SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K/A
Amendment No. 1
For the Year Ended December 31, 1997
Commission File No. 0-21177
NETSMART TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3680154
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
146 Nassau Avenue
Islip, New York 11751
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 968-2000
Purpose of Amendment: To include Part III and amended Financial Statements
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company at April 30,
1998, are as follows:
Name Age Position
Edward D. Bright 1 66 Chairman of the board and director
James L. Conway 49 President, chief executive officer and director
Leonard M. Luttinger 48 Vice president and director
Anthony F. Grisanti 49 Chief financial officer, treasurer and secretary
John F. Phillips 57 Vice president -- marketing and director
Storm R. Morgan 31 Director
Seymour Richter 1 61 Director
- ----------
1 Member of the audit and compensation committees.
Mr. Edward D. Bright has been chairman of the board and a director of the
Company since April 1998. In April 1998, Mr. Bright was also elected as
chairman, secretary, treasurer and a director of Consolidated, a public company
whose business, in addition to the Company, includes technical temporary
staffing services and telecommunications services, and a director of Trans
Global Services, Inc. ("Trans Global"), a publicly-held subsidiary of
Consolidated that provides technical temporary staffing services. From January
1996 until April 1998, Mr. Bright was an executive officer of or advisor to
Creative Socio Medics Corp. ("CSM"), a subsidiary of the Company which was
acquired from Advanced Computer Techniques, Inc. ("ACT") in June 1994. From June
1994 until January 1996, he was chief executive officer of the Company. He was a
senior executive officer and a director of CSM and ACT for more than two years
prior to June 1994.
Mr. James L. Conway has been president and a director of the Company since
January 1996 and chief executive officer since April 1998. Since 1993, he has
been president of S-Tech Corporation ("S- Tech"), which, until April 1998, was a
wholly-owned subsidiary of Consolidated which manufactures specialty vending
equipment for postal, telecommunication and other industries. From 1990 to 1993,
he was a consultant to General Aero Products Corp. ("General Aero"), a Long
Island based defense manufacturing firm as debtor in possession of General Aero
following its filing under Chapter 11 of the Federal Bankruptcy Act in 1989. Mr.
Conway devotes substantially all of his time to the business of the Company.
Mr. Leonard M. Luttinger has been a director of the Company since its
organization in September 1992 and was president from September 1992 until
January 1996, when he became chief operating officer. In October 1996, he became
vice president of the Smartcard Division. From March 1991 to September 1992, Mr.
Luttinger was vice president of smart card systems for Onecard, a corporation
engaged in the development of smart-card technology. From June 1966 to February
1991, he was employed at Unisys, a computer corporation, and its predecessor
Burroughs Corporation, in various capacities, including manager of semiconductor
and memory products and manager of scientific systems.
- 1 -
Mr. Anthony F. Grisanti has been treasurer of the Company since June 1994,
secretary since February 1995 and chief financial officer since January 1996. He
was chief financial officer of CSM and ACT for more than five years prior
thereto.
Mr. John F. Phillips has been a director of the Company and vice president
of CSM since June 1994, when CSM was acquired. He also served as vice chairman
and vice president -- marketing of the Company from June 1994 to January 1996.
He was a senior executive officer and director of CSM and ACT for more than five
years prior to June 1994. From January 1993 to June 1994, he was chairman of the
Board of CSM and ACT. From 1986 until December 1992, he was president of CSM and
ACT. Mr. Phillips is a director of ACT.
Mr. Storm R. Morgan has been a director of the Company since January 1996.
Mr. Morgan is also senior vice president of Oasis, a position he has held since
1991, and an officer and director of SMI Corporation ("SMI"), a position he has
held since 1989. Mr. Morgan is the sole stockholder of SMI.
Mr. Seymour Richter has been a director of the Company since April 1998.
Since April 1998, he has been president, acting chief executive officer and a
director of Consolidated. From July 1995 until April 1998, Mr. Richter was
employed by Patterson Travis Operating Account, Inc., a private company that
makes investments for its own account. For more than five years prior thereto,
he was the chief executive officer of Touch Base Ltd., an independent selling
organization in the apparel industry. Mr. Richter is also a director Trans
Global.
Messrs. Bright and Richter were elected to the board following the
resignation of Messrs. Lewis S. Schiller and Norman J. Hoskin in April 1998.
In 1997, the board of directors created audit and compensation committees,
both of which are composes of two independent directors. Messrs. Edward D.
Bright and Seymour Richter are the members of both committees. The audit
committee has the authority to approve the Company's audited financial
statements, to meet with the Company's independent auditors, to review with the
auditors and with management any management letter issued by the auditors and to
generally exercise the power normally accorded an audit committee of a public
corporation. In addition, any transactions between the Company or its
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 the Company's stock option plans. In addition, it reviews and approves any
changes in compensation for the Company's executive officers.
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
- 2 -
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 and its subsidiaries for the years ended December 31,
1997, 1996 and 1995 to its chief executive officer and to each four most highly
compensated executive officers officer whose compensation exceeded $100,000 for
1997.
Annual Compensation Long-Term Compensation (Awards)
------------------- ------------------------------
Restricted Stock Options, SARs
---------------- -------------
Name and Principal Position Year Salary Bonus Other Awards (Dollars) (Number)
- --------------------------- ---- ------ ----- ----- --------------- ------
Lewis S. Schiller, CEO 1 1997 -- -- -- -- --
1996 -- -- -- -- --
1995 -- -- -- -- 52,500
James L. Conway, president 1997 $125,000 -- -- -- --
1996 77,408 -- -- -- 268,750
Leonard M. Luttinger, vice 1997 136,895 -- -- -- --
president 1996 62,500 $67,262 -- -- 156,250
1995 125,000 -- -- -- 176,678
John F. Phillips, vice 1997 109,500 89,657 -- -- --
chairman and vice president 1996 100,000 33,906 -- -- 27,000
1995 123,900 -- -- -- 38,768
Anthony F. Grisanti, chief 1997 87,600 73,888 -- -- --
financial officer 1996 80,000 23,500 -- -- 15,000
1995 80,000 -- -- -- 32,464
- ----------
1 Mr. Schiller resigned as an officer and director of the Company in April
1998. Mr. Schiller has received no compensation from the Company. During
the years ended December 31, 1997, 1996 and 1995, the total compensation
paid or accrued by Consolidated to Mr. Schiller was $974,000, $340,000 and
$250,000, respectively.
The annual salary paid by Consolidated to Mr. Schiller pursuant to his
employment agreement with Consolidated was $250,000, subject to a cost of living
increase, prior to September 1, 1996. Effective September 1, 1996, Mr.
Schiller's annual salary from Consolidated was increased to $500,000. In
addition, Mr. Schiller receives incentive compensation from Consolidated based
on the results of Consolidated's operations and owns 10% of the equity interest
of Consolidated or SIS Capital Corporation ("SISC"), a wholly-owned subsidiary
of Consolidated, in each of their operating subsidiaries and investments.
Pursuant to such agreement, Mr. Schiller and his designees received 10% of
SISC's equity interest in the Company and other subsidiaries of SISC. In
addition, Mr. Schiller was entitled to 20% of SISC's gross profit in the event
of any sale of any of its subsidiaries. In April 1998, in connection with his
resignation as a director and officer of Consolidated and its subsidiaries,
Consolidated purchased Mr. Schiller's employment agreement, as a result of which
the agreement is no longer in effect.
In June 1994, the Company entered into five-year employment agreements
with Messrs. Leonard M. Luttinger, John F. Phillips and Anthony F. Grisanti,
which provide for annual base salaries of $125,000, $125,000 and $80,000,
respectively. The agreements provide for an annual cost of living adjustment,
- 3 -
an automobile allowance and a bonus of 4% of income before income taxes for
Messrs. Luttinger and Phillips and 2% of income before income taxes for Mr.
Grisanti. The maximum bonus is 300% of salary for Messrs. Luttinger and
Phillips and 200% of salary for Mr. Grisanti. For 1996, Messrs. Luttinger and
Phillips agreed to reduced base salaries of $62,500 and $100,000, respectively,
with certain incentives if certain targets are attained. For 1997, Mr. Phillips
agreed to a reduced base salary of $109,000 plus commissions. In August 1996,
the Company entered into an agreement with Mr. James L. Conway pursuant to which
it pays him an annual salary of $125,000, subject to a cost of living
adjustment, an automobile allowance and a bonus of 5% of income before income
taxes up to a maximum of 300% of his salary. Prior to August 1996, Mr. Conway
received a salary of $52,000 per year.
No stock options or SARs were granted during 1997. The following table
sets forth information concerning the exercise of options and warrants during
the year ended December 31, 1997 and the year-end value of options and warrants
held by the Company's officers named in the remuneration table. No SARs have
been granted.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options1 at Fiscal Options at Fiscal
Year End Year End2
Shares Acquired Value Exercisable/ Exercisable/
Name Upon Exercise Realized Unexercisable Unexercisable
---- ------------- -------- ------------- -------------
Lewis S. Schiller3 -- -- 166,667/ --/
-- --
James L. Conway -- -- 268,750/ --/
-- --
Leonard M. Luttinger -- -- 183,018/ $15,098/
-- --
John F. Phillips -- -- 65,768/ 22,814/
-- --
Anthony F. Grisanti -- -- 47,464/ 19,817/
-- --
- ----------
1 The number of shares of Common Stock subject to options includes shares of
Common Stock issuable upon exercise of warrants.
2 The determination of "in the money" options at December 31, 1997, is based
on the closing price of the Common Stock on the Nasdaq SmallCap Market on
December 31, 1997, which was $.875.
3 Warrants held by Mr. Schiller include warrants issued to him by the
Company and warrants transferred to him by SISC. Such warrants were issued
to him by the Company or transferred to him by SISC, as the case may be,
in 1996.
- 4 -
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, based on information provided by the
persons named below, the number and percentage of shares of outstanding Common
stock owned by each person known to the Company to own at least 5% of the
Company's Common Stock, each director, each officer named in the summary
compensation table, and all directors and officers as a group, as of April 30,
1998:
Amount and Nature
Name and of Beneficial
Address1 Ownership2 Percent of Ownership
- -------- --------- --------------------
SIS Capital Corp.3 3,530,070 39.7%
160 Broadway
New York, NY 10038
Storm R. Morgan4 307,000 3.6%
James L. Conway5 293,750 3.4%
Leonard M. Luttinger6 231,662 2.7%
Edward D. Bright7 108,912 1.3%
John F. Phillips8 108,912 1.3%
Anthony F. Grisanti9 67,384 *
Seymour Richter -- --
All directors and officers 1,217,620 13.3%
as a group (seven individuals) 4, 5, 6, 7, 8, 9
- ----------
1 Unless otherwise indicated, the address of each person is c/o Netsmart
Technologies, Inc., 146 Nassau Avenue, Islip, New York 11751.
2 Unless otherwise indicated, each person named has the sole voting and sole
investment power and has direct beneficial ownership of the shares.
3 Represents (a) 2,965,070 shares of Common Stock owned by SISC and (b)
565,000 shares of Common Stock issuable upon exercise of Series B Warrants
owned by SISC which are exercisable at $2.00 per share (15,000 shares) and
$4.00 per share (550,000 shares).
4 Includes 262,500 shares of Common Stock issuable upon exercise of Series B
Warrants owned by Mr. Morgan which are exercisable at $2.00 per share
(150,000 shares) and $4.00 per share (112,500 shares).
5 Includes 268,750 shares of Common Stock issuable upon exercise of Series B
Warrants owned by Mr. Conway, which are exercisable at $2.00 per share
(100,000 shares) and $4.00 per share (168,750 shares).
- 5 -
6 Includes (a) 156,250 shares of Common Stock issuable upon exercise of
Series B Warrants owned by Mr. Luttinger, which are exercisable at $2.00
per share (25,000 shares) and $4.00 per share (112,500 shares) and (b)
17,412 shares of Common Stock issuable upon the exercise of options held
by Mr. Luttinger.
7 Includes 42,912 shares of Common Stock issuable upon exercise of
outstanding options held by Mr. Bright.
8 Includes 42,912 shares of Common Stock issuable upon exercise of
outstanding options held by Mr. Phillips.
9 Includes 47,464 shares of Common Stock issuable upon exercise of
outstanding options held by Mr. Grisanti.
Item 13. Certain relationships and Related Transactions
In January 1996, Mr. Storm Morgan was elected a director of the Company.
At the time of his election he was a consultant of the Company. The Company does
not pay compensation to Mr. Morgan. During 1996, the Company operated under a
proposed agreement pursuant to which the Company paid to SMI, of which Mr.
Morgan is the sole stockholder, an officer and director, $619,700 for services
provides by Mr. Morgan from a time to time on an as needed basis and for four
persons to serve in management-level or other key positions of the Company on a
full time basis. These individuals provided marketing, support and technical
services to the Company. Mr. Morgan was not required to devote any minimum
amount of time to the business of the Company. In addition, during 1996 the
Company paid SMI $285,524 for expenses incurred by SMI, a substantial portion of
which was reimbursed to the Company by its clients. In 1996, the Company also
paid SMI $11,750 in commissions and $250,000 for services related to the
Company's agreement with IBN.
In February 1997 the Company modified its agreement with SMI reducing the
monthly fees payable to $9,000. During 1997 the Company paid to SMI $124,000 for
services provided by Mr. Morgan, $47,161 for expenses and consultants incurred
by SMI on behalf of the Company and $9,000 in commissions. Mr. Morgan was not
required to devote any minimum amount of time to the business of the Company.
In 1994, in connection with the execution of the agreement to acquire CSM,
SISC, a wholly-owned subsidiary of Consolidated and the principal stockholder of
the Company, granted to Messrs. Edward D. Bright, John F. Phillips and Anthony
F. Grisanti options to purchase from SISC 66,000, 66,000 and 19,920 shares of
Common Stock, respectively, at $.232 per share. Such options were exercised in
1997.
The Company has an agreement with Consolidated pursuant to which it pays
Consolidated $15,000 per month through August 1999.
In connection with the resignations of Messrs. Lewis S. Schiller, Norman
J. Hoskin and E. Gerald Kay, in April 1998, the Company exchanged general
releases with such persons.
In connection with the Company's accounts receivable financing, Mr.
Schiller guaranteed the Company's obligations to the lender and Mr. Anthony F.
Grisanti issued his guaranty which is limited to the losses or liability
resulting from certain irregularities by the Company in the submission of
invoices for
- 6 -
advances and the failure to pay over the proceeds from accounts to the lender.
The Company knows of no such irregularities. The advances under this facility
were $935,000 at December 31, 1997 and $1,338,000 at April 30, 1998. The maximum
borrowings under the facility, subject to the borrowing formula, is $1,250,000,
which is to increase to $1,500,000 on August 1, 1998. The lender has, from time
to time, permitted the Company to exceed the present borrowing limitation.
Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K.
1. Financial Statements.
The Financial Statements begin on Page F-1
- 7 -
1. Financial Statements
F-3 Report of Moore Stephens, P.C. Independent Auditors
F-4 - F-5 Consolidated Balance Sheets as of December 31, 1997
and 1996
F-6 - F7 Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1996 and 1995
F-8 Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1997, 1996 and 1995
F-9 - F-11 Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995
F-12 - F-30 Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
None
4. Exhibits
NETSMART TECHNOLOGIES, INC.
AND SUBSIDIARY
F - 1
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
INDEX
- ------------------------------------------------------------------------------
Page to Page
------------
Independent Auditor's Report................................F-3
Consolidated Balance Sheets.................................F-4.....F-5
Consolidated Statements of Operations.......................F-6.....F-7
Consolidated Statements of Stockholders' Equity.............F-8
Consolidated Statements of Cash Flows.......................F-9.....F-11
Notes to Consolidated Financial Statements .................F-12....F-30
. . . . . . . . . . .
F - 2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Netsmart Technologies, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Netsmart Technologies, Inc. and its subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period 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 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Netsmart Technologies, Inc. and its subsidiary as of December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 26, 1998
[Except for Note 19 as to which
the date is April 2, 1998]
F - 3
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
December 31,
------------
1 9 9 7 1 9 9 6
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 854,979 $ 998,317
Accounts Receivable - Net 2,182,418 2,284,450
Costs and Estimated Profits in Excess
of Interim Billings 542,324 931,786
Other Current Assets 83,770 82,205
--------- ---------
Total Current Assets 3,663,491 4,296,758
--------- ---------
PROPERTY AND EQUIPMENT - NET 308,583 382,586
--------- ---------
Other Assets:
Software Development Costs 183,150 250,920
Investment in Joint Venture at Equity -- 120,546
Customer Lists 3,067,676 3,128,814
Other Assets 116,903 71,105
---------- ----------
Total Other Assets 3,367,729 3,571,385
---------- ----------
Total Assets $ 7,339,803 $ 8,250,729
========== ==========
See Notes to Consolidated Financial Statements.
F - 4
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
December 31,
------------
1 9 9 7 1 9 9 6
------- -------
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable $ 935,177 $ 590,031
Capitalized Lease Obligations 23,331 41,449
Accounts Payable 1,131,692 983,156
Accrued Expenses 1,041,120 991,075
Interim Billings in Excess of Costs and Estimated
Profits 951,885 1,102,105
Due to Related Parties -- 23,542
Deferred Revenue 117,080 88,420
--------- ---------
Total Current Liabilities 4,200,285 3,819,778
--------- ---------
Capitalized Lease Obligations -- 15,945
--------- ---------
Commitments and Contingencies -- --
--------- ---------
Stockholders' Equity:
Preferred Stock, $.01 Par Value; Authorized 3,000,000
Shares; Authorized, Issued and Outstanding:
Series D 6% Redeemable Preferred Stock - $.01 Par
Value 3,000 Shares Authorized, 1,210 Issued and
Outstanding [Liquidation Preference of $1, 12 12
Additional Paid-in Capital - Series D Preferre 1,209,509 1,209,509
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued and Outstanding
8,333,996 Shares at December 31, 1997,
6,798,203 Shares at December 31, 1996 83,339 67,982
Additional Paid-in Capital - Common Stock 17,140,109 14,863,328
Accumulated Deficit (15,293,451) (11,725,825)
---------- ----------
Total Stockholders' Equity 3,139,518 4,415,006
---------- ----------
Total Liabilities and Stockholders' Equity $ 7,339,803 $ 8,250,729
========= ==========
See Notes to Consolidated Financial Statements.
F - 5
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 7 1 9 9 6 1 9 9 5
------- ------- -------
Revenues:
Software and Related
Systems and Services:
General 4,366,006 $ 5,108,095 $ 4,541,000
Maintenance Contract
Services 1,280,465 1,225,709 1,099,000
--------- --------- ---------
Total Software and Related
Systems and Services 5,646,471 6,333,804 5,640,000
Data Center Services 2,235,209 2,207,155 1,742,000
--------- --------- ---------
Total Revenues 7,881,680 8,540,959 7,382,000
--------- --------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 3,760,424 5,114,882 3,986,000
Maintenance Contract
Services 928,316 595,366 743,000
------- ------- ----------
Total Software and Related
Systems and Services 4,688,740 5,710,248 4,729,000
Data Center Services 1,466,107 1,220,368 889,000
--------- --------- ---------
Total Cost of Revenues 6,154,847 6,930,616 5,618,000
--------- --------- ---------
Gross Profit 1,726,833 1,610,343 1,764,000
Provision for Doubtful Accounts 814,398 260,000 8,000
Selling, General and
Administrative Expenses 2,841,724 1,661,854 2,472,000
Related Party Administrative
Expenses 180,000 69,000 18,000
Stock Based Compensation -- 3,492,300 --
Write off of Capitalized Software 553,061 -- --
Costs and Related Hardware
Research and Development 201,075 278,000 699,000
------- ------- -------
Loss from Operations (2,863,425) (4,150,811) (1,433,000)
Financing Costs -- 1,692,000 863,000
Interest Expense 308,169 472,548 355,000
Equity in Net Loss of Joint Venture 287,131 264,085 --
See Notes to Consolidated Financial Statements.
F - 6
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 7 1 9 9 6 1 9 9 5
------- ------- -------
Related Party Interest
Expense -- -- 199,000
Net Loss $(3,458,725) $ (6,579,444) $ (2,850,000)
========= ========= =========
Loss Per Common Share $ (.48) $ (1.28) $ (.59)
========= ========= =========
Weighted Average Number of
Shares of Common Stock 7,160,858 5,149,253 4,821,528
========= ========= =========
See Notes to Consolidated Financial Statements.
70752
F - 7
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Series A Series D Common Stock
Preferred Preferred Additional $.01 Par Value Additional
Stock Stock Paid-in Authorized Paid-in
at .01 at .01 Capital 15,000,000 Capital Total
Par Value Par Value Preferred Shares Common Accumulated Stockholders'
Shares Amount Shares Amount Stock Shares Amount Stock Deficit Equity
Balance - December 31, 1994
[Combined] 400 $-- -- $ -- $ 40,000 1,050,003 $11,000 $ 3,001,000 $ (2,297,000) $ 755,000
Allocated Related Party
AdministrativeExpenses -- -- -- -- -- -- -- 18,000 -- 18,000
Common Stock Issued to Affiliate -- -- -- -- -- 825,000 8,000 (8,000) -- --
Common Stock and Preferred
Stock Issued to Affiliate -- -- 2,210 -- 2,210,000 1,125,000 11,000 241,000 -- 2,462,000
Common Stock Issued to Officer
for Services -- -- -- -- -- 11,250 -- 22,000 -- 22,000
Net Loss -- -- -- -- -- -- -- -- (2,850,000) (2,850,000)
--- --- ----- --- --------- --------- ------ ---------- --------- ---------
Balance - December 31, 1995
[Consolidated] 400 4 2,210 22 2,249,505 3,011,253 30,113 3,273,968 (5,146,381) 407,221
--- --- ----- --- --------- --------- ------ ---------- --------- ---------
Common Stock Issued in Exchange for
Series D and Series A Preferred Stock (400) (4) (1,000) (10) (1,039,996)1,168,200 11,681 1,028,319 -- --
Allocated Related Party
Administrative Expenses -- -- -- -- -- -- -- 9,000 -- 9,000
Compensation from the Issuance of
Common Stock Warrants -- -- -- -- -- -- -- 3,492,300 -- 3,492,300
Common Stock Issued - Initial Public
Offering 1,293,750 12,938 5,162,063 5,175,001
Common Stock Issued - Exercise of
Warrants 800,000 8,000 1,592,000 1,600,000
Common Stock Issued - Financing
Costs 525,000 5,250 1,674,750 1,680,000
Costs Associated with Issuance of
Stock (1,369,072) (1,369,072)
Net Loss -- -- -- -- -- -- -- -- (6,579,444 (6,579,444)
--- --- --- --- --------- --------- ------ ---------- --------- ---------
Balance - December 31, 1996
[Consolidated] -- -- 1,210 12 1,209,509 6,798,203 67,982 14,863,328 (11,725,826) 4,415,005
--- --- ----- --- --------- --------- ------ ---------- ---------- ---------
Common Stock Issued as Dividends
on Preferred Stock 12,802 128 108,772 (108,900) --
Common Stock Issued - Exercise of
Options 104,777 1,647 39,265 40,912
Common Stock Issued - Exercise of
Warrants 1,278,214 12,782 1,904,539 1,917,321
Cost Associated with Exercise of
Warrants (74,995) (74,995)
Common Stock Issued - Johnson
Acquisition 80,000 800 299,200 300,000
Net Loss (3,458,725) (3,458,725)
--- --- ----- --- --------- --------- ------ --------- ---------- ---------
Balance - December 31, 1997
[Consolidated] -- $-- 1,210 $ 12 $1,209,509 8,333,996 $83,339 $17,140,109 $(15,293,451) $3,139,518
=== === ===== === ========= ========= ====== ========== ========== =========
See Notes to Financial Statements.
F - 8
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 7 1 9 9 6 1 9 9 5
------- ------- -------
Operating Activities:
Net Loss $ (3,458,725) $ (6,579,444) $ (2,850,000)
--------- --------- ---------
Adjustments to Reconcile Net
Loss to Net Cash [Used
for] Provided by Operating Activities:
Depreciation and Amortization 600,990 486,566 872,000
Administrative Expenses -- 9,000 8,000
Additional Compensation Related to the
issuance of Equity Instruments -- 3,492,300 22,000
Financing Expenses related to the issuance
of Common Stock -- 1,680,000 --
Write Off of Deferred Public
Offering Costs -- -- 460,000
Write Off of Capitalized Software Cost
and Related Hardware 553,061 -- --
Equity in Net Loss of Joint Venture 287,131 264,085 21,000
Provision for Doubtful Accounts 814,398 260,000 8,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (302,366) (431,478) (388,000)
Costs and Estimated Profits in
Excess of Interim Billings (20,538) (516,707) 87,000
Other Current Assets (1,565) (68,810) 10,000
Other Assets 11,905 (10,502) --
Increase [Decrease] in:
Accounts Payable 148,536 (202,620) 159,000
Accrued Expenses 50,045 (332,174) 935,000
Interim Billings in Excess of
Costs and Estimated Profits (150,220) 160,626 (217,000)
Due to Related Parties (21,245) (143,458) 496,000
Deferred Revenue (4,439) (52,580) 141,000
----- ------ -------
Total Adjustments 1,965,693 4,594,248 2,624,000
--------- --------- ---------
Net Cash - Operating Activities - Forward (1,493,032) (1,985,196) (226,000)
--------- --------- ---------
Investing Activities:
Acquisition of Property and
Equipment (216,041) (181,033) (138,000)
Software Development Costs (462,000) (278,800) --
Investment in Joint Venture (166,585) (384,631) --
--------- --------- ---------
Net Cash - Investing Activities -
Forward) $ (844,626) $ (844,464) $ (138,000)
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 7 1 9 9 6 1 9 9 5
------- ------- -------
Net Cash - Operating Activities -
Forwarded $ (1,493,032) $ (1,985,196) $ (226,000)
--------- --------- --------
Net Cash - Investing Activities -
Forwarded (844,626) (844,464) (138,000)
--------- --------- --------
Financing Activities:
Proceeds from Short-Term Notes 345,146 500,000 831,000
Payment of Short-Term Notes (912,270) (190,000)
Payment of Bank Note Payable (79,000) (175,000)
Payment of Short-Term Notes
to related party (750,000) --
Payment of Capitalized Lease
Obligations (34,063) (145,146) (29,000)
Issuance of Common Stock 5,175,000 --
Proceeds from Warrant exercise 1,917,319 1,600,000 --
Proceeds from Stock Option Exercise 40,913 -- --
Cash Overdraft (95,536) 56,000
Redemption of Series B Preferred Stock (96,000) --
Costs associated with issuance of Stock (74,995) (1,369,071)
Deferred Public Offering Costs -- (129,000)
--------- --------- --------
Net Cash - Financing Activities 2,194,320 3,827,977 364,000
--------- --------- --------
Net Increase [Decrease] in Cash (143,338) 998,317 --
Cash - Beginning of Periods 998,317 -- --
--------- --------- --------
Cash - End of Periods $ 854,979 $ 998,317 $ --
========= ========= ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest $ 352,837 $ 481,856 $ 349,000
Income Taxes $ -- $ -- $ --
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During the year ended December 31, 1997, the Company had the following:
12,802 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 80,000 shares of common stock to acquire customer lists and
certain other assets of Johnson Computer Systems. These shares were valued at
$300,000.
F - 10
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
During the year ended December 31, 1996, the Company had the following:
SISC exchanged 1,000 shares of Series D preferred stock for 1,125,000 shares of
common stock. As a result of this exchange the aggregate redemption price of the
Series D preferred stock was reduced to $1,210,000. The Series A preferred stock
was converted into 43,200 shares of common stock in a transaction valued at
$43,200.
Pursuant to an agreement with four accredited investors, the Company issued
250,000 units composed of two shares of common stock and one Series A Common
Stock purchase warrant. The Company incurred a one time non-cash charge of
$1,611,000.
Pursuant to a modification of an agreement with an asset based lender the
Company issued 25,000 common shares to such lender and incurred a one-time
non-cash finance charge of $81,000.
The Company granted stock options to purchase an aggregate of 242,000 shares of
common stock and recognized compensation expense of $154,800.
The Company granted 3,573,125 Series B Common Stock purchase warrants and
896,875 Series A Common Stock purchase warrants and recognized compensation
expense of $3,337,500.
During the year ended December 31, 1995, the Company had the following:
1) $388,000 of accrued interest owed to SISC was exchanged for 1,125,000
shares of common stock.
2) $2,210,000 of SISC debt was exchanged for 2,210 shares of Series D
Preferred Stock.
3) 825,000 shares of common stock were issued to a subsidiary as follows:
A) 750,000 shares were issued in connection with the transfer of CSM to
the Company.
B) 75,000 shares were issued in respect of certain indebtedness
guaranteed by Consolidated.
See Notes to Consolidated Financial Statements.
F - 11
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #1
- ------------------------------------------------------------------------------
[1] Financial Statement Presentation, Organization and Nature of Operations
The financial statements as of and for the three years ended December 31, 1997
are presented on a consolidated basis and include Netsmart Technologies, Inc.
["Netsmart"], formerly CSMC Corporation, Carte Medical Corporation and Medical
Services Corp., and its wholly-owned subsidiary, Creative Socio-Medics Corp.
["CSM"]. Netsmart and CSM are collectively referred to as the Company. All
intercompany transactions are eliminated in consolidation.
Netsmart was incorporated on September 9, 1992. Netsmart's marketing effort is
primarily directed at managed care organizations and methadone clinics and other
substance abuse facilities throughout the United States.
As of December 31, 1997, approximately 35.7% of the Company's outstanding Common
Stock was owned by SIS Capital Corp. ("SISC"), which is a wholly-owned
subsidiary of Consolidated Technology Group Ltd. ("Consolidated"), a public
company. Although the company is not majority owned by Consolidated,
Consolidated has effectual control through common Boards of Directors and other
means, thus the Company is treated as a subsidiary of Consolidated for financial
reporting purposes.
[2] Summary of Significant Accounting Policies
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents totaled approximately $940,000 and $1,000,000 at December 31, 1997
and 1996 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. Such estimate of the financial strength of such customers may be
subject to change in the near term.
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, 1997, 1996 and 1995,
approximately 35%, 31% and 54% respectively, of the Company's revenues were
generated from contracts with government agencies.
No one customer accounted for more than 10% of revenues in 1997. During the year
ended December 31, 1996 and 1995, one customer accounted for approximately
$1,879,000 and $1,400,000 or 22% and 19% respectively, of revenue. Accounts
receivable of approximately $473,000 and $336,000 were due from this customer at
December 31, 1996 and 1995. At December 31, 1997, receivables from such customer
in the amount of $745,000 were written off.
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,
1997, cash and cash equivalent balances of $840,000 were held at a financial
institution in excess of federally insured limits. The Company believes no
significant concentration of credit risk exists with respect to these cash
equivalents.
F - 12
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
Revenue Recognition - The Company recognizes revenue principally from the
licensing of its software, and from consulting and maintenance services rendered
in connection with such licensing activities. Revenue from licensing will be
recognized under the terms of the licenses. Consulting revenue is recognized
when the services are rendered. No revenue is recognized prior to obtaining a
binding commitment from the customer.
Revenues from fixed price software development contracts and revenue under
license agreements which require significant modification of the software
package to the customer's specifications, are recognized on the estimated
percentage-of-completion method. Using the units-of-work performed method to
measure progress towards completion, revisions in cost estimates and recognition
of losses on these contracts are reflected in the accounting period in which the
facts become known. Contract terms provide for billing schedules that differ
from revenue recognition and give rise to costs and estimated profits in excess
of billings, and billings in excess of costs and estimated profits. It is
reasonably possible that the amount of costs and estimated profits in excess of
billing and billings in excess of costs and estimated profits may be subject to
change in the near term. Revenue from software package license agreements
without significant vendor obligations is recognized upon delivery of the
software. Information processing revenues are recognized in the period in which
the service is provided. Maintenance contract revenue is recognized on a
straight-line basis over the life of the respective contract. Software
development revenues from time-and-materials contracts are recognized as
services are performed.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance revenue, which consists solely of staff payroll and
applicable overhead, is expensed as incurred.
Direct Costs - Direct costs generally represent labor costs related to licensing
and consulting agreements.
Property and Equipment and Depreciation - Property and equipment is stated at
cost less accumulated depreciation. Depreciation of property and equipment is
computed by the straight-line method at rates adequate to allocate the cost of
applicable assets over their expected useful lives. Amortization of leasehold
improvements is computed using the shorter of the lease term or the expected
useful life of these assets.
Estimated useful lives range from 2 to 10 years as follows:
Equipment 2-5 Years
Furniture and Fixtures 5-7 Years
Leasehold Improvements 8-10 Years
Capitalized Software Development Costs - Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Technological feasibility for the Company's computer software products is
generally based upon achievement of a detail program design free of high risk
development issues. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized computer software
development costs requires considerable judgement by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technology.
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is to be provided on a
F - 13
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
product by product basis. The annual amortization shall be the greater of the
amount computed using (a) the ratio that current gross revenues for a product
bear to the total of current and anticipated future gross revenues for that
product or (b) the straight-line method over the remaining estimated economic
life of the product including the period being reported on.
The Company performs an annual review 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.
Information related to capitalized software costs is as follows:
Years ended December 31 1997 1996 1995
----------------------- ---- ---- ----
Beginning of Year $ 250,920 $ -- $ 419,000
Capitalized 462,000 278,800 --
Amortization (114,885) (27,880) (419,000)
Net Realizable Value Adjustment (414,885) -- --
------- ------ -------
$ 183,150 $250,920 $ --
======= ======= =======
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"), (See Note 17). The gross costs of the customer list associated
acquired from Johnson was $255,409. Customer lists are being amortized on the
straight-line method.
In 1995, the amortization period of customer lists was changed from 20 years to
12 years. The change in the period of amortization reflects changes in
technology which became important in the health care industry subsequent to the
acquisition of CSM in June 1994. The development of Window-based applications,
particularly Windows 95, which had not been developed at the time of the
acquisition, together with the possibility of other changes in the software and
communications industry, represent developments that the Company feels require a
change in the amortization period to twelve years. Such change has been
accounted for as a change in accounting estimate. The effect of this change was
to increase amortization by $120,000 in 1995.
Customer lists at December 31, 1997 and 1996 are as follows:
December 31,
------------
1 9 9 7 1 9 9 6
------- -------
Customer Lists $4,106,223 $3,850,814
Less: Accumulated Amortization 1,038,547 722,000
--------- ---------
Net $3,067,676 $3,128,814
--- ========= =========
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 established
accounting standards for the impairment of long-lived assets and certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. Management has determined that
F - 14
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
expected future cash flows (undiscounted and without interest charges) exceed
the carrying value of the intangibles at December 31, 1997 and believes that no
impairment of these assets has occurred. It is at least reasonably possible that
management's estimate of expected future cash flows may change in the near term.
This may result in an accelerated amortization method or write-off of
intangibles.
Cost Associated With Public Offerings - In 1996, the Company completed a public
offering of its securities (See Note 10). Costs of $1,370,000 associated with
the offering were offset against total gross proceeds of $5,175,000. In 1995,
the Company withdrew a registration statement following the termination of a
previous public offering. Costs of $460,000, associated with that offering, were
expensed, and included in financing costs, in 1995.
Stock Options and Similar Equity Instruments - On January 1, 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", for stock
options and similar equity instruments (collectively,"Options") issued to
employees, however, the Company will continue to apply the intrinsic value based
method of accounting for options issued to employees prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" rather than the fair value based method of accounting prescribed by
SFAS No. 123. SFAS No. 123 also applies to transactions in which an entity
issues its equity instruments to acquire goods or services from non-employees.
Those transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.
Loss Per Share - The Financial Accounting Standards Board ("FASB") has issued
SFAS No. 128, "Earnings per Share"; which is effective for financial statements
issued for periods ending after December 15, 1997. Accordingly, loss per share
data in the financial statements for the year ended December 31, 1997, have been
calculated in accordance with SFAS No. 128. Prior periods' loss per share data
have been recalculated as necessary to conform prior years' data to SFAS No.
128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and replaces its primary earnings per share with basic earnings per
share representing the amount of earnings for the period available to each share
of common stock outstanding during the reporting period. SFAS No. 128 also
requires a dual presentation of basic and diluted earnings per share on the face
of the statement of operations for all companies with complex capital
structures. Diluted earnings per share reflects the amount of earnings for the
period available to each share of common stock outstanding during the reporting
period, while giving effect to all potentially dilutive common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.
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,
which recognizes the use of proceeds that could be obtained upon exercise of
options and warrants in computing diluted earnings per share. It assumes that
any proceeds would be used to purchase common stock at the average market price
during the period. 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 any reverse stock
splits, recapitalizations and any shares issued for nominable value for all
periods presented.
F - 15
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
Allocated Related Party Administrative Expenses - During the first six months of
1996 and all of 1995, certain administrative services were performed for the
Company by Consolidated Technology group Ltd. "Consolidated" and its
subsidiaries. The fair value of such services, approximately $9,000 and $18,000
respectively, was charged to related party administrative expenses, and, since
Consolidated will not be reimbursed for such charges, credited to additional
paid-in capital. (See Note 7)
Research and Development - Expenditures for research and development costs for
the years ended December 31, 1997, 1996 and 1995 amounted to $201,000, $278,000
and $699,000, respectively.
[3] Accounts Receivable
Accounts receivable is shown net of allowance for doubtful accounts of $348,029,
$288,029 and $146,263 at December 31, 1997, 1996 and 1995 respectively. The
changes in the allowance for doubtful accounts are summarized as follows:
December 31,
---------------------------
1997 1996 1995
---- ---- ----
Beginning Balance $288,029 $146,263 $137,842
Provision for Doubtful Accounts 814,398 260,000 60,000
Recoveries -- -- --
Charge-offs (754,398) (118,234) (51,579)
-------- ------- ------
Ending Balance $348,029 $288,029 $146,263
======= ======= =======
[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 7 1 9 9 6
------- -------
Costs Incurred on Uncompleted Contracts $ 2,730,054 $ 3,483,918
Estimated Profits 1,293,104 652,749
--------- ---------
Total 4,023,158 4,136,667
Billings to Date 4,432,719 4,306,986
--------- ---------
Net $ (409,561) $ (170,319)
--- ========= =========
Included in the accompanying balance sheet under the following captions:
Costs and estimated profits in excess of interim $ 542,324 $ 931,786
Interim billings in excess of costs and estimate (951,885) (1,102,105)
--------- ---------
Net $ (409,561) $ (170,319)
--- ========= =========
F - 16
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[5] Going Concern Considerations
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The Company has
sustained losses since inception and the accumulated deficit at December 31,
1997 is $15,293,451. The ability of the Company to continue as a going concern
is dependent upon the success of the Company's marketing effort and its access
to sufficient funding to enable it to continue operations. The Company has been
funded through December 31, 1997 through loans from principal stockholders, an
asset-based lender and others, and from the sale of stocks and warrants [See
Notes 7 and 8]. All these factors had raised substantial doubt about the ability
of the Company to continue as a going concern.
Such substantial doubt has been alleviated due to the Company's implementation
of the Health System Design Corporation agreement in the first quarter of 1998,
which will allow the Company to provide the "Provider Management Information
System" to nearly 600 provider agencies in the State of Ohio. In addition, in
the first quarter of 1998, the Company secured contracts such as the New Jersey
University of Medicine and Dentistry, to install its BHIS System. Management
believes that the gross profit from the implementation of the Provider
Management Information System and installation of its BHIS System will range
from $1.6 million to $3.1 million. The Company believes that the $1.6 million
gross profit can be attained with a minimal increase in the existing staff. In
addition, the Company is currently negotiating the sale of its CarteSmart
business which to date has incurred substantial losses.
There can be no assurances that management's plans to reduce operating losses by
increasing revenues to fund operations will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
[6] Property and Equipment
Property and equipment consist of the following:
December 31,
------------
1 9 9 7 1 9 9 6
------- -------
Equipment, Furniture and Fixtures $ 582,207 $ 538,634
Leasehold Improvements 164,335 164,335
--------- ---------
Totals - At Cost 746,542 702,969
Less: Accumulated Depreciation 437,959 320,383
--------- ---------
Net $ 308,583 $ 382,586
--- ========= =========
Depreciation expense amounted to $169,558, $145,686, and $140,000, respectively
for the years ended December 31, 1997, 1996 and 1995.
[7] Related Party Transactions
[A] Issuance of Stock at Organization - In connection with the organization of
the Company in September 1992, the Company issued 824,256 shares of common stock
as follows: 582,072 shares of common stock to SISC, for $1,300, 112,584 shares
to DLB, Inc. ["DLB"] for $6,700, and 43,200 shares of common stock for nominal
consideration to each of DLB and two individuals, one of whom became a director
in June 1994. DLB is controlled by the wife of the chairman of the board who is
also the chairman of the board of Consolidated. The chairman of the board
disclaims any beneficial interest in any securities owned by DLB.
F - 17
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[7] Related Party Transactions - [Continued]
[A] Issuance of Stock at Organization - [Continued]
Also in connection with the organization of the Company, the Company acquired
all of the capital stock of LMT in exchange for 129,600 shares of common stock
and 400 shares of Series A 4% Convertible Redeemable preferred stock, par value
$.01 per share ["Series A preferred stock"]. The 400 shares of Series A
preferred stock are convertible into 43,200 shares of common stock [See Note
10]. LMT was a shell corporation with no operating business. The shares of
common stock issued included 60,480 to the chief operating officer of the
Company and 25,920 to the vice-president of the Company. The remaining 43,200
and all of the shares of Series A preferred stock were issued to a non-related
individual. The Company expensed the value of the Series A preferred stock
($40,000). The issuance of the common stock was treated as compensation valued
at $.01 per share. In August 1996 the Company converted its Series A Preferred
stock into 43,200 Common Shares.
[B] Loans by Related Parties - At September 30, 1995, the total indebtedness due
SISC was $2,960,000 plus interest of $388,000. As of such date, (i) the interest
was exchanged for 1,125,000 shares of common stock, (ii) $2,210,000 of the debt
was exchanged for 2,210 shares of Series D 6% preferred stock ["Series D
preferred stock"], having a liquidation price of $1.00 per share and a
redemption price of $1,000 per share, and (iii) the remaining $750,000 due SISC
is represented by the Company's 10% subordinated note due January 15, 1997 or
earlier upon the completion of the Company's initial public offering. This note
was paid in 1996. In conjunction with the September 30, 1995 debt restructuring,
$136,000 which was previously recorded as paid-in capital, was reclassified to
debt owed to SISC. The Series D preferred stock may be redeemed at the option of
the Company commencing October 1, 1998, and is redeemable at any time after
issuance from 50% of the proceeds of any over allotment on the Company's initial
public offering or other issuance of equity securities subsequent to the
completion of the Company's initial public offering.
In connection with the issuance by the Company of its Interim Notes [the
"Interim Notes"] in July and August 1993, SISC, in anticipation of the Company's
receipt of the proceeds of such loans, advanced the Company, on a non-interest
bearing basis, $79,000, which was repaid by the Company in August 1993. Such
advance was used by the Company to pay the principal on a $50,000 demand note
and interest of $2,000 and to pay normal operating expenses. In connection with
the Interim Notes, SISC transferred to the lenders an aggregate of 15,120 shares
of common stock for $.232 per share. In connection with the agreement of the
holders of the Interim Notes to extend the maturity date of the notes to the
earlier of September 30, 1994, or three days after the Company completes its
initial public offering, SISC transferred an aggregate of 9,375 shares of common
stock to such noteholders. The Company incurred a charge of $7,000 against
operations for financing costs in conjunction with the issuance of stock by
SISC. The Interim Notes were paid in full in 1996.
During the period from January to June 1994, SISC advanced an aggregate of
$330,000 to CSM. As a result of the acquisition, such obligations are included
in the principal amount of the Company's obligations to SISC, which were
approximately $2.6 million at December 31, 1994. Included in the advances by
SISC to the Company were $300,000 which was used to pay payroll taxes and
interest and $500,000 which was used in connection with the purchase of CSM.
At December 31, 1995 and 1994, ACT [the parent of Old CSM] loaned $167,000 and
$58,000 to the Company in the form of demand notes bearing interest at 10% per
annum. These loans were paid in full in 1996.
The Company has an agreement with Consolidated and its subsidiary The Trinity
Group, Inc. ("Trinity") pursuant to which the Company will pay Trinity a monthly
fee of $15,000 for a three-year term commencing in September 1996, for general
business, management and financial consulting
F - 18
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[7] Related Party Transactions - [Continued]
[B] Loans by Related at Organization - [Continued]
services. Pursuant to this agreement, in 1997 and 1996 the Company charged
$180,000 and $60,000 respectively to related party administrative expenses.
The Company entered into an agreement with SMI Corporation (SMI), pursuant to
which the company would pay SMI compensation of $25,000 to $59,000 per month for
which SMI would provide persons to serve in management-level or other key
positions for the Company. In addition, the Company is to pay SMI 6% of the
revenues generated from Smart Card and related services. The agreement would
continue until December 31, 2000. In February of 1997 the Company modified the
agreement whereby the monthly fees were reduced to $9,000 plus expenses and all
commission arrangements were canceled. The sole stockholder of SMI, Mr. Storm
Morgan was elected as a director of the Company in January 1996. For the year
ended December 31, 1997 the Company incurred and paid $180,000 of compensation
expense. For the year ended December 31, 1996, the Company incurred and paid,
$619,700 of compensation expense pursuant to its agreement with SMI as well as
an additional $250,000 for services.
[8] Notes Payable
Asset-Based Lender - In February 1995, the Company entered into an accounts
receivable financing with an asset-based lender. Borrowings under this facility
were $935,177 and $590,031 at December 31, 1997 and 1996, respectively. The
Company can borrow up to 80% of eligible receivables, and it pays interest at
the rate of prime plus 8 1/2% and a fee equal to 5/8% of the amount of the
invoice. This note is collateralized by all of the accounts and property and
equipment of the Company. In addition, the Company's obligations under this
facility are guaranteed by the chairman of the board of the Company. Also, the
treasurer of the Company has issued his limited guaranty to the lender.
In July 1997, the agreement with the asset based lender was modified to allow
borrowings up to 80% instead of 75% of eligible receivables to a maximum of
$1,250,000 through July 31, 1998 and $1,500,000 thereafter, if the Company
elects not to terminate the agreement. The previous amount of maximum borrowings
was capped at $750,000. The interest rate was adjusted from the greater of 18%
per annum or prime plus 8% to prime plus 8 1/2% per annum. The fee on the amount
of the invoice was reduced from 1% to 5/8%.
Notes payable consist of the following:
December 31,
------------
1 9 9 7 1 9 9 6
------- -------
Asset-Based Lender - payable on demand
with interest at prime plus 8 1/2% in
1997 and the greater of 18% per annum
or prime plus 8% in 1996 $ 935,177 $ 590,031
======= =======
The weighted average interest rate on short-term borrowings outstanding as of
December 31, 1997 and 1996 amounted to approximately 22% and 22%, respectively.
In January 1996, the Company borrowed $500,000 from four accredited investors.
In connection with such loans, the Company issued its 8% promissory notes due
January 31, 1997, which were subsequently paid from the proceeds of the
Company's initial public offering during 1996. The Company also agreed to issue
and register with the Securities Act one unit for each $2.00 principal amount of
notes. The unit issued to the noteholders mirrored the units issued in the
initial public offering which consisted of two shares of the Company's Common
Stock and one Series A Redeemable Common Stock Purchase Warrant. The Company
incurred a one time non-cash finance charge of $1,611,000 upon the issuance of
these units.
F - 19
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[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.
For financial reporting purposes at December 31, 1997, the Company has net
operating loss carryforwards of $10,572,000 expiring by 2012. Pursuant to
Section 382 of the Internal Revenue Code regarding substantial changes in
Company ownership, utilization of these losses may be limited. Based on this and
the fact that the Company has generated operating losses through December 31,
1997, the deferred tax asset of approximately $4,200,000 is offset by an
allowance of $4,200,000.
A deferred tax asset of approximately $1,400,000, related to stock-based
compensation awards, has been offset by a valuation allowance of $1,400,000 due
to the uncertainty of its realization.
Deferred Tax Asset
Federal and State Net Operating Loss Carryforwards $ 4,200,000
Stock Based Compensation Awards 1,400,000
Less: Valuation Allowance (5,600,000)
---------
Net Deferred Tax Asset $ --
=========
The Valuation Allowance increased by $900,000 and $2,900,000 in 1997 and 1996
respectively.
The provision for income taxes varies from the amount computed by applying
statutory rates for the reasons summarized below:
1997 1996
---- ----
Provision Based on Statutory Rates (34)% (34)%
State Taxes Net of Federal Benefit (6)% (6)%
Increase in Valuation Allowance 40% 40%
------ ------
Total --% --%
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
2007 $ 72,000
2008 433,000
2009 2,029,000
2010 1,704,000
2011 2,935,000
2012 3,399,000
----------
$10,572,000
==========
[10] Capital Stock
Capital Stock - The Company is authorized to issue 3,000,000 shares of preferred
stock, par value $.01 per share, and 15,000,000 shares of common stock, par
value $.01 per share. The Company's Board of Directors is authorized to issue
preferred stock from time to time without stockholder action, in one or more
distinct series. The Board of Directors is authorized to determine the following
rights and preferences, among others, for each series: (i) the rate of dividends
and whether such dividends shall
F - 20
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[10] Capital Stock - [Continued]
be cumulative; (ii) the price at and the terms and conditions on which shares
may be redeemed; (iii) the amount payable upon shares in the event of voluntary
or involuntary liquidation; (iv) whether or not a sinking fund shall be provided
for the redemption or purchase of shares; (v) the terms and conditions on which
shares may be converted; and (vi) whether, and in what proportion to any other
series or class, a series shall have voting rights other than required by law.
The Board of Directors has authorized the issuance of the Series A preferred
stock, the Series B preferred stock and the Series D preferred Stock.
At December 31, 1997, only the Series D preferred stock was outstanding.
Preferred Stock - The Series A preferred stock is 4% convertible redeemable
preferred stock. The stockholders are entitled to receive a $4.00 per share
annual dividend when and as declared by the Board of Directors. Dividends are
fully cumulative and accrue from October 1, 1992. Dividends are payable annually
on March 1. The stock is redeemable at the option of the Company at any time at
which the Company has consolidated net worth of at least $2,500,000 at a price
of $1,000 per share plus accrued dividends. Each share of Series A preferred
stock is convertible into 108 shares of common stock at the discretion of the
stockholder. In the event of involuntary or voluntary liquidation, the
stockholders are entitled to receive $100 per share and all accrued and unpaid
dividends. In August 1996, the Company issued 43,200 shares of Common Stock upon
conversion of all of its Series A Preferred Stock.
The Series B preferred stock is 6% redeemable convertible preferred stock. The
stockholders are entitled to receive a $72.00 per share annual dividend when and
as declared by the Board of Directors. Dividends are fully cumulative and accrue
from April 1, 1993. Dividends are payable annually on March 1. The stock is
redeemable at the discretion of the Company at any time at which the Company has
consolidated net worth of at least $5,000,000 at a price of $1,200 per share
plus accrued dividends.
Each share of Series B preferred stock is convertible into 259.2 shares of
common stock at the discretion of the stockholders. In the event of involuntary
or voluntary liquidation, the stockholders are entitled to receive $1,200 per
share and all accrued and unpaid dividends. Each holder of Series B preferred
stock has the right, following the Company's initial public offering, to require
the Company to redeem all of the shares of Series B preferred stock owned by
such holder at a redemption price equal to $1,200 per share. In August 1996 the
Company redeemed its Series B Redeemable Preferred stock in the amount of
$96,000.
The Series D preferred stock is 6% redeemable preferred stock. The stockholders
are entitled to receive a $60.00 per share annual dividend when and as declared
by the Board of Directors. Dividends are cumulative and accrue from October 1,
1995. Dividends are payable semi-annually on April 1 and October 1. The stock is
redeemable at the option of the Company for $1,000 per share commencing October
1, 1998. Earlier redemption is permitted under certain circumstances. In the
event of voluntary or involuntary liquidation, the stockholders are entitled to
receive $1.00 per share and all accrued and unpaid dividends. On June 30, 1997,
the Company paid the dividend relating to the Series D preferred stock which
were payable on October 1, 1996 and April 1, 1997. The dividends were paid
through the issuance of 12,802 shares of Common Stock and valued at the fair
market value at the respective dates they became payable. The Series D preferred
stock is nonvoting except as is required by law.
The Company has granted to the holders of the Series A preferred stock and
Series B preferred stock and certain warrant holders, with respect to their
warrants, certain piggyback registration rights following the Company's initial
public offering, with respect to the shares of common stock issuable upon
conversion or exercise of the preferred stock or warrants.
On August 19, 1996 the Company completed a public offering whereby it sold
646,875 units at a price of $8 per unit for net proceeds of approximately $3.8
million. Each unit consisted of two shares of
F - 21
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[10] Capital Stock - [Continued]
common stock and one series A Redeemable Common Stock Purchase Warrant.
On August 21, 1996 Series B Common Stock purchase warrants to purchase 800,000
shares of common stock at $2 per share were exercised and the Company received
$1,600,000 in gross and net proceeds.
See Note 7 for additional information relating to the issuance of common stock
and preferred stock in connection with the Company's organization and in
connection with certain financings.
See Note 14 for information relating to the Company's 1993 Long-Term Incentive
Plan.
[11] Capitalized Lease Obligations
Future minimum payments under capitalized lease obligations as of December 31,
1997 are as follows:
Year ending
- -----------
December 31,
- ------------
1998 $ 23,596
------
Total Minimum Payments 23,596
Less Amount Representing Interest at 12% Per annum 265
Balance $ 23,331
------- ======
Capitalized lease obligations are collateralized by equipment which has a net
book value of $15,000 and $25,000 at December 31, 1997 and 1996, respectively.
Amortization of approximately $10,200 and $30,700 in 1997 and 1996,
respectively, has been included in depreciation expense.
[12] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted SFAS No. 107, which requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed therein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement. The following table
summarizes financial instruments by individual balance sheet accounts as of
December 31, 1997 and 1996:
Carrying Amount Fair Value
--------------- ----------
December 31, December 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
Debt Maturing Within One Year $ 935,000 $ 590,000 $ 935,000 $ 590,000
======= ======= ======= =======
For cash and cash equivalents, accounts receivable, accounts payable and debt
maturing within one year the carrying amount 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 October 31, 2002. The Company also
leases additional office space on a month-to-month basis.
F - 22
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[13] Commitments and Contingencies - [Continued]
Minimum annual rentals under noncancellable operating leases having terms of
more than one year are as follows:
Years ending
December 31,
1998 $371,000
1999 123,000
2000 67,000
2001 21,000
2002 14,000
-------
Total $596,000
=======
Rent expense amounted to $341,000, $358,000 and $309,000 respectively, for the
years ended December 31, 1997, 1996 and 1995.
The Company has an agreement with Trinity Group, Inc. ["Trinity"], a
wholly-owned subsidiary of Consolidated, pursuant to which the Company will pay
Trinity $15,000 a month for consulting services.
(See Note 7).
At the time of the acquisition of CSM, the Company entered into five-year
employment agreements with its current chief operating officer [formerly the
president] and vice president, which replaced employment agreements then in
effect, and the three individuals who had been officers of CSM. The agreements
provide for salaries of $125,000, $85,000, $125,000, $125,000 and $80,000,
respectively, subject to cost of living increases. The agreements also provide
for bonuses based upon a percentage of income before income taxes. The officers
are also provided with an automobile or an automobile allowance.
In January 1996, the vice-president's base salary was increased from $85,000 to
$100,000. Also, for 1996, the chief operating officer and two other officers,
whose base salaries were $125,000 each, agreed to reduce their base salaries to
$62,000, $100,000 and $100,000, with certain incentives if certain targets are
attained. The current president who is not one of the five individuals
previously mentioned, was compensated during 1996 at the annual rate of $52,000
prior to the public offering and $125,000 subsequent to the public offering.
On or about September 29, 1995, an action was commenced against the Company by
the filing of a summons with notice in the Supreme Court of the State of New
York, County of New York. The action was commenced by Jacque W. Pate, Jr.,
Melvin Pierce, Herbert A. Meisler, John Gavin, Elaine Zanfini, individually and
derivatively as shareholders of Onecard Health Systems Corporation and Onecard
Corporation, which corporations are collectively referred to as "Onecard." The
named defendants include, in addition to the Company, officers and directors of
the Company, its principal stockholder and the parent of its principal
stockholder. A complaint was served on November 15, 1995. The complaint makes
broad claims respecting alleged misappropriation of Onecard's trade secrets,
corporate assets and corporate opportunities, breach of fiduciary relationship,
unfair competition, fraud, breach of trust and other similar allegations,
apparently arising at the time of, or in connection with the organization of,
the Company in September 1992. The complaint seeks injunctive relief and
damages, including punitive damages, of $130 million. In September 1996 the
above action was dismissed. In March 1997, the plaintiff has refiled a new
action with the same allegations and stating claims that were at the basis of
the original complaint. Such action is in the amount of $130,000,000. The
Company contends that the technology and software were created from a "clean
office start" and the action is without merit and frivolous. No assessment as to
any outcome can be made at this time as the matter is in its very preliminary
stages. The Company denies any allegation of wrongdoing and intends
F - 23
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- ------------------------------------------------------------------------------
[13] Commitments and Contingencies - [Continued]
to vigorously defend the action. The plaintiff has not supplied documentation
requested by the defendants as part of their discovery process, nor is plaintiff
represented by an attorney. The Company plans to file a motion to dismiss the
action.
[14] Stock-Based Compensation
In July 1993, the Company adopted, by action of the board of directors and
stockholders, the 1993 Long-term Incentive Plan (the "Plan"). The Plan was
amended in October 1993, April 1994, October 1994 and February 1996. These
amendments increased the number of shares available for grant pursuant to the
plan. The Plan does not have an expiration date.
The Plan is authorized to grant options or other equity-based incentives for
511,000 shares of the common stock. If shares subject to an option under the
Plan cease to be subject to such options, or if shares awarded under the Plan
are forfeited, or otherwise terminated without a payment being made to the
participant in the form of stock, such shares will again be available for future
distribution under the Plan.
Awards under the Plan may be made to key employees, including officers of and
consultants to the Company, its subsidiaries and affiliates, but may not be
granted to any director unless the director is also an employee of or consultant
to the Company or any subsidiaries or affiliates. The Plan imposes no limit on
the number of officers and other key employees to whom awards may be made;
however, no person shall be entitled to receive in any fiscal year awards which
would entitle such person to acquire more than 3% of the number of shares of
common stock outstanding on the date of grant.
In January 1995, the Board granted, to various employees, stock options to
purchase an aggregate of 252,804 shares of common stock at $.232 per share, and
in December 1995 the Board granted, to various employees, stock options to
purchase an aggregate of 116,316 shares of common stock at $.345 per share. Such
exercise prices were determined by the Board to be the fair market value per
share on the date of grant. The options become exercisable as to 50% of the
shares on the first and second anniversaries of the date of grant. These options
expire on January 31, 2000 and December 31, 2000, respectively. In connection
with certain of the January 1995 option grants, the Board canceled previously
granted options to purchase 206,250 shares at an exercise price of $5.33 per
share which were granted in 1994. In April 1996, the Company granted stock
options to purchase an aggregate of 129,500 shares of common stock at an
exercise price of $2.00 per share and recognized compensation expense of
$154,800. The options are exercisable as to 50% of the shares on the first and
second anniversaries of the date of grant and expire in April 2001. In September
1997, 164,777 stock options were exercised in the 1993 Long Term Incentive stock
option plan and the Company received gross proceeds of $40,913.
In addition, the Company granted to the underwriter, for nominal consideration,
options to purchase 56,250 units, consisting of two common shares, and one
purchase warrant, for a four year period commencing August 13, 1997 at a price
of $5.37.
F - 24
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS, Sheet #14
- ------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
A summary of the activity under the Company's stock option plan is as follows:
1997 1996 1995
---------------- ----------------- --------------------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning of
Years 611,120 $ 1.60 369,120 $ .265 206,250 $ 5.33
Granted During the Years -- -- 242,000 3.57 369,102 .265
Canceled During the Years -- -- -- -- (206,250) 5.33
Expired During the Years -- -- -- -- -- --
Exercised During the Years (164,777) .248 -- -- -- --
------- ---- ------- ---- ------- ----
Outstanding - End of Years 446,343 $ 2.06 611,120 1.60 369,120 .265
======= ==== ======= ====
Exercisable - End of Years 325,343 $1.504 178,878 .265 -- --
====== ===== ======= ==== ======= ====
1997 1996 1995
------------------- ------------------ -----------------
Weighted Weighted Weighted Weighted Weighted Weighted
-------- -------- -------- -------- -------- --------
Average Average Average Average Average Average
-------- ------- ------- ------- ------- -------
Exercise Fair Exercise Fair Exercise Fair
-------- ---- -------- ---- -------- ----
Price Value Price Value Price Value
----- ----- ----- ----- ----- -----
Options Issued with
Exercise Price Above
Stock Price at Date of
Grant -- -- $5.37 $ .93 -- --
Options Issued with Exercise
Price Equal to Stock Price at
Date of Grant -- -- -- -- $.265 $.14
Options Issued with Exercise
Price Below Stock Price at
Date of Grant -- -- $2.00 $1.78 -- --
The following table summarizes stock option information as of December 31, 1997:
Weighted
--------
Average Remaining Weighted Average
----------------- ----------------
Range of Exercise Prices Shares Contractual Life Exercise Price
- ----------------------- ------ --------------- ---------------
$.232 to $.345 204,343 3.0 Years $ .283
$2.00 129,500 3.3 Years 2.00
$5.37 112,500 3.7 Years 5.37
------- --------- -----
Totals 446,343 3.3 Years $ 2.06
======= ========= ======
In October 1993, the Company issued to SISC warrants to purchase 375,000 shares
of common stock at $10.00 per share, 225,000 shares at $6.67 per share and
150,000 shares of common stock at $2.67
F - 25
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
- ------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
per share and issued to SMACS warrants to purchase 37,500 shares of common stock
at $6.67 per share and 37,500 shares at $2.67 per share. The warrants became
exercisable six months from the completion of the Company's initial public
offering or earlier with the consent of the Company and the underwriter and
expire on November 30, 1998.
In February 1996, the Company issued an aggregate of 3,153,750 Series B
Warrants, of which 2,526,250 are exercisable at $2.00 per share and 637,500 are
exercisable at $5.00 per share. These warrants were issued in connection with
services rendered, which, in the case of SISC, included the guarantee of the
December 1995 Interim Notes, and, in certain instances the terms of the warrants
were revised. Although the warrants were issued prior to the three-for-four
reverse split, which was effective in February 1996, the number of shares
issuable upon exercise of the warrants, but not the exercise price, was adjusted
for the reverse split. Certain of the warrants initially had a November 1998
expiration date, which was extended to December 31, 1999, which is the
expiration date of all of the warrants.
Of the warrants issued in February 1996, 787,500 warrants exercisable at $2.00
per share and 37,500 warrants exercisable at $5.00 per share were issued to
replace 825,000 warrants previously issued in October 1993. These warrants had
exercise prices ranging from $2.67 per share to $10.00 per share.
In July 1996, pursuant to a warrant exchange, (a) the holders of outstanding
warrants having a $2.00 exercise price exchanged one third of such warrants for
outstanding warrants to purchase, at an exercise price of $4.00 per share, 150%
of the number of shares of common stock issuable upon exercise of the
outstanding warrants that were exchanged, and (b) the exercise price of the
outstanding warrants have a $5.00 exercise price was reduced to $4.00. Prior to
the warrant exchange, there were outstanding warrants to purchase 2,516,250
shares of common stock at $2.00 per share and outstanding warrants to purchase
2,637,500 shares of common stock at $5.00 per share outstanding. As a result of
the warrant exchange, there are outstanding warrants to purchase 1,677,500
shares of common stock at $2.00 per share and 1,895,625 shares of common stock
at $4.00 per share. These warrants may be exercised commencing February 13, 1997
or earlier if approved by the company and the underwriter. An affiliate of the
Company, a member of the board of the directors and a Company controlled by such
directors, were given permission to exercise options in August 1996. This
individual and entities exercised warrants to purchase 800,000 shares at $2.00
per share in August 1996. All of the warrants expire on December 31, 1999. These
warrants are Series B Common Stock Purchase Warrants. The Company recorded
compensation expenses of $3,337,500 in relation to the issuance of these
warrants.
The Company issued 646,875 Series A Common Stock Purchase Warrants as a part of
its initial public offering of its securities. These warrants are exercisable
for the two year period commencing August 13, 1997 at a price of $4.50 per
share. In addition, the Company issued 250,000 Series A Common Stock Purchase
Warrant to various accredited investors (See Note 8). These warrants have the
same term as the warrants issued to the general public.
During 1997, the Company issued 70,000 Series C Common stock warrants in
exchange for the issuance of a research report on behalf of the Company. These
warrants were valued at $.30 per warrant which represented the fair value of the
services performed by the recipient. These warrants have an exercise price of $5
which was the market value of the stock at the time of issuance and will expire
on December 31, 1999.
F - 26
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #16
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
A summary of warrant activity is as follows:
1997 1996 1995
---- ---- -----
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning
of Years 3,670,000 $3.64 825,000 $ 7.27 825,000 $ 7.27
Granted or Sold During
the Years 70,000 5.00 4,470,000 3.35 -- --
Canceled During the Years -- -- (825,000) 7.27 -- --
Expired During the Years -- -- -- -- -- --
Exercised During the Years (639,107) 4.50 (800,000) 2.00 -- --
--------- ----- ---------- ----- -------- ------
Outstanding - End of Years 3,100,893 $3.50 3,670,000 $ 3.64 825,000 $ 7.27
========= ===== ========= ===== ======= ======
Exercisable - End of Years 3,100,893 $3.50 -- -- 825,000 $ 7.27
========= ===== ========= ====== ======= ======
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted Weighted Weighted Weighted
-------- -------- -------- -------- -------- --------
Average Average Average Average Average Average
------- ------- ------- ------- ------- -------
Exercise Fair Exercise Fair Exercise Fair
------- ---- -------- ---- ------- ----
Price Value Price Value Price Value
----- ----- ----- ----- ----- -----
Warrants Issued with Exercise
Price Above Stock Price at
Date of Grant -- -- $4.16 $1.04 -- --
Warrants Issued with Exercise
Price Equal to Stock Price at
Date of Grant $5.00 $ .30 -- -- -- --
Warrants Issued with Exercise
Price Below Stock Price at
Date of Grant $2.00 $1.78 -- --
The following table summarizes warrant information as of December 31, 1997:
Weighted
--------
Average Remaining Weighted Average
----------------- -----------------
Range of Exercise Prices Shares Contractual Life Exercise Price
- ------------------------ ------ ---------------- --------------
$2.00 877,500 2.0 Years 2.00
$4.00 1,895,625 2.0 Years 4.00
$4.50 257,768 .7 Years 4.50
$5.00 70,000 .7 Years 5.00
--------- -------- ----
Total 3,100,893 1.9 Years 3.50
========= ========= ====
F - 27
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #18
- ------------------------------------------------------------------------------
[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.
Total compensation cost recognized in income for stock based employee
compensation awards was $-- in 1997, $3,492,300 in 1996 and $-- in 1995,
respectively.
If the Company had accounted for the issuance of all options and compensation
based warrants pursuant to the fair value based method of SFAS No. 123, the
Company would have recorded additional compensation expense totaling $846,000
and $50,000 for the years ended December 31, 1996 and 1995 and the Company's net
loss and net loss per share would have been as follows:
Years ended
-----------
December 31,
-----------
1996 1995
---- ----
Net Loss as Reported $ (6,579,444) $(2,850,000)
========= =========
Pro Forma Net Loss $ (7,425,444) $(2,900,000)
========= =========
Net Loss Per Share as Reported $ (1.28) $ (.59)
========= =========
Pro Forma Net Loss Per Share (1.44) $ (.60)
========= =========
There were no options or Compensation Based Warrants issued in 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:
1 9 9 7 1 9 9 6 1995
------- ------- ----
Expected Life (Years) -- 2 3
Interest Rate -- 6.0% 6.0%
Annual Rate of Dividends -- 0% 0%
Volatility -- 67.9% 69.6%
The weighted average fair value of options and warrants at date of grant using
the fair value based method during 1997, 1996 and 1995 is estimated at $--,
$1.33 and $.14 respectively.
F - 28
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #19
- ------------------------------------------------------------------------------
[15] Industry Segments
The Company currently classifies its operations into two business segments: (1)
Software and Related Systems and Services and (2) Data Center Services. Software
and Related Systems and Services is the design, installation, implementation and
maintenance of computer information systems. Data Center Services involve
company personnel performing data entry and data processing services for
customers. Intersegment sales and sales outside the United States are not
material. Information concerning the Company's business segments is as follows:
Y e a r s e n d e d
---------------------
D e c e m b e r 31,
--------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Revenues:
Software and Related Systems and Services $ 5,646,471 $ 6,333,804 $ 5,640,000
Data Center Services 2,235,209 2,207,155 1,742,000
--------- --------- ----------
Total Revenues $ 7,881,680 $ 8,540,959 $ 7,382,000
-------------- ========= ========= =========
Gross Profit:
Software and Related Systems and Services $ 957,731 $ 623,556 $ 911,000
Data Center Services 769,102 986,787 853,000
---------- ---------- ----------
Total Gross Profit $ 1,726,833 $ 1,610,343 $ 1,764,000
------------------ ========== ========== ==========
Income [Loss] From Operations:
Software and Related Systems and Services $(2,776,719) $(4,053,006) $(1,692,000)
Data Center Services (86,706) (97,805) 259,000
--------- --------- ---------
Total [Loss] From Operations $(2,863,425) $(4,150,811) $(1,433,000)
---------------------------- ========= ========= =========
Depreciation and Amortization:
Software and Related Systems and Services $ 477,953 $ 367,984 $ 765,000
Data Center Services 123,037 118,582 107,000
--------- ---------- ----------
Total Depreciation and Amortization $ 600,990 $ 486,566 $ 872,000
----------------------------------- ========== ========== ==========
Capital Expenditures:
Software and Related Systems and Services $ 636,174 $ 444,516 $ 46,000
Data Center Services 41,867 15,317 92,000
---------- ---------- ----------
Total Capital Expenditures $ 678,041 $ 459,833 $ 138,000
-------------------------- ========== ========== ==========
Identifiable Assets:
Software and Related Systems and Services $ 3,696,725 $ 4,119,943 $ 3,625,000
Data Center Services 2,587,426 2,607,693 2,691,000
---------- ---------- ----------
Total Identifiable Assets $ 6,284,151 $ 6,727,636 $ 6,316,000
------------------------- ========== ========== ==========
F - 29
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #20
- ------------------------------------------------------------------------------
[16] Joint Venture
The Company entered into a joint venture with Oasis Technology, Ltd. ["Oasis"]
pursuant to which the joint venture corporation (50% owned by the Company)
purchased certain credit card processing software. The Company and Oasis each
paid $325,000 of the $650,000 purchase price. The Company accounts for its
interest in the Joint Venture on the equity method. During 1996 the Company
recognized $264,085 of its share of losses related to this joint venture and
contributed an additional $59,631 in cash to fund ongoing costs. During 1997 the
Company recognized $139,699 of its share of losses related to this joint venture
and contributed an additional $165,585 in cash to fund ongoing costs. During the
fourth quarter of 1997 the Company re-evaluated the recoverability of its
investment in the joint venture. A determination was made that this investment
would not be recoverable based upon estimated cash flows and consequently wrote
off $147,432 which reduced the carrying basis to zero. Such write off was
charged to equity in net loss of joint venture.
[17] Johnson Acquisition
In October 1997 the Company issued 80,000 shares of Common Stock for the
purchase of certain assets and customer list of Johnson Computing Systems.
Johnson Computing Systems is a provider of license software and services for the
automation of methadone dispensing and integrated clinical and billing turnkey
systems. The shares issued were valued at $300,000 and of which $255,000 was
assigned to customer lists and the balance to a covenant not to compete and
computer equipment.
[18] New Authoritative Accounting Pronouncements
The FASB has issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Financial Information". This statement is effective for fiscal years
ending after December 15, 1998 and establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is not expected to have a material impact on the
Company.
The Financial Accounting Standards Board ("FASB") has issued Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 is effective for fiscal year's beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS No. 130 is
not expected to have a material impact on the company.
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 is taking steps to meet the
requirements of the SOP and expects that it will not have a material impact on
the financial position or results of operations of the company.
[19] Subsequent Event
In April 1998, Mr. Lewis S. Schiller, who was chairman of the board, chief
executive officer and a director of Consolidated, the Company and other
subsidiaries of Consolidated, resigned as an officer and director of
Consolidated and each of its present subsidiaries, including the Company. Mr.
Norman J. Hoskin, who was a director of Consolidated, the Company and other
subsidiaries of Consolidated, resigned as a director of Consolidated and such
subsidiaries, including the Company. Contemporaneously with the effectiveness
of such resignations, Messrs. Edward D. Bright and Seymour Richter were elected
as directors to fill the vacancies created by the resignation of Messrs.
Schiller and Hoskin. Messrs. Bright, and Richter were also elected as directors
of Consolidated. In April 1998, Mr. Bright was elected as Chairman of the Board
and Mr. Conway was elected as Chief Executive Officer of the Company.
F - 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NETSMART TECHNOLOGIES, INC.
Date: April 30, 1998 /s/
---------------------------
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 April 30, 1998
- ----------------------------
James L. Conway Officer and Director(Principal
Executive Officer)
/s/ Anthony F. Grisanti Chief Financial Officer April 30, 1998
- ----------------------------
Anthony F. Grisanti (Principal Financial and
Accounting Officer)
/s/ Edward D. Bright Director April 30, 1998
- ----------------------------
Edward D. Bright
/s/ John F. Phillips Director April 30, 1998
- -----------------------------
John F. Phillips
Director April 30, 1998
- -----------------------------
Leonard M. Luttinger
Director April 30, 1998
- -----------------------------
Storm Morgan
/s/ Seymour Richter Director April 30, 1998
- -----------------------------
Seymour Richter