PART I
Item 1. Business
Introduction
Netsmart Technologies, Inc. is a leader in the design, development, marketing
and implementation of management information systems for the behavioral health
care industry through our wholly-owned operating subsidiary, Creative
Socio-Medics ("CSM"). We license our proprietary software products to behavioral
healthcare providers and we install and support our products under long-term
maintenance agreements. Our Windows-based systems provide comprehensive
healthcare information technology solutions that include billing, patient
tracking and scheduling for inpatient and outpatient environments, as well as
clinical documentation and medical record generation and management. Marketing
is directed primarily at providers of behavioral health services, including
mental health clinics, substance abuse clinics, methadone maintenance clinics,
psychiatric hospitals, and other specialty care inpatient and outpatient
providers.
We have an established nationwide customer base, including the state agencies
that have responsibility for providing behavioral healthcare services in 14
states. Our revenue grew from $7.6 million in 1997 to $13.2 million in 1998, an
increase of 73.7%, while income from continuing operations increased from a loss
of $844,000 to income of $413,000.
Forward - Looking Statements
The statements in this Form 10-K Annual Report that are not descriptions of
historical facts may be forward- looking statements that are subject to risks
and uncertainties. In particular, statements in this Form 10-K Annual Report,
including any material incorporated by reference in this Form 10-K, that state
our intentions, beliefs, expectations, strategies, predictions or any other
statements relating to our future activities or other future events or
conditions are "forward-looking statements." Forward-looking statements are
subject to risks, uncertainties and other factors, including, but not limited
to, those identified under "Risk Factors," those described in Management's
Discussion and Analysis of Financial Conditions and Results of Operations and in
any other filings with the Securities and Exchange Commission, as well as
general economic conditions, any one or more of which could cause actual results
to differ materially from those stated in such statements.
Organization of the Company
We are a Delaware corporation formed in September 1992 under the name Medical
Services Corp. Our name was changed to Carte Medical Corporation in October
1993, CSMC Corporation in June 1995 and to Netsmart Technologies, Inc. in
February 1996. Our executive offices are located at 146 Nassau Avenue, Islip,
New York 11751, telephone (516) 968-2000. Reference to us and to Netsmart
include our subsidiary, CSM, unless the context indicates otherwise.
Risk Factors
We require additional capital. We had working capital of $10,000 at December 31,
1998 as compared to a working capital deficit of $537,000 at December 31, 1997.
Our cash position decreased from $855,000 at December 31, 1997 to $199,000 at
December 31, 1998. However, in order to expand and develop our business and
perform our obligations under our agreements and purchase orders, we require
substantial additional capital, and we have no commitments from any person to
provide such capital. Our business may suffer significantly if we do not obtain
the capital when it is required. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
We are dependent upon government contracts. We market our health information
systems principally to behavioral health care facilities, many of which are
operated by government entities and include entitlement programs. During the
years ended December 31, 1998, 1997 and 1996, approximately 52%, 35%, and 31%,
respectively, of our revenue was generated from contracts with government
agencies. Government agencies generally have the right to cancel contracts at
their convenience.
1
We recently discontinued our CarteSmart division. During 1998, we discontinued
our CarteSmart division. On June 30, 1998, we sold this division to a
corporation formed by the former management of such division.
Our business is subject to the effect of technological advances and possible
product obsolescence. Our customers require software which enables them to
store, retrieve and process very large quantities of data and to provide them
with instantaneous communications among the various data bases. Our business is
designed to take advantage of recent advances in software, computer and
communications technology. Such technology has been developing at rapid rates in
recent years, and our future may be dependent upon our ability to use and
develop or obtain rights to products utilizing such technology. New technology
may develop in a manner which may make our software obsolete. If we cannot use
such new technology, it would have a significant adverse effect upon our
business.
Our industry is highly competitive. Our customers in the human services market
include entitlement programs, managed care organizations, specialty care
facilities and other major information technology users which have a need for
access to information over a distributed data network. The software industry in
general, and the health information software business in particular, are highly
competitive. Although we believe that we provide our clients with software to
enable them to perform their services more effectively, other companies have the
staff and resources to develop competitive systems. We may not be able to
compete successfully with such competitors.
The health information systems business is served by a number of major companies
and a larger number of smaller companies, many of which are better capitalized,
better known and have better marketing staffs than we have, and we may not be
able to compete effectively with such companies. We believe that price
competition is a significant factor in our ability to market our health
information systems and services. See "Business -- Competition."
We depend on our management. Our business is largely dependent upon our senior
executive officers, Messrs. James L. Conway, president and chief executive
officer, John F. Philips, vice president --marketing, and Gerald O. Koop, chief
executive officer of our operating subsidiary, Creative Socio-Medics
Corporation. We have employment agreements with Messrs. Conway, Phillips, Koop
and Anthony F. Grisanti. Mr. Grisanti is our chief financial officer.
Our business may be adversely affected if any of our key management personnel
or other key employees left our employ.
We lack patent protection. We have no patent protection for our proprietary
software.
We are subject to the effect of government regulations of health care industry.
Substantially all of our revenue has been derived from our health information
systems and services. The Federal and state governments have adopted numerous
regulations relating to the health care industry, including regulations relating
to the payments to health care providers for various services. The adoption of
new regulations can have a significant effect upon the operations of health care
providers, particularly those operated by state agencies. We cannot predict the
effect on our business of future regulations by governments and payment
practices by government agencies. Furthermore, changes in state regulations in
the health care field may force us to modify our health information systems to
meet any new record-keeping or other requirements. If that happens, we may not
be able to generate revenues sufficient to cover the costs of developing the
modifications. In addition, we may lose business if government agencies reduce
funding for entitlement programs.
Our principal stockholder and certain directors may have conflicts of interest.
SIS Capital Corp. ("SISC"), a wholly-owned subsidiary of Consolidated
Technology Group Ltd. ("Consolidated"), a public company, is our largest
stockholder, holding approximately 29.3% of our outstanding Common Stock as of
April 10, 1999. Mr. Edward D. Bright, chairman of the board and a director, is
also chairman, secretary, treasurer and a director of Consolidated, and Mr.
Seymour Richter, a director, is president, chief executive officer and a
director of Consolidated. Accordingly, Messrs. Bright and Richter may have a
conflict of interest with respect to their positions with us and with
Consolidated.
We may be subject to control by SISC. Mr. Seymour Richter, as the chief
executive officer of Consolidated and SISC, has the right to vote the shares
owned by SISC. Accordingly, SISC and Mr. Richter, who is the chief executive
officer of SISC, may be able to elect all of the directors and would thus be
able to control the Company.
2
We do not anticipate paying Common Stock dividends. We presently intend to
retain future earnings, if any, in order to provide funds for use in the
operation and expansion of our business and, accordingly, we do not anticipate
paying cash dividends on our Common Stock in the foreseeable future.
The rights of the holders of Common Stock may be affected by the potential
issuance of Preferred Stock. Our certificate of incorporation gives the board of
directors the right to determine the designations, rights, preferences and
privileges of the holders of one or more series of Preferred Stock. Accordingly,
the board of directors is empowered, without stockholder approval, to issue
Preferred Stock with voting, dividend, conversion, liquidation or other rights
which could adversely affect the voting power and equity interest of the holders
of Common Stock. The Preferred Stock, which could be issued with the right to
more than one vote per share, could be utilized as a method of discouraging,
delaying or preventing a change of control of the Company. The possible impact
on takeover attempts could adversely affect the price of the Company Stock.
Although we have no present intention to issue any additional shares of
Preferred Stock or to create any additional series of Preferred Stock, we may
issue such shares in the future. Furthermore, if we issue Preferred Stock in a
manner which dilutes the voting rights of the holders of Common Stock, our
listing on The Nasdaq SmallCap Market may be impaired.
"See Note 17 of Notes to Consolidated Financial Statements for information
concerning an agreement pursuant to which a group of purchasers, consisting
principally of our management, have agreed to purchase a portion of the shares
owned by SIS Capital.
Behavioral Health Information Systems and Services
We develop, market and support computer software which enables behavioral health
care organizations to provide a full range of services in a network computing
environment.
Users typically purchase one of several behavioral healthcare information
systems, in the form of a perpetual license to use the system, as well as
purchasing professional services, support, and maintenance. In addition, we
offer third party hardware and software pursuant to arrangements with third
party vendors. The professional services include project management, training,
consulting and software development services, which are provided either on a
time and material basis or pursuant to a fixed-price contract. The software
development services may require the adaptation of health care information
technology systems to meet the specific requirements of the customer.
Our typical license for a behavioral health information system ranges from
$10,000 to $100,000 for single facility healthcare organization to $250,000 to
$1,000,000 for multi-unit and state operated health care organizations. During
the years ended December 31, 1998, 1997 and 1996, license fees from these
systems were approximately $2,270,000, $737,000 and $329,000, respectively,
accounting for approximately 17.3%, 9.6% and 5.0% of revenue for such years. A
customer's purchase order may also include third party hardware or software. For
the years ended December 31, 1998, 1997 and 1996, revenue from hardware and
third party software accounted for approximately $2,610,000, $1,078,000 and
$1,114,000 representing 19.8%, 14.1% and 17.0% , respectively , of revenue for
such years.
In addition to our behavioral healthcare information systems and related
services, we offer processing services to substance abuse facilities and
maintain a data center facility at which its personnel perform data entry, data
processing and produce operations reports for smaller substance abuse clinics.
During the years ended December 31, 1998, 1997 and 1996, our data center
operation generated revenue of approximately $2,164,000, $2,235,000 and
$2,207,000, respectively, representing approximately 16.4%, 29.3% and 33.8% of
our revenue for such periods.
Maintenance services have generated increasing revenue and have become a more
significant portion of our business since most purchasers of health care
information system licenses also purchase maintenance service. Maintenance
revenue increases as existing customers purchase additional licenses and new
customers purchase their initial software licenses. By agreement with our
customers, we provide telephone help services and maintain and upgrade their
software. Maintenance contracts may require modifications to meet any new
federal and state reporting requirements which become effective during the term
of the maintenance contract. We do not maintain the hardware and third party
software sold to our customers, but we provide a telephone help line service for
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certain third party software, which we license to our customers. During the
years ended December 31, 1998, 1997 and 1996, our maintenance revenue was
approximately $1,432,000, $1,280,000 and $1,226,000, respectively, representing
approximately 10.9%, 16.8% and 18.8% of our revenue for such years.
We currently offer four product modules that provide a range of core application
requirements for behavioral healthcare providers. These products consist of a
suite of current technology applications developed by us, together with software
provided by others which enables us to offer enterprise-wide solutions to the
behavioral health industry.
* Behavioral Healthcare Information System for Windows - This system
is a comprehensive software solution that provides patient
management functions, billing, tracking, scheduling, and reporting
for inpatient treatment facilities. This system is also a gateway
to other company and third party products.
* Human Services Information System for Windows - This system offers
a variety of modules that include system administration, staff and
client appointment, scheduling, billing, and activity recording
for outpatient and community provider agencies.
* Clinician Workstation- This system provides clinician
documentation and medical record management including assessment,
care planning, progress notes, and on-line medical records.
* The M4 Clinical Management System (M4) - This system, owned by
Mallinckrodt Pharmaceutical Specialties, a division of
Mallinckrodt Group, provides a solution for dispensing, medical,
admissions/records, counselor and reception/security specifically
for methadone clinics. Pursuant to an exclusive license agreement
with Mallinckrodt, we will sell, install and provide training and
service for M4 informational management system for Methadone
maintenance centers. M4 will also integrate with our managed care
and behavioral health products.
All of these products have been accepted in the marketplace by an established
user base, and we believe that these Window-based products are Year 2000 ("Y2K")
compliant.
Markets and Marketing
The market for behavioral health information systems and related services
consists of both private and publicly operated providers offering hospital or
community-based outpatient behavioral healthcare services. These healthcare
providers require a healthcare information systems to administer their programs.
We believe that there are at least 15,000 behavioral healthcare providers in the
United States, including public and private hospitals, private and
community-based residential facilities and Federal, state and local governmental
agencies.
Many long-term behavioral healthcare facilities are operated by government
entities and include those operated as part of entitlement programs. During the
years ended December 31, 1998, 1997 and 1996, approximately 52.0%, 35.0% and
31.0%, respectively, of revenue was generated from contracts with government
agencies. Contracts with government agencies generally include provisions which
permit the contracting agency to cancel the contract for its convenience,
although we have not experienced a termination for convenience in the last five
years.
We believe that the demand for technology solutions is increasing as managed
care exerts pressure on healthcare providers to lower healthcare delivery costs
while expanding the availability of services. In order to remain competitive, we
believe that behavioral health delivery networks need detailed clinical and
management information systems that enable providers within the networks to
maintain a broad scope of accurate medical and financial information, manage
costs and deliver quality care efficiently. In addition, the need to upgrade
existing systems to meet the increased demand for data processing needs of
managed care and regulatory oversight has also resulted in an increased demand
for behavioral health care information technology. These data processing needs
include analysis of patient assessments, maintenance of patient records,
administration of patient treatment plans and the overall coordination of
patient case management.
4
As part of our marketing effort, we work with the state agencies and other major
users of our systems. Our state agency clients formed a State Systems
Association, presently consisting of 14 states. The association's members work
with our management to assess and determine future requirements in both patient
managed care coordination and regulatory reporting.
For the year ended December 31, 1998 one customer accounted for approximately
$2.1 million or 16% of our revenue. For the years ended December 31, 1997 and
1996, no customer accounted for more than 10% of our revenue from continuing
operations. See "Item 7. Management Discussion and Analysis of Financial
Condition and Results of Operations."
At December 31, 1998 and 1997, we had a backlog of orders, including ongoing
maintenance and data center contracts, for our behavioral health information
systems of $16.8 million and $4.8 million, respectively. A substantial amount of
the 1998 backlog is expected to be filled during 1999.
Product Development
For the years ending December 31, 1998, 1997 and 1996, we incurred approximately
$763,000 ,$201,000 and $278,000, respectively, of product development costs
relating to our behavioral health information systems.
Competition
The software industry is highly competitive. Although we believe that we can
provide a health care facility or managed care organization with software to
enable it to perform its services more effectively, other software companies
provide comparable systems and have the staff and resources to develop
competitive systems.
According to independent consulting reports, healthcare information technology
is an $18.0 billion industry served by numerous vendors. The dominant health
care information technology vendors have achieved annual sales of more than $1.0
billion by focusing on solutions for large medical/surgical health care
providers, such as large hospital systems and health maintenance organizations,
and, we believe, have neglected the behavioral healthcare industry. We believe
that most of the presently available healthcare management software does not
meet the specific needs of the behavioral healthcare industry, and that our
healthcare information systems are designed to meet the needs of this market.
However, the behavioral health information systems business is serviced by a
number of companies, some of which are better capitalized, and have larger
marketing staffs than Netsmart, and we may not be able to continue to compete
effectively with such companies.
We have an established customer base of more than 400 clients nationwide,
including large private and government providers of behavioral health care.
During the period from January 1, 1998 to March 25, 1999, we signed contracts to
provide our healthcare information systems to ten state agencies responsible for
administering behavioral services, bringing the total number of such states to
14.
Government Regulations and Contracts
The Federal and state governments have adopted numerous regulations relating to
the health care industry, including regulations relating to the payments to
health care providers for various services. The adoption of new regulations can
have a significant effect upon the operations of health care providers and
insurance companies. Although our business is aimed at meeting certain of the
problems resulting from government regulations and from efforts to reduce the
cost of health care, we cannot predict the effect of future regulations by
governments and payment practices by government agencies or health insurers,
including reductions in the funding for or scope of entitlement programs. Any
change in the structure of health care in the United States can have a material
effect on companies providing services to the health care industry, including
those providing software. Although we believe that the likely direction which
may result from the current study of the health care industry would be an
increased trend to managed care programs, thereby increasing the importance of
automation, our business may not benefit from any changes in the industry
structure. Even if the industry does evolve toward more healthcare being
provided by managed care organizations, it is possible that there will be
substantial concentration in a few very large organizations, which may seek to
develop their own software or obtain software from other sources. To the extent
that the health care industry evolves with greater government sponsored programs
and less privately
5
run organizations, our business may be adversely affected. Furthermore, to the
extent that each state changes its own regulations in the health care field, it
may be necessary for us to modify our behavioral health information systems to
meet any new record-keeping or other requirements imposed by changes in
regulations, and we may not be able to generate revenues sufficient to cover the
costs of developing the modifications.
A significant amount of our business has been with government agencies,
including specialized care facilities operated by, or under contract with,
government agencies. The decision on the part of a government agency to enter
into a contract is dependent upon a number of factors, including economic and
budgetary problems affecting the local area, and government procurement
regulations, which may include the need for approval by more than one agency
before a contract is signed. In addition, government agencies generally include
provisions in their contracts which permit the contracting agency to cancel the
contract at its convenience. We have not experienced a termination for
convenience in the last five years.
Intellectual Property Rights
We have no patent rights for our behavioral health information system software,
but we rely upon copyright protection for our software, as well as
non-disclosure and secrecy agreements with our employees and third parties to
whom we disclose information. We may not be able to protect our proprietary
rights to our system and third parties may claim rights in the system.
Disclosure of the codes used in any proprietary product, whether or not in
violation of a non-disclosure agreement, could have a materially adverse affect
upon us, even if we are successful in obtaining injunctive relief. We must
continue to invest in product development, employee training, and client
support.
Employees
As of December 31, 1998, we had 106 employees, including four executive, nine
marketing, 86 technical and seven clerical and administrative employees.
Year 2000 Issues
Year 2000 compliance generally requires a software program to record, store,
process and present calendar dates falling on or after January 1, 2000 in the
same manner as the program records, stores, processes, and presents calendar
dates falling on or before December 31, 1999. It also requires that a program
correctly handle all leap year dates, including February 29, 2000.
Typically, Year 2000 dates are being handled by most software companies through
the use of the 80/20 standard or a similar standard. Under this standard, a
system will accept a two digit date and uses the 80/20 rule ("80/20 Rule") to
determine the century. Dates entered as 00-20 are assumed to be twenty-first
century dates. For example, an entry of 18 would be assumed to be 2018. Dates of
21 and beyond are assumed to be twentieth century dates, For example, an entry
of 52 is assumed to be 1952. The 80/20 determination will be advanced each year,
starting with the year 2001, so that 80/20 would become 79/21 at that point. We
are using this standard for all new programs as well as to make older programs
Year 2000 compliant.
In addition, in some cases software companies are developing programs which will
accept four digit dates or will show the four digit date chosen by the program
when a two digit date is entered. We have chosen to use one or a combination of
more than one of these industry accepted fixes, depending on the product
involved.
In all cases, except as noted below, these fixes have been programmed, and,
where a product is not Year 2000 compliant, licensees of the product concerned
have been advised of that fact and have been provided with a method for
upgrading the program so that it will be Year 2000 compliant.
Most of the products currently being licensed are Year 2000 compliant. Some of
our products, which were developed for earlier versions of Windows are not Year
2000 compliant, and we are either developing an upgraded program or are
providing the users with the ability to upgrade the products to become Year 2000
compliant. We believe that all of our current products will either be Year 2000
compliant or we will provide the client with the
6
ability to upgrade the products to a Year 2000 compliant version by fall 1999.
We do not believe that the cost of making our systems Year 2000 compliant will
have a material effect upon our operations.
Our internal accounting system is not Year 2000 compliant. We are installing new
accounting software, which is Year 2000 compliant. The costs of such
installation will range from approximately $25,000 to $50,000.
Executive Officers
Our executive officers are as follows:
Name Age Position
---- --- --------
Edward D. Bright 62 Chairman of the Board
James L. Conway 51 President and Chief Executive Officer
Anthony F. Grisanti 49 Chief Financial Officer,
Treasurer and Secretary
Gerald Koop 60 Chief Executive Officer of CSM
John F. Phillips 61 Vice President - Marketing
Mr. Edward D. Bright has been chairman of the board and a director of Netsmart
since April 1998. In April 1998, Mr. Bright was also elected as chairman,
secretary, treasurer and a director of Consolidated, a public company engaged in
various lines of business, and a director of Trans Global Services, Inc., which
provides technical temporary staffing services. Consolidated is the largest
stockholder of Netsmart and Trans Global.
Mr. James L. Conway has been president and a director of Netsmart since January
1996 and chief executive officer since April 1998. From 1993 to April 1998 he
was president of S-Tech Corporation, which, until April 1998, was a wholly-owned
subsidiary of Consolidated. S-Tech manufactures aircraft instruments for the
U.S. military and specialty vending equipment for postal, telecommunication and
other industries. Mr. Conway is also a director of Trans Global.
Mr. Gerald Koop, has been a director of Netsmart since June 1998. He has held
management positions with CSM for more than the past five years, most recently
as its chief executive officer, a position he has held since 1996.
Mr. Anthony F. Grisanti, has been treasurer of Netsmart since June 1994,
secretary since February 1995 and Chief Financial Officer since January 1996. He
was chief financial officer of CSM for more than five years prior thereto.
Mr. John F. Phillips, Mr. John F. Phillips has been a director of Netsmart and
vice president of CSM since June 1994, when CSM was acquired, and vice
president-marketing of the Company since 1996. He was also vice president --
marketing of Netsmart from June 1994 to January 1996. He was a senior executive
officer and director of CSM and its parent company for more than five years
prior to June 1994, when CSM was acquired.
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Item 2. Property
We lease office space at the following locations:
Location Purpose Space Annual Rental Expiration
- -------- ------- ----- ------------- ----------
146 Nassau Avenue Executive 18,000 $280,000, plus 4% 12/31/03
Islip, New York offices square feet annual increases
1335 Dublin Road Offices 3,500 $50,000 (1) 11/30/00
Columbus, Ohio square feet
18B Ledgebrook Run (2) 1,800 $21,000 (1) 10/31/02
Mansfield Center, CT square feet
7590 Fay Avenue Offices 1,800 $37,000, plus 6% 12/31/00
La Jolla, California square feet annual increases
<FN>
_________________
(1) These leases provide for an annual increase in rent for operating expenses
and real estate taxes.
(2) These offices are no longer being used by us, and the space is being
subleased at our cost.
</FN>
We believe that our space is adequate for our immediate needs and that, if
additional space is required, it would be readily available on commercially
reasonable rates.
Item 3. Legal Proceedings
There are no material legal proceedings pending or threated against us. The
action by Onecard Corporation which was disclosed in prior filings with the
Securities and Exchange Commission has been dismissed.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to security holders for a vote during the three months
ended December 31, 1998.
[This Portion Intentionally Left Blank]
8
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Common Stock is traded on The Nasdaq SmallCap Market under the symbol NTST.
Set forth below is the reported high and low sales prices of the Common Stock
commencing from August 13, 1996, the date of the Prospectus relating to our
initial public offering, through December 31, 1998. All price information
reflects the one-for-three reverse split, effective September 14, 1998.
Quarter Ending High Bid Low Bid
-------------- -------- -------
September 30, 1996 (from August 13) $13.25 $12.50
December 31, 1996 3.38 3.00
March 31, 1997 6.00 2.63
June 30, 1997 6.63 2.63
September 30, 1997 6.50 2.00
December 31, 1997 6.25 .81
March 31, 1998 3.19 1.88
June 30, 1998 2.91 1.50
September 30, 1998 1.41 .81
December 31, 1998 3.13 .75
As of December 31, 1998 there were approximately 710 holders of record of the
Company's Common Stock.
No cash dividends have been paid to the holders of the shares of Common Stock
during the years ended December 31, 1998 and 1997 and 1996.
[This Portion Intentionally Left Blank]
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Item 6. Selected Financial Data
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands except per share data)
Selected Statements
of Operations Data:
Revenue $ 13,165 $ 7,635 $ 6,538 $ 6,751 $ 2,924
Income (Loss) from Continuing
Operations before interest
and other financing costs 759 (536) (1)(3,614) (1,181) (1,126)
Loss from Discontinued Operations (217) (2,615) (801) (252) (365)
Net Income (Loss) 196 (3,459) (1&2)(6,579) (3)(2,850) (1,751)
Per Share Data - Basic & Diluted:
Continuing Operations .12 (.37) (3.36) (1.61) (.85)
Discontinued Operations (.08) (1.10) (.47) (.16) (.23)
Net Income (loss) .04 (1.47) (3.83) (1.77) (1.08)
Weighted average number
of shares outstanding 2,865 2,387 1,716 1,607 1,607
Selected Balance
Sheet Data:
Working Capital (deficiency) 10 (537) 477 (2,562) (4,037)
Total Assets 10,289 7,340 8,251 6,390 7,193
Total Liabilities 7,005 4,200 3,836 5,887 6,342
Redeemable Preferred Stock -- -- -- 96 96
Accumulated Deficit (15,097) (15,293) (11,726) (5,147) (2,297)
Stockholders' Equity 3,284 3,140 4,415 407 755
<FN>
____________________
(1) Reflects $3,492 of non-cash compensation charges arising out of the issuance
by the Company of warrants and options having exercises prices which were less
than the market value of the Common Stock at the date of approval by the board
of directors.
(2) Reflects $1,692 of non-cash costs associated with the issuance of 500,000
shares of common stock to certain noteholders and 25,000 shares of common stock
to the Company's asset based lender.
(3) Reflects financing costs of $460 representing the write-off of deferred
financing costs relating to a proposed public offering scheduled for early 1995
but cancelled.
</FN>
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Years Ended December 31, 1998 and 1997
In 1998, we evaluated our smart card business and determined that the cash
requirements did not justify the continued operations of the development of such
business in the increasingly competitive smart card market. As a result, we sold
our smart card division effective July 1, 1998 and we accounted for the
operations of this division as a discontinued operation. Accordingly, references
to our continuing operations which are discussed hereafter will relate to its
behavioral health information systems business which represents our only
business.
Our revenue for 1998 was $13,165,000, an increase of $5,530,000, or 72%, from
the 1997 revenue which was $7,635,000. The largest component of revenue in 1998
was turnkey systems labor revenue which increased to $3,664,000 from $2,107,000
in 1997, reflecting a 74% increase. This increase is substantially the result of
growth in the behavioral health information systems business and our ability to
provide the staff necessary to generate additional revenue. The data center
(service bureau) revenue decreased to $2,165,000 in 1998 from $2,235,000 in
1997, reflecting a decrease of 3%. This decrease was substantially the result of
a special project performed for a client in 1997 which did not continue at the
same rate in 1998. License revenue increased to $2,270,000 in 1998 from $737,000
in 1997, an increase of 208%. License revenue is generated as part of a sale of
a behavioral health information system pursuant to a contract or purchase order
that includes delivery of the system and maintenance. Revenue from third party
hardware and software increased to $2,610,000 in 1998 from $1,089,000 in 1997,
an increase of 140%. Sales of third party hardware and software are made in
connection with the sales of turnkey systems. Maintenance revenue increased to
$1,432,000 in 1998 from $1,280,000 in 1997, reflecting an increase of 12%.
Revenue from the sales of our small turnkey division (formerly our methadone
division) was $1,025,000 in 1998. There was no revenue for this division in
1997.
Revenue from contracts from government agencies represented 52% and 35% of
revenue in 1998 and 1997, respectively.
Gross profit increased to $5,084,000 in 1998 from $2,747,000 in 1997, a 85%
increase. The increase in the gross profit was substantially the result of the
increased license revenue which provides higher margins.
Selling, general and administrative expenses were $3,516,000 in 1998, an
increase of 21% from the $2,902,000 in 1997. This increase was substantially the
result of an increase in commissions expense, sales and marketing salaries,
advertising and related sales expenses which were partially offset by a decrease
in administrative expenses as well as other miscellaneous expenses, including a
reduction in related party administrative expenses. Related party administrative
expense was $45,000 in 1998 and $180,000 in 1997. These charges were pursuant to
an management services agreement with the our principal stockholder for a
monthly fee of $15,000. This agreement was mutually terminated, effective April,
1, 1998.
During 1998, we incurred product development expenses of $763,000, an increase
of 279% from the $201,000 in 1997. These expenses were related to our behavioral
health information systems products such as our clinician workstation,
behavioral health information system for Windows, managed care and methadone
dispensing products.
Interest expense was $346,000 in 1998, an increase of $38,000, or 12% from the
$308,000 in 1997. This increase was the result of higher borrowings during 1998
which were substantially off set by a reduction in the cost of borrowings. The
most significant component of the interest expense on an ongoing basis is the
interest payable to our asset-based lender. We paid interest on such loans at a
rate equal to prime plus 8 1/2 % plus a fee of 5/8% of the face amount of the
invoice for the first nine months of 1998. Effective October 1, 1998, we amended
the terms of our agreement with the asset-based lender and reduced the interest
rate from prime plus 8 1/2% to prime plus 5% and eliminated the 5/8% fee
previously paid on the face amount of each invoice.
11
The net loss from Netsmart's discontinued operations, the smart card division,
was $217,000 in 1998, a decrease of $2,398,000 from the $2,615,000 in 1997. This
decrease is the result of a reduction of expenses in this division prior to the
sale of the division.
As a result of the foregoing factors, we generated a net income of $196,000, or
$.04 per share, in 1998 as compared with a net loss of $3.5 million, or $1.45
per share, in 1997.
Years Ended December 31, 1997 and 1996
Our revenue for 1997 was $7.6 million, an increase of $1.1 million, or 17%, from
the revenue for 1996 which was $6.5 million. The largest component of revenue in
1997 was data center revenue which increased to $2,235,000 in 1997 from
$2,207,000 in 1996, reflecting an increase of 1%. The turnkey systems labor
revenue increased to $2,107,000 in 1997 from $1,663,000 in 1996, reflecting an
increase of 27%. This increase is substantially the result of growth in the
behavioral health business and our ability to provide the staff necessary to
generate the additional revenue. Maintenance revenue increased to $1,280,000 in
1997 from $1,226,000 in 1996, reflecting a 4% increase. Revenue from third party
hardware and software decreased to $1,078,000 in 1997 from $1,114,000 in 1996, a
decrease of 3%. License revenue increased to $737,000 in 1997 from $329,000 in
1996, a 124% increase.
Revenue from contracts from government agencies represented 35% and 31% of
revenue in 1997 and 1996, respectively.
Gross profit increased to $2,747,000 in 1997 from $1,947,000 in 1996, a 41%
increase. The increase in the gross profit was substantially the result of the
increased license revenue which provides higher margins.
Selling, general and administrative expenses were $2.9 million in 1997, an
increase of 71%, from $1.7 million in 1996. The increase was the result of an
increase in personnel and salaries in the sales and marketing and administrative
areas, an increase in other direct sales expenses such as advertising, trade
shows and commissions and an increase in general and administrative expenses
including insurance and an adjustment for bad debts.
In 1996, we incurred noncash compensation charges of $3.5 million from our
issuance of warrants and options having exercise prices which were below the
market value of the Common Stock at the date of issuance. During 1996, we also
issued 500,000 shares of common stock to certain noteholders and 25,000 shares
of common stock to our asset-based lender. As a result of such issuance, we
incurred a financing cost charge to operations of approximately $1.7 million.
There were no such charges during 1997.
During 1997, we incurred product development expenses of $201,000, a decrease of
28% from the $278,000 in 1996. These expenses were related to our behavioral
health information systems products such as our clinician workstation,
behavioral health information systems for Windows, managed care and methadone
dispensing products.
Interest expense was $308,000 in 1997, a decrease of $164,000, or 35%, from the
interest expense in 1996. This is a result of a decrease in the average
borrowings during 1997. The most significant component of the interest expense
on an ongoing basis is the interest payable to the our asset-based lender.
During both years, we paid interest on such loans at a rate equal to prime plus
8 1/2% plus a fee of 5/8% of the face amount of the invoice.
Related party administrative expense was $180,000 in 1997 and $70,000 in 1996.
These charges were pursuant to an agreement with our principal stockholder to
provide general business, management and financial consulting services for a
monthly fee of $15,000 commencing in September 1996, the month after we
completed our initial public offering.
The loss from discontinued operations, the smart card division, was $2,615,000
in 1997, and $801,000 in 1996.
As a result of the foregoing factors, we incurred a loss of $3.5 million, or
$1.45 per share, in 1997 as compared with a net loss of $6.6 million, or $3.84
per share, in 1996.
12
Liquidity and Capital Resources
We had working capital of $10,000 at December 31, 1998, as compared to a working
capital deficit of $537,000 at December 31, 1997. Our cash position decreased
from $855,000 at December 31, 1997 to $199,000 at December 31, 1998. The
increase in working capital for the year ended December 31, 1998 was
substantially due to the net income after adding back depreciation and
amortization.
Our principal source of funds, other than revenue, is an accounts receivable
financing agreement with an asset based lender whereby we may borrow up to 80%
of eligible accounts receivable up to a maximum of $2,000,000. At December 31,
1998, the outstanding borrowings under this facility was $1,640,000. At December
31, 1998, the maximum amount available under this formula was $1,670,000. During
the year, with the consent of the asset-based lender, we have, from time to time
exceeded the maximum borrowing level provided in the agreement with the
asset-based lender.
In order to expand and develop our business and perform our obligations under
our agreements and purchase orders, we require substantial additional capital,
and we have no commitments from any person to provide such capital. Our business
may suffer significantly if we do not obtain the capital when it is required.
At December 31, 1998, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $6.5 million, representing
approximately 178 days of revenue based on annualizing the revenue for the year
ended December 31, 1998, although no assurance can be given that revenue will
continue at the same level as the year ended December 31, 1998. Accounts
receivable at December 31, 1998 increased by $1.4 million from $2.2 million at
December 31, 1997 to $3.6 million at December 31, 1998. We believe that, with
the elimination of expenses relating to the smart card business, the cash on
hand, the increased line with our asset based lender together with revenue from
the behavioral health information system business, it will be sufficient to
enable us to continue to operate at least through the end of 1999 without
additional funding. If we continue to grow at the existing rate into 2000 and
beyond, we may require significant additional funding. We are therefore
exploring various long term funding possibilities with several banks and
investment banking organizations. No assurances can be given as to the ability
of Netsmart to obtain additional financing and our inability to do so could have
a material adverse affect on our ability to grow.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not Applicable.
13
Part III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Registrant are as follows:
Name Age Position
- ---- --- --------
James L. Conway 50 President, Chief Executive Officer and Director
Edward D. Bright(1) 62 Chairman of the Board and Director
Anthony F. Grisanti 50 Chief Financial Officer, Treasurer and Secretary
John F. Phillips 61 President of Creative Socio-Medics Corp.
and Director
Gerald O. Koop 60 Chief Executive Officer of Creative Socio-Medics
Corp. and Director
Seymour Richter(1) 62 Director
Joseph G. Sicinski(1) 67 Director
- ----------
(1) Member of the audit and compensation committees.
Mr. James L. Conway has been our president and a director since January
1996 and our chief executive officer since April 1998. From 1993 until April
1998, he was president of S-Tech Corporation, a manufacturer of specialty
vending equipment for postal, telecommunication and other industries, which,
until April 1998, was a wholly-owned subsidiary of Consolidated Technologies
Group Ltd. ("Consolidated"). From 1997 until April 1998, Mr. Conway was also
president of other subsidiaries of Consolidated engaged in manufacturing.
Consolidated, our largest stockholder, is a public company which had been
engaged in various businesses. Mr. Conway is also a director of Trans Global
Services, Inc. ("Trans Global"), which provides technical temporary staffing
services. Consolidated is presently also the largest stockholder of Trans
Global.
Mr. Edward D. Bright has been our chairman of the board and a director
since April 1998. In April 1998, Mr. Bright was also elected as chairman,
secretary, treasurer and a director of Consolidated. From January 1996 until
April 1998, Mr. Bright was an executive officer of or advisor to Creative
Socio-Medics Corp., our subsidiary which was acquired in June 1994. From June
1994 until January 1996, he was our chief executive officer. For more than two
years prior thereto, he was a senior executive officer of Creative Socio-Medics
Corp. and its former parent. Mr. Bright is also a director of Trans Global.
Mr. Anthony F. Grisanti has been our treasurer since June 1994, our
secretary since February 1995 and our chief financial officer since January
1996. He was chief financial officer of Creative Socio-Medics and its former
parent more than five years prior thereto.
Mr. John F. Phillips has been a director and president of our subsidiary,
Creative Socio-Medics Corp., since June 1994. He also served as our vice
president -- marketing from June 1994 to January 1996. From January 1993 until
June 1994, he was chairman of the board of Creative Socio-Medics Corp. and its
former parent.
Mr. Gerald O. Koop has been a director since June 1998. He has held
management positions with Creative Socio-Medics Corp. for more than the past
five years, most recently as its chief executive officer, a position he has
held since 1996.
14
Mr. Seymour Richter has been a director since April 1998. Since April
1999, Mr. Richter has been a consultant to Consolidated. From April 1998 until
April 1999, he was president, 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.
Mr. Joseph G. Sicinski has been a director since June 1998. He is
president and a director of the Trans Global, a position he held with Trans
Global and its predecessor since September 1992. Since April 1998, he has also
been chief executive officer of Trans Global.
The Board of Directors has created audit and compensation committees, both
of which consists of Messrs. Bright, Richter and Sicinski, each of whom is a
non-employee director. The audit committee has the authority to approve our
audited financial statements, to meet with our independent auditors, to review
with the auditors and with management any management letter issued by the
auditors and generally to exercise the power normally accorded an audit
committee of a public corporation. In addition, any transactions between us or
our subsidiaries, on the one hand, and any officer, director or principal
stockholder or any affiliate of any officer, director or principal stockholder,
on the other hand, requires the prior approval of the audit committee.
The compensation committee serves as the stock option committee pursuant
to our stock option plans. In addition, it reviews and approves any changes in
compensation for our executive officers.
In April 1999, two members of the audit and compensation committees,
Messrs. Edward D. Bright and Joseph G. Sicinski, purchased shares of common
stock from SIS Capital pursuant to an agreement described under "Item 13 --
Certain Relationships and Related Transactions."
Directors are elected for a term of one year.
None of the Company's officers and directors are related.
The Company's certificate of incorporation includes certain provisions,
permitted under Delaware law, which provide that a director of the Company shall
not be personally liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for any transaction from which
the director derived an improper personal benefit, or (iv) for certain conduct
prohibited by law. The Certificate of Incorporation also contains broad
indemnification provisions. These provisions do not affect the liability of any
director under Federal or applicable state securities laws.
Section 16(a) Beneficial Ownership Reporting Compliance
During 1998, Messrs. Edward D. Bright and Seymour Richter filed their
Form 3, which was due in April 1998, in June 1998.
Item 11. Executive Compensation
Set forth below is information with respect to compensation paid or
accrued by the Company for 1998, 1997 and 1996 to its chief executive officer
and to each other officer whose salary and bonus for 1998 exceeded $100,000.
15
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation (Awards)
Options, SARs
Name and Principal Position Year Salary Bonus(1) (Number)(2)
- --------------------------- ---- ------ ------ -------------
James L. Conway, CEO 1998 $161,563 $ 60,000 90,000
(from April 1998) and 1997 125,000 -- 89,582
president 1996 77,408 -- --
Lewis S. Schiller, CEO 1998 -- -- --
(prior to April 1998)(3) 1997 -- -- --
1996 -- -- --
Gerald O. Koop, chief 1998 92,700 126,305 80,000
executive officer of Creative 1997 90,000 158,094 --
Socio-Medics Corp. 1996 90,000 134,768 6,000
John F. Phillips, vice 1998 112,800 70,540 80,000
president - marketing 1997 109,500 89,657 --
1996 100,000 33,906 9,000
Anthony F. Grisanti, chief 1998 91,240 67,717 80,000
financial officer 1997 87,600 73,888 --
1996 80,000 23,500 5,000
(1) Includes commissions paid or accrued during 1998. In addition, during
1998, Mr. Koop earned commissions of $192,284 and Mr. Grisanti earned
commissions of $57,685. These commissions are based on contracts
entered into during 1998 and will be recognized through 2000 as revenue
on the contracts is recognized.
(2) Includes, for 1998, option grants which were made pursuant to an
amendment to the 1998 Long Term Incentive Plan. Such option grants are
subject to stockholder approval of such amendment. Options which were
repriced in 1998 are reflected in the year in which the options were
initially granted.
(3) Mr. Schiller resigned as an officer and director in April 1998. Mr.
Schiller has received no compensation from us. During 1998,
Consolidated Technology reported that Mr. Schiller's compensation for
1998 included salary of $138,000 and other annual compensation of $3.5
million, which represented $1.2 million paid to him and his designated
family members for his ownership in one of Consolidated Technology's
subsidiaries which was sold in 1998, $1.9 million for the
16
purchase of his contract rights by the Company and $350,000 for other
payments due pursuant to a settlement agreement with Mr. Schiller. In
1997, Consolidated Technology paid Mr. Schiller $616,000 in salary and
$358,000 in other annual compensation, which represented commissions
paid to him on Consolidated Technology's investment activities.
In 1996, Consolidated paid Mr. Schiller salary of $286,000.
During 1998, our officers received compensation at rates of $160,000
for Mr. Conway, $112,800 for Mr. Phillips, $92,700 for Mr. Koop and $91,240 for
Mr. Grisanti. Mr. Phillips is also entitled to a commission of 2% of all data
center revenue. In addition, for 1998, we had a commission pool of up to 10%
of sales from new contracts. Mr. Koop received 2.5% of the first $9 million of
these new sales and 1% of these sales in excess of $9 million. Mr. Grisanti
received .75% of the first $9 million of these new sales and .3% of these sales
in excess of $9 million.
In July 1998, we entered into five-year employment agreements with
Messrs. James L. Conway, John F. Phillips, Gerald O. Koop and Anthony F.
Grisanti. Pursuant to these agreements, these officers receive the following
base salaries: Mr. Conway -- $160,000, Mr. Phillips -- $140,000, Mr. Koop --
$140,000, and Mr. Grisanti -- $120,000. The agreements provide for an annual
cost of living adjustment. Except for Mr. Conway, whose compensation became
effective July 1998, the salaries for the other officers became effective in
January 1999. The agreements provide that the executives are eligible to
participate in a bonus pool to be determined annually by the Compensation
Committee. The agreements also provide each of these officers with a $1,000 per
month automobile allowance. In the event of the officer's dismissal or
resignation or a material change in his duties or in the event of a termination
of employment by the executive or by us as a result of a change of control, the
officer may receive severance payments of between 24 and 36 months'
compensation. A month's compensation means the then current monthly salary plus
one-twelfth of the bonus for the prior year. The agreement with Mr. Conway
replaced an employment agreement dated August 1996. The agreements with Messrs.
Phillips and Grisanti replaced employment agreements dated June 1994.
The following table sets forth information concerning options granted
during the year ended December 31, 1998 pursuant to our long-term incentive
plans. No SARs were granted.
17
Option Grants in Year Ended December 31, 1998
% of Total Potential Realizable
Options Value at Assumed
Number of Granted to Annual Rates of Stock
Shares Employees Exercise Price Appreciation
Underlying in Fiscal Price Per Expiration
Name Options Granted Year Share Date 5%($) 10%($)
---- --------------- --------- --------- ---------- ----- ------
James L. Conway 40,000 5.2% $1.50 6/29/03 $16,400 $36,800
50,000(1) 6.5% 1.00 11/2/03 14,000 30,500
Lewis S. Schiller -- 0% -- -- -- --
Gerald O. Koop 30,000(2) 3.9% 1.50 6/29/03 12,420 27,480
50,000(1) 6.5% 1.00 11/2/03 14,000 30,500
John F. Phillips 30,000(2) 3.9% 1.50 6/29/03 12,420 27,480
50,000(1) 6.5% 1.00 11/2/03 14,000 30,500
Anthony F. Grisanti 30,000(2) 3.9% 1.50 6/29/03 12,420 27,480
50,000(1) 6.5% 1.00 11/2/03 14,000 30,500
(1) These options were granted pursuant to an amendment to our 1998
Long-Term Incentive Plan. The amendment is subject to stockholder
approval at our 1999 annual meeting of stockholders.
(2) These option grants do not include options which were repriced. Those
options are set forth in the Option Repricing Table.
On June 30, 1998, the compensation committee approved the repricing of
stock options held by employees, including options held by Messrs. Gerald O.
Koop, John F. Phillips and Anthony F. Grisanti. Options to purchase an aggregate
of 42,166 shares of common stock at $6.00 per share, which were granted in April
1996, were repriced at $1.50, which was the marked price of the common stock on
the date of the repricing. The grant of the new option and cancellation of the
old option were based on our improving results notwithstanding the decline in
the stock price. There were no repricings of options prior to 1998 at a time
when we were a reporting company. Set forth below is information concerning the
repricing of such options.
Option Repricing Table
Number of
Securities Market Price
Underlying of Stock at Exercise Price
Options Time of at Time of New Length of Original Term
Repriced or Repricing or Repricing or Exercise Remaining at Date of
Name Date Amended Amendment Amendment Price Repricing or Amendment
- ---- ---- ------- --------- --------- ----- ----------------------
Gerald O. Koop 6/30/98 6,000 $1.50 $6.00 $1.50 Two years, nine months
John F. Phillips 6/30/98 9,000 1.50 6.00 1.50 Two years, nine months
Anthony F. Grisanti 6/30/98 5,000 1.50 6.00 1.50 Two years, nine months
18
The following table sets forth information concerning the exercise of
options and warrants during the year ended December 31, 1998 and the year-end
value of options held by our officers named in the Summary Compensation Table.
No stock appreciation rights ("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
Options(1) at Fiscal Options at Fiscal
Year End Year End(2)
Shares
Acquired Value Exercisable/ Exercisable/
Name Upon Exercise Realized Unexercisable Unexercisable
---- ------------- -------- ------------- -------------
James L. Conway -- -- 97,249/70,000(3) $21,260/$99,410
Lewis S. Schiller -- -- 55,555/--(4) --/--
Gerald O. Koop -- -- 22,984/65,000 $26,019/$94,095
John F. Phillips -- -- 36,922/65,000 $49,586/$94,095
Anthony F. Grisanti -- -- 30,821/65,000 $40,359/$94,095
(1) The number of shares of Common Stock subject to options includes shares
of common stock issuable upon exercise of warrants. Options granted in
November 1998 pursuant to an amendment to our 1998 stock option plan
are unexercisable. Such options are subject to stockholder approval of
the amendment.
(2) The determination of "in the money" options at December 31, 1998, is
based on the closing price of the common stock on the Nasdaq SmallCap
Market on December 31, 1998, which was $2.563.
(3) Includes warrants to purchase 23,916 shares of common stock held by Mr.
Conway's wife, as to which he disclaims beneficial ownership.
(4) Does not include warrants held by DLB, Inc., which is owned by Mr.
Schiller's wife. Mr. Schiller disclaims beneficial ownership in DLB or
in any securities owned by DLB. Warrants held by Mr. Schiller include
warrants issued to him by us and warrants transferred to him by SIS
Capital.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Set forth below is information as of April 26, 1999, as to each person
owning of record or known by us, based on information provided to us by the
persons named below, to own beneficially at least 5% of our Common Stock, each
director, each officer listed in the Summary Compensation Table and all officers
and directors as a group.
Percent of Outstanding
Name and Address(1) Shares Common Stock
- ---------------- ------ ----------------------
SIS Capital Corp. 508,874 17.6%
Consolidated Technology Group Ltd.
160 Broadway
New York, NY 10038
James L. Conway 143,917(2) 5.0%
146 Nassau Avenue
Islip, NY 11751
John F. Phillips 133,922(3) 4.8%
Edward D. Bright 123,922 4.4%
Gerald O. Koop 77,823(4) 2.8%
Anthony F. Grisanti 58,061(5) 2.1%
Joseph G. Sicinski 10,000(6) *
Seymour Richter 5,000(7) *
All directors and officers as a group 552,645(8) 18.7%
(seven individuals)
- ----------
* Less than 1%.
(1) Unless otherwise indicated, each person has the sole voting and sole
investment power and direct beneficial ownership of the shares. Each
person is deemed to beneficially own shares of common stock issuable upon
exercise of options or warrants which are exercisable on or within 60 days
after the date as of which the information is provided. Shares of common
stock issued pursuant to options granted pursuant to an amendment to our
1998 Long-Term Incentive Plan are not deemed to be presently exercisable
since the options were granted subject to stockholder approval of the
amendment.
19
(2) Includes (a) 65,667 shares of common stock issuable upon exercise of
warrants owned by Mr. Conway and (b) 23,916 shares of common stock
issuable upon exercise of warrants held by Mr.
Conway's wife, as to which he disclaims beneficial ownership.
(3) Includes 24,000 shares of common stock issuable upon exercise of
outstanding options held by Mr. Phillips.
(4) Includes 22,984 shares of common stock issuable upon exercise of
outstanding options held by Mr. Koop.
(5) Includes 20,000 shares of common stock issuable upon exercise of
outstanding options held by Mr. Grisanti.
(6) Includes 5,000 shares of common stock issuable upon exercise of
outstanding options held by Mr. Sicinski.
(7) Represents shares of common stock issuable upon exercise of outstanding
options held by Mr. Richter.
(8) Footnotes 2 through 8 are incorporated by reference.
Item 13. Certain Relationships and Related Transactions
During 1998 the Company discontinued its CarteSmart division which
included its interest in a joint venture. On June 30, 1998 the Company sold this
division, with an option to purchase the Company's interest in the joint venture
if the other party to the venture did not elect to acquire the Company's
interest, to Granite Technologies, Inc. ("Granite"), a corporation formed by the
former management of the division. Granite issued to the Company its $500,000
promissory note and a 20% equity interest in Granite. Granite also agreed to pay
certain royalties to the Company and granted the Company a license with respect
to the CarteSmarte software. The note was subject to cancellation if the other
party to the joint venture elected to purchase the Company's interest. As the
Company does not have significant influence over the operations of Granite, the
20% interest is accounted for using the cost method.
We had a management services agreement with Consolidated pursuant
to which we paid Consolidated $15,000 per month. This agreement was terminated
in April 1998. During 1998, we paid Consolidated $45,000 pursuant to this
agreement.
In connection with the April 1998 resignations of Mr. Lewis S. Schiller as
chief executive officer and a director and Mr. E. Gerald Kay as a directors, we
exchanged general releases with such persons.
In connection with our accounts receivable financing, Mr. Anthony F.
Grisanti, our chief financial officer, issued his guaranty which is limited to
the losses or liability resulting from certain irregularities by us in the
submission of invoices for advances and the failure to pay over the proceeds
from accounts to the lender. We know of no such irregularities. The advances
under this facility were $1.6 million at December 31, 1998 and $780,000 at April
21, 1999. The maximum borrowings under the facility, subject to the borrowing
formula, is $2.0 million.
In March 1999, we and members of our management, together with other
employees and non-affiliated investors, entered into an agreement with
Consolidated, its subsidiary, SIS Capital Corp. and Mr. Anthony Grisanti, as
agent, pursuant to which:
20
* The purchasers bought an aggregate of 585,750 shares of our common stock
from SIS Capital for $2.015 per share in April 1999.
* The purchasers have the right to buy up to 206,874 additional shares of
the our common stock from SIS Capital at the same purchase price per
share.
* Consolidated Technology transferred to us shares of our preferred stock
(including the right to receive dividends thereon) and warrants to
purchase shares of our common stock, for which we issued 100,000 shares of
common stock to Consolidated in April 1999.
The following officers and directors purchased the following number of
shares of common stock from SIS Capital pursuant to this agreement:
Name Number of Shares Purchase Price
- ---- ---------------- --------------
John F. Phillips 75,000 $151,118
Edward D. Bright 62,500 125,931
Gerald O. Koop 34,600 69,716
James L. Conway 26,000 52,387
Anthony F. Grisanti 20,600 41,507
Joseph G. Sicinski 5,000 10,075
Part IV
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data begin on page F-1 of this Form
10-K.
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure
As disclosed in the Company's Form 8-K filed on July 20, 1998, the Company
changed its accountants from Moore Stephens, P.C. to Richard A. Eisner &
Company, LLP. There were no disagreements with accountants.
21
1. Financial Statements
Report of Richard A. Eisner & Company, LLP
Report of Moore Stephens, P.C.
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 Consolidated Statements of
Stockholders' Equity for the Years Ended December 31, 1998,
1997 and 1996 Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996 Notes to
Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
July 20, 1998 Change in Accountants
4. Exhibits
NETSMART TECHNOLOGIES, INC.
AND SUBSIDIARY
F - 1
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Page to Page
------------
Independent Auditor's Report - Richard A. Eisner & Company, LLP.........F-3
Independent Auditor's Report - Moore Stephens, P.C......................F-4
Consolidated Balance Sheets.......................................F-5...F-6
Consolidated Statements of Operations.............................F-7...F-8
Consolidated Statements of Stockholders' Equity.........................F-9
Consolidated Statements of Cash Flows.............................F-10..F-12
Notes to Consolidated Financial Statements .......................F-13..F-28
. . . . . . . . . . .
F - 2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Netsmart Technologies, Inc.
Islip, New York
We have audited the accompanying consolidated balance sheet of Netsmart
Technologies, Inc. and its subsidiary as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Netsmart Technologies, Inc. and its subsidiary as of December
31, 1998, and the results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
Certified Public Accountants
New York, New York
March 23, 1999
With respect to Note 17, April 8, 1999
F - 3
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Netsmart Technologies, Inc.
Islip, New York
We have audited the accompanying consolidated balance sheet of Netsmart
Technologies, Inc. and its subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two 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 audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Netsmart Technologies, Inc. and its subsidiary as of December 31, 1997, and the
results of their operations and their cash flows for each of the two 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
F - 4
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
------------
1 9 9 8 1 9 9 7
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 198,689 $ 854,979
Accounts Receivable - Net 3,600,025 2,182,418
Costs and Estimated Profits in Excess
of Interim Billings 2,899,695 542,324
Note Receivable 150,000 --
Other Current Assets 109,595 83,770
---------- ----------
Total Current Assets 6,958,004 3,663,491
---------- ----------
Property and Equipment - Net 354,036 308,583
---------- ----------
Other Assets:
Software Development Costs - Net 142,450 183,150
Customer Lists - Net 2,733,392 3,067,676
Other Assets 101,064 116,903
---------- ----------
Total Other Assets 2,976,906 3,367,729
---------- ----------
Total Assets $ 10,288,946 $ 7,339,803
========== ==========
See Notes to Consolidated Financial Statements.
F - 5
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
-----------
1 9 9 8 1 9 9 7
------- -------
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable $ 1,639,694 $ 935,177
Capitalized Lease Obligations 27,283 23,331
Accounts Payable 2,166,333 1,131,692
Accrued Expenses 1,178,893 1,041,120
Interim Billings in Excess of Costs and
Estimated Profits 1,803,999 951,885
Due to Related Parties 84,000 --
Deferred Revenue 47,619 117,080
----------- ---------
Total Current Liabilities 6,947,821 4,200,285
----------- ---------
Capitalized Lease Obligations 57,033 --
----------- ---------
Commitments and Contingencies (Note 13) -- --
Stockholders' Equity:
Preferred Stock, $.01 Par Value; Authorized 3,000,000
Series D 6% Redeemable Preferred Stock - $.01 Par
Value 3,000 Shares Authorized, 1,210 Issued and
Outstanding [Liquidation Preference of $1,210
and redemption value of $1,210,000] 12 12
Additional Paid-in Capital -
Series D Preferred Stock 1,209,509 1,209,509
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued 2,786,921 Shares
at December 31, 1998, 2,777,999 Shares at
December 31, 1997 27,869 27,780
Additional Paid-in Capital - Common Stock 17,203,904 17,195,668
Accumulated Deficit (15,097,202) (15,293,451)
---------- ----------
3,344,092 3,139,518
Less cost of 5,333 Common Shares held
in Treasury 60,000 --
---------- ---------
Total Stockholders' Equity 3,284,092 3,139,518
---------- ----------
Total Liabilities and Stockholders' Equity $ 10,288,946 $ 7,339,803
========== ==========
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 8 1 9 9 7 1 9 9 6
------- ------- -------
Revenues:
Software and Related
Systems and Services:
General $ 9,569,100 $ 4,119,780 $ 3,104,998
Maintenance Contract
Services 1,431,695 1,280,465 1,225,709
----------- --------- ---------
Total Software and Related
Systems and Services 11,000,795 5,400,245 4,330,707
Data Center Services 2,164,472 2,235,209 2,207,155
----------- --------- ---------
Total Revenues 13,165,267 7,635,454 6,537,862
----------- --------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 5,975,249 2,493,739 2,774,878
Maintenance Contract
Services 975,212 928,316 595,366
----------- --------- ---------
Total Software and Related
Systems and Services 6,950,461 3,422,055 3,370,244
Data Center Services 1,131,078 1,466,107 1,220,368
----------- --------- ---------
Total Cost of Revenues 8,081,539 4,888,162 4,590,612
----------- --------- ---------
Gross Profit 5,083,728 2,747,292 1,947,250
Selling, General and
Administrative Expenses 3,516,288 2,901,724 1,721,854
Related Party Administrative Expense 45,000 180,000 69,000
Stock Based Compensation -- -- 3,492,300
Research and Development 763,059 201,075 278,000
------------ --------- ---------
Income (Loss) from Continuing
Operations before Financing Costs
and Interest 759,381 (535,507) (3,613,904)
Financing Costs -- -- 1,692,000
Interest Expense 346,114 308,169 472,548
------------ --------- ---------
Income (Loss) from Continuing
Operations 413,267 (843,676) (5,778,452)
------------ --------- ---------
See Notes to Consolidated Financial Statements.
F - 7
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Discontinued Operations:
Loss from Discontinued Operations (397,018) (2,615,049) (800,992)
Gain on Sale of Discontinued Operations 180,000 -- --
--------- --------- ----------
Loss from Discontinued Operations (217,018) (2,615,049) (800,992)
--------- --------- ----------
Net Income (Loss) 196,249 (3,458,725) (6,579,444)
Less Cumulative Preferred Stock
Dividends 72,600 (48,400)
--------- --------- ---------
Net Income (Loss) Applicable to
Common Stock $ 123,649 $(3,507,125) $(6,579,444)
========= ========= =========
Earnings Per Common Share:
Basic and Diluted:
Income (Loss) from Continuing
Operations $ .12 $ (.37) $ (3.36)
Income (Loss) from Discontinued
Operations (.08) (1.10) (.47)
--------- --------- --------
Net Income (Loss) $ .04 $ (1.47) $ (3.83)
========= ========= ========
Weighted Average Number of Shares of
Common Stock Outstanding 2,779,655 2,386,953 1,716,418
========= ========= =========
See Notes to Consolidated Financial Statements.
F - 8
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Additional Additional
Paid-in Paid-in Total
Series A Series D Capital Capital Stock-
Treasury Shares Preferred Stock Preferred Stock Preferred Common Stock Common Accumulate holders'
Shares Cost Shares Amount Shares Amount Stock Shares Amount Stock Deficit Equity
Balance- 400 $ 4 2,210 $ 22 $2,249,505 1,003,751 $10,038 $ 3,294,033 $(5,146,381) $ 407,211
December 31, 1995
Common Stock Issued
in Exchange for
Series D and
Series A Preferred Stock (400) (4) (1,000) (10) (1,039,996) 389,400 3,894 1,036,116 -- --
Allocated Related
Party Administrative
Expenses -- -- -- -- -- -- -- 9,000 -- 9,000
Compensation from
the Issuance of
Common Stock
Warrants and options -- -- -- -- -- -- -- 3,492,300 -- 3,492,300
Common Stock
Issued - Initial
Public Offering 431,250 4,312 5,170,689 5,175,001
Common Stock
Issued - Exercise
of Warrants 266,667 2,667 1,597,333 1,600,000
Common Stock
Issued -
Financing Costs 175,000 1,750 1,678,250 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 -- -- 1,210 12 1,209,509 2,266,068 22,661 14,908,649 (11,725,825) 4,415,006
Common Stock
Issued as Dividends 4,267 43 108,858 (108,901) --
on Preferred Stock
Common Stock
Issued - Exercise
of Options 54,926 549 40,363 40,912
Common Stock
Issued - Exercise
of Warrants 426,071 4,260 1,913,061 1,917,321
Cost Associated
with Exercise
of Warrants (74,995) (74,995)
Common Stock
Issued - Johnson
Acquisition 26,667 267 299,733 300,000
Net Loss (3,458,725) (3,458,725)
---- ---- ---- ---- --------- ------- ----- ------- --------- ---------
Balance -
December 31, 1997 -- -- 1,210 12 1,209,509 2,777,999 27,780 17,195,668 (15,293,451) 3,139,518
Common Stock
Issued - Exercise
of Options 8,922 89 8,326 8,325
Purchase of
Treasury Shares 5,333 $(60,000) (60,000)
Net Income 196,249 196,249
----- ------- ---- ---- ----- ---- -------- ------- ----- ------- ---------- -------
Balance -
December 31, 1998 5,333 $(60,000) -- $ -- 1,210 $ 12 $1,209,509 2,786,921 $27,869 $17,203,904 $(15,097,202 $3,284,092
===== ======== ==== ===== ====== ==== ========= ========= ====== ========== ========== =========
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 8 1 9 9 7 1 9 9 6
------- ------- -------
Operating Activities:
Income (Loss) from Continuing Operations $ 413,267 $ (843,676) $ (5,778,452)
--------- ------- ---------
Adjustments to Reconcile Income
(Loss) from Continuing Operations to Net
Cash Used for Operating Activities:
Depreciation and Amortization 561,562 600,990 486,566
Administrative Expenses 9,000
Additional Compensation Related to the
issuance of Equity Instruments 3,492,300
Financing Expenses related to the issuance
of Common Stock 1,680,000
Cash Used in Discontinued Operations (367,018) (2,615,049) (800,992)
Write Off of Capitalized Software Cost
and Related Hardware 553,061
Equity in Net Loss of Joint Venture 287,131 264,085
Provision for Doubtful Accounts 60,000 60,000 60,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,477,607) 452,032 (231,478)
Costs and Estimated Profits in
Excess of Interim Billings (2,357,371) (20,538) (516,707)
Other Current Assets (25,825) (1,565) (68,810)
Other Assets 5,839 11,905 (10,502)
Increase [Decrease] in:
Accounts Payable 1,034,641 148,536 (202,620)
Accrued Expenses 102,773 50,045 (332,174)
Interim Billings in Excess of
Costs and Estimated Profits 852,114 (150,220) 160,626
Due to Related Parties (21,245) (143,458)
Deferred Revenue (69,461) (4,439) (52,580)
----------- ---------- ----------
Total Adjustments (1,680,353) (649,356) 3,793,256
----------- ---------- ----------
Net Cash Used For Operating Activities (1,267,086) (1,493,032) (1,985,196)
----------- ---------- ----------
Investing Activities:
Acquisition of Property and
Equipment (222,031) (216,041) (181,033)
Software Development Costs (462,000) (278,800)
Investment in Joint Venture (166,585) (384,631)
----------- ---------- ----------
Net Cash Used For Investing Activities (222,031) (844,626) (844,464)
----------- ---------- ----------
See Notes to Consolidated Financial Statements.
F - 10
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 8 1 9 9 7 1 9 9 6
------- ------- -------
Financing Activities:
Proceeds from Short-Term Notes 704,517 345,146 500,000
Payment of Short-Term Notes (912,270)
Payment of Bank Note Payable (79,000)
Proceeds of loans from Related Parties 140,000
Repayment of loans from related parties (56,000) (750,000)
Payment of Capitalized Lease Obligations (15,658) (34,063) (145,146)
Issuance of Common Stock in Public Offering 5,175,000
Proceeds from Warrant exercise 1,917,319 1,600,000
Proceeds from Stock Option Exercise 8,325 40,913
Purchase of Treasury Shares (25,000) --
Cash Overdraft (95,536)
Redemption of Series B Preferred Stock (96,000)
Costs associated with issuance of Stock (74,995) (1,369,071)
Other 76,643
-------- --------- ---------
Net Cash provided by Financing Activities 832,827 2,194,320 3,827,977
-------- --------- ---------
Net Increase [Decrease] in Cash (656,290) (143,338) 998,317
Cash - Beginning of Year 854,979 998,317 --
-------- --------- ---------
Cash - End of Year $ 198,689 $ 854,979 $ 998,317
======== ========= ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest $ 353,713 $ 352,837 $ 481,856
Income Taxes $ 16,934 $ -- $ --
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Year ended December 31, 1998:
5,333 shares of Common Stock were repurchased from Johnson Computing Systems
pursuant to the acquisition agreement, at a cost of $60,000 which was paid by
the issuance of a short term note.
Year ended December 31, 1997:
4,267 shares of common stock were issued to Series D Preferred stockholders as
dividends which were payable on October 31, 1996 and April 1, 1997. These shares
were valued at $108,900.
The Company issued 26,667 shares of common stock to acquire customer lists and
certain other assets of Johnson Computer Systems. These shares were valued at
$300,000.
F - 11
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Year ended December 31, 1996:
The Company's principal stockholder SISC exchanged 1,000 shares of Series D
preferred stock for 375,000 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 14,400 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 .667 shares of common stock and 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 8,333 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 80,667 shares of
common stock and recognized compensation expense of $154,800.
The Company granted 1,191,042 Series B Common Stock purchase warrants and
298,959 Series A Common Stock purchase warrants and recognized compensation
expense of $3,337,500.
See Notes to Consolidated Financial Statements.
F - 12
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[1] The Company
The Company licenses and installs its proprietary software products, operates an
established service bureau and enters into long term maintenance agreements with
behavioral health organizations and methadone clinics and other substance abuse
facilities throughout the United States.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The financial statements include Netsmart
Technologies, Inc. ["Netsmart"], and its wholly-owned subsidiary, Creative
Socio-Medics Corp. ["CSM"] (collectively referred to as the Company). All
intercompany transactions are eliminated in consolidation. Certain amounts
have been reclassified in the prior years' statements to conform to the current
year's presentation.
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 $249,000 and $940,000 at December 31, 1998 and
1997 respectively.
Concentration of Credit Risk - The Company extends credit to customers which
results in accounts receivable arising from its normal business activities. The
Company does not require collateral or other security to support financial
instruments subject to credit risk. The Company routinely assesses the financial
strength of its customers and based upon factors surrounding the credit risk of
the customers believes that its accounts receivable credit risk exposure is
limited.
The Company's behavioral health information systems are marketed to specialized
care facilities, many of which are operated by government entities and include
entitlement programs. During the years ended December 31, 1998, 1997 and 1996,
approximately 52%, 35% and 31% respectively, of the Company's revenues were
generated from contracts with government agencies.
During the year ended December 31, 1998, one customer accounted for
approximately $2,113,000 or 16% of revenue. Accounts receivable of approximately
$853,000 and costs and estimated profits in excess of billings of $1,260,000
less $318,000 in interim billings in excess of costs and estimated profits were
due from this customer at December 31, 1998. Approximately $1,830,000 of such
amounts were subsequently collected in 1999. No one customer accounted for more
than 10% of revenues in 1997. During the year ended December 31, 1996, one
customer of the Company's discontinued Cartesmart division accounted for
approximately $1,879,000 or 22% of revenue. Accounts receivable of approximately
$473,000 were due from this customer at December 31, 1996. In 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, 1998
and 1997, cash and cash equivalent balances of $150,000 and $840,000
respectively, were held at a financial institution in excess of federally
insured limits. The Company believes no significant concentration of credit
risk exists with respect to these cash equivalents.
F - 13
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Revenue Recognition - During 1997, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued SOP 97-2,
"Software Revenue Recognition." This SOP provides guidance on revenue
recognition on software transactions and is effective for transactions entered
into in fiscal years beginning after December 15, 1997. The company adopted SOP
97-2 in 1998. The adoption did not have a material impact on the financial
position or results of operations of the company. The Company recognizes revenue
principally from the licensing of its software, and from consulting and
maintenance services rendered in connection with such licensing activities.
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. The Company also derives revenue from the sale
of third party hardware and software. Consulting revenue is recognized when the
services are rendered. No revenue is recognized prior to obtaining a binding
commitment from the customer.
Software development revenue from time-and-materials contracts are recognized as
services are performed. Revenue from fixed price software development contracts
and revenue under license agreements which require significant modification of
the software package to the customer's specifications, are recognized on the
estimated percentage-of-completion method. Using the units-of- work performed
method to measure progress towards completion, revisions in cost estimates and
recognition of losses on these contracts are reflected in the accounting period
in which the facts become known. Contract terms provide for billing schedules
that differ from revenue recognition and give rise to costs and estimated
profits in excess of billings, and billings in excess of costs and estimated
profits.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance revenue, which consists solely of staff payroll and
applicable overhead, is expensed as incurred.
Property and Equipment and Depreciation - Property and equipment is stated at
cost less accumulated depreciation. Depreciation of property and equipment is
computed by the straight-line method at rates adequate to allocate the cost of
applicable assets over their expected useful lives. Amortization of leasehold
improvements is computed using the shorter of the lease term or the expected
useful life of these assets.
Estimated useful lives are as follows:
Equipment 3-5 Years
Furniture and Fixtures 5 Years
Leasehold Improvements 5 Years
Capitalized Software Development Costs - Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Technological feasibility for the Company's computer software products is
generally based upon achievement of a detail program design free of high risk
development issues. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized computer software
development costs requires considerable judgement by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technology.
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is provided on a product by product basis. The annual amortization
is the greater of the amount computed using (a) the ratio that current gross
revenues for a product bear to the total of current and anticipated future gross
revenues for that product or (b) the straight-line method over the remaining
estimated economic life of the product.
F - 14
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 applicable to continuing
operations is as follows:
Years ended December 31 1998 1997
----------------------- ---- ----
Beginning of Year $ 183,150 $ --
Capitalized -- 203,500
Amortization (40,700) (20,350)
--------- --------
Net $ 142,450 $ 183,150
--- ========= =========
Customer Lists - Customer lists represent a listing of customers obtained
through the acquisition of CSM to which the Company can market its products. It
also represents a listing of customers acquired from Johnson Computing Systems
("Johnson") in 1997. The gross costs of the customer list associated acquired
from Johnson was $255,409. Customer lists are being amortized on the
straight-line method over an estimated useful life of 12 years. Customer lists
at December 31, 1998 and 1997 are as follows:
December 31,
------------
1 9 9 8 1 9 9 7
------- -------
Customer Lists $ 4,106,223 $ 4,106,223
Less: Accumulated Amortization 1,372,831 1,038,547
--------- ---------
Net $ 2,733,392 $ 3,067,676
--- ========= =========
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 established
accounting standards for the impairment of long-lived assets and certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. Management has determined that expected future cash flows
(undiscounted and without interest charges) exceed the carrying value of the
long lived assets at December 31, 1998 and believes that no impairment of these
assets has occurred.
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 continues to apply the intrinsic value based
method of accounting for options issued to employees prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" rather than the fair value based method of accounting prescribed by
SFAS No. 123. SFAS No. 123 also applies to transactions in which an entity
issues its equity instruments to acquire goods or services from non-employees.
Those transactions are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.
F - 15
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Earnings (Loss) Per Share - Basic earnings (loss) per common share is computed
by dividing income (loss) from continuing operations and net income (loss) after
each is adjusted for dividends accrued during the period on the Series D
cumulative preferred stock by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the amount of
earnings for the period available to each share of common stock outstanding
during the reporting period, giving effect to all potentially dilutive common
shares from the potential exercise of stock options and warrants.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e. improving earnings per share). The dilutive
effect of outstanding options and warrants and their equivalents are reflected
in dilutive earnings per share by the application of the treasury stock method.
Options and warrants will have a dilutive effect only when the average market
price of the common stock during the period exceeds the exercise price of the
options or warrants.
All per share information has been retroactively adjusted for the one-for-three
reverse stock split which became effective September 1998.
Allocated Related Party Administrative Expenses - During the first six months of
1996, certain administrative services were performed for the Company by a
principal shareholder. The fair value of such services, approximately $9,000,
was charged to related party administrative expenses, and, since the shareholder
will not be reimbursed for such charges, credited to additional paid-in capital.
(See Note 7)
Research and Development - Research and development costs are charged to expense
as incurred.
[3] Accounts Receivable
Accounts receivable is shown net of allowance for doubtful accounts of $372,797
and $348,029 at December 31, 1998 and 1997 respectively. The changes in the
allowance for doubtful accounts are summarized as follows:
December 31,
------------
1998 1997 1996
---- ---- ----
Beginning Balance $348,029 $288,029 $346,263
Provision for Doubtful Accounts 60,000 60,000 60,000
Charge-offs (35,232) (118,234)
------- ------- -------
Ending Balance $372,797 $348,029 $288,029
======= ======= ========
[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 8 1 9 9 7
------- -------
Costs Incurred on Uncompleted Contracts $ 4,259,190 $ 2,730,054
Estimated Profits 4,038,247 1,293,104
--------- ---------
Total 8,297,437 4,023,158
Billings to Date 7,201,741 4,432,719
--------- ---------
Net $ 1,095,696 $ (409,561)
--- ========= =========
F - 16
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Included in the accompanying balance sheet under the following captions:
Costs and estimated profits in excess of
interim billings $ 2,899,695 $ 542,324
Interim billings in excess of costs and
estimated profits (1,803,999) (951,885)
--------- --------
Net $ 1,095,696 $(409,561)
--- ========= ========
[5] Discontinued Operations
During 1998 the Company discontinued its CarteSmart division which included its
interest in a joint venture. On June 30, 1998 the Company sold this division,
with an option to purchase the Company's interest in the joint venture if the
other party to the venture did not elect to acquire the Company's interest, to
Granite Technologies, Inc. ("Granite"), a corporation formed by the former
management of the division. Granite issued to the Company its $500,000
promissory note and a 20% equity interest in Granite. Granite also agreed to pay
certain royalties to the Company and granted the Company a license with respect
to the CarteSmarte software. The note was subject to cancellation if the other
party to the joint venture elected to purchase the Company's interest. As the
Company does not have significant influence over the operations of Granite, the
20% interest is accounted for using the cost method.
As a result of the discontinuation of the CarteSmarte division, the financial
statements for the periods being reported have been restated to reflect the net
loss from the CarteSmart division as a loss from discontinued operations. The
revenues from the discontinued operations amounted to $33,000, $246,000 and
$2,003,000 in 1998, 1997 and 1996 respectively.
In October 1998 the other party to the joint venture exercised their right to
purchase the Company's interest in the joint venture for a $500,000 note. The
terms of the note require twenty four monthly principal payments of $15,000
each, commencing November 1,1998 and a $140,000 balloon payment due November 1,
2000. The note also bears interest at 5.66% per annum. All monthly payments have
been received through March 1999 on a timely basis and the Company has valued
the note at $180,000 which amount is reflected as a gain on sale of discontinued
operations.
During the fourth quarter of 1997 the Company had 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 the company wrote off $147,432, which reduced the carrying
value of the venture to zero.
[6] Property and Equipment
Property and equipment consist of the following:
December 31,
-----------
1 9 9 8 1 9 9 7
------- -------
Equipment, Furniture and Fixtures $ 672,692 $ 582,207
Leasehold Improvements 247,609 164,335
-------- ---------
Totals - At Cost 920,301 746,542
Less: Accumulated Depreciation 566,265 437,959
-------- ---------
Net $ 354,036 $ 308,583
--- ======== =========
Depreciation expense amounted to $176,578, $169,558, and $145,686, respectively
for the years ended December 31, 1998, 1997 and 1996.
F - 17
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[7] Related Party Transactions
[A] Related Party Administrative Expense - The Company had an agreement with its
principal stockholder, Consolidated and its subsidiary The Trinity Group, Inc.
("Trinity") pursuant to which the Company paid Trinity a monthly fee of $15,000
for general business, management and financial consulting services. This
agreement was mutually terminated, effective April 1, 1998. Pursuant to this
agreement, in 1998, 1997 and 1996 the Company charged $45,000, 180,000 and
$60,000 respectively to related party administrative expenses.
[B] Loans by Related Parties - During 1998 certain officers and employees of the
Company loaned the Company $140,000 for which the Company issued its 18%
installment notes. These loans are being repaid in five quarterly installments
commencing September 30, 1998 and ending September 30, 1999.
The amount payable at December 31, 1998 is $84,000.
[8] Notes Payable
Asset-Based Lender - The Company entered into an accounts receivable financing
arrangement with an asset-based lender. Borrowings under this facility were
$1,639,694 and $935,177 at December 31, 1998 and 1997, respectively. Under the
agreement, the Company can borrow up to 80% of eligible accounts receivable up
to $2 million, on which it pays interest at the annual rate of prime plus 5%.
This note is collateralized by all of the accounts receivable and property and
equipment of the Company.
In October 1998, the agreement with the asset based lender was modified to allow
the Company to borrow up to 80% of the amount of qualified accounts receivable
up to a maximum of $2 million. The previous amount of maximum borrowings was
capped at $1.5 million. The interest rate was reduced from prime plus 8 1/2 % to
prime plus 5%. In addition, the 5/8% fee previously paid on the face amount of
each invoice was eliminated.
The weighted average interest rate on short-term borrowings outstanding as of
December 31, 1998 and 1997 amounted to approximately 19% and 22%, respectively.
[9] Income Taxes
The Company utilizes an asset and liability approach to determine the extent of
any deferred income taxes, as described in Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." This method gives
consideration to the future tax consequences associated with differences between
financial statement and tax bases of assets and liabilities.
At December 31, 1998, the Company has net operating loss carryforwards of
$11,363,000 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.
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
- ----------- ------
2008 315,000
2009 1,010,000
2010 3,847,000
2011 2,930,000
2012 3,261,000
---------
$11,363,000
==========
F - 18
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Deferred Tax Asset consists primarily of the following:
Benefit of federal and state net operating loss carryforwards $ 4,500,000
Benefit of stock based compensation awards 1,400,000
Less: Valuation Allowance (5,900,000)
---------
Net Deferred Tax Asset $ --
=========
The Company has provided a valuation allowance for the full amount of the
deferred tax asset of approximately $5,900,000 as its future utilization is
uncertain. The Valuation Allowance increased by $300,000, $900,000 and
$2,900,000 in 1998, 1997 and 1996 respectively.
The provision for income taxes varies from the amount computed by applying
statutory rates for the reasons summarized below:
1998 1997 1996
---- ---- ----
Provision Based on Statutory Rates 34% (34)% (34)%
State Taxes Net of Federal Benefit 6% (6)% (6)%
Increase in Valuation Allowance (40)% 40% 40%
---- ---- ----
Total -- % -- % -- %
==== ==== ====
[10] Capital Stock
At the close of business on September 14, 1998 a one for three reverse split
became effective. All common share and per common share data in the financial
statements and notes have been adjusted to reflect the one for three reverse
split.
Capital Stock - The Company is authorized to issue 3,000,000 shares of preferred
stock, par value $.01 per share, and 15,000,000 shares of common stock, par
value $.01 per share. The Company's Board of Directors is authorized to issue
preferred stock from time to time without stockholder
action, in one or more distinct series. The Board of Directors is authorized to
determine the rights and preferences of the preferred stock. The Board of
Directors has authorized the issuance of Series A, Series B and Series D
preferred Stock. At December 31, 1998, only the Series D preferred stock was
outstanding. (See Note 17)
Preferred Stock -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. 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 dividends
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 4,267 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. No dividend has been paid since April 1, 1997 and at December 31, 1998,
the accrued cumulative dividends on the Series D Preferred Stock in arrears
aggregated were $108,900 or $90 per share.
Common Stock Issuances - On August 19, 1996, the Company completed a public
offering pursuant to which it received net proceeds of approximately $3.8
million from the sale of units comprised of an aggregate of 431,250 shares of
Common Stock and Series A Redeemable Common Stock Purchase Warrants ("Series A
Warrants") to purchase an aggregate of 215,625 shares of Common Stock at $13.50
per share through August 1999.
F - 19
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During a 90 period in 1997, the terms of the Series A Warrants were amended to
reduce the exercise price. During such period, the Company received net proceeds
of approximately $1.8 million from the issuance of an aggregate of 426,071
shares of Common Stock upon exercise of Series A Warrants.
In August 1996, holders of Series B Common Stock Purchase Warrants ("Series B
Warrants") to purchase an aggregate of 266,666 shares of Common Stock at $6.00
per share exercised such warrants. The Company received $1.6 million from the
sale of such shares. See Note 14 for information relating to the issuance of the
Series B Warrants.
Treasury Stock - Pursuant to the Johnson Computing Systems agreement, the
Company purchased from Johnson Computing Systems 5,333 shares of Common Stock
for $60,000. The shares are treated as treasury shares.
Stock Options - See Note 14 for information relating to the Company's 1993
Long-Term Incentive Plan.
[11] Capitalized Lease Obligations
Future minimum payments under capitalized lease obligations as of December 31,
1998 are as follows:
Year ending
December 31,
1999 $ 36,838
2000 25,041
2001 25,041
2002 18,780
---------
Total Minimum Payments 105,700
Less Amount Representing Interest at 13.8% Per annum 21,384
---------
Balance $ 84,316
------- =========
Capitalized lease obligations are collateralized by equipment which has a net
book value of $82,000 and $15,000 at December 31, 1998 and 1997, respectively.
Amortization of approximately $10,200 and $10,200 in 1998 and 1997,
respectively, has been included in depreciation expense.
[12] Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, 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 December 31, 2003. The Company also
leases additional office space on a month-to-month basis.
Minimum annual rentals under noncancellable operating leases (net of a sublease
to Granite) having terms of more than one year are as follows:
F - 20
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years ending
- ------------
December 31,
- -----------
1999 $ 380,000
2000 389,000
2001 317,000
2002 329,000
2003 342,000
----------
Total $ 1,757,000
==========
Rent expense amounted to $349,000, $341,000 and $358,000 respectively, for the
years ended December 31, 1998, 1997 and 1996.
In July 1998, the Company entered into five-year employment agreements with its
president and chief executive officer, its vice president - marketing, the chief
executive officer of CSM and its chief financial officer, pursuant to which such
officers receive a base salary of $160,000, $140,000, $140,000 and $120,000,
respectively, with an annual cost of living adjustment. The agreements provide
that the executives are eligible to participate in a bonus pool to be
determined annually by the Compensation Committee. The agreements also provide
each of the executives with an automobile allowance. In the event the
executive's dismissal or resignation or a material change in his duties or in
the event of a termination of employment by the executive or the Company as a
result of a change of control, the executive may receive severance payments of
between 24 and 36 months' compensation.
[14] Stock-Based Compensation
Long Term Incentive Plans - The Company has two long-term incentive plans, the
1993 Long-Term Incentive Plan (the "1993 Plan"), as amended, and the 1998
Long-Term Incentive Plan (the "1998 Plan"), as amended. The Company may issue
170,333 and 280,000 shares of Common Stock pursuant to the 1993 Plan and 1998
Plan, respectively. In November 1998, the board of directors adopted an
amendment to the 1998 Plan (the "1998 Amendment"), subject to stockholder
approval, pursuant to which the number of shares subject to the 1998 Plan was
increased from 280,000 shares to 780,000 shares.
Officers and other key employees, consultants and directors (other than
non-employee directors) are eligible to receive options or other equity-based
incentives under the Plans. The 1993 Plan and the 1998 Plan (collectively, the
"Plans") are administered by the Compensation Committee of the board of
directors.
The 1998 Plan provides that each non-employee director automatically receives a
nonqualified stock option to purchase 5,000 shares of Common Stock on April 1 of
each year. However, if there are not sufficient shares available under the 1998
Plan, the non-employee director will receive a lesser number of shares. The 1998
Plan also provided for the grant on June 30, 1998, to each non-employee
director, other than the chairman of the board, of a non-qualified stock option
to purchase 10,000 shares of Common Stock, and to the chairman of the board, a
non-qualified stock option to purchase 35,000 shares of Common Stock.
Pursuant to the 1998 Amendment, the Company granted, subject to stockholder
approval of the 1998 Amendment, options to purchase 10,000 shares to each
non-employee director, other than the chairman of the board, and an option to
the chairman of the board to purchase 50,000 shares. The exercise price for such
options was $1.00 per share, which was the fair market value on the date of
grant.
In November 1998, the Committee reduced the exercise price of outstanding
options to purchase an aggregate of 43,167 shares of Common Stock, from $4.50
per share to $1.50 per share, which was in excess of the market price on the
date the Committee approved the reduction in the exercise price.
F - 21
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of the activity under the Company's stock option plans is as follows:
1998 1997 1996
------------------------ ------------------------- --------------------------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
-------- -------- --------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning of
Year 148,780 $3.244 203,706 $2.57 123,039 $ .803
Granted During the Year 823,167(a) 1.18 -- -- 80,667 5.265
Canceled During the Year (80,667)(a) 9.60 -- -- -- --
Expired During the Years -- -- -- -- -- --
Exercised During the Year (8,922) .723 (54,926) .745 -- --
------- ------- -------
Outstanding - End of Year 882,358 $1.172 148,780 $3.244 203,706 $ 2.57
======= ===== ======= ===== ======= =====
Exercisable - End of Year 242,358 $1.338 108,447 $2.492 59,626 $ .803
======= ===== ======= ===== ======= =====
<FN>
___________________________
(a) Includes 43,167 shares granted upon cancellation of an equal number of
shares having an exercise price of $4.50 per share.
</FN>
The following table summarizes stock option information as of December 31, 1998:
Options Outstanding
-------------------
Weighted
--------
Average Remaining Options
----------------- -------
Exercise Prices Number Outstanding Contractual Life Exercisable
- --------------- ------------------ ---------------- -----------
$.696 34,576 1 Year 34,576
$1.035 24,615 1.9 Years 24,615
$1.50 43,167 2.3 Years 43,167
$1.50 280,000 4.4 Years 140,000
$1.00 500,000 4.8 Years --
------- --------- -------
Totals 882,358 4.3 Years 242,358
======= ========= =======
Warrants Issued as Compensation - In February 1996, the Company issued an
aggregate of 1,051,250 Series B Common Stock Purchase Warrants, of which 838,750
are exercisable at $6.00 per share and 212,500 were exercisable at $15.00 per
share. These warrants were issued in connection with services rendered, which,
in the case of SISC, included the guarantee of certain notes payable. Although
the warrants were issued prior to a 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, 262,500 warrants exercisable at $6.00
per share and 12,500 warrants exercisable at $15.00 per share were issued to
replace 275,000 warrants previously issued in October 1993. These warrants had
exercise prices ranging from $8.00 per share to $30.00 per share.
F - 22
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In July 1996, pursuant to a warrant exchange, (a) the holders of outstanding
warrants having a $6.00 exercise price exchanged one third of such warrants for
outstanding warrants to purchase, at an exercise price of $12.00 per share, 150%
of the number of shares of common stock issuable upon exercise of the
outstanding warrants that were exchanged, and (b) the exercise price of the
outstanding warrants that had a $15.00 exercise price was reduced to $12.00.
Prior to the warrant exchange, there were outstanding warrants to purchase
838,750 shares of common stock at $6.00 per share and outstanding warrants to
purchase 879,167 shares of common stock at $15.00 per share outstanding. As a
result of the warrant exchange, there were outstanding warrants to purchase
559,167 shares of common stock at $6.00 per share and 631,877 shares of common
stock at $12.00 per share. These warrants were exercisable commencing February
13, 1997. An affiliate of the Company, a member of the board of directors and a
Company controlled by such director, were given permission to exercise options
in August 1996. This individual and entities exercised warrants to purchase
266,667 shares at $6.00 per share in August 1996. All of the remaining Series B
Common Stock Purchase Warrants expire on December 31, 1999. The Company recorded
compensation expenses of $3,337,500 in relation to the issuance of these
warrants.
In 1996 the Company issued 215,625 Series A Common Stock Purchase Warrants as a
part of its initial public offering of its securities. These warrants are
exercisable for the two year period commencing August 13, 1997 at a price of
$13.50 per share. In addition, the Company issued 83,333 Series A Common Stock
Purchase Warrants to various investors. These warrants have the same terms as
the warrants issued to the general public.
During 1997, the Company issued 23,333 Series C Common stock warrants in
exchange for the issuance of a research report on behalf of the Company. These
warrants were valued at $.90 per warrant which represented the fair value of the
services performed by the recipient. These warrants have an exercise price of
$15.00 which was the market value of the stock at the time of issuance and will
expire on December 31, 1999.
A summary of warrant activity is as follows:
1998 1997 1996
----------------------- ----------------------- ------------------------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning
of Year 1,033,632 $10.49 1,223,335 $10.93 275,000 $21.81
Granted or Sold During
the Year -- -- 23,333 15.00 1,490,002 10.00
Canceled During the Year -- -- -- -- (275,000) 21.81
Expired During the Year -- -- -- -- -- --
Exercised During the Year -- -- (213,036) 13.50 (266,667) 6.00
--------- ----- --------- -----
Outstanding - End of Year 1,033,632 $10.49 1,033,632 $10.49 1,223,335 $10.93
========= ===== ========= ===== ========= =====
Exercisable - End of Year 1,033,632 $10.49 1,033,632 $10.49 -- --
========= ===== ========= ===== ========= =====
F - 23
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes warrant information as of December 31, 1998:
Weighted
Average Remaining
Exercise Prices Shares Contractual Life
- --------------- ------ -----------------
$ 6.00 292,500 1 Year
$12.00 631,877 1 Year
$13.50 85,922 .7 Years
$15.00 23,333 1 Year
---------
Total 1,033,632 .9 Years
========= ========
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 1998 and 1997 and $3,492,300 in 1996.
If the Company had accounted for the issuance of all options and compensation
based warrants pursuant to the fair value based method of SFAS No. 123, the
Company would have recorded additional compensation expense totaling $609,372
and $846,000 for the years ended December 31, 1998 and 1996 respectively and the
Company's net loss and net loss per share would have been as follows:
Year ended
-----------
December 31,
-----------
1998 1996
---- ----
Net Income (Loss) as Reported $ 196,249 $ (6,579,444)
======= =========
Pro Forma Net Loss $(413,123) $ (7,425,444)
======= =========
Net Income (Loss) Per Share as Reported $ .04 $ (3.83)
======= =========
Pro Forma Net Loss Per Share $ (.17) $ (4.33)
======= =========
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:
1998 1996
---- ----
Expected Life (Years) 5 2
Interest Rate 4.87% 6.0%
Annual Rate of Dividends 0% 0%
Volatility 70% 67.9%
The weighted average fair value of options and warrants at date of grant using
the fair value based method during 1998, 1997 and 1996 is estimated at $.74, $--
and $3.99 respectively.
F - 24
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[15] Operating Segments
The Company currently classifies its operations into two business segments: (1)
Software and Related Systems and Services and (2) Data Center Services. Software
and Related Systems and Services is the design, installation, implementation and
maintenance of computer information systems that provide comprehensive
healthcare information technology solutions including billing, patient tracking
and scheduling for inpatient and outpatient environments, as well as clinical
documentation and medical record generation and management. Data Center Services
involve company personnel performing data entry and data processing services for
customers. Intersegment sales and sales outside the United States are not
material. Information concerning the Company's business segments is as follows:
Y e a r s e n d e d
---------------------
D e c e m b e r 31,
-------------------
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Revenues:
Software and Related Systems and Services $11,000,795 $ 5,400,245 $ 4,330,707
Data Center Services 2,164,472 2,235,209 2,207,155
---------- ---------- ----------
Total Revenues $13,165,267 $ 7,635,454 $ 6,537,862
-------------- ========== ========== ===========
Gross Profit:
Software and Related Systems and Services $ 4,050,334 $ 1,978,190 $ 960,463
Data Center Services 1,033,394 769,102 986,787
---------- --------- ---------
Total Gross Profit $ 5,083,728 $ 2,747,292 $ 1,947,250
------------------ ========== ========= =========
Income [Loss] From Operations:
Software and Related Systems and Services $ 342,501 $ (448,801) $(3,516,099)
Data Center Services 416,880 (86,706) (97,805)
---------- --------- ---------
Total [Loss] From Operations $ 759,381 $ (535,507) $(3,613,904)
---------------------------- ========== ========= =========
Depreciation and Amortization:
Software and Related Systems and Services $ 468,840 $ 477,953 $ 367,984
Data Center Services 92,722 123,037 118,582
---------- -------- ---------
Total Depreciation and Amortization $ 561,562 $ 600,990 $ 486,566
----------------------------------- ========== ======== =========
Interest Expense:
Software and related systems and services $ 289,210 $ 220,774 $ 313,018
Data Center Services 56,904 87,395 159,530
---------- -------- ---------
Total Interest Expense $ 346,114 $ 308,169 $ 472,548
=========== ======== =========
Capital Expenditures:
Software and Related Systems and Services $ 188,570 $ 636,174 $ 444,516
Data Center Services 33,461 41,867 15,317
---------- -------- --------
Total Capital Expenditures $ 222,031 $ 678,041 $ 459,833
-------------------------- ========== ======== ========
Identifiable Assets:
Software and Related Systems and Services $ 7,740,018 $ 4,452,999 $ 5,052,671
Data Center Services 2,548,928 2,886,804 3,198,058
---------- --------- ---------
Total Identifiable Assets $10,288,946 $ 7,339,803 $ 8,250,729
------------------------- ============ ========= =========
F - 25
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[16] Johnson Acquisition
In October 1997, the Company purchased the customer list and certain other
assets of Johnson Computing Systems ("Johnson Computing"), for which it issued
26,667 shares of Common Stock, valued at $300,000. Pursuant to the agreement,
because the price of the Common Stock did not reach a certain price level, the
Company purchased 5,333 shares of Common Stock from Johnson Computing for
$60,000, which is payable in installments. Johnson Computing provided software
and related support for methadone clinics. The acquisition was accounted for as
a purchase and accordingly, the results of operations of the acquired entity
were included in the consolidated statements of operations from the date of
acquisition. The proforma results for 1997 and 1996, assuming this acquisition
has been made at the beginning of 1996, would not be materially different from
the reported results.
[17] Subsequent Event
On March 25, 1999, Netsmart and a group of purchasers, consisting principally of
Netsmart's management and directors, entered into an agreement with Consolidated
Technologies, Inc. Pursuant to the agreement, the purchasers are to buy from
Consolidated, in a private sale, an aggregate of 496,312 shares of Netsmart's
common stock for an aggregate purchase price of $1 million. On April 8, 1999,
248,156 of such shares were purchased by the management investors for $500,000.
The agreement also gives the purchasers the right to buy up to between 296,312
and 496,312 additional shares of Netsmart's common stock from Consolidated at
the same purchase price per share.
In addition, Consolidated agreed to transfer to Netsmart shares of Netsmart's
preferred stock (including the right to receive dividends thereon) and warrants
to purchase shares of Netsmart's common stock, for which Netsmart will issue
100,000 shares of its common stock to Consolidated. This exchange took place on
April 8, 1999.
F - 26
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.
Dated: August 14, 1999 By /s/ James L. Conway
-------------------------------
James L. Conway, President and CEO
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 connection therewith, with the Securities and Exchange Commission.
Signature Title Date
--------- ----- ----
/s/James L. Conway President, Chief Executive August 14, 1999
- ------------------------ Officer and Director (Principal
James L. Conway Executive Officer)
/s/Anthony F. Grisanti Chief Financial Officer August 14, 1999
- ------------------------ (Principal Financial and
Anthony F. Grisanti Accounting Officer)
/s/Edward D. Bright Director August 14, 1999
- ------------------------
Edward D. Bright
/s/John F. Phillips Director August 14, 1999
- ------------------------
John F. Phillips
/s/Gerald O. Koop Director August 14, 1999
- ------------------------
Gerald O. Koop
Director
- ------------------------
Joseph G. Sicinski