest component of our
revenue is based upon the time spent by our technical personnel on a project. As
a result, during the third and fourth quarters, when many of our employees are
on vacation and holidays, our revenue could be affected.
In 1998, we evaluated our smart card business and determined that the cash
requirements did not justify the continued operations of the development of such
business in the increasingly competitive smart card market. As a result, we sold
our smart card division effective July 1, 1998, and we accounted for the
operations of this division as a discontinued operation. Accordingly, references
to our continuing operations relate to our behavioral health information systems
businesses.
Years Ended December 31, 1999 and 1998
Our revenue for 1999 was $21,252,000, an increase of $8,086,000, or 61%, from
our 1998 revenue, which was $13,165,000. The largest component of revenue in
1999 was turnkey systems labor revenue, which increased to $7,768,000 in 1999
from $3,664,000 in 1998, reflecting a 112% increase. This increase is
substantially the result of growth in the behavioral health information systems
business and our ability to provide the staff necessary to generate additional
revenue from our outstanding contracts. Revenue from third party hardware and
software increased to $5,915,000 in 1999 from $2,610,000 in 1998, which
represents an increase of 127%. Sales of third party hardware and software are
made in connection with the sales of turnkey systems. The data center (service
bureau) revenue decreased to $1,908,000 in 1999 from $2,164,000 in 1998,
reflecting a decrease of 12%. This decrease was substantially the result of a
special project performed for a client during 1998, which did not continue at
the same rate in 1999. License revenue decreased to $2,228,000 in 1999 from
$2,270,000 in 1998, reflecting a decrease of 2%. License revenue is generated as
part of a sale of a behavioral health information system pursuant to a contract
or purchase order that includes delivery of the system and maintenance. During
1999, our contracts generally had a longer term than our contracts in 1998,
resulting in the recognition of license revenue over a longer period. At
December 31, 1999, we had unrecognized license revenue of approximately $2.1
million, as compared with $1.8 million at December 31, 1998. We expect that we
will recognize this license revenue over the remaining terms of the contracts,
which we expect will be completed by December 31, 2000. However, it is possible
that a portion of the license revenue may not be recognized until a later date.
Maintenance revenue increased to $2,258,000 in 1999 from $1,432,000 in 1998,
reflecting an increase of 58%. Revenue from the sales of our small turnkey
division increased to $1,174,000 in 1999 from $1,025,000 in 1998, reflecting an
increase of 15%.
Revenue from contracts from government agencies represented 55% of revenue in
1999 and 52% of revenue in1998. This increase reflects an increase in our
contracts with state agencies.
Gross profit increased to $7,375,000 in 1999 from $5,084,000 in 1998, a 45%
increase. Our overall gross margin was 35% in 1999 compared to 39% in 1998. The
reduction in gross margin was substantially attributable to the increase in our
third party hardware and software revenue, which yields margins significantly
less than our margin from our behavioral health systems and services.
Additionally, in order to fill our backlog of orders for our behavioral health
systems, we hired additional technical personnel. Since there is a delay of
approximately nine months between the time we hire technical personnel and the
time we are able to generate revenue from their services, the increased staffing
costs had a negative impact upon our margins in 1999.
Selling, general and administrative expenses were $4,553,000 in 1999, an
increase of 29% from the $3,516,000 in 1998. This increase was substantially the
result of an increase in sales and marketing salaries and related direct selling
costs as well as an increase in the provision for incentive bonuses. These
increases were partially offset by a decrease in sales commissions.
C-12
In 1999 we issued warrants for services rendered. We also extended one series of
our warrants for two months. An aggregate of $127,000 was charged to financing
costs for the warrant issuance and the warrant extension. We did not have a
similar charge item in 1998.
We incurred product development expenses of $800,000 in 1999, an increase of 5%
from the $763,000 in 1998. These expenses were related to our behavioral health
information systems products, including our clinician workstation, behavioral
health information system for Windows, managed care and methadone dispensing
products.
Interest expense was $250,000 in 1999, a decrease of $96,000, or 28%, from the
$346,000 in 1998. This decrease was the result of lower borrowings during 1999,
in addition to a reduced cost of borrowings. The most significant component of
the interest expense on an ongoing basis is the interest payable to our
asset-based lender. We paid interest on such loans at a rate equal to prime plus
5 %. In October 1999, we entered into a credit facility agreement with a new
asset-based lender. The interest rate of the new facility is 2% above the prime
rate.
Related party administrative expense was $45,000 in 1998. These charges were
incurred pursuant to a management services agreement with our then principal
stockholder to provide general business, management and financial consulting
services for a monthly fee of $15,000. This agreement was mutually terminated
effective April 1, 1998.
We recognized a gain of $180,000 from our discontinued operations in 1999. This
gain resulted from the reduction in our reserve against a promissory note
received from the sale of the discontinued operations. We reduced the reserve as
a result of our sale of our interest in the purchaser for a note. In 1998, we
recognized a net loss from our discontinued operations of $217,000.
As a result of the foregoing factors, in 1999 we generated a net income from
continuing operations of $1,645,000, or $.56 per share (basic) and $.47 per
share (diluted), a gain from discontinued operations of $180,000, or $.06 per
share (basic) and $.05 per share (diluted), and a net income of $1,825,000, or
$.62 per share (basic) and $.52 per share (diluted). For 1998, we generated net
income from continuing operations of $413,000, or $.12 per share (basic and
diluted), a loss from discontinued operations of $217,000, or $.08 per share
(basic and diluted), and net income applicable to common stock of $124,000, or
$.04 per share (basic and diluted).
Years Ended December 31, 1998 and 1997
Our revenue for 1998 was $13,165,000, an increase of $5,530,000, or 72%, from
our 1997 revenue of $7,635,000. The largest component of revenue in 1998 was
turnkey systems labor revenue which increased to $3,664,000 from $2,107,000 in
1997, reflecting a 74% increase. This increase is substantially the result of
growth in the behavioral health information systems business and our ability to
provide the staff necessary to generate additional revenue. The data center
(service bureau) revenue decreased to $2,165,000 in 1998 from $2,235,000 in
1997, reflecting a decrease of 3%. This decrease was substantially the result of
a special project performed for a client in 1997, which did not continue at the
same rate in 1998. License revenue increased to $2,270,000 in 1998 from $737,000
in 1997, which is an increase of 208%. License revenue is generated as part of a
sale of a behavioral health information system pursuant to a contract or
purchase order that includes delivery of the system and maintenance. Revenue
from third party hardware and software increased to $2,610,000 in 1998 from
$1,089,000 in 1997, which is an increase of 140%. Sales of third party hardware
and software are made in connection with the sales of turnkey systems.
Maintenance revenue increased to $1,432,000 in 1998 from $1,280,000 in 1997,
reflecting an increase of 12%. Revenue from the sales of our small turnkey
division (formerly our methadone division) was $1,025,000 in 1998. There was no
revenue for this division in 1997.
Revenue from contracts from government agencies represented 52% and 35% of
revenue in 1998 and 1997, respectively.
Gross profit increased to $5,084,000 in 1998 from $2,747,000 in 1997, a 85%
increase. The increase in the gross profit was substantially the result of the
increased license revenue, which provides higher margins.
C-13
Selling, general and administrative expenses were $3,516,000 in 1998, an
increase of 21% from the $2,902,000 in 1997. This increase was substantially the
result of an increase in commissions expense, sales and marketing salaries,
advertising and related sales expenses which were partially offset by a decrease
in administrative expenses as well as other miscellaneous expenses, including a
reduction in related party administrative expenses.
Related party administrative expense was $45,000 in 1998 and $180,000 in 1997.
These charges were pursuant to a management services agreement with our then
principal stockholder for a monthly fee of $15,000. This agreement was mutually
terminated effective April 1, 1998.
During 1998, we incurred product development expenses of $763,000, an increase
of 279% from the $201,000 in 1997. These expenses were related to our behavioral
health information systems products such as our clinician workstation,
behavioral health information system for Windows, managed care and methadone
dispensing products.
Interest expense was $346,000 in 1998, an increase of $38,000, or 12% from the
$308,000 in 1997. This increase was the result of higher borrowings during 1998,
which were substantially off set by a reduction in the cost of borrowings. The
most significant component of the interest expense on an ongoing basis is the
interest payable to our asset-based lender. We paid interest on such loans at a
rate equal to prime plus 8-1/2 % plus a fee of 5/8% of the face amount of the
invoice for the first nine months of 1998. Effective October 1, 1998, we amended
the terms of our agreement with the asset-based lender and reduced the interest
rate from prime plus 8 1/2% to prime plus 5% and eliminated the 5/8% fee
previously paid on the face amount of each invoice.
The net loss from our discontinued operations, the smart card division, was
$217,000 in 1998, a decrease of $2,398,000 from the $2,615,000 in 1997. This
decrease is the result of a reduction of expenses in this division prior to the
sale of the division.
As a result of the foregoing factors, we generated a net income of $196,000, or
$.04 per share, in 1998 as compared with a net loss of $3.5 million, or $1.47
per share, in 1997.
Liquidity and Capital Resources
We had working capital of $2,012,000 at December 31, 1999 as compared to working
capital of $10,000 at December 31, 1998. Our cash position increased marginally
from $199,000 at December 31, 1998 to $205,000 at December 31, 1999. The
increase in working capital for 1999 was substantially due to the net income
after adding back depreciation and amortization.
Our principal source of funds, other than revenue, is an accounts receivable
financing agreement with an asset based lender which permits us to borrow up to
80% of eligible accounts receivable up to a maximum of $3.5 million. At December
31, 1999, the outstanding borrowings under this facility were $882,000 and the
maximum amount available under this formula was $2,314,000.
At December 31, 1999, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $10 million, representing
approximately 170 days of revenue based on annualizing the revenue for the year
ended December 31, 1999, although we cannot give any assurance that our revenue
will continue at the same level as the year ended December 31, 1999. Accounts
receivable at December 31, 1999 increased by $2,190,000 from $3,600,000 at
December 31, 1998 to $5,790,000 at December 31, 1999.
Our cash flow from operations was approximately $1.2 million for 1999, and,
based on our outstanding contracts and our continuing business, we believe that
our cash flow from operations, the availability under our financing agreement
and our cash on hand will be sufficient to enable us to continue to operate
without additional funding, although it is possible that we may need
additional funding if our business does not develop as we anticipate or if
our expenses, including our software development costs relating to our
expansion of our product line and our marketing cost for seeking to expand the
market for our products and services to include smaller clinics and facilities
and sole and group practitioners exceed our expectation.
C-14
Furthermore, if we continue to grow at the existing rate into 2000 and beyond,
we may require additional funding. We are exploring various long term funding
possibilities, although we cannot give any assurances that we will be able to
obtain financing, and our failure to obtain financing could impair our ability
to grow.
An important part of our growth strategy is to acquire other businesses that are
related to our current business. Such acquisitions may be made with cash or our
securities or a combination of cash and securities. To the extent that we
require cash, we may have to borrow the funds or issue equity. We have no
commitments from any financing source and we may not be able to raise any cash
necessary to complete an acquisition. If we fail to make any acquisitions, our
future growth may be limited. As of the date of this Form 10-K annual report, we
do not have any agreement or understanding, either formal or informal, as to any
acquisition.
Year 2000 Compliance
The "Year 2000 Issue" refers generally to the problems that some software may
have in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
determine whether "00" means 1900 or 2000, which may result in computer and
other failures or the creation of erroneous results.
We believe that our present software products are Year 2000 compliant, and that
any changes which may be required to software which we have delivered in the
past would be made pursuant to new contracts with the clients to provide them
with a current version of our products.
We have defined Year 2000 compliant as the ability to:
* correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
* function according to the product documentation provided for this
date change, without changes in operation resulting from the
advent of a new century, assuming correct configuration;
* where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined and
predetermined manner;
* if the date elements in interfaces and data storage specify the
century, store and provide output of date information in ways
that are unambiguous as to century; and
* recognize year 2000 as a leap year.
To date, we have not experienced any material expense relating to Year 2000
compliance.
Forward Looking Statements
Statements in this Form 10-K include forward-looking statements that address,
among other things, our expectations with respect to the development of our
business. In addition to these statements, other information including words
such as "seek" "anticipate," "believe," "plan," "estimate," "expect," "intend"
and other similar expressions are forward looking statements. Actual results
could differ materially from those currently anticipated due to a number of
factors, including those identified in this Annual Report on Form 10-K for the
year ended December 31, 1999, in our other documents filed by us with the
Securities and Exchange Commission.
C-15
Part III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Registrant are as follows:
Name Age Position
- ---- --- --------
James L. Conway 52 President, chief executive officer and
director
Edward D. Bright(1) 63 Chairman of the board and director
Anthony F. Grisanti 51 Chief financial officer, treasurer and
secretary
John F. Phillips 62 Vice president--marketing and director
Gerald O. Koop 61 Chief executive officer of Creative
Socio-Medics Corp. and director
Joseph G. Sicinski(1) 68 Director
- ----------
(1) Member of the audit and compensation committees.
Mr. James L. Conway has been our president and a director since January
1996 and our chief executive officer since April 1998. From 1993 until April
1998, he was president of S-Tech, a manufacturer of specialty vending equipment
for postal, telecommunication and other industries, which, until April 1998, was
a wholly-owned subsidiary of Consolidated Technology Group Ltd., now known as
The Sagemark Companies Ltd. Mr. Conway is also a director of Trans Global
Services, Inc., which provides technical temporary staffing services.
Mr. Edward D. Bright has been our chairman of the board and a director
since April 1998. In April 1998, Mr. Bright was also elected as chairman,
secretary, treasurer and a director of Consolidated Technology. From January
1996 until April 1998, Mr. Bright was an executive officer of or advisor to
Creative Socio-Medics Corp., our subsidiary which was acquired in June 1994.
From June 1994 until January 1996, he was our chief executive officer. For more
than two years prior thereto, he was a senior executive officer of Creative
Socio-Medics and its former parent. Mr. Bright is also a director of Trans
Global.
Mr. Anthony F. Grisanti has been our treasurer since June 1994, our
secretary since February 1995 and our chief financial officer since January
1996. He was chief financial officer of Creative Socio-Medics and its former
parent more than five years prior thereto.
Mr. John F. Phillips has been a director and vice president of our
subsidiary, Creative Socio-Medics, since June 1994, and our vice
president-marketing since 1996. He also served as our vice president --
marketing from June 1994 to January 1996. From January 1993 until June 1994, he
was chairman of the board of Creative Socio-Medics and its former parent.
Mr. Gerald O. Koop has been a director since June 1998. He has held
management positions with Creative Socio-Medica for more than the past five
years, most recently as its chief executive officer, a position he has held
since 1996.
C-16
Mr. Joseph G. Sicinski has been a director since June 1998. He is
president and a director of the Trans Global, a position he held with Trans
Global and its predecessor since September 1992. Since April 1998, he has also
been chief executive officer of Trans Global.
The Board of Directors has created audit and compensation committees,
both of which consists of Messrs. Bright, Richter and Sicinski, each of whom is
a non-employee director. The audit committee has the authority to approve our
audited financial statements, to meet with our independent auditors, to review
with the auditors and with management any management letter issued by the
auditors and generally to exercise the power normally accorded an audit
committee of a public corporation. In addition, any transactions between us or
our subsidiaries, on the one hand, and any officer, director or principal
stockholder or any affiliate of any officer, director or principal stockholder,
on the other hand, requires the prior approval of the audit committee.
The compensation committee serves as the stock option committee pursuant
to our stock option plans. In addition, it reviews and approves any changes in
compensation for our executive officers.
In April 1999, two members of the audit and compensation committees,
Messrs. Edward D. Bright and Joseph G. Sicinski, purchased shares of common
stock from SIS Capital pursuant to an agreement described under "Item 13 --
Certain Relationships and Related Transactions."
Directors are elected for a term of one year.
None of the Company's officers and directors are related.
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 except 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.
Item 11. Executive Compensation
Set forth below is information with respect to compensation paid or
accrued by the Company for 1999, 1998 and 1997 to its chief executive officer
and to each other officer whose salary and bonus for 1999 exceeded $100,000.
C-17
SUMMARY COMPENSATION TABLE
Annual Long-Term
------ ---------
Compensation Compensation
------------ ------------
(Awards)
--------
Options, SARs
-------------
Name and Principal Position Year Salary Bonus(1) (Number)(2)
- --------------------------- ---- ------ ------ -------------
James L. Conway, CEO and 1999 $160,000 $107,000 --
president 1998 161,563 27,000 90,000
1997 125,000 -- 89,582
Gerald O. Koop, chief 1999 140,000 172,169 --
executive officer of Creative 1998 92,700 126,305 80,000
Socio-Medics Corp. 1997 90,000 158,094 --
John F. Phillips, vice 1999 140,000 64,000 --
president - marketing 1998 112,800 70,540 80,000
1997 109,500 89,657 --
Anthony F. Grisanti, chief 1999 120,000 100,000 --
financial officer 1998 91,240 56,967 80,000
1997 87,600 73,888 --
- ----------
The bonus for Mr. Koop includes accrued commissions of $100,169. These
commissions will be paid in installments through 2002.
In July 1998, we entered into five-year employment agreements with
Messrs. James L. Conway, John F. Phillips, Gerald O. Koop and Anthony F.
Grisanti. Pursuant to these agreements, these officers receive the following
base salaries: Mr. Conway - $160,000, Mr. Phillips - $140,000, Mr. Koop -
$140,000, and Mr. Grisanti - $120,000. The agreements provide for an annual cost
of living adjustment. The agreements provide that the executives are eligible to
participate in a bonus pool to be determined annually by the Compensation
Committee. The agreements also provide each of these officers with a $1,000 per
month automobile allowance. In the event of the officer's dismissal or
resignation or a material change in his duties or in the event of a termination
of employment by the executive or by us as a result of a change of control, the
officer may receive severance payments of between 24 and 36 months'
compensation. A month's compensation means the then current monthly salary plus
one-twelfth of the bonus for the prior year.
No options were granted during 1999 to any of our officers named in the
Summary Compensation Table.
C-18
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options at Fiscal Options at Fiscal
Year End Year End
Shares
Acquired Value Exercisable/ Exercisable/
Name Upon Exercise Realized Unexercisable Unexercisable
---- ------------- -------- ------------- -------------
James L. Conway 20,000 $38,750 145,249/-- $376,375/--
Gerald O. Koop -- -- 87,984/-- 454,845/--
John F. Phillips 12,922 33,622 89,000/-- 458,875/--
Anthony F. Grisanti 10,821 28,609 85,000/-- 439,375/--
- ----------
The number of shares of Common Stock subject to options includes shares
of common stock issuable upon exercise of warrants.
The determination of "in the money" options at December 31, 1999, is
based on the closing price of the common stock on the Nasdaq SmallCap Market on
December 31, 1999, which was $6.375.
Information with respect to Mr. Conway includes warrants to purchase
23,916 shares of common stock held by Mr. Conway's wife, as to which he
disclaims beneficial ownership.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Set forth below is information as of April 28, 1999, as to each person
owning of record or known by us, based on information provided to us by the
persons named below, to own beneficially at least 5% of our Common Stock, each
director, each officer listed in the Summary Compensation Table and all officers
and directors as a group.
Percent of Outstanding
Name and Address(1) Shares Common Stock
- ---------------- ------ ------------
John F. Phillips 198,922 5.5%
146 Nassau Avenue
Islip, NY 11751
Edward D. Bright 191,422 5.3%
146 Nassau Avenue
Islip, NY 11751
Gerald O. Koop 152,823 4.2%
James L. Conway 152,583 4.3%
Anthony F. Grisanti 75,421 2.1%
Joseph G. Sicinski 32,000 *
All directors and officers as a group
(six individuals) 803,171 21.1%
- ----------
* Less than 1%.
Unless otherwise indicated, each person has the sole voting and sole
investment power and direct beneficial ownership of the shares. Each person is
deemed to beneficially own shares of common stock issuable upon exercise of
options or warrants which are exercisable on or within 60 days after the date as
of which the information is provided.
C-19
The number of shares owned by our directors and officers shown in the
table includes shares of common stock which are issuable upon exercise of
options and warrants that are exercisable at April 28, 2000 or will become
exercisable within 60 days after that date. Set forth below is the number of
shares issuable upon exercise of those options for each of our directors and the
officers named in the summary compensation table.
Name Number
- ---- ------
James L. Conway 48,250
John F. Phillips 89,000
Edward D. Bright 67,500
Gerald O. Koop 87,984
Anthony F. Grisanti 5,052
Joseph G. Sicinski --
All officers and directors as a group 297,786
Mr. Conway's options and warrants include shares of common stock
issuable upon exercise of warrants and shares of common stock issuable upon
exercise of warrants held by his wife, as to which he disclaims beneficial
ownership. All other officers and directors only hold options.
Item 13. Certain Relationships and Related Transactions
In March 1999, we and members of our management, together with other
employees and non- affiliated investors, entered into an agreement with
Consolidated Technology, its subsidiary, SIS Capital Corp. and Mr. Anthony
Grisanti, as agent, pursuant to which:
* The purchasers bought an aggregate of 585,750 shares of our common stock
from SIS Capital for $2.015 per share in April 1999.
* The purchasers have the right to buy up to 206,874 additional shares of
the our common stock from SIS Capital at the same purchase price per
share.
* Consolidated Technology transferred to us shares of our preferred stock
(including the right to receive dividends thereon) and warrants to
purchase shares of our common stock, for which we issued 100,000 shares
of common stock to Consolidated Technology in April 1999.
The following officers and directors purchased the following number of
shares of common stock from SIS Capital pursuant to this agreement:
Name Number of Shares Purchase Price
- ---- ---------------- --------------
John F. Phillips 75,000 $151,118
Edward D. Bright 62,500 125,931
Gerald O. Koop 34,600 69,716
James L. Conway 26,000 52,387
Anthony F. Grisanti 20,600 41,507
Joseph G. Sicinski 5,000 10,075
Part IV
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
As previously disclosed, we changed our accountants from Moore Stephens, P.C. to
Richard A. Eisner & Company, LLP commencing with the year ended December 31,
1998. There were no disagreements with Moore Stephens, P.C.
C-20
1. Financial Statements
Report of Richard A. Eisner & Company, LLP
Report of Moore Stephens, P.C.
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 Consolidated Statements of
Stockholders' Equity for the Years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
July 20, 1998 Change in Accountants
4. Exhibits
NETSMART TECHNOLOGIES, INC.
AND SUBSIDIARIES
F - 1
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Page to Page
------------
Independent Auditor's Report - Richard A. Eisner & Company, LLP.....F-3
Independent Auditor's Report - Moore Stephens, P.C..................F-4
Consolidated Balance Sheets.........................................F-5.....F-6
Consolidated Statements of Operations...............................F-7.....F-8
Consolidated Statements of Stockholders' Equity.....................F-9
Consolidated Statements of Cash Flows...............................F-10....F-12
Notes to Consolidated Financial Statements .........................F-13....F-28
. . . . . . . . . . .
F - 2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
Netsmart Technologies, Inc.
Islip, New York
We have audited the accompanying consolidated balance sheet
of Netsmart Technologies, Inc. and subsidiary as of December 31, 1999 and
1998 and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their consolidated
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
March 9, 2000
F - 3
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Netsmart Technologies, Inc.
Islip, New York
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for Netsmart Technologies, Inc. and its
subsidiary for the year ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Netsmart Technologies, Inc. and its subsidiaries for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Moore Stephens, P.C.
Certified Public Accountants
Cranford, New Jersey
March 26, 1998
F - 4
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 204,989 $ 198,689
Accounts Receivable - Net 5,789,734 3,600,025
Costs and Estimated Profits in Excess
of Interim Billings 4,253,072 2,899,695
Note Receivable 150,000 150,000
Other Current Assets 167,516 109,595
----------- -----------
Total Current Assets 10,565,311 6,958,004
----------- -----------
Property and Equipment - Net 534,864 354,036
----------- -----------
Other Assets:
Software Development Costs - Net 310,722 142,450
Customer Lists - Net 2,399,108 2,733,392
Other Assets 162,472 101,064
----------- -----------
Total Other Assets 2,872,302 2,976,906
----------- -----------
Total Assets $13,972,477 $10,288,946
=========== ===========
See Notes to Consolidated Financial Statements.
F - 5
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable $ 882,404 $ 1,639,694
Capitalized Lease Obligations 25,385 27,283
Accounts Payable 2,562,087 2,166,333
Accrued Expenses 1,243,548 1,178,893
Interim Billings in Excess of Costs and Estimated
Profits 3,750,847 1,803,999
Due to Related Parties 84,000
Deferred Revenue 88,546 47,619
---------- ----------
Total Current Liabilities 8,552,817 6,947,821
---------- ----------
Capitalized Lease Obligations 64,627 57,033
---------- ----------
Commitments and Contingencies (Note 13)
Stockholders' Equity:
Preferred Stock, $.01 Par Value;
Authorized 3,000,000 shares
Series D 6% Redeemable Preferred Stock - $.01 Par
Value 3,000 Shares Authorized, none outstanding
at December 31, 1999, 1,210 Issued and
outstanding at December 31, 1998 [Liquidation
Preference of $1,210 and redemption value
of $1,210,000] 12
Additional Paid-in Capital - Series D Preferred Stock 1,209,509
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued 2,988,738 Shares
at December 31, 1999, 2,786,921 Shares at
December 31, 1998 29,887 27,869
Additional Paid-in Capital - Common Stock 18,657,579 17,203,904
Accumulated Deficit (13,272,433) (15,097,202)
---------- ----------
5,415,033 3,344,092
Less cost of 5,333 Common Shares held in
Treasury 60,000 60,000
---------- ----------
Total Stockholders' Equity 5,355,033 3,284,092
---------- ----------
Total Liabilities and Stockholders' Equity $ 13,972,477 $ 10,288,946
=========== ==========
See Notes to Consolidated Financial Statements.
F - 6
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED 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 9 1 9 9 8 1 9 9 7
------- ------- -------
Revenues:
Software and Related
Systems and Services:
General $17,085,603 $ 9,569,100 $ 4,119,780
Maintenance Contract
Services 2,257,869 1,431,695 1,280,465
---------- ----------- ----------
Total Software and Related
Systems and Services 19,343,472 11,000,795 5,400,245
Data Center Services 1,908,158 2,164,472 2,235,209
---------- ----------- ----------
Total Revenues 21,251,630 13,165,267 7,635,454
---------- ----------- -----------
Cost of Revenues:
Software and Related
Systems and Services:
General 11,054,960 5,975,249 2,493,739
Maintenance Contract
Services 1,713,759 975,212 928,316
---------- ----------- -----------
Total Software and Related
Systems and Services 12,768,719 6,950,461 3,422,055
Data Center Services 1,107,571 1,131,078 1,466,107
---------- ----------- -----------
Total Cost of Revenues 13,876,290 8,081,539 4,888,162
---------- ----------- -----------
Gross Profit 7,375,340 5,083,728 2,747,292
Selling, General and
Administrative Expenses 4,552,866 3,516,288 2,901,724
Financing Costs 127,000 -- --
Related Party Administrative Expense 45,000 180,000
Research and Development 800,470 763,059 201,075
---------- ----------- -----------
Income (Loss) from Continuing
Operations before Interest Expense 1,895,004 759,381 (535,507)
Interest Expense 250,235 346,114 308,169
---------- ----------- -----------
Income (Loss) from Continuing Operations 1,644,769 413,267 (843,676)
---------- ----------- -----------
See Notes to Consolidated Financial Statements.
F - 7
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED 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 9 1 9 9 8 1 9 9 7
------- ------- -------
Discontinued Operations:
Loss from Discontinued Operations - (397,018) (2,615,049)
Gain on Sale of Discontinued Operations 180,000 180,000 --
---------- --------- ---------
Income (Loss) from Discontinued Operations 180,000 (217,018) (2,615,049)
---------- --------- ---------
Net Income (Loss) 1,824,769 196,249 (3,458,725)
Less Cumulative Preferred Stock Dividends - 72,600 48,400
---------- --------- ---------
Net Income (Loss) Applicable to Common Stock $ 1,824,769 $ 123,649 $(3,507,125)
========== ========= =========
Earnings Per Share of Common Stock:
Basic:
Income (Loss) from Continuing Operations $ .56 $ .12 $ (.37)
Income (Loss) from Discontinued Operations .06 (.08) (1.10)
---------- --------- ---------
Net Income (Loss) $ .62 $ .04 $ (1.47)
========== ========= =========
Weighted Average Number of Shares of
Common Stock Outstanding 2,921,254 2,779,655 2,386,953
========== ========= =========
Diluted:
Income (Loss) from Continuing Operations $ .47 $ .12 $ (.37)
Income (Loss) from Discontinued Operations .05 (.08) (1.10)
---------- --------- ---------
Net Income (Loss) $ .52 $ .04 $ (1.47)
========== ========= =========
Weighted Average Number of Shares of
Common Stock Outstanding 3,516,317 2,864,993 2,386,953
========== ========= =========
See Notes to Consolidated Financial Statements.
F - 8
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Additional
Paid-in Paid-in
Series D Capital Capital Total
-------- ------- ------- -----
Preferred Stock Preferred Common Stock Common Accumulated Treasury Shares Stockholders'
--------------- --------- ------------ ------ ----------- -------- ------ -------------
Shares Amount Stock Shares Amount Stock Deficit Shares Cost Equity
------ ------ ----- ------ ------ ----- ------- ------ ---- ------
Balance -
December 31, 1996 1,210 $ 12 $1,209,509 2,266,068 $22,661 $14,908,649 $(11,725,825) $ 4,415,006
Common Stock Issued
as Dividends on 4,267 43 108,858 (108,901) --
Preferred Stock
Common Stock Issued -
Exercise of Options 54,926 549 40,363 40,912
Common Stock Issued -
Exercise of Warrants 426,071 4,260 1,913,061 1,917,321
Cost Associated with
Exercise of Warrants (74,995) (74,995)
Common Stock Issued -
Johnson Acquisition 26,667 267 299,733 300,000
Net Loss (3,458,725) (3,458,725)
----- ---- --------- --------- ------ ---------- --------- ----- ------ ---------
Balance -
December 31, 1997 1,210 12 1,209,509 2,777,999 27,780 17,195,668 (15,293,451) 3,139,518
Common Stock Issued -
Exercise of Options 8,922 89 8,236 8,325
Purchase of
Treasury Shares 5,333 $(60,000) (60,000)
Net Income 196,249 196,249
----- ---- --------- --------- ------ ---------- ---------- ----- ------- ---------
Balance -
December 31, 1998 1,210 12 1,209,509 2,786,921 27,869 17,203,904 (15,097,202) 5,333 (60,000) 3,284,092
Common Stock Issued -
Exercise of Options 99,317 993 112,554 113,547
Common Stock Issued -
Consultant 2,500 25 5,600 5,625
Common Stock Issued (1,210) (12) (1,209,509) 100,000 1,000 1,208,521 --
for Redemption of
Series D Preferred
Stock
Issuance and
Extension of
Warrants 127,000 127,000
Net Income 1,824,769 1,824,769
----- ---- --------- --------- ------ ---------- ---------- ----- ------- ---------
December 31, 1999 -- -- -- 2,988,738 $29,887 $18,657,579 $(13,272,433) 5,333 $(60,000) $5,355,033
===== ==== ========= ========= ====== ========== ========== ===== ======= =========
See Notes to Consolidated Financial Statements.
F - 9
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED 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 9 1 9 9 8 1 9 9 7
------- ------- -------
Operating Activities:
Income (Loss) from Continuing Operations $ 1,644,769 $ 413,267 $ (843,676)
--------- ---------- ----------
Adjustments to Reconcile Income
(Loss) from Continuing Operations to Net Cash
Provided by (Used for) Operating Activities:
Depreciation and Amortization 600,907 561,562 600,990
Financing Costs Related to Issuance
and Extension of Warrants 127,000
Financing Expenses related to the issuance
of Common Stock 5,625
Cash Used in Discontinued Operations (367,018) (2,615,049)
Write Off of Capitalized Software Cost
and Related Hardware 553,061
Equity in Net Loss of Joint Venture 287,131
Provision for Doubtful Accounts 84,000 60,000 60,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (2,273,709) (1,477,607) 452,032
Costs and Estimated Profits in
Excess of Interim Billings (1,353,377) (2,357,371) (20,538)
Other Current Assets (57,921) (25,825) (1,565)
Other Assets (61,408) 5,839 11,905
Increase [Decrease] in:
Accounts Payable 395,754 1,034,641 148,536
Accrued Expenses 64,655 102,773 50,045
Interim Billings in Excess of
Costs and Estimated Profits 1,946,848 852,114 (150,220)
Due to Related Parties (21,245)
Deferred Revenue 40,927 (69,461) (4,439)
--------- --------- ---------
Total Adjustments (480,699) (1,680,353) (649,356)
--------- --------- ---------
Net Cash Provided by (Used For)
Operating Activities 1,164,070 (1,267,086) (1,493,032)
--------- --------- ---------
Investing Activities:
Acquisition of Property and
Equipment (406,751) (222,031) (216,041)
Software Development Costs (208,972) (462,000)
Cash Provided by Discontinued Operations 180,000
Investment in Joint Venture (166,585)
--------- --------- ---------
Net Cash Used For Investing Activities (435,723) (222,031) (844,626)
--------- --------- ---------
See Notes to Consolidated Financial Statements.
F - 10
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED 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 9 1 9 9 8 1 9 9 7
------- ------- -------
Financing Activities:
Proceeds from Short-Term Notes 882,404 704,517 345,146
Payment of Short-Term Notes (1,639,694)
Proceeds from Capitalized Lease Obligation 40,000
Proceeds of loans from Related Parties 140,000
Repayment of loans from related parties (84,000) (56,000)
Payment of Capitalized Lease Obligations (34,304) (15,658) (34,063)
Proceeds from Warrant Exercise 1,917,319
Proceeds from Stock Option Exercise 113,547 8,325 40,913
Purchase of Treasury Shares (25,000)
Costs associated with issuance of Stock (74,995)
Other 76,643
--------- -------- ---------
Net Cash (Used in)provided by
Financing Activities (722,047) 832,827 2,194,320
--------- -------- ---------
Net Increase [Decrease] in Cash
and Cash Equivalents 6,300 (656,290) (143,338)
Cash and Cash Equivalents -
Beginning of Year 198,689 854,979 998,317
--------- -------- ---------
Cash and Cash Equivalents -
End of Year $ 204,989 $198,689 $ 854,979
========= ======== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the years for:
Interest $ 262,884 $353,713 $ 352,837
Income Taxes $ 41,478 $ 16,934 $ --
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Year ended December 31, 1999:
Pursuant to a March 25, 1999 agreement between us, Consolidated Technology Group
Ltd., now known as The Sagemark Companies, SIS Capital Corp., a wholly-owned
subsidiary of Consolidated, and a group of purchasers, consisting principally of
the Company's management and directors, on April 8, 1999, Consolidated
transferred to us the 1,210 shares of the Company's Series D 6% Redeemable
Preferred Stock, including the right to receive $145,200 of accumulated
dividends, and warrants to purchase shares of our common stock in exchange for
which the Company issued 100,000 shares of common stock to SIS Capital. The
shares of Series D Preferred Stock and the annual dividends of $72,600
associated with the Series D Preferred Stock have been cancelled.
Year ended December 31, 1998:
5,333 shares of Common Stock were repurchased from Johnson Computing Systems
pursuant to the acquisition agreement, at a cost of $60,000 which was paid by
the issuance of a short term note.
F - 11
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Year ended December 31, 1997:
4,267 shares of common stock were issued to Series D Preferred stockholders as
dividends which were payable on October 31, 1996 and April 1, 1997. These shares
were valued at $108,900.
The Company issued 26,667 shares of common stock to acquire customer lists and
certain other assets of Johnson Computer Systems. These shares were valued at
$300,000.
See Notes to Consolidated Financial Statements.
F - 12
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #1
- --------------------------------------------------------------------------------
[1] The Company
The Company licenses and installs its proprietary software products, operates an
established service bureau and enters into long term maintenance agreements with
behavioral health organizations and methadone clinics and other substance abuse
facilities throughout the United States.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The financial statements include Netsmart
Technologies, Inc. ["Netsmart"], and its wholly-owned subsidiary, Creative
Socio-Medics Corp. ["CSM"] as well as PsyMedX, a joint venture which Netsmart
owns 80% (collectively referred to as the Company). All intercompany
transactions are eliminated in consolidation.
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 $192,000 and $249,000 at December 31, 1999 and
1998 respectively.
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 or other security to support financial
instruments subject to credit risk. 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.
The Company's behavioral 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, 1999, 1998 and 1997,
approximately 55%, 52% and 35% respectively, of the Company's revenues were
generated from contracts with government agencies.
During the year ended December 31, 1999, one customer accounted for
approximately $3,835,000 or 18% of revenue. Accounts receivable of approximately
$69,000 and costs and estimated profits in excess of billing of $1,805,000 less
$170,000 in interim billings in excess of costs and estimated profits were due
from this customer at December 31, 1999.
During the year ended December 31, 1998, the same customer accounted for
approximately $2,113,000 or 16% of revenue. Accounts receivable of approximately
$853,000 and costs and estimated profits in excess of billings of $1,260,000
less $318,000 in interim billings in excess of costs and estimated profits were
due from this customer at December 31, 1998. No one customer accounted for more
than 10% of revenues in 1997.
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, 1999
and 1998, cash and cash equivalent balances of $90,000 and
F - 13
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
$150,000 respectively, 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 - During 1997, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued SOP 97-2,
"Software Revenue Recognition." This SOP provides guidance on revenue
recognition on software transactions and is effective for transactions entered
into in fiscal years beginning after December 15, 1997. The company adopted SOP
97-2 in 1998. The adoption did not have a material impact on the financial
position or results of operations of the Company. The Company recognizes revenue
principally from the licensing of its software, and from consulting and
maintenance services rendered in connection with such licensing activities.
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. The Company also derives
revenue from the sale of third party hardware and software. Consulting revenue
is recognized when the services are rendered. No revenue is recognized prior to
obtaining a binding commitment from the customer.
Software development revenue from time-and-materials contracts are recognized as
services are performed. Revenue 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. Revenue from software package license
agreements without significant vendor obligations is recognized upon delivery of
the software. 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.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance revenue, which consists solely of staff payroll and
applicable overhead, is expensed as incurred.
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 are as follows:
Equipment 3-5 Years
Furniture and Fixtures 5 Years
Leasehold Improvements 5 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
F - 14
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
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 provided on a product by product basis. The annual amortization
is 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.
The Company periodically performs reviews of the recoverability of such
capitalized software costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be
generated from the applicable software net realizable value, any remaining
capitalized amounts are written off.
During 1999, the Company established PsyMedX, a joint venture with Pathware Inc.
The Company owns 80% of PsyMedX and Pathware, Inc. owns 20%. The agreement
focuses on a joint effort to develop and market web portal services and ASP
solutions for the behavioral healthcare providers, consumers and managers
throughout the United States. As of December 31, 1999, the Company has invested
approximately $209,000 in this venture which was expended for software
development costs.
Information related to capitalized software costs applicable to continuing
operations is as follows:
Years ended December 31 1999 1998
----------------------- ---- ----
Beginning of Year $142,450 $183,150
Capitalized 208,972 --
Amortization (40,700) (40,700)
------- -------
Net $310,722 $ 142,450
--- ======= ========
Customer Lists - Customer lists represent a listing of customers obtained
through the acquisition of CSM to which the Company can market its products. It
also represents a listing of customers acquired from Johnson Computing Systems
("Johnson") in 1997. The gross costs of the customer list acquired from Johnson
was $255,409. Customer lists are being amortized on the straight-line method
over an estimated useful life of 12 years.
Customer lists at December 31, 1999 and 1998 are as follows:
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Customer Lists $4,106,223 $4,106,223
Less: Accumulated Amortization 1,707,115 1,372,831
--------- ---------
Net $2,399,108 $2,733,392
--- ========= =========
The Company has 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
F - 15
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
determined that expected future cash flows (undiscounted and without interest
charges) exceed the carrying value of the long lived assets at December 31, 1999
and believes that no impairment of these assets has occurred.
Stock Options and Similar Equity Instruments - 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 continues 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
are 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.
Earnings (Loss) Per Share - Basic earnings (loss) per common share is computed
by dividing income (loss) from continuing operations and net income (loss) after
each is adjusted for dividends accrued during the period on the Series D
cumulative preferred stock by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the amount of
earnings for the period available to each share of common stock outstanding
during the reporting period, giving effect to all potentially dilutive shares of
common stock from the potential exercise of stock options and warrants.
The computation of diluted earnings per share does not assume conversion,
exercise or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e. improving earnings per share). The dilutive
effect of outstanding options and warrants and their equivalents are reflected
in dilutive earnings per share by the application of the treasury stock method.
Options and warrants will have a dilutive effect only when the average market
price of the common stock during the period exceeds the exercise price of the
options or warrants.
All per share information has been retroactively adjusted for the one-for-three
reverse stock split which became effective September 1998.
Research and Development - Research and development costs are charged to expense
as incurred.
[3] Accounts Receivable
Accounts receivable is shown net of allowance for doubtful accounts of $305,226
and $372,797 at December 31, 1999 and 1998 respectively. The changes in the
allowance for doubtful accounts are summarized as follows:
December 31,
-------------------------------
1999 1998 1997
---- ---- ----
Beginning Balance $ 372,797 $348,029 $288,029
Provision for Doubtful Accounts 84,000 60,000 60,000
Charge-offs (151,571) (35,232)
-------- ------- -------
Ending Balance $ 305,226 372,797 $348,029
======== ======= =======
F - 16
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[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 9 1 9 9 8
------- -------
Costs Incurred on Uncompleted Contracts $12,582,652 $ 4,259,190
Estimated Profits 7,446,962 4,038,247
---------- ---------
Total 20,029,614 8,297,437
Billings to Date 19,527,389 7,201,741
---------- ---------
Net $ 502,225 $ 1,095,696
--- ========== =========
Included in the accompanying balance sheet under the following captions:
Costs and estimated profits in
excess of interim billings $ 4,253,072 $ 2,899,695
Interim billings in excess of
costs and estimated profits (3,750,847) (1,803,999)
---------- ---------
Net $ 502,225 $ 1,095,696
--- ========== =========
[5] Discontinued Operations
During 1998 the Company discontinued its CarteSmart division which included its
interest in a joint venture. On June 30, 1998, the Company sold this division,
with an option to purchase the Company's interest in the joint venture if the
other party to the venture did not elect to acquire the Company's interest, to
Granite Technologies, Inc. ("Granite"), a corporation formed by the former
management of the division. Granite issued to the Company its $500,000
promissory note and an equity interest in Granite equal to 20% at the time of
transaction. Granite also agreed to pay certain royalties to the Company. The
note was subject to cancellation if the other party to the joint venture elected
to purchase the Company's interest. As the Company has virtually no influence
over the financing and operating policies of Granite, the interest in Granite
accounted for using the cost method.
As a result of the discontinuation of the CarteSmart division, the financial
statements for the periods being reported have been restated to reflect the net
loss from the CarteSmart division as a loss from discontinued operations. The
revenues from the discontinued operations amounted to $33,000 and $246,000 in
1998 and 1997 respectively.
In October 1998, the other party to the joint venture exercised their right to
purchase the Company's interest in the joint venture for a $500,000 note. The
terms of the note require twenty four monthly principal payments of $15,000
each, commencing November 1, 1998 and a $140,000 balloon payment due November 1,
2000. The note also bears interest at 5.66% per annum. The Company valued the
note at $180,000 at December 31, 1998 based on managements estimates of future
collections on the note. As all payments have been received through February
2000 on a timely basis the company recognized an additional $180,000 of value in
1999.
During the fourth quarter of 1999, the Company was informed that a third party
made a $1.2 million investment in Granite. This transaction is not indicative of
the value of the Company's investment in Granite. The Company's cost basis of
its investment in Granite on its balance sheet is zero.
F - 17
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[6] Property and Equipment
Property and equipment consist of the following:
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Equipment, Furniture and Fixtures $ 869,497 $ 672,692
Leasehold Improvements 264,153 247,609
--------- --------
Totals - At Cost 1,133,650 920,301
Less: Accumulated Depreciation 598,786 566,265
--------- --------
Net $ 534,864 $ 354,036
--- ========= ========
Depreciation expense amounted to $225,923, $176,578, and $169,558, respectively
for the years ended December 31, 1999, 1998 and 1997.
[7] Related Party Transactions
[A] Related Party Administrative Expense - The Company had an agreement with its
then principal stockholder, Consolidated Technology Group Ltd. (now known as The
Sagemark Companies Ltd.) and its subsidiary The Trinity Group, Inc. ("Trinity")
pursuant to which the Company paid Trinity a monthly fee of $15,000 for general
business, management and financial consulting services. This agreement was
mutually terminated, effective April 1, 1998. Pursuant to this agreement, in
1998, and 1997 the Company charged $45,000, and $180,000 respectively to related
party administrative expenses.
[B] Loans by Related Parties - During 1998, certain officers and employees of
the Company loaned the Company $140,000 for which the Company issued its 18%
installment notes. These loans were repaid in five quarterly installments
commencing September 30, 1998 and ending September 30, 1999.
[8] Notes Payable
Asset-Based Lender - In October 1999, the Company entered into a new two year
credit facility agreement with a Bank. Under this agreement, the Company can
draw up to 80% of eligible accounts receivable up to $3.5 million, on which it
pays interest at 2% above the prime rate. The credit facility with the Company's
prior lender limited the Company's availability to $2 million at 5% above the
prime rate. All of the accounts receivable and property and equipment of the
Company and its subsidiary collateralize the note. Borrowings under these
facilities were $882,404 and $1,639,694 at December 31, 1999 and 1998,
respectively.
The weighted average interest rate on short-term borrowings outstanding as of
December 31, 1999 and 1998 amounted to approximately 16% and 19% respectively.
F - 18
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[9] Income Taxes
The Company utilizes an asset and liability approach to determine the extent of
any deferred income taxes, as described in Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." This method gives
consideration to the future tax consequences associated with differences between
financial statement and tax bases of assets and liabilities.
At December 31, 1999, the Company has net operating loss carryforwards of
$9,424,000 expiring by 2012. Pursuant to Section 382 of the Internal Revenue
Code regarding substantial changes in Company ownership, utilization of this net
operating loss carryforward is limited to $1,360,000 per year.
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
- ------------ ------
2010 3,233,000
2011 2,930,000
2012 3,261,000
---------
$9,424,000
=========
The Deferred Tax Asset consists primarily of the following:
Benefit of federal and state net operating loss carryforwards $ 3,770,000
Benefit of stock based compensation awards 1,400,000
Less: Valuation Allowance (5,170,000)
---------
Net Deferred Tax Asset $ --
- ----------------------- =========
The Company has provided a valuation allowance for the full amount of the
deferred tax asset of approximately $5,170,000 as its future utilization is
uncertain. The Valuation Allowance decreased by $730,000 in 1999 and increased
by $300,000 and $900,000 in 1998 and 1997 respectively.
The provision for income taxes varies from the amount computed by applying
statutory rates for the reasons summarized below:
1999 1998 1997
---- ---- ----
Provision Based on Statutory Rates 34% 34% (34)%
State Taxes Net of Federal Benefit 6% 6% (6)%
(Decrease) Increase in Valuation Allowance (40)% (40)% 40%
---- ---- ----
Total -- % -- % -- %
==== ==== ====
[10] Capital Stock
At the close of business on September 14, 1998, a one-for-three reverse split of
the common stock became effective. All common stock and per shares of common
stock data in the financial statements and notes have been adjusted to reflect
this reverse split.
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
F - 19
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- --------------------------------------------------------------------------------
[10] Capital Stock - [Continued]
action, in one or more distinct series. The Board of Directors is authorized to
determine the rights and preferences of the preferred stock. The Board of
Directors has authorized the issuance of Series A, Series B and Series D
preferred Stock. No shares of any series of preferred stock were outstanding on
December 31, 1999.
Pursuant to a March 25, 1999, agreement between the Company, Consolidated
Technology Group Ltd. and a group of purchasers, consisting principally of the
Company's management and directors, on April 8, 1999, Consolidated transferred
to the Company the 1,210 shares of the Company's Series D 6% Redeemable
Preferred Stock, including the right to receive $145,200 of accumulated
dividends for which the Company issued 100,000 shares of common stock to
Consolidated. The shares of Series D Preferred Stock have been cancelled as well
as the annual dividends of $72,600 associated with the Series D Preferred Stock.
Common Stock Issuances - On August 19, 1996, the Company completed a public
offering pursuant to which it received net proceeds of approximately $3.8
million from the sale of units comprised of an aggregate of 431,250 shares of
Common Stock and Series A Redeemable Common Stock Purchase Warrants ("Series A
Warrants") to purchase an aggregate of 215,625 shares of common stock at $13.50
per share through August 1999.
During a 90 day period in 1997, the terms of the Series A Warrants were
amended to reduce the exercise price. During such period, the Company received
net proceeds of approximately $1.8 million from the issuance of an
aggregate of 426,071 shares of common stock upon exercise of Series A Warrants.
In August 1996, holders of Series B Common Stock Purchase Warrants ("Series B
Warrants") to purchase an aggregate of 266,666 shares of Common Stock at $6.00
per share exercised such warrants. The Company received $1.6 million from the
sale of such shares. See Note 14 for information relating to the issuance of the
Series B Warrants.
Treasury Stock - In 1998, pursuant to the Johnson Computing Systems agreement,
the Company purchased from Johnson Computing Systems 5,333 shares of Common
Stock for $60,000. The shares are treated as treasury shares.
Stock Options - See Note 14 for information relating to the Company's 1993 and
1998 Long-Term Incentive Plans.
F - 20
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------
[11] Capitalized Lease Obligations
Future minimum payments under capitalized lease obligations as of December 31,
1999 are as follows:
Year ending
- -----------
December 31,
- ------------
2000 $ 35,862
2001 35,862
2002 27,515
2003 10,822
-------
Total Minimum Payments 110,061
Less Amount Representing Interest at
12.6% to 13.8% Per annum 20,049
-------
Balance $ 90,012
------- =======
Capitalized lease obligations are collateralized by equipment which has a net
book value of $97,000 and $82,000 at December 31, 1999 and 1998, respectively.
Amortization of approximately $19,329, $10,200 and $10,200 in 1999, 1998 and
1997, respectively, has been included in depreciation expense.
[12] Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, note
receivable, accounts payable and debt maturing within one year approximated fair
value for these instruments because of their short maturities.
[13] Commitments and Contingencies
The Company leases space for its executive offices and facilities under
noncancellable operating leases expiring December 31, 2003.
Minimum annual rentals under noncancellable operating leases (net of a sublease
to Granite in the amount of $21,000 per year through 2002) having terms of more
than one year are as follows:
Years ending
- ------------
December 31,
- ------------
2000 $ 389,000
2001 317,000
2002 329,000
2003 342,000
---------
Total $1,377,000
----- =========
Rent expense amounted to $388,000, $349,000 and $341,000 respectively, for the
years ended December 31, 1999, 1998 and 1997.
In July 1998, the Company entered into five-year employment agreements with its
president and chief executive officer, its vice president - marketing, the chief
executive officer of CSM and its chief financial officer, pursuant to which such
officers receive a base salary of $160,000, $140,000, $140,000 and $120,000,
respectively, with an annual cost of living adjustment. The agreements
F - 21
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- --------------------------------------------------------------------------------
[13] Commitments and Contingencies - [Continued]
provide that the executives are eligible to participate in a bonus pool to be
determined annually by the Compensation Committee. Bonuses awarded to these
executives aggregating $343,000 are included in accrued expenses at December 31,
1999. The agreements also provide each of the executives with an automobile
allowance. In the event the executive's dismissal or resignation or a material
change in his duties or in the event of a termination of employment by the
executive or the Company as a result of a change of control, the executive may
receive severance payments of between 24 and 36 months' compensation.
[14] Stock-Based Compensation
Long Term Incentive Plans - The Company has three long-term incentive plans, the
1993 Long- Term Incentive Plan (the "1993 Plan"), as amended, the 1998 Long-Term
Incentive Plan (the "1998 Plan"), as amended, and the 1999 Long-Term Incentive
Plan (the "1999 Plan"). The 1999 plan was approved by the Board of Directors in
November 1999, covers 150,000 shares of common stock and is subject to
stockholder approval. No options have been granted under the 1999 Plan. The
Company may issue 170,333 and 780,000 shares of Common Stock pursuant to the
1993 Plan and 1998 Plan, respectively.
Officers and other key employees, consultants and directors (other than
non-employee directors) are eligible to receive options or other equity-based
incentives under the Plans. The 1993 Plan, the 1998 Plan and the 1999 Plan
(collectively, the "Plans") are administered by the Compensation Committee of
the board of directors.
The 1998 Plan provides that each non-employee director automatically receives a
nonqualified stock option to purchase 5,000 shares of Common Stock on April 1 of
each year. However, if there are not sufficient shares available under the 1998
Plan, the non-employee director will receive a lesser number of shares. The 1998
Plan also provided for the grant on June 30, 1998, to each non- employee
director, other than the chairman of the board, of a non-qualified stock option
to purchase 10,000 shares of Common Stock, and to the chairman of the board, a
non-qualified stock option to purchase 35,000 shares of Common Stock.
In November 1998, the Committee reduced the exercise price of outstanding
options to purchase an aggregate of 43,167 shares of Common Stock, from $4.50
per share to $1.50 per share, which was in excess of the market price on the
date the Committee approved the reduction in the exercise price, and accordingly
did not result in any compensation charge.
F - 22
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
A summary of the activity under the Company's stock option plans is as follows:
1999 1998 1997
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning of
Year 882,358 $1.172 148,780 $3.244 203,706 $2.57
Granted During the Year -- -- 823,167(a) 1.18 -- --
Canceled During the Year -- -- (80,667)(a) 9.60 -- --
Expired During the Years -- -- -- -- -- --
Exercised During the Year (99,317) $1.143 (8,922) .723 (54,926) .745
------- ----- ------- ----- ------ ----
Outstanding - End of Year 783,041 $1.176 882,358 $1.172 148,780 $3.244
======= ===== ======= ===== ======= =====
Exercisable - End of Year 783,041 $1.176 242,358 $1.338 108,447 $2.492
======= ===== ======= ===== ======= =====
(a) Includes under "Granted During the Year" 43,167 shares granted upon
cancellation of an equal number of shares having an exercise price of $4.50 per
share, and under "Cancelled During the Year" the cancellation of options to
purchase 43,167 shares.
The following table summarizes stock option information as of December 31, 1999:
Options Outstanding
-------------------
Weighted
--------
Average Remaining Options
----------------- -------
Exercise Prices Number Outstanding Contractual Life Exercisable
- --------------- ------------------ ---------------- -----------
$1.035 8,208 .9 Years 8,208
$1.50 32,333 1.3 Years 32,333
$1.50 242,500 3.4 Years 242,500
$1.00 500,000 3.8 Years 500,000
------- --------- -------
Totals 783,041 3.6 Years 783,041
======= ========= =======
Warrants Issued as Compensation - In February 1996, the Company issued Series B
Common Stock Purchase Warrants to purchase 1,051,250 shares of common stock, of
which warrants to purchase 838,750 shares were exercisable at $6.00 per share
and warrants to purchase 212,500 are exercisable at $15.00 per share,
subsequently adjusted to $12, see below. These warrants were issued in
connection with services rendered, which, in the case of SIS Capital, included
the guarantee of certain notes payable. Certain of the warrants initially had a
November 1998 expiration date, which was extended to December 31, 1999, which
was the expiration date of all of the warrants. In December 1999 the remaining
$6 and $12 warrants totaling 287,500 and 448,544, respectively, were extended to
February 29, 2000. The Company recognized a financing cost of $81,000 with
respect to this extension. In February 2000, these warrants were further
extended to April 30, 2000, which will result in a charge of $125,000 in the
first quarter of 2000.
F - 23
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
Of the warrants issued in February 1996, 262,500 warrants exercisable at $6.00
per share and 12,500 warrants exercisable at $15.00 per share were issued to
replace 275,000 warrants previously issued in October 1993. These warrants had
exercise prices ranging from $8.00 per share to $30.00 per share.
In July 1996, pursuant to a warrant exchange, (a) the holders of outstanding
warrants having a $6.00 exercise price exchanged one third of such warrants for
outstanding warrants to purchase, at an exercise price of $12.00 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 that had a $15.00 exercise price was reduced to $12.00.
Prior to the warrant exchange, there were outstanding warrants to purchase
838,750 shares of common stock at $6.00 per share and outstanding warrants to
purchase 879,167 shares of common stock at $15.00 per share outstanding. As a
result of the warrant exchange, there were outstanding warrants to purchase
559,167 shares of common stock at $6.00 per share and 631,877 shares of common
stock at $12.00 per share. These warrants were exercisable commencing February
13, 1997. An affiliate of the Company, a member of the board of directors and a
Company controlled by such director, were given permission to exercise options
in August 1996. This individual and entities exercised warrants to purchase
266,667 shares at $6.00 per share in August 1996. The Company recorded
compensation expenses of $3,337,500 in relation to the issuance of these
warrants.
In 1996 the Company issued 215,625 Series A Common Stock Purchase Warrants as a
part of its initial public offering of its securities. These warrants were
exercisable for the two year period commencing August 13, 1997 at a price of
$13.50 per share. In addition, the Company issued 83,333 Series A Common Stock
Purchase Warrants to various investors. These warrants have the same terms as
the warrants issued to the general public. During 1997, 213,036 of these
warrants were exercised. The remainder expired in August 1999.
During 1997, the Company issued Series C Common stock warrants to purchase
23,333 shares of common stock for consulting services in connection with the
issuance of a research report on behalf of the Company. These warrants were
valued at $.90 per warrant which represented the fair value of the services
performed by the recipient. These warrants have an exercise price of $15.00
which was the market value of the stock at the time of issuance and expired on
December 31, 1999.
During 1999, the Company issued warrants to purchase 45,000 shares in connection
with a financial advisory agreement whereby the Company will pay consulting
fees in addition to the issuance of the warrants. These warrants were valued at
$.58 per warrant, which represented the cost of the services based upon the
contractual agreement. These warrants have an exercise price of $5.45, which
represented a 15% premium over the market value of the stock at the time of
issuance and will expire in October 2004.
During 1999, the Company issued 9,000 warrants for services rendered. These
warrants were valued at $2.20 per warrant based upon the Black-Scholes
calculation. These warrants have an exercise price of $4.20 per warrant, which
was the market value of the stock at the time of issuance and will expire in
October 2004.
F - 24
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
A summary of warrant activity is as follows:
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning
of Year 1,033,632 $10.49 1,033,632 $10.49 1,223,335 $10.93
Granted, Sold or Extended
During the Year 790,044 9.36 -- -- 23,333 15.00
Canceled During the Year (188,333) 11.84 -- -- -- --
Expired During the Year (845,299) 10.20 -- -- -- --
Exercised During the Year -- -- -- -- (213,036) 13.50
--------- ----- --------- ----- --------- -----
Outstanding - End of Year 790,044 $ 9.35 1,033,632 $10.49 1,033,632 $10.49
========= ===== ========= ===== ========= =====
Exercisable - End of Year 790,044 $ 9.35 1,033,632 $10.49 1,033,632 $10.49
========= ===== ========= ===== ========= =====
The following table summarizes warrant information as of December 31, 1999:
Weighted
--------
Average Remaining
-----------------
Exercise Prices Shares Contractual Life
- --------------- ------ ------------------
$ 6.00 287,500 .3 Year
$12.00 448,544 .3 Year
$ 5.45 45,000 4.7 Years
$ 4.20 9,000 4.7 Years
------- ---------
Total 790,044 .6 Years
======= =========
F - 25
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
The Company applies Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, for
stock options issued to employees in accounting for its stock options plans.
There was no compensation cost recognized in income for stock based employee
compensation awards for 1999, 1998 and 1997.
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
$609,372 for the year ended December 31, 1998 and the Company's net loss and net
loss per share would have been as follows:
Year ended
-----------
December 31,
------------
1998
----
Net Income as Reported $ 196,249
=========
Pro Forma Net Loss $(413,123)
=========
Net Income Attributable to Common Stock $ 123,649
=========
Pro-Forma Net Income Attributable to Common Stock $(485,723)
=========
Net Income (Loss) Per Share as Reported $ .04
=========
Pro Forma Net Loss Per Share $ (.17)
=========
There were no options or compensation based warrants issued in 1999 or 1997
which were accounted for under APB No. 25. 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:
1998
----
Expected Life (Years) 5
Interest Rate 4.87%
Annual Rate of Dividends 0%
Volatility 70%
The weighted average fair value of options and warrants at date of grant using
the fair value based method during 1998 is estimated at $.74.
F - 26
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #15
- --------------------------------------------------------------------------------
[15] Operating 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 that provide comprehensive
healthcare information technology solutions including billing, patient tracking
and scheduling for inpatient and outpatient environments, as well as clinical
documentation and medical record generation and management. 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 9 1 9 9 8 1 9 9 7
------- ------- -------
Revenues:
- ---------
Software and Related Systems and Services $19,343,472 $11,000,795 $ 5,400,245
Data Center Services 1,908,158 2,164,472 2,235,209
---------- ---------- ----------
Total Revenues $21,251,630 $13,165,267 $ 7,635,454
-------------- ========== ========== ==========
Gross Profit:
- -------------
Software and Related Systems and Services $ 6,574,753 $ 4,050,334 $ 1,978,190
Data Center Services 800,587 1,033,394 769,102
---------- ---------- ----------
Total Gross Profit $ 7,375,340 $ 5,083,728 $ 2,747,292
------------------ ========== ========== ==========
Income [Loss] From Operations:
- ------------------------------
Software and Related Systems and Services $ 1,494,381 $ 342,501 $ (448,801)
Data Center Services 400,623 416,880 (86,706)
---------- ---------- ----------
Total Income [Loss] From Operations $ 1,895,004 $ 759,381 $ (535,507)
----------------------------------- ========== ========== ==========
Depreciation and Amortization:
- ------------------------------
Software and Related Systems and Services $ 356,191 $ 468,840 $ 477,953
Data Center Services 244,716 92,722 123,037
---------- ---------- ----------
Total Depreciation and Amortization $ 600,907 $ 561,562 $ 600,990
----------------------------------- ========== ========== ==========
Interest Expense:
- -----------------
Software and related systems and services $ 227,767 $ 289,210 $ 220,774
Data Center Services 22,468 56,904 87,395
---------- ---------- ----------
Total Interest Expense $ 250,235 $ 346,114 $ 308,169
========== ========== ==========
Capital Expenditures:
- ---------------------
Software and Related Systems and Services $ 595,747 $ 188,570 $ 636,174
Data Center Services 19,976 33,461 41,867
---------- ---------- ----------
Total Capital Expenditures $ 615,723 $ 222,031 $ 678,041
-------------------------- ========== ========== ==========
Identifiable Assets:
- --------------------
Software and Related Systems and Services $11,757,183 $ 7,740,018 $ 4,452,999
Data Center Services 2,215,294 2,548,928 2,886,804
---------- ---------- ----------
Total Identifiable Assets $13,972,477 $10,288,946 $ 7,339,803
------------------------- ========== ========== ==========
F - 27
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
- --------------------------------------------------------------------------------
[16] Subsequent Event
In January 2000, the Company acquired the Connex suite of managed care and
employee assistance program (EAP) information systems from Behavioral Health
Partners, Inc. (BHPI). The acquisition price consisted of approximately $80,000
in cash and 15,528 shares of Netsmart's common stock valued at $100,000. The
purchase price was allocated to computer software in the amount of $180,000.
F - 28
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: March 29, 2000 /s/ James L. Conway
-------------------
James L. Conway, President
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. Each person whose
signature appears below hereby authorizes Edward D. Bright, James L. Conway and
Anthony F. Grisanti or any of them acting in the absence of the others, as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post- effective amendments)
to this registration statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission.
Signature Title Date
- --------- ----- ----
/s/ James L. Conway President, Chief Executive March 29, 2000
- ------------------------- Officer and Director (Principal
James L. Conway Executive Officer)
/s/ Anthony F. Grisanti Chief Financial Officer March 29, 2000
- ------------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)
/s/ Edward D. Bright Director March 29, 2000
- -------------------------
Edward D. Bright
/s/ John F. Phillips Director March 29, 2000
- -------------------------
John F. Phillips
/s/ Gerald Koop Director March 29, 2000
- -------------------------
Gerald Koop
/s/ Joseph Sicinski Director March 29, 2000
- -------------------------
Joseph Sicinski