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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
Commission File Number 0-21177
NETSMART TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3680154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
146 Nassau Avenue, Islip, NY 11751
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 968-2000
Securities registered pursuant to Section 12(b) of the Act: ____
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Outstanding shares as of April 9, 1998
------------------- ---------------------------------------
Common Stock, par value
.01 per share 8,333,996
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X_ No__
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S - K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Item III is incorporated by reference from the Registrant's definitive proxy
statement relating to its 1998 Annual Meeting of Stockholders.
PART I
Item 1. Business
Introduction
Netsmart Technologies, Inc. ("Netsmart" or the "Company") principally develops,
markets and supports computer software designed to enable behavioral health care
organizations to manage their administrative, clinical and billing requirements
in a network computing environment. Behavioral health care organizations provide
mental health and substance abuse care and childrens services in private and
publicly funded facilities. Increasingly such care is provided in integrated
service delivery networks of inpatient and outpatient care facilities.
77% of Netsmart's revenue for the year ended December 31, 1996 and 97% of its
revenue for the fiscal year ended December 31, 1997 was generated by its
behavioral health information systems and related services which are marketed by
its subsidiary Creative Socio-Medics Corp. ("CSM"). CSM was acquired by Carte
Medical Holdings, Inc. ("Holdings") from a nonaffiliated party in June 1994 and
transferred by Holdings to Netsmart in September 1995.
Netsmart has also developed proprietary network technology utilizing smart cards
which it markets in the health care field as the CarteSmart System. A smart card
is a plastic card about the size of a standard credit card which contains a
single embedded microprocessor chip with both data storage and computing
capabilities.
Forward Looking Statements
Statements in this Form 10-K that are not descriptions of historical facts may
be forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified in this Form 10-K and in other
documents filed by the Company with the Securities and Exchange Commission.
Organization of the Company
Netsmart is a Delaware corporation formed in September 1992 under the name
Medical Services Corp. Its name was changed to Carte Medical Corporation in
October 1993 through the merger of Medical Services Corporation into its
wholly-owned subsidiary, Carte Medical Corp. The Company's corporate name was
changed to CSMC Corporation in June 1995 and to Netsmart Technologies, Inc. in
February 1996.
In June 1994, the assets of CSM were acquired by a wholly-owned subsidiary of
SIS Capital Corp. ("SISC"), the Company's principal stockholder, from a
non-affiliated party. In September 1995, the stock of CSM was transferred to the
Company. References to Netsmart include both the Company, its former and present
subsidiaries, including CSM from June 16, 1994.
The Company's executive offices are located at 146 Nassau Avenue, Islip, New
York 11751, telephone (516) 968-2000.
As of April 8, 1998 approximately 29.7% of the Company's outstanding Common
Stock was owned by SISC, which is a wholly-owned subsidiary of Consolidated
Technology Group Ltd. ("Consolidated"), a public company. Consolidated, through
The Trinity Group, Inc. ("Trinity"), which was a wholly-owned subsidiary of
Consolidated, has an agreement with the Company pursuant to which the Company
pays Consolidated a fee of $15,000 per month through August 1999.
In April 1998, Mr. Lewis S. Schiller, who was chairman of the board, chief
executive officer and a director of Consolidated, the Company and other
subsidiaries of Consolidated, resigned as an officer and director of
Consolidated and each of its present subsidiaries, including the Company.
Mr. Norman J. Hoskin, who was a director of Consolidated, the Company and other
subsidiaries of Consolidated, resigned as a director
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of Consolidated and such subsidiaries, including the Company. Contemporaneously
with the effectiveness of such resignations, Messrs. Edward D. Bright and
Seymour Richter were elected as directors to fill the vacancies created by the
resignation of Messrs. Schiller and Hoskin. Messrs. Bright, and Richter were
also elected as directors of Consolidated. In April 1998, Mr. Bright was
elected as Chairman of the Board and Mr. Conway was elected as Chief Executive
Officer of the Company.
Behavioral Health Information Systems and Services
Since the June 1994 acquisition of CSM, Netsmart has offered its customers a
range of products and services principally based upon the behavioral health
information systems which were developed and marketed by CSM. Users typically
purchase one of the behavioral health information systems, in the form of a
perpetual license to use the system, as well as contract services, and
maintenance from Netsmart. In addition, Netsmart offers third party hardware and
software pursuant to arrangements with the hardware and software vendors. The
contract services include project management, training, consulting and software
development services, which are provided either on a time and material basis or
pursuant to a fixed-price contract. The software development services may
require CSM to adapt one of its behavioral health information systems to meet
the specific requirements of the customer.
The typical price for a license for CSM's behavioral health information systems
ranges from $10,000 to $30,000 for single facility health care organizations to
$250,000 to $500,000 for multi-unit and state operated health care
organizations. During the years ended December 31, 1997, 1996 and 1995, CSM
installed 35, 6, and 11 behavioral health information systems. Licensing of such
systems represented approximately $737,000, $329,000, and $162,000 in the years
ended December 31, 1997, 1996 and 1995, respectively, accounting for
approximately 9.4%, 3.9%, and 2.2% of revenue for such periods.
A customer's purchase order may also include third party hardware or software.
For the years ended December 31, 1997, 1996 and 1995, revenue from hardware and
third party software accounted for approximately $1.1 million, $1.1 million and
$2.1 million, representing 13.4%, 13% and 29.1%, respectively, of revenues in
such periods.
In addition to its behavioral health information systems and related services,
CSM offers processing services to substance abuse facilities. CSM maintains a
data center facility at which its personnel perform data entry and data
processing and produce operations reports for smaller substance-abuse clinics.
During the years ended December 31, 1997, 1996 and 1995, CSM's data center
operation generated revenue of approximately $2.2 million, $2.2 million and
$1.7, respectively, representing approximately 28.4%, 25.8% and 23.6% of CSM's
revenues for such periods.
Maintenance services have generated increasing revenue and have become a more
significant portion of CSM's business since virtually all purchasers of health
care information system licenses typically purchase maintenance service.
Maintenance revenue increases as present customers purchase additional licenses
from CSM and new customers obtain their initial licenses for its health
information services. Under its maintenance contracts, which are executed on an
annual basis, CSM provides telephone help services to its customers and
maintains and upgrades its software. Its obligations under the maintenance
contract may require CSM to make any modifications necessary to meet new Federal
and state reporting requirements. CSM does not maintain the hardware and third
party software sold to its customers, but does provide a telephone help line
service for certain of the third party software which it relicenses.
The CarteSmart System
Netsmart's CarteSmart System software was designed to operate on
industry-standard computer networks and smart cards.
Netsmart's initial applications were designed to meet the needs of managed care
organizations and entitlement programs and Netsmart developed a smart card
interface to its health management systems. Each time a patient visits a
participating health care provider, the health care provider adds to the
patient's data base information concerning the visit, including the date,
procedures performed and diagnosis. At the
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time of the first visit to a participating physician, the physician enters
information relating to the diagnosis and treatment given on that visit together
with such information relating to chronic conditions, such as allergies and
medication, as the physician deems important. This information is inputted into
the patient's smart card and may also be transmitted to the managed care
organization's central data base, where, unless dissemination of such
information has been restricted by the patient, other health care providers will
have access to the information.
To date, Netsmart has licensed its CarteSmart software in conjunction with a
pilot project for San Diego County, which involved the issuance of smart cards
to approximately 1,200 mental health patients participating in the California
Medical Managed Care Initiative. Netsmart is also marketing its CarteSmart
System to other entitlement programs and managed care organizations; however,
except for the pilot project in San Diego County, Netsmart has not entered into
any agreements with any such organizations, and no assurance can be given that
Netsmart will enter into any such agreements.
Commencing in May 1995, Netsmart entered into a series of agreements with IBN
Limited, a New York corporation for services and CarteSmart software licenses
for the implementation of a satellite based distributed network of automatic
teller machines and off-line point of sale terminals using smart cards for the
former Soviet Union. At the beginning of fiscal 1998 Netsmart learned that IBN
has not been successful in marketing its system in the former Soviet Union, and
Netsmart has decided to write-off approximately $754,000 of receivables due from
IBN.
Netsmart has evaluated its CarteSmart business and the investment which will be
required to further develop and enhance its CarteSmart System to succeed in the
increasingly competitive smart card market. At the current time it is continuing
to market its CarteSmart System only in the health and human services market. As
a result of its evaluation, the Company is currently negotiating the sale of its
CarteSmart business. The Company will explore other options if these
negotiations are not successful.
Markets and Marketing
The market for CSM's behavioral health information systems and related services
is comprised of both private and publicly operated providers offering hospital
or community based outpatient behavioral health care services. As a result of
national managed care initiatives most providers are joining in regional
networks containing both public and private facilities. Management Information
Systems, such as CSM's behavioral health information system are a required
component of the administrative structure of these networks. CSM believes that
there are approximately 15,000 providers of such treatment programs in the
United States, including public and private hospitals, private and
community-based residential facilities and Federal, state and local governmental
agencies.
Many of the long term behavioral health care facilities which are potential CSM
customers are operated by government entities and include entitlement programs.
During the years ended December 31, 1997, 1996 and 1995, approximately 34, 31%
and 54%, respectively, of revenues was generated from contracts with government
agencies. Contracts with government agencies generally include provisions which
permit the contracting agency to cancel the contract at its convenience,
although the Company has not experienced a termination for convenience in the
last five years.
For the year ended December 31, 1997, no customer accounted for more than 10% of
Netsmart's revenue. In the year ended December 31, 1996, IBN Limited generated
revenue of approximately $1.9 million, representing 22% of Netsmart's revenue.
At December 31, 1997 and 1996, Netsmart had a backlog of orders, including
ongoing maintenance and data center contracts, for its behavioral health
information systems in the aggregate amount of $4.8 million and $3.7 million
respectively. Substantially all of the backlog at December 31, 1997 is expected
to be filled during 1998.
Netsmart's sales force is comprised of 9 full-time sales and marketing
representatives.
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Product Development
During 1997 the Company incurred product development costs of $664,000, of which
$405,000 was incurred for the CSM behavioral health information system, and
$259,000 was incurred for the development of a customer activated terminal and
server software of the Carte Smart system. $204,000 of the cost incurred for
enhancement of the CSM behavioral health system was capitalized.
During 1996 the company incurred product development costs of $557,000 for the
Smart Carte system, of which $279,000 was capitalized and written off in fiscal
1997.
Competition
The software industry in general is highly competitive. Although Netsmart
believes that it can provide a health care facility or managed care organization
with software to enable it to perform its services more effectively, other
software companies provide comparable systems and computer and communications
companies have the staff and resources to develop competitive systems, and
users, such as insurance companies, have the ability to develop software systems
in house. Because of the large subscriber base participating in the major
managed care organizations, the inability of Netsmart to license any such
organizations could have a materially adverse effect upon its business.
Furthermore, various companies have offered smart card programs, by which a
person can have his medical records stored and software vendors and insurance
companies have developed software to enable a physician or other medical care
provider to have direct access to the insurer's computer and other software
designed to maintain patient health and/or medication records. The market the
Company is addressing is very cost sensitive.
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 no assurance can be given that Netsmart will be able
to continue to compete effectively with such companies.
Government Regulations
The Federal and State governments have adopted numerous regulations relating to
the health care industry, including regulations relating to the payments to
health care providers for various services. The adoption of new regulations can
have a significant effect upon the operations of health care providers and
insurance companies. Although Netsmart's business is aimed at meeting certain of
the problems resulting from government regulations and from efforts to reduce
the cost of health care, the effect of future regulations by governments and
payment practices by government agencies or health insurers, including
reductions in the funding for or scope of entitlement programs, cannot be
predicted. Any change in, the structure of health care in the United States can
have a material effect on companies providing services to the health care
industry, including those providing software. Although Netsmart believes that
one likely direction which may result from the current study of the health care
industry would be an increased trend to managed care programs, no assurance can
be given that Netsmart's business will benefit from any changes in the industry
structure. Even if the industry does evolve toward more health care being
provided by managed care organizations, it is possible that there will be
substantial concentration in a few very large organizations, which may seek to
develop their own software or obtain software from other sources. To the extent
that the health care industry evolves with greater government sponsored programs
and less privately run organizations, Netsmart's business may be adversely
affected. Furthermore, to the extant that each state changes its own regulations
in the health care field, it may be necessary for Netsmart to modify its
behavioral health information systems to meet any new record-keeping or other
requirements imposed by changes in regulations, and no assurance can be given
that Netsmart will be able to generate revenues sufficient to cover the costs of
developing the modifications.
Approximately one-third of CSM's business has been with government agencies,
including specialized care facilities operated by, or under contract with,
government agencies. The decision on the part of a government agency to enter
into a contract is dependent upon a number of factors, including economic and
budgetary problems affecting the local area, and government procurement
regulations, which may include the need for approval by more than one agency
before a contract is signed. In addition, contracts with
4
government agencies generally include provisions which permit the contracting
agency to cancel the contract at its convenience, although the Company has not
experienced a termination for convenience in the last five years.
Intellectual Property Rights
Netsmart has no patent rights for its behavioral health information system
software, but it relies upon copyright protection for its software, as well as
non-disclosure and secrecy agreements with its employees and third parties to
whom Netsmart discloses information. No assurance can be given that Netsmart
will be able to protect its proprietary rights to its system or that any third
party will not claim rights in the system. Disclosure of the codes used in the
CarteSmart System or in any proprietary product, whether or not in violation of
a non-disclosure agreement, could have a materially adverse affect upon
Netsmart, even if Netsmart is successful in obtaining injunctive relief.
Employees
As of December 31, 1997, Netsmart had 85 employees, including five executive,
nine marketing, 64 technical and seven clerical and administrative employees.
The chief executive officer and the president of Netsmart devote only a portion
of their time to the business of Netsmart.
Executive Officers of the Company
The following are the executive officers of the Company as of April 15, 1998:
Name Age Position with the Company
- ---- --- -------------------------
Edward D. Bright 61 Chairman of the Board
James L. Conway 50 President and Chief Executive Officer
Leonard M. Luttinger 49 Vice President
Anthony F. Grisanti 49 Chief Financial Officer,
Treasurer and Secretary
John F. Phillips 60 Vice President-- Marketing
Gerald O. Koop 58 Chief Executive Officer, CSM
Mr. Edward D. Bright has been Chairman of the Board and a director of the
Company since April 1998. In April 1998, Mr. Bright was also elected as
chairman, secretary, treasurer and a director of Consolidated and a director of
Trans Global Services, Inc. ("Trans Global"), a publicly-held subsidiary of
Consolidated that provides technical temporary staffing services. From January
1996 until April 1998, Mr. Bright was an executive officer of or advisor to CSM.
From June 1994, when CSM was acquired by the Company from Advanced Computer
Techniques, Inc. ("ACT"), until January 1996, he was chief executive officer of
the Company. He was a senior executive officer and a director of CSM and ACT for
more than two years prior to June 1994.
Mr. James L. Conway became CEO of the Company in April 1998. Mr. Conway has been
president and a director of the Company since January 1996. From 1993 until
April 1998, he was president of S-Tech Corporation ("S-Tech"), which was a
wholly-owned subsidiary of Consolidated which manufactures specialty vending
equipment for postal, telecommunication and other industries. From 1990 to 1993,
he was a consultant to General Aero Products Corp. ("General Aero"), a Long
Island based defense manufacturing firm as debtor in possession of General Aero
following its filing under Chapter 11 of the Federal Bankruptcy Act in 1989.
Mr. Leonard M. Luttinger has been a director of the Company since its
organization in September 1992 and was president from September 1992 until
January 1996, when he became chief operating officer. From October 1996 through
March 1997, he was vice president of the Smartcard Division. From March 1991 to
September 1992, Mr. Luttinger was vice president of smart card systems for
Onecard, a corporation engaged in the development of smart-card technology. From
June 1966 to February 1991, he was employed at
5
Unisys, a computer corporation, and its predecessor Burroughs Corporation, in
various capacities, including manager of semiconductor and memory products and
manager of scientific systems.
Mr. Anthony F. Grisanti has been treasurer of the Company since June 1994,
secretary since February 1995 and chief financial officer since January 1996. He
was chief financial officer of CSM and ACT for more than five years prior
thereto.
Mr. John F. Phillips has been a director of the Company and vice president of
CSM since June 1994, when CSM was acquired. He was a senior executive officer
and director of CSM and ACT for more than five years prior to June 1994.
Mr. Gerald Koop has been an executive of CSM since June 1994 when CSM was
acquired. He served as marketing executive from June 1994 to January 1996. From
January 1996 to present, he has operated as chief executive officer of CSM.
Prior to June 1994, Mr. Koop was on medical leave of absence from CSM.
Item 2. Property
The Company's executive offices and facilities are located in approximately
15,000 square feet of space at 146 Nassau Avenue, Islip, New York, pursuant to a
lease which terminates on February 28, 1999, at a minimum annual rental of
$263,000. This lease provides for fixed annual increases ranging from 4% to 5%.
The Company also leases approximately 3,500 square feet of office space at 1335
Dublin Road, Columbus, Ohio, pursuant to a lease which terminates on November
30, 2002, at a minimum annual rental of $50,000. This lease provides for annual
increases for operating expenses and real estate taxes.
The Company also leases approximately 1,800 square feet of office space at 18B
Ledgebrook Run, Mansfield Center, Connecticut, pursuant to a lease which
terminates on October 31, 2002, at a minimum annual rental of $21,000. This
lease provides for annual increases for operating expenses and real estate
taxes.
The Company also leases approximately 1,800 square feet of office space at 7590
Fay Avenue, La Jolla, California, pursuant to a lease which terminates on March
31, 1999, at a minimum annual rental of $31,000.
This lease provides for fixed annual increases of 4%.
The Company occupies, on a month to month basis, approximately 2,000 square feet
of office space in Ashland, Oregon, at a monthly rental of $700.
The Company believes that its space is adequate for its immediate needs and
that, if additional space is required, it would be readily available on
commercially reasonable rates.
Item 3. Legal Proceedings
In March 1997, an action was commenced against the Company and certain of its
officers, directors and stockholders by Onecard Health Services Corporation in
the Supreme Court of the State of New York, County of New York. The action was
similar to one previously brought by the same plaintiff, which was dismissed in
September 1966. The named defendants include, in addition to the Company,
Messrs. Lewis S. Schiller, formerly chief executive officer and a director of
the Company, Leonard M. Luttinger, vice president and a director of the Company,
Thomas L. Evans, formerly a vice president of the Company, Consolidated and
certain of its subsidiaries, other stockholders of the Company and other
individuals who were or may have been officers or directors of Onecard but who
have no affiliation with the Company or Consolidated. Mr. Luttinger and Mr.
Evans were employees of Onecard prior to the formation of the Company. Mr.
Schiller was not an employee or director or, consultant to, or otherwise
affiliated with, Onecard. The complaint makes broad claims respecting alleged
misappropriation of Onecard's trade secrets, corporate assets and corporate
opportunities, breach of fiduciary relationship unfair competition, fraud,
6
breach of trust and other similar allegations, apparently arising at the time
of, or in connection with, the organization of the Company in September 1992.
The complaint seeks injunctive relief and damages, including punitive damages,
of $130 million. The Company believes that the action is without merit, and it
will vigorously defend the action. The Company has filed an answer denying all
of the plaintiffs' allegations and has asserted affirmative defenses. In
addition, the Company believes that there is a difference in the technology used
in the Onecard software and the Company's CarteSmart software and in the type of
computer network on which the software operates. The Company has demanded that
the plaintiff particularize the broad allegations of the complaint and the
produce documents referred to in the complaint. The plaintiff is presently not
represented by counsel and has not produced the requested documentation. The
Company plans to file a motion to dismiss the action. No assurance can be given
as to the ultimate disposition of the action, and an adverse decision may have a
material adverse effect upon the business of the Company.
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, 1997.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's 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 the Company's initial public offering.
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
As of December 31, 1997 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, 1997 and 1996 and 1995.
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Item 6. Selected Financial Data
Year Ended December 31,
-----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in 000's except per share data)
Selected Statements
of Operations Data:
Revenues $ 7,882 $ 8,541 $ 7,382 $ 2,924 $ 57
Income (Loss) from
Operations 1 (2,863) 2 (4,151) (1,433) (1,491) (339)
Net Income (Loss) (3,459) 2&3 (6,579) 4 (2,850) (1,751) (433)
Net Income (Loss)
per Common Share (.48) (1.28) (.59) (.36) (.10)
Weighted average number
of shares outstanding 7,161 5,149 4,822 4,822 4,763
Selected Balance
Sheet Data:
Working Capital (deficiency) (537) 477 (2,562) (4,037) (938)
Total Assets 7,340 8,251 6,390 7,193 585
Total Liabilities 4,200 3,836 5,887 6,342 (938)
Redeemable Preferred Stock -- -- 96 96 96
Accumulated Deficit (15,293) (11,726) (5,147) (2,297) (546)
Stockholders' Equity
(deficiency) 3,140 4,415 407 755 (449)
- --------
1Reflects a write off of$553 of capitalized software costs and related
hardware. Reflects a write off of $754 of accounts receivable and costs and
estimated profits in excess of interim billings associated with one client.
These write offs relate to the Smarte Carte business.
2Reflects $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.
3Reflects $1,692 of non cash costs associated with the issuance of
500,000 common shares to certain noteholders and 25,000 shares of common stock
to the Company's asset based lender.
4Reflects financing costs of $460 representing the write-off of deferred
financing costs relating to a proposed public offering scheduled for early 1995
but cancelled.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Years Ended December 31, 1997 and 1996.
The Company's revenue for 1997 was $7.9 million, a decrease of approximately
$659,000, or 8% from the revenue for 1996 which was $8.5 million. This decrease
results from a decrease in revenue from $1,879,000 in 1996 to $95,000 in 1997,
from a contract with IBN Limited ("IBN"). IBN represented the Company's most
significant customer for 1996, accounting for approximately 22% of revenue. The
Company is no longer providing professional services to IBN and in 1997, the
Company wrote off $754,000 of accounts receivable relating to IBN.
Revenue from the Company's behavioral health information systems ("BHIS")
continued to represent the Company's principal source of revenue in 1997,
accounting for $7.6 million or 97% of revenue. 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 BHIS revenues 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 BHIS backlog and the
ability of the Company 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%. Sales
of third party hardware and software are made in connection with the sales of
BHIS. License revenue increased to $737,000 in 1997 from $329,000 in 1996, a
124% increase. License revenue is generated as part of a sale of BHIS pursuant
to a contract or purchase order that includes delivery of the system and
maintenance. The Company believes that the increase in 1997 installations should
enable the Company to increase the maintenance revenue in future periods.
Revenue from contracts from government agencies represented 34% of revenue for
1997 .
Gross profit increased to $1,727,000 in 1997 from $1,610,000 in 1996, a 7%
increase. The increase in the gross profit was substantially the result of a
reduction of costs associated with the IBN contract. During 1996 the costs
associated with this contract were disproportionately high. In addition, the
Company generated a higher gross margin from its health information systems,
particularly from the increase in license revenue which provides higher margins.
Selling, general and administrative expenses were $2.8 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
such as insurance and an adjustment for bad debts.
During 1996, the Company incurred non cash compensation charges of $3.5 million
arising out of the issuance by the Company of warrants and options having
exercise prices which were below the market value of the Common Stock at the
date of issuance. During 1996, the Company also issued 500,000 shares of common
stock to certain noteholders and 25,000 common shares to the Company's asset
based lender. As a result of such issuance, the Company incurred a financing
cost charge to operations of approximately $1.7 million. There were no such
charges during 1997.
During 1997, the Company incurred product development expenses of $201,000,
which were related to the Company's behavioral health information systems
products. In addition, the Company capitalized $204,000 of behavioral health
information systems software development costs associated with such products as
its clinician workstation, BHIS for Windows, managed care and methadone
dispensing products. The Company also capitalized $259,000 of software
development costs for the Company's contract with a customer, with respect to
its customer activated terminal product and server software. Amortization of
such software in 1997 amounted to $59,000 which was charged to cost of revenue.
In 1996, the Company incurred product development expenses of $557,000, which
were related to the Company's contract with IBN and the development of SmartCard
products. $279,000 of such amount was capitalized in 1996 and written off in
1997.
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In 1997, the Company's 50% share of its loss in its joint venture corporation
with respect to the development of CCAC software purchased in 1996 increased
from $264,000 in 1996 to $287,000 in 1997. Included in the 1997 loss was a write
off of the investment in the joint venture corporation in the amount of
$147,000. This adjustment was made after a determination was made that this
investment would not be recovered, based upon estimated cash flows. This
adjustment reduced the carrying basis to zero.
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 Company's asset-based lender.
The Company pays 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.
During 1997, the Company wrote off certain receivables from IBN totaling
$754,000.
As a result of the foregoing factors, the Company incurred a net loss of $3.5
million, or $.48 per share, in 1997 as compared with a net loss of $6.6 million,
or $1.28 per share, in 1996.
Years Ended December 31, 1996 and 1995
The Company's revenue for 1996 was $8.5 million, an increase of $1.1 million, or
15% from the revenue for 1995 which was $7.4 million. Approximately $1,550,000
of the increase in revenue was generated pursuant to the Company's agreement
with IBN. IBN represented the Company's most significant customer for 1996,
accounting for approximately 22% of revenue. Furthermore, through December 31,
1996 IBN has generated revenue of $2.4 million, or approximately 89.6% of the
Company's total revenue from the SmartCard systems during the two years ended
December 31, 1996 and 1995 on a combined basis. The revenue generated to date
includes approximately $419,000 of guaranteed royalties. As of December 31,
1996, the contract was more than 80% complete. The Company is continuing to
provide professional services to IBN, although revenues from such services have
declined substantially from the level at the beginning of the year. The Company
intends to expand its marketing effort for its CarteSmart System, however, at
December 31, 1996, the Company did not have any significant contracts for the
CarteSmart system.
Revenue from the Company's behavioral health information systems continued to
represent the Company's principal source of revenue in 1996, accounting for $6.5
million or 76% of revenue. However, as a result of the increase of revenue from
SmartCard systems, principally from IBN, revenue from behavioral health
information systems and services declined as a percentage of total revenue.
Except for revenue from the IBN contract, the largest component of revenue in
1996 was data center (service bureau) revenue which increased to $2,207,000 in
1996 from $1,742,000 in 1995, an increase of 27%. The BHIS revenue decreased to
$1,663,000 in 1996 from $1,777,000 in 1995, reflecting a decrease of 6%.
Maintenance revenue increased to $1,226,000 in 1996 from $1,099,000 in 1995,
reflecting an 11% increase. Revenue from third party hardware and software
decreased to $1,114,000 in 1996 from $2,148,000 in 1995, a decrease of 48%.
Sales of third party hardware and software are made only in connection with the
sales of BHIS. License revenue increased to $329,000 in 1996 from $162,000 in
1995. License revenue is generated as part of a sale of a BHIS product pursuant
to a contract or purchase order that includes delivery of a BHIS and
maintenance. The Company believes that the increase in 1996 installations should
enable the Company to increase the maintenance revenue in future periods.
Revenue from contracts from government agencies represented 31% of revenue for
1996 . The Company believes that such contracts will continue to represent an
important part of its business, particularly its behavioral health information
systems business.
Gross profit decreased to $1,332,000 in 1996 from $1,763,000 in 1995, a 24%
decrease. The decrease in the gross profit was substantially the result of costs
associated with the completion of the IBN contract. At December 31, 1996 the IBN
contract was more than 80% complete.
Selling, general and administrative expenses were $1.9 million in 1996, a
decrease of 24% from the $2.5 million in 1995. The decline was substantially the
result of a one time charge in 1995 of a write off of deferred public offering
costs in the amount of $460,000 as well as a reduction in executive compensation
and a reduction in staff in 1996.
10
During 1996, the Company incurred non cash compensation charges of $3.5 million
arising out of the issuance by the Company of warrants and options having
exercise prices which were less than the market value of the Common Stock at the
date of approval by the board of directors. During 1996, the Company issued
500,000 common shares to certain noteholders and 25,000 common shares to the
Company's asset based lender. As a result of such issuance, the Company incurred
a financing cost charge to operations of approximately $1.7 million.
During 1996, the Company incurred development expenses in the amount of
$278,000, which were related to the Company's contract with IBN and the
development of SmartCard products. Also during 1996 the Company incurred
capitalized software development costs in the amount of $279,000 of which
$28,000 has been amortized in 1996 and charged to cost of revenue. In 1995, the
Company incurred research and development expenses in the amount of $699,000.
In 1996 the Company recognized its 50% share of its loss in its joint venture
corporation with respect to the purchase of CCAC software. The amount of such
loss was $264,000.
Interest expense was $473,000 in 1996, a decrease of $81,000, or 15% from the
interest expense in 1995. The most significant component of the interest expense
on an ongoing basis is the interest payable to the Company's asset-based lender,
which it pays interest equal to the greater if 18% per annum or prime plus 8%
plus a fee of 1% of the face amount of the invoice.
As a result of the foregoing factors, the Company incurred a net loss of $6.6
million, or $1.28 per share in 1996 as compared with a net loss of $2.9 million,
or $.59 per share in 1995.
Liquidity and Capital Resources
The Company had a working capital deficit of $537,000 at December 31, 1997 as
compared to a working capital surplus of $477,000 at December 31, 1996. The
decrease in working capital for the year ended December 31, 1997 was
substantially due to the net loss incurred for the year as well as the Company's
investment in its capitalized software and computer equipment notwithstanding
the receipt of net proceeds of $1.9 million from the issuance of Common Stock
upon the exercise of warrants, as described below. The Company also invested an
additional $166,000 in its CCAC joint venture during the year ended December 31,
1997. The Company's cash balances were $855,000 at December 31, 1997 as compared
to $998,000 at December 31, 1996.
The Company's principal source of funds, other than revenue and proceeds from
the warrant exercise mentioned below, is an accounts receivable financing
agreement with an asset based lender whereby it may borrow up to 80% of eligible
accounts receivable up to a maximum of $1,250,000. This maximum will increase to
$1,500,000 effective August 1, 1998. As of December 31, 1997, the outstanding
borrowings under this facility was $935,000. At December 31, 1997, the maximum
amount available under this formula was $981,000.
At December 31, 1997, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $2.7 million, representing
approximately 124 days of revenue based on annualizing the revenue for the year
ended December 31, 1997, although no assurance can be given that revenue will
continue at the same level as the year ended December 31, 1997. Accounts
receivable at December 31, 1997 decreased by $102,000 from $2,284,000 at
December 31, 1996 to $2,182,000 at December 31, 1997. At December 31, 1997 Beth
Israel Medical Center and the State of Colorado accounted for 12% and 10%
respectively, of the total gross accounts receivable balance. No other customer
accounted for more than 10% of the accounts receivable balance.
In September 1997 the Company amended the terms of its Series A Redeemable
Common Stock Purchase Warrants. Pursuant to the amendment, (i) the exercise
price of the Warrant was reduced from $4.50 to $3.00, and (ii) upon payment of
the $3.00 exercise price, the Company would issue two shares of Common Stock,
resulting in an effective exercise price of $1.50 per share. These terms were
available until December 16, 1997. At December 31, 1997, 639,107 warrants were
exercised and the Company
11
received $1,917,000 in gross proceeds. The Company believes that these funds,
together with revenue from operations will be sufficient to enable it to operate
without additional funds for at least through 1998.
Year 2000 Issue
Many existing computer programs use only two digits to identify a year in a date
field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000.
This issue is referred to as the "Year 2000 issue". The Company is in the
process of evaluating the potential cost to it in addressing the Year 2000 issue
and the potential consequences of an incomplete or untimely resolution of the
Year 2000 issue. No assurance can be given that the Company will not incur
significant cost in addressing the Year 2000 issue or that the failure to
adequately address the Year 2000 issue will not have a material adverse effect
upon the Company.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not Applicable.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data begin on page F-1 of this Form
10-K.
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Part III, consisting of Items 10, 11, 12 and 13, is incorporated by reference
from the definitive proxy statement relating to the Company's 1998 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission
within 120 days after the end of the year ended December 31, 1997.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
12
1. Financial Statements
F-3 Report of Moore Stephens, P.C. Independent Auditors
F-4 - F-5 Consolidated Balance Sheets as of December 31, 1997 and 1996
F-6 - F7 Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995
F-8 Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
F-9 - F-11 Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
F-12 - F-30 Notes to Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
None
4. Exhibits
13
NETSMART TECHNOLOGIES, INC.
F - 1
NETSMART TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Page to Page
Independent Auditor's Report...................................F-3
Balance Sheets.................................................F-4......F-5
Statements of Operations.......................................F-6......F-7
Statements of Stockholders' Equity.............................F-8
Statements of Cash Flows.......................................F-9......F-11
Notes to Financial Statements .................................F-12.....F-30
. . . . . . . . . . .
F - 2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Netsmart Technologies, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of
Netsmart Technologies, Inc. and its subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Netsmart Technologies, Inc. and its subsidiary as of December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 26, 1998
F - 3
NETSMART TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
-----------
1 9 9 7 1 9 9 6
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 854,979 $ 998,317
Accounts Receivable - Net 2,182,418 2,284,450
Costs and Estimated Profits in Excess
of Interim Billings 542,324 931,786
Other Current Assets 83,770 82,205
----------- ------------
Total Current Assets 3,663,491 4,296,758
----------- ------------
PROPERTY AND EQUIPMENT - NET 308,583 382,586
----------- ------------
Other Assets:
Software Development Costs 183,150 250,920
Investment in Joint Venture at Equity -- 120,546
Customer Lists 3,067,676 3,128,814
Other Assets 116,903 71,105
----------- ------------
Total Other Assets 3,367,729 3,571,385
----------- ------------
Total Assets $ 7,339,803 $ 8,250,729
========== ===========
See Notes to Financial Statements.
F - 4
NETSMART TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
-----------
1 9 9 7 1 9 9 6
------- -------
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable $ 935,177 $ 590,031
Capitalized Lease Obligations 23,331 41,449
Accounts Payable 1,131,692 983,156
Accrued Expenses 1,041,120 991,075
Interim Billings in Excess of Costs and Estimated
Profits 951,885 1,102,105
Due to Related Parties -- 23,542
Deferred Revenue 117,080 88,420
-------------- ---------------
Total Current Liabilities 4,200,285 3,819,778
------------- -------------
Capitalized Lease Obligations -- 15,945
Commitments and Contingencies -- --
Stockholders' Equity:
Preferred Stock, $.01 Par Value; Authorized 3,000,000
Shares; Authorized, Issued and Outstanding:
Series D 6% Redeemable Preferred Stock - $.01 Par
Value 3,000 Shares Authorized, 1,210 Issued and
Outstanding [Liquidation Preference of $1,210,000] 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 and Outstanding
8,333,996 Shares at December 31, 1997,
6,798,203 Shares at December 31, 1996 83,339 67,982
Additional Paid-in Capital - Common Stock 17,140,109 14,863,328
Accumulated Deficit (15,293,451) (11,725,825)
------------- -------------
Total Stockholders' Equity 3,139,518 4,415,006
------------- -------------
Total Liabilities and Stockholders' Equity $ 7,339,803 $ 8,250,729
============ ============
See Notes to Financial Statements.
F - 5
NETSMART TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
----------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Revenues:
Software and Related
Systems and Services:
General $ 4,366,006 $ 5,108,095 $ 4,541,000
Maintenance Contract
Services 1,280,465 1,225,709 1,099,000
--------- --------- ---------
Total Software and Related
Systems and Services 5,646,471 6,333,804 5,640,000
Data Center Services 2,235,209 2,207,155 1,742,000
--------- --------- ---------
Total Revenues 7,881,680 8,540,959 7,382,000
--------- --------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 3,760,424 5,114,882 3,986,000
Maintenance Contract
Services 928,316 595,366 743,000
------- ------- ----------
Total Software and Related
Systems and Services 4,688,740 5,710,248 4,729,000
Data Center Services 1,466,107 1,220,368 889,000
--------- --------- ----------
Total Cost of Revenues 6,154,847 6,930,616 5,618,000
--------- --------- ---------
Gross Profit 1,726,833 1,610,343 1,764,000
Provision for Doubtful Accounts 814,398 260,000 8,000
Selling, General and
Administrative Expenses 2,841,724 1,661,854 2,472,000
Related Party Administrative
Expenses 180,000 69,000 18,000
Stock Based Compensation -- 3,492,300 --
Write off of Capitalized Software Costs 553,061 -- --
and Related Hardware
Research and Development 201,075 278,000 699,000
--------- ---------- ----------
Loss from Operations (2,863,425) (4,150,811) (1,433,000)
Financing Costs -- 1,692,000 863,000
Interest Expense 308,169 472,548 355,000
Equity in Net Loss of Joint Venture 287,131 264,085 --
See Notes to Financial Statements.
F - 6
NETSMART TECHNOLOGIES, INC.
- ----------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
----------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Related Party Interest
Expense -- -- 199,000
Net Loss $(3,458,725) $(6,579,444) $(2,850,000)
=========== ============ ============
Loss Per Common Share $ (.48) $ (1.28) $ (.59)
=========== ============ ============
Weighted Average Number of
Shares of Common Stock 7,160,858 5,149,253 4,821,528
=========== ============ ============
See Notes to Financial Statements.
F - 7
NETSMART TECHNOLOGIES, INC.
- -----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Series A Series D Common Stock
Preferred Preferred Additional $.01 Par Value Additional
Stock Stock Paid-in Authorized Paid-in
at .01 at .01 Capital 15,000,000 Capital Total
Par Value Par Value Preferred Shares Common Accumulated Stockholders'
Shares Amount Shares Amount Stock Shares Amount Stock Deficit Equity
Balance - December 31, 1994
[Combined] 400 $-- -- $ -- $ 40,000 1,050,003 $11,000 $ 3,001,000 $ (2,297,000) $ 755,000
Allocated Related Party
AdministrativeExpenses -- -- -- -- -- -- -- 18,000 -- 18,000
Common Stock Issued to Affiliate -- -- -- -- -- 825,000 8,000 (8,000) -- --
Common Stock and Preferred
Stock Issued to Affiliate -- -- 2,210 -- 2,210,000 1,125,000 11,000 241,000 -- 2,462,000
Common Stock Issued to Officer
for Services -- -- -- -- -- 11,250 -- 22,000 -- 22,000
Net Loss -- -- -- -- -- -- -- -- (2,850,000) (2,850,000)
--- --- ----- --- --------- --------- ------ ---------- --------- ---------
Balance - December 31, 1995
[Consolidated] 400 4 2,210 22 2,249,505 3,011,253 30,113 3,273,968 (5,146,381) 407,221
--- --- ----- --- --------- --------- ------ ---------- --------- ---------
Common Stock Issued in Exchange for
Series D and Series A Preferred Stock (400) (4) (1,000) (10) (1,039,996)1,168,200 11,681 1,028,319 -- --
Allocated Related Party
Administrative Expenses -- -- -- -- -- -- -- 9,000 -- 9,000
Compensation from the Issuance of
Common Stock Warrants -- -- -- -- -- -- -- 3,492,300 -- 3,492,300
Common Stock Issued - Initial Public
Offering 1,293,750 12,938 5,162,063 5,175,001
Common Stock Issued - Exercise of
Warrants 800,000 8,000 1,592,000 1,600,000
Common Stock Issued - Financing
Costs 525,000 5,250 1,674,750 1,680,000
Costs Associated with Issuance of
Stock (1,369,072) (1,369,072)
Net Loss -- -- -- -- -- -- -- -- (6,579,444 (6,579,444)
--- --- --- --- --------- --------- ------ ---------- --------- ---------
Balance - December 31, 1996
[Consolidated] -- -- 1,210 12 1,209,509 6,798,203 67,982 14,863,328 (11,725,826) 4,415,005
--- --- ----- --- --------- --------- ------ ---------- ---------- ---------
Common Stock Issued as Dividends
on Preferred Stock 12,802 128 108,772 (108,900) --
Common Stock Issued - Exercise of
Options 104,777 1,647 39,265 40,912
Common Stock Issued - Exercise of
Warrants 1,278,214 12,782 1,904,539 1,917,321
Cost Associated with Exercise of
Warrants (74,995) (74,995)
Common Stock Issued - Johnson
Acquisition 80,000 800 299,200 300,000
Net Loss (3,458,725) (3,458,725)
--- --- ----- --- --------- --------- ------ --------- ---------- ---------
Balance - December 31, 1997
[Consolidated] -- $-- 1,210 $ 12 $1,209,509 8,333,996 $83,339 $17,140,109 $(15,293,451) $3,139,518
=== === ===== === ========= ========= ====== ========== ========== =========
See Notes to Financial Statements.
F - 8
NETSMART TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
----------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Operating Activities:
Net Loss $ (3,458,725) $ (6,579,444) $ (2,850,000)
------------ ------------ ------------
Adjustments to Reconcile Net
Loss to Net Cash [Used
for] Provided by Operating Activities:
Depreciation and Amortization 600,990 486,566 872,000
Administrative Expenses -- 9,000 8,000
Additional Compensation Related to the
issuance of Equity Instruments -- 3,492,300 22,000
Financing Expenses related to the issuance
of Common Stock -- 1,680,000 --
Write Off of Deferred Public
Offering Costs -- -- 460,000
Write Off of Capitalized Software Cost
and Related Hardware 553,061 -- --
Equity in Net Loss of Joint Venture 287,131 264,085 21,000
Provision for Doubtful Accounts 814,398 260,000 8,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (302,366) (431,478) (388,000)
Costs and Estimated Profits in
Excess of Interim Billings (20,538) (516,707) 87,000
Other Current Assets (1,565) (68,810) 10,000
Other Assets 11,905 (10,502) --
Increase [Decrease] in:
Accounts Payable 148,536 (202,620) 159,000
Accrued Expenses 50,045 (332,174) 935,000
Interim Billings in Excess of
Costs and Estimated Profits (150,220) 160,626 (217,000)
Due to Related Parties (21,245) (143,458) 496,000
Deferred Revenue (4,439) (52,580) 141,000
------------ ------------ -----------
Total Adjustments 1,965,693 4,594,248 2,624,000
------------ ------------ -----------
Net Cash - Operating Activities - Forward (1,493,032) (1,985,196) (226,000)
------------ ------------ -----------
Investing Activities:
Acquisition of Property and
Equipment (216,041) (181,033) (138,000)
Software Development Costs (462,000) (278,800) --
Investment in Joint Venture (166,585) (384,631) --
------------ ------------ -----------
Net Cash - Investing Activities -
Forward) $ (844,626) $ (844,464) $ (138,000)
See Notes to Financial Statements.
F - 9
NETSMART TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
----------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Net Cash - Operating Activities -
Forwarded $(1,493,032) $(1,985,196) $ (226,000)
----------- ----------- ------------
Net Cash - Investing Activities -
Forwarded (844,626) (844,464) (138,000)
----------- ----------- -------------
Financing Activities:
Proceeds from Short-Term Notes 345,146 500,000 831,000
Payment of Short-Term Notes (912,270) (190,000)
Payment of Bank Note Payable (79,000) (175,000)
Payment of Short-Term Notes
to related party (750,000) --
Payment of Capitalized Lease
Obligations (34,063) (145,146) (29,000)
Issuance of Common Stock 5,175,000 --
Proceeds from Warrant exercise 1,917,319 1,600,000 --
Proceeds from Stock Option Exercise 40,913 -- --
Cash Overdraft 95,536) 56,000
Redemption of Series B Preferred Stock (96,000) --
Costs associated with issuance of Stock (74,995) (1,369,071)
Deferred Public Offering Costs -- (129,000)
--------- ----------- -----------
Net Cash - Financing Activities 2,194,320 3,827,977 364,000
---------- ----------- -----------
Net Increase [Decrease] in Cash (143,338) 998,317 --
Cash - Beginning of Periods 998,317 -- --
--------- ----------- -----------
Cash - End of Periods $ 8 54,979 $ 998,317 $ --
=========== =========== ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest $ 352,837 $ 481,856 $ 349,000
Income Taxes $ -- $ -- $ --
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During the year ended December 31, 1997, the Company had the following:
12,802 shares of common stock were issued to Series D Preferred stockholders as
dividends which were payable on October 31, 1996 and April 1, 1997. These shares
were valued at $108,900.
The Company issued 80,000 shares of common stock to acquire customer lists and
certain other assets of Johnson Computer Systems. These shares were valued at
$300,000.
F - 10
NETSMART TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
During the year ended December 31, 1996, the Company had the following:
SISC exchanged 1,000 shares of Series D preferred stock for 1,125,000 shares of
common stock. As a result of this exchange the aggregate redemption price of the
Series D preferred stock was reduced to $1,210,000. The Series A preferred stock
was converted into 43,200 shares of common stock in a transaction valued at
$43,200.
Pursuant to an agreement with four accredited investors, the Company issued
250,000 units composed of two shares of common stock and one Series A Common
Stock purchase warrant. The Company incurred a one time non-cash charge of
$1,611,000.
Pursuant to a modification of an agreement with an asset based lender the
Company issued 25,000 common shares to such lender and incurred a one-time
non-cash finance charge of $81,000.
The Company granted stock options to purchase an aggregate of 242,000 shares of
common stock and recognized compensation expense of $154,800.
The Company granted 3,573,125 Series B Common Stock purchase warrants and
896,875 Series A Common Stock purchase warrants and recognized compensation
expense of $3,337,500.
During the year ended December 31, 1995, the Company had the following:
1) $388,000 of accrued interest owed to SISC was exchanged for 1,125,000
shares of common stock.
2) $2,210,000 of SISC debt was exchanged for 2,210 shares of Series D
Preferred Stock.
3) 825,000 shares of common stock were issued to a subsidiary as follows:
A) 750,000 shares were issued in connection with the transfer of CSM
to the Company.
B) 75,000 shares were issued in respect of certain indebtedness
guaranteed by Consolidated.
See Notes to Financial Statements.
F - 11
NETSMART TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #1
- --------------------------------------------------------------------------------
[1] Financial Statement Presentation, Organization and Nature of Operations
The financial statements as of and for the three years ended December 31, 1997
are presented on a consolidated basis and include Netsmart Technologies, Inc.
["Netsmart"], formerly CSMC Corporation, Carte Medical Corporation and Medical
Services Corp., and its wholly-owned subsidiary, Creative Socio-Medics Corp.
["CSM"]. Netsmart and CSM are collectively referred to as the Company. All
intercompany transactions are eliminated in consolidation.
Netsmart was incorporated on September 9, 1992. Netsmart's marketing effort is
primarily directed at managed care organizations and methadone clinics and other
substance abuse facilities throughout the United States.
[2] Summary of Significant Accounting Policies
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents totaled approximately $940,000 and $1,000,000 at December 31, 1997
and 1996 respectively.
Concentration of Credit Risk - The Company extends credit to customers which
results in accounts receivable arising from its normal business activities. The
Company does not require collateral from its customers. The Company routinely
assesses the financial strength of its customers and based upon factors
surrounding the credit risk of the customers believes that its accounts
receivable credit risk exposure is limited. Such estimate of the financial
strength of such customers may be subject to change in the near term.
The Company's behavioral health information systems are marketed to specialized
care facilities, many of which are operated by government entities and include
entitlement programs. During the years ended December 31, 1997, 1996 and 1995,
approximately 35%, 31% and 54% respectively, of the Company's revenues were
generated from contracts with government agencies.
No one customer accounted for more than 10% of revenues in 1997. During the year
ended December 31, 1996 and 1995, one customer accounted for approximately
$1,879,000 and $1,400,000 or 22% and 19% respectively, of revenue. Accounts
receivable of approximately $473,000 and $336,000 were due from this customer at
December 31, 1996 and 1995. At December 31, 1997, receivables from such customer
in the amount of $745,000 were written off.
The Company places its cash and cash equivalents with high credit quality
financial institutions. The amount on deposit in any one institution that
exceeds federally insured limits is subject to credit risk. At December 31,
1997, cash and cash equivalent balances of $840,000 were held at a financial
institution in excess of federally insured limits. The Company believes no
significant concentration of credit risk exists with respect to these cash
equivalents.
Revenue Recognition - The Company recognizes revenue principally from the
licensing of its software, and from consulting and maintenance services rendered
in connection with such licensing activities. Revenue from licensing will be
recognized under the terms of the licenses.
F - 12
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
Consulting revenue is recognized when the services are rendered. No revenue is
recognized prior to obtaining a binding commitment from the customer.
Revenues from fixed price software development contracts and revenue under
license agreements which require significant modification of the software
package to the customer's specifications, are recognized on the estimated
percentage-of-completion method. Using the units-of-work performed method to
measure progress towards completion, revisions in cost estimates and recognition
of losses on these contracts are reflected in the accounting period in which the
facts become known. Contract terms provide for billing schedules that differ
from revenue recognition and give rise to costs and estimated profits in excess
of billings, and billings in excess of costs and estimated profits. It is
reasonably possible that the amount of costs and estimated profits in excess of
billing and billings in excess of costs and estimated profits may be subject to
change in the near term. Revenue from software package license agreements
without significant vendor obligations is recognized upon delivery of the
software. Information processing revenues are recognized in the period in which
the service is provided. Maintenance contract revenue is recognized on a
straight-line basis over the life of the respective contract. Software
development revenues from time-and-materials contracts are recognized as
services are performed.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance revenue, which consists solely of staff payroll and
applicable overhead, is expensed as incurred.
During 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 97-2, "Software Revenue
Recognition." This SOP provides guidance on revenue recognition on software
transactions and is effective for transactions entered into in fiscal years
beginning after December 15, 1997. The company is taking steps to meet the
requirements of the SOP and expects that it will not have a material impact on
the financial position or results of operations of the company.
Direct Costs - Direct costs generally represent labor costs related to licensing
and consulting agreements.
Property and Equipment and Depreciation - Property and equipment is stated at
cost less accumulated depreciation. Depreciation of property and equipment is
computed by the straight-line method at rates adequate to allocate the cost of
applicable assets over their expected useful lives. Amortization of leasehold
improvements is computed using the shorter of the lease term or the expected
useful life of these assets.
Estimated useful lives range from 2 to 10 years as follows:
Equipment 2-5 Years
Furniture and Fixtures 5-7 Years
Leasehold Improvements 8-10 Years
Capitalized Software Development Costs - Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Technological feasibility for the Company's computer software products is
generally based upon achievement of a detail program design free of high risk
development issues. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized computer software
development costs requires considerable judgement by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in
F - 13
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
software and hardware technology.
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is to be provided on a product by product basis. The annual
amortization shall be the greater of the amount computed using (a) the ratio
that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported on.
The Company performs an annual review of the recoverability of such capitalized
software costs. At the time a determination is made that capitalized amounts are
not recoverable based on the estimated cash flows to be generated from the
applicable software net realizable value, any remaining capitalized amounts are
written off.
Information related to capitalized software costs is as follows:
Years ended December 31 1997 1996 1995
----------------------- ----------- ----------- --------
Beginning of Year $ 250,920 $ -- $ 419,000
Capitalized 462,000 278,800 --
Amortization (114,885) (27,880) (419,000)
Net Realizable Value Adjustment (414,885) -- --
--------- --------- ---------
$ 183,150 $ 250,920 $ --
========= ======== ==========
Customer Lists - Customer lists represent a listing of customers obtained
through the acquisition of CSM to which the Company can market its products. It
also represents a listing of customers acquired from Johnson Computing Systems
("Johnson"), (See Note 17). The gross costs of the customer list associated
acquired from Johnson was $255,409. Customer lists are being amortized on the
straight-line method.
In 1995, the amortization period of customer lists was changed from 20 years to
12 years. The change in the period of amortization reflects changes in
technology which became important in the health care industry subsequent to the
acquisition of CSM in June 1994. The development of Window-based applications,
particularly Windows 95, which had not been developed at the time of the
acquisition, together with the possibility of other changes in the software and
communications industry, represent developments that the Company feels require a
change in the amortization period to twelve years. Such change has been
accounted for as a change in accounting estimate. The effect of this change was
to increase amortization by $120,000 in 1995.
Customer lists at December 31, 1997 and 1996 are as follows:
December 31,
1 9 9 7 1 9 9 6
Customer Lists $4,106,223 $3,850,814
Less: Accumulated Amortization 1,038,547 722,000
----------- ------------
Net $3,067,676 $3,128,814
--- ========== ============
F - 14
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 established
accounting standards for the impairment of long-lived assets and certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. Management has determined that expected future cash flows
(undiscounted and without interest charges) exceed the carrying value of the
intangibles at December 31, 1997 and believes that no impairment of these assets
has occurred. It is at least reasonably possible that management's estimate of
expected future cash flows may change in the near term. This may result in an
accelerated amortization method or write-off of intangibles.
Cost Associated With Public Offerings - In 1996, the Company completed a public
offering of its securities (See Note 10). Costs of $1,370,000 associated with
the offering were offset against total gross proceeds of $5,175,000. In 1995,
the Company withdrew a registration statement following the termination of a
previous public offering. Costs of $460,000, associated with that offering, were
expensed, and included in financing costs, in 1995.
Stock Options and Similar Equity Instruments - On January 1, 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", for stock
options and similar equity instruments (collectively,"Options") issued to
employees, however, the Company will continue to apply the intrinsic value based
method of accounting for options issued to employees prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" rather than the fair value based method of accounting prescribed by
SFAS No. 123. SFAS No. 123 also applies to transactions in which an entity
issues its equity instruments to acquire goods or services from non-employees.
Those transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.
Loss Per Share - The Financial Accounting Standards Board ("FASB") has issued
SFAS No. 128, "Earnings per Share"; which is effective for financial statements
issued for periods ending after December 15, 1997. Accordingly, loss per share
data in the financial statements for the year ended December 31, 1997, have been
calculated in accordance with SFAS No. 128. Prior periods' loss per share data
have been recalculated as necessary to conform prior years' data to SFAS No.
128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and replaces its primary earnings per share with basic earnings per
share representing the amount of earnings for the period available to each share
of common stock outstanding during the reporting period. SFAS No. 128 also
requires a dual presentation of basic and diluted earnings per share on the face
of the statement of operations for all companies with complex capital
structures. Diluted earnings per share reflects the amount of earnings for the
period available to each share of common stock outstanding during the reporting
period, while giving effect to all potentially dilutive common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e. improving earnings per share). The dilutive
effect of outstanding options and warrants and their equivalents are reflected
in dilutive earnings per share by the application of the treasury stock method,
which recognizes the use of proceeds that could be obtained upon exercise of
options and warrants in computing diluted earnings per share. It assumes that
any proceeds would be used to purchase common stock at the average market price
during the period. Options and warrants will have a dilutive effect only when
the average market price of the common stock during the period exceeds the
exercise price of the options or warrants.
F - 15
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
All per share information has been retroactively adjusted for any reverse stock
splits, recapitalizations and any shares issued for nominable value for all
periods presented.
Investment in Joint Venture - The Company's investment in a joint venture (See
Note 16) is accounted for under the equity method.
Allocated Related Party Administrative Expenses - During the first six months of
1996 and all of 1995, certain administrative services were performed for the
Company by Consolidated Technology group Ltd. "Consolidated" and its
subsidiaries. As of April 8, 1998, approximately 29.7% of the Company's
outstanding Common Stock owned by SIS Capital Corp. ("SISC"), which is a wholly
owned subsidiary of Consolidated, a public company. The fair value of such
services, approximately $9,000 and $18,000 respectively, was charged to related
party administrative expenses, and, since Consolidated will not be reimbursed
for such charges, credited to additional paid-in capital. (See Note 7)
Research and Development - Expenditures for research and development costs for
the years ended December 31, 1997, 1996 and 1995 amounted to $201,000, $278,000
and $699,000, respectively.
[3] Accounts Receivable
Accounts receivable is shown net of allowance for doubtful accounts of $348,029,
$288,029 and $146,263 at December 31, 1997, 1996 and 1995 respectively. The
changes in the allowance for doubtful accounts are summarized as follows:
December 31,
1997 1996 1995
Beginning Balance $ 288,029 $ 146,263 $ 137,842
Provision for Doubtful Accounts 814,398 260,000 60,000
Recoveries -- -- --
Charge-offs (754,398) (118,234) (51,579)
--------- --------- --------
Ending Balance $ 348,029 $ 288,029 $ 146,263
======== ======== ========
[4] Costs and Estimated Profits in Excess of Interim Billings and Interim
Billings in Excess of Costs and Estimated Profits
Costs, estimated profits, and billings on uncompleted contracts are summarized
as follows:
December 31,
1 9 9 7 1 9 9 6
Costs Incurred on Uncompleted Contracts $ 2,730,054 $ 3,483,918
Estimated Profits 1,293,104 652,749
--------- ----------
Total 4,023,158 4,136,667
Billings to Date 4,432,719 4,306,986
--------- ----------
Net $ (409,561) $ (170,319)
--- ========== ==========
F - 16
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[4] Costs and Estimated Profits in Excess of Interim Billings and Interim
Billings in Excess of Costs and Estimated Profits - [Continued]
Included in the accompanying balance sheet under the following captions:
Costs and estimated profits in excess of interim billings $ 542,324 $ 931,786
Interim billings in excess of costs and estimated profits (951,885) (1,102,105)
--------- ---------
Net $(409,561) $ (170,319)
--- ========= ==========
[5] Going Concern Considerations
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The Company has
sustained losses since inception and the accumulated deficit at December 31,
1997 is $13,838,560. The ability of the Company to continue as a going concern
is dependent upon the success of the Company's marketing effort and its access
to sufficient funding to enable it to continue operations. The Company has been
funded through December 31, 1997 through loans from principal stockholders, an
asset-based lender and others, and from the sale of stocks and warrants [See
Notes 7 and 8]. All these factors had raised substantial doubt about the ability
of the Company to continue as a going concern.
Such substantial doubt has been alleviated due to the Company's implementation
of the Health System Design Corporation agreement in the first quarter of 1998,
which will allow the Company to provide the "Provider Management Information
System" to nearly 600 provider agencies in the State of Ohio. In addition, in
the first quarter of 1998, the Company secured contracts such as the New Jersey
University of Medicine and Dentistry, to install its BHIS System. Management
believes that the gross profit from the implementation of the Provider
Management Information System and installation of its BHIS System will
range from $1.6 million to $3.1 million. The Company believes that the $1.6
million gross profit can be attained with a minimal increase in the existing
staff.
There can be no assurances that management's plans to reduce operating losses by
increasing revenues to fund operations will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
[6] Property and Equipment
Property and equipment consist of the following:
December 31,
1 9 9 7 1 9 9 6
Equipment, Furniture and Fixtures $ 582,207 $ 538,634
Leasehold Improvements 164,335 164,335
------- -------
Totals - At Cost 746,542 702,969
Less: Accumulated Depreciation 437,959 320,383
-------- -------
Net $ 308,583 $ 382,586
--- ======= =======
Depreciation expense amounted to $169,558, $145,686, and $140,000, respectively
for the years ended December 31, 1997, 1996 and 1995.
F - 17
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[7] Related Party Transactions
[A] Issuance of Stock at Organization - In connection with the organization of
the Company in September 1992, the Company issued 824,256 shares of common stock
as follows: 582,072 shares of common stock to SISC, for $1,300, 112,584 shares
to DLB, Inc. ["DLB"] for $6,700, and 43,200 shares of common stock for nominal
consideration to each of DLB and two individuals, one of whom became a director
in June 1994. DLB is controlled by the wife of the chairman of the board who is
also the chairman of the board of Consolidated. The chairman of the board
disclaims any beneficial interest in any securities owned by DLB.
Also in connection with the organization of the Company, the Company acquired
all of the capital stock of LMT in exchange for 129,600 shares of common stock
and 400 shares of Series A 4% Convertible Redeemable preferred stock, par value
$.01 per share ["Series A preferred stock"]. The 400 shares of Series A
preferred stock are convertible into 43,200 shares of common stock [See Note
10]. LMT was a shell corporation with no operating business. The shares of
common stock issued included 60,480 to the chief operating officer of the
Company and 25,920 to the vice-president of the Company. The remaining 43,200
and all of the shares of Series A preferred stock were issued to a non-related
individual. The Company expensed the value of the Series A preferred stock
($40,000). The issuance of the common stock was treated as compensation valued
at $.01 per share. In August 1996 the Company converted its Series A Preferred
stock into 43,200 Common Shares.
[B] Loans by Related Parties - At September 30, 1995, the total indebtedness due
SISC was $2,960,000 plus interest of $388,000. As of such date, (i) the interest
was exchanged for 1,125,000 shares of common stock, (ii) $2,210,000 of the debt
was exchanged for 2,210 shares of Series D 6% preferred stock ["Series D
preferred stock"], having a liquidation price of $1.00 per share and a
redemption price of $1,000 per share, and (iii) the remaining $750,000 due SISC
is represented by the Company's 10% subordinated note due January 15, 1997 or
earlier upon the completion of the Company's initial public offering. In
conjunction with the September 30, 1995 debt restructuring, $136,000 which was
previously recorded as paid-in capital, was reclassified to debt owed to SISC.
The Series D preferred stock may be redeemed at the option of the Company
commencing October 1, 1998, and is redeemable at any time after issuance from
50% of the proceeds of any over allotment on the Company's initial public
offering or other issuance of equity securities subsequent to the completion of
the Company's initial public offering.
In connection with the issuance by the Company of its Interim Notes [the
"Interim Notes"] in July and August 1993, SISC, in anticipation of the Company's
receipt of the proceeds of such loans, advanced the Company, on a non-interest
bearing basis, $79,000, which was repaid by the Company in August 1993. Such
advance was used by the Company to pay the principal on a $50,000 demand note
and interest of $2,000 and to pay normal operating expenses. In connection with
the Interim Notes, SISC transferred to the lenders an aggregate of 15,120 shares
of common stock for $.232 per share. In connection with the agreement of the
holders of the Interim Notes to extend the maturity date of the notes to the
earlier of September 30, 1994, or three days after the Company completes its
initial public offering, SISC transferred an aggregate of 9,375 shares of common
stock to such noteholders. The Company incurred a charge of $7,000 against
operations for financing costs in conjunction with the issuance of stock by
SISC. The Interim Notes were paid in full in 1996.
During the period from January to June 1994, SISC advanced an aggregate of
$330,000 to CSM. As a result of the acquisition, such obligations are included
in the principal amount of the Company's obligations to SISC, which were
approximately $2.6 million at December 31, 1994. Included in the advances by
SISC to the Company were $300,000 which was used to pay payroll taxes and
interest and $500,000 which was used in connection with the purchase of CSM.
At December 31, 1995 and 1994, ACT [the parent of Old CSM] loaned $167,000 and
$58,000 to the Company in the form of demand notes bearing interest at 10% per
annum. These loans were paid in
F - 18
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #8
- --------------------------------------------------------------------------------
[7] Related Party Transactions - [Continued]
[B] Loans by Related at Organization - [Continued]
full in 1996.
The Company has an agreement with Consolidated and its subsidiary The Trinity
Group, Inc. ("Trinity") pursuant to which the Company will pay Trinity a monthly
fee of $15,000 for a three-year term commencing in September 1996, for general
business, management and financial consulting services. Pursuant to this
agreement, in 1997 and 1996 the Company charged $180,000 and $60,000
respectively to related party administrative expenses.
The Company entered into an agreement with SMI Corporation (SMI), pursuant to
which the company would pay SMI compensation of $25,000 to $59,000 per month for
which SMI would provide persons to serve in management-level or other key
positions for the Company. In addition, the Company is to pay SMI 6% of the
revenues generated from Smart Card and related services. The agreement would
continue until December 31, 2000. In February of 1997 the Company modified the
agreement whereby the monthly fees were reduced to $9,000 plus expenses and all
commission arrangements were canceled. The sole stockholder of SMI, Mr. Storm
Morgan was elected as a director of the Company in January 1996. For the year
ended December 31, 1997 the Company incurred and paid $180,000 of compensation
expense. For the year ended December 31, 1996, the Company incurred and paid,
$619,700 of compensation expense pursuant to its agreement with SMI as well as
an additional $250,000 for services.
[8] Notes Payable
Asset-Based Lender - In February 1995, the Company entered into an accounts
receivable financing with an asset-based lender. Borrowings under this facility
were $935,177 and $590,031 at December 31, 1997 and 1996, respectively. The
Company can borrow up to 80% of eligible receivables, and it pays interest at
the rate of prime plus 8 1/2% and a fee equal to 5/8% of the amount of the
invoice. This note is collateralized by all of the accounts and property and
equipment of the Company. In addition, the Company's obligations under this
facility are guaranteed by the chairman of the board of the Company. Also, the
treasurer of the Company has issued his limited guaranty to the lender.
In July 1997, the agreement with the asset based lender was modified to allow
borrowings up to 80% instead of 75% of eligible receivables to a maximum of
$1,250,000 through July 31, 1998 and $1,500,000 thereafter, if the Company
elects not to terminate the agreement. The previous amount of maximum borrowings
was capped at $750,000. The interest rate was adjusted from the greater of 18%
per annum or prime plus 8% to prime plus 8 1/2% per annum. The fee on the amount
of the invoice was reduced from 1% to 5/8%.
Notes payable consist of the following:
December 31,
1 9 9 7 1 9 9 6
Asset-Based Lender - payable on demand with interest
at prime plus 8 1/2% in 1997 and the greater of 18%
per annum or prime plus 8% in 1996 $ 935,177 $ 590,031
=========== ==========
The weighted average interest rate on short-term borrowings outstanding as of
December 31, 1997 and 1996 amounted to approximately 22% and 22%, respectively.
In January 1996, the Company borrowed $500,000 from four accredited investors.
In connection with such loans, the Company issued its 8% promissory notes due
January 31, 1997, which were subsequently paid from the proceeds of the
Company's initial public offering during 1996. The
F - 19
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------
[8] Notes Payable - [Continued]
Company also agreed to issue and register with the Securities Act one unit for
each $2.00 principal amount of notes. The unit issued to the noteholders
mirrored the units issued in the initial public offering which consisted of two
shares of the Company's Common Stock and one Series A Redeemable Common Stock
Purchase Warrant. The Company incurred a one time non-cash finance charge of
$1,611,000 upon the issuance of these units.
[9] Income Taxes
The Company utilizes an asset and liability approach to determine the extent of
any deferred income taxes, as described in Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". This method gives
consideration to the future tax consequences associated with differences between
financial statement and tax bases of assets and liabilities.
For financial reporting purposes at December 31, 1997, the Company has net
operating loss carryforwards of $10,572,000 expiring by 2012. Pursuant to
Section 382 of the Internal Revenue Code regarding substantial changes in
Company ownership, utilization of these losses may be limited. Based on this and
the fact that the Company has generated operating losses through December 31,
1997, the deferred tax asset of approximately $4,200,000 is offset by an
allowance of $4,200,000.
A deferred tax asset of approximately $1,400,000, related to stock-based
compensation awards, has been offset by a valuation allowance of $1,400,000 due
to the uncertainty of its realization.
Deferred Tax Asset
Federal and State Net Operating Loss Carryforwards $ 4,200,000
Stock Based Compensation Awards 1,400,000
Less: Valuation Allowance (5,600,000)
-------------
Net Deferred Tax Asset $ --
=============
The Valuation Allowance increased by $900,000 and $2,900,000 in 1997 and 1996
respectively.
The provision for income taxes varies from the amount computed by applying
statutory rates for the reasons summarized below:
1997 1996
---- ----
Provision Based on Statutory Rates (34)% (34)%
State Taxes Net of Federal Benefit (6)% (6)%
Increase in Valuation Allowance 40% 40%
------ ------
Total -- % -- %
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
2007 $ 72,000
2008 433,000
2009 2,029,000
2010 1,704,000
2011 2,935,000
2012 3,399,000
-----------
$ 10,572,000
F - 20
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #10
- --------------------------------------------------------------------------------
[10] Capital Stock
Capital Stock - The Company is authorized to issue 3,000,000 shares of preferred
stock, par value $.01 per share, and 15,000,000 shares of common stock, par
value $.01 per share. The Company's Board of Directors is authorized to issue
preferred stock from time to time without stockholder action, in one or more
distinct series. The Board of Directors is authorized to determine the following
rights and preferences, among others, for each series: (i) the rate of dividends
and whether such dividends shall be cumulative; (ii) the price at and the terms
and conditions on which shares may be redeemed; (iii) the amount payable upon
shares in the event of voluntary or involuntary liquidation; (iv) whether or not
a sinking fund shall be provided for the redemption or purchase of shares; (v)
the terms and conditions on which shares may be converted; and (vi) whether, and
in what proportion to any other series or class, a series shall have voting
rights other than required by law. The Board of Directors has authorized the
issuance of the Series A preferred stock, the Series B preferred stock and the
Series D preferred Stock. At December 31, 1997, only the Series D preferred
stock was outstanding.
Preferred Stock - The Series A preferred stock is 4% convertible redeemable
preferred stock. The stockholders are entitled to receive a $4.00 per share
annual dividend when and as declared by the Board of Directors. Dividends are
fully cumulative and accrue from October 1, 1992. Dividends are payable annually
on March 1. The stock is redeemable at the option of the Company at any time at
which the Company has consolidated net worth of at least $2,500,000 at a price
of $1,000 per share plus accrued dividends. Each share of Series A preferred
stock is convertible into 108 shares of common stock at the discretion of the
stockholder. In the event of involuntary or voluntary liquidation, the
stockholders are entitled to receive $100 per share and all accrued and unpaid
dividends. As of December 31, 1995, approximately $4,000 of dividends [$10 per
share] were in arrears. In August 1996, the Company issued 43,200 shares of
Common Stock upon conversion of all of its Series A Preferred Stock.
The Series B preferred stock is 6% redeemable convertible preferred stock. The
stockholders are entitled to receive a $72.00 per share annual dividend when and
as declared by the Board of Directors. Dividends are fully cumulative and accrue
from April 1, 1993. Dividends are payable annually on March 1. The stock is
redeemable at the discretion of the Company at any time at which the Company
has consolidated net worth of at least $5,000,000 at a price of $1,200 per
share plus accrued dividends.
Each share of Series B preferred stock is convertible into 259.2 shares of
common stock at the discretion of the stockholders. In the event of involuntary
or voluntary liquidation, the stockholders are entitled to receive $1,200 per
share and all accrued and unpaid dividends. Each holder of Series B preferred
stock has the right, following the Company's initial public offering, to require
the Company to redeem all of the shares of Series B preferred stock owned by
such holder at a redemption price equal to $1,200 per share. As of December 31,
1995, approximately $11,000 [$138 per share] of dividends were in arrears. In
August 1996 the Company redeemed its Series B Redeemable Preferred stock in the
amount of $96,000.
The Series D preferred stock is 6% redeemable preferred stock. The stockholders
are entitled to receive a $60.00 per share annual dividend when and as declared
by the Board of Directors. Dividends are cumulative and accrue from October 1,
1995. Dividends are payable semi-annually on April 1 and October 1. The stock is
redeemable at the option of the Company for $1,000 per share commencing October
1, 1998. Earlier redemption is permitted under certain circumstances. In the
event of voluntary or involuntary liquidation, the stockholders are entitled to
receive $1.00 per share and all accrued and unpaid dividends. On June 30, 1997,
the Company paid the dividend relating to the Series D preferred stock which
were payable on October 1, 1996 and April 1, 1997. The dividends were paid
through the issuance of 12,802 shares of Common Stock and valued at the fair
market value at the respective dates they became payable. The Series D preferred
stock is nonvoting except as is required by law.
F - 21
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #11
- --------------------------------------------------------------------------------
[10] Capital Stock - [Continued]
The Company has granted to the holders of the Series A preferred stock and
Series B preferred stock and certain warrant holders, with respect to their
warrants, certain piggyback registration rights following the Company's initial
public offering, with respect to the shares of common stock issuable upon
conversion or exercise of the preferred stock or warrants.
On August 19, 1996 the Company completed a public offering whereby it sold
646,875 units at a price of $8 per unit for net proceeds of approximately $3.8
million. Each unit consisted of two shares of common stock and one series A
Redeemable Common Stock Purchase Warrant.
On August 21, 1996 Series B Common Stock purchase warrants to purchase 800,000
shares of common stock at $2 per share were exercised and the Company received
$1,600,000 in gross and net proceeds.
See Note 7 for additional information relating to the issuance of common stock
and preferred stock in connection with the Company's organization and in
connection with certain financings.
See Note 14 for information relating to the Company's 1993 Long-Term Incentive
Plan.
[11] Capitalized Lease Obligations
Future minimum payments under capitalized lease obligations as of December 31,
1997 are as follows:
Year ending
- -----------
December 31,
- -----------
1998 $ 23,596
-----------
Total Minimum Payments 23,596
Less Amount Representing Interest at 12% Per annum 265
------------
Balance $ 23,331
------- ===========
Capitalized lease obligations are collateralized by equipment which has a net
book value of $15,000 and $25,000 at December 31, 1997 and 1996, respectively.
Amortization of approximately $10,200 and $30,700 in 1997 and 1996,
respectively, has been included in depreciation expense.
[12] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted SFAS No. 107, which requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed therein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement. The following table
summarizes financial instruments by individual balance sheet accounts as of
December 31, 1997 and 1996:
Carrying Amount Fair Value
--------------- ----------
December 31, December 31,
--------------- -----------
1997 1996 1997 1996
---- ---- ---- ----
Debt Maturing Within One Year $935,000 $590,000 $935,000 $590,000
======== ======== ======== ========
For cash and cash equivalents, accounts receivable, accounts payable and debt
maturing within one year the carrying amount approximated fair value for these
instruments because of their short maturities.
F - 22
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #12
- --------------------------------------------------------------------------------
[13] Commitments and Contingencies
The Company leases space for its executive offices and facilities under
noncancellable operating leases expiring October 31, 2002. The Company also
leases additional office space on a month-to-month basis.
Minimum annual rentals under noncancellable operating leases having terms of
more than one year are as follows:
Years ending
December 31,
1998 $371,000
1999 123,000
2000 67,000
2001 21,000
2002 14,000
-------
Total $596,000
Rent expense amounted to $341,000, $358,000 and $309,000 respectively, for the
years ended December 31, 1997, 1996 and 1995.
The Company has an agreement with Trinity Group, Inc. ["Trinity"], a
wholly-owned subsidiary of Consolidated, pursuant to which the Company will pay
Trinity $15,000 a month for consulting services.
(See Note 7).
At the time of the acquisition of CSM, the Company entered into five-year
employment agreements with its current chief operating officer [formerly the
president] and vice president, which replaced employment agreements then in
effect, and the three individuals who had been officers of CSM. The agreements
provide for salaries of $125,000, $85,000, $125,000, $125,000 and $80,000,
respectively, subject to cost of living increases. The agreements also provide
for bonuses based upon a percentage of income before income taxes. The officers
are also provided with an automobile or an automobile allowance.
In January 1996, the vice-president's base salary was increased from $85,000 to
$100,000. Also, for 1996, the chief operating officer and two other officers,
whose base salaries were $125,000 each, agreed to reduce their base salaries to
$62,000, $100,000 and $100,000, with certain incentives if certain targets are
attained. The current president who is not one of the five individuals
previously mentioned, was compensated during 1996 at the annual rate of $52,000
prior to the public offering and $125,000 subsequent to the public offering.
On or about September 29, 1995, an action was commenced against the Company by
the filing of a summons with notice in the Supreme Court of the State of New
York, County of New York. The action was commenced by Jacque W. Pate, Jr.,
Melvin Pierce, Herbert A. Meisler, John Gavin, Elaine Zanfini, individually and
derivatively as shareholders of Onecard Health Systems Corporation and Onecard
Corporation, which corporations are collectively referred to as "Onecard." The
named defendants include, in addition to the Company, officers and directors of
the Company, its principal stockholder and the parent of its principal
stockholder. A complaint was served on November 15, 1995. The complaint makes
broad claims respecting alleged misappropriation of Onecard's trade secrets,
corporate assets and corporate opportunities, breach of fiduciary relationship,
unfair competition, fraud, breach of trust and other similar allegations,
apparently arising at the time of, or in connection with the organization of,
the Company in September 1992. The complaint seeks injunctive relief and
damages, including punitive damages, of $130 million. In September 1996 the
above action was dismissed.
F - 23
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #13
- --------------------------------------------------------------------------------
[13] Commitments and Contingencies - [Continued]
In March 1997, the plaintiff has refiled a new action with the same allegations
and stating claims that were at the basis of the original complaint. Such action
is in the amount of $130,000,000. The Company contends that the technology and
software were created from a "clean office start" and the action is without
merit and frivolous. No assessment as to any outcome can be made at this time as
the matter is in its very preliminary stages. The Company denies any allegation
of wrongdoing and intends to vigorously defend the action. The plaintiff has not
supplied documentation requested by the defendants as part of their discovery
process, nor is plaintiff represented by an attorney. The Company plans to file
a motion to dismiss the action.
[14] Stock-Based Compensation
In July 1993, the Company adopted, by action of the board of directors and
stockholders, the 1993 Long-term Incentive Plan (the "Plan"). The Plan was
amended in October 1993, April 1994, October 1994 and February 1996. These
amendments increased the number of shares available for grant pursuant to the
plan. The Plan does not have an expiration date.
The Plan is authorized to grant options or other equity-based incentives for
511,000 shares of the common stock. If shares subject to an option under the
Plan cease to be subject to such options, or if shares awarded under the Plan
are forfeited, or otherwise terminated without a payment being made to the
participant in the form of stock, such shares will again be available for future
distribution under the Plan.
Awards under the Plan may be made to key employees, including officers of and
consultants to the Company, its subsidiaries and affiliates, but may not be
granted to any director unless the director is also an employee of or consultant
to the Company or any subsidiaries or affiliates. The Plan imposes no limit on
the number of officers and other key employees to whom awards may be made;
however, no person shall be entitled to receive in any fiscal year awards which
would entitle such person to acquire more than 3% of the number of shares of
common stock outstanding on the date of grant.
In January 1995, the Board granted, to various employees, stock options to
purchase an aggregate of 252,804 shares of common stock at $.232 per share, and
in December 1995 the Board granted, to various employees, stock options to
purchase an aggregate of 116,316 shares of common stock at $.345 per share. Such
exercise prices were determined by the Board to be the fair market value per
share on the date of grant. The options become exercisable as to 50% of the
shares on the first and second anniversaries of the date of grant. These options
expire on January 31, 2000 and December 31, 2000, respectively. In connection
with certain of the January 1995 option grants, the Board canceled previously
granted options to purchase 206,250 shares at an exercise price of $5.33 per
share which were granted in 1994. In April 1996, the Company granted stock
options to purchase an aggregate of 129,500 shares of common stock at an
exercise price of $2.00 per share and recognized compensation expense of
$154,800. The options are exercisable as to 50% of the shares on the first and
second anniversaries of the date of grant and expire in April 2001. In September
1997, 164,777 stock options were exercised in the 1993 Long Term Incentive stock
option plan and the Company received gross proceeds of $40,913.
In addition, the Company granted to the underwriter, for nominal consideration,
options to purchase 56,250 units, consisting of two common shares, and one
purchase warrant, for a four year period commencing August 13, 1997 at a price
of $5.37.
F - 24
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #14
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
A summary of the activity under the Company's stock option plan is as follows:
1997 1996 1995
------- ------ ------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
----- ----- ------ ----- ------ -----
Outstanding - Beginning of
Years 611,120 $1.60 369,120 $ .265 206,250 $ 5.33
Granted During the Years -- -- 242,000 3.57 369,102 .265
Canceled During the Years -- -- -- -- (206,250) 5.33
Expired During the Years -- -- -- -- -- --
Exercised During the Years (164,777) .248 -- -- -- --
------- ----- ------- ------ ------- -----
Outstanding - End of Years 446,343 $2.06 611,120 1.60 369,120 .265
======= ===== ======= ====== ======= =====
Exercisable - End of Years 325,343 $1.504 178,878 .265 -- --
======= ===== ======= ====== ======= =====
1997 1996 1995
------ ----- -----
Weighted Weighted Weighted Weighted Weighted Weighted
-------- -------- -------- -------- -------- --------
Average Average Average Average Average Average
------- ------- ------- ------- ------- -------
Exercise Fair Exercise Fair Exercise Fair
-------- ---- -------- ---- -------- ----
Price Value Price Value Price Value
----- ----- ----- ----- ----- -----
Options Issued with
Exercise Price Above
Stock Price at Date of
Grant -- -- $5.37 $ .93 -- --
Options Issued with Exercise
Price Equal to Stock Price at
Date of Grant -- -- -- -- $.265 $.14
Options Issued with Exercise
Price Below Stock Price at
Date of Grant -- -- $2.00 $1.78 -- --
The following table summarizes stock option information as of December 31, 1997:
Weighted
--------
Average Remaining Weighted Average
----------------- ----------------
Range of Exercise Prices Shares Contractual Life Exercise Price
- ------------------------ ------ ---------------- --------------
$.232 to $.345 204,343 3.0 Years $ .283
$2.00 129,500 3.3 Years 2.00
$5.37 112,500 3.7 Years 5.37
------- --------- -------
Totals 446,343 3.3 Years $ 1.21
======= ========= ======
In October 1993, the Company issued to SISC warrants to purchase 375,000 shares
of common stock at $10.00 per share, 225,000 shares at $6.67 per share and
150,000 shares of common stock at $2.67
F - 25
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #15
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
per share and issued to SMACS warrants to purchase 37,500 shares of common stock
at $6.67 per share and 37,500 shares at $2.67 per share. The warrants became
exercisable six months from the completion of the Company's initial public
offering or earlier with the consent of the Company and the underwriter and
expire on November 30, 1998.
In February 1996, the Company issued an aggregate of 3,153,750 Series B
Warrants, of which 2,526,250 are exercisable at $2.00 per share and 637,500 are
exercisable at $5.00 per share. These warrants were issued in connection with
services rendered, which, in the case of SISC, included the guarantee of the
December 1995 Interim Notes, and, in certain instances the terms of the warrants
were revised. Although the warrants were issued prior to the three-for-four
reverse split, which was effective in February 1996, the number of shares
issuable upon exercise of the warrants, but not the exercise price, was adjusted
for the reverse split. Certain of the warrants initially had a November 1998
expiration date, which was extended to December 31, 1999, which is the
expiration date of all of the warrants.
Of the warrants issued in February 1996, 787,500 warrants exercisable at $2.00
per share and 37,500 warrants exercisable at $5.00 per share were issued to
replace 825,000 warrants previously issued in October 1993. These warrants had
exercise prices ranging from $2.67 per share to $10.00 per share.
In July 1996, pursuant to a warrant exchange, (a) the holders of outstanding
warrants having a $2.00 exercise price exchanged one third of such warrants for
outstanding warrants to purchase, at an exercise price of $4.00 per share, 150%
of the number of shares of common stock issuable upon exercise of the
outstanding warrants that were exchanged, and (b) the exercise price of the
outstanding warrants have a $5.00 exercise price was reduced to $4.00. Prior to
the warrant exchange, there were outstanding warrants to purchase 2,516,250
shares of common stock at $2.00 per share and outstanding warrants to purchase
2,637,500 shares of common stock at $5.00 per share outstanding. As a result of
the warrant exchange, there are outstanding warrants to purchase 1,677,500
shares of common stock at $2.00 per share and 1,895,625 shares of common stock
at $4.00 per share. This warrants may be exercised commencing February 13, 1997
or earlier if approved by the company and the underwriter. An affiliate of the
Company, a member of the board of the directors and a Company controlled by such
directors, were given permission to exercise options in August 1996. This
individual and entities exercised warrants to purchase 800,000 shares at $2.00
per share in August 1996. All of the warrants expire on December 31, 1999. These
warrants are Series B Common Stock Purchase Warrants. The Company recorded
compensation expenses of $3,337,500 in relation to the issuance of these
warrants.
The Company issued 646,875 Series A Common Stock Purchase Warrants as a part of
its initial public offering of its securities. These warrants are exercisable
for two year period commencing August 13, 1997 at a price of $4.50. In addition,
the Company issued 250,000 Series A Common Stock Purchase Warrant to various
accredited investors (See Note 8). These warrants have the same term as the
warrants issued to the general public.
During 1997, the Company issued 70,000 Series C Common stock warrants in
exchange for the issuance of a research report on behalf of the Company. These
warrants were valued at $.30 per warrant which represented the fair value of the
services performed by the recipient. These warrants have an exercise price of $5
which was the market value of the stock at the time of issuance and will expire
on December 31, 1999.
F - 26
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #16
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
A summary of warrant activity is as follows:
1997 1996 1995
---- ---- -----
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning
of Years 3,670,000 $3.64 825,000 $ 7.27 825,000 $ 7.27
Granted or Sold During
the Years 70,000 5.00 4,470,000 3.35 -- --
Canceled During the Years -- -- (825,000) 7.27 -- --
Expired During the Years -- -- -- -- -- --
Exercised During the Years (639,107) 4.50 (800,000) 2.00 -- --
--------- ----- ---------- ----- -------- ------
Outstanding - End of Years 3,100,893 $3.50 3,670,000 $ 3.64 825,000 $ 7.27
========= ===== ========= ===== ======= ======
Exercisable - End of Years 3,100,893 $3.50 -- -- 825,000 $ 7.27
========= ===== ========= ====== ======= ======
1997 1996 1995
---- ---- ----
Weighted Weighted Weighted Weighted Weighted Weighted
-------- -------- -------- -------- -------- --------
Average Average Average Average Average Average
------- ------- ------- ------- ------- -------
Exercise Fair Exercise Fair Exercise Fair
------- ---- -------- ---- ------- ----
Price Value Price Value Price Value
----- ----- ----- ----- ----- -----
Warrants Issued with Exercise
Price Above Stock Price at
Date of Grant -- -- $4.16 $1.04 -- --
Warrants Issued with Exercise
Price Equal to Stock Price at
Date of Grant $5.00 $ .30 -- -- -- --
Warrants Issued with Exercise
Price Below Stock Price at
Date of Grant $2.00 $1.78 -- --
The following table summarizes warrant information as of December 31, 1997:
Weighted
--------
Average Remaining Weighted Average
----------------- -----------------
Range of Exercise Prices Shares Contractual Life Exercise Price
- ------------------------ ------ ---------------- --------------
$2.00 877,500 2.0 Years 2.00
$4.00 1,895,625 2.0 Years 4.00
$4.50 257,768 .7 Years 4.50
$5.00 70,000 .7 Years 5.00
--------- -------- ----
Total 3,100,893 1.9 Years 3.50
========= ========= ====
F - 27
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #18
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
The Company applies accounting principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, for stock options issued
to employees in accounting for its stock options plans. Total compensation cost
recognized in income for stock based employee compensation awards was $3,492,300
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 $846,000
and $50,000 for the years ended December 31, 1996 and the Company's net loss and
net loss per share would have been as follows:
Y e a rs e n d e d
---------------------
D e c e m b e r 3 1,
----------------------
1 9 9 6 1995
------- ----
Net Loss as Reported $ (6,579,444) $(2,850,000)
============ ===========
Pro Forma Net Loss $ (7,425,444) $(2,900,000)
============ ===========
Net Loss Per Share as Reported $ (1.28) $ (.59)
============ ===========
Pro Forma Net Loss Per Share (1.44) $ (.60)
============ ===========
The fair value of options and warrants at date of grant was estimated using the
Black-Scholes fair value based method with the following weighted average
assumptions:
1 9 9 7 1 9 9 6 1995
------- ------- ----
Expected Life (Years) -- 2 3
Interest Rate -- 6.0% 6.0%
Annual Rate of Dividends -- 0% 0%
Volatility -- 67.9% 69.6%
The weighted average fair value of options and warrants at date of grant using
the fair value based method during 1997, 1996 and 1995 is estimated at $--,
$1.33 and $.14 respectively.
F - 28
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #19
- --------------------------------------------------------------------------------
[15] Industry Segments
The Company currently classifies its operations into two business segments: (1)
Software and Related Systems and Services and (2) Data Center Services. Software
and Related Systems and Services is the design, installation, implementation and
maintenance of computer information systems. Data Center Services involve
company personnel performing data entry and data processing services for
customers. Intersegment sales and sales outside the United States are not
material. Information concerning the Company's business segments is as follows:
Y e a r s e n d e d
---------------------
D e c e m b e r 31,
---------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Revenues:
- --------
Software and Related Systems and Services $ 5,646,471 $ 6,333,804 $ 5,640,000
Data Center Services 2,235,209 2,207,155 1,742,000
----------- ----------- -----------
Total Revenues $ 7,881,680 $ 8,540,959 $ 7,382,000
-------------- =========== =========== ===========
Gross Profit:
- ------------
Software and Related Systems and Services $ 957,731 $ 623,456 $ 911,000
Data Center Services 769,102 986,787 853,000
----------- ----------- -----------
Total Gross Profit $ 1,726,833 $ 1,610,243 $ 1,764,000
------------------ =========== =========== ===========
Income [Loss] From Operations:
- -----------------------------
Software and Related Systems and Services $ (2,776,719) $ (4,053,006) $ (1,692,000)
Data Center Services (86,706) (97,805) 259,000
------------ ----------- -----------
Total [Loss] From Operations $ (2,863,425) $ (4,150,811) $ (1,433,000)
---------------------------- =========== =========== ===========
Depreciation and Amortization:
- -----------------------------
Software and Related Systems and Services $ 477,953 $ 367,984 $ 765,000
Data Center Services 123,037 118,582 107,000
----------- ----------- -----------
Total Depreciation and Amortization $ 600,990 $ 486,566 $ 872,000
----------------------------------- =========== =========== ===========
Capital Expenditures:
- --------------------
Software and Related Systems and Services $ 636,174 $ 444,516 $ 46,000
Data Center Services 41,867 15,317 92,000
------------ ----------- ------------
Total Capital Expenditures $ 678,041 $ 459,833 $ 138,000
-------------------------- =========== =========== ===========
Identifiable Assets:
- -------------------
Software and Related Systems and Services $ 3,696,725 $ 4,119,943 $ 3,625,000
Data Center Services 2,587,426 2,607,693 2,691,000
----------- ----------- -----------
Total Identifiable Assets $ 6,284,151 $ 6,727,636 $ 6,316,000
------------------------- =========== =========== ===========
F - 29
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #20
- --------------------------------------------------------------------------------
[16] Joint Venture
The Company entered into a joint venture with Oasis Technology, Ltd. ["Oasis"]
pursuant to which the joint venture corporation (50% owned by the Company)
purchased certain credit card processing software. The Company and Oasis each
paid $325,000 of the $650,000 purchase price. The Company accounts for its
interest in the Joint Venture on the equity method. During 1996 the Company
recognized $264,085 of its share of losses related to this joint venture and
contributed an additional $59,631 in cash to fund ongoing costs. During 1997 the
Company recognized $139,699 of its share of losses related to this joint venture
and contributed an additional $165,585 in cash to fund ongoing costs. During the
fourth quarter of 1997 the Company re-evaluated the recoverability of its
investment in the joint venture. A determination was made that this investment
would not be recoverable based upon estimated cash flows and consequently wrote
off $147,432 which reduced the carrying basis to zero. Such write off was
charged to equity in net loss of joint venture.
[17] Johnson Acquisition
In October 1997 the Company issued 80,000 shares of Common Stock for the
purchase of certain assets and customer list of Johnson Computer Systems.
Johnson Computing Systems is a provider of license software and services for the
automation of methadone dispensing and integrated clinical and billing turnkey
systems. The shares issued were valued at $300,000 and of which $255,000 was
assigned to customer lists and the balance to a covenant not to compete and
computer equipment.
[18] New Authoritative Accounting Pronouncement
The FASB has issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Financial Information". This statement is effective for fiscal years
ending after December 15, 1998 and establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is not expected to have a material impact on the
Company.
The Financial Accounting Standards Board ("FASB") has issued Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 is effective for fiscal year's beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS No. 130 is
not expected to have a material impact on the company.
F - 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NETSMART TECHNOLOGIES, INC.
Date: April 11, 1998 ___________________________
James Conway
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ Anthony F. Grisanti Chief Financial Officer April 11, 1998
- ----------------------------------
Anthony F. Grisanti
/S/ James Conway President & Director April 11, 1998
- ----------------------------------
James Conway Chief Executive Officer
/S/ John Phillips Director April 11, 1998
- ----------------------------------
John Phillips
/S/ Edward Bright Director April 11, 1998
- ----------------------------------
Edward Bright Chairman of Board of Directors
/S/ Seymour Richter Director April 11, 199
- ----------------------------------
Seymour Richter
/S/ Leonard M. Luttinger Director April 11, 1998
- -----------------------------------
Leonard M. Luttinger
/S/ Storm Morgan Director April 11, 1998
- -----------------------------------
Storm Morgan
Netsmart Technologies, Inc.
Index to Exhibits
December 31, 1997
a) Exhibits
2.11 Plan and Agreement of Reorganization ("Purchase Agreement") dated as of
April 13, 1994, by and among Consolidated Technology Group Ltd., CSM
Acquisition Corp., the Registrant, Creative Socio-Medics Corp. ("Old
CSM"), and Advanced Computer Techniques, Inc. ("ACT")
2.21 Amendment dated April 13, 1994 to the Purchase Agreement.
2.31 Disclosure Letter to the Plan and Agreement of Reorganization ("Purchase
Agreement") dated as of April 13, 1994, by and among Consolidated
Technology Group Ltd., CSM Acquisition Corp., the Registrant, Old CSM,
and ACT.
2.41 Second Amendment dated June 16, 1994 to the Purchase Agreement.
2.51 Agreement dated October 26, 1994, between the Registrant and
Consolidated Technology Group, Ltd. ("Consolidated") relating to the
plan and agreement of reorganization dated as of April 13, 1994, as
amended, among the Registrant, Consolidated, CSM Acquisition Corp.,
Creative Socio-Medics Corp. and Advanced Computer Techniques, Inc.
2.61 Letter agreement dated December 5, 1994, between the Registrant
and Consolidated.
3.11 Restated Certificate of Incorporation, as amended, including
certificates of designation with respect to the Series A, B and D
Preferred Stock.
3.21 By-Laws
4.11 Form of Warrant Agreement dated August 13, 1996, among the Registrant,
American Stock Transfer & Trust Company, as Warrant Agent, and Monroe
Parker Securities, Inc., to which the form of Series A Redeemable Common
Stock Purchase Warrant is included as an exhibit.
4.22 Form of Amendment to the Warrant Agreement.
10.11 Employment Agreement dated June 16, 1994, between the Registrant
and Leonard M. Luttinger, as amended. 10.22 Employment Agreement dated
as of August 15, 1996, between the Registrant and James L. Conway. 10.31
Employment Agreement dated June 16, 1994, between the Registrant and
John F. Phillips, as amended.
10.41 Employment Agreement dated June 16, 1994, between the Registrant
and Anthony F. Grisanti. 10.51 Agreement dated March 1, 1996 between
the Registrant and The Trinity Group, Inc.
10.61 1993 Long-Term Incentive Plan.
10.71 Form of Series B Common Stock Purchase Warrant.
10.81 Form of Option Agreement from SIS Capital Corp. to certain officers of
Old CSM.
10.91 Agreement dated March 3, 1995 between CSM and United Credit
Corporation, as amended.
10.101 Software licensing and service agreement dated April 27, 1996 between
the Registrant and IBN Limited.
10.111 Letter agreement dated February 28, 1996 between the Registrant
and Oasis Technology Ltd. ("Oasis) relating to a proposed joint
venture.
10.121 Source code license agreement dated November 10, 1995 between the
Registrant and Oasis.
10.131 Software marketing and distribution agreement between the Registrant
and Oasis.
10.141 Joint marketing letter agreement dated March 31, 1995 between the
Registrant and Oasis.
10.151 Agreement dated February 7, 1996 between the Credit Card Acquisition
Corp. and Fiton Business, S.A.
10.162 Stockholders agreement dated as of September 2, 1996 between the
Registrant, Consolidated Technology Group Ltd. 1174378 Ontario Inc. and
Credit Card Acquisition Corp. (a subsidiary of the Registrant), Oasis
Technologies Holdings, Ltd. and Oasis Technology Ltd.
10.172 Amendment dated July 22, 1997, to March 3, 1995 agreement between CSM
and United Credit Corporation.
11.1 Computation of loss per share.
21.1 Subsidiaries of the Registrant.
24.1 Consent of Moore Stephens, P.C.
25.1 Powers of attorney (See Signature Page)
27.1 Financial data schedule.
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1 Filed as an exhibit to the Registrant's registration statement on Form S-1,
File No. 333-2550, which was declared effective by the Commission on August 13,
1996, and incorporated herein by reference.
2 Filed as an exhibit to the Registrant's registration statement on Form S-1,
File No. 333-32391, which was declared effective by the Commission on September
17, 1997, and incorporated herein by reference.