<PAGE> 1
As filed with the Securities and Exchange Commission on June 17, 1996
Registration No. 333-2550
Securities and Exchange Commission
Washington, D.C. 20549
Amendment No. 1 to Form S-1
Registration Statement under the Securities Act of 1933
Netsmart Technologies, Inc.
(Exact name of registrant as specified in its charter)
Asher S. Levitsky P.C., Esanu Katsky Korins & Siger
605 Third Avenue, New York, New York 10158
(212) 953-6000, Fax:(212) 953-6899
(Name, address and telephone number of agent for service)
Copies to:
Lewis S. Schiller, Chief Executive Officer
Netsmart Technologies, Inc.
146 Nassau Avenue, Islip, NY 11751
(516) 968-2000, Fax:(516) 968-2123
Alexander Bienenstock, Esq.
Singer, Bienenstock, Zamansky, Ogele & Selengut, LLP
40 Exchange Place; 20th floor, New York, NY 10005
(212) 809-8550, Fax:(212) 344-0394
Calculation of Registration Fee:
Maximum Maximum
Title of each class of Amount Offering Aggregate
securities to be to be Price Offering Registration
registered registered per Unit Price Fee
(1)
- -------------------------- -------------- -------- ------------ ------------
Units, each Unit
consisting of two shares
of Common Stock, par value
$.01 per share, and one
Series A Redeemable Common
Stock Purchase Warrant(2) 646,875 Units $8.00 $5,175,000.00 $1,784.48
Common Stock, par value
$.01 per share(3),(4) 646,875 Shs. 4.50 2,910,937.50 1,003.77
Underwriter's Unit
Purchase Options(5) 56,250 Optns. .001 56.25 .02
Units, each Unit
consisting of two shares
of Common Stock, par value
$.01 per share, and one
Series A Redeemable Common
Stock Purchase Warrant(4),
(6) 56,250 Units 9.60 540,000.00 186.21
Common Stock, par value
$.01 per share(4),(7) 56,250 Shs. 4.50 253,125.00 87.29
<PAGE> 2
Series B Common Stock
Purchase Warrants(8) 800,000 Wts. 2.00 1,600,000.00 551.73
Common Stock, par value
$.01 per share(4),(9) 800,000 Shs. 2.00 1,600,000.00 551.73
Units, each Unit
consisting of two shares
of Common Stock, par value
$.01 per share, and one
Series A Redeemable Common
Stock Purchase Warrant(10) 250,000 Units 8.00 2,000,000.00 689.66
Common Stock, par value
$.01 per share(11) 250,000 Shs. 4.50 1,125,000.00 387.93
---------
Total $5,242.80
=========
(Footnotes on following page)
(Footnotes from proceeding page)
(1) Estimated solely for purposes of computation of the registration fee
pursuant to Rule 457.
(2) Includes 84,375 Units issuable upon exercise of the Underwriter's over-
allotment option, and does not include the 250,000 Units being issued to, and
offered for sale by, certain noteholders (the "Selling Stockholders").
(3) Represents shares of Common Stock issuable upon exercise of the Series A
Redeemable Common Stock Purchase Warrants ("Warrants") included in the Units
offered pursuant to this Registration Statement.
(4) Pursuant to Rule 416, there are also being registered such additional
securities as may become issuable pursuant to the anti-dilution provisions of
the Warrants or the Underwriter's Unit Purchase Options.
(5) Represents options (the "Underwriter's Options") to purchase 56,250 Units.
(6) Represents Units issuable upon exercise of the Underwriter's Options.
(7) Represents shares of Common Stock issuable upon exercise of the Warrants
issuable pursuant to the Underwriter's Options.
(8) Represents Series B Common Stock Purchase Warrants ("Outstanding
Warrants") to be sold by the Selling Warrant Holders. See "Selling Security
Holders."
(9) Represents shares of Common Stock issuable upon exercise of the
Outstanding Warrants.
(10) Represents Units (each Unit consisting of two shares of Common Stock and
one Warrant) to be issued to the Selling Stockholders. See "Selling Security
Holders."
(11) Represents shares of Common Stock issuable upon exercise of the Warrants
included in the Units to be issued to the Selling Stockholders.
<PAGE> 3
Netsmart Technologies, Inc.
Cross-Reference Sheet Pursuant to Rule 404
Item No. Caption in Prospectus
- --------------------------------- -------------------------------------------
1. Forepart of the Registration Registration Statement Facing Page,
Statement and Outside Front Prospectus Cover Page
Cover of Prospectus
2. Inside Front and Outside Bank Inside Cover Page, Back Cover Page
Cover Pages of Prospectus
3. Summary Information, Risk Prospectus Summary, Risk Factors
Factors and Ratio of Earnings
to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Cover Page, Risk Factors, Underwriting
Price
6. Dilution Dilution
7. Selling Security Holders Cover Page, Inside Cover Page, Selling
Security Holders
8. Plan of Distribution Cover Page, Inside Cover Page, Selling
Security Holders, Underwriting
9. Description of Securities to Description of Securities
be Registered
10. Interest of Named Experts and N.A.
Counsel
11. Information with Respect to (a)-(c) Prospectus Summary, Business
the Registrant (d) Cover Page
(e) Financial Statements
(f) Prospectus Summary, Selected Financial
Data
(g) N.A.
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(i) N.A
(j)-(k) Management
(l) Principal Stockholders
(m) Certain Transactions
12. Disclosure of Commission N.A.
Position on Indemnification
for Securities Act Liabilities
<PAGE> 4
PROSPECTUS
SUBJECT TO COMPLETION DATED JUNE 17, 1996
562,500 Units
Netsmart Technologies, Inc.
(Each Unit consisting of two shares of Common Stock, par value $.01 per share,
and one Series A Redeemable Common Stock Purchase Warrant)
Netsmart Technologies, Inc. (the "Company") is offering 562,500 Units, each
Unit consisting of two shares of Common Stock and one Series A Redeemable
Common Stock Purchase Warrant (the "Warrants") or an aggregate of 1,125,000
shares of Common Stock and 562,500 Warrants. The Common Stock and Warrants
comprising the Units will be separately transferable immediately upon
issuance. Each Warrant entitles the holder to purchase one share of Common
Stock at $4.50 per share (subject to adjustment) during the two-year period
commencing one year from the date of this Prospectus. The Warrants are
redeemable by the Company, with the consent of Monroe Parker Securities, Inc.
(the "Underwriter"), commencing one year from the date of this Prospectus, for
$.05 per Warrant, on not more than 60 nor less than 30 days' written notice if
the closing bid price per share of Common Stock is at least $9.00 (subject to
adjustment) for at least 20 consecutive trading days ending within ten days of
the date the Warrants are called for redemption. See "Description of
Securities."
Prior to this Offering, there has been no public market for the Company's
securities. The initial public offering price and composition of the Units
and the exercise price and other terms of the Warrants have been determined
through negotiations between the Company and the Underwriter, and are not
related to the Company's assets, book value, financial condition or other
recognized criteria of value. Although the Company has applied for the
inclusion of the Common Stock, Units and Warrants in The Nasdaq SmallCap
Market under the symbols NTST, NTSTU and NTSTW, respectively, there can be no
assurance that an active trading market in the Company's securities will
develop or be sustained.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY
INVESTORS WHO CAN AFFORD TO SUSTAIN A LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
Per Unit $8.00 $ .80 $7.20
Total(3) $4,500,000 $450,000 $4,050,000
(footnotes on page 2)
<PAGE> 5
The Units are being offered, subject to prior sale, when, as and if
delivered to and accepted by the Underwriter and subject to the approval of
certain legal matters by counsel and certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify the Offering and
to reject any order in whole or in part. It is expected that delivery of the
certificates representing the Common Stock and Warrants comprising the Units
will be made against payment therefor at the offices of the Underwriter at
2500 Westchester Avenue, Purchase, New York 10577 on , 1996.
Monroe Parker Securities, Inc.
The date of this Prospectus is ____________, 1996
(footnotes from Cover Page)
(1) Excludes additional compensation to be received by the Underwriter in the
form of (a) a non-accountable expense allowance equal to 3% of the gross
proceeds of this Offering ($.24 per Unit) for a total of $135,000 ($155,250 if
the Underwriter's over-allotment option is exercised in full), (b) options
(the "Underwriter's Options") to purchase 56,250 Units at $11.60 per Unit
exercisable during the four-year period commencing one year from the date of
this Prospectus, and (c) a one-year consulting agreement pursuant to which the
Company will pay the Underwriter a fee of $60,000. See "Underwriting." In
addition, the Company has agreed to indemnify the Underwriter against certain
liabilities, including liability under the Securities Act of 1933, as amended
(the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of the Offering of approximately
$525,000 ($.93 per Unit), which are payable by the Company and relate to the
Offering by the Company and possible sale by selling security holders, and
which include the Underwriter's non-accountable expense allowance and
consulting agreement.
(3) The Company has granted to the Underwriter an option, exercisable within
45 days after the date of this Prospectus, to purchase up to an additional
84,375 Units on the same terms solely to cover over-allotments. If the over-
allotment option is exercised in full, the Total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $5,175,000, $517,500
and $4,657,500, respectively. See "Underwriting."
A significant number of Units may be sold to customers of the Underwriter.
Such customers may subsequently engage in the sale or purchase of the
securities through or with the Underwriter. Although they have no obligation
to do so, the Underwriter may become a market maker and otherwise effect
transactions in securities of the Company, and, if the Underwriter
participates in such market, it may be a dominating influence in the trading
of securities. The prices and the liquidity of the securities may be
significantly affected by the degree, if any, of the participation of the
Underwriter in such market, should a market arise.
This Prospectus, with a different Cover Page, relates to the sale by
selling security holders of (i) 800,000 Series B Common Stock Purchase
Warrants ("Outstanding Warrants") in private transactions, and (ii) the public
sale of the 800,000 shares of Common Stock issuable upon exercise of the
Outstanding Warrants and 250,000 Units being issued on or about the date of
this Prospectus to certain note holders. See "Selling Security Holders." The
sale of such securities by the selling security holders is not part of the
underwritten public offering.
<PAGE> 6
The Company will be subject to certain informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith will
file reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 or at the regional offices of the
Commission at Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661 and Seven World Trade Center, New York, New York 10048. Copies
of such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and with such other periodic reports
as the Company may from time to time deem appropriate or as may be required by
law. The Company uses the calendar year as its fiscal year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, COMMON
STOCK AND/OR WARRANTS AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
-2-
<PAGE> 7
PROSPECTUS
SUBJECT TO COMPLETION DATED JUNE 17, 1996
Netsmart Technologies, Inc.
800,000 Series B Common Stock Purchaser Warrants 250,000 Units (each Unit
consisting of two shares of Common Stock, par value $.01 per share,
and one Series A Redeemable Common Stock Purchase Warrant)
The 250,000 Units and/or the shares of Common Stock and Series A Redeemable
Common Stock Purchase Warrants (the "Warrants") may be sold commencing [the
day after 13 months from the date of the Prospectus], by certain selling
stockholders (the "Selling Stockholders") of Netsmart Technologies, Inc. (the
"Company"). Each Unit consists of two shares of Common Stock and one Warrant.
The Common Stock and Warrants comprising the Units are separately
transferable. Each Warrant entitles the holder to purchase one share of
Common Stock at $4.50 per share (subject to adjustment) during the two-year
period commencing one year from the date of this Prospectus. The Warrants are
redeemable by the Company, with the consent of Monroe Parker Securities, Inc.,
the underwriter for the Company's initial public offering (the "Underwriter"),
commencing one year from the date of this Prospectus, for $.05 per Warrant, on
not more than 60 nor less than 30 days' written notice if the closing bid
price per share of Common Stock is at least $9.00 (subject to adjustment) for
at least 20 consecutive trading days ending within ten days of the date the
Warrants are called for redemption. See "Description of Securities."
The 800,000 Series B Common Stock Purchase Warrants ("Outstanding
Warrants") may be sold in negotiated transactions by certain of the Company's
warrant holders (the "Selling Warrant Holders") in negotiated transactions.
The Outstanding Warrants have an exercise price of $2.00 per share, expire on
December 31, 1999 and are not redeemable by the Company. During the first six
months from the date of this Prospectus, the Outstanding Warrants may not be
exercised and the underlying shares of Common Stock may not be sold without
the consent of the Company or the Underwriter. During the 18 months following
the expiration of such six month period, neither the Outstanding Warrants nor
the underlying shares of Common Stock may be sold without the consent of the
Underwriter. The Outstanding Warrants are not to be publicly sold, and there
is not expected to be any public market for the Outstanding Warrants. The
Outstanding Warrants provide that, in the event that they are sold or
otherwise transferred pursuant to an effective registration statement, they
expire 90 days from the date of transfer. As a result, any purchaser of
Outstanding Warrants must, within a short period, either exercise the
Outstanding Warrants or permit them to expire unexercised.
The 800,000 shares of Common Stock issuable upon exercise of the
Outstanding Warrants may not be sold during the first six months from the date
of this Prospectus without the prior consent of the Company and the
Underwriter. During the 18 months following the expiration of such six month
period, such shares may not be sold without the consent of the Underwriter.
The Company will not receive any proceeds from the sale by the Selling
Stockholders or Selling Warrant Holders (collectively, "Selling Security
Holders") of the Units or Outstanding Warrants or underlying securities except
to the extent that any Warrants or Outstanding Warrants are exercised. The
cost of the registration of the securities for the Selling Security Holders,
estimated at approximately $5,000, is being borne by the Company.
<PAGE> 8
The Selling Warrant Holders have advised the Company that any transfer of
the Outstanding Warrants will be either a sale in private transactions at
negotiated prices or by gift. They have advised the Company with respect to
the underlying shares of Common Stock, and each of the Selling Stockholders
has advised the Company with respect to the Units and shares of Common Stock
and Warrants comprising the Units that such sale may be effected from time to
time in transactions (which may include block transactions) by or for the
account of the Selling Security Holders in the over-the-counter market or in
negotiated transactions, a combination of such methods of sale or otherwise.
Sales may be made at fixed prices which may be changed, at market prices or in
(continued on page 2)
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY
INVESTORS WHO CAN AFFORD TO SUSTAIN A LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ____________, 1996
(continued from cover page)
negotiated transactions, a combination of such methods of sale or otherwise,
and securities may be transferred by gift.
Selling Security Holders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Security Holders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the over-
the-counter market, in negotiated transactions or otherwise. Such broker-
dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Security Holders and/or the
purchasers from whom such broker-dealer may act as agents or to whom they may
sell as principals or otherwise (which compensation as to a particular broker-
dealer may exceed customary commissions).
The Company has informed the Selling Security Holders that the anti-
manipulative rules under the Securities Exchange Act of 1934, Rules 10b-2,
10b-6 and 10b-7, may apply to their sales in the market and has furnished each
of the Selling Security Holders with a copy of these rules. The Company has
also informed the Selling Security Holders of the need for delivery of copies
of this Prospectus.
This Prospectus, with a different Cover Page, relates to the sale by
Company pursuant to an underwritten public offering of 562,500 Units, each
Unit consisting of two shares of Common Stock and one Series A Redeemable
Common Stock Purchase Warrant (the "Warrants") or an aggregate of 1,125,000
shares of Common Stock and 562,500 Warrants. See "Underwriting."
The Company will be subject to certain informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith will
file reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities maintained by the Commission at 450
<PAGE> 9
Fifth Street, N.W., Washington, D.C. 20549 or at the regional offices of the
Commission at Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661 and Seven World Trade Center, New York, New York 10048. Copies
of such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and with such other periodic reports
as the Company may from time to time deem appropriate or as may be required by
law. The Company uses the calendar year as its fiscal year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, COMMON
STOCK AND/OR WARRANTS AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
-2-
<PAGE> 10
PROSPECTUS SUMMARY
The following discussion summarizes certain information contained in this
Prospectus. It does not purport to be complete and is qualified in its
entirety by reference to more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. All
share and per share information in this Prospectus has been restated to
reflect a 2,000 for one Common Stock recapitalization effective in August
1993, a .576 for one reverse split effective in October 1993 and a three-for-
four reverse split effective February 1996.
THE COMPANY
Netsmart Technologies, Inc. (the "Company") develops, markets and supports
computer software designed to enable organizations to provide a range of
services in a network computing environment. A network computing environment
is a computer system that provides multiple users with access to a common data
base and functions. A network system can be a local system, such as a local
area network, known as a LAN, which operates within an office or facility, or
a distributed system which provides simultaneous access to a common data base
to many users at multiple locations.
There are typically three parties in the Company's network systems -- the
sponsor, the users and the service providers. The sponsor is the party that
maintains the data base. The sponsor may be a managed care organization, a
university or a financial institution. The users are the individuals who use
the system, and may be the subscribers of a managed care organization, the
students at a university or the bank card or credit card holders of a
financial network. The service providers are those who provide goods or
services to the users. Service providers are the physicians, pharmacies or
other health care professionals who provide medical services for the managed
care organization, the university book store, food service and library and
banks and merchants who provide goods, services or funds to bank card or
credit card holders.
The Company has developed proprietary network technology using smart cards
which it markets in the health care, financial and education fields as the
CarteSmart System. A smart card is a plastic card the size of a standard
credit card which contains a single embedded microprocessor chip. The card
has data storage and computing capabilities, and the smart card software
includes security elements to restrict unauthorized access to or modification
of certain information contained on the card. The Company also supplies
network applications which use telecommunications rather than smart cards to
obtain access to and manage data information. The smart card permits both
access to and updating of information on the card. For example, in the health
care field, the health care provider can, by inserting the smart card in a
smart card reader, confirm insurance coverage, chronic conditions such as
allergies, medications currently prescribed and reports of recent visits to
participating health care providers. The health care provider can then input
new information, including diagnostic and treatment information, from the
current office visit onto both the smart card and the organization's computer.
Substantially all of the Company's revenue through December 31, 1995 and
approximately 63.5% of revenue for the three months ended March 31, 1996 was
generated by its health information systems and related services, which are
marketed through Creative Socio-Medics Corp. ("CSM"), a subsidiary which was
acquired by Carte Medical Holdings, Inc. ("Holdings"), the Company's principal
stockholder, from a nonaffiliated party in June 1994. In September 1995, the
stock of CSM was transferred by Holdings to the Company. See "Business --
<PAGE> 11
Acquisition of CSM." The Company offers these systems and related services to
specialty care health organizations and entitlement programs in the United
States. Revenue from health care systems and related services includes the
sale of third party hardware and software, which accounted for approximately
10.5% and 26.7% of revenue for the three months ended March 31, 1996 and the
year ended December 31, 1995.
Prior to the acquisition of CSM in June 1994, the Company was a development
stage company and its sole source of revenue was $57,000 in consulting revenue
which it received in 1993.
An initial version of the Company's CarteSmart technology was first used in
a pilot program in Europe in 1993. In January 1995, the Company introduced
its CarteSmart System in the United States with the implementation of a pilot
program in San Diego County, California. This program involved the issuance
of smart cards to approximately 1,200 mental health patients participating in
the California MediCal Managed Care Initiative. The Company is presently
negotiating for the expansion of the program. The Company is marketing its
CarteSmart Systems to other entitlement programs and specialized health care
organizations, including users of its health information systems.
In July 1995, the Company entered into an agreement for the implementation
in 1995 of a magnetic stripe identification card system at Virginia
Commonwealth University ("VCU") which uses CarteSmart technology to enable
students to use one card for identification, food service and library
services. The system was implemented in 1995, and generated revenue of
$118,000 during that year.
-3-
During 1995, the Company entered into a series of preliminary letter
agreements with IBN Limited ("IBN") for the license and implementation of a
CarteSmart automated teller machine and point of sale system in the former
Soviet Union. In May 1996, the Company entered into a final agreement with
IBN. Substantially all of the Company's revenue from smart card systems
during the three months ended March 31, 1996 was generated by the IBN
agreement. As part of the IBN project, the Company is integrating the Oasis
Technology, Ltd. ("Oasis") IST/Share Financial Transaction Processing System
with its own and other third-party products.
In February 1996, a wholly-owned subsidiary of the Company entered into an
agreement with Fiton Business S.A. ("Fiton") pursuant to which the subsidiary
agreed to purchase from Fiton an application software product, known as the
SATC software (the "SATC Software"), which processes retail plastic card
transactions and merchant transactions. The purchase price is $650,000, of
which $475,000 has been paid as of May 31, 1996. The subsidiary will acquire
title to the SATC Software upon payment of the balance of the purchase price,
which is due in September 1996. The subsidiary's obligations are guaranteed
by the Company, Consolidated and Oasis. The Company expects to enter into a
joint venture with Oasis pursuant to which the subsidiary that purchased the
SATC Software will become a joint venture corporation, with 50% of its stock
being owned by each of the Company and Oasis. The SATC Software is designed
to perform functions required by credit card issuers including application
processing and tracking, credit evaluation, credit authorization and the
printing of statements. The Company intends to integrate the SATC Software
with both its CarteSmart System and Oasis' IST/Share software and the joint
venture corporation intends to market the SATC Software to the financial
services industry.
<PAGE> 12
The Company is a Delaware corporation, formed in September 1992 under the
name Medical Services Corp., a holding company, whose operations were
conducted by its wholly owned subsidiary, Carte Medical Corp. In October
1993, the Company merged its subsidiary into itself and changed its name to
Carte Medical Corporation. In June 1995, the Company's name was changed to
CSMC Corporation, and in February 1996, the Company's name was changed to
Netsmart Technologies, Inc. References to the Company include both the
Company, its former and present subsidiaries, including CSM from June 16,
1994, the date of the acquisition of the assets of Creative Socio-Medics Corp.
("Old CSM") by Holdings, unless the context indicates otherwise. References
to CSM relate to the business and operations of both CSM and its predecessor,
Old CSM, unless the context indicates otherwise. The Company's executive
offices are located at 146 Nassau Avenue, Islip, New York 11751, telephone
(516) 968-2000.
As of May 31, 1996, approximately 78.0% of the Company's Common Stock was
owned by Holdings, a wholly-owned subsidiary of SIS Capital Corp. ("SISC"),
which is in turn a wholly-owned subsidiary of Consolidated Technology Group
Ltd. ("Consolidated"), a public company. See "Certain Transactions,"
"Principal Stockholders" and "Selling Security Holders."
The following is a description of the relationships among the Company and
certain related parties, which relationships are described in greater detail
under "Certain Transactions."
Consolidated is a public corporation and owns all of the capital stock of
SISC, which, in turn, owns all of the issued and outstanding capital stock of
Holdings. Holdings is the principal stockholder of the Company. See
"Principal Stockholders." Mr. Lewis S. Schiller, chairman of the board and a
director of the Company, is chairman of the board, chief executive officer and
a director of Consolidated, SISC and Holdings. Another subsidiary of
Consolidated, The Trinity Group, Inc. ("Trinity"), has an agreement with the
Company pursuant to which the Company is to pay Trinity a monthly fee of
$15,000 for the three-year period commencing with the month in which the
Company receives the proceeds from this Offering for general business,
management and financial consulting services.
Oasis is an independent software company that markets to the financial
services industry. The Company has a cross-marketing agreement with Oasis and
intends to enter into a joint venture agreement with Oasis with respect to the
SATC Software. Mr. Storm R. Morgan, a director of and consultant to the
Company, is senior vice president of and has an equity interest in, Oasis.
Mr. Morgan is the sole stockholder, a director and officer of SMI, Inc.
("SMI"). The Company has an agreement with SMI pursuant to which the Company
is to pay SMI compensation of $25,000 to $59,000 per month for management,
marketing and technical services to be provided to the Company through
December 31, 2000.
-4-
<PAGE> 13
THE OFFERING
Securities Offered: 562,500 Units at $8.00 per Unit. Each consists of two
by the Company: shares of Common Stock and one Series A Redeemable
Common Stock Purchase Warrant (the "Warrants"). The
shares of Common Stock and Warrants comprising the Units
will be separately transferable immediately upon
issuance.
Securities Offered The Prospectus, with a different cover page, relates to
by Selling Security (i) the sale by SISC and Bridge Ventures, Inc. ("Bridge
Holders Ventures"), (SISC and Bridge Ventures in their
capacities as selling security holders being referred to
collectively as the "Selling Warrant Holders") of an
aggregate of 800,000 Outstanding Warrants and the sale
of the underlying shares of Common Stock, commencing six
months from the date of this Prospectus or earlier with
the consent of the Company and the Underwriter, and (ii)
the sale by certain note holders (the "Selling
Stockholders") of an aggregate of 250,000 Units. The
Units to be issued to the Selling Stockholders are
identical to the Units sold to the public pursuant to
this Prospectus. The sales by the Selling Warrant
Holders and the Selling Stockholders (collectively, the
"Selling Security Holders") are not a part of the
underwritten public offering.
The Outstanding Warrants have an exercise price of $2.00
per share, expire on December 31, 1999 and are not
redeemable. During the first six months from the date
of this Prospectus, the Outstanding Warrants may not be
exercised and the underlying shares of Common Stock may
not be sold without the consent of the Company or the
Underwriter. During the 18 months following the
expiration of such six month period, neither the
Outstanding Warrants nor the underlying shares of Common
Stock may be sold without the consent of the
Underwriter. The Outstanding Warrants are not to be
publicly sold, and there is not expected to be any
public market for the Outstanding Warrants. The
Outstanding Warrants provide that, in the event that
they are sold or otherwise transferred pursuant to an
effective registration statement, they expire 90 days
from the date of transfer. As a result, any purchaser
of Outstanding Warrants must, within a short period,
either exercise the Outstanding Warrants or permit them
to expire unexercised.
Any sales of such securities prior to the expiration of
two years from the date of this Prospectus, with respect
to the Selling Warrant Holders, or prior to the
expiration of 13 months from the completion of this
Offering, with respect to the Selling Stockholders, will
require the consent of the Underwriter. The Selling
Warrant Holders and the Selling Stockholders
(collectively, the "Selling Security Holders") have
advised the Company that any sales of such securities
will be made on The Nasdaq SmallCap Market at prevailing
prices or in private transactions at negotiated prices,
<PAGE> 14
except that any transfer by the Selling Warrant Holders
of their Outstanding Warrants will be made in private
transactions at negotiated prices. See "Selling
Security Holders."
Description of Warrants:
Exercise of Warrants The Warrants are exercisable commencing one year from
the date of this Prospectus. Subject to redemption by
the Company, the Warrants may be exercised at any time
during the two-year period commencing one year from the
date of this Prospectus at an exercise price of $4.50
per share, subject to adjustment.
Redemption of The Warrants are redeemable by the Company commencing
Warrants one year from the date of this Prospectus, with the
consent of the Underwriter, at $.05 per Warrant, on not
more than 60 nor less than 30 days written notice,
provided that the closing bid price of the Common Stock
is at least $9.00 per share, subject to adjustment,
during 20 consecutive trading days ending within ten
days of the date the Warrants are called for redemption.
-5-
Use of Proceeds: The net proceeds of this Offering will be used to pay
outstanding loans, including loans due to related
parties, and for working capital and other corporate
purposes. See "Use of Proceeds," and "Interim
Financings."
Risk Factors: Purchase of the Units involves a high degree of risk and
substantial dilution, and should be considered only by
investors who can afford to sustain a loss of their
entire investment. See "Risk Factors" and "Dilution."
Nasdaq Symbols:
Common Stock NTST
Units NTSTU
Warrants NTSTW
Common Stock and Warrants Outstanding:
At the date of this Prospectus:
4,136,253 shares of Common Stock(1)
3,153,750 Series B Common Stock Purchase Warrants
("Outstanding Warrants")(2)
As Adjusted:(3)
5,786,253 shares of Common Stock(1)
812,500 Series A Common Stock Purchase Warrants
3,153,750 Outstanding Warrants
(1) Does not include a maximum of 511,000 shares of Common Stock which may be
issued pursuant to the Company's 1993 Long Term Incentive Plan, of which stock
options to purchase 487,256 shares are outstanding, 3,153,750 shares of Common
Stock issuable pursuant to the Outstanding Warrants, 43,200 shares of Common
<PAGE> 15
Stock issuable upon the conversion of outstanding shares of Series A 4%
Convertible Redeemable Preferred Stock ("Series A Preferred Stock"), 20,737
shares of Common Stock issuable upon the conversion of outstanding shares of
Series B 6% Redeemable Convertible Preferred Stock ("Series B Preferred
Stock"), 25,000 shares of Common Stock to be issued to the Company's asset-
based lender, or any shares of Common Stock issuable upon exercise of the
Warrants, the Underwriter's over-allotment option or Underwriter's Options or
the securities underlying the Underwriter's Options.
(2) There are presently Outstanding Warrants to purchase an aggregate of
2,516,250 shares of Common Stock at $2.00 per share and 637,500 shares of
Common Stock at $5.00 per share. See "Certain Transactions" and "Description
of Securities Series B Common Stock Purchase Warrants."
(3) Reflects (a) the issuance of the 1,125,000 shares of Common Stock and
562,500 Warrants comprising the Units offered hereby, (b) the issuance of
500,000 shares of Common Stock and 250,000 Warrants comprising the Units to be
issued to the Selling Stockholders and (c) the issuance of 25,000 shares of
Common Stock to the Company's asset-based lender.
SUMMARY FINANCIAL INFORMATION
Statement of Operations Data(1):
Three Months Ended March 31, Year Ended December 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
Revenue $2,560,000 $1,427,000 $7,382,000 $2,924,000 57,000
Net income (loss) 76,000 (558,000) (2,850,000) (1,751,000)(433,000)
Net income (loss)
per share of
Common Stock .02 (.12) (.59) (.36) (.09)
Weighted average
number of shares
outstanding(2) 4,821,528 4,821,528 4,821,528 4,821,528 4,763,028
-6-
Balance Sheet Data:
March 31, 1996 December 31,
As Adjusted(3) Actual 1995 1994
-------------- --------- ------ ------
Working capital
(deficiency) $ 542,000 $(2,837,000) $(2,562,000) $(4,037,000)
Total assets 9,913,000 7,674,000 6,390,000 7,193,000
Total liabilities 5,950,000 7,090,000 5,887,000 6,342,000
Redeemable Preferred
Stock -- 96,000 96,000 96,000
Accumulated deficit (6,751,000) (5,071,000) (5,147,000) (2,297,000)
Stockholders'
equity(4) 4,013,000 488,000 407,000 755,000
Net tangible book
value (deficiency)
per share of Common
Stock(5) .09 (.73) (.74) (.94)
<PAGE> 16
(1) Statement of operations data includes the operations of CSM commencing
July 1, 1994.
(2) All shares of Common Stock issued prior to the date of this Prospectus are
treated as outstanding since inception.
(3) As adjusted to reflect (a) the receipt by the Company of the net proceeds
from the sale of the 562,500 Units offered hereby, (b) the use of a portion of
the proceeds of this Offering to pay certain debt and redeem the Series B
Preferred Stock and (c) the issuance of 250,000 Units to the Selling
Stockholders and 25,000 shares of Common Stock to the Company's asset-based
lender. See "Use of Proceeds," "Capitalization," "Interim Financings" and
"Selling Security Holders."
(4) Stockholders' equity includes $1,250,000 additional paid-in capital
relating to Preferred Stock.
(5) Excludes the amount allocated to the liquidation preferences of the Series
A and D Preferred Stock.
Pro Forma Statement of Operations Data
- --------------------------------------
The following pro forma Statement of Operations Data assumes that certain
compensation agreements with related parties had been in effect for the year
ended December 31, 1995. See Notes 11 and 13 of Notes to Netsmart
Technologies, Inc. Consolidated Financial Statements.
Year Ended December 31, 1995
----------------------------
Net loss $(2,850,000)
Pro forma adjustments to expense: Increase in
expenses for management services agreements (684,000)
Pro forma net loss (3,534,000)
Net loss per share of Common Stock (.59)
Pro forma net loss per share of Common Stock (.73)
Weighted average number of shares of Common
Stock outstanding 4,821,528
-7-
RISK FACTORS
The purchase of the Units offered hereby involves a high degree of risk and
should be considered only by investors who can afford to sustain the loss of
their entire investment. In analyzing this Offering, prospective investors
should carefully consider the following factors, among others.
1. History of losses; qualified opinion of accountants. The Company
commenced operations in September 1992. Its sole source of revenue from
inception through June 30, 1994 was approximately $57,000 in consulting fees
received during 1993. Commencing July 1, 1994, the Company's financial
statements include the operations of CSM, which was acquired by Holdings in
June 1994. Although the Company generated net income of $76,000, or $.02 per
share, for the three months ended March 31, 1996, it sustained losses of
approximately $2.9 million, or $.59 per share, for the year ended December 31,
1995, $1.8 million, or $.36 per share, for the year ended December 31, 1994,
and $400,000, or $.09 per share, for the year ended December 31, 1993. From
its organization in September 1992 until March 31, 1996, the Company sustained
a cumulative loss of $5.1 million. The Company's independent accountants have
<PAGE> 17
included an explanatory paragraph in their report stating that there is
substantial doubt about the ability of the Company to continue as a going
concern. Substantially all of the Company's revenue through December 31, 1995
has been generated from the Company's health information systems and related
services. In order to generate any revenues from its CarteSmart System, the
Company must be successful in licensing its system. CarteSmart revenue is
expected to consist principally of license fees, which are based on the number
of cards issued, and consulting and maintenance revenues relating to the
CarteSmart Systems being installed. Thus, in order for the Company to
generate significant revenues from its CarteSmart System, it must develop a
substantial base of smart card users. The failure of the Company to generate
revenues at a level in excess of its ongoing expenses may force the Company to
reduce or cease operations. The Company is also subject to the risks normally
associated with a new business enterprise, including unforeseeable expenses,
delays and complications. No assurance can be given that the Company can or
will ever operate profitably.
Pursuant to the subscription agreements by which the Selling Stockholders
purchased the Company's 8% Promissory Notes due January 31, 1997 (the "January
1996 Interim Notes"), the Company is issuing to the Selling Stockholders an
aggregate of 250,000 Units. The January 1996 Interim Notes are payable from
the proceeds of this Offering. In addition, the Company is to issue 25,000
shares of Common Stock as a fee to its asset-based lender. As a result of
these issuances, the Company will incur at the time of such issuances, which
will be on or about the closing of this Offering, financing costs of $1.6
million and $80,000, respectively, which reflect the value of such securities
and which will have a material impact upon the results of the Company's
operations for 1996.
2. The Company's significant working capital deficiency; delinquency on
payment to vendors. As of March 31, 1996, the Company had a working capital
deficiency of approximately $2.8 million. The Company's assets at March 31,
1996 include intangible assets of $3.4 million relating to customer lists
purchased as part of the acquisition of Old CSM. The customer lists reflect
clients which, at the time of the June 1994 acquisition of the assets of Old
CSM, used CSM's health information systems or other services provided by CSM.
The value of this asset, which represents approximately 43.8% of total assets
at such date, is dependent upon the ability of the Company to generate
revenues, including revenues from the CarteSmart System, from such customer
base.
As a result of the Company's working capital deficiency, the Company was
increasingly delinquent in payments to vendors. Accounts payable to vendors
increased to $1.6 million at March 31, 1996 from $1.2 million at December 31,
1995. The delinquency for vendors deemed critical to the Company's operations
is generally less than 60 days, and the delinquency for other vendors was in
excess of 90 days.
3. Substantial capital requirements of the Company. The Company's
operations through 1994 were financed principally by SISC, the parent of
Holdings, which is the principal stockholder of the Company, and DLB, Inc.
("DLB"). Old CSM's operations from January 1994 until the acquisition in June
1994 were financed principally by SISC. Mr. Lewis S. Schiller, chairman of
the board of directors of the Company, is the chief executive officer of SISC.
SISC is a wholly owned subsidiary of Consolidated, of which Mr. Schiller is
chief executive officer. DLB is controlled by Mr. Schiller's wife, although
Mr. Schiller disclaims any beneficial interest in DLB. In April 1994, SISC
purchased the Company's obligations to DLB from DLB.
<PAGE> 18
At September 30, 1995, prior to the recapitalization of debt by SISC,
the Company owed SISC approximately $3.0 million and interest of approximately
$388,000. As of September 30, 1995, SISC converted the $388,000 of accrued
interest into 1,125,000 shares of Common Stock, reflecting a price of $.345
per share, and exchanged $2.2 million principal
-8-
amount of debt for 2,210 shares of a new series of Preferred Stock, the Series
D 6% Redeemable Cumulative Preferred Stock ("Series D Preferred Stock"), which
has a redemption price of $2.2 million. In January 1996, SISC exchanged 1,000
shares of Series D Preferred Stock for 1,125,000 shares of Common Stock,
reflecting a purchase price of $.89 per share, which reduced the aggregate
redemption price of the Series D Preferred Stock to $1.2 million. The
remaining $750,000 is represented by the Company's 10% subordinated note due
January 1997. The $750,000 note is payable from the proceeds of this
Offering, however, SISC has agreed not to require any payment from the
proceeds of this Offering except from the proceeds of the over-allotment
option, if the over-allotment option is exercised. SISC has not made any
additional advances to the Company subsequent to September 30, 1995. However,
SISC may make advances to the Company in the future.
Since January 1995, the Company's principal source of funds has been an
accounts receivable financing agreement and interim loans from nonaffiliated
accredited investors. In February 1995, the Company entered into an accounts
receivable financing with an asset-based lender. Borrowings under this
facility were $972,000 at March 31, 1996 and $960,000 at May 31, 1996. The
Company can borrow up to 75% of eligible receivables, and it pays interest at
the greater of 18% per annum or prime plus 8% and a fee equal to 1% of the
amount of the invoice. In March 1996, the maximum borrowing under the
agreement was increased from $750,000 to $1.0 million and the percentage of
eligible receivables was increased from 75% to 80%. These higher levels of
borrowing capacity will continue in effect until the Company either completes
this Offering or raises $350,000 in a private placement of securities, at
which time the lower levels will be restored. In addition, the Company will
be required to pay the lender a $25,000 fee at the closing of this Offering or
such other financing and issue to the lender 25,000 shares of Common Stock.
The Company's obligations under this facility are guaranteed by Messrs. Lewis
S. Schiller and Leonard M. Luttinger, the chairman of the board and chief
executive officer, and the chief operating officer, respectively, of the
Company. In addition, two officers of CSM, including Mr. Anthony F. Grisanti,
chief financial officer of the Company, have issued their limited guaranty to
the lender.
In January 1996, the Company borrowed $500,000 and issued January 1996
Interim Notes, which are due on January 31, 1997 or earlier upon the
completion of this Offering. The proceeds from the issuance of the January
1996 Interim Notes were used to make the initial payment with respect to the
purchase of SATC Software, for working capital and to pay expenses relating to
this Offering. See "Interim Financings" and "Selling Security Holders."
The purchase price for the SATC Software is $650,000, of which $325,000
was due and was paid at the time of the execution of the agreement in February
1996. The remaining $325,000 is due in three installments during 1996 of
which two installments of $75,000 each were paid by Oasis. The Company has an
agreement with Oasis pursuant to which Oasis will pay the remaining $325,000
as part of its contribution to the joint venture. However, the Company has a
direct obligation to the seller to make the payments, and, in the event that
Oasis fails to make the payments, the Company will be required to make the
<PAGE> 19
remaining payment of $175,000, which is due in September 1996. The
obligations are also guaranteed by Consolidated and Oasis. The Company and
Oasis have not finalized their joint venture agreement.
The Company has an agreement with SMI Corporation ("SMI") pursuant to
which the Company pays SMI compensation of $25,000 to $59,000 per month, for
which SMI will provide the services of Mr. Morgan from time to time on an as-
needed basis and up to four other persons to serve in management-level or
other key positions for the Company on a full-time basis. Mr. Morgan is not
required to devote any minimum amount of time to the business of the Company.
The agreement continues until December 31, 2000. The agreement also provides
for payment of 6% of smart card and related revenues generated by the Company.
Pursuant to the agreement, the Company is to pay SMI a fee of $250,000 for
services in connection with the Company's agreement with IBN, of which $50,000
is payable from the proceeds of this Offering. See "Use of Proceeds" and
"Certain Transactions."
Mr. Storm R. Morgan, a director of the Company, is senior vice president
of and has an equity interest in Oasis and is sole stockholder, a director and
officer of SMI. See "Certain Transactions."
Pursuant to employment agreements with five officers of the Company and
its subsidiaries, the Company is paying for 1996 base salaries of $442,500.
In addition, the Company is paying its president, Mr. James L. Conway, an
annual salary of $52,000, and it has an agreement to pay Trinity, a wholly-
owned subsidiary of Consolidated, consulting fees of $180,000 per annum. See
"Management" and "Certain Transactions." The aggregate annual payments under
such agreements at the present rates of compensation are $674,000. If the
monthly payments to SMI are included, the total compensation payable to such
persons at a present annual rate ranges from $974,000 (based on $25,000 per
month payable to SMI) to $1.4 million (based $59,000 per month payable to
SMI), in addition to 6% of the Company's revenue from smart card and related
services. To the extent that the Company does not generate sufficient cash
flow from its operations, a portion of the proceeds of this Offering may be
used for such purposes. Furthermore, if the fees payable to SMI in connection
with the purchase of the SATC Software and the agreement with IBN are
included, the total annualized defined payments to such persons would range
from $1.2 million to $1.6 million. See "Use of Proceeds."
-9-
Although the Company believes that the proceeds from this Offering will
enable it to operate for one year from the date of this Prospectus, it is
possible that conditions may arise as a result of which the Company may
require additional capital prior to one year from the date of this Prospectus,
and no assurance can be given that the Company will be able to obtain any or
adequate funds when required or that any funds available to it will be on
reasonable terms. The failure to obtain necessary funds could result in the
reduction or cessation of operations by the Company.
4. Limited use of CarteSmart software; need to customize software. As of
December 31, 1995, except for a pilot program with an initial version of the
CarteSmart System in Europe in 1993 and a recent pilot project in San Diego
County, California, the CarteSmart System has not been used by customers for
any significant period of time. The Company has an agreement with the Albert
Einstein School of Medicine pursuant to which the smart card interface to the
previously installed health information system is scheduled to be installed
during the second quarter of 1996, and the Company has a series of letter
agreements to develop a CarteSmart System based installation for IBN, for
<PAGE> 20
which the initial module was delivered in May 1996. The Company is
negotiating with IBN with respect to a definitive agreement. However, no
assurance can be given that the Company will be able to negotiate a definitive
agreement with IBN, that either of the proposed schedules will be met or that
the Company's systems will meet the needs of its clients. The failure of the
Company to have an established customer base may adversely affect its ability
to market the CarteSmart System. The ability of the CarteSmart System to
operate profitably over an extended period of time is dependent upon a number
of factors not within the control of the Company, including the performance of
the cards and card readers and the hardware used, all of which are purchased
by the users of the CarteSmart System from independent sources. Since the
Company does not sell smart cards or smart card readers as part of its
products and services, the Company must rely upon others to provide hardware
which meets the Company's specifications. No assurance can be given that the
Company's software will function during actual operations in the manner
contemplated by the Company or that it will operate free from maintenance or
other performance problems for sustained periods of time.
Although the Company's CarteSmart System software has general
application, its experience with each of its four CarteSmart clients reflects
a need to customize the software to meet the specific needs of the client.
Although the customization need not be significant, each user has its unique
requirements that must be met. These requirements may include the need to
enable the CarteSmart System to interface with the client's existing systems
to the development of a range of software products to meet needs which are not
presently being served. Although the Company believes that its CarteSmart
software can be readily adapted to meet the needs of its clients, no assurance
can be given as to the ability of the Company to meet specific client
requirements. Furthermore, the costs of customization may be significant,
and, to the extent the Company has fixed price contracts, there can be no
assurance that the Company will be able to generate profits from its
CarteSmart agreements.
5. Effect of technological advances; possible obsolescence. Users of
software systems such as the Company's CarteSmart System and its health
information systems require software which enables the storage, retrieval and
processing of very large quantities of data and demand instantaneous
communications among the various data bases. Thus, the Company's business is
designed to take advantage of recent advances in software, computer and
communications technology. Such technology has been developing at rapid rates
in recent years and the future of the Company may be dependent upon its
ability to have access to and to develop or obtain rights to products
utilizing such technology. It is possible that new technology may develop in
a manner which may make the Company's software obsolete. The failure of the
Company to obtain access to such technology could have a material adverse
effect upon the Company's future development.
6. Default on notes and bank debt; prior default on tax obligation, and
possible claim relating to CSM. In July and August 1993, the Company issued
notes (the "Interim Notes") in the principal amount of $216,000. The Interim
Notes matured in October and November 1993, and the Company is in default on
the Interim Notes. As of May 31, 1996, Interim Notes in the principal amount
of $135,000 were outstanding. In December 1994, the Company issued notes (the
"December 1994 Interim Notes") in the principal amount of $200,000, payment of
which was guaranteed by Consolidated. The Company has paid $67,000 principal
amount of the December 1994 Interim Notes and the Company and Consolidated are
in default with respect to the remaining $133,000. The Interim Notes and
December 1994 Interim Notes are to be paid from the proceeds of this Offering.
See "Use of Proceeds."
<PAGE> 21
Prior to April 1994, the Company had failed to pay certain withholding
taxes which, together with interest and estimated penalties, were estimated at
$334,000. Payment of the estimated withholding tax obligation and interest,
totaling approximately $300,000, was made in April 1994 from an advance made
by SISC for such purpose.
As of March 31, 1996, the Company had outstanding bank debt of $29,000,
representing bank debt incurred by CSM prior to the acquisition. Such debt
was $19,000 as of May 20, 1996. These obligations are treated as demand
notes. The loan
-10-
agreement relating to such loans requires CSM and its parent to maintain
consolidated working capital of $450,000 and tangible net worth of at least
$1.3 million. CSM was not in compliance with these covenants. The bank loans
were assumed by the Company in connection with the acquisition of CSM. CSM is
also delinquent in payments aggregating approximately $138,000 under various
equipment leases and its office lease although none of the lessors have
declared a default. CSM has executed a confession of judgment as a result of
default under a hardware purchase agreement. As of December 31, 1995, $28,000
was due on the obligation underlying the confession of judgment.
In June 1994, Holdings acquired the assets of Old CSM. A portion of the
purchase price consisted of shares of Consolidated common stock, which were
issued to Old CSM, a wholly-owned subsidiary of Advanced Computer Techniques,
Inc. ("ACT"). The Company has been advised by ACT that certain of its
security holders have expressed concern about the current market price of the
Consolidated common stock which was issued to Old CSM as part of the purchase
price for Old CSM's assets as a result of a substantial decline in the price
of such common stock since the assets of Old CSM were acquired by Holdings in
June 1994. Although no formal or informal claim has been made against
Consolidated, Holdings or the Company and the Company does not believe that it
has any liability arising out of any such concern or related claim, no
assurance can be given that the Company, Holdings, Consolidated or their
officers and directors will not be subject to liability or that such liability
will not be material.
7. Onecard litigation. 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 stockholders 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, Messrs. Lewis S. Schiller, chief executive officer
and a director of the Company, Leonard M. Luttinger, chief operating officer
of the Company, Thomas L. Evans, vice president of the Company, Holdings, the
Company's principal stockholder, Consolidated, and 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 of, consultant to,
or otherwise affiliated with, Onecard. 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
<PAGE> 22
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 filed a motion to dismiss the complaint, which
motion has not been decided by the Court. However, 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.
8. Dependence upon contracts with government agencies. The Company's
health information systems are marketed principally to specialized care
facilities, many of which are operated by government entities and include
entitlement programs. During the three months ended March 31, 1996 and the
years ended December 31, 1995, 1994 and 1993, approximately 30%, 54%, 49% and
47%, respectively, of CSM's revenues was generated from contracts with
government agencies. The Company's largest customer for the three months
ended March 31, 1996 was IBN, which generated revenue of $933,000, or 36.4% of
revenue for the quarter. The Company's largest customer for 1995 was the
State of Colorado, which accounted for approximately $1.4 million, or 18.5% of
revenue. CSM's largest customer for 1994 was Cuyahoga County, Ohio, which
accounted for 5.5% of its revenue. No other customers accounted for 5% or
more of the Company's or CSM's revenues in any of such periods. Contracts
with government agencies generally include provisions which permit the
contracting agency to cancel the contract at its convenience.
9. Competition. The Company markets health information software and
services and licenses software in the health and human services market. Its
customers in such market include entitlement programs, managed care
organizations, specialty care facilities and other major computer users which
have a need for access over a distributed data network. The Company has
recently commenced marketing and developing software products for the
financial services and education markets. The software industry in general is
highly competitive. In addition, with technological developments in the
communications industry, it is possible that communications as well as
computer and software companies may offer similar or comparable services to
those offered by the Company. Although the Company believes that it can
provide its clients with software to enable them to perform their services
more effectively, other companies, including major computer and communications
companies, have the staff and resources to develop competitive systems, and
users, such as insurance and financial services companies, have the ability to
develop software systems in-house. In the health care field various companies
have offered smart card programs by which a person can have his medical
records stored, and software vendors and insurance
-11-
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 enable a physician to maintain patient health and/or medication
records. The Company believes the health insurance industry is developing
switching software to be used in transmitting claims from health care
providers to the insurers, and it may also develop the software to process
such claims, which would compete with certain functions of the CarteSmart
System. Major systems and consulting vendors, such as Unisys Corporation
("Unisys"), AT&T Corp. and Andersen Worldwide, have provided smart card based
solutions to their clients and they offer other software systems in the
industries to which the Company is marketing its products and services.
Furthermore, the recently announced joint venture among Visa, MasterCard and
certain major banks relating to the development of a smart card based system
may have an adverse effect upon the ability of the Company to market smart
<PAGE> 23
card products to the financial services industry. No assurance can be given
that the Company will be able to compete successfully with such competitors.
The health information systems business, in which the Company has derived
substantially all of its revenue through December 31, 1995, is highly
competitive, and is serviced by a number of major companies and a larger
number of smaller companies, many of which are better capitalized, better
known and have better marketing staffs than the Company, and no assurance can
be given that the Company will be able to compete effectively with such
companies. Major vendors of health information systems include Shared Medical
Systems Corp. and HBO Corp. The Company believes that price competition is a
significant factor in its ability to market its health information systems and
services. In marketing its products and services to the financial services
industry, the Company competes with numerous software vendors as well as major
banks, credit card issuers and other financial services companies which have
the resources to develop competing products. Competition for the education
market includes not only major software developers but credit card issuers and
telecommunications companies that can market their products not only to the
institutions but to the students as well. See "Business -- Competition."
10. Dependence on management. The Company's business is largely
dependent upon its senior executive officers. The Company's chief operating
officer is Mr. Leonard M. Luttinger. Mr. Thomas L. Evans, vice president, is
responsible for smart card product development. Mr. John F. Phillips has been
responsible for CSM's marketing, and is continuing to perform such duties for
the Company. Mr. Storm R. Morgan, a consultant and a director of the Company,
together with SMI, will have responsibilities with respect to CarteSmart
products. The Company has employment agreements with Messrs. Luttinger,
Thomas L. Evans, Edward D. Bright, John F. Phillips and Anthony F. Grisanti,
who are chief operating officer of the Company, vice president of the Company,
vice president of CSM, president of CSM and chief financial officer of the
Company, respectively. The Company also has a consulting contract with SMI, a
corporation owned by Mr. Morgan, and an agreement with Trinity, a wholly-owned
subsidiary of Consolidated. The loss of service of key management personnel
or other key employees would have a material adverse effect upon the Company's
business and prospects. Furthermore, the market for qualified personnel is
highly competitive, the Company will compete with some of the major computer,
communications and software companies as well as major corporations hiring in
house staff in seeking to hire such employees, and no assurance can be given
as to the ability of the Company to employ such persons. The Company
anticipates that it will continue to be largely dependent upon Mr. Evans for
product development and enhancement and Messrs. Luttinger, Morgan and Phillips
for marketing. Pursuant to the underwriting agreement, the Company has agreed
to use its best efforts to obtain key man life insurance in the amount of
$1,000,000 on the lives of each of Messrs. Conway, Luttinger and Evans. See
"Underwriting."
11. Lack of patent protection. The Company has no patent protection for
its proprietary software, including the CarteSmart System. Although the
Company has signed non disclosure agreements with its employees and others to
whom it discloses proprietary information, no assurance can be given that such
protection will be sufficient. The unauthorized use or disclosure of the
Company's proprietary software and other proprietary information may have a
materially adverse effect upon its business. Furthermore, although the
Company's software was developed independent of any work performed by its
employees for former employers, an action has been commenced against the
Company on behalf of Onecard. An adverse decision in the Onecard litigation
could have a material adverse effect upon the Company's business and financial
condition. See "Risk Factors 7. -- Onecard litigation."
<PAGE> 24
12. Effect of government regulations of health care industry.
Substantially all of the Company's revenue has been derived from its health
information systems, including the CarteSmart interface. 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, and the effect of future regulations by governments and payment
practices by government agencies or health insurers cannot be predicted. To
the extent that the health care industry evolves with more government
sponsored programs and fewer privately run organizations, the Company's
business may be adversely affected. Furthermore, to the extent that each
state changes its own regulations in the health care field, it may be
necessary for the Company to modify its health information systems which are
in operation to meet any new record-keeping or other requirements imposed by
changes in regulations, and no assurance can be given that the Company will be
able to generate
-12-
revenues sufficient to cover the costs of developing the modifications. In
addition, reductions in funding for entitlement programs may adversely affect
the market for the Company's health information systems and services.
13. Conflicts of interest; proceeds to benefit affiliates. As of
September 30, 1995, prior to the recapitalization of debt by SISC, the Company
owed SISC approximately $3.0 million and interest of $388,000. The total
advances to the Company include approximately $300,000 used to pay withholding
taxes and interest, $500,000 to fund the cash portion of the purchase price of
CSM and $330,000 for advances to Old CSM during the period from January to
June 1994. SISC, either directly or through Holdings, may in the future make
advances to the Company. As of September 30, 1995, SISC converted the accrued
interest into 1,125,000 shares of Common Stock, and exchanged $2.2 million for
2,210 shares of Series D Preferred Stock, which is redeemable under certain
conditions at $1,000 per share. The remaining $750,000 is represented by the
Company's 10% note due January 1997 or earlier upon completion of the
Company's initial public offering. SISC has agreed not to require any
payment from the proceeds of this Offering unless the over-allotment option is
exercised, in which event a portion of the proceeds from the exercise of the
over-allotment option may be used for such purposes.
Mr. Lewis S. Schiller, chairman of the board and a director of the
Company, is the chairman of the board of a number of other corporations,
including Consolidated and other companies owned or controlled by
Consolidated. As of May 31, 1996, Holdings, the largest stockholder of the
Company, owned approximately 78.0% of the outstanding Common Stock of the
Company and, as a result, has the ability to elect all of the directors of the
Company. Holdings was organized in June 1994 by SISC to hold SISC's equity
interest in the Company and CSM prior to the transfer of CSM stock to the
Company, which was effected at September 30, 1995. As a result of SISC's
stock ownership and Mr. Schiller's position as chairman of the board, SISC has
effectively determined the terms and conditions of any transactions between
the two companies, including the number and price of shares issued to Holding
and terms of warrants and other securities issued to SISC, and SISC and
Holdings continue to have this power. Mr. Schiller devotes only a limited
amount of his time to the business of the Company. Mr. Schiller does not have
an employment agreement with the Company; however, the Company has an
agreement with Trinity, a wholly-owned subsidiary of Consolidated, pursuant to
which the Company will pay Trinity fees of $15,000 per month for the three-
<PAGE> 25
year period commencing with the month in which the Company receives the
proceeds from this Offering. Prior to such time, no compensation or fees will
be paid or accrued to Mr. Schiller, Consolidated, SISC or any other subsidiary
of Consolidated. Pursuant to an employment agreement between Mr. Schiller and
Consolidated, Mr. Schiller has the right to purchase 10% of SISC's equity
position in its subsidiaries, including the Company, for 110% of SISC's cost.
Pursuant to this agreement, in December 1995 and January 1996, Mr. Schiller
exercised his option to purchase 373,507 shares of Common Stock. See "Certain
Transactions."
As of May 31, 1996, the Company owed its asset-based lender approximately
$960,000 under an accounts receivable financing arrangement. The proceeds of
this loan were used to pay $90,000 to the Company's bank, to pay $67,000 plus
interest to the holders of the December 1994 Interim Notes, for working
capital and for other corporate purposes. The Company's obligations to the
asset based lender are guaranteed by Messrs. Lewis S. Schiller and Leonard M.
Luttinger, chief executive officer and chief operating officer, respectively,
of the Company. In addition, two officers of CSM, including Mr. Anthony F.
Grisanti, chief financial officer of the Company, have issued their limited
guaranty to the lender. The limited guaranty is related only to the
regularity of the receivables. The Company does not believe that there is any
irregularity in any of its receivables.
The Company has an agreement with SMI pursuant to which the Company pays
SMI compensation of between $25,000 to $59,000 per month, for which SMI will
provide the services of Mr. Morgan from time to time on an as-needed basis and
up to four other persons to serve in management-level or other key positions
for the Company on a full-time basis. The agreement continues until December
31, 2000. The agreement also provides for the payment to SMI of 6% of smart
card and related revenues generated by the Company. Pursuant to the
agreement, the Company is to pay SMI fees of $250,000 for services in
connection with the Company's agreement with IBN, and $50,000 of such fees is
payable from the proceeds of this Offering. See "Use of Proceeds." See
"Certain Transactions" with respect to Outstanding Warrants issued to Mr.
Morgan and employees of SMI.
The holders of the Company's Series B Preferred Stock have the right,
following the completion of the Company's initial public offering, to demand
redemption of the Series B Preferred Stock at $1,200 per share. SISC, Mr. E.
Gerald Kay, a director, and Mr. Harris Freedman, a founder, hold 40, 20 and 20
shares, respectively, of Series B Preferred Stock and each of them would be
entitled to demand redemption of his Series B Preferred Stock for $1,200 per
share. The Series B Preferred Stock will be redeemed from the proceeds of
this Offering at a redemption price of $96,000, in which event past dividends
will be waived.
-13-
CSM borrowed funds from time to time from ACT, the parent of Old CSM. See
"Business -- Acquisition of CSM." Messrs. John F. Phillips, a director of the
Company and vice president of CSM, and Edward D. Bright, president of CSM, are
directors of ACT. As of March 31, 1996 and May 20, 1996, the Company owed ACT
$232,000 and $256,000, respectively. A portion of the proceeds of this
Offering will be used to pay such obligation.
Pursuant to employment, consulting and other agreements with officers and
other related parties, the total annualized defined payments to such persons
would range from $1.2 million to $1.6 million, of which $50,000 is to be paid
from the proceeds of this Offering. To the extent that the Company does not
<PAGE> 26
generate cash flow from operations sufficient to enable it to make such
payments from cash flow, a portion of the proceeds of this Offering allocated
to working capital may be used for such purposes. See "Use of Proceeds."
14. Continued control by SISC and management. At May 31, 1996, 80.3% of
the outstanding shares of Common Stock were owned by Holdings (78.0%) and Mr.
Lewis S. Schiller (2.3%), chief executive officer of the Company and of
Holdings, and 84.8% of such shares were owned by the Company's officers and
directors and their affiliates, including Holdings. Mr. Schiller, as the
chief executive officer of Consolidated, SISC and Holdings, has the right to
vote the shares owned by Holdings and SISC. If the shares owned by DLB, which
is controlled by Mr. Schiller's wife, are included, the percentage would be
90.5%. Upon the sale of the 562,500 Units offered hereby, and the issuance of
the 250,000 Units to the Selling Stockholders, Holdings and Mr. Schiller would
own 57.7% of the Common Stock, all officers and directors as a group would own
61.1% and all officers and directors and DLB would own 65.2%. In addition,
SISC holds Outstanding Warrants to purchase 1,300,000 shares of Common Stock
at $2.00 per share. Accordingly, SISC, which owns Holdings, and Mr. Schiller,
who is the chief executive officer of SISC, will continue to be able to elect
all of the directors and will thus be able to continue to control the Company.
15. Broad discretion as to use of proceeds; potential unspecified
acquisitions and change in use of proceeds. Approximately $2.2 million,
representing approximately 63.5% of the net proceeds of this Offering, are
allocated to working capital and other corporate purposes. Accordingly,
management will have broad discretion with respect to the expenditure of the
net proceeds of this Offering. Purchasers of the Units offered hereby will be
entrusting their funds to the Company's management, upon whose judgment the
investors must depend, with only limited information concerning management's
specific intentions. The Company may enter into joint ventures, acquisitions
or other arrangements, such as joint marketing arrangements and licensing
agreements, which the Company believes would further the Company's growth and
development. No assurance can be given as that any such agreements will
result in additional revenue or net income for the Company. See "Use of
Proceeds" and "Business Potential Business Agreements."
Notwithstanding its plan to develop its business as described in this
Prospectus, future events, including the problems, expenses, difficulties,
complications and delays frequently encountered by businesses, as well as
changes in the economic climate or changes in government regulations, may make
the reallocation of funds necessary or desirable. Any such reallocation will
be at the discretion of the Board of Directors. Accordingly, in the event
that the Company determines that it is unable to develop a profitable business
as described in this Prospectus, the Company may engage in other, unrelated
businesses and use a portion of the proceeds of the Offering for such purpose.
However, the Company has no such intention at this time. No assurance can be
given that any such businesses can or will be profitably operated.
16. No public market. Prior to this Offering, there has been no public
trading market for the Company's securities. Although the Company has applied
to have the Common Stock, Units and Warrants included in The Nasdaq SmallCap
Market, there can be no assurance that an active market in any of such
securities will develop or, if such a market develops, that it will be
sustained.
17. Arbitrary offering price and terms. The composition and price of the
Units and the terms of the Warrants offered hereby have been determined by
negotiations between the Company and the Underwriter, and do not necessarily
<PAGE> 27
bear any relation to the results of the Company's operations or its financial
condition or any other indicia of value.
18. Possible restrictions on market-making activities in Company's
securities. The Underwriter has advised the Company that it intends to make a
market in the Company's securities. Rule 10b-6 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), may prohibit the Underwriter
from engaging in any market-making activities with regard to the Company's
securities for the period from nine business days (or such other applicable
period as Rule 10b-6 may provide) prior to any solicitation by the Underwriter
of the exercise of Warrants until the later of the termination of such
solicitation, activity or the termination (by waiver or otherwise) of any
right that the Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation
-14-
As a result, the Underwriter may be unable to provide a market for the
Company's securities during certain periods while the Warrants are
exercisable. In addition, under applicable rules and regulations under the
Exchange Act, any person engaged in the distribution of the Selling Security
Holders' securities may not simultaneously engage in market-making activities
with respect to any securities of the Company for the applicable "cooling off"
period (at least two and possibly nine business days) prior to the
commencement of such distribution. Accordingly, in the event the Underwriter
is engaged in a distribution of the Selling Security Holders' securities, it
will not be able to make a market int he Company's securities during the
applicable restrictive period. Any temporary cessation of such market-making
activities could have an adverse effect on the market price of the Company's
securities. See "Selling Security Holders" and "Underwriting."
19. Possible delisting from The Nasdaq System and market illiquidity. In
order for the Common Stock, Units and Warrants to be included in The Nasdaq
SmallCap Market, the Company must, after giving effect to the completion of
this Offering, have a net worth of at least $2 million and total assets of at
least $4 million. The Company expects that it will meet the listing
requirements for The Nasdaq SmallCap Market upon completion of this Offering
and that the Company's Common Stock, Warrants and Units will be initially
included in The Nasdaq SmallCap Market. If the Company is unable to satisfy
Nasdaq's requirements for continued listing, the Common Stock, Warrants and
Units may be delisted from The Nasdaq SmallCap Market. In such event,
trading, if any, in such securities would thereafter be conducted in the over-
the-counter market in the so-called "pink sheets" or the Nasdaq's "Electronic
Bulletin Board." Consequently, the liquidity of the Company's securities
could be impaired, not only in the number of securities which could be bought
and sold, but also through delays in the timing of transactions, reduction in
security analysts' and the news media's coverage of the Company, and lower
prices for the Company's securities than might otherwise be attained.
A significant number of the Units may be sold to customers of the
Underwriter. Such customers may subsequently engage in the sale or purchase
of the securities through or with the Underwriter. Although they have no
obligation to do so, the Underwriter may become market makers and otherwise
effect transactions in securities of the Company, and, if they participate in
such market, may be dominating influences in the trading of the securities.
The prices and the liquidity of the securities may be significantly affected
by the degree, if any, of the participation of the Underwriter in such market,
should a market arise.
<PAGE> 28
20. Risks of low-priced stocks; penny stock regulations. If the
Company's securities were delisted from The Nasdaq SmallCap Market (See "Risk
Factors -- 19. Possible delisting of securities from The Nasdaq System and
market illiquidity") they may become subject to Rule 15g-9 under the Exchange
Act, which imposes additional sales practice requirements on broker-dealers
which sell such securities to persons other than established customers and
institutional accredited investors. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the rule may affect the ability of broker-dealers to sell
the Company's Common Stock and Warrants and may affect the ability of
purchasers in this Offering to sell any of the Common Stock or Warrants
acquired pursuant to this Prospectus in the secondary market.
The Commission's regulations define a "penny stock" to be any equity
security that has a market price (as therein defined) less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. The penny stock restrictions will not apply to the
Company's Common Stock, Units and Warrants if the Common Stock is listed on
The Nasdaq SmallCap Market and has certain price and volume information
provided on a current and continuing basis or meet certain minimum net
tangible assets or average revenue criteria. There can be no assurance that
the Company's securities will qualify for exemption from these restrictions.
If the Company's Common Stock or Warrants were subject to the rules on penny
stocks, the market liquidity for the Common Stock or Warrants could be
severely adversely affected.
21. Potential adverse effect of redemption of Warrants. Commencing one
year from the date of this Prospectus, with the consent of the Underwriter,
the Warrants may be redeemed by the Company at a redemption price of $.05 per
Warrant upon not more than 60 nor less than 30 days' notice if the closing
price of the Common Stock is at least $9.00, subject to adjustment, during the
20 consecutive trading days ending within ten days of the date of the Warrants
are called for redemption. Redemption of the Warrants could force the holders
to exercise the Warrants and pay the exercise price therefor at a time when it
may be disadvantageous for the holder to do so, to sell the Warrants at the
then current market price when they might otherwise wish to hold the Warrants,
or to accept the redemption price, which, at the time the Warrants are called
for redemption, is likely to be substantially less than the market value of
the Warrants. The Company will not call the Warrants for redemption except
pursuant to a currently effective prospectus and registration statement. See
"Description of Securities Series A Redeemable Common Stock Purchase
Warrants."
22. Current prospectus and state registration required to exercise
Warrants. Holders of the Warrants will only be able to exercise the Warrants
if (a) a current prospectus under the Securities Act relating to the shares of
Common Stock
-15-
issuable upon exercise of the Warrants is then in effect and (b) such
securities are qualified for sale or exemption from qualification under the
applicable securities laws of the states in which the various holders of
Warrants reside. Although the Company has undertaken to use its best efforts
to maintain the effectiveness of a current prospectus covering the Common
Stock underlying the Warrants, and may not call the Warrants for redemption
unless there is a current and effective registration statement covering the
issuance of the Common Stock upon exercise of the Warrants, there can be no
<PAGE> 29
assurance that the Company will be able to do so. Pursuant to Section
10(a)(3) of the Securities Act, this Prospectus, unless amended or
supplemented in accordance with the rules and regulations of the Commission
pursuant to the Securities Act, may not be used by the Company in connection
with the exercise of any Warrants subsequent to nine months from the date of
this Prospectus. Prior to the expiration of nine months from the date of this
Prospectus, it may be necessary to amend or supplement this Prospectus under
certain conditions, in which event the Warrants could not be exercised prior
to the date of the amended Prospectus or supplement. Unless there is an
effective and current registration statement covering the issuance of the
Common Stock upon exercise of the Warrants, the Company will not accept
payment for, or issue Common Stock with respect to, the exercise of any
Warrants, and any payments made by a Warrant holder will be refunded by the
Company. The value of the Warrants may be greatly reduced if a current
prospectus covering the Common Stock issuable upon the exercise of the
Warrants is not kept effective or if such securities are not qualified or
exempt from qualification in the states in which the holders of Warrants
reside. See "Description of Securities Series A Redeemable Common Stock
Purchase Warrants."
The Company has registered or qualified the Warrants for sale in a limited
number of states. Although the Company is not aware of any states which
prohibit the registration or qualification of securities of the type offered
by the Company and anticipates that it will qualify for available after-market
exemptions in a majority of states within several months after the completion
of the Offering, there can be no assurance that an exception permitting the
exercise of the Warrants will be available in any jurisdiction other than
those in states which the Common Stock and Warrants were initially registered
or are exempt from registration at the time a holder seeks to exercise
Warrants.
23. No Common Stock dividends anticipated. The Company presently intends
to retain future earnings, if any, in order to provide funds for use in the
operation and expansion of its business and, accordingly, does not anticipate
paying cash dividends on its Common Stock in the foreseeable future. The
Company is required to pay annual dividends of $1,600 per annum, commencing
March 1, 1994, with respect to the Series A Preferred Stock and of $5,760 per
annum, commencing March 1, 1994, with respect to the Series B Preferred Stock,
which may be paid in cash or in shares of Common Stock. The Company did not
pay the dividends due March 1, 1994, 1995 or 1996. As of the date of this
Prospectus, the aggregate dividend arrearages were approximately $22,000. The
Series B Preferred Stock is to be redeemed from the proceeds of this Offering,
and payment of accrued dividends is being waived. Dividends on the 1,210
shares of Series D Preferred Stock are payable at the annual rate of $72,600
in equal semi-annual installments commencing with the first April 1 or October
1 following the closing of this Offering. Dividends on the Series D Preferred
Stock may be paid either in cash or in shares of Common Stock.
24. Dilution. A purchaser of Common Stock in this Offering will
experience immediate and substantial dilution of $3.91, or 97.8%, from the
initial public offering price of the Common Stock issued pursuant to this
Prospectus of $4.00 per share (assuming no value is allocated to the Warrant
included in the Units). See "Dilution."
25. Shares eligible for future sale. All of the presently issued and
outstanding shares of Common Stock and preferred stock are "restricted
securities" as that term is defined under Rule 144 promulgated under the
Securities Act. If a public market develops for the Company's Common Stock,
the Company is unable to predict the effect that sales made under Rule 144 or
<PAGE> 30
other sales may have on the then prevailing market price of the Common Stock.
Of the 4,136,253 presently outstanding shares of Common Stock, 896,994 shares
of Common Stock, together with the 63,936 shares of Common Stock issuable upon
conversion of the Series A and B Preferred Stock, will become eligible for
sale pursuant to Rule 144 commencing 90 days after the effective date of the
registration statement of which this Prospectus forms a part. The remaining
shares of Common Stock will become eligible for sale pursuant to Rule 144 in
September 1997 as to 1,755,000 shares held by SISC, in December 1997 to
February 1998 as to the remaining 1,484,259 shares, of which 1,012,500 shares
are owned by Holdings. The holders of substantially all of the outstanding
Common Stock have agreed that they will not sell their shares for two years
from the date of this Prospectus without the prior approval of the
Underwriter.
26. Shares issuable pursuant to warrants, options and Preferred Stock;
registration rights. The Company may issue stock grants or options to
purchase up to an aggregate 511,000 shares of Common Stock pursuant to its
1993 Long Term Incentive Plan, of which 357,756 shares are subject to
outstanding options. The Company has issued Outstanding Warrants to purchase
2,516,250 shares of Common Stock at an exercise price of $2.00 per share and
637,500 shares of Common Stock at an exercise price of $5.00 per share, in
each case commencing six months after the date of this Prospectus or earlier
with the consent of the Company and the Underwriter. During the term of such
options and warrants, the holders will have the
-16-
opportunity to profit from a rise in the market price of the Common Stock, and
their exercise may dilute the book value per share of the Common Stock. The
Company has provided certain piggyback registration rights to the holders of
options to purchase 151,920 shares of Common Stock granted by SISC in
connection with the acquisition of CSM. However, the holders of such stock
and Outstanding Warrants have agreed not to sell the Common Stock issuable
upon such conversion or exercise for two years from the date of this
Prospectus without the prior approval of the Underwriter. The holders of
Outstanding Warrants have demand and piggyback registration rights commencing
two years from the date of this Prospectus or earlier with the consent of the
Underwriter. The Company will bear the cost of preparing such registration
statements but will not receive any proceeds from the sale of shares of Common
Stock pursuant thereto other than payment of the exercise price with respect
to the warrants issued by the Company. The existence of these registration
rights, as well as the sale of shares of Common Stock pursuant to registration
statements which the Company may be required to prepare, may have a depressive
effect on the price of the Common Stock in the open market. In addition, the
existence of such warrants and options and the registration rights referred to
above may adversely affect the terms on which the Company can obtain
additional equity financing. The holders of warrants are likely to exercise
them at a time when the Company would otherwise be able to obtain capital on
terms more favorable than those provided by the warrants.
27. Potential adverse impact of Preferred Stock on rights of holders of
Common Stock. The Company's certificate of incorporation authorizes the
issuance of so-called "blank check" preferred stock with the board of
directors having the right to determine the designations, rights, preferences
and privileges of the holders of one or more series of Preferred Stock.
Accordingly, the board of directors is empowered, without stockholder
approval, to issue Preferred Stock with voting, dividend, conversion,
liquidation or other rights which could adversely affect the voting power and
equity interest of the holders of Common Stock. The Preferred Stock, which
<PAGE> 31
could be issued with the right to more than one vote per share, could be
utilized as a method of discouraging, delaying or preventing a change of
control of the Company. The possible impact on takeover attempts could
adversely affect the price of the Company Stock. Although the Company has no
present intention to issue any additional shares of Preferred Stock or to
create any additional series of Preferred Stock, the Company may issue such
shares in the future.
28. Inexperience of the Underwriter. The Underwriter has been actively
engaged in the securities brokerage and investment banking business since
1994. However, the Underwriter has engaged in only limited underwriting
activities, and this Offering is only the third public offering in which the
Underwriter has acted as the sole or managing underwriter. There can be no
assurance that the Underwriter's limited experience as an underwriter of
public offerings will not adversely affect the offering of the Units, the
subsequent development of a trading market, if any, or the market for and
liquidity of the Company's securities. Accordingly, purchasers of the Units
offered hereby may suffer a lack of liquidity in their investment or a
material diminution of the value of their investment.
DILUTION
The net tangible book value of the Company's Common Stock at March 31,
1996 was approximately $(.73) per share. All share and per share information
included in this Prospectus has been restated to reflect a 2,000 for one
Common Stock recapitalization effective August 1993, a .576 for one reverse
split effective in October 1993 and a three-for-four reverse split effective
in February 1996. Net tangible book value represents the amount of the
Company's tangible assets reduced by the amount of its liabilities and the
liquidation preference of the Series A, B and D Preferred Stock. Without
taking into effect any change in net tangible book value of the Company after
March 31, 1996, other than as a result of (i) the sale of the 562,500 Units
offered pursuant to this Prospectus (at a per share price of $4.00, with no
value ascribed to the Warrant included in the Unit) after deducting fees and
other estimated expenses of the Offering, (ii) the issuance of 250,000 Units
to the holders of the January 1996 Interim Notes and 25,000 shares of Common
Stock to the Company's asset-based lender for no cash consideration and (iii)
the redemption of the Series B Preferred Stock, the Company's net tangible
book value as of March 31, 1996 would have been approximately $.09 per share.
This amount represents an immediate increase in net tangible book value per
share of approximately $.82 to the present stockholders and an immediate
dilution (the difference between the offering price of the shares and the net
tangible book value per share after the Offering) per share of approximately
$3.91 to the purchasers of the Common Stock.
-17-
The following table illustrates the dilution of one share of Common Stock as
of March 31, 1996:
Public offering price per share of Common Stock $4.00
Net tangible book value per share at March 31, 1996 $(.73)
Increase per share attributable to sale of the Units
offered hereby .82
---
<PAGE> 32
Pro forma net tangible book value per share after Offering .09
----
Dilution to public investors $3.91*
=====
* If the Underwriter exercises the over-allotment option in full, the pro
forma net tangible book value would be $.18 per share of Common Stock,
resulting in an increase in the net tangible book value per share of $.89
and dilution to the public investors of $3.82 per share.
The following tables summarize, as of March 31, 1996, (a) the number of
shares of Common Stock purchased from the Company, the total cash
consideration and the average price per share paid to the Company for the
Common Stock outstanding prior to this Offering, (b) the issuance of 500,000
shares of Common Stock included in the 250,000 Units to be issued to the
Selling Stockholders, who are the holders of the January 1996 Interim Notes
for no cash consideration, and (c) the number of shares and consideration to
be paid by the public investors for the 1,125,000 shares of Common Stock
included in the 562,500 Units to be sold in this Offering:
Total Percent
Shares of Percent Cash of Total Average
Common of Consid- Consid- Price
Stock Total eration eration Per
Purchased Shares Paid Paid Share
--------- ------ ---------- -------- -------
Existing Stockholders(1) 4,136,253 71.8% $1,418,000 24.0% $ .34
Selling Stockholders(2) 500,000 8.7 -0- 0.0 $ .00
Public Investors 1,125,000 19.5 4,500,000 76.0 $4.00
--------- ------ --------- ------ -----
Total 5,761,253 100.0% $5,918,000 100.0%
========= ====== ========== ======
(1) For purposes of this table, no value is given to (a) the consideration
received for shares of Common Stock issued for services rendered at the time
of the Company's organization, (b) the consideration received in respect of
the guarantee of the Company's obligations under the December 1994 Interim
Notes or (c) the shares of Consolidated common stock issued in connection with
the acquisition of CSM or in connection with the December 1994 Interim Notes.
(2) Represents shares of Common Stock being issued to the Selling
Stockholders, who are the holders of the January 1996 Interim Notes, pursuant
to the Registration Statement of which this Prospectus forms a part. See
"Interim Financings" and "Selling Security Holders."
USE OF PROCEEDS
Pursuant to employment, consulting and other agreements with officers and
other related parties, the total annualized defined payments to such persons
would range from $1.2 million to $1.6 million, of which $50,000 is to be paid
from the proceeds of this Offering. A discussion of these obligations is set
forth after the footnotes to the Use of Proceeds table. To the extent that
the Company does not generate cash flow from operations sufficient to enable
it to make such payments from cash flow, a portion of the proceeds of this
Offering allocated to working capital may be used for such purposes.
<PAGE> 33
The Company intends to utilize the net proceeds from the sale of the Units
issued pursuant to this Prospectus, estimated at approximately $3.5 million
(assuming the Underwriter's over-allotment option is not exercised),
substantially as follows:
(a) Approximately $870,000 (24.7% of the net proceeds) to pay principal
and interest on the Interim Notes, December 1994 Interim Notes and January
1996 Interim Notes held by unrelated parties, of which notes in the principal
amount of $133,000 plus interest and an extension payment are guaranteed by an
affiliate of the Company.(1)
-18-
(b) Approximately $270,000 (7.7%) to pay ACT for loans made to the
Company.(2)
(c) Approximately $96,000 (2.7%) to redeem the Series B Preferred Stock.(3)
(d) $50,000 (1.4%) to SMI on account of fees due to SMI in connection with
the purchase of the SATC Software and the IBN agreement.(4)
(e) The balance of approximately $2.2 million (63.5%) for working capital
and other corporate purposes, including the elimination of the Company's
working capital deficiency, marketing and product development and the possible
acquisition of one or more businesses, product lines or software products in
the computer network and related business and the payment of a $25,000 fee to
the Company's asset-based lender and accrued dividends on the Series A
Preferred Stock which were approximately $5,500 as of March 31, 1996.(5)
(1) Interim Notes in the principal amount of $216,000 were due in October and
November 1993. The Company has paid an Interim Note in the amount of $27,000,
and SISC has purchased an Interim Note in the principal amount of $54,000.
December 1994 Interim Notes in the principal amount of $200,000 were issued in
December 1994, of which $67,000 has been paid. The Company is in default with
respect to the remaining $133,000 principal amount of December 1994 Interim
Notes and $135,000 principal amount of Interim Notes. In addition, the
Company owes a $12,500 extension payment with respect to the December 1994
Interim Notes. January 1996 Interim Notes in the principal amount of $500,000
were issued in January 1996. The proceeds from these notes were used to make
the initial $325,000 payment pursuant to the agreement to acquire the SATC
Software and for working capital and other corporate purposes, including
expenses relating to this Offering. See "Certain Transactions" and "Interim
Financings."
(2) This money represents demand loans made by ACT for working capital. The
loans bear interest at 10% per annum. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions." Although ACT is independent of the Company, because Mr. John
Phillips is a director of both companies, it may be deemed an affiliate of the
Company.
(3) See "Description of Securities -- Series B Preferred Stock." Three
stockholders Holdings, which holds 40 shares, Mr. E. Gerald Kay, a
director, and one other stockholder, each of whom holds 20 shares, of Series B
Preferred Stock -- have the right to demand redemption of the Series B
Preferred Stock following the completion of this Offering. The holders of the
Series B Preferred Stock have advised the Company that they intend to demand
redemption. The Company will pay $96,000 from the proceeds of this Offering
<PAGE> 34
to redeem the Series B Preferred Stock, and the unpaid dividends will be
waived. Holdings and Mr. Kay may be deemed affiliates of the Company.
(4) The balance of the $250,000 fee is payable from the proceeds of the over-
allotment option, if exercised, or from cash flow, and is due in any event 13
months from the date of this Prospectus. See "Certain Transactions." Because
Mr. Storm Morgan, a director of the Company, is the sole stockholder, a
director and officer of SMI, SMI may be deemed an affiliate of the Company.
(5) To the extent that the principal amount of the Company's obligations to
its asset-based lender at the time of the closing of this Offering exceed
$750,000, a portion of the proceeds allocated to working capital may be used
to reduce the principal amount of such borrowings to $750,000. At May 31,
1996, the outstanding balance due the asset-based lender was $960,000.
The Company has employment agreements with five executive officers of the
Company and CSM, pursuant to which it is paying base salaries during 1996 at
the aggregate annual rate of $442,500. In addition, the Company is paying its
president at the annual rate of $52,000, and it has an agreement with Trinity
pursuant to which the Company will pay Trinity $180,000 per year during the
three-year period commencing on first day of the month in which the Company
receives the proceeds from this Offering. The aggregate annual payments under
such agreements and arrangements at the present rates of compensation are
$674,000. The Company's agreement with SMI requires monthly payments of
$25,000 to $59,000 per month, for which SMI will provide the services Mr.
Morgan from time to time on an as-needed basis and up to four other persons to
serve in management-level or other key positions for the Company on a full-
time basis. The agreement continues
-19-
until December 31, 2000. If the monthly payments to SMI are included, the
total compensation payable to such persons at the present annual rate ranges
from $974,000 (based on $25,000 per month payable to SMI) to $1.4 million
(based on monthly payment of $59,000 to SMI), in addition to 6% of the
Company's revenue from smart card and related services which are payable to
SMI. To the extent that the Company does not generate sufficient cash flow
from its operations, a portion of the proceeds of this Offering may be used
for such purposes. Furthermore, if the fee payable to SMI in connection with
the Company's agreement with IBN is included, the total annualized defined
payments to such persons would range from $1.2 million to $1.6 million, of
which $50,000 is payable from the proceeds of this Offering, and a portion of
the proceeds of this Offering allocated to working capital may be used to pay
the balance of such $250,000 fee in the event that the over-allotment option
is not exercised and the Company does not generate sufficient cash flow to
provide it with the funds to make such payment, which is due not later than 13
months from the date of this Prospectus. See "Certain Transactions."
The foregoing represents the Company's best estimate of its allocation of
the proceeds of this Offering based upon the present state of its business,
operations and plans, current business conditions and the Company's evaluation
of the market for the CarteSmart System and health information system and
services as well its estimate of the time and effort required to develop new
products, including enhancements for the SATC Software. Management will have
broad discretion to determine the use of a substantial portion of the proceeds
of this Offering, and conditions may develop which could cause management to
reallocate proceeds from the categories listed above, including difficulties
encountered in developing and implementing its proposed expanded marketing
program, problems in the operation of the CarteSmart System, other problems
<PAGE> 35
encountered in the Company's business and changes in government policy, none
of which can be predicted with any degree of certainty. Furthermore, future
events, including the problems, expenses, difficulties, complications and
delays frequently encountered by new businesses, as well as changes in the
economic climate and changes or anticipated changes in government regulations,
may make the reallocation of funds necessary or desirable. Any such
reallocation will be at the discretion of the Board of Directors.
Furthermore, in the event that the Company determines that it is unable to
develop a profitable business as described in this Prospectus, the Company may
use the proceeds from this Offering to engage in other unrelated businesses,
although it has no such intention at this time.
The Company believes that the net proceeds from this Offering will be
sufficient to satisfy the Company's cash requirements for at least twelve
months following the date of this Prospectus. However, it is possible that
conditions may arise as a result of which the Company may require additional
capital prior to one year from the date of this Prospectus, and no assurance
can be given that the Company will be able to obtain any or adequate funds
when required or that any funds available to it will be on reasonable terms.
The failure to obtain necessary funds could result in the reduction or
cessation of operations by the Company.
The Company may use a portion of the proceeds of this Offering in
connection with joint ventures, acquisitions or other arrangements, such as
joint marketing arrangements and licensing agreement, which management deems
necessary or desirable in connection with the development of the Company's
business and related activities. Although the Company has engaged in
negotiations and is performing a due diligence investigation with respect to
such a transaction, it has not entered into any letters of intent or
agreements with respect to any such arrangements or transactions. See
"Business Potential Business Agreements."
In the event that the Underwriter exercises its over-allotment option, a
portion of the proceeds from such exercise is expected to be used to make a
payment on the Company's $750,000 note to SISC and the fee due to SMI.
Pending the application of the funds as described above, said funds will
be invested in short term interest bearing deposits and securities.
-20-
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to reflect (i) the sale of the 562,500 Units
offered hereby, (ii) the issuance of 250,000 Units to the holders of the
January 1996 Interim Notes and 25,000 shares to the Company's asset-based
lender, and (iii) the application of a portion of the proceeds from this
Offering to pay short-term debt and redeem the Series B Preferred Stock.
<PAGE> 36
March 31, 1996
------------------------------
Actual As Adjusted
------------- ---------------
Short-term debt:
Demand loans from related party(1) $ 232,000
Note payable -- asset-based lender(2) 972,000 $ 750,000
Interim financing notes(3) 768,000
Bank loan and cash overdraft payable(4) 136,000 136,000
Capital lease obligations --
current maturities(5) 168,000 168,000
---------- ----------
$2,276,000 $1,054,000
========== ==========
Long-term debt:
10% Note to related party(6) $ 750,000 $ 750,000
Capital lease obligations --
long-term portion(5) 29,000 29,000
---------- ----------
779,000 779,000
Redeemable Preferred Stock:
80 shares are issued, outstanding and
designated as Series B 6% Redeemable
Preferred Stock, with certain optional
and mandatory redemption rights(7) 96,000 --
---------- ----------
Stockholders' equity:
Preferred Stock, par value $.01 per share,
3,000,000 shares authorized, of which:
400 shares are issued, outstanding and
designated as Series A 4% Convertible
Redeemable Preferred Stock, with certain
optional redemption rights(8) -- --
3,000 shares authorized and 1,210 shares
issued, outstanding and designated as
Series D 6% Redeemable Cumulative
Preferred Stock, with certain optional
redemption rights(9) -- --
Additional paid-in capital --
Preferred Stock 1,250,000 1,250,000
Common Stock, par value $.01 per share,
15,000,000 shares authorized, 4,136,253
shares issued and outstanding and 5,786,253
outstanding as adjusted(10) 41,000 58,000
Additional paid-in capital -- Common Stock(11) 4,268,000 9,456,000
Accumulated deficit(11) (5,071,000) (6,751,000)
----------- -----------
Stockholders' equity 488,000 4,013,000
----------- -----------
Total capitalization $1,363,000 $4,792,000
========== ==========
<PAGE> 37
(1) Represents demand loans made by ACT to the Company. See "Use of
Proceeds," "Certain Transactions" and Note 5 of Notes to Network Technologies,
Inc. Consolidated Financial Statements.
-21-
(2) Represents secured notes due to an asset-based lender, which are
guaranteed by officers of the Company. The amount outstanding on May 31, 1996
was $960,000. See Note 6 of Notes to Netsmart Technologies, Inc. Consolidated
Financial Statements.
(3) See "Interim Financings" and Note 6 of Notes to Netsmart Technologies,
Inc. Consolidated Financial Statements. The amount outstanding reflects
Interim Notes of $135,000 and December 1994 Interim Notes of $133,000. In
addition, the Company owes a $12,500 extension fee to the holders of the
December 1994 Interim Notes.
(4) Represents the balance due on a secured bank loan incurred by Old CSM
prior to the acquisition of CSM. The loan is treated as a demand loan and
bears interest at prime plus 1 1/2%. At May 31, 1996, the outstanding balance
was $19,000. See Note 6 of Notes to Netsmart Technologies, Inc. Consolidated
Financial Statements.
(5) See Note 9 of Notes to Netsmart Technologies, Inc. Consolidated Financial
Statements.
(6) This note to SISC is due in January 1997, but is payable from the proceeds
of the Company's initial public offering. SISC has agreed (a) to extend the
stated maturity date to April 1, 1997 and (b) not to require any payment
unless the over-allotment option is exercised. See "Use of Proceeds,"
"Certain Transactions" and Note 5 of Notes to Netsmart Technologies, Inc.
Consolidated Financial Statements.
(7) Represents a series of Preferred Stock which have mandatory redemption
provisions or are redeemable on demand by the holder. The amount shown
represents the liquidation preference. See "Description of Securities --
Series B Preferred Stock" for information concerning the rights, preferences
and privileges of the holders of the Series B Preferred Stock, including the
right to demand redemption following completion of this Offering.
(8) The liquidation preference of the Series A Preferred Stock is $100 per
share, or an aggregate of $40,000. The redemption price is $1,000 per share,
or an aggregate of $400,000. See "Description of Securities Series A
Preferred Stock" for information concerning the rights, preferences and
privileges of the holders of the Series A Preferred Stock.
(9) The liquidation preference of the Series D Preferred Stock is $1 per
share. The redemption price is $1,000 per share, or an aggregate of
$1,210,000.
(10) Does not include an aggregate of 3,753,687 shares of Common Stock
reserved as follows: (a) 3,153,750 shares issuable upon exercise of the
Outstanding Warrants, (b) 511,000 shares issuable upon the grant of options,
rights or other equity based incentives provided pursuant to the Company's
1993 Long Term Incentive Plan, (c) 43,200 shares issuable upon conversion of
the outstanding shares of Series A Preferred Stock, (d) 20,737 shares issuable
upon conversion of the outstanding shares of Series B Preferred Stock, and (e)
25,000 shares issuable to the Company's asset-based lender. In addition,
there are reserved (i) 562,500 shares issuable upon exercise of the Warrants
included in the Units offered by this Prospectus, (ii) 253,125 shares of
<PAGE> 38
Common Stock for issuance upon exercise of the Underwriter's over-allotment
option and upon exercise of Warrants issuable upon exercise of such over-
allotment option, (iii) 168,750 shares of Common Stock for issuance upon
exercise of the Underwriter's Options and exercise of Warrants issuable upon
exercise of the Underwriter's Options. See "Certain Transactions,"
"Description of Securities" and "Underwriting."
(11) Reflects increase of $1,680,000 in additional paid-in capital and in
accumulated deficit arising from the issuance of 250,000 Units to the Selling
Stockholders and 25,000 shares to the Company's asset-based lender.
See "Business Property" and Notes 9 and 11 of Notes to Netsmart
Technologies, Inc. Consolidated Financial Statements for information
concerning the Company's long term lease obligations.
-22-
NETSMART TECHNOLOGIES, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Set forth below is selected financial data with respect to the Company for
the three months ended March 31, 1996 and 1995, the years ended December 31,
1995, 1994 and 1993 and the period from inception (September 9, 1992) to
December 31, 1992. The selected financial data has been derived from the
financial statements which appear elsewhere in this Prospectus. The report of
the Company's independent accountants includes an explanatory paragraph
stating that there is substantial doubt as to the ability of the Company to
continue as a going concern. The unaudited financial data for the interim
periods reflect, in the opinion of management, all adjustments (which include
only normal recurring adjustments) necessary to present fairly the data for
such periods. The results of operations for interim periods are not
necessarily indicative of operating results for the entire year This data
should be read in conjunction with the financial statements of the Company and
the related notes which are included elsewhere in this Prospectus.
<PAGE> 39
Statement of Operations Data:
- ------------------------------
September
Three Months Ended Year Ended 9, 1992
March 31, December 31, (Inception)
------------------ ---------------------- December
1996 1995 1995 1994 1993 31, 1992
---- ---- ---- ---- ---- --------
Revenue $2,560 $1,427 $7,382 $2,924 $ 57 $ --
Net income (loss) 76 (558) (2,850) (1,751) (433) (113)
Net income (loss)
per share of Common
Stock .02 (.12) (.59) (.36) (.09) (.02)
Weighted average
number of shares
outstanding 4,822 4,822 4,822 4,822 4,763 4,763
Balance Sheet Data:
- -------------------
December 31,
----------------------------
March 31, 1996 1995 1994 1993
-------------- ---- ---- ----
Working capital
(deficiency) $(2,837) $(2,562) $(4,037) $(938)
Total assets 7,674 6,390 7,193 585
Total liabilities 7,090 5,887 6,342 938
Redeemable Preferred
Stock 96 96 96 96
Accumulated deficit (5,071) (5,147) (2,297) (546)
Stockholders' equity
(deficiency) 488 407 755 (449)
-23-
<PAGE> 40
NETSMART TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Results of Operations
Three Months Ended March 31, 1996 and 1995
The Company's revenue for the three months ended March 31, 1996 (the
"March 1996 period") was $2.6 million, an increase of $1.1 million, or 79%,
from the revenue for the three months ended March 31, 1995 (the "March 1995
period"), which was $1.4 million. Approximately $933,000 of the increase in
revenue reflects revenue generated pursuant to the Company's agreement with
IBN. IBN represented the Company's most significant customer for the March
1996 period, accounting for approximately 36.4% of revenue for the quarter.
Furthermore, through March 31, 1996, IBN has generated revenue of $1.4
million, or approximately 89.8% of the Company's total revenue from SmartCard
Systems during the March 1996 period and the year ended December 31, 1995, on
a combined basis. The revenue generated to date includes approximately
$200,000 of the guaranteed royalties. As of March 31, 1996, the contract was
more than 75% completed. Following completion of the contract, the Company
anticipates that it will continue to receive royalty and maintenance revenue
from IBN. The Company intends to expand its marketing effort for its
CarteSmart System; however, at March 31, 1996, the Company did not have any
significant contracts for the CarteSmart System.
Revenue from the Company's health information systems continued to
represent the Company's principal source of revenue during the March 1996
period, accounting for $1.6 million, or 63.2% of revenue. Except for revenue
from the IBN contract, the largest components of revenue for the March 1996
period were data center revenue and turnkey systems, which increased to
$481,000 and $410,000, respectively, in the March 1996 period from $420,000
and $387,000, respectively, in the March 1995 period, reflecting increases of
14.5% and 6.1%, respectively. Maintenance revenue increased to $289,000 in
the March 1996 period from $252,000 in the March 1995 period, a 14.6%
increase. Revenue from third party hardware and software decreased to
$268,000 from $301,000 in the March 1995 period, a decrease of 11.0%. Sales
of third party hardware and software are made only in connection with sales of
turnkey systems. License revenues increased to $168,000 in the March 1996
period from $53,000 in the March 1995 period. The license revenue reflects
the sale of three systems in the March 1996 period as contrasted with two
systems in the March 1995 period. License revenue is generated as part of a
sale of a turnkey system pursuant to a contract or purchase order that
includes the development of a turnkey system and maintenance. The Company
believes that the increase in installations at March 31, 1996 from the prior
year should enable the Company to increase the maintenance revenue in future
periods.
Although revenue from contracts from government agencies represented 30%
of revenue for the three months ended March 31, 1996, a decrease from the 54%
for the year ended December 31, 1996, the Company believes that such contracts
will continue to represent an important part of its business, particularly its
health information systems business. During the three months ended March 31,
1996, contracts from government agencies accounted for approximately 47% of
its revenue from health information systems. The ability of the Company to
generate revenue from both CarteSmart Systems and from its government
contracts will continue to have a material effect upon its ability to be
profitable. The Company believes that its CarteSmart System could be a source
of additional revenue from existing customers, including government agencies
<PAGE> 41
and entitlement programs. However, no assurance can be given as to the
ability of the Company to generate revenue at a level above its expenses, in
particular the expenses due to related parties as discussed in "Use of
Proceeds" and "Certain Transactions."
Gross profit increased to $662,000 in the March 1996 period from $317,000
in the March 1995 period, a 109% increase, which reflected an increase in the
gross margin to 25.8% in the March 1996 period from 22.2% in the March 1995
period. The improved margin reflects the inclusion of CarteSmart revenue, on
which the Company realized a higher margin than on its health information
systems and services. In addition, the sale of third party hardware and
software generally reflects a lower gross margin than the Company's other
products and services. Accordingly, the decline in revenue from third party
hardware and software, both in terms of revenue and percentage of revenue, had
a positive effect upon the Company's gross margin.
Selling, general and administrative expenses were $455,000 for the March
1996 period, a decrease of 23.3% from $593,000 for the March 1995 period. The
decline reflected a reduction in executive compensation and a reduction in
staff. A significant portion of the Company's payments to SMI at the rate of
$59,000 per month were related to the IBN agreement and, accordingly, were
included in cost of revenue. Amortization of customer lists was $78,000 in
the March 1996 period, compared with $48,000 in the March 1995 period. At
December 31, 1995, the Company changed the amortization of customer lists from
20 years to twelve years. The Company believes that the change in the life of
the customer list
-24-
reflects frequent changes which have occurred in the software industry and are
likely to occur in the future and which may affect the cash flow to be
generated by the customer lists purchased in connection with the acquisition
of CSM.
During the March 1996 period, the Company did not incur any research and
development expenses, since the personnel who had been engaged in such
activities were reassigned to work on the IBN contract, and, as a result,
their salaries and related expenses were included as cost of revenue. During
the March 1995 period, the Company incurred research and development expenses
of $156,000.
Interest expense was $126,000 in the March 1996 period, an increase of
$56,000, or 80.0%, from the interest expense for the March 1995 period. The
increased interest reflects higher borrowing levels pursuant to the Company's
agreement with its asset-based lender. The most significant component of the
interest on an ongoing basis is the interest payable to the Company's asset-
based lender, on which it pays interest equal to the greater of 18% per annum
or prime plus 8% plus a fee of 1% of the face amount of the invoice. The debt
restructure whereby at September 30, 1995, SISC exchanged more than $2 million
in debt for shares of Series D Preferred Stock and the subsequent exchange by
SISC of a portion of such preferred stock for Common Stock will have the
effect of reducing the interest payable by the Company, which reduction will
be offset to some extent by dividends payable to SISC with respect to the
Series D Preferred Stock. However, the $72,600 annual dividends payable on
the 1,210 shares of Series D Preferred Stock will be significantly less than
the interest paid on the debt. Furthermore, the Company believes that upon
completion of this Offering, it may be able to reduce outstanding debt, and it
will seek to obtain better financing terms than were available to it prior to
<PAGE> 42
the Offering, although no assurance can be given that the Company will be able
to negotiate more favorable financing terms.
As a result of the foregoing factors, the Company generated net income of
$76,000, or $.02 per share, for the March 1996 period, as compared with a loss
of $558,000, or $.12 per share, for the March 1995 period.
The Company is addressing its continuing losses through the development
and implementation of an integrated marketing plan for both its CarteSmart
System and health information systems and services and the development of
enhancements to its health information systems and the development and
implementation of a marketing plan directed at the financial services industry
and educational institutions. The Company has obtained its initial contracts
for its products in both areas with its agreements with IBN (financial
services) and VCU (educational institutions). Furthermore, it believes that
the acquisition, through a joint venture corporation, of the SATC Software,
and the further development of such software will provide it with a
significant product for the financial services industry. However,
notwithstanding the Company's product development and marketing efforts,
losses may continue, and no assurance can be given that the Company will be
successful in these efforts.
Pursuant to the subscription agreements by which the Selling Stockholders
purchased the January 1996 Interim Notes, the Company is issuing to the
Selling Stockholders an aggregate of 250,000 Units. In addition, the Company
is to issue 25,000 shares of Common Stock as a fee to its asset-based lender.
As a result of these issuances, the Company will incur at the time of such
issuances, which will be on or about the closing of this Offering, financing
costs of $1.6 million and $80,000, respectively, which reflect the value of
such securities and which will have a material impact upon the results of the
Company's operations for 1996.
Years Ended December 31, 1995 and 1994
The results of the Company's operations for the year ended December 31,
1995 are not comparable with the results of operations for 1994 since the
acquisition of CSM was effective July 1, 1994, and the results of operations
for 1994 include the CSM business only from such date.
The Company's revenue for 1995 was $7.4 million, representing an increase
of 152% from the revenue of the Company for 1994 of $2.9 million. The
increase reflected the inclusion of CSM's operations for only the last six
months of the year. Revenue from health information systems and services
accounted for $6.8 million, or 91.5% of total revenue for 1995 and more than
99% of pro forma combined revenue of the Company and CSM for 1994. CarteSmart
Systems revenue accounted for the balance of the revenue for the periods. In
1994, the Company generated CarteSmart Systems revenue of $30,000 from the
pilot project in San Diego County. In 1995, revenue from CarteSmart
technology was $631,000.
The largest component of revenue for 1995 was $2.0 million from the sale
of third party hardware and software, as compared with $519,000 for 1994.
Such revenue represented 26.7% and 17.7% of revenue for 1995 and 1994,
respectively. A significant portion of revenue in 1995 represented the sale
of hardware ($842,000) and software and related services ($524,000) pursuant
to a purchase order from the State of Colorado for its Department of Human
Services. Revenue from
-25-
<PAGE> 43
services related to turnkey systems and data center revenue accounted for $1.8
million and $1.7 million, or 24.1% and 23.6% of revenue, respectively, for
1995, as compared with $664,000 and $884,000, or 22.7% and 30.2% of revenue,
respectively, for 1994. Maintenance revenue was $1.1 million and $500,000 in
1995 and 1994, respectively, representing 14.9% and 17.1% of revenue,
respectively. The Company believes that the increase in installations at
December 31, 1995 from the prior year should enable the Company to increase
the maintenance revenue in future periods. Revenue from CarteSmart Systems
increased to $631,000 in 1995, representing 8.6% of revenue, from $90,000 in
1994, representing 3.1% of revenue. The CarteSmart System revenue reflected
revenue from IBN ($481,000), VCU ($118,000) and the San Diego pilot program
($31,000) in 1995 and the San Diego program ($90,000) in 1994. The overall
increase in revenue reflects the inclusion of CarteSmart Systems revenue
combined with the revenue from the Colorado agreement. As discussed under
"Results of Operations -- Three Months Ended March 31, 1996 and 1995," the
increased revenue from CarteSmart Systems has a positive effect upon revenue
in the March 1996 period.
Both the increase in revenue and the change in revenue mix reflected
increased revenue resulting from an enhanced marketing effort following the
June 1994 acquisition of CSM. During the second half of 1994, the Company
received significant purchase orders from the State of Colorado for its
Department of Human Services and the State of Oklahoma. The Colorado order
covered the purchase of the Company's health information system, including
software, consulting services and hardware, at a total purchase price of
approximately $1.2 million. Of the purchase price, approximately $700,000
represented the purchase price of the software and consulting services, and
the balance represents the cost of the hardware. In July 1994, the Company
received a purchase order from a state agency of the State of Oklahoma for a
health information system which includes the graphical interface. The order
called for the installation of the system in ten hospitals for a purchase
price of approximately $430,000. The Company is continuing to market its
health information systems to entitlement programs. It believes that the
inclusion of the graphical and smart card functions, which were implemented
during the second half of 1994 and the first half of 1995, will assist it in
marketing its products to entitlement programs. It also believes that the
successful pilot project for the smart card interface in San Diego provides
the Company with an important tool in marketing this function to both new and
existing clients. The Company is commencing a marketing effort for its
CarteSmart System directed at the financial services industry and educational
institutions. However, in the industries to which the Company is marketing
its products, there is typically a long selling cycle, as a result of which
the Company must continue to support its marketing effort for a significant
period before any revenue is realized.
Gross profit increased to $1.8 million in 1995 from $390,000 in 1994, an
increase of 352%, which reflected an increase in the gross margin to 23.9% in
1995 from 13.3% in 1994. The increase in gross profit resulted from both the
improved gross margin and the inclusion of twelve months of CSM operations in
1995 and six months of such operations in 1994. The improved margin reflects
the significant increase in CarteSmart revenue, on which the Company realized
a higher margin than on its health information systems and services. However,
the amortization of capitalized software costs of $419,000 during 1995 is
reflected as a cost of revenue, which offset the higher margin for the
CarteSmart System. During 1995, the Company changed its CarteSmart System
from a DOS-based system to a Windows-based system. The capitalized costs
related to the DOS-based system. As a result, at December 31, 1995, the
Company wrote off the unamortized software development costs, which increased
<PAGE> 44
cost of revenue. In addition, the Company expensed the development of the
Windows-based system, which was charged to research and development.
Selling, general and administrative expenses were $2.5 million and $1.5
million for 1995 and 1994, respectively, representing a 65.0% increase. In
1994, selling, general and administrative expenses included approximately
$236,000 of compensation expense arising out of the issuance of Consolidated
common stock to former officers of CSM and the grant by SISC to such persons
of options to purchase shares of the Company's Common Stock which were owned
by SISC. However, in 1995, selling, general and administrative expenses
included a $200,000 increase in annualized expenses resulting from an increase
in the marketing staff, a $100,000 increase in the level of compensation for
the Company's and CSM's officers following the June 1994 acquisition of CSM,
$150,000 in legal expenses, a portion of which related to the acquisition of
CSM, and $313,000 of the amortization of customer lists resulting from the CSM
acquisition. Commencing July 1, 1994, general and administrative expenses
reflects the amortization of customer lists resulting from the CSM
acquisition.
Research and development was $699,000 and $367,000 for 1995 and 1994,
respectively, representing a 90.4% increase. The increase reflects research
and development for smart card and related products and the graphical
interface for the Company's health information systems.
During 1995, the Company incurred financing costs of $863,000,
representing the write-off of deferred financing costs relating to a proposed
initial public offering which had been scheduled for early 1995, but which had
been canceled. No such expenses were incurred in 1994.
-26-
Interest expense was $554,000 and $260,000 for 1995 and 1994, reflecting a
113% increase. The increased interest reflects (i) financing costs of
$208,000 reflecting interest and fees at higher borrowing levels pursuant to
the Company's agreement with its asset-based lender and (ii) interest at 10%
on an increased average level of borrowings from SISC. The most significant
component of the interest on an ongoing basis is the interest payable to the
Company's asset-based lender, on which it pays interest equal to the greater
of 18% per annum or prime plus 8% plus a fee of 1% of the face amount of the
invoice. The debt restructure whereby at September 30, 1995, SISC exchanged
more than $2 million in debt for shares of Series D Preferred Stock and the
subsequent exchange by SISC of a portion of such preferred stock for Common
Stock will have the effect of reducing the interest payable by the Company,
which reduction will be offset to some extent by dividends payable to SISC
with respect to the Series D Preferred Stock. However, the $72,600 annual
dividends payable on the 1,210 shares of Series D Preferred Stock will be
significantly less than the interest paid on the debt. Furthermore, the
Company believes that upon completion of this Offering, it may be able to
reduce outstanding debt, and it will seek to obtain better financing terms
than were available to it prior to the Offering, although no assurance can be
given that the Company will be able to negotiate more favorable financing
terms.
As a result of the foregoing factors, the Company sustained losses of $2.9
million, or $.59 per share, for 1995, as compared with a loss of $1.8 million,
or $.36 per share.
<PAGE> 45
Years Ended December 31, 1994 and 1993
The Company does not believe that the results of its operations in 1994
and 1993 are comparable. Until the completion of the CSM acquisition in June
1994, the Company was a development stage company. Its only revenue prior to
the June 1994 acquisition of CSM was $57,000 in consulting revenue from an
insurance company in The Netherlands, which it received in 1993. Furthermore,
CSM's operations prior to the acquisition are not comparable to those
operations following the acquisition since the combination of the operations
of the two companies enabled the Company to generate more revenue than the
Company believes would have resulted from the separate operation of the two
companies. Following the acquisition in June 1994, the companies combined
their operations and developed a more effective development and marketing
organization, as evidenced by the development in the second half of 1994 and
the first half of 1995, of the graphical and smart card interfaces for the
health information systems and enabled the Company to obtain its first
installations of its CarteSmart System in the United States, with the pilot
project in San Diego. Furthermore, the contract with the Albert Einstein
School of Medicine also represented an agreement for smart card applications
at an existing CSM installation.
Revenue for 1994 was $2.9 million compared with $57,000 for 1993. The
increase reflects the inclusion of revenue from CSM's health information
systems from July 1, 1994. Similarly, the increase in cost of revenue and
gross profit also reflected such business. The largest component of revenue
for 1994 was $884,000 from the data center, representing 30.2% of total
revenue. Revenue from contract services and sales of third party hardware and
software were $754,000 and $519,000, representing 25.8% and 17.8% of revenue.
Selling, general and administrative expenses increased to $1.5 million
from $376,000, reflecting the inclusion of CSM's overhead for the second half
of the year as well as (a) approximately $236,000, representing compensation
expense arising out of the issuance of Consolidated common stock to former
officers of CSM and the grant by SISC to such persons of options to purchase
shares of the Company's Common Stock which were owned by SISC and (b) $215,000
amortization of research and development resulting from the writedown of the
value of one version of the CarteSmart Software which had been capitalized.
In addition, during the second half of 1994, general and administrative
expenses reflects the amortization of customer list resulting from the CSM
acquisition.
During 1994, the Company incurred $367,000 of research and development
expenses relating principally to the CarteSmart system and the development of
tools for the development of its graphical interface to its health information
systems.
Interest expense increased to $260,000 from $87,000, principally as a
result of increased borrowings from SISC subsequent to December 31, 1993, and
the inclusion of interest on CSM's bank debt commencing July 1, 1994.
As a result of the foregoing, the Company sustained a net loss of $1.8
million, or $.36 per share, for 1994, as compared with a loss of $433,000, or
$.09 per share, for 1993.
Liquidity and Capital Resources
-27-
<PAGE> 46
At March 31, 1996, the Company had a working capital deficiency of
approximately $2.8 million. The working capital deficit increased by
approximately $300,000 since December 31, 1995. Since its organization, it
sustained losses of approximately $5.1 million. Its operation through
December 1994 were funded principally through loans of approximately $3.0
million from SISC, and loans from unrelated parties of approximately $400,000,
on which the Company is presently in default. Such loans plus interest and a
$12,500 extension fee, are to be paid from the proceeds of this Offering. At
September 30, 1995, SISC exchanged $2,210,000 principal amount of the
Company's obligations to SISC for 2,210 shares of Series D Preferred Stock,
which have a redemption price of $2,210,000, exchanged $388,000 of interest
for 1,125,000 shares of Common Stock, and accepted a 10% subordinated note due
January 1997 for the remaining $750,000. SISC has agreed to extend the
maturity date to April 1, 1997. The note is payable from the proceeds of this
Offering, but SISC has agreed not to require any payment unless the over-
allotment option is exercised. If the over-allotment option is exercised, the
Company intends to make a payment on account of the Company's note to SISC.
In addition, to the extent that the Company receives proceeds from the
exercise of any Warrants or Outstanding Warrants, a portion of such proceeds
may be used for such purposes. In January 1996, SISC exchanged 1,000 shares
of Series D Preferred Stock for 1,125,000 shares of Common Stock. In
addition, during the period from July 1994 through May 1996, the Company
borrowed an aggregate of $256,000 from ACT. Such advances were made on a
demand basis, and will be paid from the proceeds of this Offering.
Since January 1, 1995, the Company's principal source of funds other than
revenue has been an accounts receivable financing agreement and interim loans
from nonaffiliated accredited investors. In February 1995, the Company
entered into an accounts receivable financing agreement with an asset-based
lender pursuant to which it may borrow up to 75% of eligible accounts
receivable. In March 1996, the maximum borrowing under the agreement was
increased from $750,000 to $1.0 million and the percentage of eligible
receivables was increased from 75% to 80%. These higher levels of borrowing
capacity will continue in effect until the Company either completes this
Offering or raises $350,000 in a private placement of securities, at which
time the lower levels will be restored. In addition, the Company will be
required to pay the lender a $25,000 fee at the closing of this Offering or
such other financing and issue to the lender 25,000 shares of Common Stock.
As of March 31, 1996 and May 31, 1996, the outstanding borrowings under such
facility were $972,000 and $960,000, respectively. The proceeds of the
financing were used to pay $90,000 on the Company's bank loan, $67,000 plus
interest on the December 1994 Interim Notes and for working capital and other
corporate purposes. The Company pays interest on these borrowings of the
greater of 18% per annum or prime plus 8% and pay a fee of 1% of the face
amount of the invoice. The Company intends to seek alternative financing on
more favorable terms. In the event that it is unable to obtain alternative
financing, it may keep the facility in place. Certain of the Company's
officers have given the lender certain guarantees with respect to the
financing. In the event that the Company's borrowings from the asset-based
lender exceed $750,000 on the closing date with respect to this Offering, a
portion of the proceeds from this Offering allocated to working capital may be
used to reduce the borrowings to $750,000.
In January 1996, the Company borrowed $500,000 from unaffiliated
investors, and issued its 8% note due the earlier of January 31, 1997 or five
days after the completion of this Offering. The proceeds of the notes were
used to make the initial $325,000 payment of the $650,000 purchase price of
the SATC Software, for working capital and to pay expenses relating to this
Offering. At December 31, 1995, the Company owed the holders of the Interim
<PAGE> 47
Notes and the December 1994 Interim Notes an aggregate of $295,000, plus
interest and, with respect to the December 1994 Interim Notes, a $12,500
extension fee. The Company is in default with respect to such notes, and the
notes will be paid from the proceeds of this Offering. The Company continues
to require additional funds for its operations.
As a result of its working capital deficit, the Company was delinquent in
payments to its vendors. Accounts payable to vendors increased to $1.6
million at March 31, 1996 from $1.2 million at December 31, 1995. The
delinquency for vendors deemed critical to the Company's operations is
generally less than 60 days, and the delinquency for other vendors was in
excess of 90 days. Although vendors have demanded payment from the Company,
the Company has sought to work with the vendors by modest payments on account.
The Company is not presently in litigation with any of its vendors. The
Company believes that, following completion of this Offering, it will be able
to improve its vendor payments and, accordingly, the past delinquencies will
not have an ongoing adverse effect.
At March 31, 1996, accounts receivable and cost and estimated profits in
excess of interim billings were approximately $3.4 million, representing
approximately 91 days of revenue based on annualizing the revenue for the
March 1996 period, although no assurance can be given that revenue for the
year will continue at the same level as in the March 1996 period. At December
31, 1995, accounts receivable and cost and estimated profits in excess of
interim billings were approximately $2.5 million, representing approximately
88 days of revenue. The Company believes that such amount is reasonable
considering the customer base, which is largely government agencies, hospitals
and clinics. Since the Company does not receive significant payments in
advance of services rendered, the Company does not anticipate that it will
generate significant deferred revenue.
-28-
The Company's independent accountants have included an explanatory
paragraph in their report stating that there is substantial doubt about the
ability of the Company to continue as a going concern. The Company has
addressed this issue through the expansion of its marketing efforts for its
health information systems and CarteSmart Systems products. The CarteSmart
products have been an increasing source of revenue, having accounted for more
than 36% of its revenue for the March 1996 period, principally as a result of
the IBN contract. Although the Company does not have any backlog for its
CarteSmart System, it is actively marketing the CarteSmart Systems to
potential users both in the health and human services market and in other
markets. The Company believes that the acquisition of the SATC Software will
increase the potential uses for the CarteSmart System. The Company is
continuing its efforts to increase its revenue from its health information
systems and services.
The Company believes that the net proceeds from this Offering available to
it, after giving effect to the payment of outstanding debt, will be sufficient
to enable it to operate without additional funding for at least one year from
the date of this Prospectus. The Company believes that the increased revenue
from both its CarteSmart System and medical information systems and services
will be sufficient to enable it to cover the additional expenses described in
"Use of Proceeds." In this connection, the Company believes that its
marketing arrangement with Oasis can increase its business. However, it is
possible that conditions may arise as a result of which the Company may
require additional capital prior to one year from the date of this Prospectus,
and no assurance can be given that the Company will be able to obtain any or
<PAGE> 48
adequate funds when required or that any funds available to it will be on
reasonable terms. The failure to obtain necessary funds could result in the
reduction or cessation of operations by the Company. Furthermore, there can
be no assurance that the Company will generate significant revenues as a
result of its agreement with Oasis or that the amount payable under the
agreement with SMI will not significantly exceed the cash derived from any
services rendered by SMI or as a result of the SMI agreement.
BUSINESS
Background
The Company was organized in September 1992 to develop systems that
operate in a distributed network environment using a range of technologies. A
network system is a computer system that provides multiple users with access
to a common data base. A network system can be a local system, such as a
local area network or LAN, which operates within a single office or facility,
or a network system which provides simultaneous access to a common data base
by different users or different classes of users at multiple locations.
There are up to three parties in the Company's network systems -- the
sponsor, the users and the service providers. The sponsor is the party that
maintains the data base. The sponsor may be a managed care organization,
university or a bank or credit card association. The users are the persons
who use the system, and may be the subscribers for a managed care
organization, the students at a university and the bank card or credit card
holders for a bank or credit card association. The service providers are
those who provide goods or services to the users. Service providers may be
the physicians, pharmacies or other health care professionals who provide
medical services to the subscribers of the managed care organization, the
university book store, food service department, vending machine operators,
library and others who provide service to students at the university, and
merchants and operators of automated teller machines who provide goods,
services or funds to bank card or credit card holders.
Acquisition of CSM
On June 16, 1994, Holdings, the Company's principal stockholder, through a
wholly-owned subsidiary, CSM Acquisition Corp. ("Acquisition Corporation"),
acquired the assets and assumed liabilities of Old CSM pursuant to a plan and
agreement of reorganization dated as of April 13, 1994, as amended (the
"Purchase Agreement"), among the Company, Consolidated, Acquisition
Corporation, Old CSM and ACT, the parent of Old CSM. At the time of the
acquisition of CSM, ACT was a publicly traded company. Consolidated is the
parent of SISC, which is the sole stockholder of Holdings. In connection with
the purchase, (i) Acquisition Corporation purchased the assets and assumed
liabilities of Old CSM in exchange for 800,000 shares of Consolidated's common
stock and $500,000, which was advanced by the Company to Acquisition
Corporation from the proceeds of a loan made by SISC, (ii) Holdings
transferred the stock of Acquisition Corporation to the Company on September
30, 1995, (iii) in consideration for the transfer of the Acquisition
Corporation stock, the Company issued to Holdings an aggregate of 750,000
shares of Common Stock, and (iv) Acquisition Corporation changed its corporate
name to Creative Socio-Medics Corp. See "Certain Transactions."
-29-
<PAGE> 49
The Purchase Agreement was negotiated among officers of the Company,
Consolidated, ACT and CSM. There was no affiliation or other relationship
between Consolidated, Acquisition Corporation and the Company, on the one
hand, and ACT and Old CSM, on the other hand. At the time the acquisition of
CSM was consummated, Messrs. Edward D. Bright and John F. Phillips, who were
officers and directors of ACT and Old CSM, and Mr. Anthony F. Grisanti, who
was an officer of ACT and Old CSM, resigned their positions as officers of
both companies. Messrs. Bright, Phillips and Grisanti are the vice president,
president and secretary and chief financial officer, respectively, of CSM, as
a subsidiary of the Company. Mr. Phillips is also a director of the Company,
and Mr. Grisanti is also chief financial officer, treasurer and secretary of
the Company.
At the time of the execution of the Purchase Agreement, SISC granted to
Messrs. Bright, Phillips and Grisanti options to purchase an aggregate of
151,920 shares of the Company's Common Stock owned by SISC. The shares of
Common Stock owned by SISC were transferred to Holdings subject to the
options. The options are exercisable at an exercise price of $.232 per share
during the five-year period commencing in June 1994. In June 1994, at the
closing of the acquisition, Consolidated issued to such individuals an
aggregate of 40,000 shares of Consolidated common stock. The value of the
40,000 shares of Consolidated common stock, approximately $136,000, is
included as part of the Company's obligations due to SISC. See "Certain
Transactions."
In June 1994, at the time of the purchase of the assets from Old CSM, the
Company entered into five-year employment agreements with Messrs. Leonard M.
Luttinger, Edward D. Bright, John F. Phillips, Thomas L. Evans and Anthony F.
Grisanti, pursuant to which they were employed as executive officers of the
Company at a base compensation of $125,000, $125,000, $125,000, $85,000 and
$80,000, respectively. The agreements with Messrs. Luttinger and Evans
replaced earlier employment agreements with such persons. See "Management --
Remuneration" for information concerning the terms of the employment
agreements. At such time, Old CSM owed Messrs. Bright, Phillips and Grisanti
an aggregate of $133,000 in accrued salary and out-of-pocket expenses incurred
on behalf of Old CSM, which has been paid.
The acquisition of CSM provided the Company with an ongoing stream of
revenue together with a marketing force familiar with the entitlement and
health care field which was marketing a compatible product. At the time of
the acquisition, CSM's health information systems did not provide certain
capabilities which were sought by its customer base. Following the
acquisition, the Company developed two enhancements to its health information
systems -- a graphical interface, which enables the users of the systems to
operate in a WindowsTM environment, and a smart card interface using the
Company's CarteSmart System, which enables the users to enter and retrieve
data through the use of smart cards. Windows is a trade mark of Microsoft
Corp. Following the implementation of the smart card interface, the Company
initiated a marketing effort for its CarteSmart System to users of its health
information systems. The two CarteSmart agreements in the health care field -
- - the San Diego County pilot project and the Albert Einstein School of
Medicine agreement -- reflect amendments to the Company's existing agreements.
The CarteSmart System
The Company's CarteSmart System software was designed to operate on
industry-standard computer networks and "smart cards." A smart card is a
<PAGE> 50
plastic card the size of a standard credit card which contains an embedded
microprocessor chip. The card has data storage and computing capabilities,
and the smart card software includes security elements to restrict
unauthorized access to or modification of certain information contained on the
card. A smart card may also include a magnetic stripe to allow it to be used
in networks that do not include smart card functionality. The smart cards are
designed to be issued only by the sponsor organization, such as a managed care
organization, specialty care facility, administrator of an entitlement program
or other similar organization, a university or a bank or credit card
organization.
The CarteSmart software consists of components which allow the Company to
develop network applications for sponsors with less effort than would be
required if those network applications were developed from scratch. The
CarteSmart software consists of an Application Program Interface ("API") and
an API Generator which allows fast customization of the API for specific
network applications. The API is a set of software modules that provide the
common functions required to support a computer network using smart cards. By
using the API, the Company or a sponsor may develop network systems more
quickly than if all of the software necessary to implement the network were
custom written for a particular network application. The API Generator is a
tool developed by the Company that is designed to allow the Company or a
network sponsor to develop a custom API for a particular network and reduce
the effort required to build network systems.
The CarteSmart System is designed to operate on file servers and personal
computers which utilize the DOS, Windows 3.1, Windows 95, Windows NT or UNIX
operating systems, depending upon the application. The software used in the
smart
-30-
card can be used or adapted for use in most commercially available smart
cards. Smart cards generally meet international standards and are considered
commodity products, although each manufacturer has its own software to
interface with a computer. Accordingly, the Company believes that a
manufacturer would provide any necessary assistance in order to market its
cards.
Although the Company's CarteSmart System software has general application,
its experience with each of its four CarteSmart clients reflects a need to
customize the software to meet the specific needs of the client. Although the
customization need not be significant, each user has its unique requirements
that must be met. These requirements may include the need to enable the
CarteSmart System to interface with the client's existing systems to the
development of a range of software products to meet needs which are not
presently being served.
The Company's initial applications were designed to meet the needs of
managed care organizations and entitlement programs, and the Company developed
a smart card interface to its health management systems. Each time a patient
visits a participating health care provider, the health care provider adds to
the patient's data base information concerning the visit, including the date,
procedures performed and diagnosis. At the time of the first visit to a
participating physician, the physician enters information relating to the
diagnosis and treatment given on that visit together with such information
relating to chronic conditions, such as allergies and medication, as the
physician deems important. The Company does not anticipate that the health
care provider will be expected to include information relating to earlier
<PAGE> 51
diagnoses or treatment; however, the organization which provides the smart
card may require additional information to be input at the initial visit.
This information is input into the patient's smart card and may also be
transmitted to the managed care organization's central data base, where,
unless dissemination of such information has been restricted by the patient,
other health care providers will have access to the information. The health
care provider can read information from, and write information onto, the smart
card through a card interface device, which is standard computer peripheral
equipment readily available from computer outlets and can be easily connected
to a personal computer. The information transferred to the smart card is
first input by the health care provider on a computer and includes the date of
service, diagnosis, treatment, including any prescribed medication, and any
other information which the health care provider determines.
At the time of the visit, the health care provider inputs the standard
codes for the diagnosis and procedures performed. Errors in inputting the
diagnosis and the procedure code delay payment or affect the amount of
payment. The SmartCard System can be integrated with the health care
provider's existing practice management system, without requiring any
additional personnel. The CarteSmart System software has integrated within it
an easy to use diagnosis and procedure code look up capability, as well as
error checking and other safeguards which assist the health care provider in
inputting the proper codes based upon normal medical terminology.
The smart card stores only a limited amount of information, and is
intended to reflect current medical conditions and not a record of medical
treatment from birth. When the storage capacity of the card, which is
equivalent to approximately ten typed pages, is reached, items are deleted on
a chronological basis, with the earliest items being deleted first, although
there is an override procedure by which certain crucial medical information,
such as allergies and chronic conditions, can be retained, regardless of the
date when the patient was diagnosed or treated for the condition. The card
also includes information on each prescription which the patient is taking. A
smart card is different from a magnetic stripe card, such as is used at VCU,
in that it has an updatable data storage capacity, which a magnetic stripe
card does not.
To date, the Company has licensed an initial version of its CarteSmart
software in the medical and health care field to an affiliate of a health
insurance company in The Netherlands for a pilot project, to San Diego County
for a pilot project and to the Albert Einstein School of Medicine. In January
1995, pursuant to an agreement with San Diego County, California, the Company
introduced its CarteSmart System in the United States. The initial phase, a
pilot program which was completed during 1995, involved the issuance of smart
cards to approximately 1,200 mental health patients participating in the
California MediCal Managed Care Initiative. The Company recognized revenue of
$31,000 and $90,000 from the San Diego pilot program during 1995 and 1994,
respectively. The Company is presently negotiating for an expansion of the
program to include substance abuse and acute care as well as mental health for
the county's total healthcare population. The Company is also marketing its
CarteSmart System to other entitlement programs and managed care
organizations; however, as of the date of this Prospectus, except for the
pilot project in San Diego County, the Company has not entered into any
agreements with any such organizations, and no assurance can be given that the
Company will enter into any such agreements.
In November 1995, the Company entered into an agreement with the Albert
Einstein School of Medicine to add the CarteSmart System to its existing
system to provide smart card network capabilities for use in its clinics and
<PAGE> 52
out-patient facilities. Installation of the smart card network is scheduled
for the second quarter of 1996, and, as of March 31, 1996, no revenue had been
generated from such customer. The Company is presently customizing the
CarteSmart health care application
-31-
software to meet the requirements of the Albert Einstein School of Medicine,
including the ability to interface with its present computer systems in
addition to the health information system licensed from the Company.
During 1995, the Company commenced marketing its CarteSmart based products
to markets other than the health care field. In July 1995, the Company
entered into an agreement pursuant to which it installed a magnetic stripe
identification system which uses CarteSmart technology to provide for the
centralized issuance of a single card to all persons allowed access to the
university and its services. The card contains the individual's name, photo,
signature and unique card identification number, which defines the holder's
entitlement to food service and library services. Approximately 20,000
students are using the system. The Company is negotiating with respect to an
agreement to expand the program to support additional services, however, no
assurance can be given that the program will be expanded. A magnetic card
differs from a smart card since it does not have an independent updatable data
storage capability.
The Company believes that a major market for its smart card technology is
the financial services industry, including banks and credit card issuers.
Commencing in May 1995, the Company entered into a series of letter agreements
with IBN for services and CarteSmart software licenses for the implementation
of a satellite based distribution network of automatic teller machines and
off-line point of sale terminals using smart cards for the former Soviet
Union. In April 1996, the Company entered into a definitive agreement for the
development of the system and the license of the system to IBN. IBN is a New
York-based company which has rights to install such systems in the former
Soviet Union. The Company's agreement with IBN is not contingent upon the
success of IBN's installations in the former Soviet Union, although the extent
of its revenues from royalties will be based on the number of cards issued and
may be adversely affected by political developments in the former Soviet
Union. The system being delivered to IBN includes Oasis Technologies'
IST/Share Financial Transaction System software and other third party software
which the Company is integrating with its CarteSmart software to complete the
IBN system. Through March 31, 1996, the Company has generated approximately
$1.4 million revenue from IBN.
In developing the CarteSmart System for the financial services industry,
the Company is using networking technologies that use telecommunications
networks as well as smart cards. In addition, the Company, through a
subsidiary, is purchasing the SATC Software, which processes retail plastic
card transactions and merchant transactions. The purchase price is $650,000,
of which $325,000 was paid by the Company, $150,000 was paid by Oasis and the
remaining $175,000 is to be paid by Oasis, although the Company remains
obligated for the balance if Oasis fails to make the payment. The SATC
Software is designed to perform functions required by credit card issuers,
including applications processing and tracking, credit evaluations, credit
authorization and the printing of statements. In the event the final payment
is not made, the subsidiary will not acquire title. The Company has an
agreement with Oasis pursuant to which Oasis is to make the remaining
payments, and it is negotiating an agreement with Oasis pursuant to which the
subsidiary will become a joint venture corporation owned 50% by the Company
<PAGE> 53
and 50% by Oasis and/or its principals. See "Business -- Product
Development."
As of March 31, 1996, except for $57,000 in consulting revenue generated
in 1993, the Company generated revenue from its Carte Smart System from three
clients -- IBN, from which it generated revenue of $933,000 in the three
months ended March 31, 1996 and $481,000 for the year ended December 31, 1995,
VCU, from which it generated revenue of $10,000 in the three months ended
March 31, 1996 and $118,000 for the year ended December 31, 1995, and the San
Diego pilot project, which generated revenue of $31,000 in the year ended
December 31, 1995 and $90,000 in the year ended December 31, 1994.
-32-
The Company is entering into an agreement with SMI pursuant to which the
Company pays SMI compensation of $25,000 to $59,000 per month, for which SMI
will provide the services of Mr. Storm Morgan, a director of the Company, on
an as-needed basis and up to four other persons to serve in management-level
or other key positions for the Company on a full-time basis. Mr. Morgan is
not required to devote any minimum amount of time to the business of the
Company. The agreement also provides for payment of 6% of smart card and
related revenues generated by the Company. The Company believes that the
royalty is reasonable based on the experience of SMI and its personnel in
developing businesses similar to that of the Company. The Company anticipates
that SMI will assist the Company in marketing its CarteSmart Systems, however,
no assurance can be given as to the extent of any revenue which may be
generated from SMI's efforts.
Health Information Systems and Services
Since the acquisition of CSM, the Company has offered its customers a
range of products and services, principally based upon the health information
systems which were developed and marketed by CSM prior to the acquisition.
Users typically purchase one of the health information systems, in the form of
a perpetual license to use the system, as well as contract services,
maintenance and third party hardware and software which the Company offers
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 materials basis
or pursuant to a fixed-price contract. The software development services may
require the Company to adapt one of its health information systems to meet the
specific requirements of the customer.
Although the health information systems constituted the basis of CSM's
business, revenue from the license of such systems, has not represented a
major component of its revenues. The typical price for a license for CSM's
health information systems ranges from $10,000 to $30,000. During the years
ended December 31, 1995, 1994 and 1993, CSM installed health information
systems with eleven, thirteen and twelve customers, respectively. Revenue
from the licensing of such systems represented approximately $162,000,
$375,000 and $235,000, in the years ended December 31, 1995, 1994 and 1993,
respectively, accounting for approximately 2.2%, 7.4% and 4.7% of revenue for
such periods. However, the Company license of a health information system is
not limited to the grant of a license, and typically includes significant
additional services, including software development and consulting services
and maintenance services.
<PAGE> 54
The Company offers software systems developed by CSM which are designed to
meet the requirements of providers of long-term specialty care treatment.
Certain of its systems were developed to meet the requirements of Federally
funded target cities projects and is installed in Baltimore, Los Angeles,
Atlanta and Cuyahoga County (Cleveland), Ohio.
A customer's purchase order may also include third party hardware or
software. For the three months ended March 31, 1996 and the years ended
December 31, 1995, 1994 and 1993, revenue from hardware and third party
software accounted for approximately $268,000, $2.0 million, $900,000 and $1.0
million, representing 10.5%, 26.7%, 18.1% and 19.6%, respectively, of revenues
in such periods.
In addition to its health information systems and related services, the
Company offers specialty care facilities a data center, at which its personnel
perform data entry and data processing and produce operations reports. These
services are typically provided to smaller substance-abuse clinics. During
the three months ended March 31,1996 and the years ended December 31, 1995,
1994 and 1993, CSM's service bureau operation generated revenue of
approximately $481,000, $1.7 million, $1.6 million and $1.7 million,
respectively, representing approximately 18.8%, 23.6%, 32.5% and 33.6% of
CSM's revenues for such periods. The largest user of the service bureau is
the State of New York Office of Alcohol and Substance Abuse Services, which
uses the Company's service bureau to maintain its statewide database of
methadone users, however, such customer accounted for less than 4% of CSM's
revenues in the three months ended March 31, 1996 and the years ended December
31, 1995, 1994 and 1993. The Company intends to augment the marketing effort
for the service bureau, although no assurance can be given that such
operations will continue to be profitable.
Maintenance services have generated increasing revenue and are becoming a
more significant portion of the Company's business. Since purchasers of
health information system licenses typically purchase maintenance service,
maintenance revenue increases as new customers obtain licenses for its health
information services. Under its maintenance contracts, which are executed on
an annual basis, the Company maintains its software and provides certain
upgrades. Its obligations under the maintenance contract may require the
Company to make any modifications necessary to meet new Federal reporting
requirements. The Company does not maintain the hardware and third party
software sold to its customers.
-33-
Markets and Marketing
Although the market for smart card systems includes numerous applications
where a secure distributed data base processing system is important, the
Company's initial marketing efforts were directed to the health and human
services market, including managed care organizations and entitlement
programs. In the United States alone, the Company believes that there are
presently more than 75 million persons who participate in managed care
programs, which are sponsored by almost 600 organizations or health insurers.
Because of the relationship between the organization and the participating
medical care providers and patients, the organization can institute a smart
card system without the need for the Company to conduct a separate marketing
effort directed at the medical care providers. Although independent health
insurers which do not operate a managed care organization may, in the future,
be a market for a smart card system, because the relationship between the
insurer and the medical care provider is different from that of the managed
care organization and its participating medical care providers, the Company is
<PAGE> 55
not treating independent insurance companies as a market for the CarteSmart
System, and no assurance can be given that it will ever become a market for
the system.
The market for the Company's health information systems and related
services is comprised of various providers of specialty care involving long
term treatment of a repetitive nature rather than short term critical care,
such as medical and surgical hospitals or clinics. The Company believes that
there are approximately 15,000 providers of such treatment programs in the
United States, including public and private hospitals, private and community
based residential facilities and Federal, state and local governmental
agencies. Of these facilities, approximately 200 are customers of the
Company.
The Company believes that the acquisition of the CSM business and assets
complements its CarteSmart business and personnel. Following the acquisition,
the Company developed the graphical and smart card interface to the CSM health
information system and commenced a marketing effort directed to the Company's
customer base. The two smart card agreements, San Diego County and the Albert
Einstein School of Medicine, represent amendments to existing contracts to
include smart card services.
The Company's health information systems are marketed principally to
specialized care facilities, many of which are operated by government entities
and include entitlement programs. During the three months ended March 31,
1996 and the years ended December 31, 1995, 1994 and 1993, approximately 30%,
54%, 49% and 47%, respectively, of CSM's revenues was generated from contracts
with government agencies. Contracts with government agencies generally
include provisions which permit the contracting agency to cancel the contract
at its convenience.
For the three months ended March 31, 1996, the Company's largest customer
was IBN, which generated revenue of $933,000, or 14.8% of revenue. For the
year ended December 31, 1995, one customer accounted for more than 5% of the
Company's revenue. The State of Colorado generated revenue of approximately
$1.4 million, representing 18.5% of revenue for the year. At March 31, 1996,
this contract was substantially completed. Percentage of completion is based
on the percentage of work performed by such date. CSM's largest customer for
1994 was Cuyahoga County (Cleveland) Ohio, from which CSM recognized revenue
of $250,000, or 7.0% of revenue. During 1993, CSM had two customers which
accounted for at least 5% of its revenue. Its largest customer for 1993 was
the City of Baltimore, which entered into a contract with CSM for
approximately $800,000 for software licenses and various contract services,
maintenance, hardware and software. CSM's revenue from the Baltimore contract
accounted for $312,000, or 6.3% of revenue, in 1993. The contract was
completed in July 1994, and revenue from the contract in 1994 was
substantially less than such revenue was in 1993. A contract with the City of
Los Angeles accounted for 5.2% of revenue for 1993. No other customer
accounted for 5% or more of the Company's revenues in any of such periods.
The Company believes that the CarteSmart software has applications beyond
the health and human services market and is seeking to market the software to
educational institutions and in the financial services industry. See
"Business -- The CarteSmart System." In April 1995, the Company entered into
a joint marketing agreement with Oasis, pursuant to which each company markets
the software of the other company. Oasis, an independent software developer,
has developed and markets a transaction processing system, known as IST/Share,
designed for high volume users in the financial services industry. Mr. Storm
R. Morgan, a director of and consultant to the Company, is an officer of, and
<PAGE> 56
has an equity interest in, Oasis. The Company believes that its agreement
with Oasis will enhance its ability to market and introduce its product to the
financial services industry where Oasis has an existing client base.
The Company may enter into negotiations with other companies which have
business, product lines or products which are compatible with the Company's
business objectives. However, no assurance can be given as to the ability of
the Company to enter into any agreement with such a company or that any
agreement will result in licenses of the CarteSmart System. See "Business --
Potential Business Agreements."
-34-
At March 31, 1996, the Company had a backlog of orders, including ongoing
maintenance and data center contracts, in the aggregate amount of
approximately $3.9 million, substantially all of which are expected to be
filled during the following twelve months. Such backlog reflected data center
contracts of $1.7 million, maintenance contracts of $1.2 million and contracts
for turnkey health information systems of $1.0 million. The data center and
maintenance contracts are typically one to three year contracts and the
backlog reflects the unexpired term of the contracts, based upon the average
monthly usage for the preceding three months. The backlog did not include any
contracts for CarteSmart Systems.
At March 31, 1995, the Company's backlog was approximately $4.8 million,
consisting of $1.6 million of data center contracts, $1.0 million for
maintenance contracts and contracts for turnkey health information systems
contracts of $2.1 million.
The Company's sales force is comprised of three full-time sales
representatives, as well as Mr. Leonard M. Luttinger, chief operating officer,
John F. Phillips, president of CSM, and SMI, a consultant to the Company. Mr.
Storm R. Morgan's services include activities relating to the marketing of the
CarteSmart System to industries outside of the medical field. His present
efforts are devoted principally to the financial services industry. In
addition, Mr. Luttinger and other members of the Company's technical staff are
available to assist in market support, especially for proposals which
contemplate the use of smart card transaction processing networks.
Product Development
The Company is continuing the development and enhancement of the
CarteSmart System, and six of its employees are engaged in such activities.
For the year ended December 31, 1995 and the year ended December 31, 1994,
research and development expenses were $699,000 and $367,000, respectively.
No research and developmental expenses were incurred during the three months
ended March 31, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company intends to expand its
development activities following completion of this Offering. The Company
intends to develop a product based on both the SATC Software and its own
technologies, including the CarteSmart System, and to develop a network
support tool for the financial services industry. The proposed enhancements
include an increased language capability so that it can be multilingual, an
interface with the Company's CarteSmart System and an interface with Oasis'
IST/Share, which is a transaction processing system for high volume users in
the financial services industry.
<PAGE> 57
Competition
The Company is in the business of licensing software to entitlement
programs and managed care organizations, specialty care institutions and
other major computer users who have a need for access to a distributed data
network, and marketing health information systems software to specialty care
organizations. The software industry in general is highly competitive. In
addition, with technological developments in the communications industry, it
is possible that communications as well as computer and software companies may
offer similar or comparable services. Although the Company believes that it
can provide a health care facility or managed care organization with software
to enable it to perform its services more effectively, other companies,
including major computer and communications companies have the staff and
resources to develop competitive systems, and users, such as insurance
companies, have the ability to develop software systems in house. Because of
the large subscriber base participating in the major managed care
organizations, the inability of the Company to license any such organizations
could have a materially adverse effect upon its business. Furthermore,
various companies have offered smart cards programs, by which a person can
have his medical records stored, and software vendors and insurance companies
have developed software to enable a physician or other medical care provider
to have direct access to the insurer's computer and other software designed to
maintain patient health and/or medication records. The market is very cost
sensitive. In marketing systems such as the CarteSmart System, the Company
must be able to demonstrate the ability of the network sponsor to provide
enhanced services at lower effective cost. Major systems and consulting
vendors, such as Unisys, AT&T Corp. and Andersen Worldwide have provided smart
card based solutions to their clients and they offer other software systems in
the industries to which the Company is marketing its products and services.
No assurance can be given that the Company will be able to compete
successfully with such competitors. The Company believes the health insurance
industry is developing switching software to be used in transmitting claims
from health care providers to the insurers, and insurers or managed care
organizations may also develop or license or purchase from others the software
to process such claims, which would compete with certain functions of the
CarteSmart System. The health information systems business is highly
competitive, and is serviced by a number of major companies and a larger
number of smaller companies, many of which are better capitalized, better
known and have better marketing staffs than the Company, and no assurance can
be given that the Company will be able to compete effectively with such
companies. Major vendors of health information systems include Shared Medical
-35-
Systems Corp. and HBO Corp. The Company believes that price competition is a
significant factor in its ability to market its health information systems and
services, and was a factor in the decline in CSM's revenue from 1992 to lower
levels in 1994 and 1993, although such revenue increased during 1995.
The Company also faces intense competition as it seeks to enter the
education and financial services markets. Competition for the education
market includes not only major and minor software developers, but credit card
issuers and telecommunications companies. In marketing its CarteSmart-based
products to educational institutions, the Company can focus on the benefits to
the university of providing an all-purpose card to ease administration and
reduce costs. Major credit card issuers and communications companies, such as
American Express, AT&T and MCI, can offer similar services by permitting the
university to link their cards with the university's services. Such
organizations can also use these marketing efforts as a part of their overall
<PAGE> 58
corporate marketing strategy to familiarize the students with their particular
cards and services in hopes of attracting the students as a long-term user of
their cards and services. As part of a marketing plan, rather than a profit
center, such card issuers may be able to offer the universities services
similar to the Company, but at a lower cost to the university. In this
context, it is possible that, unless the Company can enter into a marketing
arrangement with a major card issuer or telecommunications company, the
Company may not be able compete successfully in marketing its CarteSmart
products to educational institutions.
The financial services industry is served by numerous software vendors.
In addition, major banks, credit card issuers and other financial services
companies have the resources to develop networking software in house. At
present, most financial institutions use magnetic stripe cards rather than
smart cards. The Company believes that its CarteSmart System together with
the SATC Software and its joint marketing agreement with Oasis, which
presently serves the financial services industry, will assist the Company in
selling and licensing its products and services in the financial services
industry. However, to the extent that smart cards become more important in
the financial services industry, more companies in the financial services
industry, as well as the major computer and software companies, all of whom
are better known and substantially better capitalized than the Company, and
numerous smaller software developers, are expected to play in increasingly
active role in developing and marketing smart card based products.
Furthermore, the recently announced joint venture among Visa, MasterCard and
certain major banks relating to the development of a smart card based system,
may have an adverse effect upon the ability of the Company to market smart
card products to the financial services industry. No assurance can be given
as to the ability of the Company to compete in this industry.
Government Regulations
The Federal and state governments have adopted numerous regulations
relating to the health care industry, including regulations relating to the
payments to health care providers for various services. The adoption of new
regulations can have a significant effect upon the operations of health care
providers and insurance companies. Although the Company's business is aimed
at meeting certain of the problems resulting from government regulations and
from efforts to reduce the cost of health care, the effect of future
regulations by governments and payment practices by government agencies or
health insurers, including reductions in the funding for or scope of
entitlement programs, cannot be predicted. Any change in the structure of
health care in the United States can have a material effect on companies
providing services, including those providing software. Although the Company
believes that one likely direction which may result from the current study of
the health care industry would be an increased trend to managed care programs,
which is the market to which the Company is seeking to license its CarteSmart
System, no assurance can be given that the Company'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,
the Company's business may be adversely affected. Furthermore, to the extent
that each state changes its own regulations in the health care field, it may
be necessary for the Company to modify its health information systems to meet
any new record-keeping or other requirements imposed by changes in
<PAGE> 59
regulations, and no assurance can be given that the Company will be able to
generate revenues sufficient to cover the costs of developing the
modifications.
A substantial percentage of CSM's business has been with government
agencies, including specialized care facilities operated by, or under contract
with, government agencies. See "Business -- Markets and Marketing." The
decision on the part of a government agency to enter into a contract is
dependent upon a number of factors, including economic and budgetary problems
affecting the local area, and government procurement regulations, which may
include the need for approval by more than one agency before a contract is
signed. In addition, contracts with government agencies generally include
provisions which permit the contracting agency to cancel the contract at its
convenience.
-36-
Intellectual Property Rights
The CarteSmart System is a proprietary system developed by the Company,
and its health information system software is proprietary software developed
by CSM. The Company has no patent rights for the CarteSmart System or health
information system software, but it relies upon non disclosure and secrecy
agreements with its employees and third parties to whom the Company discloses
information. No assurance can be given that the Company 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 the Company,
even if the Company is successful in obtaining injunctive relief, and no
assurance can be given that the Company will be able to obtain injunctive
relief. Furthermore, the Company may not be able to enforce its rights in the
CarteSmart System in certain foreign countries.
Prior to joining the Company, Messrs. Leonard M. Luttinger and Thomas L.
Evans, chief operating officer and vice president, respectively, of the
Company, were employed by Onecard Corporation ("Onecard"), a corporation which
was engaged in the development of smart card technology. The Company
developed its CarteSmart technology independent of Onecard, and no Onecard
technology was incorporated in the CarteSmart technology. See "Business --
Litigation" for information with respect to an action commenced by Onecard
against the Company, Consolidated and certain of the Company's officers.
Source of Supply
Since the Company does not provide any of the hardware or the smart cards,
it is the responsibility of the licensee to obtain the hardware, smart cards
and other supplies. The Company's software operates on computer hardware and
smart cards manufactured by a number of suppliers.
Potential Business Agreements
Following completion of this Offering, the Company may enter into joint
ventures, acquisitions or other arrangements, such as joint marketing
arrangements and licensing agreements, which the Company believes would
further the Company's growth and development. In negotiating such agreements
or arrangements, the Company anticipates that such agreements would be based
<PAGE> 60
upon the manner in which the Company's business can be expanded, the extent to
which either the Company's technology can be introduced or developed in fields
not then being addressed by the Company or the extent to which additional
channels can be developed for the Company's products and technology. The
Company is a participant in a joint marketing vehicle by which the Company's
products can be marketed by the other parties to the marketing arrangement,
and the Company would have access to customers of the marketing partners. The
Company's proposed joint venture with Oasis to purchase the SATC Software and
its joint marketing agreement with Oasis are examples of such agreements.
Although the Company is engaged in negotiations and performing its due
diligence investigations with respect to the potential acquisition of a
product line, the Company has not entered into any letters of intent or
agreements with respect to any such arrangements or transactions.
Furthermore, no assurance can be given that any agreement which the Company
enters into will generate any revenue to the Company. To the extent that the
Company enters into an agreement with an affiliated party, the terms and
conditions of such agreement will be on terms at least as favorable to the
Company as those the Company could achieve in negotiations at arm's length
with an independent third party. If any such agreement is with an affiliated
party, the Company will seek the approval of a majority of the directors who
have no affiliation with the other party.
Employees
As of March 31, 1996, the Company had 66 employees, including five
executive, four marketing and marketing support, 51 technical and six clerical
and administrative employees. The chief executive officer and the president
of the Company devote only a portion of their time to the business of the
Company. Upon completion of this Offering, the Company intends to hire
additional personnel as needed.
-37-
Litigation
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 stockholders of Onecard. The named
defendants include, in addition to the Company, Messrs. Lewis S. Schiller,
chief executive officer and a director of the Company, Leonard M. Luttinger,
chief operating officer of the Company, and Thomas L. Evans, vice president of
the Company, Holdings, the Company's principal stockholder, Consolidated, and
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. Messrs. Luttinger and Evans were employees of
Onecard prior to the formation of the Company. Mr. Schiller was not an
employee or director of, consultant to, or otherwise affiliated with, Onecard.
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 or, 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 filed an answer denying all allegations contained in the complaint and
<PAGE> 61
filed a motion to dismiss, which motion has not been decided by the Court.
However, 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
Company.
Property
The Company's executive offices and facilities are located in
approximately 18,000 square feet of space at 146 Nassau Avenue, Islip, New
York, pursuant to a lease which terminates on February 28, 1999, at a minimum
annual rental of $250,000. This lease provides for fixed annual increases
ranging from 4% to 5%. The Company believes that such space is adequate for
its immediate needs. The Company occupies, on a month-to-month basis, an
aggregate of approximately 2,500 square feet of office space in Wethersfield,
Connecticut and La Jolla, California, at an aggregate monthly rental of
$4,700.
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 terms.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position
- --------------------- ----- -------------------------------
Lewis S. Schiller 65 Chairman of the Board, Chief Executive Officer
and Director
James L. Conway 48 President and Director
Leonard M. Luttinger 47 Chief Operating Officer and Director
Thomas L. Evans 40 Vice President
Anthony F. Grisanti 47 Chief Financial Officer, Treasurer and Secretary
John F. Phillips 57 Vice President of CSM and Director
E. Gerald Kay 55 Director
Storm R. Morgan 31 Director
Mr. Lewis S. Schiller has been chairman of the board and a director of the
Company since its organization in September 1992. Mr. Schiller is chairman of
the board and chief executive officer of Consolidated, SISC and Holdings and
is chief executive officer and/or chairman of Consolidated's operating
subsidiaries, whose operations include magnetic resonance imaging centers,
three dimensional imaging products, telecommunications and various
manufacturing operations. SISC is the sole stockholder of Holdings, the
principal stockholder of the Company, and SISC and Holdings are wholly owned
subsidiaries of Consolidated. Mr. Schiller has held such positions for more
than the past five years. Since May 1995, Mr.
<PAGE> 62
-38-
Schiller has also been chairman of the board, chief executive officer and a
director of Trans Global Services, Inc. (formerly known as Concept
Technologies Group, Inc.), ("Trans Global"), a contract engineering company,
of which SISC holds a majority of the voting rights. Mr. Schiller devotes
only a portion of his time to the business of the Company. On December 11,
1989, Mr. Schiller was elected as chairman and chief executive and financial
officer of General Technologies Group, Ltd. ("GTG"), a Long Island based
defense manufacturing firm in which Consolidated was a stockholder and a major
creditor. On December 14, 1989, GTG filed for protection under Chapter 11 of
the Bankruptcy Act. Consolidated also commenced litigation against GTG, its
former chairman and chief executive officer, accountants and secured lender
which was settled out of court in 1993 and 1996. Mr. Schiller is also a
director of Fingermatrix, Inc., a public company which develops and markets
fingerprint identification systems. Mr. Schiller devotes a significant
portion of his time to the business of Consolidated and its other
subsidiaries. He anticipates that he will devote such amount of his time to
the business of the Company as is necessary; however, Mr. Schiller does not
expect to devote more than 10% of his time to the business of the Company.
Mr. James L. Conway has been president and a director of the Company since
January 1996. Since 1993, he has been president of S-Tech Corporation ("S-
Tech"), a wholly-owned subsidiary of Consolidated which manufactures specialty
vending equipment for postal, telecommunication and other industries and
avionics products. His position as president of S-Tech Corporation is his
principal business activity. From 1990 to 1993, he was president of GTG, as
debtor in possession following its filing under Chapter 11 of the Bankruptcy
Act. Mr. Conway devotes 40% to 50% of his time to the business of the
Company.
Mr. Leonard M. Luttinger has been president and a director of the Company
since its organization in September 1992 until January 1996, when he became
chief operating officer. From March 1991 to September 1992, Mr. Luttinger was
vice president of smart card systems for Onecard, a corporation engaged in the
development of smart card technology. From June 1966 to February 1991, he was
employed at Unisys, a computer corporation, and its predecessor Burroughs
Corporation, in various capacities, including manager of semiconductor and
memory products and manager of scientific systems.
Mr. Thomas L. Evans has been vice president of the Company since September
1992. From January 1991 to September 1992, Mr. Evans was director of
development for Onecard. From September 1987 to November 1990, he was
director of management information systems for Allied Grocers Co-operative,
Inc., a food and grocery distributor. From June 1973 to September 1987, he
was a senior project manager for Unisys.
Mr. Anthony F. Grisanti has been treasurer of the Company since June 1994,
secretary since February 1995 and chief financial officer since January 1996.
He was chief financial officer of CSM and ACT for more than five years prior
thereto.
Mr. John F. Phillips has been a director of the Company and vice president
of CSM since June 1994, when CSM was acquired. He also served as vice
chairman and vice president -- marketing of the Company from June 1994 to
January 1996. He was a senior executive officer and director of CSM and ACT
for more than five years prior to June 1994. From January 1993 to June 1994,
he was chairman of the Board of CSM and ACT. From 1986 until December 1992,
he was president of CSM and ACT. Mr. Phillips is a director of ACT.
<PAGE> 63
Mr. E. Gerald Kay has been a director of the Company since June 1994. For
more than the past five years, Mr. Kay has been chairman of the board and
chief executive officer of Chem International, Inc., a pharmaceutical
manufacturer, Manhattan Drug Co., Inc., a wholesaler of pharmaceutical
products, The Vitamin Factory, Inc., a chain of retail vitamin stores, and
Connaught Press, Inc., a publisher. From 1988 to 1990 he was also president
and a director of The Rexall Group, Inc., a distributor of Rexall brand
products. Mr. Kay is also a director of Trans Global.
Mr. Storm R. Morgan has been a director of the Company since January 1996.
Mr. Morgan is also senior vice president of Oasis, a position he has held
since 1991, and an officer and director of SMI, a position he has held since
1989.
Messrs. Phillips and Grisanti and Mr. Edward D. Bright, who was chief
executive officer and a director of the Company from June 1994 to December
1995, resigned as officers of ACT and Old CSM in June 1994, at the time of the
sale by Old CSM of its assets. Although Messrs. Phillips and Bright continue
to serve as directors of ACT, they anticipate that such service will not
require any significant amount of their business time and effort.
The Company's Certificate of Incorporation includes certain provisions,
permitted under Delaware law, which provide that a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for any
transaction from which the director derived an improper personal benefit, or
(iv) for certain conduct
-39-
prohibited by law. The Certificate of Incorporation also contains broad
indemnification provisions. These provisions do not affect the liability of
any director under Federal or applicable state securities' laws.
The Board of Directors does not have any executive, nominating or audit
committees.
Remuneration
Set forth below is information concerning the Company's chief executive
officer and the only officers who received or accrued compensation in excess
of $100,000 during the years ended December 31, 1995, 1994 and 1993.
Information with respect to Messrs. Bright and Phillips reflects, for 1994,
the combined compensation received from the Company and Old CSM, and for 1993,
the compensation received from Old CSM.
Annual Compensation Long-Term Compensation (Awards)
------------------------ -------------------------------
Name and Principal Year Salary Bonus Restricted Stock Options, SARs
Position ---- -------- -------- ---------------- -------------
- ------------------ Awards (Dollars) (Number)
---------------- -------------
<PAGE> 64
Lewis S. Schiller, 1995 --(1) -- -- 52,500
CEO (through June 1994 --(1) -- -- --
1994) 1993 --(1) -- -- --
Leonard M. 1995 $125,000 -- -- 176,768
Luttinger, 1994 113,390 -- -- 15,000(2)
President 1993 110,423 $24,000 $4,065(3) --
Edward D. Bright, 1995 127,627 -- -- 38,768
CEO of CSM, CEO of 1994 115,203 -- --(4) 15,000(2)
the Company (from 1993 104,507 -- -- --
July 1994 to
December 1995)
John F. Phillips, 1995 123,900 -- -- 38,768
chairman of the 1994 108,416 -- --(4) 15,000(2)
board of CSM, vice 1993 109,226 -- -- --
chairman and vice
president -- marketing
- -------------------
(1) Mr. Schiller received no compensation from the Company. Effective
December 31, 1994, Consolidated changed its fiscal year to the calendar year
from the twelve months ended July 31. During the year ended December 31,
1995, the period from August 1, 1994 to December 31, 1994, for the fiscal
years ended July 31, 1994 and 1993, the total compensation paid or accrued by
Consolidated to Mr. Schiller were $250,000, $94,000, $181,451 and $175,000,
respectively. The Company has an agreement with Trinity pursuant to which it
is to pay Trinity consulting fees of $180,000 per year for the three years
following the date of this Prospectus. The services to be rendered by Trinity
include general business and financial management services and may be rendered
by officers of Trinity, including Mr. Schiller, who is chief executive officer
of both Trinity and the Company.
(2) In December 1994, the Company issued options to purchase 15,000 shares
of Common Stock at $5.33 per share to each of Messrs. Luttinger, Bright and
Phillips pursuant to the Company's 1993 Long-Term Incentive Plan. In January
1995, these options were cancelled and new options were granted with an
exercise price of $.232 per share, which was determined by the Board of
Directors to be the fair market value per share on such date, to Messrs.
Luttinger (8,058 shares), Bright (20,058 shares) and Phillips (20,058 shares).
See "Management -- Long-Term Incentive Plan." See "Business -- Acquisition of
CSM" and "Certain Transactions" for information relating to the grant by SISC
of options to purchase Common Stock and the issuance by Consolidated of its
common stock to Messrs. Bright, Phillips and one other officer.
(3) Represents the value of 17,752 shares of Common Stock transferred to
Mr. Luttinger by SISC. See "Certain Transactions."
(4) See "Business -- Acquisition of CSM" and "Certain Transactions" for
information relating to the grant of options by SISC and the issuance of
Consolidated Common Stock by Consolidated to Messrs. Bright and Phillips.
-40-
In June 1994, at the closing of the acquisition of CSM, the Company
entered into five-year employment agreements with Messrs. Luttinger, Evans,
Edward D. Bright, John F. Phillips and Anthony F. Grisanti providing for
<PAGE> 65
annual base salaries of $125,000, $85,000, $125,000, $125,000 and $80,000,
respectively. The agreements with Messrs. Luttinger and Evans replaced prior
agreements and increased their compensation. In January 1996, Mr. Evans' base
salary was increased to $100,000. The agreements provide for an annual cost
of living adjustment, an automobile allowance and a bonus of 4% of income
before income taxes for Messrs. Luttinger, Bright and Phillips and 2% of
income before income taxes for Messrs. Evans and Grisanti. The maximum bonus
is 300% of salary for Messrs. Luttinger, Bright and Phillips and 200% of
salary for Messrs. Evans and Grisanti. The agreements provide that such
individuals will be elected as executive officers of the Company. Mr.
Luttinger's agreement also provides for payment of his relocation expenses.
For 1996, Messrs. Luttinger, Phillips and Bright agreed to reduced base
salaries of $62,500, $100,000 and $100,000, with certain incentives if certain
targets are attained. The aggregate annual base salaries for 1996 under these
agreements is $442,500. The Company also pays one other officer, Mr. James L.
Conway, salary of $52,000 per year. In addition, the Company has an agreement
with Trinity pursuant to which the Company will pay Trinity $180,000 per year
during the three-year period commencing on the first day of the month in which
the Company receives the proceeds from this Offering. See "Certain
Transactions."
The annual base compensation payable by Consolidated to Mr. Schiller
pursuant to his agreement with Consolidated is $250,000, subject to a cost of
living increase. In addition, Mr. Schiller receives incentive compensation
based on the results of Consolidated's operations and has a right to purchase
10% of Consolidated's or SISC's equity interest in their operating
subsidiaries and investments for 110% of their cost. In December 1995 and
January 1996, Mr. Schiller exercised his option with respect to 373,507 shares
of Common Stock owned by Holdings. See "Certain Transactions."
Mr. Storm R. Morgan, a director of the Company, serves as a consultant to
the Company. The Company does not pay any compensation directly to Mr.
Morgan; however, it has a consulting agreement with SMI, a company wholly-
owned by Mr. Morgan and of which he is a director and officer, pursuant to
which the Company pays SMI monthly payments of $25,000 to $59,000 per month,
for which SMI will provide the services of Mr. Morgan from time to time on an
as-needed basis and up to four other persons to serve in management-level or
other key positions for the Company on a full-time basis. In addition, the
Company pays SMI a fee equal to 6% of revenue from smart card and related
services. See "Certain Transactions."
Pursuant to the underwriting agreement, the Company has agreed to use its
best efforts to obtain key man life insurance in the amount of $1,000,000 on
the lives of each of Messrs. James L. Conway, Leonard M. Luttinger and Thomas
L. Evans. See "Underwriting."
Long-Term Incentive Plan
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. The Plan
does not have an expiration date. Set forth below is a summary of the Plan,
but this summary is qualified in its entirety by reference to the full text of
the Plan, a copy of which is filed as an exhibit to the Registration
Statement, of which this Prospectus is a part.
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
<PAGE> 66
the Plan cease to be subject to such option, 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.
The Plan is to be administered by a committee of no less than three
disinterested directors to be appointed by the board (the "Committee"). No
member or alternate member of the Committee shall be eligible to receive
options or stock under the Plan (except as to the automatic grant of options
to directors) or under any plan of the Company or any of its affiliates. The
Committee has broad discretion in determining the persons to whom stock
options or other awards are to be granted, the terms and conditions of the
award, including the type of award, the exercise price and term and the
restrictions and forfeiture conditions.
-41-
If no Committee is appointed, the functions of the committee shall be
performed by the board of directors. At present no Committee has been
appointed.
The Committee will have the authority to grant the following types of
awards under the Plan: incentive or non qualified stock options; stock
appreciation rights; restricted stock; deferred stock; stock purchase rights
and/or other stock based awards. The Plan is designed to provide the
Committee with broad discretion to grant incentive stock based rights.
In January 1995, the Board granted stock options to purchase an aggregate
of 252,804 shares of Common Stock at $.232 per share, and in December 1995,
the Board granted stock options to purchase an aggregate of 104,952 shares of
Common Stock at $.345 per share. Such exercise prices were determined by the
Board to be the fair market value per share on the date of grant. The options
become exercisable as to 50% of the shares on the first and second
anniversaries of the date of grant. In connection with certain of the January
1995 option grants, the Board cancelled 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, including options to purchase 27,000 shares which were granted to each
of Messrs. Edward D. Bright and John F. Phillips. The options are exercisable
as to 50% of the shares on the first and second anniversaries of the date of
grant.
The following table sets forth information concerning options granted
during the year ended December 31, 1995 to the officers named in the
compensation table under "Management -- Remuneration." No SARs were granted.
See "Certain Transactions" for information concerning the issuance of
Outstanding Warrants to such persons.
<PAGE> 67
Option Grants in Last Fiscal Year
Percent of
Total Options
Number of Shares Granted to Exersize
Underlying Employees in Price Expiration
Name Options Granted Fiscal Year(1) Per Share Date
- --------------------- ---------------- -------------- --------- ----------
Lewis S. Schiller 52,500(2) 8.7% $5.00 12/31/99
Leonard M. Luttinger 8,058 1.3% .232(3) 1/31/00
18,710 3.1% .345 12/31/00
37,500(2) 6.3% 2.00 12/31/99
112,500(2) 18.8% 5.00 12/31/99
Edward D. Bright 20,058 3.3% .232(3) 1/31/00
18,710 3.1% .345 12/31/00
John F. Phillips 20,058 3.3% .232(3) 1/31/00
18,710 3.1% .345 12/31/00
- -------------------
(1) The percentage is based upon the total number of stock options granted
(357,756) and Outstanding Warrants issued (240,000) to individuals who, at the
time of issuance, were officers, directors or employees of the Company.
(2) Represents Outstanding Warrants.
(3) In connection with the January 1995 option grants, the Company
cancelled options to purchase 15,000 shares of Common Stock at $5.33 per
share, which had been granted in 1994 to each of Messrs. Luttinger, Bright and
Phillips.
The following table sets forth information concerning the exercise of
options during the year ended December 31, 1995 and the year-end value of
options held by the officers named in the compensation table under "Management
- -- Remuneration."
-42-
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Value
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options
Options at at Fiscal
Shares Fiscal Year End Year End (1)
Acquired
Upon Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- --------------------- -------- -------- ---------------- ----------------
Lewis S. Schiller -- -- --/ --/
52,500 -0-
Leonard M. Luttinger -- -- --/ --/
176,768 $ 911
Edward D. Bright -- -- --/ --/
38,768 2,267
John F. Phillips -- -- --/ --/
38,768 2,267
- -------------------
<PAGE> 68
(1) The determination of "in the money" options at December 31, 1995, is
based on the fair market value of the Common Stock as determined by the Board
of Directors in December 1995 of $.345 per share.
CERTAIN TRANSACTIONS
Issuance of Securities at Organization
In connection with its organization, the Company, in September 1992,
issued an aggregate of 824,256 shares of Common Stock as follows: 582,072
shares of Common Stock to SISC for $1,300, 112,584 shares to DLB for $6,700,
and 43,200 shares of Common Stock to each of DLB, Mr. Harris Freedman and Mr.
E. Gerald Kay, who has been a director of the Company since June 1994, for
nominal consideration. SISC, DLB, Mr. Freedman and Mr. Kay may be deemed
founders of the Company. Mr. Lewis S. Schiller, chairman of the board of the
Company, is chairman of the board and chief executive officer of SISC. DLB is
controlled by the wife of Mr. Lewis S. Schiller; however, Mr. Schiller
disclaims any beneficial interest in any securities owned by DLB. Mr.
Freedman is an officer of Bridge Ventures, one of the selling warrantholders.
See "Selling Security Holders."
Also in connection with its organization, the Company acquired all of the
capital stock of LMT, Inc. ("LMT") in exchange for 129,600 shares of Common
Stock and 400 shares of Series A Preferred Stock, which are convertible into
an aggregate of 43,200 shares of Common Stock. LMT was a shell corporation
which was organized at the same time as the Company and never engaged in any
business. One of the stockholders of LMT, Mr. Martin Hodes, had, prior to the
Company's organization, but in anticipation of the Company's formation,
incurred substantial expenses in connection with technology related to the
Company's business, but which was never used by the Company. The shares of
Common Stock were issued as follows: 60,480 shares to Leonard M. Luttinger,
chief operating officer and a director of the Company, 43,200 shares to Mr.
Martin Hodes, and 25,920 shares to Mr. Thomas Evans, vice president of the
Company. Prior to the issuance of the stock to the LMT stockholders, none of
the LMT stockholders had any affiliation with the Company.
From December 1992 through March 1993, the Company sold to each of four
accredited investors, including Mr. E. Gerald Kay, DLB and Mr. Harris
Freedman, one unit of the Company's securities for $25,000 per unit. Each
such unit consisted of 4,536 shares of Common Stock and 20 shares of Series B
Preferred Stock. Each share of Series B Preferred Stock is convertible into
259.2 shares of Common Stock. In April 1994, DLB sold its shares of Series B
Preferred Stock to SISC.
In October 1993, SISC transferred an aggregate of 74,100 shares of Common
Stock for $.232 per share, as follows: 17,460, 8,640 and 18,000 shares to
Messrs. Luttinger, Hodes and Evans, respectively, and 6,000 shares to each of
five key
-43-
employees of the Company. The $15,000 consideration payable to SISC with
respect to the 65,520 shares transferred by SISC to Messrs. Luttinger, Evans
and five employees was included in the Company's obligations to SISC.
In June 1993, SISC transferred 4,253 shares to a nonaffiliated party.
During the period from November 1993 and March 1994, SISC transferred an
<PAGE> 69
aggregate of 36,201 shares of Common Stock at $.232 per share to DLB and six
unaffiliated persons.
Loan Transactions with Related Parties
During the period between the Company's organization in September 1992 and
September 30, 1995, the Company borrowed approximately $2.9 million and
$97,000 from SISC and DLB, respectively. These loans bear interest at 10% per
annum. In April 1994, SISC purchased from DLB the note representing the
Company's obligations to DLB and DLB's Series B Preferred Stock. At such
time, SISC also purchased an Interim Note for $54,000 from an unrelated party
for $54,000.
The largest amounts owed by the Company at any one time to SISC during
1994 and 1995 were approximately $2.6 million and $3.0 million, respectively,
which were outstanding on December 31, 1994 and September 30, 1995. The
largest amount due to DLB during 1994 was $97,000, which was outstanding from
the beginning of the year until such obligation was purchased by SISC in April
1994.
In October 1993, the Company issued 78,000 shares of Common Stock to SISC
in consideration for the cancellation by SISC of approximately $18,100 of
indebtedness. At September 30, 1995, the Company's indebtedness to SISC was
approximately $3.0 million plus interest of $388,000. This indebtedness
includes loans made by SISC to the Company and CSM as well as the value of the
40,000 shares of Consolidated common stock issued to certain individuals in
connection with the acquisition of CSM. See "Certain Transactions --
Acquisition of CSM." At September 30, 1995:
(a) SISC accepted 2,210 shares of Series D Preferred Stock, which have a
redemption price of $1,000 per share, or an aggregate of $2,210,000 in
exchange for cancellation of the Company's indebtedness in the principal
amount of $2.2 million. The Series D Preferred Stock is not voting and there
are limitations on the redemption of such shares. See "Description of
Securities -- Series D Preferred Stock." The Company issued a $750,000
promissory note to SISC in respect of the balance of its indebtedness to SISC.
The note is due in January 1997, but is payable five days after the completion
of the Company's initial public offering. SISC has agreed to extend the
maturity date to April 1, 1997. SISC has agreed not to require any payment
unless the over-allotment option is exercised, and, in the event that the
over-allotment option is exercised, a portion of such proceeds may be used for
such purposes. In addition, in the event the Company receives the proceeds
from the exercise of any Warrants or Outstanding Warrants, a portion of such
proceeds may be used to make a payment to SISC.
(b) The Company issued 1,125,000 shares of Common Stock to Holdings in
consideration of the cancellation by SISC of accrued interest at September 30,
1995 of $388,000, reflecting a price of $.345 per share.
In January 1996, SISC exchanged 1,000 shares of Series D Preferred Stock
for 1,125,000 shares of Common Stock. As a result of this exchange, the
aggregate redemption price of the Series D Preferred Stock was reduced to $1.2
million.
In connection with the July and August 1993 issuance by the Company of
Interim Notes in the principal amount of $216,000, SISC sold to the lenders an
aggregate of 15,120 shares of Common Stock for $.232 per share, and the
Company agreed to give such stockholders certain piggyback registration rights
<PAGE> 70
with respect to such shares. In connection with the agreement of the holders
of the Interim Notes to extend the maturity date until December 31, 1994, SISC
transferred an aggregate of 9,375 shares of Common Stock to such holders. The
holder of an Interim Note in the principal amount of $27,000 received payment
of the note and no shares were transferred.
In connection with the issuance by the Company of its December 1994
Interim Notes in the principal amount of $200,000, Consolidated (i) issued
shares of its common stock to the holders of such notes at the time of the
issuance of such notes, (ii) issued additional shares of its common stock upon
the exercise by the Company of its right to extend the maturity date of the
December 1994 Interim Notes to January 31, 1995, and a subsequent extension to
April 30, 1995, and (iii) guaranteed payment when such notes were not paid on
January 31, 1995. In anticipation of such interim financing, SISC advanced
the Company $50,000, which was repaid from the proceeds of the December 1994
Interim Notes. Pursuant to a modification and extension agreement dated as of
January 31, 1995, among the Company and the noteholders, the principal of the
notes was payable in three installments due on February 28, March 31 and April
30, 1995 and additional shares of
-44-
Consolidated common stock were issued. The first payment of $67,000 plus
interest was made. The Company had the right to defer the March 1995 payment
until April 1995 by the payment of an extension fee of $12,500 and the
issuance by Consolidated of additional shares of its common stock. The
Company has not made either of the other two payments and is in default on the
notes. The remaining principal plus accrued interest and the extension fee
was approximately $150,000 at December 31, 1995. See "Interim Financings."
In consideration of the issuance of the shares of Consolidated's common stock
and its agreement to guarantee payment of the notes, the Company agreed to
issue 75,000 shares of Common Stock to Holdings. Such shares were issued at
September 30, 1995. In addition, the Company agreed to issue Outstanding
Warrants to SISC. See "Certain Transactions -- Issuance of Warrants."
During 1994 and 1995, ACT lent the Company $58,000 and $109,000,
respectively. The outstanding balance on December 31, 1995 and 1994 were
$167,000 and $58,000, respectively, representing the largest amounts owed
during such years. ACT has lent money to the Company during 1996, and, at
March 31, 1996 and May 31, 1996, the balance due to ACT was $232,000 and
$256,000, respectively, which, with interest, is to be paid from the proceeds
of this Offering. The loans, which were made on a demand basis and bear
interest at 10% per annum, were used for working capital and other corporate
purposes.
The Company believes that the transactions described above are fair and
reasonable to the Company and were made on terms that are not less favorable
to the Company than could have been obtained from non-affiliated third
parties, if such third parties were available, and it intends that
transactions with related parties will be on an arms-length basis.
Issuance of Warrants
In October 1993, the Company issued to SISC warrants to purchase 375,000
shares of Common Stock at $10.00 per share, 225,000 shares at $6.67 per share
and 150,000 shares of Common Stock at $2.67 per share and issued to SMACS
warrants to purchase 37,500 shares of Common Stock at $6.67 per share and
37,500 shares at $2.67 per share. These warrants became exercisable six
<PAGE> 71
months from the completion of the Company's initial public offering or earlier
with the consent of the Company and the underwriter and expired on November
30, 1998. In connection with the Company's prior proposed initial public
offering, SISC agreed to a reduction in the amount to be paid to SISC from the
proceeds of such offering, and the Company issued to SISC a warrant to
purchase 525,000 shares of Common Stock at $6.67 per share, and the Company
and SISC agreed to an adjustment in the exercise price of warrants to purchase
375,000 shares of Common Stock from $10.00 per share to $6.67 per share.
In February 1996, the Company issued an aggregate of 3,153,750 Outstanding
Warrants, of which 2,516,250 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 1994 Interim Notes. 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 Outstanding Warrants, but not
the exercise price, was adjusted for the reverse split. The Outstanding
Warrants expire on December 31, 1999. The Outstanding Warrants, which, with
respect to SISC and SMACS, replaced of the warrants described in preceding
paragraph, were issued in February 1996 to the following persons:
Name $2 Warrants $5 Warrants
- ---------------------------- ----------- -----------
SISC 1,968,750 --
Lewis S. Schiller -- 52,500
Storm R. Morgan 225,000 --
James L. Conway 112,500 112,500
Leonard M. Luttinger 37,500 112,500
Thomas L. Evans -- 37,500
SMACS Holdings, Inc. 37,500 187,500
Bridge Ventures, Inc. 135,000 135,000
--------- -------
Total 2,516,250 637,500
========= =======
SISC transferred Outstanding Warrants to purchase 668,750 shares of Common
Stock to Mr. Lewis S. Schiller (206,250 warrants), E. Gerald Kay (100,000
warrants), two officers and one director of Consolidated (150,000 warrants),
SMI
-45-
(62,500 warrants) and two other individuals who are not affiliated with the
Company (150,000 warrants). Mr. Schiller has an employment agreement with
Consolidated pursuant to which he has an option to purchase 10% of
Consolidated's or SISC's or their subsidiaries' interest in equity securities
owned by them. The transfer of the Outstanding Warrants to Mr. Schiller was
made pursuant to such employment agreement and for other services to SISC. In
February 1996, Mr. Schiller transferred to DLB 133,500 shares of Common Stock
and Outstanding Warrants to purchase 106,250 shares of Common Stock at $2.00
per share in satisfaction of certain of his obligations to DLB or its
stockholder. DLB and Mr. Schiller have transferred 15,000 shares and 35,000
shares, respectively, of Common Stock to each of the Schillers' three adult
children and one person who is an officer of Consolidated. Mr. Schiller and
DLB disclaim any beneficial interest in the shares owned by the Schillers'
adult children.
The Company issued the Outstanding Warrants to Messrs. James L. Conway and
Storm R. Morgan prior to their election as directors and prior to Mr. Conway's
election as president of the Company.
<PAGE> 72
Acquisition of CSM
In April 1994, the Company entered into the Purchase Agreement to acquire
the assets of CSM from Old CSM. In June 1994, the acquisition of CSM's assets
was completed. Consolidated issued 800,000 shares of its common stock to Old
CSM, and SISC advanced the Company $500,000 to enable it to pay the cash
portion of the purchase price. The assets of Old CSM were acquired by a
subsidiary of Holdings, and the subsidiary changed its corporate name to
Creative Socio-Medics Corp. In September 1995, Holdings transferred the CSM
stock to the Company, and the Company issued 750,000 shares of Common Stock to
Holdings.
In connection with the execution of the Purchase Agreement, SISC granted
to Messrs. Edward D. Bright, John F. Phillips and Anthony F. Grisanti options
to purchase 66,000, 66,000 and 19,920 shares of Common Stock, respectively.
The shares subject to option are outstanding shares which are owned by
Holdings. The options are exercisable at an exercise price of $.232 per share
during the five-year period commencing on June 1994. The Company has agreed
to give Messrs. Bright, Phillips and Grisanti certain registration rights,
which do not apply prior to the completion of this Offering, with respect to
the shares of Common Stock issuable upon exercise of the options. At the
closing of the acquisition, Consolidated issued 17,377, 17,377 and 5,246
shares of Consolidated common stock to Messrs. Bright, Phillips and Grisanti,
respectively. Mr. Phillips has been a director of the Company and an officer
of the Company and/or CSM since the acquisition of CSM. Mr. Bright was chief
executive officer and a director of the Company from June 1994 through
December 1995 and has been an officer of CSM since the June 1994 acquisition.
Mr. Grisanti has been treasurer of the Company since June 1994. The value of
such shares, which was approximately $136,000, was included in the amount owed
by the Company to SISC at September 30, 1995. See "Certain Transactions --
Loan Transactions with Related Parties."
At the time of the acquisition of CSM in June 1994, SISC transferred its
stock in the Company to Holdings, its wholly-owned subsidiary, which, until
September 30, 1995, owned all of the stock of CSM as well as a controlling
interest in the Company.
Other Related Party Transactions
The Company has an agreement with Trinity pursuant to which the Company
will pay Trinity a monthly fee of $15,000 for a three year term commencing on
the first day of the month in which the Company receives the proceeds from
this Offering for general business, management and financial consulting
services. Neither Mr. Lewis S. Schiller, chairman of the board of the
Company, Consolidated, SISC and Trinity, nor any other employee of
Consolidated, SISC or Trinity receives any compensation from the Company for
services rendered by him, and the fee reflects compensation for services
rendered and to be rendered by Trinity to the Company. No compensation is
payable or accruable pursuant to the agreement until the completion of the
Company's initial public offering.
Pursuant to an employment agreement between Mr. Schiller and Consolidated,
Mr. Schiller has the right to purchase 10% of SISC's equity position in its
subsidiaries, including the Company, for 110% of SISC's cost. In December
1995, Mr. Schiller exercised his option and purchased from SISC an aggregate
of 348,009 shares of Common Stock of the Company at exercise prices per share
ranging from $.002 to $.38. The option exercised by Mr. Schiller covered his
option with respect to all of the Common Stock issued to SISC and/or Holdings
<PAGE> 73
through December 31, 1995. In January 1996, Mr. Schiller exercised his option
to purchase 112,500 shares of Common Stock representing his option with
respect to the stock issuable in connection with the 1,125,000 shares of
Common Stock issued to Holdings in exchange for 1,000 shares of Series D
Preferred Stock. Such option had an exercise price of $.978 per share.
Pursuant to his employment agreement with Consolidated, the exercise price is
payable over a five-year period.
-46-
In January 1996, the Company issued 11,250 shares of Common Stock to Mr.
Thomas L. Evans for services rendered by him. The fair value of such shares
will be treated as compensation to Mr. Evans in 1995.
In January 1996, Mr. Storm R. Morgan was elected as a director of the
Company. At the time of his election, he was a consultant to the Company.
The Company does not pay compensation to Mr. Morgan. In March 1996, the
Company entered into an agreement with SMI, of which Mr. Morgan is sole
stockholder, an officer and a director, pursuant to which the Company pays SMI
monthly payments of $25,000 to $59,000 per month, for which SMI will provide
to the Company the services of Mr. Morgan from time to time on an as-needed
basis and up to four persons to serve in management-level or other key
positions for the Company on a full-time basis. These individuals are
providing marketing, support and technical services to the Company. Mr.
Morgan is not required to devote any minimum amount of time to the business of
the Company. The agreement continues until December 31, 2000. If four
persons (other than Mr. Morgan) are provided, the monthly fee payable to SMI
will be $59,000. To the extent that SMI provides the services of persons
other than Mr. Morgan, the Company may terminate such persons on 60 days
notice, in which event the monthly payment is reduced by $8,500 per person,
but in no event will the monthly payment be less than $25,000. The agreement
also provides for payment to SMI of 6% of smart card and related revenues
generated by the Company. In addition, the Company is to pay SMI a fee of
$250,000 for services relating to the Company's agreement with IBN, of which
$50,000 is payable from the proceeds of this Offering. The remaining $200,000
is payable from the proceeds of the over-allotment option, if exercised by the
Underwriter, and from cash flow, provided, that in any event such amount shall
be due 13 months from the date of this Prospectus. The agreement also
provides that, in the event that the Company receives a commission from sales
of smart cards and smart card readers, the Company is to pay SMI 50% to 100%
of the commissions received.
Mr. Morgan is also senior vice president of, and holds an equity interest
in, Oasis. The Company has a joint marketing agreement with Oasis pursuant to
which each company markets the products of the other for which it receives a
commission. The Company and Oasis are also forming a joint venture
corporation to acquire the SATC Software. The purchase price of the SATC
Software is $650,000, of which $325,000 is payable by each of the Company and
Oasis. The initial $325,000 payment was made by the Company. Oasis has
agreed to provide the joint venture company with the funds to make the
remaining installments, which are due during 1996 and has paid two
installments each in the amount of $75,000. The remaining payment of $175,000
is due in September 1996. However, the agreement pursuant to which the SATC
Software is being purchased, requires the Company to make the payment
regardless of whether the Company receives payment from Oasis. The Company
intends to develop enhancements to the SATC Software to enable it to interface
with Oasis' IST/Share as well as the Company's own CarteSmart System software.
<PAGE> 74
In connection with the Company's accounts receivable financing, Messrs.
Schiller and Luttinger guaranteed the Company's obligations to the lender and
Messrs. Edward D. Bright and Anthony F. Grisanti, vice president of CSM and
secretary and chief financial officer of the Company, respectively, issued
their guaranty which is limited to the losses or liability resulting from
certain irregularities by the Company in the submission of invoices for
advances and the failure to pay over the proceeds from accounts to the lender.
The Company knows of no such irregularities. The advances under this facility
were approximately $972,000 and $960,000 at March 31, 1996 and May 31, 1996,
respectively.
The Company has performed consulting services for certain of
Consolidated's affiliated companies. Such services, which have not been
substantial and consist of technical support, programming and systems
analysis, are rendered on an arms-length basis.
INTERIM FINANCINGS
In July and August 1993, the Company issued its Interim Notes, which are
payable from the proceeds of this Offering, in the aggregate principal amount
of $216,000. The notes were issued to seven accredited investors, none of
whom is an officer, director or principal stockholder of the Company or an
affiliate of any such person. In connection with the issuance of such notes,
SISC sold to the purchasers 2,160 shares of Common Stock at $.232 per share
for each $27,000 note purchased. The holders of the shares of Common Stock
have certain piggyback rights subsequent to this Offering. The net proceeds
to the Company from the Interim Notes was approximately $205,000, of which
$78,535 was used to reimburse SISC for money advanced by SISC without interest
to pay principal and interest on notes in the aggregate principal amount of
$50,000 and for other working capital purposes. The balance of such net
proceeds was used for working capital and other corporate purposes. In
connection with an extension of the maturity date to December 31, 1994, SISC
transferred to the holders of the Interim Notes an aggregate of 9,375 shares
of the Company's Common Stock owned by it. In April 1994, SISC purchased from
one of the noteholders such noteholder's Interim Note in the principal amount
of $54,000. The Company has paid $27,000 of the Interim Notes. The
outstanding Interim Notes are to be paid from the proceeds of this Offering.
See "Use of Proceeds" and "Certain Transactions."
-47-
In December 1994, the Company borrowed $200,000 from accredited investors
and issued to the investors its December 1994 Interim Notes in the principal
amount of $200,000. The proceeds of the loan were used for working capital
and other corporate purposes, including the payment of expenses relating to
this Offering. In anticipation of such interim financing, SISC advanced the
Company $50,000, which was repaid from the proceeds of the December 1994
Interim Notes. The December 1994 Interim Notes were due December 31, 1994.
In connection with the December 1994 Interim Notes, Consolidated issued an
aggregate of 30,000 shares of its common stock to the lenders in December
1994. The last reported sale price for the Consolidated common stock on
December 1, 1994, the date of the initial closing for the sale of December
1994 Interim Notes, was $.69 per share. Pursuant to the terms of the notes,
the Company extended the maturity date of the December 1994 Interim Notes
until January 31, 1995, in connection with which Consolidated delivered an
additional 30,000 shares of Consolidated common stock. The December 1994
Interim Notes provided that if such notes are not paid by January 31, 1995,
Consolidated is to issue and deliver its guaranty of the payment of the
<PAGE> 75
principal of the December 1994 Interim Notes and accrued interest thereon in
three equal installments on the last day of February, March and April 1995.
Pursuant to a modification and extension agreement dated as of January 31,
1995, among the Company and the noteholders, the principal amount of the
December 1994 Interim Notes was payable in three installments due on February
28, March 31 and April 30, 1995. The first payment of $67,000 plus interest
was made. The Company had the right to defer the March payment until April by
the payment by the Company of a $12,500 extension fee and the issuance by
Consolidated of 25,004 additional shares of Consolidated common stock. The
Company has not made either of the other two payments and is in default on the
notes. The unpaid principal amount of the December 1994 Interim Notes of
$133,000, plus accrued interest, plus the $12,500 extension fee, which are
guaranteed by Consolidated, will be paid from the proceeds of this Offering.
In consideration of the issuance by Consolidated of shares of its common stock
in connection with the December 1994 Interim Notes, its agreement to issue
additional shares of its common stock if the notes are extended and its
agreement to provide the guarantee in the event that the December 1994 Interim
Notes are not paid by January 31, 1995, the Company issued to SISC Outstanding
Warrants to purchase 300,000 shares of Common Stock at $2.00 per share and
issued 75,000 shares of Common Stock to Holdings. See "Use of Proceeds" and
"Certain Transactions."
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 are payable from the proceeds of
this Offering. The Company also agreed that, if the Company completes an
initial public offering of its securities prior to the January 31, 1997
maturity date, it would register pursuant to the Securities Act and issue to
the noteholders one Unit for each $2.00 principal amount of notes.
Accordingly, the Company has registered 250,000 Units for issuance to the
noteholders for no cash consideration. The shares of Common Stock and
Warrants comprising the Units will be issued at the time of payment of the
notes, but the holders of the Units have agreed not to sell shares of Common
Stock or engage in short sales or sales against the box for a period of 13
months commencing on the date the Company receives the proceeds of this
Offering. See "Selling Security Holders."
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of May 31, 1996 and as adjusted to give
effect to the sale of the 1,125,000 shares of Common Stock included in the
562,500 Units offered by this Prospectus and the 500,000 shares of Common
Stock included in the 250,000 Units to be issued to the holders of the January
1996 Interim Notes, who are the Selling Stockholders, and the 25,000 shares of
Common Stock to be issued to the Company's asset-based lender, the number and
percentage of shares of outstanding Common Stock owned by each person owning
at least 5% of the Company's Common Stock, each director owning stock and all
directors and officers as a group:
Common Stock
Amount and Nature
Name and of Beneficial Percent of Ownership
Address(1) Ownership(2) Outstanding As Adjusted
- ---------------------- ----------------- ----------- -----------
Lewis S. Schiller(3) 3,332,759 80.3% 57.7%
160 Broadway
New York, NY 10038
<PAGE> 76
-48-
SIS Capital Corp.(4) 3,232,758 78.0% 56.0%
and
Carte Medical Holdings, Inc.
160 Broadway
New York, NY 10038
DLB, Inc.(5) 237,577 5.7% 4.1%
One Butler Road
Scarsdale, New York 10583
Leonard M. Luttinger(6) 82,029 2.0% 1.4%
John F. Phillips(7) 76,129 1.8% 1.3%
E. Gerald Kay(8) 52,920 1.3% 0.9%
James L. Conway(9) -- -- --
Storm R. Morgan(10) -- -- --
All Directors and Officers 3,544,462 84.8% 61.1%
as a group (five individuals
owning stock)(3),(6),(7),(8),
(9),(10),(11)
(1) Unless otherwise indicated, the address of each person is c/o Netsmart
Technologies, Inc., 146 Nassau Avenue, Islip, New York 11751.
(2) Unless otherwise indicated, each person named has the sole voting and
sole investment power and has direct beneficial ownership of the shares.
Since Outstanding Warrants are not exercisable for six months following the
date of this Prospectus without the consent of the Company and the
Underwriter, for purpose of this table, shares issuable upon exercise of
Outstanding Warrants are not deemed to be outstanding at May 31, 1996.
Information as to ownership of Outstanding Warrants by each person named in
the table is set forth in the footnotes.
(3) Includes (a) 100,000 shares of Common Stock owned by Mr. Schiller, (b)
3,222,390 shares owned by Holdings, of which Mr. Schiller is the chief
executive officer and has the power to vote the shares, and (c) 10,368 shares
of Common Stock issuable upon conversion of the 40 shares of Series B
Preferred Stock owned by Holdings. In addition, SISC holds Outstanding
Warrants to purchase 1,300,000 shares of Common Stock at $2.00 per share, and
Mr. Schiller holds Outstanding Warrants to purchase 100,000 shares of Common
Stock at $2.00 per share and 52,500 shares of Common Stock and $5.00 per
share. Includes 151,920 shares of Common Stock owned by Holdings, subject to
options granted by SISC in connection with the acquisition of CSM. See
"Certain Transactions." Shares owned by Mr. Schiller do not include
securities owned by DLB, which is owned by Mr. Schiller's wife and with
respect to which Mr. Schiller disclaims beneficial interest. At May 31, 1996,
DLB owned 237,577 shares of Common Stock and Outstanding Warrants to purchase
106,250 shares of Common Stock at $2.00 per share. If the shares owned by DLB
were included with Mr. Schiller's shares, the number of shares of Common Stock
beneficially owned by Mr. Schiller at May 31, 1996 would be 3,572,358, or
86.2% of the outstanding shares of Common Stock at such date, and 61.9% as
adjusted.
<PAGE> 77
(4) Includes (a) 3,222,390 shares owned by Holdings and (b) 10,368 shares
of Common Stock issuable upon conversion of the Series B Preferred Stock owned
by Holdings. In addition, SISC holds Outstanding Warrants to purchase
1,300,000 shares of Common Stock at $2.00 per share. The shares owned by SISC
include 151,920 shares of Common Stock owned by Holdings, subject to options
granted by SISC in connection with the acquisition of CSM. See "Certain
Transactions."
(5) Does not include Outstanding Warrants to purchase 106,250 shares of
Common Stock at $2.00 owned by DLB.
-49-
(6) Includes 4,029 shares of Common Stock issuable upon exercise of
outstanding options. In addition, Mr. Luttinger owns Outstanding Warrants to
purchase 37,500 shares of Common Stock at $2.00 per share and 112,500 shares
of Common Stock at $5.00 per share.
(7) Represents 66,000 shares issuable upon exercise of an option granted by
SISC and 10,029 shares of Common Stock issuable upon exercise of outstanding
options.
(8) Includes 5,184 shares of Common Stock issuable upon conversion of
shares of Series B Preferred Stock owned by Mr. Kay. In addition, Mr. Kay
holds Outstanding Warrants to purchase 100,000 shares of Common Stock at $2.00
per share.
(9) Mr. Conway holds Outstanding Warrants to purchase 112,500 shares of
Common Stock at $2.00 per share and 112,500 shares of Common Stock at $5.00
per share.
(10) Mr. Morgan holds Outstanding Warrants to purchase 225,000 shares of
Common Stock at $2.00 per share, and SMI, of which Mr. Morgan is sole
stockholder and an officer and director, owns outstanding Warrants to purchase
62,500 shares of Common Stock at $2.00 per share.
(11) Information with respect to all officers and directors as a group also
includes 26,560 shares of Common Stock issuable upon exercise of an option
granted by SISC to Mr. Anthony F. Grisanti.
SELLING SECURITY HOLDERS
The Selling Warrant Holders, SISC and Bridge Ventures, may sell, from time
to time, the 800,000 shares of Common Stock issuable upon exercise of the
Outstanding Warrants pursuant to this Prospectus. During the first six months
from the date of this Prospectus, the Outstanding Warrants may not be
exercised, and the underlying shares of Common Stock may not be sold, without
the consent of the Company and the Underwriter. For the 18 months following
the expiration of such six-month period, neither the Outstanding Warrants nor
the underlying shares of Common Stock may be sold without the consent of the
Underwriter. The Outstanding Warrants are not to be publicly sold, and there
is not expected to be any public market for the Outstanding Warrants. The
Outstanding Warrants provide that, in the event that they are sold or
otherwise transferred pursuant to an effective registration statement, they
expire 90 days from the date of transfer. As a result, any purchaser of
Outstanding Warrants must, within a short period, either exercise the
Outstanding Warrants or permit them to expire unexercised. The Outstanding
Warrants have an exercise price of $2.00 per share. SISC may exercise
<PAGE> 78
Outstanding Warrants by delivery of shares of Series D Preferred Stock, with
each such share to be deemed to have a value of $1,000. See "Description of
Securities -- Series D Preferred Stock."
SISC owns Outstanding Warrants to purchase 1,300,000 shares of Common
Stock at $2.00 per share. Bridge Ventures owns Outstanding Warrants to
purchase 135,000 shares of Common Stock at $2.00 per share and 135,000 shares
at $5.00 per share. In addition, SMACS Holdings, Inc. ("SMACS"), an affiliate
of Bridge Ventures, holds outstanding Warrants to purchase 37,500 shares of
Common Stock at $2.00 per share and 187,500 shares at $5.00 per share, and Mr.
Harris Freedman, an officer of Bridge Ventures and SMACS, owns 47,736 shares
of Common Stock. See "Certain Transactions."
The Outstanding Warrants become exercisable six months from the date of
this Prospectus, or earlier with the consent of the Company and the
Underwriter. At such time as the Outstanding Warrants become exercisable,
neither the Outstanding Warrants nor the underlying Common Stock may be sold
without the prior consent of the Underwriter until the expiration of two years
from the date of this Prospectus, and in no event may such Warrants or the
underlying Common Stock be sold prior to the exercise in full or the
expiration of the Underwriter's over-allotment option. The holders of the
Outstanding Warrants have one demand registration right commencing two years
after the date of this Prospectus. The Outstanding Warrants being registered
are exercisable at $2.00 per share, expire on December 31, 1999 and may not be
redeemed by the Company.
Set forth below is information as to the stock ownership of the Selling
Warrant Holders as of the date the Outstanding Warrants become exercisable.
-50-
Amount
and Nature Shares Percent of Ownership
Name and of Beneficial Being --------------------
Address Ownership Offered Outstanding As Adjusted
- ------------------- ------------- -------- ----------- -----------
SIS Capital Corp. 4,532,758(1) 750,000 64.1% 53.5%(2)
160 Broadway
New York, NY 10038
Bridge Ventures, Inc. 270,000(3) 50,000 4.5% 3.6%
545 Madison Avenue
New York, NY 10022
(1) Includes (a) 1,300,000 shares of Common Stock issuable upon exercise of
the Outstanding Warrants, (b) 3,222,390 shares owned by Holdings, which is
wholly owned by SISC, of which 151,920 shares of Common Stock are subject to
options granted by SISC in connection with the CSM acquisition, and (c) 10,368
shares of Common Stock issuable upon conversion of the 40 shares of Series B
Preferred Stock owned by Holdings. Mr. Lewis S. Schiller, chairman of the
board of the Company is the chief executive officer of Consolidated, the
parent of SISC, and has the right to vote and direct the disposition of the
shares owned by Holdings, SISC's wholly-owned subsidiary. See "Business
Acquisition of CSM," "Management" and "Certain Transactions."
<PAGE> 79
(2) If the over-allotment option is exercised in full, SISC's percent of
ownership on an as adjusted basis would be 56.2%.
(3) Represents 270,000 shares of Common Stock issuable upon exercise of
Outstanding Warrants owned by Bridge Ventures. Shares owned by Bridge
Ventures do not include securities owned by SMACS or by Mr. Harris Freedman,
who is an officer of Bridge Ventures and SMACS.
In connection with the issuance of the January 1996 Interim Notes, the
Company has agreed that, if the Company completes its initial public offering
prior to the January 31, 1997 maturity date of the notes, it will issue to the
note holders one Unit for each $2.00 principal amount of January 1996 Interim
Notes. The Company has registered, and will issue pursuant to the
Registration Statement of which this Prospectus is a part, an aggregate of
250,000 Units, consisting of 500,000 shares of Common Stock and 250,000
Warrants, to the persons named below (the "Selling Stockholders"). The
Selling Stockholders have agreed that they will not sell such shares prior to
the expiration of 13 months from the date the Company first receives the
proceeds of this Offering without the consent of the Underwriter. They have
further agreed that during such 13-month period they will not engage in any
short sales or short sales against the box with respect to the Company's
securities.
Set forth below is information as to the Selling Stockholders. None of
the Selling Stockholders is a stockholder or warrant holder of the Company.
Name Number of Shares(1) Number of Warrants
- ---------------------------- ------------------- ------------------
360 Central Corporation 300,000 150,000
12382 Baywind Court
Boca Raton, FL 33428
Charles S. Junger 100,000 50,000
42 West 39th St.
New York, NY 10018
Steven Capizzi 50,000 25,000
42 Cider Creek Circle
Rochester, NY 14616
Kenneth Lipson 50,000 25,000
251 28th Avenue
San Francisco, CA 94121
-51-
(1) Does not include shares of Common Stock issuable upon exercise of the
Warrants included in the Units to be issued to the Selling Stockholders.
The Company will not receive any proceeds from the sale by the Selling
Warrant Holders of the shares of Common Stock issuable upon exercise of their
Outstanding Warrants other than the exercise price of the Outstanding Warrants
to the extent that the Outstanding Warrants are exercised, or from the sale by
the Selling Stockholders other than upon exercise of their Warrants.
<PAGE> 80
The Selling Warrant Holders have advised the Company that any transfer of
the Outstanding Warrants will be either a sale in private transactions at
negotiated prices or by gift. They have advised the Company with respect to
the underlying shares of Common Stock, and each of the Selling Stockholders
has advised the Company with respect to the shares of Common Stock and
Warrants being acquired by them pursuant to this Prospectus that such sale may
be effected from time to time in transactions (which may include block
transactions by or for the account of the Selling Warrant Holders or Selling
Stockholders (collectively, "Selling Security Holders") in the over-the-
counter market or in negotiated transactions, a combination of such methods of
sale or otherwise. Sales may be made at fixed prices which may be changed, at
market prices or in negotiated transactions, a combination of such methods of
sale or otherwise, and securities may be transferred by gift.
Selling Security Holders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Security Holders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the over-
the-counter market, in negotiated transactions or otherwise. Such broker-
dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Security Holders and/or the
purchasers from whom such broker-dealer may act as agents or to whom they may
sell as principals or otherwise (which compensation as to a particular broker-
dealer may exceed customary commissions).
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Selling Security Holder's securities may
not simultaneously engage in market-making activities with respect to any
securities of the Company during the applicable "cooling-off" period (at least
two and possibly nine business days) prior to the commencement of such
distribution. Accordingly, in the event the Underwriter is engaged in a
distribution of a Selling Security Holder's securities, it will not be able to
make a market in the Company's securities during the applicable restrictive
period. However, the Underwriter has not agreed to and is not obligated to
act as broker-dealer in the sale of any Selling Security Holder's securities
and the Selling Security Holders may be required, and in the event the
Underwriter is a market-maker, will likely be required, to sell such
securities through another broker-dealer. In addition, each Selling Security
Holder desiring to sell securities will be subject to the applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation Rules 10b-6 and 10b-7, which provisions may limit
the timing of the purchases and sales of shares of the Company's securities by
such Selling Security Holders.
The Selling Security Holders and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities might be deemed to be
underwriting discount and commissions under the Securities Act.
DESCRIPTION OF SECURITIES
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. Holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders.
<PAGE> 81
Holders of Common Stock are entitled to share in such dividends as the Board
of Directors, in its discretion, may declare from funds legally available. In
the event of liquidation, each outstanding share entitles its holder to
participate ratably in the assets remaining after payment of liabilities.
There are presently 4,136,253 shares of Common Stock outstanding, and upon
completion of this Offering and the issuance of 250,000 Units to the Selling
Stockholders and 25,000 shares of Common Stock to the Company's asset-based
lender, assuming the Underwriter's over-allotment option is not exercised,
there will be 5,786,253 shares of Common Stock outstanding. In addition, at
May 31, 1996, there were reserved for issuance 3,153,750 shares for issuance
upon the exercise of the Outstanding Warrants, 511,000 shares for issuance
upon exercise of options granted and to be granted pursuant to the Plan,
43,200 shares for issuance upon conversion of the Series A Preferred Stock and
20,737 shares for issuance upon conversion of the Series B Preferred Stock.
-52-
Stockholders have no preemptive or other rights to subscribe for or
purchase additional shares of any class of stock or of any other securities of
the Company, and there are no redemption or sinking fund provisions with
regard to the Common Stock. All outstanding shares of Common Stock are, and
those issuable pursuant to this Prospectus or upon exercise of the Warrants
will be when issued as provided in this Prospectus, validly issued, fully
paid, and nonassessable. Stockholders do not have cumulative voting rights.
The Company's Board of Directors is authorized to issue, from time to time
and without further stockholder action, up to 3,000,000 shares of Preferred
Stock in one or more distinct series. The Board of Directors is authorized to
fix the following rights and preferences, among others, for each series: (i)
the rate of dividends and whether such dividends shall be cumulative; (ii) the
price at and the terms and conditions on which shares may be redeemed; (iii)
the amount payable upon shares in the event of voluntary or involuntary
liquidation; (iv) whether or not a sinking fund shall be provided for the
redemption or purchase of shares; (v) the terms and conditions on which shares
may be converted; and (vi) whether, and in what proportion to any other series
or class, a series shall have voting rights other than required by law, and,
if voting rights are granted, the number of voting rights per share. The
Company has no plans, agreements or understandings with respect to the
designation of any series or the issuance of any shares of Preferred Stock.
There are presently three series of Preferred Stock which are authorized.
Set forth below is information concerning each series of Preferred Stock. The
Series A, B and D Preferred Stock are on a parity with each other with respect
to dividends and on liquidation and dissolution. The Board of Directors may
create other series of Preferred Stocks which are either junior or senior to
or on a parity with the Series A, B or D Preferred Stock as to dividends
and/or on any voluntary or mandatory liquidation without the approval of the
holders of such series of Preferred Stock. Upon completion of this Offering,
the outstanding shares of Series A Preferred Stock will be converted into
shares of Common Stock, the shares of Series B Preferred Stock will be
redeemed, and the only series of Preferred Stock which will remain outstanding
will be the Series D Preferred Stock.
The Company's certificate of incorporation authorizes the issuance of so-
called "blank check" preferred stock with the board of directors having the
right to determine the designations, rights, preferences and privileges of the
holders of one or more series of Preferred Stock. Accordingly, the board of
directors is empowered, without stockholder approval, to issue Preferred Stock
with voting, dividend, conversion, liquidation or other rights which could
<PAGE> 82
adversely affect the voting power and equity interest of the holders of Common
Stock. The Preferred Stock, which could be issued with the right to more than
one vote per share, could be utilized as a method of discouraging, delaying or
preventing a change of control of the Company. The possible impact on
takeover attempts could adversely affect the price of the Company Stock.
Although the Company has no present intention to issue any additional shares
of Preferred Stock or to create any additional series of Preferred Stock, the
Company may issue such shares in the future.
Series A Preferred Stock
The Series A Preferred Stock consists of 400 shares, all of which are
issued and outstanding. Holders of shares of Series A Preferred Stock are
entitled to receive, when and as declared by the Board of Directors of the
Company, out of funds of the Company legally available for payment, dividends
at an annual rate of $4 per share. Dividends on the Series A Preferred Stock
are payable annually on March 1 in each year to holders of record at the close
of business on the immediately preceding February 15. The first dividend
payment date was March 1, 1994. Dividends accrue from the date of issuance of
the shares and are payable in cash or in shares of Common Stock, valued at
fair market value, as the Company's board of directors shall determine. The
Company did not pay the $2,262 dividend due March 1, 1994 or the $1,600
dividend due March 1, 1995 and 1996, and a portion of proceeds of this
Offering may be used to make such payment. Other than as required by
applicable law, holders of shares of Series A Preferred Stock will not be
entitled to any voting rights with respect to their shares.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, after payment has been made on any security of the
Company, if any, which ranks senior to the Series A Preferred Stock, holders
of shares of Series A Preferred Stock will be entitled to receive from the
assets of the Company $100 per share plus accrued and unpaid dividends to the
payment date, before any payment or distribution is made to holders of shares
of Common Stock or any other series or class of stock hereafter issued which
ranks junior as to liquidation rights to the Series A Preferred Stock.
Each share of Series A Preferred Stock, unless previously redeemed, is
convertible, commencing on the date of issuance, into 108 shares of Common
Stock. If the Series A Preferred Stock is called for redemption, conversion
rights will
-53-
expire at the close of business on the business day prior to the redemption
date. The conversion rate is subject to adjustment upon the occurrence of
certain events.
The Company has the right to redeem the shares of Series A Preferred Stock
at a redemption price of $1,000 per share, plus accumulated and unpaid
dividends, at any time after the end of the first fiscal quarter in which its
financial statements show a consolidated net worth, determined in accordance
with generally accepted accounting principles consistently applied, of at
least $2,500,000. The Series A Preferred Stock may be redeemed in whole only
and not in part. Once the Series A Preferred Stock becomes redeemable, the
Company may redeem the Series A Preferred Stock upon at least 30, but not more
than 60 days' prior written notice to the registered holders. If the Series A
Preferred Stock is called for redemption, conversion rights will expire at the
close of business on the business day prior to the redemption date. The
<PAGE> 83
Company has agreed not to redeem the Series A Preferred Stock prior to the
expiration of two years from the date of this Prospectus. The sole holder of
the Series A Preferred Stock has agreed to convert his Series A Preferred
Stock into Common Stock following completion of this Offering.
Series B Preferred Stock
The Series B Preferred Stock consists of 80 shares, all of which are
issued and outstanding. Holders of shares of Series B Preferred Stock are
entitled to receive, when and as declared by the Board of Directors of the
Company, out of funds of the Company legally available for payment, dividends
at an annual rate of $72 per share. Dividends on the Series B Preferred Stock
will be payable annually on March 1 in each year to holders of record at the
close of business on the immediately preceding February 28. The first
dividend payment date was March 1, 1994. Dividends shall accrue from April 1,
1993, and are payable in cash or in shares of Common Stock, valued at fair
market value, as the Company's board of directors shall determine, except that
the first dividend shall be paid in cash. The Company did not pay the $5,271
dividend due March 1, 1994 or the $5,760 dividends due on each of March 1,
1995 and 1996. The Series B Preferred Stock is to be redeemed from the
proceeds of this Offering, and payment of the accrued dividends is being
waived. Other than as required by applicable law, holders of shares of Series
B Preferred Stock will not be entitled to any voting rights with respect to
their shares.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, after payment has been made on any security of the
Company, if any, which ranks senior to the Series B Preferred Stock, holders
of shares of Series B Preferred Stock will be entitled to receive from the
assets of the Company $1,200 per share plus accrued and unpaid dividends to
the payment date, before any payment or distribution is made to holders of
shares of Common Stock or any other series or class of stock hereafter issued
which ranks junior as to liquidation rights to the Series B Preferred Stock.
The holders of the Series B Preferred Stock will be entitled at any time
after the Company receives the proceeds from this Offering, subject to prior
redemption, to convert each share of Series B Preferred Stock into 259.2
shares of Common Stock of the Company. If the Series B Preferred Stock is
called for redemption, conversion rights will expire at the close of business
on the business date prior to the redemption date. The conversion rate is
subject to adjustment upon the occurrence of certain events. If the holder of
Series B Preferred Stock demands redemption following the Company's initial
public offering, as described below, such holder's rights of conversion
terminate immediately upon issuing such demand.
Each holder of Series B Preferred Stock has the right, during the 30 day
period following the date the Company receives the proceeds of this Offering,
on written notice to the Company, 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. No holder of Series B Preferred Stock shall be
entitled to demand redemption of less than all of the shares of Series B
Preferred Stock owned by such holder. The Company shall be required to pay
the redemption price within 90 days after the receipt of the notice from the
holder. In the event that a holder of Series B Preferred Stock gives such
notice, such holder's right to convert the Series B Preferred Stock into
Common Stock will terminate immediately upon making the demand for redemption,
and the holder's only claim against the Company shall be for the amount of the
redemption price.
<PAGE> 84
The Company shall have the right to redeem the shares of Series B
Preferred Stock at a redemption price of $1,200 per share, plus accumulated
and unpaid dividends, at any time after the end of the first fiscal quarter in
which its financial statements show a consolidated net worth, determined in
accordance with generally accepted accounting principles consistently applied,
of at least $5,000,000. The Series B Preferred Stock may be redeemed in whole
only, and not in part. Once the Series B Preferred Stock becomes redeemable,
the Company may redeem the Series B Preferred Stock upon at least 30, but not
more than 60 days' prior written notice to the registered holders. If the
Series B Preferred Stock is called for redemption,
-54-
conversion rights will expire at the close of business on the business day
prior to the redemption date. The Series B Preferred Stock is to be redeemed
following completion of this Offering. See "Use of Proceeds."
Series D Preferred Stock
The Series D Preferred Stock consists of a maximum of 3,000 shares, of
which 1,210 shares are issued and outstanding and owned by SISC. The holders
of the Series D Preferred Stock are entitled to receive, out of funds of the
Company legally available for payment, dividends at the annual rate of $60 per
share. Dividends are cumulative and accrue from the date of issuance, which
was October 1, 1995. Dividends are payable semiannually on the first day of
April and October, with the first dividend payment date being the first of
such dates to occur after the Company receives the proceeds of this Offering.
Other than as required by applicable law, holders of shares of Series D
Preferred Stock will not be entitled to any voting rights with respect to
their shares.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, after payment has been made on any security of the
Company, if any, which ranks senior to the Series D Preferred Stock, holders
of shares of Series D Preferred Stock will be entitled to receive from the
assets of the Company $1.00 per share plus accrued and unpaid dividends to the
payment date, before any payment or distribution is made to holders of shares
of Common Stock or any other series or class of stock hereafter issued which
ranks junior as to liquidation rights to the Series D Preferred Stock. The
Series D Preferred Stock is on a parity with the Series A and B Preferred
Stock as to dividends and upon liquidation or dissolution of the Company.
The Series D Preferred Stock is redeemable at the option of the Company
for $1,000 per share commencing October 1, 1998, except that, prior to October
1, 1998, the Company may redeem shares of Series D Preferred Stock from 50% of
the net proceeds from the sale by the Company of its equity securities,
including the issuance of convertible securities and shares of Common Stock
issued upon exercise of warrants or options, excluding this Offering, except
to the extent that fifty percent (50%) of the net proceeds to the Company from
the sale of securities pursuant to the over-allotment option may be used to
redeem any shares of Series D Preferred Stock. However, the Company has
agreed not to apply any proceeds from the over-allotment option, if exercised,
to redeem the Series D Preferred Stock. The Company is not required to
provide for the redemption of any shares of Series D Preferred Stock through
the operation of a sinking fund. Any action to redeem the Series D Preferred
Stock shall be taken by the Board of Directors, with any person who is a
holder or an officer, director or principal stockholder of a holder of Series
D Preferred Stock not participating in the vote. The Series D Preferred Stock
<PAGE> 85
may also be transferred to the Company to exercise Outstanding Warrants, with
each share valued at $1,000 for such purpose.
Series A Redeemable Common Stock Purchase Warrants
The holder of each Warrant is entitled, upon payment of the exercise price
of $4.50 per share, to purchase one share of Common Stock. Unless previously
redeemed, the Warrants are exercisable during the two-year period commencing
one year from the date of this Prospectus. Holders of the Warrants will only
be able to exercise the Warrants if (a) a current prospectus under the
Securities Act of 1933, as amended (the "Securities Act") relating to the
shares of Common Stock issuable upon exercise of the Warrants is then in
effect, and (b) such securities are qualified for sale or exemption from
qualification under the applicable securities laws of the states in which the
various holders of Warrants reside.
Commencing one year from the date of this Prospectus, with the consent of
the Underwriter, the Warrants are subject to redemption by the Company, on not
more than 60 nor less than 30 days' written notice, at a price of $.05 per
Warrant, if the closing price per share of the Common Stock is at least $9.00,
subject to adjustment, for at least 20 consecutive trading days ending within
ten days of the date on which the Warrants are called for redemption. Holders
of Warrants will automatically forfeit their rights to purchase the shares of
Common Stock issuable upon exercise of such Warrants unless the Warrants are
exercised before the close of business on the business day immediately prior
to the date set for redemption. All of the outstanding Warrants must be
redeemed if any are redeemed. A notice of redemption shall be mailed to each
of the registered holders of the Warrants by first class, postage prepaid,
within five business days (or such longer period to which the Underwriter may
consent) after the Warrants are called for redemption, but no earlier than the
sixtieth nor later than the thirtieth day before the date fixed for
redemption. The notice of redemption shall specify the redemption price, the
date fixed for redemption, the place where the Warrant certificates shall be
delivered and the redemption price to be paid, and that the right to exercise
the Warrants shall terminate at 5:00 p.m. (New York City time) on the business
day immediately preceding the date fixed for redemption. The Warrants can
only be redeemed if, on the date the Warrants are called for redemption, there
is an effective registration statement covering the shares of Common Stock
issuable upon exercise of the Warrants.
-55-
The Warrants may be exercised upon surrender of the certificate(s)
therefor on or prior to 5:00 p.m. New York City time on the expiration date of
the Warrants or, if the Warrants are called for redemption, the day prior to
the redemption date (as explained above) at the offices of the Company's
warrant agent (the "Warrant Agent") with the form of "Election to Purchase" on
the reverse side of the certificate(s) filled out and executed as indicated,
accompanied by payment of the full exercise price for the number of Warrants
being exercised.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, such as stock
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events.
The Company is not required to issue fractional shares of Common Stock,
and in lieu thereof will make a cash payment based upon the current market
<PAGE> 86
value of such fractional shares. The holder of the Warrants will not possess
any rights as a stockholder of the Company unless and until the holder
exercises the Warrants.
Although the Warrants have a fixed exercise price and a formula for
adjustments in certain events and have a fixed expiration date, it is possible
that in the future the Company may wish to reduce the exercise price or extend
the exercise period. The Company has no plans to reduce such price or extend
the Warrants. Any such change would be effected pursuant to a post-effective
amendment to the registration statement of which this Prospectus is a part or
a new registration statement, and no exercise of the Warrant with amended
terms may be exercised unless and until such post-effective amendment or new
registration statement has been declared effective by the Commission.
Series B Common Stock Purchase Warrants
As of the date of this Prospectus, there were Outstanding Warrants to
purchase 2,516,250 shares of Common Stock at $2.00 per share and 637,500
shares of Common Stock at $5.00 per share. See "Certain Transactions" for
information with respect to the issuance of such Outstanding Warrants.
The Outstanding Warrants may be exercised during the period commencing six
months from the date the Company receives proceeds from this Offering and
ending on December 31, 1999. The exercise of the Outstanding Warrants can be
accelerated with the consent of the Company and the Underwriter. The holders
of the Outstanding Warrants have demand and piggy-back registration rights
with respect to stock issuable upon issuance of the Outstanding Warrants
commencing two years from the date of this Prospectus or earlier with the
consent of the Underwriter and the managing underwriter of the subsequent
offering. The Company has no right to redeem the Outstanding Warrants. In
the event that the Outstanding Warrants are transferred pursuant to an
effective registration statement, the Outstanding Warrants automatically
terminate 90 days after the date of transfer, provided that the registration
statement remains current and effective during such period. In such event,
the transferee must either exercise the Outstanding Warrant or permit it to
expire unexercised.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, such as stock
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events.
The holders of the Outstanding Warrants have been given the opportunity to
profit from a rise in the market for the shares of the Company's Common Stock
at a nominal cost per share, with a resulting dilution in the interests of
stockholders. The holders of the Outstanding Warrants can be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain equity capital, if then needed, by a new equity offering on terms more
favorable than those provided by the Outstanding Warrants. Such facts may
adversely affect the terms on which the Company could obtain additional
financing.
Dividend Policy
Except for the obligation of the Company to pay dividends with respect to
the Preferred Stock, the Company presently intends to retain future earnings,
if any, in order to provide funds for use in the operation and expansion of
<PAGE> 87
its business and accordingly does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. See "Description of Securities" for
information concerning dividends payable with respect to the Series A, B and D
Preferred Stock.
-56-
Shares Eligible for Future Sale
All of the presently issued and outstanding shares of Common Stock and
preferred stock are "restricted securities" as that term is defined under Rule
144 promulgated under the Securities Act. If a public market develops for the
Company's Common Stock, the Company is unable to predict the effect that sales
made by under Rule 144 or other sales may have on the then prevailing market
price of the Common Stock. Of the 4,136,253 presently outstanding shares of
Common Stock, 896,994 shares of Common Stock, together with the 63,936 shares
of Common Stock issuable upon conversion of the Series A and B Preferred
Stock, will become eligible for sale pursuant to Rule 144 commencing 90 days
after the effective date of the registration statement of which this
Prospectus forms a part. The remaining shares of Common Stock will become
eligible for sale pursuant to Rule 144 in September 1997 as to 1,755,000
shares held by SISC, in December 1997 to February 1998 as to the remaining
1,484,259, of which 1,012,500 shares are owned by Holdings.
Commencing on the date the shares may be sold pursuant to Rule 144, in any
three month period, a holder may sell up to the greater of 1% of the
outstanding Common Stock, which is 57,612 shares based on 5,761,253 shares of
Common Stock outstanding upon completion of this Offering assuming the over-
allotment option is not exercised or the average weekly trading volume.
Shares held by persons who are not affiliated with the Company may sell the
Common Stock without limitation on the later of three years after the stock is
purchased or 90 days from the date of this Prospectus.
Transfer Agent and Warrant Agent
The transfer agent for the Common Stock and Warrant Agent for the Warrants
is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005.
UNDERWRITING
Monroe Parker Securities, Inc. (the "Underwriter") has agreed, on the
terms and subject to the conditions of the Underwriting Agreement, to purchase
from the Company, and the Company has agreed to sell to the Underwriter,
562,500 Units. The Underwriter is committed to purchase and pay for all of
the Units offered hereby on a "firm commitment" basis if any are purchased.
The Underwriter has advised the Company that it proposes to offer the
Units to the public at the initial public offering price set forth on the
cover page of this Prospectus. The Underwriter may allow to certain dealers,
who are members of the National Association of Securities Dealers, Inc.
("NASD"), concessions not exceeding $. per Unit, of which not more than $.
per Unit may be reallowed to other dealers who are members of the NASD. After
the initial public offering, the offering price, the concession and the
reallowance may be changed.
<PAGE> 88
The Company has granted an option to the Underwriter, exercisable during
the 45 day period from the date of this Prospectus, to purchase up to a
maximum of 84,375 additional Units at the offering price, less the
underwriting discounts, for the sole purpose of covering over-allotments of
the Units.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance of 3% of the aggregate public offering price of all Units sold
(including any Units sold pursuant to the Underwriter's over-allotment
option).
The Company has also agreed to enter into a one-year consulting agreement
pursuant to which the Company will pay the Underwriter a fee of $60,000, which
is to be paid in full at the closing of this Offering. During the period of
the consulting agreement, the Underwriter will be reimbursed for its Company-
approved out of pocket expenses. The Company has also entered into an
agreement with the Underwriter pursuant to which the Company will pay the
Underwriter a fee in the event the Company enters into an acquisition, merger
or similar transaction with a party introduced to it by the Underwriter. As
of the date of this Prospectus, the Underwriter has not introduced the Company
to any such party.
The holders of substantially all of the outstanding Common Stock and
Outstanding Warrants have agreed not to sell publicly any of their securities
without the written consent of the Underwriter for a period of two years from
the date of this Prospectus. See "Selling Security Holders" for information
relating to the restrictions on sales by the Selling Security Holders. The
Company has agreed that, during the two years following the date of this
Prospectus, it will not, without the consent of the Underwriter, issue shares
of Common Stock (other than upon exercise or conversion of existing
securities, the Warrants, the Underwriter's Options or pursuant to the Plan)
or file a registration statement.
-57-
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
In connection with this Offering, the Company has agreed to sell to the
Underwriter, for a purchase price of $56.25, Underwriter's Options to purchase
from the Company up to 56,250 Units at an exercise price equal to 145% of the
initial public offering price per Unit. The Units issuable upon exercise of
the Underwriter's Options are substantially identical to the Units offered
hereby, except that, in the event that the Underwriter's Options are exercised
after the redemption (but before the expiration) of the Warrants, the Warrants
underlying the Underwriter's Options are immediately redeemable by the
Company. The Underwriter's Options are exercisable for a four-year period
commencing one year from the date this Prospectus, except that, if the
Warrants expire prior to the exercise of the Underwriter's Options, upon such
exercise the Company will issue two shares of Common Stock and no Warrants.
During the one-year period commencing on the date of this Prospectus, the
Underwriter's Options may not be sold, transferred, assigned or hypothecated,
except to the officers of the Underwriter or to selling group members or
officers or partners or members thereof, all of which shall be bound by such
restrictions. The Underwriter's Options will contain anti-dilution provisions
providing for adjustment under certain circumstances similar to those
applicable to the Warrants included in the Units. The holders of the
Underwriter's Options have no voting, dividend or other rights as stockholders
<PAGE> 89
of the Company with respect to securities underlying the Underwriter's
Options. The holders of the Underwriter's Options have been given the
opportunity to profit from a rise in the market for the Company's securities
at a nominal cost, with a resulting dilution in the interests of stockholders.
The holders of the Underwriter's Options can be expected to exercise them at a
time when the Company would, in all likelihood, be able to obtain equity
capital, if then needed, by a new equity offering on terms more favorable than
those provided by the Underwriter's Options. Such facts may adversely affect
the terms on which the Company could obtain additional financing. Any profit
received by the Underwriter on the sale of the Underwriter's Options or the
securities issuable upon exercise of the Underwriter's Options may be deemed
additional underwriting compensation.
The Company has agreed during the term of the Underwriter's Options and
for two years thereafter to give advance notice to the holders of the
Underwriter's Options or underlying securities of its intention to file a
registration statement, and, in such case, the holders of the Underwriter's
Options and underlying securities shall have the right to require the Company
to include the underlying securities in such registration statement at the
Company's expense. At the demand of the holders of a majority of holders of
the Underwriter's Options and underlying Common Stock, including Common Stock
issued or issuable upon exercise of the Warrants issuable upon exercise of the
Underwriter's Options, during the term of the Underwriter's Options, the
Company will also be required to file one such registration statement at the
Company's expense. In addition, the Company has agreed to cooperate with the
holders of the Underwriter's Options in filing a registration at the expense
of the holders of the Underwriter's Options or underlying securities.
The Company has also agreed to pay the Underwriter a Warrant solicitation
fee equal to 4% of the exercise price of the Warrants, a portion of which may
be reallowed to a member of the NASD who solicited or assisted in the
solicitation of the exercise of the Warrants. The Warrant exercise fee shall
not be payable with respect to any Warrant exercises prior to the first
anniversary of the date of this Prospectus and may be paid only if (i) the
market price of the Common Stock on the date the Warrant is exercised is
greater than the exercise price of the Warrant, (ii) the exercise of the
Warrant was solicited by a member of the NASD and the customer states in
writing that the transaction was solicited and designates in writing the
broker-dealer to receive compensation for the exercise, (iii) the Warrant is
not held in a discretionary account, (iv) disclosure of the compensation
arrangements are made, in addition to the disclosure provided in this
Prospectus, in documents provided to holders of warrants at the time of
exercise, and (v) the solicitation of the Warrant was not made in violation of
Rule 10b 6 of the Commission under the Securities Exchange Act of 1934.
Rule 10b-6 of the Commission pursuant to the Exchange Act may prohibit the
Underwriter from engaging in any market making activities with regard to the
Company's securities for the period from nine business days (or such other
applicable period as Rule 10b-6 may provide) prior to any solicitation by the
Underwriter of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Underwriter may be
unable to provide a market for the Company's securities during certain periods
while the Warrants are exercisable.
Prior to this Offering there has been no public market for the securities
of the Company. The public offering price and composition of the Units and
the exercise price and other terms of the Warrants have been arbitrarily
<PAGE> 90
determined by negotiation between the Company and the Underwriter and are not
related to the Company's assets, book value, financial condition or any other
recognized criteria of value. In determining such price and terms, the
Company and the Underwriter considered a number of factors, including
estimates of the Company's business potential, the amount of dilution to
public investors, the Company's prospects, and the general condition of the
securities markets.
-58-
Pursuant to the Underwriting Agreement, the Company has agreed to use its
best efforts to purchase key-man life insurance in the amount of $1 million on
the life of each of Messrs. James L. Conway, Leonard M. Luttinger and Thomas
L. Evans, president, chief operating officer and vice president, respectively,
of the Company, and to keep such insurance in effect for at least three years
from the date of this Prospectus, provided that such insurance is available on
standard rates. The Company will be the beneficiary of these policies.
The Company has agreed not to call the Series A Preferred Stock for
redemption during the two years following the date of this Prospectus without
the consent of the Underwriter.
The Underwriter has informed the Company that sales to any account over
which the Underwriter exercises discretionary authority will not exceed 1% of
this Offering.
LEGAL MATTERS
Esanu Katsky Korins & Siger, 605 Third Avenue, New York, New York 10158,
counsel for the Company, have given their opinion as to the authorization and
valid issuance of the shares of Common Stock and Warrants comprising the Units
offered by this Prospectus. Singer, Bienenstock, Zamansky, Ogele & Selengut,
LLP, 40 Exchange Place, New York, New York 10005, is acting as counsel for the
Underwriter in connection with this Offering.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Mortenson and Associates, P.C., independent certified public
accountants, as stated in their report appearing herein, which includes an
explanatory paragraph that there is substantial doubt as to the ability of the
Company to continue as a going concern, and are included in reliance on their
report given on the authority of that firm as experts in accounting and
auditing. The financial statements of CSM for the year ended December 31,
1993 included in this Prospectus have been audited by Richard A. Eisner &
Company, LLP, independent certified public accountants, as stated in their
report appearing herein, and are included in reliance on their report given on
the authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1 relating to the securities offered
hereby has been filed by the Company with the Securities and Exchange
Commission. This Prospectus does not contain all of the information set forth
in such Registration Statement. For further information with respect to the
Company and to the securities offered hereby, reference is made to such
<PAGE> 91
Registration Statement, including the exhibits thereto. Statements contained
in this Prospectus as to the content of any contract or other document
referred to are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
-59-
<PAGE> 92
[This page intentionally left blank]
-60-
<PAGE> 93
INDEX TO FINANCIAL STATEMENTS
Page to Page
------------
Netsmart Technologies:
Independent Auditor's Report F-3
Balance Sheets F-4 - F-7
Statements of Operations F-8 - F-9
Statements of Stockholders' Equity F-10 - F-14
Statements of Cash flows F-15 - F-19
Notes to Financial Statements F-20 - F-40
Creative Socio-Medics Corp.:
Independent Auditors Report F-41
Statements of Operations F-42
Statements of Changes in Capital Deficiency F-43
Statements of Cash Flows F-44 - F-45
Notes to Financial Statements F-46 - F-47
F-1
<PAGE> 94
[Page is intentionally blank.]
F-2
<PAGE> 95
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 sheet of
Netsmart Technologies, Inc. [formerly CSMC Corporation] and subsidiary as of
December 31, 1995, and the combined balance sheet of Netsmart Technologies,
Inc. and affiliate as of December 31, 1994, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Netsmart Technologies, Inc. and subsidiary as of December 31, 1995, and
Netsmart Technologies, Inc. and affiliate as of December 31, 1994, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1995, and the results of Netsmart Technologies,
Inc.'s operations and cash flows for the year ended December 31, 1993, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the financial
statements and as discussed in Note 3 to the financial statements, the Company
has suffered recurring losses since its inception in 1992, and has an
accumulated deficit at December 31, 1995 of $5,147,000. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/_____________________________
MORTENSON AND ASSOCIATES, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 6, 1996
F-3
<PAGE> 96
NETSMART TECHNOLOGIES, INC.
______________________________________________________________________________
BALANCE SHEETS
______________________________________________________________________________
March 31, December 31,
1996 __________________________
[Consolidated] 1995 1994
[Unaudited] [Consolidated] [Combined]
______________ ____________ ________
Assets:
Current Assets:
Cash $71,000 $-- $--
Accounts Receivable - Net 2,329,000 2,112,000 1,732,000
Costs and Estimated Profits in
Excess of Interim Billings 1,055,000 415,000 502,000
Other Current Assets 19,000 14,000 24,000
--------- --------- ---------
Total Current Assets 3,474,000 2,541,000 2,258,000
--------- --------- ---------
Property and Equipment - Net 336,000 347,000 349,000
--------- --------- ---------
Other Assets:
Software Development Costs -- -- 419,000
Deferred Public Offering Costs 114,000 -- 331,000
Investment in Joint Venture at Equity -- -- 21,000
Customer Lists 3,364,000 3,442,000 3,755,000
Advance Payment under Proposed
Joint Venture 325,000 -- --
Other Assets 61,000 60,000 60,000
--------- --------- ---------
Total Other Assets 3,864,000 3,502,000 4,586,000
--------- --------- ---------
Total Assets $7,674,000 $6,390,000 $7,193,000
========= ========= =========
See Notes to Financial Statements.
F-4
<PAGE> 97
NETSMART TECHNOLOGIES, INC.
______________________________________________________________________________
BALANCE SHEETS
______________________________________________________________________________
March 31, December 31,
1996 __________________________
[Consolidated] 1995 1994
[Unaudited] [Consolidated] [Combined]
______________ ____________ ________
Liabilities and Stockholders'
Equity:
Current Liabilities:
Cash Overdraft $ 107,000 $ 95,000 $ 39,000
Notes Payable - Bank 29,000 79,000 254,000
Notes Payable - Other 1,740,000 1,003,000 362,000
Capitalized Lease Obligations 168,000 169,000 185,000
Accounts Payable 1,627,000 1,186,000 1,027,000
Accrued Expenses 1,134,000 1,323,000 388,000
Interim Billings in Excess of
Costs and Estimated Profits 1,210,000 940,000 1,157,000
Due to Related Parties 232,000 167,000 2,883,000
Deferred Revenue 64,000 141,000 --
--------- --------- ---------
Total Current Liabilities - Forward 6,311,000 5,103,000 6,295,000
--------- --------- ---------
Capitalized Lease Obligations - Forward 29,000 34,000 47,000
--------- --------- ---------
Subordinated Debt - Related
Party - Forward 750,000 750,000 --
--------- --------- ---------
Commitments and Contingencies - Forward -- -- --
--------- --------- ---------
Redeemable Preferred Stock:
Series B 6% Redeemable Preferred Stock;
80 Shares Authorized, Issued and
Outstanding [Liquidation Preference
and Redemption Price of $96,000] -
Forward $ 96,000 $ 96,000 $ 96,000
--------- --------- ---------
See Notes to Financial Statements.
F-5
<PAGE> 98
NETSMART TECHNOLOGIES, INC.
______________________________________________________________________________
BALANCE SHEETS
______________________________________________________________________________
March 31, December 31,
1996 __________________________
[Consolidated] 1995 1994
[Unaudited] [Consolidated] [Combined]
______________ ____________ ________
Total Current Liabilities -
Forwarded $6,311,000 $5,103,000 $6,295,000
--------- --------- ---------
Capitalized Lease Obligations -
Forwarded 29,000 34,000 47,000
--------- --------- ---------
Subordinated Debt - Related Party
- Forwarded 750,000 750,000 --
--------- --------- ---------
Commitments and Contingencies -
Forwarded -- -- --
--------- --------- ---------
Redeemable Preferred Stock -
Forwarded 96,000 96,000 96,000
--------- --------- ---------
Stockholders' Equity:
Preferred Stock, $.01 Par Value;
Authorized 3,000,000 Shares;
Authorized, Issued and Outstanding:
Series A 4% Convertible Redeemable
Preferred Stock - $.01 Par Value
400 Shares Authorized, Issued and
Outstanding [Liquidation Preference
of $40,000] -- -- --
Series D 6% Redeemable Preferred Stock
- $.01 Par Value 3,000 Shares
Authorized, 2,210 and 1,210 Issued and
Outstanding [Liquidation Preference
of $2,210 and $1,210] at December 31,
1995 and March 31, 1996, Respectively -- -- --
Additional Paid-in Capital - Preferred
Stock [$40,000 - Series A; $2,210,000
- Series D at December 31, 1995,
$1,210,000 - Series D at March 31,
1996] 1,250,000 2,250,000 40,000
--------- --------- ---------
Total Preferred Stock - Forward $1,250,000 $2,250,000 $ 40,000
--------- --------- ---------
See Notes to Financial Statements.
F-6
<PAGE> 99
NETSMART TECHNOLOGIES, INC.
______________________________________________________________________________
BALANCE SHEETS
______________________________________________________________________________
March 31, December 31,
1996 __________________________
[Consolidated] 1995 1994
[Unaudited] [Consolidated] [Combined]
______________ ____________ ________
Total Current Liabilities -
Forwarded $6,311,000 $5,103,000 $6,295,000
--------- --------- ---------
Capitalized Lease Obligations -
Forwarded 29,000 34,000 47,000
--------- --------- ---------
Subordinated Debt - Related Party
- Forwarded 750,000 750,000 --
--------- --------- ---------
Commitments and Contingencies -
Forwarded -- -- --
--------- --------- ---------
Redeemable Preferred Stock -
Forwarded 96,000 96,000 96,000
--------- --------- ---------
Total Preferred Stock - Forward 1,250,000 2,250,000 40,000
--------- --------- ---------
Common Stock - $.01 Par Value;
Authorized 15,000,000 Shares; Issued
and Outstanding 1,050,003 Shares at
December 31, 1994, 3,011,253 Shares
at December 31, 1995, 4,136,253
Shares at March 31, 1996 41,000 30,000 11,000
Additional Paid-in Capital -
Common Stock 4,268,000 3,274,000 3,001,000
Accumulated Deficit (5,071,000) (5,147,000) (2,297,000)
--------- --------- ---------
Total Stockholders' Equity 488,000 407,000 755,000
--------- --------- ---------
Total Liabilities and Stockholders'
Equity $7,674,000 $6,390,000 $7,193,000
========= ========= =========
See Notes to Financial Statements.
F-7
<PAGE> 100
NETSMART TECHNOLOGIES, INC.
______________________________________________________________________________
STATEMENTS OF OPERATIONS
______________________________________________________________________________
Three Months Ended March 31,
______________________________
1996 1995
[Consolidated] [Combined]
[Unaudited] [Unaudited]
______________ ___________
Revenues $2,560,000 $1,427,000
Cost of Revenues 1,898,000 1,110,000
--------- ---------
Gross Profit 662,000 317,000
Selling, General and Administrative Expenses 455,000 593,000
Related Party Administrative Expenses 5,000 4,000
Research and Development -- 156,000
--------- ---------
Income [Loss] from Operations 202,000 (436,000)
Financing Costs -- --
Interest Expense 126,000 70,000
Related Party Interest Expense -- 52,000
--------- ---------
Net Income [Loss] $ 76,000 $ (558,000)
========= =========
Net Income [Loss] Per Share $ 0.02 $ (0.12)
========= =========
Number of Shares of Common Stock 4,821,528 4,821,528
========= =========
See Notes to Financial Statements.
F-8
<PAGE> 101
NETSMART TECHNOLOGIES, INC.
______________________________________________________________________________
STATEMENTS OF OPERATIONS
______________________________________________________________________________
Years Ended December 31,
____________________________________
1995 1994 1993
[Consolidated] [Combined]
______________ __________ __________
Revenues $7,382,000 $2,924,000 $ 57,000
Cost of Revenues 5,618,000 2,534,000 20,000
--------- --------- ---------
Gross Profit 1,764,000 390,000 37,000
Selling, General and Administrative
Expenses 2,480,000 1,495,000 358,000
Related Party Administrative
Expenses 18,000 19,000 18,000
Research and Development 699,000 367,000 --
--------- --------- ---------
Income [Loss] from Operations (1,433,000) (1,491,000) (339,000)
Financing Costs 863,000 -- 7,000
Interest Expense 355,000 71,000 87,000
Related Party Interest Expense 199,000 189,000 --
--------- --------- ---------
Net Income [Loss] $(2,850,000) $(1,751,000) $ (433,000)
========= ========= =========
Net Income [Loss] Per Share $ (.59) $ (.36) $ (.09)
========= ========= =========
Number of Shares of Common Stock 4,821,528 4,821,528 4,763,028
========= ========= =========
See Notes to Financial Statements.
F-9
<PAGE> 102
<TABLE>
<CAPTION>
NETSMART TECHNOLOGIES, INC.
_________________________________________________________________________________________________________
STATEMENTS OF STOCKHOLDERS' EQUITY
_________________________________________________________________________________________________________
Three Months
Year Ended December 31, Ended March 31,
________________________________________________________________ ____________________
1993 1994 1995 1995
[Combined] [Consolidated] [Consolidated]
[Unaudited]
____________________ ____________________ ____________________ ____________________
Shares Amounts Shares Amounts Shares Amounts Shares Amounts
_________ _________ _________ _________ _________ _________ _________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Series A Preferred
Stock at $0.01
Par Value:
Beginning Balance 400 $ -- 400 $ -- 400 $ -- 400 $ --
========= ========= ========= ========= ========= ========= ========= =========
Ending Balance 400 $ -- 400 $ -- 400 $ -- 400 $ --
========= ========= ========= ========= ========= ========= ========= =========
Series D Preferred
Stock at $0.01
Par Value:
Beginning Balance -- $ -- -- $ -- -- $ -- 2,210 $ --
Preferred Stock
Issued to
Affiliate -- -- -- -- 2,210 -- -- --
Issuance of Common
Stock in Exchange
for Series D
Preferred Stock -- -- -- -- -- -- (1,000) --
--------- --------- --------- --------- --------- --------- --------- ---------
Ending balance -- $ -- -- $ -- 2,210 $ -- 1,210 $ --
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-10
<PAGE> 103
<TABLE>
<CAPTION>
NETSMART TECHNOLOGIES, INC.
_________________________________________________________________________________________________________
STATEMENTS OF STOCKHOLDERS' EQUITY
_________________________________________________________________________________________________________
Three Months
Year Ended December 31, Ended March 31,
________________________________________________________________ ____________________
1993 1994 1995 1995
[Combined] [Consolidated] [Consolidated]
[Unaudited]
____________________ ____________________ ____________________ ____________________
Shares Amounts Shares Amounts Shares Amounts Shares Amounts
_________ _________ _________ _________ _________ _________ _________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Additional Paid-in
Capital Preferred
Stock:
Beginning Balance $ 40,000 $ 40,000 $ 40,000 $2,250,000
Preferred Stock
Issued to
Affiliate -- -- 2,210,000 --
Issuance of Common
Stock in Exchange
for Series D
Preferred Stock -- -- --
(1,000,000)
--------- --------- --------- ---------
Ending balance $ 40,000 $ 40,000 $2,250,000 $1,250,000
========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-11
<PAGE> 104
<TABLE>
<CAPTION>
NETSMART TECHNOLOGIES, INC.
_________________________________________________________________________________________________________
STATEMENTS OF STOCKHOLDERS' EQUITY
_________________________________________________________________________________________________________
Three Months
Year Ended December 31, Ended March 31,
________________________________________________________________ ____________________
1993 1994 1995 1995
[Combined] [Consolidated] [Consolidated]
[Unaudited]
____________________ ____________________ ____________________ ____________________
Shares Amounts Shares Amounts Shares Amounts Shares Amounts
_________ _________ _________ _________ _________ _________ _________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock $0.01
Par Value,
Authorized
15,000,000 Shares:
Beginning Balance 967,467 $ 10,000 1,050,003 $ 11,000 1,050,003 $ 11,000 3,011,253 $ 30,000
Common Stock Issued
as Part of Units for
Cash in January 1993 4,536 -- -- -- -- -- -- --
Common Stock Issued
for Debt in
October 1993 78,000 1,000 -- -- -- -- -- --
Common Stock Issued
to Affiliate -- -- -- -- 1,950,000 19,000 -- --
Common Stock Issued
to Officer
for Services -- -- -- -- 11,250 -- -- --
Issuance of Common
Stock in Exchange
for Series D
Preferred Stock -- -- -- -- -- -- 1,125,000 11,000
--------- --------- --------- --------- --------- --------- --------- ---------
Ending balance 1,050,003 $ 11,000 1,050,003 $ 11,000 3,011,253 $ 30,000 4,136,253 $ 41,000
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-12
<PAGE> 105
<TABLE>
<CAPTION>
NETSMART TECHNOLOGIES, INC.
_________________________________________________________________________________________________________
STATEMENTS OF STOCKHOLDERS' EQUITY
_________________________________________________________________________________________________________
Three Months
Year Ended December 31, Ended March 31,
________________________________________________________________ ____________________
1993 1994 1995 1995
[Combined] [Consolidated] [Consolidated]
[Unaudited]
____________________ ____________________ ____________________ ____________________
Shares Amounts Shares Amounts Shares Amounts Shares Amounts
_________ _________ _________ _________ _________ _________ _________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Additional Paid-in
Capital, Common
Stock:
Beginning Balance $ 3,000 $ 46,000 $3,001,000 $3,274,000
Common Stock Issued
as Part of Units for
Cash in January 1993 1,000 -- -- --
Common Stock Trans-
ferred by SISC in
Connection with
Interim Notes in
October and
November 1993 7,000 -- -- --
Allocated Related
Party Administra-
tive Expenses 18,000 19,000 18,000 5,000
Combination with CSM -- 2,936,000 -- --
Common Stock Issued
for Debt in
October 1993 17,000 -- -- --
Common Stock Issued
to Affiliate -- -- 233,000 --
Common Stock Issued
to Officer
for Services -- -- 22,000 --
</TABLE>
See Notes to Financial Statements.
F-13
<PAGE> 106
<TABLE>
<CAPTION>
NETSMART TECHNOLOGIES, INC.
_________________________________________________________________________________________________________
STATEMENTS OF STOCKHOLDERS' EQUITY
_________________________________________________________________________________________________________
Three Months
Year Ended December 31, Ended March 31,
________________________________________________________________ ____________________
1993 1994 1995 1995
[Combined] [Consolidated] [Consolidated]
[Unaudited]
____________________ ____________________ ____________________ ____________________
Shares Amounts Shares Amounts Shares Amounts Shares Amounts
_________ _________ _________ _________ _________ _________ _________ _________
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Additional Paid-in
Capital, Common
Stock (continued):
Issuance of Common
Stock in Exchange
for Series D
Preferred Stock -- -- -- 989,000
--------- --------- --------- ---------
Ending balance $ 46,000 $3,001,000 $3,274,000 $4,268,000
========= ========= ========= =========
Accumulated Deficit:
Beginning Balance $ (113,000) $ (546,000) $(2,297,000)
$(5,147,000)
Net Income (Loss) (433,000) (1,751,000) (2,850,000) 76,000
--------- --------- --------- ---------
Ending balance $ (546,000) $(2,297,000) $(5,147,000)
$(5,071,000)
========= ========= ========= =========
Total Stockholders'
Equity $ (449,000) $ 755,000) $ 407,000 $ 488,000
========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-14
<PAGE> 107
NETSMART TECHNOLOGIES, INC.
______________________________________________________________________________
STATEMENTS OF CASH FLOWS
______________________________________________________________________________
Three Months Ended March 31,
______________________________
1996 1995
[Consolidated] [Combined]
[Unaudited] [Unaudited]
______________ ___________
Operating Activities:
Net Income [Loss] $ 76,000 $ (558,000)
--------- ---------
Adjustments to Reconcile Net
Income [Loss] to Net Cash [Used for]
Provided by Operating Activities:
Depreciation and Amortization 109,000 131,000
Administrative Expenses 5,000 4,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (217,000) 636,000
Costs and Estimated Profits in
Excess of Interim Billings (640,000) (102,000)
Other Current Assets (5,000)
10,000
Other Assets (1,000) --
Increase [Decrease] in:
Accounts Payable 441,000 (384,000)
Accrued Expenses (189,000) 350,000
Interim Billings in Excess of
Costs and Estimated Profits 270,000 (552,000)
Due to Related Parties 65,000 209,000
Deferred Revenue (77,000) --
--------- ---------
Total Adjustments (239,000) 302,000
--------- ---------
Net Cash - Operating Activities - Forward (163,000) (256,000)
--------- ---------
Investing Activities:
Acquisition of Property and Equipment (20,000) (4,000)
Advance Payment under Proposed Joint Venture (325,000) --
--------- ---------
Net Cash - Investing Activities - Forward $ (345,000) $ (4,000)
--------- ---------
See Notes to Financial Statements.
F-15
<PAGE> 108
NETSMART TECHNOLOGIES, INC.
______________________________________________________________________________
STATEMENTS OF CASH FLOWS
______________________________________________________________________________
Three Months Ended March 31,
______________________________
1996 1995
[Consolidated] [Combined]
[Unaudited] [Unaudited]
______________ ___________
Net Cash - Operating Activities - Forwarded (163,000) (256,000)
--------- ---------
Net Cash - Investing Activities - Forwarded $ (345,000) $ (4,000)
--------- ---------
Financing Activities:
Proceeds from Short-Term Notes 764,000 492,000
Payment of Short-Term Notes (27,000) (67,000)
Payment of Bank Note Payable (50,000) (110,000)
Payment of Capitalized Lease Obligations (6,000) (5,000)
Cash Overdraft 12,000 (35,000)
Deferred Public Offering Costs (114,000) (15,000)
--------- ---------
Net Cash - Financing Activities 579,000 260,000
--------- ---------
Net Increase [Decrease] in Cash 71,000 --
Cash - Beginning of Periods -- --
--------- ---------
Cash - End of Periods $ 71,000 $ --
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest $ 95,000 $ --
========= =========
See Notes to Financial Statements.
F-16
<PAGE> 109
NETSMART TECHNOLOGIES, INC.
______________________________________________________________________________
STATEMENTS OF CASH FLOWS
______________________________________________________________________________
Years Ended December 31,
____________________________________
1995 1994 1993
[Consolidated] [Combined]
______________ __________ __________
Operating Activities:
Net Income [Loss] $(2,850,000)$(1,751,000) $(433,000)
Adjustments to Reconcile Net
Income [Loss] to Net Cash [Used for]
Provided by Operating Activities:
Depreciation and Amortization 872,000 470,000 8,000
Financing Costs -- -- 7,000
Administrative Expenses 18,000 19,000 18,000
Additional Compensation 22,000 236,000 --
Write Off of Deferred Public
Offering Costs 460,000 -- --
Equity in Net Loss of Joint Venture 21,000 15,000 --
Provision for Doubtful Accounts 8,000 -- --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (388,000) (369,000) --
Costs and Estimated Profits in
Excess of Interim Billings 87,000 (233,000) --
Other Current Assets 10,000 45,000 4,000
Other Assets -- (3,000) --
Increase [Decrease] in:
Accounts Payable 159,000 13,000 45,000
Accrued Expenses 935,000 199,000 16,000
Interim Billings in Excess of
Costs and Estimated Profits (217,000) 413,000 --
Accrued Payroll Taxes and
Related Expenses -- (276,000) 217,000
Due to Related Parties 496,000 1,629,000 314,000
Deferred Revenue 141,000 -- --
--------- --------- ---------
Total Adjustments 2,624,000 2,158,000 629,000
--------- --------- ---------
Net Cash - Operating Activities -
Forward (226,000) 407,000 196,000
--------- --------- ---------
See Notes to Financial Statements.
F-17
<PAGE> 110
NETSMART TECHNOLOGIES, INC.
______________________________________________________________________________
STATEMENTS OF CASH FLOWS
______________________________________________________________________________
Years Ended December 31,
____________________________________
1995 1994 1993
[Consolidated] [Combined]
______________ __________ __________
Net Cash - Operating Activities -
Forwarded (226,000) 407,000 196,000
--------- --------- ---------
Investing Activities:
Acquisition of Property and Equipment (138,000) (122,000) (19,000)
Software Development Costs -- (177,000) (426,000)
Investment in Joint Venture -- (25,000) --
Cash Acquired in Combination with CSM -- 31,000 --
--------- --------- ---------
Net Cash - Investing Activities $ (138,000) $ (293,000) $ (445,000)
--------- --------- ---------
Financing Activities:
Proceeds from Short-Term Notes 831,000 200,000 216,000
Payment of Short-Term Notes (190,000) -- --
Payment of Bank Note Payable (175,000) (60,000) --
Payment of Capitalized Lease Obligations (29,000) (8,000) --
Issuance of Preferred Stock -- -- 24,000
Issuance of Common Stock -- -- 1,000
Cash Overdraft 56,000 37,000 2,000
Deferred Public Offering Costs (129,000) (283,000) --
--------- --------- ---------
Net Cash - Financing Activities 364,000 (114,000) 243,000
--------- --------- ---------
Net Increase [Decrease] in Cash -- -- (6,000)
Cash - Beginning of Periods -- -- 6,000
--------- --------- ---------
Cash - End of Periods $ -- $ -- $ --
========= ========= =========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the periods for:
Interest $ 349,000 $ 76,000 $ 2,000
========= ========= =========
See Notes to Financial Statements.
F-18
<PAGE> 111
NETSMART TECHNOLOGIES, INC.
______________________________________________________________________________
STATEMENTS OF CASH FLOWS
______________________________________________________________________________
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
In October 1993, the Company converted $18,000 of SISC debt into 78,000 shares
of common stock.
In September 1995:
1) $388,000 of accrued interest owed to SISC was exchanged for 1,125,000
shares of common stock.
2) $2,210,000 of SISC debt was exchanged for 2,210 shares of Series D
Preferred Stock.
3) 825,000 shares of common stock were issued to Holdings as follows:
A) 750,000 shares were issued in connection with the transfer of the
Acquisition Corp. stock to CSMC.
B) 75,000 shares were issued in respect of certain indebtedness
guaranteed by Consolidated.
See Notes to Financial Statements.
F-19
<PAGE> 112
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[1] Financial Statement Presentation, Organization and Nature of Operations
The financial statements as of December 31, 1995 are presented on a
consolidated basis and include Netsmart Technologies, Inc. [formerly "CSMC
Corporation" and "Carte Medical Corporation"] ["Netsmart"], and its wholly-
owned subsidiary, Creative Socio-Medics Corp. ["CSM"] [collectively, the
"Company"]. All intercompany transactions are eliminated in consolidation.
The financial statements as of December 31, 1994, which include Netsmart and
CSM commencing July 1, 1994, are presented on a combined basis because they
are under common control. All intercompany transactions are eliminated in
combination. The acquisition by Carte Medical Holdings, Inc. ["Holdings"],
the principal stockholder of Netsmart, of CSM occurred on June 16, 1994. The
operations of CSM from that date to June 30, 1994 were not substantial and are
not included in the combined financial statements as of December 31, 1994.
The financial statements prior to July 1, 1994 reflect the results of
operations and financial position of Netsmart.
Netsmart was incorporated on September 9, 1992 to engage in the development
and marketing of an integrated proprietary software system designed to run on
multiple systems in a distributed network environment. Netsmart's marketing
effort through December 31, 1995 was primarily directed at managed care
organizations and methadone clinics and other substance abuse facilities
throughout the country. Netsmart's software operates on computer networks,
including networks based on personal computers, and so-called "smart cards."
A smart card is a plastic card the size of a standard credit card which
combines data storage capacity and access to information along with computing
capacity within a single embedded microprocessor chip contained in the card.
Netsmart was organized under the name Medical Services Corp. ["MSC"], and had
a wholly-owned subsidiary named Carte Medical Corp. In October 1993, the
subsidiary was merged into MSC, and the name was changed to Carte Medical
Corporation. In May 1995, the name of the Company was changed to CSMC
Corporation and in February 1996, the name was changed to Netsmart
Technologies, Inc.
Netsmart is controlled by Consolidated Technology Group Ltd. ["Consolidated"],
a public company, through its wholly-owned subsidiary Holdings. Prior to June
16, 1994, Netsmart's principal stockholder was SIS Capital Corp. ["SISC"], a
wholly-owned subsidiary of Consolidated. Netsmart's chairman of the board is
the chief executive officer of Consolidated. Prior to 1995, substantially all
of the funds for Netsmart's operations had been advanced by principal
stockholders, principally SISC. During 1995, the Company's principal source
of funds has been an accounts receivable financing agreement with an asset-
based lender [See Note 5].
From inception through July 1994, Netsmart had generated revenue of
approximately $57,000, which represents fees for consulting services, and was
considered to be in the development stage. As of July 1994, the Company was
no longer considered to be in the development stage.
F-20
<PAGE> 113
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[1] Financial Statement Presentation, Organization and Nature of Operations
[Continued]
In August 1993, Netsmart effected a 2,000-for-one common stock
recapitalization, and in October 1993, Netsmart effected a .576-for-one
reverse split in its common stock. In February 1996, the Company effected a
three-for-four reverse split in its common stock. All share and per share
information in these financial statements give effect, where appropriate, to
such transactions.
In April 1994, Netsmart entered into an Agreement and Plan of Reorganization
[the "Purchase Agreement"] among Consolidated, Netsmart, CSM Acquisition Corp.
["Acquisition Corp."], a wholly-owned subsidiary of Consolidated, Creative
Socio-Medics ["Old CSM"], and Advanced Computer Techniques, Inc. ["ACT"], Old
CSM's parent.
Pursuant to the Purchase Agreement, in June 1994, Acquisition Corp. acquired
the assets and assumed liabilities of Old CSM in exchange for 800,000 shares
of Consolidated's common stock and $500,000 cash which was advanced by
Netsmart from a loan from SISC. The following summarizes the purchase price
allocated to acquired assets at fair value:
Cash $ 500,000
Stock of Consolidated 2,700,000
---------
Purchase Cost $3,200,000
=========
Allocated to:
Customer Lists $3,851,000
Accounts Receivable 1,363,000
Costs and Estimated Profits in
Excess of Billings 269,000
Property and Equipment 261,000
Other Assets 213,000
Liabilities Assumed (2,757,000)
---------
Total $3,200,000
=========
The value of Consolidated stock was calculated based on the 800,000 shares of
common stock given per the acquisition agreement at the fair value of $3.375
per share. The $2,700,000 is recorded as additional paid-in capital since
such amount will not be reimbursed.
In June 1994, SISC formed a wholly-owned subsidiary, Holdings, and transferred
its stock in Netsmart and Acquisition Corp. to Holdings. On September 30,
1995, the stock of Acquisition Corp., whose name had been changed to Creative
Socio-Medics Corp. in June 1994, was transferred to the Company. At the same
time, the Company issued 825,000 shares of its common stock to Holdings, of
which 750,000 shares were issued in connection with the transfer of the
F-21
<PAGE> 114
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[1] Financial Statement Presentation, Organization and Nature of Operations
[Continued]
Acquisition Corp. stock and 75,000 shares were issued in respect of certain
indebtedness guaranteed by Consolidated.
At the time of the execution of the Purchase Agreement, SISC granted three
officers of Old CSM, who became officers of the Company, options to purchase
an aggregate of 151,920 shares of common stock at $.232 per share. The value
of the options is based on a fair value of approximately $.89 per share of the
Company's common stock less the exercise price of $.232 per share. The shares
subject to option are outstanding shares which were owned by SISC and
transferred to Holdings subject to the options. The Company has granted to
these individuals certain piggy back registration rights with respect to the
shares of common stock issuable upon exercise of the options. The value of
these options is approximately $100,000 and is treated as compensation by the
Company. At the closing of the purchase of Old CSM, Consolidated transferred
to such three officers an aggregate of 40,000 shares of Consolidated common
stock, which were valued at approximately $136,000. The value of such shares
is treated as compensation by the Company. The value of Consolidated stock
was determined on a consistent basis with those shares given in the
acquisition. The amounts of $100,000 and $136,000 were credited to additional
paid-in capital.
The following pro forma unaudited results assumes the acquisition of CSM had
occurred at the beginning of the indicated periods:
Years Ended December 31,
________________________
1994 1993
__________ __________
Net Revenues $5,050,000 $5,048,000
========= =========
Net Loss $(2,136,000) $ (751,000)
========= =========
Loss Per Share $ (0.44) $ (0.16)
========= =========
Number of Shares of Common Stock 4,821,528 4,763,028
========= =========
[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.
F-22
<PAGE> 115
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[2] Summary of Significant Accounting Policies [Continued]
Concentration of Credit Risk - The Company extends credit to customers which
results in accounts receivable arising from its normal business activities.
The Company does not require collateral from its customers. The Company
routinely assesses the financial strength of its customers and based upon
factors surrounding the credit risk of the customers believes that its
accounts receivable credit risk exposure is limited. Such estimate of the
financial strength of such customers may be subject to change in the near
term.
The Company's health information systems are marketed to specialized care
facilities, many of which are operated by government entities and include
entitlement programs. During the years ended December 31, 1995 and 1994,
approximately 54% and 49% of the Company's revenues were generated from
contracts with government agencies. There were no revenues generated from
government agency contracts in 1993.
During the year ended December 31, 1995, one customer accounted for
approximately $1,400,000 or 19% of revenue. Accounts receivable of
approximately $336,000 were due from this customer at December 31, 1995. No
one customer accounted for more than 10% of revenues in 1994 or 1993.
Revenue Recognition - The Company anticipates that it will recognize revenue
principally from the licensing of its software, and from consulting and
maintenance services rendered in connection with such licensing activities.
Revenue from licensing will be recognized under the terms of the licenses,
which are expected to provide for a royalty, which may be payable annually,
monthly or on some other basis, based on the number of persons using smart
cards pursuant to the license agreement. Consulting revenue is recognized
when the services are rendered.
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. Revenue from software package license
agreements without significant vendor obligations is recognized upon delivery
of the software. Information processing revenues are recognized in the period
in which the service is provided. Maintenance contract revenue is recognized
on a straight-line basis over the life of the respective contract. Software
development revenues from time-and-materials contracts are recognized as
services are performed.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance revenue, which consists solely of staff payroll, is
expensed as incurred.
F-23
<PAGE> 116
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[2] Summary of Significant Accounting Policies [Continued]
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.
Costs, estimated profits, and billings on uncompleted contracts are summarized
as follows:
December 31,
________________________
1995 1994
__________ __________
Costs Incurred on Uncompleted Contracts $2,588,000 $1,494,000
Estimated Profits 491,000 1,390,000
--------- ---------
Total 3,079,000 2,884,000
Billings to Date 3,604,000 3,539,000
--------- ---------
Net $ (525,000) $ (655,000)
========= =========
Included in the accompanying balance sheet
under the following captions:
Costs and estimated profits in excess
of interim billings $ 415,000 $ 502,000
Interim billings in excess of costs
and estimated profits 940,000 1,157,000
--------- ---------
Net $ (525,000) $ (655,000)
========= =========
Direct Costs - Direct costs generally represent labor costs related to
licensing and consulting agreements.
Accounts Receivable - Accounts receivable is shown net of allowance for
doubtful accounts of $146,000 and $138,000 at December 31, 1995 and 1994,
respectively.
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.
F-24
<PAGE> 117
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[2] Summary of Significant Accounting Policies [Continued]
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 judgment by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technology.
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is to be provided on a product by product basis. The annual
amortization shall be the greater of the amount computed using (a) the ratio
that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported on. In 1995, due to a change from a DOS based operating
system to a Windows based operating system, management determined that the
estimated economic life of the developed computer software had expired. This
has been accounted for as a change in accounting estimate and as a result
amortization increased by $210,000 in 1995. Amortization of capitalized
computer software development costs amounted to $419,000, $221,000 and $3,000
at December 31, 1995, 1994 and 1993, respectively. Amortization expense has
been included in cost of revenues for all periods.
Customer Lists - Customer lists represent a listing of customers obtained
through the acquisition of CSM to which the Company can market its products.
Customer lists are being amortized on the straight-line method.
In 1995, the amortization period of customer lists was changed from 20 years
to 12 years. 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. Management has determined that expected future cash flows exceed the
carrying value of customer lists at December 31, 1995. It is at least
reasonably possible that management's estimate of expected future cash flows
will change in the near term. This may result in an accelerated amortization
method or write-off of the customer lists. Customer lists at December 31,
1995 and 1994 are as follows:
F-25
<PAGE> 118
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #7
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[2] Summary of Significant Accounting Policies [Continued]
December 31,
________________________
1995 1994
__________ __________
Customer Lists $3,851,000 $3,851,000
Less: Accumulated Amortization 409,000 96,000
--------- ---------
Net $3,442,000 $3,755,000
========= =========
Deferred Public Offering Costs - The Company has withdrawn its registration
statement following termination in early 1995 of its proposed initial public
offering. Deferred public offering costs in the amount of $460,000 are
expensed in 1995 and are included in financing costs.
Loss Per Share - Loss per share is based on the weighted average number of
shares outstanding for each period presented. Certain options and warrants,
issued to related parties, and included in the computation of loss per share.
Such options and warrants resulted in a net increase in outstanding common
stock of 685,275 shares for all periods presented. In August 1993, the
Company effected a 2,000-for-one common stock recapitalization, in October
1993, the Company effected a .576-for-one reverse split in its common stock,
and, in February 1996, the Company effected a three-for-four reverse split in
its common stock. In January 1996, the Company issued 1,125,000 shares of
common stock in exchange for 1,000 shares of Series D preferred stock. All
share and per share information in these financial statements gives effect,
where appropriate, to such transactions. Dividends on preferred stock are
included in the calculation of loss per share.
Proposed Investment in Joint Venture - The Company's proposed investment in a
joint venture will represent a minority interest in a corporation organized to
promote the cross-marketing of the computer related products and services of
the stockholders. The investment will be accounted for under the equity
method.
Allocated Related Party Administrative Expenses - During 1995, 1994 and 1993,
certain administrative services were performed for the Company by Consolidated
and its subsidiaries. The fair value of such services, approximately $18,000,
$19,000 and $18,000, respectively, was charged to general and administrative
expenses, and, since Consolidated will not be reimbursed for such charges,
credited to additional paid-in capital.
Research and Development - Expenditures for research and development costs for
the year ended December 31, 1995 and 1994 amounted to $699,000 and $367,000,
respectively. There were no research and development costs in 1993.
F-26
<PAGE> 119
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #8
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[3] Going Concern
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has sustained
losses since inception and the accumulated deficit at December 31, 1995 is
$5,147,000. 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, 1995 through loans from principal stockholders, an
asset-based lender and others and from the sale of stock [See Notes 5 and 6].
The ability of the Company to effect its transition, ultimately, to profitable
operations is dependent upon obtaining adequate financing through a private
placement or initial public offering and achieving a level of revenues from
the license of its software and consulting and maintenance revenues to support
its cost structure. The failure of the Company to generate revenues at a
level in excess of its ongoing expenses may force the Company to reduce or
cease operations. Management plans to increase revenues by marketing its
products to markets other than the health care field, such as the financial
services industry.
[4] Property and Equipment
Property and equipment consist of the following:
December 31,
________________________
1995 1994
__________ __________
Equipment, Furniture and Fixtures $ 674,000 $ 596,000
Leasehold Improvements 164,000 164,000
--------- ---------
Totals - At Cost 838,000 760,000
Less: Accumulated Depreciation 491,000 411,000
--------- ---------
Net $ 347,000 $ 349,000
========= =========
Depreciation amounted to $140,000, $69,000 and $5,000, respectively for the
years ended December 31, 1995, 1994 and 1993.
[5] Related Party Transactions
[A] Issuance of Stock at Organization - In connection with the organization of
the Company in September 1992, the Company issued 824,256 shares of common
stock as follows: 582,072 shares of common stock to SISC, for $1,300, 112,584
shares to DLB, Inc. ["DLB"] for $6,700, and 43,200 shares of common stock for
nominal consideration to each of DLB and two individuals, one of whom became a
director in June 1994. DLB is controlled by the wife of the chairman of the
board who is also the chairman of the board of Consolidated. The chairman of
the board disclaims any beneficial interest in any securities owned by DLB.
F-27
<PAGE> 120
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #9
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[5] Related Party Transactions [Continued]
Also in connection with the organization of the Company, the Company acquired
all of the capital stock of LMT in exchange for 129,600 shares of common stock
and 400 shares of Series A 4% Convertible Redeemable preferred stock, par
value $.01 per share ["Series A preferred stock"]. The 400 shares of Series A
preferred stock are convertible into 43,200 shares of common stock [See Note
8]. 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.
[B] Loans by Related Parties - At September 30, 1995, the total indebtedness
due SISC was $2,960,000 plus interest of $388,000. As of such date, (i) the
interest was exchanged for 1,125,000 shares of common stock, (ii) $2,210,000
of the debt was exchanged for 2,210 shares of Series D 6% preferred stock
["Series D preferred stock"], having a liquidation price of $1.00 per share
and a redemption price of $1,000 per share, and (iii) the remaining $750,000
due SISC is represented by the Company's 10% subordinated note due January 15,
1997 or earlier upon the completion of the Company's initial public offering.
In conjunction with the September 30, 1995 debt restructuring, $136,000 which
was previously recorded as paid-in capital, was reclassified to debt owed to
SISC. The Series D preferred stock may be redeemed at the option of the
Company commencing October 1, 1998, and is redeemable at any time after
issuance from 50% of the proceeds of any over allotment on the Company's
initial public offering or other issuance of equity securities subsequent to
the completion of the Company's initial public offering.
At December 31, 1994, SISC has advanced $2,626,000 which are in the form of
demand notes bearing interest at 10%. This amount includes a $97,000 note due
to DLB, Inc. which was purchased by SISC in April 1994. Interest expense on
these notes for the years ended December 31, 1995 and 1994 amounted to
$199,000 and $189,000, respectively.
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
F-28
<PAGE> 121
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #10
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[5] Related Party Transactions [Continued]
[B] Loans by Related Parties [Continued] - operations for financing costs in
conjunction with the issuance of stock by SISC. The Interim Notes are
currently in default.
From December 1992 through March 1993, the Company sold to each of DLB, one
present director, one founder and one non-affiliated individual units at a
price of $25,000 per unit. Each unit consists of 4,536 shares of common stock
and 20 shares of Series B 6% Redeemable Convertible preferred stock, par value
$.01 per share ["Series B preferred stock"]. The 20 shares of Series B
preferred stock acquired by each person are convertible into 5,184 shares of
common stock [See Note 8].
In October 1993, the Company converted $18,000 of SISC debt into 78,000 shares
of common stock.
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.
[C] Other Matters - As of December 31, 1993, the Company had a liability for
payroll taxes, including estimated interest and penalties, of approximately
$334,000. Certain officers and principal stockholders are personally
responsible for such payments. Payment of the estimated payroll tax
obligation and interest totaling approximately $300,000 was made in April 1994
from an advance made by SISC for such purpose.
In February 1996, the Company issued an aggregate of 3,153,750 Series B
Warrants, of which 2,516,250 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 1994 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.
F-29
<PAGE> 122
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #11
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[5] Related Party Transactions [Continued]
[C] Other Matters [Continued] - The following is a schedule of warrants:
No.of No. of
Warrants Exercise FMV at Warrants
Date of Grant Issued Price Date of Grant Exercised
_____________ __________ ________ _____________ _________
February 1996 2,516,250 $2.00 $2.00 --
February 1996 637,500 5.00 2.00 --
--------- -----
Totals 3,153,750 --
========= =====
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, while
the fair value of common stock was $.232 per share.
In October 1993, SISC transferred shares of common stock to two officers, who
received 17,460 and 18,000 shares, respectively, and to five employees, each
of whom received 6,000 shares. The fair value of such shares, approximately
$15,000 in the aggregate, was charged to compensation.
In December 1995, the Company accrued a charge for additional compensation in
the approximate amount of $22,000 for services rendered by its vice president.
The charge represents 11,250 shares of common stock issued to the vice
president in January 1996.
[6] Notes Payable
Bank - Notes payable to bank in the amount of $79,000, are payable on demand.
The notes bear interest at 1-1/2% over the bank's prime rate and are
collateralized by the assets of CSM. The loan agreements require CSM and its
parent to maintain consolidated working capital of $450,000 and consolidated
tangible net worth of $1,300,000. The Company is not in compliance with these
covenants and the notes are in default.
Asset-Based Lender - In February 1995, the Company entered into an accounts
receivable financing with an asset-based lender. Borrowings under this
facility were $707,000 at December 31, 1995. The Company can borrow up to 75%
of eligible receivables, and it pays interest at the greater of 18% per annum
or prime plus 8% and a fee equal to 1% of the amount of the invoice. This
note is collateralized by all of the accounts and property and equipment of
the Company. In addition, the Company's obligations under this facility are
guaranteed by the chairman of the board and president of the Company. Also,
the chief executive officer and treasurer of the Company have issued their
limited guaranty to the lender.
F-30
<PAGE> 123
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #12
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[6] Notes Payable [Continued]
Investors - In 1994 and 1993, the Company borrowed $200,000 and $216,000,
respectively, from accredited investors and issued its 1993 Interim Notes and
December 1994 Interim Notes, respectively, to such investors. In 1994, SISC
purchased an Interim Note in the amount of $54,000 from a noteholder. In
1995, the first payment of approximately $66,000 was paid on the December 1994
Interim Notes. No other payments have been made on either of these notes and
they are currently in default. In addition, the Company owes a $12,500
extension fee to the holder of the December 1994 Interim Notes.
In connection with the agreement of the holders of the 1993 Interim Notes to
extend the maturity date of the notes to the earlier of September 30, 1994, or
three days after the Company completes its initial public offering. SISC
transferred an aggregate of 9,375 shares of common stock to such noteholders.
The Company incurred a charge of $7,000 against operations for financing costs
in conjunction with the issuance of stock by SISC. In connection with the
issuance of the December 1994 Interim Notes: (i) Consolidated issued the
lender 85,000 shares of its stock, (ii) the Company issued to SISC outstanding
warrants to purchase 300,000 shares of common stock at $2.00 per share, and
(iii) the Company issued 75,000 shares of common stock to Holdings. The
Company incurred charges totaling $103,000 against operations for financing
costs in conjunction with the issuances of stock. Such charges were recorded
as intercompany charges due to SISC and Consolidated by the Company.
Notes payable consist of the following:
December 31,
________________________
1995 1994
__________ __________
Bank - payable on demand with interest at
1-1/2% over the bank's prime rate, which
was 8.5% at December 31, 1995, currently
in default $ 79,000 $ 254,000
Investors - interest at 10%, currently
in default 296,000 362,000
Asset-Based Lender - payable on demand
with interest at the greater of 18% per
annum or prime plus 8% 707,000 --
--------- ---------
Totals $1,082,000 $ 616,000
========= =========
The weighted average interest rate on short-term borrowings outstanding as of
December 31, 1995 and 1994 amounted to approximately 17% and 10%,
respectively.
F-31
<PAGE> 124
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #13
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[7] Income Taxes
For financial reporting purposes at December 31, 1995, the Company has net
operating loss carryforwards of $5,125,000 expiring by 2010. The Tax Reform
Act of 1986 includes provisions which may limit the net operating loss
carryforwards available for use in any given year if certain events occur,
including significant changes in stock ownership. If the Company is
successful in completing an initial public offering, utilization of the
Company's net operating loss carryforwards to offset future income may be
limited due to income tax regulations regarding substantial changes in company
ownership.
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
- ------------ ---------
2007 $ 113,000
2008 433,000
2009 1,751,000
2010 2,850,000
---------
$5,147,000
=========
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" at January 1, 1993. Adoption
had no material effect on the financial statements. A deferred tax asset
arising primarily from the benefits of net operating loss carryforwards of
approximately $1,800,000 is offset by an allowance of $1,800,000.
[8] Capital Stock
Capital Stock - The Company is authorized to issue 3,000,000 shares of
preferred stock, par value $.01 per share, and 15,000,000 shares of common
stock, par value $.01 per share. The Company's Board of Directors is
authorized to issue preferred stock from time to time without stockholder
action, in one or more distinct series. The Board of Directors is authorized
to fix the following rights and preferences, among others, for each series:
(i) the rate of dividends and whether such dividends shall be cumulative; (ii)
the price at and the terms and conditions on which shares may be redeemed;
(iii) the amount payable upon shares in the event of voluntary or involuntary
liquidation; (iv) whether or not a sinking fund shall be provided for the
redemption or purchase of shares; (v) the terms and conditions on which shares
may be converted; and (vi) whether, and in what proportion to any other series
or class, a series shall have voting rights other than required by law. The
Board of Directors has authorized the issuance of the Series A preferred
stock, the Series B preferred stock and the Series D preferred Stock.
F-32
<PAGE> 125
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #14
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[8] Capital Stock
Preferred Stock - The Series A preferred stock is 4% convertible redeemable
preferred stock. The stockholders are entitled to receive a $4.00 per share
annual dividend when and as declared by the Board of Directors. Dividends are
fully cumulative and accrue from October 1, 1992. Dividends are payable
annually on March 1. The stock is redeemable at the option of the Company at
any time at which the Company has consolidated net worth of at least
$2,500,000 at a price of $1,000 per share plus accrued dividends. Each share
of Series A preferred stock is convertible into 108 shares of common stock at
the discretion of the stockholder. In the event of involuntary or voluntary
liquidation, the stockholders are entitled to receive $100 per share and all
accrued and unpaid dividends. As of December 31, 1995, approximately $4,000
of dividends [$10 per share] were in arrears.
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.
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.
The Series A, Series B and Series D preferred stock are nonvoting except as is
required by law.
The Company has granted to the holders of the Series A preferred stock and
Series B preferred stock and certain warrant holders, with respect to their
warrants, certain piggyback registration rights following the Company's
initial public offering, with respect to the shares of common stock issuable
upon conversion or exercise of the preferred stock or warrants.
F-33
<PAGE> 126
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #15
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[8] Capital Stock [Continued]
See Note 5 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 12 for information relating to the Company's 1993 Long-Term Incentive
Plan.
[9] Capitalized Lease Obligations
Future minimum payments under capitalized lease obligations as of December 31,
1995 are as follows:
Year ending
December 31,
1996 $209,000
1997 20,000
1998 17,000
-------
Total Minimum Payments 246,000
Less Amount Representing Interest at
Rates Ranging from 11% to 12%
Per annum 43,000
-------
Balance $203,000
=======
Capitalized lease obligations are collateralized by equipment which has a net
book value of $64,000 and $104,000 at December 31, 1995 and 1994,
respectively. The Company has not made timely payments on a capitalized lease
obligation on equipment with a net book value of $21,000 and $62,000 at
December 31, 1995 and 1994, respectively. Amortization of approximately
$40,000 and $45,000 in 1995 and 1994, respectively, has been included in
depreciation expense.
[10] 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, 1995:
F-34
<PAGE> 127
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #16
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[10] Fair Value of Financial Instruments [Continued]
Carrying
Amount Fair Value
_________ __________
Debt Maturing Within One Year $1,082,000 $1,082,000
Long-Term Debt 750,000 750,000
--------- ---------
Totals $1,832,000 $1,832,000
========= =========
For debt classified as current, it was assumed that the carrying amount
approximated fair value for these instruments because of their short
maturities. The fair value of long-term debt is based on current rates at
which the Company could borrow funds with similar remaining maturities. The
carrying amount of long-term debt approximates fair value.
[11] Commitments and Contingencies
The Company leases space for its executive offices and facilities under a
noncancellable operating lease expiring February 28, 1999. The Company also
leases additional office space on a month-to-month basis.
Minimum annual rentals under noncancellable operating leases having terms of
more than one year are as follows:
Years ending
December 31,
____________
1996 $249,000
1997 248,000
1998 261,000
1999 44,000
2000 and thereafter --
-------
Total $802,000
=======
Rent expense amounted to $309,000, $148,000 and $25,000, respectively, for the
years ended December 31, 1995, 1994 and 1993.
The Company has an agreement with Trinity Group, Inc. ["Trinity"], a wholly-
owned subsidiary of Consolidated, pursuant to which the Company will pay
Trinity $15,000 a month for consulting services. Neither the Company's
chairman of the board, who is the chairman of the board of Consolidated, nor
any other employee of Consolidated, Trinity or SISC receives compensation from
the Company. No compensation is payable or accruable until the completion of
an initial public offering. Upon completion of an initial public offering,
F-35
<PAGE> 128
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #17
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[11] Commitments and Contingencies [Continued]
the Company will pay Trinity $15,000 per month for the three-year term of the
agreement.
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, will receive an annual salary of $52,000 in
1996.
Following is pro forma unaudited information for the years ended December 31,
1995, 1994 and 1993 assuming the above management services agreement and
employment agreement and the management service agreement with SMI Corporation
[See Note 13] had been in effect in their entirety during these periods:
Years Ended December 31,
______________________________________
1995 1994 1993
__________ __________ __________
Net Loss $(2,850,000) $(1,751,000) $ (433,000)
Pro Forma Adjustments to Expense:
Increase in Management Services
Expense Per Agreements (684,000) (684,000) (684,000)
Increase in Executive Compensation
Expense Per New Employment
Agreements -- (39,000) (34,000)
---------- ---------- ----------
Pro Forma Net Loss after Increases
in Consulting Expense and Executive
Compensation Expense Per Agreements $(3,534,000) $(2,474,000) $(1,151,000)
========== ========== ==========
Net Loss Per Share $ (.59) $ (.36) $ (.09)
========== ========== ==========
F-36
<PAGE> 129
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #18
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[11] Commitments and Contingencies [Continued]
Years Ended December 31,
______________________________________
1995 1994 1993
__________ __________ __________
Pro Forma Net Loss Per Share after
Increases in Management Services
Expense and Executive Compensation
Expense Per Agreements $ (.73) $ (.51) $ (.24)
========== ========== ==========
Number of Shares of Common Stock 4,821,528 4,821,528 4,763,028
========== ========== ==========
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.
Management believes that the action is without merit, and it will vigorously
defend the action.
[12] Long-Term Incentive Plan
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. The Plan
does not have an expiration date.
The Plan is authorized to issue for 511,000 shares of common stock. If shares
subject to an option under the Plan cease to be subject to such option, or if
shares awarded under the Plan are forfeited, or otherwise terminated without a
payment being made to the participant in the form of stock, such shares will
again be available for future distribution under the Plan.
F-37
<PAGE> 130
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #19
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[12] Long-Term Incentive Plan [Continued]
Awards under the Plan may be made to key employees, including officers of and
consultants to the Company, its subsidiaries and affiliates, but may not be
granted to any director unless the director is also an employee of or
consultant to the Company or any subsidiaries or affiliates. The Plan imposes
no limit on the number of officers and other key employees to whom awards may
be made; however, no person shall be entitled to receive in any fiscal year
awards which would entitle such person to acquire more than 3% of the number
of shares of common stock outstanding on the date of grant.
In January 1995, the Board granted stock options to purchase an aggregate of
252,804 shares of common stock at $.232 per share, and in December 1995, the
Board granted stock options to purchase an aggregate of 104,952 shares of
common stock at $.345 per share. Such exercise prices were determined by the
Board to be the fair market value per share on the date of grant. The options
become exercisable as to 50% of the shares on the first and second
anniversaries of the date of the grant. 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.
[13] Subsequent Events
The Company executed an agreement in February 1996 to purchase an application
software product known as the SATC Software which processes retail plastic
card transactions and merchant transactions. The purchase price for the SATC
Software is $650,000, of which $325,000 was paid in February 1996 with the
remaining balance of $325,000 due in three installments during 1996.
The Company intends to enter into a joint venture with Oasis Technology, Ltd.
["Oasis"] in May 1996 pursuant to which the joint venture corporation will
purchase the SATC software and made an advance payment of $325,000, in January
1996, pursuant to such proposed joint venture. The Company has an agreement
with Oasis that Oasis will pay the remaining $325,000 as part of its
contribution to the joint venture. However, the Company has a direct
obligation to the seller to make the payments, and, in the event that Oasis
fails to make the payments, the Company will be required to make the payments.
The obligations are also guaranteed by Consolidated.
The Company intends to enter into an agreement with SMI Corporation ["SMI"],
pursuant to which the Company pays SMI compensation of $25,000 to $59,000 per
month for which SMI will provide persons to serve in management-level or other
key positions for the Company. In addition, the Company will pay SMI 6% of
the revenues generated from Smart Card and related services. The agreement
will continue until December 31, 2000. Pursuant to the agreement, the Company
is to pay SMI fees of $250,000 for services rendered in 1996. The sole
stockholder of SMI, Mr. Storm Morgan, was elected as a director of the Company
in January 1996.
In January 1996, the Company borrowed $500,000 from four accredited investors.
F-38
<PAGE> 131
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #20
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[13] Subsequent Events [Continued]
In connection with such loans, the Company issued its 8% promissory notes due
January 31, 1997, which are payable from the proceeds of the Company's initial
public offering. The Company also agreed that, if the Company completes an
initial public offering of its securities prior to the January 31, 1997
maturity date, it would register pursuant to the Securities Act and issue to
the noteholders one unit for each $2.00 principal amount of notes. The unit
to be issued to the noteholders will mirror the units to be issued in the
initial public offering. The Company will incur a one-time non-cash finance
charge of approximately $1,600,000 upon the issuance of these units.
In January 1996, SISC exchanged 1,000 shares of Series D preferred stock for
1,125,000 shares of common stock. As a result of this exchange, the aggregate
redemption price of the Series D preferred stock was reduced to $1,210,000.
In March 1996, the agreement with the asset-based lender was modified to allow
borrowings up to 80% of eligible receivables to a maximum of $1,000,000. In
consideration, the Company will pay the asset-based lender (i) an annual fee
of $10,000 and (ii) a monthly fee of $10,000. If the Company receives equity
funds by way of the an initial public offering or a private placement of at
least $350,000, the original borrowing availability will be reinstated and the
Company shall pay the asset-based lender a $25,000 fee and issue it 25,000
shares of Company common stock. The Company will incur a one-time non-cash
finance charge of approximately $80,000 upon the issuance of the common stock.
[14] New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ["FASB"] issued 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,"
in March of 1995. SFAS No. 121 established accounting standards for the
impairment of long-lived assets, 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. SFAS No. 121
is effective for financial statements issued for fiscal years beginning after
December 15, 1995. Adoption of SFAS No. 121 is not expected to have a
material impact on the Company's financial statements.
The FASB has also issued SFAS No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method
of accounting for stock options and similar equity instruments as contrasted
to the intrinsic valued based method of accounting prescribed by Accounting
Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company has not decided if it will adopt SFAS No. 123 or
continue to apply APB Opinion No. 25 for financial reporting purposes. SFAS
No. 123 will have to be adopted for financial note disclosure purposes in any
event. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years that begin after December 15, 1995;
the disclosure requirements of SFAS No. 123 are effective for financial
statements for fiscal years beginning after December 15, 1995.
F-39
<PAGE> 132
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #21
[Information as of and for the Periods Ended March 31, 1996 and 1995 are
Unaudited]
______________________________________________________________________________
[15] Unaudited Interim Statements
The financial statements for the three months ended March 31, 1996 and 1995
are unaudited; however, in the opinion of management all adjustments
[consisting solely of normal recurring adjustments] necessary to a fair
presentation of the financial statements for these interim periods have been
made. The results for interim periods are not necessarily indicative of the
results to be obtained for a full fiscal year.
[16] Subsequent Events [Unaudited]
In March 1996, the Company filed a registration statement for the sale of its
securities through an initial public offering. In the first quarter of 1996,
the Company incurred $114,000 of deferred costs in connection with the
anticipated initial public offering. Deferred public offering costs will be
charged against the proceeds of the anticipated public offering. If the
offering is not consummated, the cost will be expensed.
In April 1996, the Board granted stock options to purchase 129,500 shares of
common stock at $2.00 per share. The fair value per share at the date of
grant was $2.00 per share.
In April 1996, the Company and SISC agreed to extend the maturity date of the
Company's 10% subordinated note payable in the amount of $750,000. The new
maturity date shall be April 1, 1997 or earlier upon the completion of the
Company's initial public offering.
F-40
<PAGE> 133
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholder
Creative Socio-Medics Corp.
East Islip, New York
We have audited the accompanying Creative Socio-Medics Corp. statements
of operations, changes in capital (deficiency) and cash flows for the year
ended December 31, 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the results of the operations and the cash flows of
Creative Socio-Medics Corp. for the year ended December 31, 1993, in
conformity with generally accepted accounting principles.
/S/_________________________
Richard A. Eisner & Company, LLP
New York, New York
March 4, 1994
June 16, 1994
With respect to Note 1
F-41
<PAGE> 134
CREATIVE SOCIO-MEDICS CORP.
STATEMENTS OF OPERATIONS
(in thousands)
Six Months Ended Year Ended
June 30, December 31,
___________________ ____________
1994 1993 1993
________ ________ ____________
(Unaudited)
Revenue (Note 2) $2,126 $2,790 $4,991
----- ----- -----
Costs and expenses:
Cost of revenue 1,786 2,089 3,697
Sales and marketing 370 347 719
General and administrative (Note 1) 227 303 656
Interest expense 32 36 69
----- ----- -----
2,415 2,775 5,141
----- ----- -----
Net income (loss) $ (289) $ 15 $ (150)
===== ===== =====
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-42
<PAGE> 135
CREATIVE SOCIO-MEDICS CORP.
STATEMENT OF CHANGES IN CAPITAL (DEFICIENCY)
(Note 1)
Common Shares
Issued
_______________________
Number
of Par (Accumulated
Shares Value Deficit)
__________ _________ ________________
(in thousands)
Balance - January 1, 1993 1 -- $ (133)
Dividend to parent (23)
Net (loss) (150)
----- ----- -----
Balance - December 31, 1993 1 -- $ (306)
===== ===== =====
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-43
<PAGE> 136
CREATIVE SOCIO-MEDICS CORP.
STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended Year Ended
June 30, December 31,
___________________ ____________
1994 1993 1993
________ ________ ____________
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ (289) $ 15 $ (150)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 57 81 165
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable (181) (130) 95
(Increase) decrease in costs and
estimated profits in excess of
interim billings 84 (103) (85)
(Increase) decrease in other
current assets 17 16 (34)
Decrease in other long-term assets 7
Increase (decrease) in accounts
payable and accrued expenses 158 (26) (67)
Increase in billings in excess of
costs and estimated profits. 63 216 262
----- ----- -----
Net cash provided by (used in)
operating activities (91) 69 193
----- ----- -----
Cash flows from investing activities:
Purchases of fixed assets (24) (10) (20)
Investment in C Smart (11) -- --
----- ----- -----
Net cash (used in) investing activities (35) (10) (20)
----- ----- -----
Cash flows from financing activities:
(Decrease) in bank overdraft (6) (2) (50)
Payment of bank debt (40) (45) (45)
Deferred registration costs (47) -- --
Proceeds from promissory note 330 -- --
Payment of capitalized lease obligations (25) (21) (55)
Dividends (55) 9 (23)
----- ----- -----
Net cash provided by (used in)
financing activities 157 (59) (173)
----- ----- -----
Net increase (decrease) in cash 31 -- --
Cash at beginning of year -- -- --
----- ----- -----
Cash at end of year $ 31 $ -- $ --
===== ===== =====
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-44
<PAGE> 137
CREATIVE SOCIO-MEDICS CORP.
STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended Year Ended
June 30, December 31,
___________________ ____________
1994 1993 1993
________ ________ ____________
(Unaudited)
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 24 $ 30 $ 29
Noncash investing and financing activities:
(1) The Company acquired fixed assets of $51,000 and financed existing
accounts payable of $24,000 in the six months ended June 30,, 1994
pursuant to a capitalized lease obligation.
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-45
<PAGE> 138
CREATIVE SOCIO-MEDICS CORP.
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to the six months ended June 30, 1994 and 1993)
(NOTE 1) - Basis of Presentation:
The Company and principles of consolidation:
Creative Socio-Medics Corp. (the "Company" or "CSM"), a wholly-owned
subsidiary of Advanced Computer Techniques Corporation ("ACT") through
June 15, 1994, develops, markets and supports software products and services,
concentrating on government agencies and healthcare facilities. Sales to
government agencies represented 47% of revenues in 1993.
ACT charged CSM for operating expenses incurred on its behalf, amounting to
approximately $23,000 and $427,000 for the six months ended June 30, 1994
(unaudited) and the year ended December 31, 1993.
On June 16, 1994, the Company sold all of its net assets to CSM Acquisition
Corp., a wholly owned subsidiary of Consolidated Technology Group, Ltd..
(NOTE 2) - Significant Accounting Policies:
[1] Revenue recognition:
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. Revisions in cost estimates and recognition
of losses on these contracts are reflected in the accounting period in which
the facts become known. Revenue from software package license agreements
without significant vendor obligations is recognized upon delivery of the
software. 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.
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.
The cost of maintenance revenue, which consists solely of staff payroll, is
expensed as incurred.
[2] Fixed assets:
Equipment (including equipment under capital leases), and furniture and
fixtures are depreciated on the straight-line method over estimated useful
lives ranging from two to ten years. Leasehold improvements are amortized on
the straight-line method over the terms of the lease. Depreciation and
amortization of fixed assets aggregated $57,000 for the six-month period ended
June 30, 1994 (unaudited) and $120,000 in 1993.
F-46
<PAGE> 139
CREATIVE SOCIO-MEDICS CORP.
NOTES TO FINANCIAL STATEMENTS
(Unaudited with respect to the six months ended June 30, 1994 and 1993)
(NOTE 2) - Significant Accounting Policies: (continued)
[3] Development and enhancement:
Expenditures for development and enhancement costs included in cost of
revenues for the six-month period ended June 30, 1994 (unaudited) was $83,000
and for the year ended December 31, 1993 was approximately $52,000.
[4] Interim financial information:
In the opinion of management, all adjustments have been made to present fairly
the results of operations and cash flows for the six-month periods ended
June 30, 1994 and 1993.
(NOTE 3) - Rent Expense:
Total gross rent under leases charged to operations amounted to approximately
$108,000 for the six-month period ended June 30, 1994 (unaudited) and $253,000
in the year ended December 31, 1993.
F-47
<PAGE> 140
562,500 Units
Netsmart Technologies, Inc.
(Each Unit Consists of two shares of Common Stock and one Series A
Redeemable Common Stock Purchase Warrant)
PROSPECTUS
Monroe Parker Securities, Inc.
____________, 1996
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus, and, if given
or made, such information or representations must not be relied on as having
been authorized by the Company or by the Underwriter. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby to any person in any jurisdiction in which such
offer or solicitation was not authorized or in which the person making such
offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the circumstances of the
Company of the facts herein set forth since the date of this Prospectus.
TABLE OF CONTENTS
Page
----
Prospectus Summary 3
Risk Factors 8
Dilution 17
Use of Proceeds 18
Capitalization 21
Selected Financial Data 23
Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Business 29
Management 38
Certain Transactions 43
Interim Financings 47
Principal Stockholders 48
Selling Security Holders 50
Description of Securities 52
Underwriting 57
Legal Matters 59
Experts 59
Additional Information 59
Index to Financial Statements F-1
Until ____________, 1996 (25 days after the date of this Prospectus) all
dealers effecting transactions in the registered securities, whether or not
participating in the distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE> 141
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
SEC registration fee $ 5,242.82
NASD registration fee 2,020.41
Nasdaq listing fee 10,000.00
Printing and engraving 25,000.00*
Accountants' fees and expenses 75,000.00*
Legal fees 150,000.00*
Transfer agent's and warrant agent's fees and expenses 5,000.00*
Blue Sky fees and expenses 40,000.00*
Underwriter's non accountable expense allowance 135,000.00
Underwriter's consulting agreement 60,000.00
Miscellaneous 17,736.77*
-----------
Total $525,000.00*
============
* Estimated
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law and Article EIGHTH of
the Company's Restated Certificate of Incorporation (Exhibit 3.1) provide for
indemnification of directors and officers of the Company under certain
circumstances.
Reference is made to Paragraphs 6 and 7 of the Underwriting Agreement
(Exhibit 1.1) with respect to indemnification of the Company and the
Underwriter. In addition, the Outstanding Warrants (Exhibit 10.7) and the
subscription agreement relating to the January 1996 Interim Notes (Exhibit
10.12) also include indemnification provisions.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, offices or controlling persons of the
registrant, pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
Item 15. Recent Sales of Unregistered Securities
Set forth below is information concerning the issuance by the Registrant
of its securities since its organization in September 1992. All securities
issued are restricted securities and the certificates bear restrictive legend.
<PAGE> 142
(a) In August 1993, the Registrant effected a 2,000 for one Common Stock
recapitalization. In October 1993, the Registrant effected a .576-for-
one reverse split in its Common Stock, and in February 1996, the Registrant
effected a three-for-four reverse split of its Common Stock. The issuance of
shares of Common Stock in such transactions was exempt from the registration
requirements of the Securities Act pursuant to Section 3(a)(9) thereof. All
share and per share information in this Item 26 has been restated, where
appropriate, to give effect to such transactions.
(b) In connection with the organization of the Registrant in September
1992, the Registrant issued 582,072 shares of Common Stock to SIS Capital
Corp. ("SISC") for $1,300 (.002 per share), 112,584 shares of Common Stock to
DLB, Inc. ("DLB") for $6,700 ($.06 per share), and 43,200 shares of Common
Stock to each of DLB, Mr. Harris Freedman and Mr. E. Gerald Kay for nominal
considerations. DLB is owned by Ms. Carol Schiller, wife of Mr. Lewis S.
Schiller, chairman of the board and a director of the Registrant. Mr.
Schiller disclaims any beneficial interest in DLB or the shares of Common
Stock owned by DLB.
(c) In connection with the organization of the Registrant, the Registrant
acquired all of the capital stock of LMT, Inc. ("LMT") in exchange for 129,600
shares of Common Stock and 400 shares of Series A Preferred Stock, which are
convertible into
II-1
an aggregate of 43,200 shares of Common Stock. LMT was a shell corporation
with no operating business, and accordingly, there was no cash consideration
paid to the Registrant.
Number of Shares
-------------------------------
Name Common Stock Preferred Stock
- ---------------------- -------------------------------
Leonard M. Luttinger 60,480
Martin Hodes 43,200 400
Thomas Evans 25,920
------- ---
129,600 400
======= ===
(d) During the period from December 1992 to March 1993, the Registrant
sold units to four accredited investors, each unit consisting of 4,536 shares
of Common Stock and 20 shares of Series B Preferred Stock for an aggregate
consideration of $25,000 per unit. Each share of Series B Preferred Stock is
convertible into 259.2 shares of Common Stock. The price per unit was
allocable as follows: $24,000 to the Series B Preferred Stock ($1,200 per
share) and $1,000 to the Common Stock ($.22 per share). One unit was issued
to each of the following persons: DLB, Inc., Harris Freedman, E. Gerald Kay
and Murray Vinarub.
(e) In July and August 1993, the Registrant issued its 90-Day Promissory
Notes in the aggregate principal amount of $216,000 to the seven accredited
investors named below. In connection with such issuances, SISC transferred
15,120 shares of Common Stock to the purchasers of the notes. In March 1994,
in connection with the agreement of the note holders to extend the time for
payment until December 31, 1994, SISC transferred to the note holders an
aggregate of 9,375 shares of Common Stock.
<PAGE> 143
Name Principal Amount Initial Shares Additional Shares
- ------------------------- ---------------- -------------- -----------------
Norman Goldstein $ 54,000 4,320 --(1)
All American Funding Corp. 27,000 2,160 1,875
Beau-Lev 27,000 2,160 1,875
David Catanzarite 27,000 --(2) --(2)
Israel Cohen 27,000 2,160 1,875
T.H. Lehman & Co. 27,000 2,160 1,875
MBO Holdings, N.V. 27,000 2,160 1,875
-------- ------ -----
$216,000 15,120 9,375
======== ====== =====
(1) The note issued to Mr. Goldstein was purchased by SISC, and,
accordingly, no shares were transferred to him.
(2) The note issued to Mr. Catanzarite was paid and no shares were
transferred to him.
(f) In October 1993, the Registrant issued to SISC an aggregate of 78,000
shares of Common Stock for $.232 per share, which was treated as a reduction
of the amount due from the Registrant to SISC of approximately $18,000.
(g) In October 1993, the Registrant issued to SISC warrants to purchase
375,000 shares of Common Stock at $10.00 per share, 225,000 shares at $6.67
per share and 150,000 shares of Common Stock at $2.67 per share and issued to
SMACS Holdings, Inc. ("SMACS"), warrants to purchase 37,500 shares of Common
Stock at $6.67 per share and 37,500 shares at $2.67 per share. These warrants
became exercisable six months from the completion of the Registrant's initial
public offering or earlier with the consent of the Registrant and the
underwriter and expired on November 30, 1998. In connection with the
Registrant's prior proposed initial public offering, SISC agreed to a
reduction in the amount to be paid to SISC from the proceeds of such offering,
and the Registrant issued to SISC a warrant to purchase 525,000 shares of
Common Stock at $6.67 per share, and the Registrant and SISC agreed to an
adjustment in the exercise price of warrants to purchase 375,000 shares of
Common Stock from $10.00 per share to $6.67 per share.
(h) In February 1996, the Registrant issued an aggregate of 3,153,750
Outstanding Warrants, of which 2,516,250 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 1994 Interim Notes. 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 Outstanding
Warrants, but not the exercise price, was adjusted for the reverse split. The
Outstanding Warrants expire on December 31, 1999. The Outstanding Warrants,
which, with respect to SISC and SMACS, replaced of the warrants described in
Paragraph (g) of this Item 15, were issued in February 1996 to the following
persons:
II-2
<PAGE> 144
Name $2 Warrants $5 Warrants
- ---------------------------- ----------- -----------
SISC 1,968,750 --
Lewis S. Schiller -- 52,500
Storm R. Morgan 225,000 --
James L. Conway 112,500 112,500
Leonard M. Luttinger 37,500 112,500
Thomas L. Evans -- 37,500
SMACS Holdings, Inc. 37,500 187,500
Bridge Ventures, Inc. 135,000 135,000
--------- -------
Total 2,516,250 637,500
========= =======
(i) In December 1994, the Registrant issued its 10% promissory notes due
December 31, 1994 (the "December 1994 Interim Notes") in the principal amount
of $200,000. In connection with the issuance of the December 1994 Interim
Notes, Consolidated Technology Group Ltd. ("Consolidated") issued to the
purchasers of such notes 1,500 shares of its common stock for each $10,000
principal amount of December 1994 Interim Notes. In connection with the
extension of the maturity date of the December 1994 Interim Notes to January
31, 1994, Consolidated issued an additional 1,500 shares of its common stock
for each $10,000 principal amount of December 1994 Interim Notes. Carte
Medical Holdings, Inc. ("Holdings"), the principal stockholder of the
Registrant, is a wholly-owned subsidiary of SISC, which is a wholly-owned
subsidiary of Consolidated. The Registrant had the right to defer the March
1995 payment by the payment of a $12,500 extension fee and the issuance by
Consolidated of 1,250 shares of Consolidated common stock for each $10,000
principal amount of December 1994 Interim Notes. In connection with the
issuance by Consolidated of its common stock, its agreement to issue
additional shares of its common stock and its agreement to guarantee the
December 1994 Interim Notes if such notes are not paid by January 31, 1995,
the Registrant agreed to issue 75,000 shares of Common Stock to Holdings.
Such shares were issued in September 1995. Set forth below is information
concerning the issuance of the December 1994 Interim Notes. The number of
shares of Consolidated common stock reflects both the initial issuance and the
additional issuance.
Principal Amount Shares of Consolidated
Name of Notes Common Stock
- ----------------------- ---------------- ----------------------
Joseph Brussese $ 25,000 10,625
Bernard Savetz 25,000 10,625
Ruth Wolf 25,000 10,625
Larry Pallini 15,000 6,375
Jeffrey Schwartz 15,000 6,375
Rosemary G. Barsky 12,500 5,313
Alvin I. Lebenfeld 12,500 5,313
Ronald S. Levine 12,500 5,313
Irwin Pincus 12,500 5,313
David Schiffman 12,500 5,313
Michael Friedman 10,000 4,250
Steven L. Tillman 10,000 4,250
Robert Friedman 6,250 2,657
Lawrence Lupo 6,250 2,657
-------- ------
$200,000 85,004
<PAGE> 145
(j) At September 30, 1995, the Registrant owed SISC approximately $3.0
million plus interest of $388,000. At September 30, 1995:
(i) Holdings transferred to the Registrant all of the stock of CSM in
exchange for 750,000 shares of Common Stock in accordance with the
Registrant's agreement with SISC.
(ii) The Registrant issued to Holdings 75,000 shares of Common Stock in
consideration for the guarantee by Consolidated of the December 1994 Interim
Notes and the issuance by Consolidated of shares of its common stock to the
holders of such notes. See Item (h) of this Item 15.
II-3
(iii) SISC accepted 2,210 shares Series D Preferred Stock, which have a
redemption price of $1,000 per share, or an aggregate of $2,210,000 in
exchange for cancellation of the Registrant's indebtedness to SISC in the
principal amount of $2,210,000. The Series D Preferred Stock is not voting
and there are limitations on the redemption of such shares. The Registrant
issued a $750,000 promissory note to SISC in respect of the balance of its
indebtedness to SISC. The note is due in January 1997, but is payable five
days after the completion of the Registrant's initial public offering.
(iv) The Registrant issued 1,125,000 shares of Common Stock to Holdings
in consideration of the cancellation by SISC of accrued interest at September
30, 1995 of $388,000, reflecting a price of $.345 per share of Common Stock.
(k) In January 1996, SISC exchanged 1,000 shares of Series D Preferred
Stock for 1,125,000 shares of Common Stock, reflecting a price of $.89 per
share of Common Stock.
(l) In January 1996, the Registrant issued to Mr. Thomas Evans, vice
president of the Registrant, 11,250 shares of Common Stock for services
rendered in 1995. The shares were valued at $2.00 per share.
(m) In January 1996, the Registrant issued to the following four
accredited investors notes (the "January 1996 Interim Notes") in the principal
amount of $500,000, which are due January 1997 or earlier upon completion of
the Registrant's initial public offering. Pursuant to the subscription
agreement, if the Registrant effects its initial public offering prior to the
maturity date of the January 1996 Interim Notes, the Registrant will issue
pursuant to the registration statement relating to such initial public
offering one unit identical with that offered to the public for each $2.00
principal amount of January 1996 Interim Note. See "Selling Security
Holders." Set forth below are the purchasers of the January 1996 Interim
Notes and the principal amount of January 1996 Interim Notes issued.
Name Principal Amount
- ---------------------------- ----------------
360 Central Corporation $300,000
Charles S. Junger 100,000
Steven Capizzi 50,000
Kenneth Lipson 50,000
The issuances described in Paragraphs (b) through (l) are exempt from the
registration requirements of the Securities Act pursuant to Section 4(2)
thereof as transactions not involving a public offering. No underwriting was
involved in connection with any such issuances and no fees or commissions were
paid.
<PAGE> 146
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1 Form of Underwriting Agreement.
1.2 Form of Underwriter's Option.
1.3 Form of Consulting Agreement between the Registrant and the
Underwriter.
1.4(2) Form of M/A Agreement between the Registrant and the Underwriter.
2.1(2) 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")
2.2(2) Amendment dated April 13, 1994 to the Purchase Agreement.
2.3(2) 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.
2.4(2) Second Amendment dated June 16, 1994 to the Purchase Agreement.
2.5(2) 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.
2.6(2) Letter agreement dated December 5, 1994, between the Registrant and
Consolidated.
3.1(2) Restated Certificate of Incorporation, as amended, including
certificates of designation with respect to the Series A, B and D
Preferred Stock.
3.2 By-Laws
4.1 Form of Warrant Agreement 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.
II-4
5.1(1) Opinion of Esanu Katsky Korins & Siger.
10.1(2) Employment Agreement dated June 16, 1994, between the Registrant and
Leonard M. Luttinger, as amended.
10.2(2) Employment Agreement dated June 16, 1994, between the Registrant and
Thomas Evans.
10.3(2) Employment Agreement dated June 16, 1994, between the Registrant and
John F. Phillips, as amended.
10.4(2) Employment Agreement dated June 16, 1994, between the Registrant and
Anthony F. Grisanti.
10.5(2) Employment Agreement dated June 16, 1994, between the Registrant and
Edward D. Bright, as amended.
10.6(2) Agreement dated March 1, 1996 between the Registrant and The Trinity
Group, Inc.
10.7(2) 1993 Long-Term Incentive Plan.
10.8(2) Form of Outstanding Warrant.
10.9(2) Form of Option Agreement from SIS Capital Corp. to certain officers
of Old CSM.
10.10(2) Interim Notes.
10.11(2) Form of Subscription Agreement for Interim Notes.
<PAGE> 147
10.12(2) Form of Subscription Agreement relating to the December 1994 Interim
Notes, including the form of December 1994 Interim Note.
10.13(2) Modification and extension agreement dated as of January 31, 1995,
among the Registrant and the holders of the December 1994 Interim
Notes.
10.14(2) January 1996 Interim Notes.
10.15(2) Form of Subscription Agreement for January 1996 Interim Notes.
10.16(2) Contract dated September 22, 1994. by and between the State of
Colorado for the use and benefit of the Department of Human
Services and CSM.
10.17(2) Agreement dated March , 1995 between CSM and United Credit
Corporation, as amended.
10.18 Software licensing and service agreement dated April 27, 1996
between the Registrant and IBN Limited.
10.19(2) Letter agreement dated February 28, 1996 between the Registrant and
Oasis Technology Ltd. ("Oasis) relating to the a proposed joint
venture.
10.20(2) Source code license agreement dated November 10, 1995 between the
Registrant and Oasis.
10.21(2) Software marketing and distribution agreement between the Registrant
and Oasis.
10.22(2) Joint marketing letter agreement dated March 31, 1995 between the
Registrant and Oasis.
10.23(1) Agreement dated February 7, 1996 between the Credit Card Acquisition
Corp. and Fiton Business, S.A.
10.24(1) Management, Marketing and Advisory Agreement dated as of March ,
1996, between the Registrant and SMI Corporation.
10.25(2) Purchase Order dated June 30, 1995 from Virginia Commonwealth
University to the Registrant.
10.26(2) Form of the Registrant's 10% Subordinated Note due January 15, 1997
issued to SIS Capital Corp.
11.1 Computation of loss per share.
24.1 Consent of Mortenson and Associates, P.C. (See Page II-7)
24.2 Consent of Richard A. Eisner & Company, LLP. (See Page II-8)
24.3(1) Consent of Esanu Katsky Korins & Siger (included in Exhibit 5.1).
25.1(2) Powers of attorney.
27 Financial data schedule.
(1) To be filed by amendment.
(2) Previously filed.
(b) Financial Statement Schedules
None
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this amendment to this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York on this 17th day of
June, 1996
<PAGE> 148
NETSMART TECHNOLOGIES, INC.
By: /S/ Lewis S. Schiller
Lewis S. Schiller
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to this registration statement has been signed by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title
- ---------------------------- -------------------------
Lewis S. Schiller Chairman of the Board, Chief
- --------------------- Executive Officer and Director
Lewis S. Schiller (Principal Executive Officer)
Anthony F. Grisanti Treasurer and Chief Financial
- ----------------------- Officer (Principal Financial
Anthony F. Grisanti and Accounting Officer)
James L. Conway Director
- -------------------
James L. Conway
Leonard M. Luttinger Director
- ------------------------
Leonard M. Luttinger
John F. Phillips Director
- --------------------
John F. Phillips
Director
- -----------------
E. Gerald Kay
Storm R. Morgan Director
- -------------------
Storm R. Morgan
By: /S/ Lewis S. Schiller
- -------------------------
Lewis S. Schiller
Attorney in Fact
June 17, 1996
II-6
<PAGE> 149
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form S 1 of our
report dated March 6, 1996, accompanying the financial statements of Netsmart
Technologies, Inc., which report includes an explanatory paragraph relating to
the ability of Netsmart Technologies, Inc. to continue as a going concern, and
to the use of our name, and the statements with respect to us as appearing
under the heading "Experts" in the Prospectus.
Mortenson and Associates, P.C.
Certified Public Accountants.
Cranford, New Jersey
June 17, 1996
II-7
<PAGE> 150
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Amendment No. 1 to this Registration Statement on
Form S-1 of Netsmart Technologies, Inc. of our report dated March 4, 1994,
except for Note 1 as to which the date is June 16, 1994, on the statements of
operations, changes in capital (deficiency) and cash flows of Creative Socio-
Medics Corp. for the year ended December 31, 1993. We also consent to the use
of our name and the statement with respect to us appearing under the heading
"Experts" in the Prospectus.
Richard A. Eisner & Company, LLP
New York, New York
June 17, 1996
II-8
<PAGE> 151
Exhibit 1.1
562,500 Units
(each Unit consisting of two (2) shares of Common Stock, par value $.01 per
share, and one (1) redeemable Series A Warrant, which will be exercisable
commencing ________ __, 1997 through ________ __, 1999, at a price of $4.50,
to purchase one (1) share of Common Stock)
NETSMART TECHNOLOGIES, INC.
UNDERWRITING AGREEMENT
New York, New York
________ __, 1996
Monroe Parker Securities, Inc.
2500 Westchester Avenue
Purchase, New York 10577
NETSMART TECHNOLOGIES, INC., a Delaware corporation (the "Company"), proposes
to issue and sell to Monroe Parker Securities, Inc. ("you" or the
"Underwriter") pursuant to this Underwriting Agreement (the "Agreement") an
aggregate of 562,500 Units, each unit being hereinafter referred to as a
"Unit" and consisting of two (2) shares of Common Stock, par value $.01 per
share ("Shares"), and one (1) redeemable Series A Warrant ("Warrant"), which
will be exercisable commencing _________ __, 1997 through ________ __, 1999,
at a price of $4.50, to purchase of one (1) share of Common Stock. The
Components of the Units will be separately transferable immediately upon
issuance. The Warrants are subject to redemption, in certain instances,
commencing one year from the date of this Agreement. In addition, the Company
proposes to grant to the Underwriter the option referred to in Section 2(b) to
purchase all or any part of an aggregate of 84,375 additional Units. Unless
the context otherwise indicates, the term "Units" shall include such 84,375
additional Units. The Common Stock of the Company to be outstanding after
giving effect to the sale of the Shares is herein called the "Common Stock."
The Shares and Warrants included in the Units (including the Units which the
Underwriter has the option to purchase) are herein collectively called the
"Securities."
You have advised the Company that you desire to purchase the Units. The
Company confirms the agreements made by it with respect to the purchase of the
Units by the Underwriter as follows:
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriter that:
(a) A registration statement (File No. 333-2550) on Form S 1 relating to
the public offering of the Units, including a form of prospectus subject to
completion, copies of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission under the Act and one or
more amendments to such registration statement may have been so filed. After
the execution of this Agreement, the Company will file with the Commission
either (i) if such registration statement, as it may have been amended, has
been declared by the Commission to be effective under the Act, either (A) if
<PAGE> 152
the Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter
defined) relating to the Units that shall identify the Preliminary Prospectus
(as hereinafter defined) that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if
the Company does not rely on Rule 434 under the Act a prospectus in the form
most recently included in an amendment to such registration statement (or, if
no such amendment shall have been filed, in such registration statement), with
such changes or insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act and in the case of either clause (i)(A)
or (i)(B) of this sentence, as have been provided to and approved by the
Underwriter prior to the execution of this Agreement, or (ii) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Underwriter prior to the
execution of this Agreement.
As used in this Agreement, the term "Registration Statement" means such
registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and
including any information omitted therefrom pursuant to Rule 430A under the
Act and included in the Prospectus (as hereinafter defined); the term
"Preliminary Prospectus" means each prospectus subject to completion filed
with such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto at the time it was or is declared
effective); the term "Prospectus" means (A) if the Company relies on Rule 434
under the Act, the Term Sheet relating to the Units that is first filed
pursuant to Rule 424(b)(7) under the Act, together with the Preliminary
Prospectus identified therein that such Term Sheet supplements; (B) if the
Company does not rely on Rule 434 under the Act, the prospectus first filed
with the Commission pursuant to Rule 424(b) under the Act or (c) if the
Company does not rely on Rule 434 under the Act and if no prospectus is
required to be filed pursuant to said Rule 424(b), such term means the
prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and
prior to the Option Closing Date (as hereinafter defined), the terms
"Registration Statement" and "Prospectus" shall include such registration
statement and prospectus as so amended, and the term "Prospectus" shall
include the prospectus as so supplemented, or both, as the case may be; and
the term "Term Sheet" means any term sheet that satisfies the requirements of
Rule 434 under the Act. Any reference to the "date" of a Prospectus that
includes a Term Sheet shall mean the date of such Term Sheet.
-2-
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus. At the time the Registration Statement
becomes effective and at all times subsequent thereto up to and on the Closing
Date (as hereinafter defined) or the Option Closing Date, as the case may be,
(i) the Registration Statement and Prospectus will in all respects conform to
the requirements of the Act and the Rules and Regulations; and (ii) neither
the Registration Statement nor the Prospectus will include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make statements therein not misleading;
provided, however, that the Company makes no representations, warranties or
agreements as to information contained in or omitted from the Registration
Statement or Prospectus in reliance upon, and in conformity with, written
<PAGE> 153
information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus on page 2 with respect to
stabilization, under the heading "Underwriting" and the identity of counsel to
the Underwriter under the heading "Legal Matters" constitute the only
information furnished in writing by or on behalf of the Underwriter for
inclusion in the Registration Statement and Prospectus, as the case may be.
(c) The Company and each of its subsidiaries (each a "Subsidiary" and
collectively, the "Subsidiaries") have been duly incorporated and are validly
existing as a corporation in good standing under the laws of the jurisdiction
of their respective incorporation, with full power and authority (corporate
and other) to own their respective properties and conduct their business as
described in the Prospectus and are duly qualified to do business as a foreign
corporation and are in good standing in all other jurisdictions in which the
nature of their respective business or the character or location of their
respective properties requires such qualification, except where failure to so
qualify will not materially affect the business, properties or financial
condition of the Company and its Subsidiaries taken as a whole.
(d) The authorized, issued and outstanding capital stock of the Company
as of March 31, 1996 is as set forth in the Prospectus under "Capitalization;"
the shares of issued and outstanding capital stock of the Company set forth
thereunder have been duly authorized, validly issued and are fully paid and
non assessable; except as set forth in the Prospectus, no options, warrants,
or other rights to purchase, agreements or other obligations to issue, or
agreements or other rights to convert any obligation into, any shares of
capital stock of the Company have been granted or entered into by the Company;
and the capital stock conforms to all statements relating thereto contained in
the Registration Statement and Prospectus.
(e) The Units and the Shares are duly authorized, and when issued and
delivered pursuant to this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable and free of preemptive rights of any security
holder of the Company. Neither the filing of the Registration Statement nor
the offering or sale of the Units as contemplated in this Agreement gives rise
to any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as
described in the Registration Statement.
-3-
The Warrants have been duly authorized and, when issued and delivered
pursuant to this Agreement, will have been duly executed, issued and delivered
and will constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms and entitled to the benefits
provided by the warrant agreement pursuant to which such Warrants are to be
issued (the "Warrant Agreement"), which will be substantially in the form
filed as an exhibit to the Registration Statement. The Shares issuable upon
exercise of the Warrants have been reserved for issuance upon the exercise of
the Warrants and when issued in accordance with the terms of the Warrants and
Warrant Agreement, will be duly and validly authorized, validly issued, fully
paid and non assessable and free of preemptive rights and no personal
liability will attach to the ownership thereof and the certificates evidencing
such Shares will be in due and proper legal form. The Warrant Agreement has
been duly authorized and, when executed and delivered pursuant to this
Agreement, will have been duly executed and delivered and will constitute the
valid and legally binding obligation of the Company enforceable in accordance
<PAGE> 154
with its terms. The Warrants and the Warrant Agreement conform to the
respective descriptions thereof in the Registration Statement and Prospectus.
The Shares and the Warrants contained in the Unit Purchase Option (described
in Section 12 hereof) have been duly authorized and, when duly issued and
delivered, such Warrants will constitute valid and legally binding obligations
of the Company enforceable in accordance with their terms and entitled to the
benefits provided by the Unit Purchase Option. The Shares included in the Unit
Purchase Option (and the shares of Common Stock issuable upon exercise of such
Warrants) have been reserved for issuance upon exercise of the Unit Purchase
Option and, when issued and sold, will be duly authorized, validly issued,
fully paid and non assessable and free of preemptive rights and no personal
liability will attach to the ownership of such Shares.
(f) This Agreement, the Unit Purchase Option, the M/A Agreement (to be
delivered to you in accordance with Section 3(t) hereof) and the Consulting
Agreement (to be delivered in accordance with Section 3(u) hereof) have been
duly and validly authorized, executed and delivered by the Company. The
Company has full power and lawful authority to authorize, issue and sell the
Units and the Unit Purchase Option to be sold by it hereunder on the terms and
conditions set forth herein, and no consent, approval, authorization or other
order of any governmental authority is required in connection with such
authorization, execution and delivery or with the authorization, issue and
sale of the Units or the Unit Purchase Option, except such as may be required
under the Act or state securities laws.
(g) Except as described in the Prospectus, neither the Company nor any
of its Subsidiaries are in violation, breach or default of or under, and
consummation of the transactions herein contemplated and the fulfillment of
the terms of this Agreement will not conflict with, or result in a breach or
violation of, any of the terms or provisions of, or constitute a default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any of the property or assets of the Company or any
Subsidiary pursuant to the terms of any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary may be bound
or to which any
-4-
of the property or assets of the Company or any Subsidiary is subject, nor
will such action result in any violation of the provisions of the articles of
incorporation or the by laws of the Company or any Subsidiary, as amended, or
any statute or any order, rule or regulation applicable to the Company or any
Subsidiary of any court or of any regulatory authority or other governmental
body having jurisdiction over the Company or any Subsidiary.
(h) Subject to the qualifications stated in the Prospectus, the Company
and each of the Subsidiaries has good and marketable title to all properties
and assets described in the Prospectus as owned by it, free and clear of all
liens, charges, encumbrances or restrictions, except such as are not
materially significant or important in relation to its business; all of the
material leases and subleases under which the Company or any Subsidiary is the
lessor or sublessor of properties or assets or under which the Company or any
Subsidiary holds properties or assets as lessee or sublessee as described in
the Prospectus are in full force and effect, and, except as described in the
Prospectus, the Company or any Subsidiary is not in default in any material
respect with respect to any of the terms or provisions of any of such leases
or subleases, and no claim has been asserted by anyone adverse to rights of
<PAGE> 155
the Company or any Subsidiary as lessor, sublessor, lessee or sublessee under
any of the leases or subleases mentioned above, or affecting or questioning
the right of the Company or any Subsidiary to continued possession of the
leased or subleased premises or assets under any such lease or sublease except
as described or referred to in the Prospectus; and the Company or any
Subsidiary owns or leases all such properties described in the Prospectus as
are necessary to its operations as now conducted and, except as otherwise
stated in the Prospectus, as proposed to be conducted as set forth in the
Prospectus.
(i) Mortenson and Associates, P.C., and Richard A. Eisner & Company,
LLP, who have given their reports on certain financial statements filed and to
be filed with the Commission as a part of the Registration Statement, which
are incorporated in the Prospectus, are with respect to the Company,
independent public accountants as required by the Act and the Rules and
Regulations.
(j) The financial statements, together with related notes, set forth in
the Prospectus present fairly the financial position and results of operations
and changes in cash flow position of the Company on the basis stated in the
Registration Statement, at the respective dates and for the respective periods
to which they apply. Said statements and related notes have been prepared in
accordance with generally accepted accounting principles applied on a basis
which is consistent during the periods involved. The information set forth
under the captions "Dilution," "Capitalization" and "Selected Financial Data"
in the Prospectus fairly present, on the basis stated in the Prospectus, the
information included therein. The pro forma financial information included in
the Prospectus has been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, and includes all
adjustments necessary to present fairly the pro forma financial condition and
results of operations at the respective dates and for the respective periods
indicated and all assumptions used in preparing such pro forma financial
statements are reasonable.
-5-
(k) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, neither the Company nor any of
the Subsidiaries has incurred any liabilities or obligations, direct or
contingent, not in the ordinary course of business, or entered into any
transaction not in the ordinary course of business, which is material to the
business of the Company and its Subsidiaries taken as a whole, and there has
not been any change in the capital stock of, or any incurrence of short term
or long term debt by, the Company or any Subsidiary or any issuance of
options, warrants or other rights to purchase the capital stock of the Company
or any Subsidiary or any adverse change or any development involving, so far
as the Company can now reasonably foresee, a prospective adverse change in the
condition (financial or other), net worth, results of operations, business,
key personnel or properties of the Company and its Subsidiaries taken as a
whole which would be material to the business or financial condition of the
Company and its Subsidiaries taken as a whole and neither the Company nor any
of its Subsidiaries has become a party to, and neither the business nor the
property of the Company nor any Subsidiary has become the subject of, any
material litigation whether or not in the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not now pending or,
to the knowledge of the Company, threatened, any action, suit or proceeding to
which the Company or any Subsidiary is a party before or by any court or
governmental agency or body, which might result in any material adverse change
<PAGE> 156
in the condition (financial or other), business prospects, net worth, or
properties of the Company and its Subsidiaries taken as a whole, nor are there
any actions, suits or proceedings related to environmental matters or related
to discrimination on the basis of age, sex, religion or race; and no labor
disputes involving the employees of the Company or any Subsidiary exist or are
imminent which might be expected to adversely affect the conduct of the
business, property or operations or the financial condition or results of
operations of the Company and its Subsidiaries taken as a whole.
(m) Except as disclosed in the Prospectus, the Company and each of its
Subsidiaries have filed all necessary federal, state and foreign income and
franchise tax returns and has paid all taxes shown as due thereon; and there
is no tax deficiency which has been or to the knowledge of the Company might
be asserted against the Company or any Subsidiary.
(n) The Company and each of its Subsidiaries have sufficient licenses,
permits and other governmental authorizations currently required for the
conduct of its business or the ownership of its properties as described in the
Prospectus and is in all material respects complying therewith and owns or
possesses adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations, service mark
registrations, copyrights and licenses necessary for the conduct of such
business and had not received any notice of conflict with the asserted rights
of others in respect thereof. To the best knowledge of the Company, none of
the activities or business of the Company or any Subsidiary are in violation
of, or cause the Company or any Subsidiary to violate, any law, rule,
regulation or order of the United States, any state, county or locality, or of
any agency or body of the United States or of any state, county or locality,
the violation of which would have a material adverse impact upon the
-6-
condition (financial or otherwise), business, property, prospective results of
operations, or net worth of the Company and its Subsidiaries taken as a whole.
(o) Neither the Company or any Subsidiary has directly or indirectly, at
any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution in violation of law or (ii)
made any payment to any state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi public duties,
other than payments or contributions required or allowed by applicable law.
The Company's internal accounting controls and procedures are sufficient to
cause the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(p) On the Closing Dates (hereinafter defined) all transfer or other
taxes, (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Units and Unit Purchase Option to
the Underwriter hereunder will have been fully paid or provided for by the
Company and all laws imposing such taxes will have been fully complied with.
(q) All contracts and other documents of the Company and each of the
Subsidiaries which are, under the Rules and Regulations, required to be filed
as exhibits to the Registration Statement have been so filed and the material
provisions thereof have been accurately summarized in the Prospectus as
required by the Rules and Regulations.
<PAGE> 157
(r) The Company has not taken and will not take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation
of the price of the Units, Shares or Warrants or to facilitate the sale or
resale of the Securities.
(s) The Company has not entered into any agreement pursuant to which any
person is entitled either directly or indirectly to compensation from the
Company for services as a finder in connection with the proposed public
offering.
(t) Except as previously disclosed in writing by the Company to the
Underwriter, no officer, director or stockholder of the Company has any
affiliation or association with any member of the National Association of
Securities Dealers Inc. ("NASD").
(u) The Company is not, and upon receipt of the proceeds from the sale
of the Units will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.
(v) The Company has not distributed and will not distribute prior to the
First Closing Date any offering material in connection with the offering and
sale of the Units other than the Preliminary Prospectus, Prospectus, the
Registration Statement or the other materials permitted by the Act, if any.
-7-
(w) There are no business relationships or related-party transactions of
the nature described in Item 404 of Regulation S-K involving the Company, the
Subsidiaries and any person described in such Item that are required to be
disclosed in the Prospectus and that have not been so disclosed.
2. Purchase, Delivery and Sale of the Units.
(a) Subject to the terms and conditions of this Agreement, and upon the
basis of the representations, warranties, and agreements herein contained, the
Company agrees to issue and sell to the Underwriter, and the Underwriter
agrees to buy from the Company at $_______ per Unit, at the place and time
hereinafter specified, 562,500 Units (the "First Units").
Delivery of the First Units against payment therefor shall take place at
the offices of Monroe Parker Securities, Inc., 2500 Westchester Avenue,
Purchase, New York 10577 (or at such other place as may be designated by
agreement between you and the Company) at 10:00 a.m., New York time, on
________ __, 1996, or at such later time and date as you may designate, such
time and date of payment and delivery for the First Units being herein called
the "First Closing Date."
(b) In addition, subject to the terms and conditions of this Agreement,
and upon the basis of the representations, warranties and agreements herein
contained, the Company hereby grants an option to the Underwriter to purchase
all or any part of an aggregate of an additional 84,375 Units at the same
price per Unit as the Underwriter shall pay for the First Units being sold
pursuant to the provisions of subsection (a) of this Section 2 (such
additional Units being referred to herein as the "Option Units") .This option
may be exercised within 45 days after the effective date of the Registration
Statement upon notice by you to the Company advising as to the amount of
Option Units as to which the option is being exercised, the names and
<PAGE> 158
denominations in which the certificates for such Option Units are to be
registered and the time and date when such certificates are to be delivered.
Such time and date shall be determined by you but shall not be earlier than
four nor later than ten full business days after the exercise of said option,
nor in any event prior to the First Closing Date, and such time and date is
referred to herein as the "Option Closing Date." Delivery of the Option Units
against payment therefor shall take place at the offices of Monroe Parker
Securities, Inc., 2500 Westchester Avenue, Purchase, New York 10577. The
Option granted hereunder may be exercised only to cover overallotments in the
sale by the Underwriter of the First Units referred to in subsection (a)
above. In the event the Company declares or pays a dividend or distribution on
its Common Stock, whether in the form of cash, shares of Common Stock or any
other consideration, prior to the Option Closing Date, such dividend or
distribution shall also be paid on the Option Units on the Option Closing
Date.
(c) The Company will make the certificates for the securities comprising
the Units to be purchased by the Underwriter hereunder available to you for
checking at least two full business days prior to the First Closing Date or
the Option Closing Date (which are collectively referred to herein as the
"Closing Dates") .The certificates shall be in such names and denominations
-8-
as you may request, at least two full business days prior to the Closing
Dates. Time shall be of the essence and delivery at the time and place
specified in this Agreement is a further condition to the obligations of the
Underwriter.
Definitive certificates in negotiable form for the Units to be purchased
by the Underwriter hereunder will be delivered by the Company to you against
payment of the purchase price by certified or bank cashier's checks in New
York Clearing House funds, payable to the order of the Company.
In addition, in the event you exercise the option to purchase from the
Company all or any portion of the Option Units pursuant to the provisions of
subsection (b) above, payment for such Units shall be made to or upon the
order of the Company by certified or bank cashier's checks payable in New York
Clearing House funds at the offices of Monroe Parker Securities, Inc., at the
time and date of delivery of such Units as required by the provisions of
subsection (b) above, against receipt of the certificates for such Units by
you registered in such names and in such denominations as you may request.
It is understood that the Underwriter proposes to offer the Units to be
purchased hereunder to the public upon the terms and conditions set forth in
the Registration Statement, after the Registration Statement becomes
effective.
3. Covenants of the Company. The Company covenants and agrees with the
Underwriter that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective as promptly as possible. If required, the
Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. Upon notification from the Commission that the Registration Statement has
become effective, the Company will so advise you and will not at any time,
whether before or after the effective date, file the Prospectus, Term Sheet or
<PAGE> 159
any amendment to the Registration Statement or supplement to the Prospectus of
which you shall not previously have been advised and furnished with a copy or
to which you or your counsel shall have objected in writing or which is not in
compliance with the Act and the Rules and Regulations. At any time prior to
the later of (A) the completion by the Underwriter of the distribution of the
Units contemplated hereby (but in no event more than nine months after the
date on which the Registration Statement shall have become or been declared
effective) and (B) 25 days after the date on which the Registration Statement
shall have become or been declared effective, the Company will prepare and
file with the Commission, promptly upon your request, any amendments or
supplements to the Registration Statement or Prospectus which, in your
opinion, may be necessary or advisable in connection with the distribution of
the Units.
-9-
As soon as the Company is advised thereof, the Company will advise you,
and confirm the advice in writing, of the receipt of any comments of the
Commission, of the effectiveness of any post effective amendment to the
Registration Statement, of the filing of any supplement to the Prospectus or
any amended Prospectus, of any request made by the Commission for amendment of
the Registration Statement or for supplementing of the Prospectus or for
additional information with respect thereto, of the issuance by the Commission
or any state or regulatory body of any stop order or other order or threat
thereof suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any preliminary prospectus, or of
the suspension of the qualification of the Units for offering in any
jurisdiction, or of the institution of any proceedings for any of such
purposes, and will use its best efforts to prevent the issuance of any such
order, and, if issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each Preliminary
Prospectus, and the Company has consented and hereby consents to the use of
such copies for the purposes permitted by the Act. The Company authorizes the
Underwriter and dealers to use the Prospectus in connection with the sale of
the Units for such period as in the opinion of counsel to the Underwriter the
use thereof is required to comply with the applicable provisions of the Act
and the Rules and Regulations. In case of the happening, at any time within
such period as a Prospectus is required under the Act to be delivered in
connection with sales by an underwriter or dealer of any event of which the
Company has knowledge and which materially affects the Company or the
securities of the Company, or which in the opinion of counsel for the Company
or counsel for the Underwriter should be set forth in an amendment of the
Registration Statement or a supplement to the Prospectus in order to make the
statements therein not then misleading, in light of the circumstances existing
at the time the Prospectus is required to be delivered to a purchaser of the
Units or in case it shall be necessary to amend or supplement the Prospectus
to comply with law or with the Rules and Regulations, the Company will notify
you promptly and forthwith prepare and furnish to you copies of such amended
Prospectus or of such supplement to be attached to the Prospectus, in such
quantities as you may reasonably request, in order that the Prospectus, as so
amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material facts necessary in order to make the
statements in the Prospectus, in the light of the circumstances under which
they are made, not misleading. The preparation and furnishing of any such
amendment or supplement to the Registration Statement or amended Prospectus or
supplement to be attached to the Prospectus shall be without expense to the
Underwriter, except that in case the Underwriter is required, in connection
with the sale of the Units to deliver a Prospectus nine months or more after
<PAGE> 160
the effective date of the Registration Statement ("Effective Date"), the
Company will upon request of and at the expense of the Underwriter, amend or
supplement the Registration Statement and Prospectus and furnish the
Underwriter with reasonable quantities of prospectuses complying with Section
10(a)(3) of the Act. The Company will comply with the Act, the Rules and
Regulations and the Securities Exchange Act of 1934 (the "Exchange Act") and
the rules and regulations thereunder in connection with the offering and
issuance of the Units.
-10-
(b) The Company will use its best efforts to qualify to register the
Units for sale under the securities or "blue sky" laws of such jurisdictions
as the Underwriter may designate and will make such applications and furnish
such information as may be required for that purpose and to comply with such
laws, provided the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or to execute a general consent of
service of process in any jurisdiction in any action other than one arising
out of the offering or sale of the Units. The Company will, from time to time,
prepare and file such statements and reports as are or may be required to
continue such qualification in effect for so long a period as the Underwriter
may reasonably request.
(c) If the sale of the Units provided for herein is not consummated for
any reason caused by the Company, the Company shall pay all costs and expenses
incident to the performance of the Company's obligations hereunder, including
but not limited to, all of the expenses itemized in Section 8, including the
accountable expenses of the Underwriter.
(d) The Company will use its best efforts to (i) cause a registration
statement under the Exchange Act to be declared effective concurrently with
the completion of this offering and will notify the Underwriter in writing
immediately upon the effectiveness of such registration statement, and (ii) if
requested by the Underwriter, to obtain a listing on the Pacific Stock
Exchange and to obtain and keep current a listing in the Standard & Poors or
Moody's Industrial OTC Manual.
(e) For so long as the Company is a reporting company under either
Section 12(g) or 15(d) of the Exchange Act, the Company, at its expense, will
furnish to its stockholders an annual report (including financial statements
audited by independent public accountants), in reasonable detail and at its
expense, will furnish to you during the period ending five (5) years from the
date hereof, (i) as soon as practicable after the end of each fiscal year, a
balance sheet of the Company and any of its subsidiaries as at the end of such
fiscal year, together with statements of income, surplus and cash flow of the
Company and any subsidiaries for such fiscal year, all in reasonable detail
and accompanied by a copy of the certificate or report thereon of independent
accountants; (ii) as soon as practicable after the end of each of the first
three fiscal quarters of each fiscal year, consolidated summary financial
information of the Company for such quarter in reasonable detail; (iii) as
soon as they are available, a copy of all reports (financial or other) mailed
to security holders; (iv) as soon as they are available, a copy of all non
confidential reports and financial statements furnished to or filed with the
Commission or any securities exchange or automated quotation system on which
any class of securities of the Company is listed; and (v) such other
information as you may from time to time reasonably request. Furthermore, for
a period of three years from the Effective Date the Company, at its expense,
shall provide you with copies of the Company's daily transfer sheets, if
requested by you to do so.
<PAGE> 161
(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent
-11-
the accounts of the Company and its subsidiary or subsidiaries are
consolidated in reports furnished to its stockholders generally.
(g) The Company will deliver to you at or before the First Closing Date
two signed copies of the Registration Statement including all financial
statements and exhibits filed therewith, and of all amendments thereto, and
will deliver to you such number of conformed copies of the Registration
Statement, including such financial statements but without exhibits, and of
all amendments thereto, as you may reasonably request. The Company will
deliver to you, from time to time until the Effective Date, as many copies of
any Preliminary Prospectus filed with the Commission prior to the effective
date of the Registration Statement as you may reasonably request. The Company
will deliver to you on the Effective Date and thereafter for so long as a
Prospectus is required to be delivered under the Act, from time to time, as
many copies of the Prospectus, in final form, or as thereafter amended or
supplemented, as you may from time to time reasonably request. The Company,
not later than (i) 5:00 p.m., New York City time, on the date of determination
of the public offering price, if such determination occurred at or prior to
12:00 noon, New York City time, on such date or (ii) 6:00 p.m., New York City
time, on the business day following the date of determination of the public
offering price, if such determination occurred after 12:00 noon, New York City
time, on such date, will deliver to you, without charge, as many copies of the
Prospectus and any amendment or supplement thereto as you may reasonably
request for purposes of confirming orders that are expected to settle on the
First Closing Date.
(h) The Company will make generally available to its security holders
and to the registered holders of its Warrants and deliver to you as soon as it
is practicable to do so but in no event later than 90 days after the end of
twelve months after its current fiscal quarter, an earnings statement (which
need not be audited) covering a period of at least twelve consecutive months
beginning after the effective date of the Registration Statement, which shall
satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the Units
for the purposes set forth under "Use of Proceeds" in the Prospectus, and will
file such reports with the Commission with respect to the sale of the Units
and the application of the proceeds therefrom as may be required pursuant to
Rule 463 under the Act.
(j) The Company will, promptly upon your request, prepare and file with
the Commission any amendments or supplements to the Registration Statement,
Preliminary Prospectus or Prospectus and take any other action, which in the
reasonable opinion of Singer, Bienenstock, Zamansky, Ogele & Selengut, LLP.,
counsel to the Underwriter, may be reasonably necessary or advisable in
connection with the distribution of the Units, and will use its best efforts
to cause the same to become effective as promptly as possible.
(k) The Company will reserve and keep available that maximum number of
its authorized but unissued securities which are issuable upon exercise of the
Unit Purchase Option outstanding from time to time.
-12-
<PAGE> 162
(l) Prior to the Effective Date, the Company shall have obtained
agreements on your behalf stating that for a period of twenty-four (24) months
from the First Closing Date, neither the Company nor the holders of all of the
currently outstanding shares of Common Stock of the Company, nor the holders
of all outstanding securities convertible or exercisable into shares of Common
Stock of the Company (with the exception of the holders of Interim Notes, as
described in sub-Section 3(m) below), will directly or indirectly, offer, sell
(including any short sale), grant any option for the sale of, acquire any
option to dispose of, or otherwise dispose of any shares of Common Stock
without the prior written consent of the Underwriter. In addition, the holders
of registration rights shall have agreed not to exercise such rights for the
aforesaid twenty-four (24) month period without the consent of the
Underwriter. In order to enforce this covenant, the Company shall impose stop
transfer instructions with respect to the securities owned by such holders
until the end of such period.
(m) The holders of Interim Notes issued by the Company in January 1996
(the "Selling Stockholders") have agreed that they shall not sell any of the
aggregate of 500,000 shares of Common Stock and 250,000 Warrants to be issued
to them pursuant to the Registration Statement (in accordance with the terms
of the Interim Notes) prior to the expiration of thirteen (13) months from the
First Closing Date without the consent of the Underwriter.
(n) The Company has agreed not to call the Series A Preferred Stock for
redemption during the two (2) years following the Effective Date, without the
consent of the Underwriter.
(o) Prior to completion of this offering, the Company will make all
filings required, including registration under the Exchange Act, to obtain the
listing of the Units, Common Stock, and Warrants on the Nasdaq SmallCap Market
(or a listing on such other market or exchange as the Underwriter consents
to), and will effect and maintain such listing for at least five years from
the date of this Agreement.
(p) The Company and each of the beneficial owners of more than 5% of the
Company's outstanding Common Stock (the "Principal Stockholders") represents
that it or he has not taken and agree that it or he will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in the stabilization or manipulation
of the price of the Units, Shares or the Warrants or to facilitate the sale or
resale of the Securities.
(q) On the First Closing Date and simultaneously with the delivery of
the Units, the Company shall execute and deliver to you the Unit Purchase
Option. The Unit Purchase Option will be substantially in the form of the
Underwriter's Unit Purchase Option filed as an Exhibit to the Registration
Statement.
(r) During the two year period from the First Closing Date, the Company
will not, without the prior written consent of the Underwriter, grant any
options to purchase shares
-13-
of Common Stock of the Company. During the two year period from the First
Closing Date, the Company will not, without the prior written consent of the
Underwriter, publicly or privately offer or sell any of its securities under
the Act.
<PAGE> 163
(s) James L. Conway shall be President of the Company on the Closing
Dates. The Company has agreed to obtain key person life insurance on the lives
of Messrs. James L. Conway, Leonard M. Luttinger and Thomas Evans, President,
Chief Operating Officer and Vice President of the Company, respectively, each
in an amount of not less than $1 million and will use its best efforts to
maintain such insurance during the three-year period commencing with the First
Closing Date unless his employment with the Company is earlier terminated. In
such event, the Company will obtain a comparable policy on the life of his
successor for the balance of the three-year period. For a period of thirteen
months from the First Closing Date, the compensation of the executive officers
of the Company shall not be increased from the compensation levels disclosed
in the Prospectus.
(t) On the First Closing Date and simultaneously with the delivery of
the Units the Company shall execute and deliver to you an agreement with you
regarding mergers, acquisitions, joint ventures and certain other forms of
transactions, in the form previously delivered to the Company by you (the "M/A
Agreement").
(u) On the First Closing Date and simultaneously with the delivery of
the Units, the Company shall execute and deliver to you, and pay the fee
thereunder, a one year consulting agreement in the form previously delivered
to the Company by you (the "Consulting Agreement").
(v) So long as any Warrants are outstanding, the Company shall use its
best efforts to cause post effective amendments to the Registration Statement
to become effective in compliance with the Act and without any lapse of time
between the effectiveness of any such post effective amendments and cause a
copy of each Prospectus, as then amended, to be delivered to each holder of
record of a Warrant and to furnish to you and each dealer as many copies of
each such Prospectus as you or the dealer may reasonably request. The Company
shall not call for redemption any of the Warrants unless a registration
statement covering the securities underlying the Warrants has been declared
effective by the Commission and remains current at least until the date fixed
for redemption. In addition, for so long as any Warrant is outstanding, the
Company will promptly notify you of any material change in the business,
financial condition or prospects of the Company.
(w) Upon the exercise of any Warrant or Warrants after ________ __,
1997, the Company will pay Monroe Parker Securities, Inc. a fee of 4% of the
aggregate exercise price of the Warrants, a portion of which may be reallowed
to the dealer who solicited the exercise (which may also be Monroe Parker
Securities, Inc.) if (i) the market price of the Company's Common Stock is
greater than the exercise price of the Warrants on the date of exercise; (ii)
the exercise of
-14-
the Warrant was solicited by a member of the National Association of
Securities Dealers, Inc. and the customer states in writing that the
transaction was solicited and designates in writing the broker-dealer to
receive compensation for the exercise, (iii) the Warrant is not held in a
discretionary account; (iv) the disclosure of compensation arrangements has
been made in documents provided to customers, both as part of the original
offering and at the time of exercise, and (v) the solicitation of the Warrant
was not in violation of Rule 10b 6 promulgated under the Securities Exchange
Act of 1934, as amended. Transactions will be presumed to be unsolicited
pursuant to Item 4 of NASD Notice to Members 81-38 unless the customer has
indicated in writing that the transaction was not solicited and has designated
<PAGE> 164
the broker/dealer which is to receive compensation for the exercise. The
Company agrees not to solicit the exercise of any Warrants other than through
Monroe Parker Securities, Inc. and will not authorize any other dealer to
engage in such solicitation without the prior written consent of Monroe Parker
Securities, Inc.
(x) For a period of five (5) years from the Effective Date the Company
(i) at its expense, shall cause its regularly engaged independent certified
public accountants to review (but not audit) the Company's financial
statements for each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
10 Q quarterly report and the mailing of quarterly financial information to
stockholders and (ii) shall not change its accounting firm without the prior
written consent of the Chairman or the President of the Underwriter.
(y) As promptly as practicable after the First Closing Date, the Company
will prepare, at its own expense, hard cover "bound volumes" relating to the
offering, and will distribute at least four of such volumes to the individuals
designated by the Underwriter or counsel to the Underwriter.
4. Conditions of Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Units which it has agreed to purchase
hereunder, are subject to the accuracy (as of the date hereof, and as of the
Closing Dates) of and compliance with the representations and warranties of
the Company herein, to the performance by the Company of its obligations
hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and you shall
have received notice thereof not later than 10:00 A.M., New York time, on the
day following the date of this Agreement, or such later time and date as shall
have been agreed to by the Underwriter; if required, the Prospectus or any
Term Sheet that constitutes a part thereof and any amendment or supplement
thereto shall have been filed with the Commission in the manner and within the
time period required by Rule 434 and 424(b) under the Act; on or prior to the
Closing Dates no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that or a similar
purpose shall have been instituted or shall be pending or, to your knowledge
or to the knowledge of the Company, shall be
-15-
contemplated by the Commission; any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Singer, Bienenstock, Zamansky, Ogele & Selengut, LLP., counsel
to the Underwriter;
(b) At the First Closing Date, you shall have received the opinion,
dated as of the First Closing Date, of Esanu Katsky Korins & Siger, counsel
for the Company, in form and substance satisfactory to counsel for the
Underwriter, to the effect that:
(i) the Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware, with
full corporate power and authority to own its properties and conduct its
business as described in the Registration Statement and Prospectus and is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in New York and in each other jurisdiction in which the ownership or
leasing of its properties or conduct of its business requires such
qualification;
<PAGE> 165
(ii) to the best knowledge of such counsel, (a) the Company and each
of the Subsidiaries has obtained, or is in the process of obtaining, all
licenses, permits and other governmental authorizations necessary to the
conduct of its business as described in the Prospectus, (b) such licenses,
permits and other governmental authorizations obtained are in full force and
effect, and (c) the Company and each of the Subsidiaries is in all material
respects complying therewith;
(iii) the authorized capitalization of the Company as of March 31,
1996 is as set forth under "Capitalization" in the Prospectus; all shares of
the Company's outstanding stock requiring authorization for issuance by the
Company's board of directors have been duly authorized, validly issued, are
fully paid and non assessable and conform to the description thereof contained
in the Prospectus; the outstanding shares of Common Stock of the Company have
not been issued in violation of the preemptive rights of any shareholder and
the shareholders of the Company do not have any preemptive rights or other
rights to subscribe for or to purchase, nor are there any restrictions upon
the voting or transfer of any of the Shares; the Common Stock, the Warrants,
the Unit Purchase Option and the Warrant Agreement conform to the respective
descriptions thereof contained in the Prospectus; the Shares have been, and
the shares of Common Stock to be issued upon exercise of the Warrants and the
Unit Purchase Option, upon issuance in accordance with the terms of such
Warrants, the Warrant Agreement and Unit Purchase Option have been duly
authorized and, when issued and delivered,
-16-
will be duly and validly issued, fully paid, non assessable, free of
preemptive rights and no personal liability will attach to the ownership
thereof; all prior sales by the Company of the Company's securities have been
made in compliance with or under an exemption from registration under the Act
and applicable state securities laws and no shareholders of the Company have
any rescission rights with respect to Company securities; a sufficient number
of shares of Common Stock has been reserved for issuance upon exercise of the
Warrants and Unit Purchase Option and to the best of such counsel's knowledge,
neither the filing of the Registration Statement nor the offering or sale of
the Units as contemplated by this Agreement gives rise to any registration
rights or other rights, other than those which have been waived or satisfied
for or relating to the registration of any shares of Common Stock;
(iv) this Agreement, the Unit Purchase Option, the Warrant Agreement,
the M/A Agreement and the Consulting Agreement have been duly and validly
authorized, executed and delivered by the Company and, assuming due execution
by each other party hereto or thereto, each constitutes a legal, valid and
binding obligation of the Company enforceable against the Company in
accordance with its respective terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution may be
limited by applicable law;
(v) the certificates evidencing the shares of Common Stock are in
valid and proper legal form; the Warrants will be exercisable for shares of
Common Stock of the Company in accordance with the terms of the Warrants and
at the prices therein provided for; at all times during the term of the
Warrants the shares of Common Stock of the Company issuable upon exercise of
the Warrants will have been duly authorized and reserved for issuance upon
such exercise and such shares, when issued upon such exercise in accordance
<PAGE> 166
with the terms of the Warrants and at the price provided for, will be duly and
validly issued, fully paid and non assessable;
(vi) except as disclosed in the Prospectus, such counsel knows of no
pending or threatened legal or governmental proceedings to which the Company
is a party which could materially adversely affect the business, property,
financial condition or operations of the Company; or which question the
validity of the Securities, this Agreement, the Warrant Agreement, the Unit
Purchase Option, the
-17-
M/A Agreement or the Consulting Agreement, or of any action taken or to be
taken by the Company pursuant to this Agreement, the Warrant Agreement, the
Unit Purchase Option, the M/A Agreement or the Consulting Agreement; and no
such proceedings are known to such counsel to be contemplated against the
Company; there are no governmental proceedings or regulations required to be
described or referred to in the Registration Statement which are not so
described or referred to;
(vii) except as disclosed in the Prospectus, neither the Company nor
any Subsidiary is in violation of or default under, nor will the execution and
delivery of this Agreement, the Unit Purchase Option, the Warrant Agreement,
the M/A Agreement or the Consulting Agreement, and the incurrence of the
obligations herein and therein set forth and the consummation of the
transactions herein or therein contemplated, result in a breach or violation
of, or constitute a default under the certificate or articles of incorporation
or by laws, in the performance or observance of any material obligations,
agreement, covenant or condition contained in any bond, debenture, note or
other evidence of indebtedness or in any contract, indenture, mortgage, loan
agreement, lease, joint venture or other agreement or instrument to which the
Company or any Subsidiary is a party or by which it or any of their respective
properties may be bound or in violation of any material order, rule,
regulation, writ, injunction, or decree of any government, governmental
instrumentality or court, domestic or foreign;
(viii) the Registration Statement has become effective under the Act,
and to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement is in effect, and no proceedings
for that purpose have been instituted or are pending before, or threatened by,
the Commission; the Registration Statement and the Prospectus (except for the
financial statements and other financial data contained therein, or omitted
therefrom, as to which such counsel need express no opinion) comply as to form
in all material respects with the applicable requirements of the Act and the
Rules and Regulations;
(ix) such counsel has participated in the preparation of the
Registration Statement and the Prospectus and nothing has come to the
attention of such counsel to cause such counsel to have reason to believe that
the Registration Statement or any amendment thereto at the time it became
effective or as of the Closing Dates contained any untrue statement of a
material fact required to be stated therein or omitted to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any supplement thereto contains any
untrue statement of a material fact or omits to state a material fact
necessary in order to make statements therein, in light of the circumstances
under which they were made, not misleading (except, in the case of both the
-18-
<PAGE> 167
Registration Statement and any amendment thereto and the Prospectus and any
supplement thereto, for the financial statements, notes thereto and other
financial information and schedules contained therein, as to which such
counsel need express no opinion);
(x) all descriptions in the Registration Statement and the Prospectus,
and any amendment or supplement thereto, of contracts and other documents are
accurate and fairly present the information required to be shown, and such
counsel is familiar with all contracts and other documents referred to in the
Registration Statement and the Prospectus and any such amendment or supplement
or filed as exhibits to the Registration Statement, and such counsel does not
know of any contracts or documents of a character required to be summarized or
described therein or to be filed as exhibits thereto which are not so
summarized, described or filed;
(xi) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in connection with
the authorization, issuance, transfer, sale or delivery of the Units by the
Company, in connection with the execution, delivery and performance of this
Agreement by the Company or in connection with the taking of any action
contemplated herein, or the issuance of the Unit Purchase Option or the
Securities underlying the Unit Purchase Option, other than registrations or
qualifications of the Units under applicable state or foreign securities or
Blue Sky laws and registration under the Act;
(xii) the statements in the Registration Statement under the captions
"Business", "Use of Proceeds", "Management", and "Description of Securities"
have been reviewed by such counsel and insofar as they refer to descriptions
of agreements, statements of law, descriptions of statutes, licenses, rules or
regulations or legal conclusions, are correct in all material respects;
(xiii) the Units, the Common Stock and the Warrants have been duly
authorized for quotation on the Nasdaq SmallCap Market; and
(xiv) to such counsel's knowledge, there are no business relationships
or related-party transactions of the nature described in Item 404 of
Regulation S-K involving the Company, any Subsidiary and any person described
in such Item that are required to be disclosed in the Prospectus and which
have not been so disclosed.
Such opinion shall also cover such matters incident to the transactions
contemplated hereby as the Underwriter or counsel for the Underwriter shall
reasonably request. In rendering such
-19-
opinion, such counsel may rely upon certificates of any officer of the Company
or public officials as to matters of fact; and may rely as to all matters of
law other than the law of the United States or of the State of Delaware upon
opinions of counsel satisfactory to you, in which case the opinion shall state
that they have no reason to believe that you and they are not entitled to so
rely.
(c) All corporate proceedings and other legal matters relating to this
Agreement, the Registration Statement, the Prospectus and other related
matters shall be satisfactory to or approved by Singer, Bienenstock, Zamansky,
Ogele & Selengut, LLP., counsel to the Underwriter, and you shall have
received from such counsel a signed opinion, dated as of the First Closing
Date, with respect to the validity of the issuance of the Units, the form of
<PAGE> 168
the Registration Statement and Prospectus (other than the financial statements
and other financial data contained therein), the execution of this Agreement
and other related matters as you may reasonably require. The Company shall
have furnished to counsel for the Underwriter such documents as they may
reasonably request for the purpose of enabling them to render such opinion.
(d) You shall have received a letter prior to the Effective Date and
again on and as of the First Closing Date from Mortenson and Associates, P.C.,
independent public accountants for the Company, substantially in the form
approved by you, and including estimates of the Company's revenues and results
of operations for the period ending at the end of the month immediately
preceding the Effective Date and results of the comparable period during the
prior fiscal year.
(e) At the Closing Dates, (i) the representations and warranties of the
Company contained in this Agreement shall be true and correct with the same
effect as if made on and as of the Closing Dates and the Company shall have
performed all of its obligations hereunder and satisfied all the conditions on
its part to be satisfied at or prior to such Closing Date; (ii) the
Registration Statement and the Prospectus and any amendments or supplements
thereto shall contain all statements which are required to be stated therein
in accordance with the Act and the Rules and Regulations, and shall in all
material respects conform to the requirements thereof, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto shall contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading; (iii) there shall have been, since the
respective dates as of which information is given, no material adverse change,
or any development involving a prospective material adverse change, in the
business, properties, condition (financial or otherwise), results of
operations, capital stock, long term or short term debt or general affairs of
the Company from that set forth in the Registration Statement and the
Prospectus, except changes which the Registration Statement and Prospectus
indicate might occur after the effective date of the Registration Statement,
and the Company shall not have incurred any material liabilities or entered
into any agreement not in the ordinary course of business other than as
referred to in the Registration Statement and Prospectus; and (iv) except as
set forth in the Prospectus, no action, suit or proceeding at law or in equity
shall be pending or threatened against the Company which would be required to
be set forth in the Registration Statement, and no proceedings shall be
pending or threatened against the Company before or by any commission, board
or administrative agency in the United States or
-20-
elsewhere, wherein an unfavorable decision, ruling or finding would materially
and adversely affect the business, property, condition (financial or
otherwise), results of operations or general affairs of the Company, and (v)
you shall have received, at the First Closing Date, a certificate signed by
each of the Chairman of the Board or the President and the principal financial
or accounting officer of the Company, dated as of the First Closing Date,
evidencing compliance with the provisions of this subsection (e).
(f) Upon exercise of the option provided for in Section 2(b) hereof, the
obligations of the Underwriter to purchase and pay for the Option Units
referred to therein will be subject (as of the date hereof and as of the
Option Closing Date) to the following additional conditions:
<PAGE> 169
(i) The Registration Statement shall remain effective at the Option
Closing Date, and no stop order suspending the effectiveness thereof shall
have been issued and no proceedings for that purpose shall have been
instituted or shall be pending, or, to your knowledge or the knowledge of the
Company, shall be contemplated by the Commission, and any reasonable request
on the part of the Commission for additional information shall have been
complied with to the satisfaction of Singer, Bienenstock, Zamansky, Ogele &
Selengut, LLP., counsel to the Underwriter.
(ii) At the Option Closing Date there shall have been delivered to you
as Underwriter the signed opinion of Esanu Katsky Korins & Siger, counsel for
the Company, dated as of the Option Closing Date, in form and substance
satisfactory to Singer, Bienenstock, Zamansky, Ogele & Selengut, LLP., counsel
to the Underwriter, which opinion shall be substantially the same in scope and
substance as the opinion furnished to you at the First Closing Date pursuant
to Section 4(b) hereof, except that such opinion, where appropriate, shall
cover the Option Units.
(iii) At the Option Closing Date there shall have been delivered to
you a certificate of the Chairman of the Board or the President and the
principal financial or accounting officer of the Company, dated the Option
Closing Date, in form and substance satisfactory to Singer, Bienenstock,
Zamansky, Ogele & Selengut, LLP., counsel to the Underwriter, substantially
the same in scope and substance as the certificate furnished to you at the
First Closing Date pursuant to Section 4(e) hereof.
(iv) At the Option Closing Date there shall have been delivered to you
a letter in form and substance satisfactory to you from Mortenson and
Associates, P.C., dated the Option Closing Date and addressed to the
Underwriter confirming the information in their letter referred to in Section
4(d) hereof and stating that nothing has come to their attention during
-21-
the period from the ending date of their review referred to in said letter to
a date not more than five business days prior to the Option Closing Date,
which would require any change in said letter if it were required to be dated
the Option Closing Date.
(v) All proceedings taken at or prior to the Option Closing Date in
connection with the sale and issuance of the Option Units shall be
satisfactory in form and substance to you, and you and Singer, Bienenstock,
Zamansky, Ogele & Selengut, LLP., counsel to the Underwriter, shall have been
furnished with all such documents, certificates, and opinions as you may
request in connection with this transaction in order to evidence the accuracy
and completeness of any of the representations, warranties or statements of
the Company or its compliance with any of the covenants or conditions
contained herein.
(g) No action shall have been taken by the Commission or the NASD the
effect of which would make it improper, at any time prior to the Closing
Dates, for members of the NASD to execute transactions (as principal or agent)
in the Units, Common Stock or the Warrants and no proceedings for the taking
of such action shall have been instituted or shall be pending, or, to the
knowledge of the Underwriter or the Company, shall be contemplated by the
Commission or the NASD. The Company represents that at the date hereof it has
no knowledge that any such action is in fact contemplated by the Commission or
the NASD. The Company shall have advised the Underwriter of any NASD
<PAGE> 170
affiliation of any of its officers, directors, stockholders or their
affiliates.
(h) The estimated revenues and earnings of the Company for the_______
ending ________ __, 1996 will be greater than those of the _______ ended
________ __, 1995.
(i) If any of the conditions herein provided for in this Section shall
not have been fulfilled as of the date indicated, this Agreement and all
obligations of the Underwriter under this Agreement may be canceled at, or at
any time prior to, each Closing Date by the Underwriter. Any such cancellation
shall be without liability of the Underwriter to the Company.
5. Conditions of the Obligations of the Company. The obligation of the
Company to sell and deliver the Units is subject to the condition that at the
Closing Dates, no stop orders suspending the effectiveness of the Registration
Statement shall have been issued under the Act or any proceedings therefor
initiated or threatened by the Commission.
If the conditions to the obligations of the Company provided for in this
Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only
the obligation of the Company to sell and deliver the Units on exercise of the
option provided for in Section 2(b) hereof shall be affected.
-22-
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Underwriter
and each person, if any, who controls the Underwriter within the meaning of
the Act against any losses, claims, damages or liabilities, joint or several
(which shall, for all purposes of this Agreement, include, but not be limited
to, all reasonable costs of defense and investigation and all attorneys'
fees), to which the Underwriter or such controlling person may become subject,
under the Act or otherwise, and will reimburse, as incurred, the Underwriter
and such controlling persons for any legal or other expenses reasonably
incurred in connection with investigating, defending against or appearing as a
third party witness in connection with any losses, claims, damages or
liabilities, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in (A)
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, (B) any blue sky application or other
document executed by the Company specifically for that purpose or based upon
written information furnished by the Company filed in any state or other
jurisdiction in order to qualify any or all of the Units under the securities
laws thereof (any such application, document or information being hereinafter
called a "Blue Sky Application"), or arise out of or are based upon the
omission or alleged omission to state in the Registration Statement, any
Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or
in any Blue Sky Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however,
that the Company will not be liable in any such case to the extent, but only
to the extent, that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation of the Registration Statement or any
<PAGE> 171
such amendment or supplement thereof or any such Blue Sky Application or any
such preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto. This indemnity will be in addition to any liability which
the Company may otherwise have.
(b) The Underwriter will indemnify and hold harmless the Company, each
of its directors, each nominee (if any) for director named in the Prospectus,
each of its officers who have signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees) to which the Company or any
such director, nominee, officer or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was
-23-
made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto (i) in reliance upon and in
conformity with written information furnished to the Company by the
Underwriter specifically for use in the preparation thereof and (ii) relates
to the transactions effected by the Underwriter in connection with the offer
and sale of the Units contemplated hereby. This indemnity agreement will be in
addition to any liability which the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
this Section, notify in writing the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise
than under this Section. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate in, and, to
the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, subject to the provisions
herein stated, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel
reasonably satisfactory to the indemnified party; provided that if the
indemnified party is the Underwriter or a person who controls the Underwriter
within the meaning of the Act, the fees and expenses of such counsel shall be
at the expense of the indemnifying party if (i) the employment of such counsel
has been specifically authorized in writing by the indemnifying party or (ii)
<PAGE> 172
the named parties to any such action (including any impleaded parties) include
both the Underwriter or such controlling person and the indemnifying party and
in the judgment of the Underwriter, it is advisable for the Underwriter or
controlling persons to be represented by separate counsel (in which case the
indemnifying party shall not have the right to assume the defense of such
action on behalf of the Underwriter or such controlling person, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or separate but substantially similar or related actions
in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for the Underwriter and controlling persons, which
firm shall be designated in writing by you). No settlement of any action
against an indemnified party shall be made without the consent of the
indemnifying party, which shall not be unreasonably withheld in light of all
factors of importance to such indemnifying party.
-24-
7. Contribution.
In order to provide for just and equitable contribution under the Act in any
case in which (i) the Underwriter makes claim for indemnification pursuant to
Section 6 hereof but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact
that the express provisions of Section 6 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of the
Underwriter, then the Company and each person who controls the Company, in the
aggregate, and the Underwriter shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees) in
either such case (after contribution from others) in such proportions that the
Underwriter is responsible in the aggregate for that portion of such losses,
claims, damages or liabilities represented by the percentage that the
underwriting discount per Unit appearing on the cover page of the Prospectus
bears to the public offering price appearing thereon, and the Company shall be
responsible for the remaining portion, provided, however, that (a) if such
allocation is not permitted by applicable law then the relative fault of the
Company and the Underwriter and controlling persons, in the aggregate, in
connection with the statements or omissions which resulted in such damages and
other relevant equitable considerations shall also be considered. The relative
fault shall be determined by reference to, among other things, whether in the
case of an untrue statement of a material fact or the omission to state a
material fact, such statement or omission relates to information supplied by
the Company, or the Underwriter and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The Company and the Underwriter agree that it would not
be just and equitable if the respective obligations of the Company and the
Underwriter to contribute pursuant to this Section 7 were to be determined by
pro rata or per capita allocation of the aggregate damages (even if the
Underwriter and its controlling persons in the aggregate were treated as one
entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in the first sentence
of this Section 7. No person guilty of a fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution
from any person who is not guilty of such fraudulent misrepresentation. As
used in this paragraph, the word "Company" includes any officer, director, or
<PAGE> 173
person who controls the Company within the meaning of Section 15 of the Act.
If the full amount of the contribution specified in this paragraph is not
permitted by law, then the Underwriter and each person who controls the
Underwriter shall be entitled to contribution from the Company, its officers,
directors and controlling persons to the full extent permitted by law. The
foregoing contribution agreement shall in no way affect the contribution
liabilities of any persons having liability under Section 11 of the Act other
than the Company and the Underwriter. No contribution shall be requested with
regard to the settlement of any matter from any party who did not consent to
the settlement; provided, however, that such consent shall not be unreasonably
withheld in light of all factors of importance to such party.
-25-
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or the sale of the
Units to the Underwriter is consummated, the Company will pay all costs and
expenses incident to the performance of this Agreement by the Company
including, but not limited to, the fees and expenses of counsel to the Company
(which fees shall not exceed $150,000) and of the Company's accountants; the
costs and expenses incident to the preparation, printing, filing and
distribution under the Act of the Registration Statement (including the
financial statements therein and all amendments and exhibits thereto),
Preliminary Prospectus and the Prospectus, as amended or supplemented, or the
Term Sheet, the fee of the NASD in connection with the filing required by the
NASD relating to the offering of the Units contemplated hereby; all expenses,
including reasonable fees (not to exceed $30,000) and disbursements of counsel
to the Underwriter, in connection with the qualification of the Units under
the state securities or blue sky laws which the Underwriter shall designate;
the cost of printing and furnishing to the Underwriter copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, the Agreement Among Underwriters, Selling Agreement, Underwriters'
Questionnaire, Underwriters' Power of Attorney and the Blue Sky Memorandum,
any fees relating to the listing of the Units, Common Stock and Warrants on
the Nasdaq Small Cap Market or any other securities exchange, the cost of
printing the certificates representing the securities comprising the Units,
the fees of the transfer agent and warrant agent, and the cost of publication
of at least three "tombstones" of the offering (at least one of which shall be
in national business newspaper and one of which shall be in a major New York
newspaper) and the cost of preparing at least four hard cover "bound volumes"
relating to the offering, in accordance with the Underwriter's request. The
Company shall pay any and all taxes (including any transfer, franchise,
capital stock or other tax imposed by any jurisdiction) on sales to the
Underwriter hereunder. The Company will also pay all costs and expenses
incident to the furnishing of any amended Prospectus or of any supplement to
be attached to the Prospectus as called for in Section 3(a) of this Agreement
except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at the First
Closing Date pay to Monroe Parker Securities, Inc. a non accountable expense
allowance of $150,000, no portion of which has been paid. In the event the
overallotment option is exercised, the Company shall pay to Monroe Parker
Securities, Inc. at the Option Closing Date an additional amount equal to 3%
of the gross proceeds received upon exercise of the overallotment option. In
the event the transactions contemplated hereby are not consummated by reason
of any action by the Underwriter (except if such prevention is based upon a
breach by the Company of any covenant, representation or warranty contained
herein or because any other condition to the Underwriter's obligations
<PAGE> 174
hereunder required to be fulfilled by the Company is not fulfilled) the
Company shall be liable for the actual accountable out-of-pocket expenses of
the Underwriter, including legal fees, up to a maximum of $40,000. In the
event the transactions contemplated hereby are not consummated by reason of
any action of the Company or because of a breach by the Company of any
covenant, representation or warranty herein, the Company shall be liable for
the actual accountable out-of-pocket expenses of the Underwriter, including
legal fees, up to a maximum of $135,000.
-26-
(c) No person is entitled either directly or indirectly to compensation
from the Company, from the Underwriter or from any other person for services
as a finder in connection with the proposed offering, and the Company agrees
to indemnify and hold harmless the Underwriter against any losses, claims,
damages or liabilities, joint or several (which shall, for all purposes of
this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Underwriter or person may
become subject insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon the claim of any
person (other than an employee of the party claiming indemnity) or entity that
he or it is entitled to a finder's fee in connection with the proposed
offering by reason of such person's or entity's influence or prior contact
with the indemnifying party.
9. Effective Date.
The Agreement shall become effective upon its execution except that you may,
at your option, delay its effectiveness until 11:00 A.M., New York time on the
first full business day following the effective date of the Registration
Statement, or at such earlier time after the Effective Date as you in your
discretion shall first commence the initial public offering by the Underwriter
of any of the Units. The time of the initial public offering shall mean the
time of release by you of the first newspaper advertisement with respect to
the Units, or the time when the Units are first generally offered by you to
dealers by letter or telegram, whichever shall first occur. This Agreement may
be terminated by you at any time before it becomes effective as provided
above, except that Sections 3(c), 6, 7, 8, 12, 13, 14 and 15 shall remain in
effect notwithstanding such termination.
10. Termination.
(a) This Agreement, except for Sections 3(c), 6, 7, 8, 12, 13, 14 and 15
hereof, may be terminated at any time prior to the First Closing Date, and the
option referred to in Section 2(b) hereof, if exercised, may be canceled at
any time prior to the Option Closing Date, by you if in your judgment it is
impracticable to offer for sale or to enforce contracts made by the
Underwriter for the resale of the Units agreed to be purchased hereunder by
reason of (i) the Company having sustained a material loss, whether or not
insured, by reason of fire, earthquake, flood, accident or other calamity, or
from any labor dispute or court or government action, order or decree; (ii)
trading in securities on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq SmallCap Market or the Nasdaq National Market having been
suspended or limited; (iii) material governmental restrictions having been
imposed on trading in securities generally (not in force and effect on the
date hereof); (iv) a banking moratorium having been declared by federal or New
York state authorities; (v) an outbreak of international hostilities or other
national or international calamity or crisis or change in economic or
political conditions having occurred; (vi) a pending or threatened legal or
<PAGE> 175
governmental proceeding or action relating generally to the Company's
business, or a notification having been received by the Company of the threat
of any such proceeding or action, which could materially adversely affect the
Company; (vii) except as contemplated by the Prospectus, the Company is merged
or consolidated into or acquired by another company or group
-27-
or there exists a binding legal commitment for the foregoing or any other
material change of ownership or control occurs; (viii) the passage by the
Congress of the United States or by any state legislative body or federal or
state agency or other authority of any act, rule or regulation, measure, or
the adoption of any orders, rules or regulations by any governmental body or
any authoritative accounting institute or board, or any governmental
executive, which is reasonably believed likely by the Underwriter to have a
material impact on the business, financial condition or financial statements
of the Company or the market for the securities offered pursuant to the
Prospectus; (ix) any adverse change in the financial or securities markets
beyond normal market fluctuations having occurred since the date of this
Agreement, or (x) any material adverse change having occurred, since the
respective dates of which information is given in the Registration Statement
and Prospectus, in the earnings, business prospects or general condition of
the Company, financial or otherwise, whether or not arising in the ordinary
course of business.
(b) If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 10 or in Section 9, the
Company shall be promptly notified by you, by telephone or telegram, confirmed
by letter.
11. Unit Purchase Option.
At or before the First Closing Date, the Company will sell to Monroe Parker
Securities, Inc. or its designees for a consideration of $56.25, and upon the
terms and conditions set forth in the form of Unit Purchase Option annexed as
an exhibit to the Registration Statement, a Unit Purchase Option to purchase
an aggregate of 56,250 Units. In the event of conflict in the terms of this
Agreement and the Unit Purchase Option, the language of the Unit Purchase
Option shall control.
12. Representations, Warranties and Agreements to Survive Delivery.
The respective indemnities, agreements, representations, warranties and
other statements of the Company or its Principal Stockholders, where
appropriate, and the undertakings set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of the Underwriter, the Company or any of
its officers or directors or any controlling person and will survive delivery
of and payment of the Units and the termination of this Agreement.
13. Notice.
Any communications specifically required hereunder to be in writing, if sent
to the Underwriter, will be mailed, delivered and confirmed to it at Monroe
Parker Securities, Inc., 2500 Purchase, New York 10577, with a copy sent to
Singer, Bienenstock, Zamansky, Ogele & Selengut, LLP., 40 Exchange Place, New
York, New York 10005, Attention: Alexander Bienenstock, Esq., or if sent to
the Company, will be mailed, delivered and confirmed to it at 146 Nassau
Avenue, Islip,
<PAGE> 176
-28-
New York 11751, Attention: President, with a copy to Esanu Katsky Korins &
Siger, 605 Third Avenue, New York, New York 10158, Attention: Asher S.
Levitsky, Esq.
14. Parties in Interest.
The Agreement herein set forth is made solely for the benefit of the
Underwriter, the Company and, to the extent expressed, the Principal
Stockholders, any person controlling the Company or the Underwriter, and
directors of the Company, nominees for directors (if any) named in the
Prospectus, its officers who have signed the Registration Statement, and their
respective executors, administrators, successors, assigns and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser, as such purchaser,
from the Underwriter of the Units. All of the obligations of the Underwriter
hereunder are several and not joint.
15. Applicable Law.
This Agreement will be governed by, and construed in accordance with, the
laws of the State of New York applicable to agreements made and to be entirely
performed within New York.
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return this agreement, whereupon it will become a binding
agreement between the Company and the Underwriter in accordance with its
terms.
Very truly yours,
NETSMART TECHNOLOGIES, INC.
By: /S/____________________________________
Lewis S. Schiller, Chairman
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
MONROE PARKER SECURITIES, INC.
By: /S/____________________________________
Authorized Officer
-29-
We hereby agree to be bound by the provisions of Sections 3(l) and (p), and
12 hereof.
/S/______________________________
Lewis S. Schiller
<PAGE> 177
SIS CAPITAL CORP. and CARTE MEDICAL HOLDINGS, INC.
By: /S/___________________________
Authorized Officer
-30-
<PAGE> 178
Exhibit 1.2
Option to Purchase Units
NETSMART TECHNOLOGIES, INC.
Unit Purchase Option
Dated: June 17, 1996
THIS CERTIFIES THAT _________________________________________ and its
registered assigns (herein sometimes called the "Holder") is entitled to
purchase from Netsmart Technologies, Inc., a Delaware corporation (hereinafter
called the "Company"), at the price and during the period as hereinafter
specified, up to ______ Units ("Units"), each Unit consisting of two shares of
the Company's Common Stock, par value $.01 per share ("Common Stock"), and one
Series A Redeemable Common Stock Purchase Warrant (a "Warrant" and
collectively, the "Warrants").
1. This option (this "Option"), together with options of like tenor,
constituting in the aggregate options (the "Options") to purchase an aggregate
of fifty six thousand two hundred fifty (56,250) Units, was originally issued
pursuant to an underwriting agreement (the "Underwriting Agreement") between
the Company and Monroe Parker Securities, Inc. (the "Underwriter") in
connection with a public offering of five hundred sixty two thousand five
hundred (562,500) Units, at an aggregate price of $56.25 for the Options.
Except as specifically otherwise provided in this Option, the Common Stock and
the Warrants issued upon exercise of the Option shall bear the same terms and
conditions as described under the captions "Description of Securities" and
"Underwriting" in the Company's Registration Statement on Form S1, File No.
333-2550 (the "Registration Statement") which was declared effective by the
Securities and Exchange Commission (the "Commission") on _______________, 1996
(the "Effective Date"). Pursuant to the Underwriting Agreement, Options to
purchase fifty six thousand two hundred fifty (56,250) Units are being issued
to the Underwriter and/or selected dealers. The Holder shall have registration
rights under the Securities Act of 1933, as amended (the "Act"), for this
Option, the Units issuable upon exercise of this Option, the Common Stock and
the Warrants included in the Units issuable upon exercise of this Option and
the shares of Common Stock issuable upon exercise of the Warrants, as more
fully described in Paragraph 7 of this Option. The Warrants issuable upon
exercise of this Option shall be issued pursuant to the warrant agreement (the
"Warrant Agreement") dated as of _______________, 1996, among the Company,
American Stock Transfer & Trust Company, as warrant agent, and the
Underwriter.
<PAGE> 179
2. During the four-year period commencing on the first anniversary of the
Effective Date to 5:00 P.M. New York City time on _______________, 2001,
inclusive (the "Term"), the Holder shall have the option to purchase the Units
pursuant to this Option at a price of eleven and 60/100 dollars ($11.60) per
Unit (the "Initial Exercise Price"), representing 145% of the initial public
offering price of the Units offered pursuant to the Registration Statement.
3. This Option may be exercised at any time within the period above
specified, in whole or in part, by the surrender of this Option (with the
purchase form at the end of this Option properly executed) at the principal
executive office of the Company (or such other office or agency of the Company
as it may designate by notice in writing to the Holder at the address of the
Holder appearing on the books of the Company) accompanied by payment to the
Company of the Option Exercise Price, as hereinafter defined, for the number
of Units specified in the above-mentioned purchase form together with
applicable stock transfer taxes, if any, and delivery to the Company of a duly
executed agreement (an "Assumption Agreement"), which may be incorporated in
the purchase form, signed by the person(s) designated in the purchase form as
the person in whose name the underlying securities are to be issued (the
"Purchaser") to the effect that such person(s) agree(s) to be bound by the
provisions of Paragraphs 8(b), (c) and (d) of this Option. This Option shall
be deemed to have been exercised, in whole or in part to the extent specified
in said purchase form, immediately prior to the close of business on the date
this Option is surrendered and payment is made in accordance with the
foregoing provisions of this Paragraph 3, and the person or persons in whose
name or names the certificates for shares of Common Stock and Warrants shall
be issuable upon such exercise shall become the holder or holders of record of
such Common Stock and Warrants at that time and date. The Common Stock and
Warrants and the certificates for the Common Stock and Warrants so purchased
shall be delivered to the Holder or other Purchaser within a reasonable time,
not exceeding ten (10) days, after the rights represented by this Option shall
have been so exercised; provided, that the Company shall not be required to
deliver certificates for the securities unless the Purchaser shall have
delivered the Assumption Agreement to the Company. If the Option is exercised
subsequent to expiration of the Warrants (including any extensions thereof),
only the shares of Common Stock issuable upon exercise of the option, and no
Warrants, shall be issued upon such exercise.
4. Neither this Option nor the Common Stock or Warrants comprising the
Units issuable upon exercise of this Option nor the Common Stock issuable upon
exercise of such Warrants shall be transferred, sold, assigned, or
hypothecated during the one-year period commencing on the Effective Date,
except that such securities may be transferred during such period to
successors of the Holder, and
-2-
<PAGE> 180
may be assigned in whole or in part to any person who is an officer of the
Underwriter or to a member of the selling group or an officer, partner or
managing member thereof. Any person who is a permitted transferee may transfer
the Option by will or pursuant to the laws of descent and distribution. Any
such assignment during such period shall be effected by the Holder executing
the form of assignment at the end of this Option and surrendering this Option
for cancellation at the office of the Company or other office or agency as
provided in Paragraph 3 of this Agreement accompanied by a certificate (signed
by an officer of the Holder if the Holder is a corporation or limited
liability company or a general partner of the Holder if the Holder is a
partnership), stating that each transferee is a permitted transferee under
this Paragraph 4; whereupon the Company shall issue, in the name or names
specified by the Holder (including the Holder) a new Option or Options of like
tenor and representing in the aggregate rights to purchase the same number of
Units as are purchasable hereunder.
5. The Company covenants and agrees that all shares of Common Stock which
are sold as part of the Units purchased pursuant to this Option, and all
shares of Common Stock which may be issued upon exercise of the Warrants have
been, and will be, duly authorized and, will, upon issuance, be duly and
validly issued, fully paid and nonassessable and no personal liability will
attach to the holder thereof. The Company covenants and agrees that the
Warrants which are issued as part of the Units purchased pursuant to this
Option have been duly authorized and, when issued and delivered, will have
been duly executed, issued and delivered and will constitute the valid and
legally binding obligations of the Company enforceable in accordance with
their terms. The Company further covenants and agrees that during the period
within which this Option may be exercised, the Company will at all times have
authorized and reserved a sufficient number of shares of its Common Stock to
provide for the exercise of this Option and that it will have authorized and
reserved a sufficient number of shares of Common Stock for issuance upon
exercise of the Warrants.
6. This Option shall not entitle the Holder to any voting rights or other
rights as a stockholder of the Company.
7. (a) The Company shall advise the Holder, whether the Holder holds this
Option or has exercised this Option and holds Units or any of the underlying
securities, as hereinafter defined, by written notice (certified or registered
mail) at least thirty (30) days prior to the filing of any post-effective
amendment to the Registration Statement or of any new registration statement
or post-effective amendment thereto under the Act covering any securities of
the Company (other than a registration statement on Form S-8, S-4 or
subsequent similar forms), and will during the term of the Option and for a
period of two years thereafter, upon the request of the Holder, at the
Company's cost
-3-
<PAGE> 181
and expense, include in any such post-effective amendment (if permitted by
law) or registration statement, such information as may be required to permit
a public offering of all or any of the Units underlying this Option, the
Common Stock or Warrants issued as part of the Units, or the Common Stock
issuable upon the exercise of the Warrants (collectively "underlying
securities") .In connection with any such registration statement, the Company
shall supply prospectuses, use its best efforts to qualify any of the
described securities for sale in such states as such Holder reasonably
designates and furnish indemnification in the manner provided in Paragraph 8
of this Option. The Holder(s) participating in any such registration shall
furnish information and indemnification as set forth in said Paragraph 8.
(b) In connection with any underwritten public offering relating solely
to an offering of the Company's securities by the Company, the Holder will
agree to defer any sale of such securities for up to ninety (90) days from the
effective date of the applicable registration statement, provided that the
underwriter or managing underwriter has requested such deferral on the grounds
that the offering by the Company would be materially adversely affected by the
earlier sale of such securities and the Company agrees to keep the
registration statement current for nine (9) months after the effective date of
the registration statement or such longer period as such registration
statement is otherwise being kept effective.
(c) If any majority holder (as defined below) shall give notice to the
Company at any time to the effect that such holder desires to register under
the Act the Units or any of the underlying securities under such circumstances
that a public distribution (within the meaning of the Act) of any such
securities will be involved then the Company will promptly, but no later than
thirty (30) business days after date such notice is given (the "Notice Date"),
file a post-effective amendment to the current Registration Statement or a new
registration statement pursuant to the Act, to the end that the Units and/or
any of the underlying securities, as the Holder shall determine, may be
publicly sold under the Act as promptly as practicable thereafter and the
Company will use its best efforts to cause such registration to become
effective; provided, that such holder shall furnish the Company with
appropriate written information as to the Holder and the proposed plan of
distribution and indemnification as set forth in Paragraph 8. The majority
holder may, at its option, by notice to the Company, request the filing of a
post-effective amendment to the Registration Statement or a new registration
statement under the Act on two occasions during the term of the Option. Within
ten (10) business days after receiving any such notice pursuant to this
Paragraph 7(c), the Company shall give notice to the other Holders of the
Options, advising that the Company is proceeding with such post-effective
amendment or registration statement and offering to include therein the Units
and/or the underlying securities of the other Holders,
-4-
<PAGE> 182
provided, however, that it shall be a condition to the inclusion for a
registration statement of securities of any Holder that such Holder shall
furnish the Company with such appropriate information (relating to the
intentions of such Holder) in connection therewith as the Company shall
request in writing. The costs and expense of the first such post-effective
amendment or new registration statement shall be borne by the Company, except
that each Holder shall bear the fees of his own counsel and/or accountants and
any underwriting discounts or commissions applicable to any of the securities
sold by him. The costs and expenses of the second such registration statement
shall be borne by the Holders. The Company will maintain and keep such
registration statement current under the Act for a period of at least nine (9)
months from the effective date of such registration statement. The Company
shall supply prospectuses, use its best efforts to qualify any of the
described securities for sale in such states as such holder reasonably
designates and furnish indemnification in the manner provided in Paragraph 8
of this Agreement. If, on the date of receipt by the Company of notice from
any majority holder requesting registration of Units and/or any of the
underlying securities pursuant to this Paragraph 7(c), the Company has
previously notified the Holder pursuant to Paragraph 7(a) of this Option that
the Company intends to file a post-effective amendment to the Registration
Statement or a new registration statement under the Act covering any
securities of the Company and offering to include the Units and/or the
underlying securities of the Holder in such Registration Statement or provides
notice to the Holder pursuant to Paragraph 7(a) of this Option within seven
(7) days after receipt of such notice from any majority holder, the Company
will include such shares in such post-effective amendment or registration
statement. In such event, the Holders shall, if requested by the underwriters
or managing underwriter, agree not to sell any registered securities for such
period, not to exceed sixty (60) days as such underwriter may request,
provided that the underwriter or managing underwriter has requested such
deferral on the grounds that the offering by the Company would be materially
adversely affected by the earlier sale of such securities and the Company
agrees to keep the registration statement current for nine (9) months after
the effective date of the registration statement or such longer period as such
registration statement is otherwise being kept effective.
(d) The term "majority holder" as used in this Paragraph 7 shall mean
the holder of at least a majority of the Common Stock (including the Common
Stock issued or issuable upon exercise of the Warrants) for which the Options
(considered in the aggregate) are exercisable and shall include any owner or
combination of owners of such securities, which ownership shall be calculated
by determining the number of shares of Common Stock held by such owner or
owners resulting from the exercise of any Option after giving effect to any
stock dividend, split, reverse split or other
-5-
<PAGE> 183
recapitalization, the number of shares of Common Stock issuable upon exercise
of any unexercised Option, the number of shares of Common Stock issuable upon
exercise of any then outstanding Warrants issued upon exercise of any Option,
and the number of shares of Common Stock issuable upon exercise of any
Warrants issuable upon exercise of any Option.
(e) In connection with any registration described in Paragraph 7(a) of
this Option, the Holder may request inclusion of the Option in such
registration statement; provided, however, that the Company shall not be
required to maintain any public market in the Options and, if both this Option
is included in such registration statement and this Option is transferred at a
time subsequent to the effective date of such registration statement when such
registration statement is current, this Option shall expire and cease to be
exercisable at 5:00 P.M. New York City time on the ninetieth (90th) day after
transfer of the Option or, if such ninetieth (90th) day shall be a day on
which banking institutions in the State of New York are authorized by law to
close, then on the next succeeding day which shall not be such a day. In the
event that any registration statement referred to in the preceding sentence
shall cease to be current during the ninety (90) day period referred to in
such sentence, then, notwithstanding the preceding sentence, the
exercisability of this Option shall not be affected by the transfer of this
Option and this Paragraph 7(e) shall not be applicable to such transfer.
8. (a) Whenever, pursuant to Paragraph 7 of this Option, a registration
statement relating to this Option or any underlying securities is filed under
the Act or is amended or supplemented, the Company will indemnify and hold
harmless each holder of the securities covered by such registration statement,
amendment or supplement (such holder being hereinafter called the
"Distributing Holder"), and each person, if any, who controls (within the
meaning of the Act) the Distributing Holder, and each underwriter (within the
meaning of the Act) of such securities and each person, if any, who controls
(within the meaning of the Act) any such underwriter, against any losses,
claims, damages or liabilities, joint or several, to which the Distributing
Holder, any such controlling person or any such underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages
or liabilities (or action in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in any such registration statement or any preliminary prospectus or
final prospectus constituting a part thereof or any amendment or supplement
thereto, or arise out of or are based upon the omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; and will reimburse the Distributing Holder
and each such controlling person and underwriter for any legal or other
expenses reasonably incurred by the Distributing Holder or such controlling
person or underwriter in connection with investigating or defending any such
-6-
<PAGE> 184
loss, claim, damage, liability or action; provided, however, that the Company
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder or for any other
Distributing Holder, expressly for use in the preparation thereof.
(b) The Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, each
person, if any who controls the Company (within the meaning of the Act) and
each underwriter participating in such offering (within the meaning of the
Act) and each person, if any, who controls (within the meaning of the Act) any
such underwriter, against any losses, claims, damages or liabilities to which
the Company or any such director, officer, controlling person or underwriter
may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in said registration
statement, said preliminary prospectus, said final prospectus, or said
amendment or supplement, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder expressly for use in the
preparation thereof; and will reimburse the Company or any such director,
officer or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under this Paragraph
8 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against any indemnifying party, give
the indemnifying party notice of the commencement thereof.
(d) In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, join with any other indemnifying party similarly notified to
assume the
-7-
<PAGE> 185
defense thereof, with counsel reasonably satisfactory to such indemnified
party, and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Paragraph 8 for any legal
or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, that if the defendants in any such action include
both the indemnified party and the indemnifying party and either (i) the
indemnifying party or parties agree, or (ii) representation of both the
indemnifying party or parties and the indemnified party or parties by the same
counsel is inappropriate under applicable standards of professional conduct
because of actual or potential conflicting interests between them, then the
indemnified party or parties shall have the right to select separate counsel
to assume such legal defense and to otherwise participate in the defense of
such action. The indemnifying party will not be liable to such indemnified
party under this Paragraph 8 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof
unless (i) the indemnified party shall have employed counsel in connection
with the assumption of legal defenses in accordance with the proviso to the
immediately preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel approved by the indemnifying party for all indemnified
parties), (ii) the indemnifying party shall not have employed counsel to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall an indemnifying party be liable under
this Paragraph 8 for any settlement, effected without its written consent,
which consent shall not be unreasonably withheld, of any claim or action
against an indemnified party.
9. The number and kind of securities purchasable upon the exercise of the
Option shall be subject to adjustment from time to time upon the happening of
certain events as hereinafter provided, except that, unless the Company elects
to issue additional Warrants pursuant to Paragraph 9(i) of the Warrant
Agreement, the provisions of this Paragraph 9 shall not apply to the Warrants
issuable upon exercise of this Option. The number and kind of securities
purchasable upon exercise of the Option shall be subject to adjustment (with
no change in the Option Exercise Price) as follows:
(a) In case the Company shall pay a dividend or make a distribution or
a split with respect to its shares of Common Stock in shares of Common Stock,
subdivide or reclassify its outstanding Common Stock into a greater number of
shares, or combine or reclassify its outstanding Common Stock into a smaller
number of shares or otherwise effect a reverse split, the number of shares of
Common Stock issuable upon exercise of this Option shall, as of the time of
the record date for such dividend or distribution or of the effective date of
such subdivision, combination or reclassification, be
-8-
<PAGE> 186
proportionately adjusted so that the Holder of any Option exercised after such
date shall be entitled to receive the aggregate number and kind of shares
which, if such Option had been exercised immediately prior to such time, he
would have owned upon such exercise and such shares as he would have been
entitled to receive upon such dividend, subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any
event listed in this Paragraph 9(a) shall occur.
(b) No adjustment in the Option Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least five cents
($.05) in such price; provided, however, that any adjustments which by reason
of this Paragraph 9(b) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
this Paragraph 9 shall be made to the nearest cent or to the nearest one-
hundredth of a share of Common Stock as the case may be. Anything in this
Paragraph 9 to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in the Option Exercise Price,
in addition to those required by this Paragraph 9, as it in its discretion
shall determine to be advisable in order that any dividend or distribution in
shares of Common Stock, subdivision, reclassification or combination of Common
Stock, issuance of warrants to purchase Common Stock or distribution of
evidences of indebtedness or other assets (excluding cash dividends) referred
to hereinabove in this Paragraph 9 hereafter made by the Company to the
holders of its Common Stock shall not result in any tax to the holders of its
Common Stock or securities convertible into Common Stock.
(c) Whenever the Option Exercise Price is adjusted, as herein provided,
the Company shall promptly cause a notice setting forth the adjusted Option
Exercise Price and adjusted number of shares of Common Stock issuable upon
exercise of the Option as to each Unit to be mailed to the Holders at their
last address appearing in the Option register maintained by the Company, and
shall cause a certified copy thereof to be mailed to its transfer agent. The
Company may retain a firm of independent public accountants of recognized
standing selected by the Board of Directors (who may be the regular
accountants employed by the Company) to make any computation required by this
Paragraph 9, and a certificate signed by such firm shall be evidence of the
correctness of such adjustment.
(d) In the event that at any time, as a result of an adjustment made
pursuant to Paragraph 9(a) of this Option, the Holder of any Option thereafter
shall become entitled to receive any shares of the Company, other than Common
Stock, thereafter the number of such other shares so receivable upon exercise
of any Option shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to
the Common Stock contained in this Paragraph 9.
-9-
<PAGE> 187
(e) Irrespective of any adjustments in the Option Exercise Price or the
number or kind of shares purchasable upon exercise of Options, Options
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Options initially
issuable pursuant to this Agreement.
IN WITNESS WHEREOF, the Company has caused this Option to be signed by its
duly authorized officers this ____ day of ______, 1996.
NETSMART TECHNOLOGIES, INC.
Attest:
By:_/S/____________________
Lewis S. Schiller, CEO
______________________________
Anthony F. Grisanti, Secretary
-10-
<PAGE> 188
PURCHASE FORM
(To be signed only upon exercise of Option)
The undersigned, the holder of the foregoing Option, hereby irrevocably elects
to exercise the purchase rights represented by such Option for, and to
purchase thereunder, _____ Units of Netsmart Technologies, Inc., each Unit
consisting of two shares of Common Stock and one Series A Redeemable Common
Stock Purchase Warrant (the "Warrants") and herewith makes payment of $______
thereof, agrees to be bound by the provisions of Paragraphs 8(b), (c) and (d)
of the Option, and requests that the certificates for shares of Common Stock
and Warrants be issued in the name(s) of, and delivered to
_____________________________________ whose address(es) is
(are)________________________________________________________________________.
Dated: _______________, 199 .
_____________________________
By:______________________________
Address:_________________________________________________
_________________________________________________
-11-
<PAGE> 189
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and transfers unto
______________________________ the right to purchase Units represented by the
foregoing Option to the extent of ______ Units, and
appoints______________________________________ attorney to transfer such
rights on the books of Netsmart Technologies, Inc. with full power of
substitution in the premises.
Dated: _______________, 199 .
_____________________________
By:_____________________________
Signature Medallion Guaranteed
______________________________
-12-
<PAGE> 190
Exhibit 1.3
CONSULTING AGREEMENT
Agreement made and entered into as of the ___ day of ________, 1996, by and
between Netsmart Technologies, Inc., a Delaware corporation having offices at
146 Nassau Avenue, Islip, New York 11751 (the "Company"), and Monroe Parker
Securities, Inc., a New York corporation having offices at 2500 Westchester
Avenue, Purchase, New York 10577 (the "Consultant").
WITNESSETH:
WHEREAS, the Company desires to retain the Consultant and the Consultant
desires to be retained by the Company, all pursuant to the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual promises and
covenants herein contained, it is agreed as follows:
1. Retention. The Company hereby retains the Consultant to perform
consulting services related to corporate finance and other financial service
matters, and the Consultant hereby accepts such retention and shall perform
for the Company the duties described herein, faithfully and to the best of its
ability. In this regard, Consultant shall devote such business time and
attention to matters on which the Company shall request its services, subject
to the direction of the Chairman of the Board or the President of the Company,
as shall be determined by the Consultant.
2. Term. The Consultant's retention hereunder shall be for a term of one
(1) year.
3. Compensation.
(a) The compensation payable to Consultant shall be sixty thousand
dollars ($60,000), which fee shall be due and payable on the date of the
closing of the Company's initial public offering.
(b) The Company shall pay such reasonable expenses as shall be incurred
by the officers and employees of the Consultant in connection with the
discharge of their duties hereunder, including travel and entertainment, but
not including expenses relating to Consultant's office operations; such
payment shall be made upon presentation by the Consultant of the details of,
and vouchers for, such expenses; provided that all travel and entertainment
expenses and any other expenses involving more than $200 shall require the
prior approval of the Company.
4. Termination. This agreement may not be terminated by the Company. This
agreement may be terminated by the Consultant at any time upon two weeks
notice.
5. Notices. Any notices hereunder shall be sent to the Company and the
Consultant at their respective addresses above set forth. Any notice shall be
given by registered or certified mail, postage prepaid, and shall be deemed to
have been given when deposited in the United States mail. Either party may
designate any other address to which notice shall be given, by giving written
notice to the other of such change of address in the manner herein provided.
6. Governing Law. This Agreement has been made in the State of New York and
shall be construed and governed in accordance with the laws such State
<PAGE> 191
applicable to agreements executed and to be performed wholly within such
State.
7. Entire Agreement. This Agreement constitutes the entire agreement
between the parties relating to the subject matter hereof, superseding any and
all prior or contemporaneous oral and prior written agreements, understandings
and letters of intent. This Agreement may not be modified or amended nor may
any right be waived except by a writing which expressly refers to this
Agreement, states that it is a modification, amendment or waiver and is signed
by all parties with respect to a modification or amendment or the party
granting the waiver with respect to a waiver. No course of conduct or dealing
and no trade custom or usage shall modify any provisions of this Agreement.
8. Binding Effect. This Agreement shall be binding upon the parties hereto
and their respective heirs, administrators, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
NETSMART TECHNOLOGIES, INC.
By:_/S/__________________
Lewis S. Schiller, CEO
MONROE PARKER SECURITIES, INC.
By:_/S/______________
Authorized Officer
<PAGE> 192
Exhibit 3.2
BYLAWS OF NETSMART TECHNOLOGIES, INC.
ARTICLE I
Offices
SECTION 1. Registered Office. The registered office of Netsmart Technologies,
Inc. (the "Corporation") in the State of Delaware, shall be in the city of
Wilmington, county of New Castle, Delaware.
SECTION 2. Other Offices. The Corporation may also have offices at other
places either within or without the State of Delaware.
ARTICLE II
Meetings of Stockholders
SECTION 1. Annual Meetings. The annual meeting of the stockholders of the
Corporation for the election of directors and for the transaction of such
other business as may properly come before the meeting shall be held on such
date and at such place and hour as shall be designated by the Board of
Directors (the "Board") in the notice thereof.
SECTION 2. Special Meetings. A special meeting of the stockholders for any
purpose or purposes may be called at any time by the Board, the Chief
Executive Officer, the Chairman of the Board, the President, a majority of the
Directors then in office or by holders of 10% or more of all shares of stock
entitled to vote at such meeting, and such meeting shall be held on such date
and at such place and hour as shall be designated in the notice thereof.
SECTION 3. Notice of Meetings. Except as otherwise expressly required by
these Bylaws or by law, notice of each meeting of the stockholders shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder of record entitled to notice of, or to vote at, such meeting
by delivering a typewritten or printed notice thereof to such stockholder
personally or by depositing such notice in the United States mail, postage
prepaid, directed to such stockholder at his address as it appears on the
stock records of the Corporation or by transmitting notice thereof to him at
such address by telegraph, cable or other form of recorded communication.
Every such notice shall state the place, date and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting
is called. Except as otherwise expressly required by law, no publication of
any notice of a meeting of the stockholders shall be required. Notice of any
adjourned meeting of the stockholders shall not be required to be given if the
time and place thereof are announced at the meeting at which the adjournment
is taken, the adjourned meeting is held within 30 days thereafter and a new
record date for the adjourned meeting is not thereafter fixed.
<PAGE> 193
SECTION 4. Quorum and Manner of Acting. Except as otherwise expressly
required by law, if stockholders holding of record a majority of the shares of
stock of the Corporation entitled to be voted shall be present in person or by
proxy, a quorum for the transaction of business at any meeting of the
stockholders shall exist. In the absence of a quorum at any such meeting or
any adjournment or adjournments thereof, a majority in voting interest of
those present in person or by proxy and entitled to vote thereat, or, in the
absence therefrom of all the stockholders, any officer entitled to preside at,
or to act as secretary of, such meeting, may adjourn such meeting from time to
time until stockholders holding the amount of stock requisite for a quorum
shall be present in person or by proxy. At any such adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called. The absence from any meeting
in person or by proxy of stockholders holding the number of shares of stock of
the Corporation required by law, by the Certificate of Incorporation or by
these Bylaws for action upon any given matter shall not prevent action at such
meeting upon any other matter or matters which may properly come before the
meeting if there shall be present thereat in person or by proxy stockholders
holding the number of shares of stock of the Corporation required in respect
of such other matter or matters.
SECTION 5. Organization of Meetings. At each meeting of the stockholders, one
of the following shall act as chairman of the meeting and preside thereat, in
the following order of precedence:
the Chairman of the Board;
the President;
any other officer of the Corporation designated by the Board to so act and
preside;
any other officer of the Corporation designated by a majority in voting
interest of the stockholders present in person or by proxy and entitled to
vote thereat; or
a stockholder of record of the Corporation designated by a majority in
voting interest of the stockholders present in person or by proxy and entitled
to vote thereat.
The Secretary of the Corporation or, if he shall be absent from or presiding
over the meeting in accordance with the provisions of this Section, the person
(who shall be an Assistant Secretary of the Corporation, if an Assistant
Secretary shall be present thereat) whom the chairman of the meeting shall
appoint, shall act as secretary of the meeting and keep the minutes thereof.
SECTION 6. Order of Business. The order of business at each meeting of the
stockholders shall be determined by the chairman of the meeting, but such
order of business may be changed by the vote of a majority in voting interest
of those present in person or by proxy at such meeting and entitled to vote
thereat.
SECTION 7. Voting.
(a) Except as otherwise provided in the Certificate of Incorporation,
including any certificate of designation setting forth the rights, preferences
and privileges of the holders of any series of Preferred Stock of the
-2-
<PAGE> 194
Corporation, each stockholder shall, at each meeting of the stockholders, be
entitled to one vote in person or by proxy for each share of Common Stock of
the Corporation on the matter in question held by him and registered in his
name on the stock record of the Corporation on the date fixed pursuant to
these Bylaws as the record date for the determination of stockholders who
shall be entitled to receive notice of and to vote at such meeting; or, if no
record date shall have been so fixed, then at the close of business on the day
next preceding the day on which notice of the meeting shall be given or, if
notice of the meeting shall be waived, at the close of business on the day
next preceding the day on which the meeting shall be held.
(b) Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Any vote of stock of the Corporation may be held at any meeting of
the stockholders by the person entitled to vote the same in person or by proxy
appointed by an instrument in writing delivered to the Secretary or an
Assistant Secretary of the Corporation or the secretary of the meeting;
provided, however, that no proxy shall be voted or acted upon after three
years from its date unless such proxy provides for a longer period. The
attendance at any meeting of a stockholder who may theretofore have given a
proxy shall not have the effect of revoking the same unless he shall in
writing so notify the secretary of the meeting prior to the voting of the
proxy. At all meetings of the stockholders, all matters, except as otherwise
provided in the Certificate of Incorporation, in these Bylaws or by law, shall
be decided by the vote of a majority in voting interest of the stockholders
present in person or by proxy and entitled to vote thereat, a quorum being
present. Unless required by law or so directed by the chairman of the meeting,
the vote at any meeting of the stockholders on any question need not be by
ballot. On a vote by ballot, each ballot shall be signed by the stockholder
voting, or by his proxy if there be such proxy, and shall state the number of
shares voted.
SECTION 8. Consent in Lieu of Meeting. Any action required to be taken at any
annual or special meeting of stockholders of the Corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may
be taken without a meeting, without prior notice and without a vote if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted; provided, however,
that the provisions of this Section 8 shall not apply as long as the
Corporation is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, pursuant to Section 12 or 13(d) of such Act,
or any subsequent or successor laws. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing, and
any certificate filed shall state that such written notice has been given.
SECTION 9. List of Stockholders. It shall be the duty of the Secretary or
other officer of the Corporation who shall have charge of the stock record,
either directly or through another officer of the Corporation or through a
transfer agent or transfer clerk appointed by the Board, to prepare and make,
at least l0 days before every meeting of the stockholders, a complete list of
the stockholders entitled to vote thereat, arranged in alphabetical order, and
showing the address of each stockholder and the number of shares registered in
-3-
<PAGE> 195
the name of each stockholder. Such list shall be open to the examination
of any stockholder, for any purpose germane to the meeting, during ordinary
business hours for a period of at least l0 days prior to the meeting, either
at the place where the meeting is to be held or at such other place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting. Such list shall also be produced and kept at the time
and place of the meeting during the whole time thereof and may be inspected by
any stockholder who is present. The stock record shall be the only evidence as
to who are the stockholders entitled to examine the stock record, such list or
the books of the Corporation or to vote in person or by proxy at any meeting
of the stockholders.
SECTION 10. Inspectors. Either the Board or, in the absence of a designation
of inspectors by the Board, the chairman of the meeting may, in its or his
discretion, appoint two or more inspectors, who need not be stockholders, who
shall receive and take charge of ballots and proxies and decide all questions
relating to the qualification of those asserting the right to vote and the
validity of ballots and proxies. In the event of the failure or refusal to
serve of any inspector designated by the Board, the chairman of the meeting
shall appoint an inspector to act in place of each such inspector designated
by the Board. In the absence of a designation of inspectors by the Board and
the chairman of the meeting, the secretary of the meeting shall perform the
duties which would otherwise have been performed by the inspectors.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The property, business, affairs and policies of
the Corporation shall be managed by or under the direction of the Board.
SECTION 2. Number and Term of Office. The number of directors which shall
constitute the whole Board shall be one or more persons, as such number shall
be fixed from time to time by a vote of a majority of the whole Board. The
term "whole Board" as used in these Bylaws shall mean the number of positions
on the Board regardless of the number of directors then in office. Each of the
directors of the Corporation shall hold office until the annual meeting after
his election and until his successor shall be elected and shall qualify or
until his earlier death or resignation or removal in the manner hereinafter
provided.
SECTION 3. Election. At each annual meeting of the stockholders for the
election of directors at which a quorum is present, the persons receiving the
greatest number of votes, up to the number of directors to be elected, shall
be the directors. Directors need not be stockholders of the Corporation or
residents of the State of Delaware.
SECTION 4. Meetings.
(a) Annual Meetings. As soon as practicable after each annual election of
directors, the Board shall meet for the purpose of organization, the election
of officers and the transaction of other business.
(b) Regular Meetings. Regular meetings of the Board or any committee
thereof shall be held as the Board or such committee shall from time to time
determine.
-4-
<PAGE> 196
(c) Special Meetings. Special meetings of the Board, at which any and all
business may be transacted, shall be held whenever called by the President or
by a written call signed by any two or more directors and filed with the
Secretary.
(d) Notice of Meetings. No notice of regular meetings of the Board or of
any committee thereof or of any adjourned meeting thereof need be given. The
Secretary shall give notice to each director of each special meeting of the
Board or adjournment thereof, including the time and place thereof. Such
notice shall be given not less than two (2) days before the date of the
meeting to each director by delivering a typewritten notice thereof to such
director personally or by depositing such notice in the United States mail,
postage prepaid by Express Mail or first class mail, or by messenger service
or overnight delivery service which guarantees next day delivery, directed to
such director at his residence or usual business address or by transmitting
notice thereof to him by telecopier or other form of recorded communication,
including recorded telephonic notice, provided, however, that if notice of the
meeting shall be given by first class mail, such notice shall be given not
less than five (5) days prior to the date of the meeting. Notice of any
meeting of the Board or any committee thereof shall not be required to be
given to any director who shall attend such meeting. Any meeting of the Board
or any committee thereof shall be a legal meeting without any notice thereof
having been given if all the directors then in office shall be present
thereat. The purposes of a meeting of the Board or any committee thereof need
not be specified in the notice thereof.
(e) Time and Place of Meetings. Regular meetings of the Board or any
committee thereof shall be held at such time or times and place or places as
the Board or the committee may from time to time determine. Each special
meeting of the Board or any committee thereof shall be held at such time and
place as the caller or callers thereof may determine. In the absence of such a
determination, each meeting of the Board or any committee thereof shall be
held at such time and place as shall be designated in the notices or waiver of
notices thereof.
(f) Quorum and Manner of Acting. Except as otherwise expressly required by
these Bylaws or by law, a majority of the directors then in office and a
majority of the members of any committee shall be present in person at any
meeting thereof in order to constitute a quorum for the transaction of
business at such meeting, and the vote of a majority of the directors present
at any such meeting at which a quorum is present shall be necessary for the
passage of any resolution or for an act to be the act of the Board or such
committee. In the absence of a quorum, a majority of the directors present
thereat may adjourn such meeting from time to time until a quorum shall be
present thereat. Notice of any adjourned meeting need not be given.
(g) Organization of Meetings. At each meeting of the Board, one of the
following shall act as chairman of the meeting and preside thereat, in the
following order of precedence:
(i) the Chairman of the Board;
(ii) the Vice Chairman, or, if there be more than one Vice Chairman, the
Vice Chairman in order determined by the Board of Directors;
(iii) the President, if a director; or
-5-
<PAGE> 197
(iv) any director chosen by a majority of the directors present thereat.
(h) Minutes. The Secretary or such other person present whom the chairman
of the meeting shall appoint, shall act as secretary of such meeting and keep
the minutes thereof. The order of business at each meeting of the Board shall
be determined by the chairman of such meeting.
(i) Consent in Lieu of Meeting. Any action required or permitted to be
taken at any meeting of the Board or any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may
be, consent thereto in a writing or writings, and such writing or writings are
filed with the minutes of the proceedings of the Board or committee.
(j) Action by Communications Equipment. The directors may participate in a
meeting of the Board or any committee thereof by means of conference telephone
or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting.
SECTION 5. Compensation. Each director, in consideration of his serving as
such, shall be entitled to receive from the Corporation such amount per annum
and such fees for attendance at meetings of the Board or of any committee, or
both, as the Board shall from time to time determine. The Board may likewise
provide that the Corporation shall reimburse each director or member of a
committee for any expenses incurred by him on account of his attendance at any
such meeting. Nothing contained in this Section 5 shall be construed to
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor or to require the Board to provide for
compensation to directors.
SECTION 6. Resignation, Removal and Vacancies.
(a) Any director may resign at any time by giving written notice of his
resignation to the Board or the President of the Corporation. Any such
resignation shall take effect at the time specified therein or when delivered
to the Board or the President, as the Board shall determine. Except as
aforesaid, the acceptance of such resignation shall not be necessary to make
it effective.
(b) Any director may be removed at any time for cause or without cause by
vote of the holders of record of a majority in voting interest of shares then
entitled to vote at an election of directors at a duly constituted meeting of
stockholders. The vacancy in the Board caused by any such removal may be
filled by the stockholders at such meeting or, if not so filled, then by the
Board as provided in the next paragraph of these Bylaws. Any director may also
be removed at any time for cause by vote of a majority of the whole Board.
(c) In case of any vacancy on the Board or in case of any newly created
directorship, a majority of the directors of the Corporation then in office,
though less than a quorum, or the sole remaining director may elect a director
to fill the vacancy or the newly created directorship for the unexpired
portion of the term being filled. The director elected to fill such vacancy
shall hold office for the unexpired term in respect of which such vacancy
occurred.
SECTION 7. Committees. The Board from time to time may appoint from among its
members an executive committee and one or more other committees, each of which
-6-
<PAGE> 198
shall have one or more members as the Board shall determine. Each committee
shall have and may exercise such powers as the Board may delegate, to the
extent permitted by law. The Board shall have power to change the members of
any committee at any time, to fill vacancies and to discharge any such
committee, either with or without cause, at any time.
ARTICLE IV
Officers
SECTION 1. Election and Appointment and Term of Office.
(a) The officers of the Corporation may be a Chairman of the Board or Co-
Chairmen, one or more Vice Chairmen, a President, such number, if any, of
other Vice Presidents (including Executive or Senior Vice Presidents) as the
Board may from time to time determine, a Secretary and a Treasurer and such
officers as the Board may from time to time determine. The Chairman of the
Executive Committee may, if the Board of Directors so determines, be an
officer of the Corporation. Each such officer shall be elected by the Board at
its annual meeting or such other time as the Board shall determine, and shall
serve at the discretion of the Board. Two or more offices may be held by the
same person except that the same person shall not be both President and
Secretary. The Board may elect or appoint (and may authorize the President to
appoint) such other officers (including one or more Assistant Secretaries and
Assistant Treasurers) as it deems necessary who shall have such authority and
shall perform such duties as the Board or the President may from time to time
prescribe. The Board of Directors may, but shall not be required to, designate
one or more officers who shall hold the position(s) of, and perform the duties
of, the Chief Executive Officer, the Chief Operating Officer, the Chief
Financial Officer and the Chief Accounting Officer.
(b) If additional officers are elected or appointed during the year, each
shall hold office until the next annual meeting of the Board at which officers
are regularly elected or appointed and until his successor is elected or
appointed and qualified or until his earlier death or resignation or removal
in the manner hereinafter provided.
SECTION 2. Duties and Functions.
(a) Chairman. The Chairman of the Board, if elected, shall preside over
meetings of the Board of Directors and shall perform such other duties as are
expressly delegated to the Chairman of the Board by the Board. The Chairman of
the Executive Committee shall shall be a member of the Executive Committee and
shall preside at meetings of the Executive Committee and shall have such other
duties as are expressly delegated to him by the Board.
(b) Vice Chairman. The Vice Chairman shall preside over meetings of the
Board of Directors in the absence of the Chairman of the Board and shall
perform such other duties as are expressly delegated to the Vice Chairman.
If more than one Vice Chairman shall be elected, the Board of Directors shall
designate the order in which they preside over meetings of the Board of
Directors in the absence of the Chairman of the Board.
(c) Chief Executive Officer. The Chief Executive Officer, if elected,
shall be responsible for supervising the management of the business and
affairs of the Corporation, subject to the directions and limitations imposed
-7-
<PAGE> 199
by the Board of Directors, these Bylaws and the Certificate of Incorporation
of this Corporation. All other officers shall report and be accountable to the
Chief Executive Officer, except as otherwise provided in these Bylaws or as
otherwise determined by the Board of Directors.
(d) Chief Operating Officer. The Chief Operating Officer, if elected,
shall be responsible for supervising the day to day operations of the business
and affairs of the Corporation, subject to the directions and limitations
imposed by the Board, the Chief Executive Officer and these Bylaws, and shall
report to the Chief Executive Officer or to the Board of Directors, as the
Board of Directors shall determine. All other officers involved with the
operations of the Corporation shall report and be accountable to the Chief
Operating Officer.
(e) Chief Financial Officer. The Chief Financial Officer, if elected,
shall be responsible for supervising the Corporation's overall financial
planning and financial controls and shall be responsible for the maintenance
of the Corporation's books and records, subject to the directions and
limitations imposed by the Board, the Chief Executive Officer and these
Bylaws. All other officers involved with the financial and accounting
functions of the Corporation shall report and be accountable to the Chief
Financial Officer, and the Chief Financial Officer shall report to the Chief
Executive Officer or the Board of Directors, as the Board of Directors shall
determine.
(f) Chief Accounting Officer. The Chief Accounting Officer, if elected,
shall keep true and full accounts of all assets, liabilities, receipts and
disbursements and other transactions of the Corporation and shall cause
regular audits of the books and records of the Corporation to be made, and
shall have charge, supervision and control of the accounting affairs of the
Corporation, subject to the directions and limitations imposed by the Board,
the Chief Executive Officer, the Chief Financial Officer and these Bylaws.
(g) President. The President shall be responsible for implementing the
policies adopted by the Board and shall report to the Board. The President
shall also have the powers and duties delegated to him by these Bylaws and
such other powers and duties as the Board may from time to time determine.
(h) Vice Presidents. Each Vice President shall have such powers and duties
as shall be prescribed by the Board.
(i) Secretary. The Secretary shall keep the records of all meetings of the
stockholders, the Board and all other committees, if any, in one or more books
kept for that purpose. He shall give or cause to be given due notice of all
meetings in accordance with these Bylaws and as required by law. He shall be
custodian of the seal of the Corporation and of all contracts, deeds,
documents and other corporate papers, records (except accounting records) and
indicia of title to properties owned by the Corporation as shall not be
committed to the custody of another officer by the Board, or by the President.
He shall affix or cause to be affixed the seal of the Corporation to
instruments requiring the same when the same have been signed on behalf of the
Corporation by a duly authorized officer. He shall perform all duties and have
all powers incident to the office of Secretary and shall perform such other
duties as shall be assigned to him by the Board or the President. The
Secretary may be assisted by one or more Assistant Secretaries.
-8-
<PAGE> 200
(j) Treasurer. The Treasurer shall have charge and custody of all moneys,
stocks, bonds, notes and other securities owned or held by the Corporation,
except those held elsewhere at the direction of the Chief Executive Officer or
the Board. He shall perform all duties and have all powers incident to the
office of Treasurer and shall perform such other duties as shall be assigned
to him by the Board, the Chief Executive Officer and the Chief Financial
Officer. The Treasurer may be assisted by one or more Assistant Treasurers,
and the Treasurer shall report to the Chief Financial Officer or to such other
officer as may be designated by the Board or to the Board of Directors, as the
Board of Directors shall determine.
SECTION 3. Resignation, Removal and Vacancies.
(a) Any officer may resign at any time by giving written notice of his
resignation to the Board or the President. Any such resignation shall take
effect at the time specified therein or when delivered to the Board, as the
Board shall determine. Except as aforesaid, the acceptance of such resignation
shall not be necessary to make it effective.
(b) Any officer, agent or employee elected or appointed by the Board may be
removed, with or without cause, at any time by the Board. Any officer, agent
or employee appointed by an officer may be removed, with or without cause, at
any time by the Board or such officer. Any removal pursuant to Section 2 or 3
of these Bylaws shall not affect any rights which a terminated employee shall
have under any employment agreement between such person and the Corporation
which has been approved by the Board of Directors and has been executed by an
officer authorized by the Board to execute such agreement.
(c) A vacancy in any office may be filled for the unexpired portion of the
term in the same manner as provided in these Bylaws for election or
appointment to such office.
ARTICLE IV
Waiver of Notices; Place of Meetings
SECTION 1. Waiver of Notices. Whenever notice is required to be given by the
Certificate of Incorporation, by these Bylaws or by law, a waiver thereof in
writing, signed by the person entitled to such notice or by an attorney
thereunto authorized, shall be deemed equivalent to notice, whether given
before or after the time specified therein and, in the case of a waiver of
notice of a meeting, whether or not such waiver specifies the purpose of or
business to be transacted at such meeting. Attendance of a person at a meeting
shall constitute a waiver of notice of such meeting, except where the person
attends the meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
SECTION 2. Place of Meetings. Any meeting of the stockholders, the Board or
any committee of the Board may be held within or outside the State of
Delaware.
ARTICLE V
Execution and Delivery of Documents; Deposits; Proxies; Books and Records
-9-
<PAGE> 201
SECTION 1. Execution and Delivery of Documents; Delegation. The Board shall
designate the officers, employees and agents of the Corporation who shall have
power to execute and deliver deeds, contracts, mortgages, bonds, debentures,
checks, drafts and other orders for the payment of money and other documents
for and in the name of the Corporation and may authorize such officers,
employees and agents to delegate such power (including authority to
redelegate) by written instrument to other officers, employees or agents of
the Corporation. Such delegation may be by resolution or otherwise, and the
authority granted shall be general or confined to specific matters, all as the
Board may determine.
SECTION 2. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation or
otherwise as the Board, the President, or any other officer of the Corporation
to whom power in that respect shall have been delegated by the Board or these
Bylaws shall select.
SECTION 3. Proxies in Respect of Stock or Other Securities of Other
Corporations. The Chief Executive Officer, the Chairman of the Board, the
President or any other officer of the Corporation designated by the Board
shall have the authority from time to time to appoint an agent or agents of
the Corporation to exercise in the name and on behalf of the Corporation the
powers and rights which the Corporation may have as the holder of stock or
other securities in any other corporation, to vote or consent in respect of
such stock or securities and to execute or cause to be executed in the name
and on behalf of the Corporation and under its corporate seal or otherwise,
such written proxies, powers of attorney or other instruments as he may deem
necessary or proper in order that the Corporation may exercise such powers and
rights. Any such officer may instruct any person or persons appointed as
aforesaid as to the manner of exercising such powers and rights.
SECTION 4. Books and Records. The books and records of the Corporation may be
kept at such places within or without the State of Delaware as the Board may
from time to time determine.
ARTICLE VI
Certificates; Stock Record; Transfer and Registration; New Certificates;
Record Date; etc.
SECTION 1. Certificates for Stock.
(a) Every owner of stock of the Corporation shall be entitled to have a
certificate certifying the number of shares owned by him in the Corporation
and designating the class of stock to which such shares belong, which shall
otherwise be in such form as the Board shall prescribe. Each such certificate
shall be signed by, or in the name of the Corporation by, the Chief Executive
Officer, the Chairman of the Board, the President or a Vice President and by
the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Corporation. Any or all of such signatures may be facsimiles.
(b) In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may nevertheless be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Every certificate surrendered to the Corporation for exchange or transfer
-10-
<PAGE> 202
shall be cancelled and a new certificate or certificates shall not be issued
in exchange for any existing certificate until such existing certificate shall
have been so cancelled, except in cases provided for in Section 4 of this
Article.
SECTION 3. Stock Record. A stock record in one or more counterparts shall be
kept of the name of the person, firm or corporation owning the stock
represented by each certificate for stock of the Corporation issued, the
number of shares represented by each such certificate, the date thereof and,
in the case of cancellation, the date of cancellation. Except as otherwise
expressly required by law, the person in whose name shares of stock stand on
the stock record of the Corporation shall be deemed the owner thereof for all
purposes as regards the Corporation.
SECTION 4. Transfer and Registration of Stock.
(a) Transfer. The transfer of stock and certificates of stock which
represent the stock of the Corporation shall be governed by the Uniform
Commercial Code, as in effect in Delaware and as amended from time to time.
(b) Registration. Registration of transfers of shares of the Corporation
shall be made only on the books of the Corporation by the registered holder
thereof, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the Corporation, on the surrender of
the certificate or certificates for such shares properly endorsed or
accompanied by a stock power duly executed.
SECTION 5. New Certificates.
(a) Lost, Stolen or Destroyed Certificates. Where a stock certificate has
been lost, apparently destroyed or wrongfully taken, the issuance of a new
stock certificate or the claims based on such certificate shall be governed by
the Uniform Commercial Code, as in effect in Delaware and amended from time to
time.
(b) Multilated Certificates. Where the holder of any certificate for stock
of the Corporation notifies the Corporation of the mutilation of such
certificate within a reasonable time after he has notice of it, the
Corporation will issue a new certificate for stock in exchange for such
mutilated certificate theretofore issued by it.
(c) Bond. The Board may, in its discretion, require the owner of the lost,
stolen, destroyed or mutilated certificate to give the Corporation a bond in
such sum, limited or unlimited, in such form and with such surety or sureties
sufficient to indemnify the Corporation against any claim that may be made
against it on account of the loss, theft, destruction or mutilation of any
such certificate or the issuance of any such new certificate.
SECTION 6. Regulations. The Board may make such rules and regulations as it
may deem expedient, not inconsistent with these Bylaws, concerning the issue,
transfer and registration of certificates for stock of the Corporation. The
Board may appoint or authorize any officer or officers to appoint one or more
transfer clerks or one or more transfer agents and one or more registrars and
may require all certificates for stock to bear the signature or signatures of
any of them.
-11-
<PAGE> 203
SECTION 7. Fixing Date for Determination of Stockholders of Record. In order
that the Corporation may determine the stockholders entitled to notice of or
to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled
to receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than l0 days before the date of such meeting, nor more than 60 days
prior to any other action. A determination of stockholders entitled to notice
of or to vote at a meeting of the stockholders shall apply to any adjournment
of the meeting; provided, however, that the Board may fix a new record date
for the adjourned meeting.
ARTICLE VII
Seal
The Board shall provide a corporate seal which shall bear the full name of the
Corporation and the year and state of its incorporation.
ARTICLE VIII
Fiscal Year
The fiscal year of the Corporation shall be determined by resolution of the
Board of Directors.
ARTICLE IX
Amendments
These Bylaws may be amended, altered or repealed by the vote of a majority of
the whole Board; provided, however, that the holders of a majority of the
outstanding stock of the Corporation entitled to vote in respect thereof, may,
by their vote given at an annual meeting or at any special meeting, amend or
repeal any Bylaw made by the Board.
-12-
<PAGE> 204
Exhibit 4.1
WARRANT AGREEMENT
AGREEMENT, dated as of this 15th day of June, 1996, by and among Netsmart
Technologies, Inc., a Delaware corporation (the "Company"), American Stock
Transfer & Trust Company, as Warrant Agent (the "Warrant Agent"), and Monroe
Parker Securities, Inc., a New York corporation ("Monroe Parker").
WITNESSETH:
WHEREAS, in connection with a public offering of five hundred sixty two
thousand five hundred (562,500) Units (the "Units"), pursuant to an
underwriting agreement (the "Underwriting Agreement") dated as of ,
1996, between the Company and Monroe Parker, the Company may issue up to six
hundred forty six thousand eight hundred seventy five (646,875) Series A
Redeemable Common Stock Purchase Warrants (the "Warrants"); and
WHEREAS, in connection with the issuance, pursuant to the Underwriting
Agreement, to Monroe Parker or its designees of a unit purchase option (the
"Underwriter's Option"), the Company may issue up to fifty six thousand two
hundred fifty (56,250) Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, as
hereinafter defined, the issuance of certificates representing the Warrants,
the exercise of the Warrants, and the rights of the holders thereof;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties
hereto agree as follows:
1. Definitions. As used in this Agreement, the following terms shall
have the following meanings, unless the context shall otherwise require:
(a) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall be
administered, which office is located at the date of this Agreement at 40 Wall
Street, 46th floor, New York, New York 10005.
(b) "Effective Date" shall mean the date that the Registration Statement
is declared effective by the Securities and Exchange Commission (the
"Commission").
(c) "Exercise Date" shall mean, as to any Warrant, the date on which the
Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (b)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the Purchase Price; provided, however, that, subject to Paragraph 4(a) of this
Agreement, if payment shall be made by personal or corporate check, the
exercise of the Warrant shall not be effective until the Warrant Agent shall
be satisfied that the check shall have cleared; provided, further, that if
such
<PAGE> 205
payment is made prior to the Warrant Expiration Date or the expiration of a
period during which a reduced Purchase Price is in effect pursuant to
Paragraph 9(f) of this Agreement and the check shall not have cleared until
after the Warrant Expiration Date or such other date, then the Warrant shall
be deemed to have been exercised immediately prior to 5:00 P.M. New York City
time on the Warrant Expiration Date.
(d) "Purchase Price" shall mean the purchase price per share to be paid
upon exercise of each Warrant in accordance with the terms hereof, which price
shall be four and 50/100 dollars ($4.50) per share with respect to the
Warrants, subject to adjustment from time to time pursuant to the provisions
of Paragraph 9 of this Agreement.
(e) "Redemption Price" shall mean the price at which the Company may, at
its option, redeem the Warrants, in accordance with the terms of this
Agreement, which price shall be five cents ($.05) per Warrant. The Redemption
Price shall not be subject to adjustment pursuant to this Agreement.
(f) "Registration Statement" shall mean the Company's registration
statement on Form S-1, File No. 333-2550, which was declared effective by the
Commission on ____________, 1996.
(g) "Registered Holder" shall mean, as to any Warrant and as of any
particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the
Warrant Agent pursuant to Paragraph 6 of this Agreement.
(h)"Transfer Agent" shall mean American Stock Transfer & Trust Company,
as the Company's transfer agent, or its authorized successor, as such.
(i) "Warrant Expiration Date" shall mean 5:00 P.M. New York City time on
the first to occur of (i)____________, 1999, or (ii) the business day
immediately preceding the Redemption Date, as defined in Paragraph 8(c) of
this Agreement; provided, that if such date shall in the State of New York be
a holiday or a day on which banks are authorized or required to close, the
Warrant Expiration Date shall be the next day which is not such a date. Upon
notice to all warrantholders the Company shall have the right to extend the
Warrant Expiration Date.
(j) "Warrant Shares" shall mean the shares of Common Stock issuable upon
exercise of the Warrants.
(k) "Warrants" shall mean the Warrants.
2. Warrants and Issuance of Warrants Certificates.
(a) Each Warrant initially shall entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase one (1) share of
Common Stock upon the exercise thereof, in accordance with the terms of this
Agreement, subject to modification and adjustment as provided in Paragraph 9
of this Agreement.
(b) Upon execution of this Agreement, Warrant Certificates representing
the number of Warrants initially issuable pursuant to the Underwriting
Agreement shall be executed by the Company and delivered to the Warrant Agent.
Upon written order of the Company signed by its President or Chairman or a
Vice President and by its Secretary or an Assistant Secretary or its Treasurer
-2-
<PAGE> 206
or an Assistant Treasurer, the Warrant Certificates shall be countersigned,
issued and delivered by the Warrant Agent.
(c) From time to time, up to the Warrant Expiration Date, the Transfer
Agent shall countersign and deliver stock certificates in required whole
number denominations representing the shares of Common Stock issuable upon the
exercise of Warrants in accordance with this Agreement.
(d) From time to time, up to the Warrant Expiration Date, the Warrant
Agent shall countersign and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this Agreement; provided that no Warrant
Certificates shall be issued except (i) those initially issued hereunder or
otherwise issuable pursuant to the Underwriting Agreement, including those
issuable in exchange for certain outstanding warrants, (ii) those issued on or
after the date of this Agreement, upon the exercise of fewer than all Warrants
represented by any Warrant Certificate, to evidence any unexercised Warrants
held by the exercising Registered Holder, (iii) those issued upon any transfer
or exchange pursuant to Paragraph 6 of this Agreement; (iv) those issued in
replacement of lost, stolen, destroyed or mutilated Warrant Certificates
pursuant to Paragraph 7 of this Agreement; (v) those issued pursuant to the
Underwriter's Option, and (vi) at the option of the Company, in such form as
may be approved by the Board of Directors, to reflect any adjustment or change
in the Purchase Price or the number of shares of Common Stock purchasable upon
exercise of the Warrants made pursuant to Paragraph 9 of this Agreement. In
addition, at the discretion of the Company, the Company may authorize the
issuance of additional Warrants, which shall be subject to the provisions of
this Agreement.
3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates for the Warrants shall be substantially in
the form annexed as Exhibit A to this Agreement, (the provisions of which are
hereby incorporated herein) and may have such letters, numbers or other marks
of identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may
be required to comply with any law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange on which
the Warrants may be listed, or to conform to usage or to the requirements of
Paragraph 2(b) of this Agreement. The Warrant Certificates shall be dated the
date of issuance thereof (whether upon initial issuance, transfer, exchange in
lieu of mutilated, lost, stolen, or destroyed Warrant Certificates) and issued
in registered form. Warrant Certificates shall be numbered serially with the
letter WA or other letters acceptable to the Company and the Warrant Agent.
(b) Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, President or any Vice President and by its
Secretary or an Assistant Secretary, by manual signatures or by facsimile
signatures printed thereon, and shall have imprinted thereon a facsimile of
the Company's seal. Warrant Certificates shall be manually countersigned by
the Warrant Agent and shall not be valid for any purpose unless so
countersigned. In case any officer of the Company who shall have signed any
of the Warrant Certificates shall cease to be an officer of the Company or to
hold the particular office referenced in the Warrant Certificate before the
date of issuance of the Warrant Certificates or before countersignature by the
Warrant Agent and issue and delivery thereof, such Warrant Certificates may
nevertheless be countersigned by the Warrant Agent, issued and delivered with
-3-
<PAGE> 207
the same force and effect as though the person who signed the Warrant
Certificates had not ceased to be an officer of the Company or to hold such
office. After countersignature by the Warrant Agent, Warrant Certificates
shall be delivered by the Warrant Agent to the Registered Holder without
further action by the Company, except as otherwise provided by Paragraph 4(a)
of this Agreement.
4. Exercise.
(a) Each Warrant may be exercised by the Registered Holder thereof at
any time on or after the issuance thereof, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth herein
and in the Warrant Certificate. A Warrant shall be deemed to have been
exercised immediately prior to the close of business on the Exercise Date and
the person entitled to receive the securities deliverable upon such exercise
shall be treated for all purposes as the holder of those securities upon the
exercise of the Warrant as of the close of business on the Exercise Date. As
soon as practicable on or after the Exercise Date, the Warrant Agent shall
deposit the proceeds received from the exercise of a Warrant and shall notify
the Company in writing of the exercise of the Warrant. Promptly following,
and in any event within five (5) days after the date of such notice from the
Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to be
issued and delivered by the Transfer Agent, to the person or persons entitled
to receive the same, a certificate or certificates for the securities
deliverable upon such exercise, (plus a certificate for any remaining
unexercised Warrants of the Registered Holder) unless prior to the date of
issuance of such certificates the Company shall instruct the Warrant Agent to
refrain from causing such issuance of certificates pending clearance of checks
received in payment of the Purchase Price pursuant to such Warrants.
Notwithstanding the foregoing, in the case of payment made in the form of a
check drawn on an account of the Representative or such other investment banks
and brokerage houses as the Company shall approve in writing to the Warrant
Agent, by the Representative or such other investment bank or brokerage house,
certificates shall immediately be issued without prior notice to the Company
or any delay. Upon the exercise of any Warrant and clearance of the funds
received, the Warrant Agent shall promptly remit the payment received for the
Warrant (the "Warrant Proceeds") to the Company or as the Company may direct
in writing, subject to the provisions of Paragraphs 4(b) and 4(c) of this
Agreement.
(b) If, at the Exercise Date in respect of the exercise of any Warrant
after one year from the Effective Date, (i) the market price of the Company's
Common Stock is greater than the Purchase Price then in effect, (ii) the
exercise of the Warrant was solicited by a member of the National Association
of Securities Dealers, Inc. ("NASD"), (iii) the Warrant was not held in a
discretionary account, (iv) disclosure of compensation arrangements was made
both at the time of the original offering and at the time of exercise of the
Warrant was not in violation of Rule 10b-6 (as such rule or any successor rule
may be in effect as of such time of exercise) promulgated under the Securities
Exchange Act of 1934, then the Warrant Agent, simultaneously with the
distribution of the Warrant Proceeds to the Company shall, on behalf of the
Company, pay from the Warrant Proceeds, a fee of four percent (4%) (the
"Monroe Parker's Fee") of the Purchase Price to Monroe Parker (a portion of
which may be reallowed by Monroe Parker to the dealer who solicited the
exercise, which may also be Monroe Parker). In the event Monroe Parker's Fee
is not paid within ten (10) days of the date on which the Company receives
Warrant Proceeds, then Monroe Parker's Fee shall begin accruing interest at an
-4-
<PAGE> 208
annual rate of prime plus four (4)%, payable by the Company to Monroe Parker's
at the time the Company pays Monroe Parker's Fee. Within five (5) business
days after exercise, the Warrant Agent shall send to Monroe Parker a copy of
the reverse side of each Warrant exercised. Monroe Parker shall reimburse the
Warrant Agent, upon request, for its reasonable expenses relating to
compliance with this Paragraph 4(b). In addition, Monroe Parker and the
Company may, at any time during business hours, examine the records of the
Warrant Agent, including its ledger of original Warrant Certificates returned
to the Warrant Agent upon exercise of Warrants. The provisions of this
Paragraph 4(b) may not be modified, amended or deleted without the prior
written consent of the Representative.
(c) In order to enforce the provisions of Paragraph 4(b) of this
Agreement, the Warrant Agent is hereby expressly authorized to withhold
payment to the Company of the Warrant Proceeds unless and until the Company
establishes an escrow account for the purpose of depositing the entire amount
of Monroe Parker's Fee, which amount will be deducted from the net Warrant
Proceeds to be paid to the Company. The funds placed in the escrow account
may not be released to the Company without a written agreement from Monroe
Parker that the required Monroe Parker's Fee has been received by Monroe
Parker.
5. Reservation of Shares; Listing; Payment of Taxes.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all Warrant Shares shall, at the time of delivery in accordance
with this Agreement, be duly and validly issued, fully paid, nonassessable and
free from all taxes, liens and charges with respect to the issue thereof
(other than those which the Company shall promptly pay or discharge), and that
upon issuance such shares shall be listed on each national securities exchange
or eligible for inclusion in each automated quotation system, if any, on which
the other shares of outstanding Common Stock of the Company are then listed or
eligible for inclusion.
(b) The Company covenants that if any securities to be reserved for the
purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any Federal securities law
before such securities may be validly issued or delivered upon such exercise,
then the Company will in good faith and as expeditiously as reasonably
possible, endeavor to secure such registration or approval. The Company will
use reasonable efforts to obtain appropriate approvals or registrations under
state "blue sky" securities laws. With respect to any such securities,
however, Warrants may not be exercised by, or shares of Common Stock issued
to, any Registered Holder in any state in which such exercise would be
unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance, or delivery of any shares upon exercise of the
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if
any.
-5-
<PAGE> 209
(d) The Warrant Agent is hereby irrevocably authorized to requisition
the Company's Transfer Agent from time to time for certificates representing
shares of Common Stock issuable upon exercise of the Warrants, and the Company
will authorize the Transfer Agent to comply with all such proper requisitions.
The Company will file with the Warrant Agent a statement setting forth the
name and address of the Transfer Agent of the Company for shares of Common
Stock issuable upon exercise of the Warrants.
6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant Certificates
representing an equal aggregate number of Warrants of the same class or may be
transferred in whole or in part. Warrant Certificates to be exchanged shall
be surrendered to the Warrant Agent at its Corporate Office, and upon
satisfaction of the terms and provisions of this Agreement, the Company shall
execute and the Warrant Agent shall countersign, issue and deliver in exchange
therefor the Warrant Certificate or Certificates which the Registered Holder
making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which, subject
to such reasonable regulations as it may prescribe, it shall register Warrant
Certificates and the transfer thereof in accordance with its regular practice.
Upon due presentment for registration of transfer of any Warrant Certificate
at such office, the Company shall execute and the Warrant Agent shall issue
and deliver to the transferee or transferees a new Warrant Certificate or
Certificates representing an equal aggregate number of Warrants.
(c) With respect to all Warrant Certificates presented for registration
or transfer, or for exchange or exercise, the subscription form on the reverse
thereof shall be duly endorsed, or be accompanied by a written instrument or
instruments of transfer and subscription, in form satisfactory to the Company
and the Warrant Agent, duly executed by the Registered Holder or his attorney
in fact duly authorized in writing.
(d) A reasonable service charge may be imposed by the Warrant Agent for
any exchange or registration of transfer of Warrant Certificates. In
addition, the Company may require payment by such holder of a sum sufficient
to cover any tax or other governmental charge that may be imposed in
connection with any exchanges, registration or transfer of Warrant
Certificates.
(e) All Warrant Certificates surrendered for exercise or for exchange in
case of mutilated Warrant Certificates shall be promptly cancelled by the
Warrant Agent and thereafter retained by the Warrant Agent until termination
of this Agreement or resignation as Warrant Agent, or, with the prior written
consent of the Representative, disposed of or destroyed, at the direction of
the Company.
(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary. The Warrants, which are being publicly being offered in Units
with shares of Common Stock pursuant to the Underwriting Agreement, will be
immediately detachable from the Common Stock and transferable separately
therefrom.
-6-
<PAGE> 210
(g) Notwithstanding any other provisions of this Agreement, no Warrants
issued upon exercise of the Representative's Option and no shares of Common
Stock issuable upon exercise of such Warrants may be sold, transferred,
assigned or hypothecated for a period of one year from the Effective Date
except to the officers of the Underwriters or to selling group members or
officers or partners thereof, all of whom shall be bound by such restrictions.
Until the expiration of such one-year period, Warrant certificates and stock
certificates shall be marked with a legend referring to such restriction.
7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent
of evidence satisfactory to them of the ownership of and loss, theft,
destruction or mutilation of any Warrant Certificate and (in case of loss,
theft or destruction) of indemnity satisfactory to them, and (in the case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or
Warrant Agent that the Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number
of Warrants. Applicants for a substitute Warrant Certificate shall comply
with such other reasonable regulations and pay such other reasonable charges
as the Warrant Agent may prescribe.
8. Redemption.
(a) Commencing one year from the Effective Date or earlier with the
consent of Monroe Parker, the Company shall have the right, on not less than
thirty (30) nor more than sixty (60) days notice given prior to the Redemption
Date, as hereinafter defined, any time to redeem the then outstanding Warrants
at the Redemption Price of five cents ($.05) per Warrant, provided the Market
Price of the Common Stock shall equal or exceed the "Target Price." The
"Target Price" shall mean two hundred percent (200%) of the Purchase Price.
Market Price for the purpose of this Paragraph 8 shall mean, if the Common
Stock is listed on the NASDAQ System or the New York or American Stock
Exchange, the average last reported sales price (or, if no sale is reported on
any such trading day, the closing bid price) on the principal market for the
Common Stock or, if the Common Stock is not so listed or traded, the average
of the last reported high bid and low asked prices of the Common Stock, during
the twenty (20) days ending within ten (10) days of the date the Warrants are
called for redemption. Notice of redemption shall be mailed by first class
mail, postage prepaid, not later than five (5) business days (or such longer
period to which the Representative may consent) after the date the Warrants
are called for redemption. All Warrants must be redeemed if any Warrants are
redeemed.
(b) If the conditions set forth in Paragraph 8(a) of this Agreement are
met, and the Company desires to exercise its right to redeem the Warrants, it
shall request Monroe Parker or the Warrant Agent to mail the notice of
redemption referred to in said Paragraph 8(a) to each of the Registered
Holders of the Warrants to be redeemed, first class, postage prepaid, not
earlier than the sixtieth (60th) day nor later than the thirtieth (30th) day
before the date fixed for redemption, at their last addresses as shall appear
on the records maintained pursuant to Paragraph 6(b) of this Agreement. Any
notice mailed in the manner provided herein shall be conclusively presumed to
have been duly given whether or not the Registered Holder receives such
notice. The Warrant Agent agrees to mail such notice if requested by the
Company or the Representative.
-7-
<PAGE> 211
(c) The notice of redemption shall specify (i) the Redemption Price,
(ii) the date fixed for redemption, (iii) the place where the Warrant
Certificates shall be delivered, and (iii) that the right to exercise the
Warrant shall terminate at 5:00 p.m. (New York City time) on the business day
immediately preceding the date fixed for redemption. The date fixed for the
redemption of the Warrants shall be the Redemption Date. No failure to mail
such notice nor any defect therein or in the mailing thereof shall affect the
validity of the proceedings for such redemption except as to a Registered
Holder (A) to whom notice was not mailed or (B) whose notice was defective.
An affidavit of the Warrant Agent or of the Secretary or an Assistant
Secretary of the Representative or the Company that notice of redemption has
been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
(d) Any right to exercise a Warrant, and any right of the holders of
Monroe Parker's Option to receive Warrants upon exercise of Monroe Parker's
Option, shall terminate at 5:00 p.m. (New York City time) on the business day
immediately preceding the Redemption Date. After such time, Holders of the
Warrants shall have no further rights except to receive, upon surrender of the
Warrant, the Redemption Price without interest, subject to the provisions of
applicable laws relating to the treatment of abandoned property. In the event
that the Warrants or the Warrant Shares shall not be subject to a current and
effective registration statement under the Securities Act of 1933, as amended,
at any time subsequent to the date the Warrants are called for redemption, the
notice of redemption shall not be effective and shall be deemed for all
purposes not to have been given. Nothing in the preceding sentence shall be
construed to prohibit or restrict the Company from thereafter calling the
Warrants for redemption in the manner provided for, and subject to the
provisions of, this Paragraph 8.
(e) From and after the Redemption Date with respect to the Warrants, the
Company shall, at the place specified in the notice of redemption, upon
presentation and surrender to the Company by or on behalf of the Registered
Holder thereof of one or more Warrant Certificates evidencing Warrants to be
redeemed, deliver or cause to be delivered to or upon the written order of
such Holder a sum in cash equal to the Redemption Price of each such Warrant.
From and after the Redemption Date and upon the deposit or setting aside by
the Company of a sum sufficient to redeem all the Warrants called for
redemption, such Warrants shall expire and become void and all rights
hereunder and under the Warrant Certificates, except the right to receive
payment of the Redemption Price, shall cease.
(f) Notwithstanding any other provision of this Agreement, the Company
shall not call the Warrants for redemption unless there is, at the time the
Warrants are called for redemption, a current and effective registration
statement or a post-effective amendment to the Registration Statement covering
the issuance of the shares of Common Stock issuable upon exercise of the
Warrants.
(g) In the event that the Representative's Option is exercised at a time
subsequent to the redemption of the Warrants but prior to the Warrant
Expiration Date, as defined in Paragraph 1(i)(i) of this Agreement, then,
notwithstanding any other provisions of this Agreement, the Warrants issued
upon such exercise may be redeemed by the Company at any time after issuance.
9. Adjustment of Exercise Price and Number of Securities Issuable upon
Exercise of Warrants.
-8-
<PAGE> 212
(a) In case the Company shall, at any time or from time to time after
the date of this Agreement, pay a dividend or make a distribution on its
shares of Common Stock in shares of Common Stock, subdivide or reclassify its
outstanding Common Stock into a greater number of shares, or combine or
reclassify its outstanding Common Stock into a smaller number of shares or
otherwise effect a reverse split, the Purchase Price in effect at the time of
the record date for such dividend or distribution or of the effective date of
such subdivision, combination or reclassification shall be proportionately
adjusted so that the holder of any Warrant exercised after such date shall be
entitled to receive the aggregate number and kind of shares which, if such
Warrant had been exercised immediately prior to such time, he would have owned
upon such exercise and been entitled to receive upon such dividend,
subdivision, combination or reclassification. Such adjustment shall be made
successively whenever any event listed in this Paragraph 9(a) shall occur.
(b) In case the Company shall, at any time or from time to time after
the date of this Agreement, issue rights or warrants to all holders of its
Common Stock entitling them to subscribe for or purchase shares of Common
Stock (or securities convertible into Common Stock) at a price (or having a
conversion price per share) less than the current market price of the Common
Stock (as defined in Paragraph 9(e) of this Agreement) on the record date
mentioned below, the Purchase Price shall be adjusted so that the same shall
equal the price determined by multiplying the Purchase Price in effect
immediately prior to the date of such issuance by a fraction, of which the
numerator shall be the number of shares of Common Stock outstanding on the
record date mentioned below plus the number of additional shares of Common
Stock which the aggregate offering price of the total number of shares of
Common Stock so offered (or the aggregate conversion price of the convertible
securities so offered) would purchase at such current market price per share
of the Common Stock, and of which the denominator shall be the number of
shares of Common Stock outstanding on such record date plus the number of
additional shares of Common Stock offered for subscription or purchase (or
into which the convertible securities so offered are convertible). Such
adjustment shall be made successively whenever such rights or warrants are
issued and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants; and
to the extent that shares of Common Stock are not delivered (or securities
convertible into Common Stock are not delivered) after the expiration of such
rights or warrants, the Purchase Price shall be readjusted to the Purchase
Price which would then be in effect had the adjustments made upon the issuance
of such rights or warrants been made upon the basis of delivery of only the
number of shares of Common Stock (or securities convertible into Common Stock)
actually delivered.
(c) In case the Company shall, at any time or from time to time after
the date hereof, distribute to all holders of Common Stock evidences of its
indebtedness or assets (excluding cash dividends or distributions paid out of
current earnings and dividends or distributions referred to in Paragraph 9(a)
of this Agreement) or subscription rights or warrants (excluding those
referred to in Paragraph 9(b) of this Agreement), then in each such case the
Purchase Price in effect thereafter shall be determined by multiplying the
Purchase Price in effect immediately prior thereto by a fraction, of which the
numerator shall be the total number of shares of Common Stock outstanding
multiplied by the current market price per share of Common Stock (as defined
in Paragraph 9(e) of this Agreement), less the fair market value (as
determined by the Company's Board of Directors) of said assets or evidences of
indebtedness so distributed or of such rights or warrants, and of which the
-9-
<PAGE> 213
denominator shall be the total number of shares or Common Stock outstanding
multiplied by such current market price per share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such distribution.
(d) Whenever the Purchase Price payable upon exercise of each Warrant is
adjusted pursuant to Paragraphs 9(a), (b) or (c) of this Agreement, the number
of shares of Common Stock purchasable upon exercise of each Warrant shall
simultaneously be adjusted by multiplying the number of shares issuable upon
exercise of each Warrant in effect on the date thereof by the Purchase Price
in effect on the date thereof and dividing the product so obtained by the
Purchase Price, as adjusted.
(e) For the purpose of any computation pursuant to Paragraphs 9(b) and
(c) of this Agreement, the current market price per share of Common Stock at
any date shall be deemed to be the average of the daily closing prices for
thirty (30) consecutive business days commencing forty five (45) business days
before such date. The closing price for each day shall be the reported last
sale price regular way or, in case no such reported sale takes place on such
day, the average of the last reported high bid and low asked prices regular
way, in either case on the principal national securities exchange on which the
Common Stock is admitted to trading or listed, if the Common Stock admitted to
trading or listing on the New York or American Stock Exchange or on The Nasdaq
Stock Market if included in such system or if not listed or admitted to
trading on such exchange or system, the average of the highest bid and lowest
asked prices as reported by Nasdaq, or the National Quotation Bureau, Inc. or
another similar organization if Nasdaq is no longer reporting such
information, or if not so available, the fair market price as determined by
the Board of Directors.
(f) No adjustment in the Purchase Price shall be required unless such
adjustment would require an increase or decrease of at least five cents
($0.05) in such price; provided, however, that any adjustments which by reason
of this Paragraph 9(f) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under
this Paragraph 9 shall be made to the nearest cent or to the nearest one tenth
of a share, as the case may be. Anything in this Paragraph 9 to the contrary
notwithstanding, the Company may, upon notice to the record holders of the
Warrants, in its sole discretion, reduce the Purchase Price of the Warrants,
and, if such reduction is not otherwise required by this Paragraph 9, such
reduction (i) will not, unless the Board of Directors otherwise determines,
result in any change in the number or class of shares of Common Stock issuable
upon exercise of such Warrants, and (ii) may be of limited duration, in which
event the reduction in Purchase Price shall not apply to any Warrants
exercised after the expiration of the time during which the reduced Purchase
Price is in effect.
(g) The Company may retain a firm of independent public accountants of
recognized standing selected by the Board of Directors (who may be the regular
accountants employed by the Company) to make any computation required by this
Paragraph 9, and a certificate signed by such firm shall be conclusive
evidence of the correctness of such adjustment.
(h) In the event that at any time, as a result of an adjustment made
pursuant to Paragraph 9(a) of this Agreement, the holder of any Warrant
thereafter shall become entitled to receive any shares of the Company, other
-10-
<PAGE> 214
than Common Stock, thereafter the number of such other shares so receivable
upon exercise of any Warrant shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Common Stock contained in Paragraphs 9(a) to (f),
inclusive, of this Agreement.
(i) The Company may elect, upon any adjustment of the Purchase Price
hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Common Stock purchasable upon the
exercise of each Warrant as hereinabove provided, so that each Warrant
outstanding after such adjustment shall represent the right to purchase one
share of Common Stock. Each Warrant held of record and each Warrant issuable
upon exercise of the Representative's Option prior to such adjustment of the
number of Warrants shall become that number of Warrants or an Representative's
Option to purchase that number of Warrants (calculated to the nearest tenth)
determined by multiplying the number one by a fraction, the numerator of which
shall be the Purchase Price in effect immediately prior to such adjustment and
the denominator of which shall be the Purchase Price in effect immediately
after such adjustment. Upon each adjustment of the number of Warrants
pursuant to this Paragraph 9, the Company shall, as promptly as practicable,
cause to be distributed to each Registered Holder of Warrant Certificates on
the date of such adjustment Warrant Certificates evidencing, subject to
Paragraph 10 of this Agreement, the number of additional Warrants to which
such Holder shall be entitled as a result of such adjustment or, at the option
of the Company, cause to be distributed to such Holder in substitution and
replacement for the Warrant Certificates held by him prior to the date of
adjustment (and upon surrender thereof, if required by the Company) new
Warrant Certificates evidencing the number of Warrants to which such Holder
shall be entitled after such adjustment. With respect to the Representative's
Option, the Company shall give the registered holders of the Representative's
Option notice as to the number of Warrants issuable in respect of such
Representative's Option reflecting such adjustment. Any Warrants or notice to
registered holders of Representative's Option may be mailed by the Warrant
Agent or by first class mail, postage prepaid.
(j) In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock, or in case of any consolidation
or merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification, capital reorganization or other
change of outstanding shares of Common Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as, or
substantially as, an entirety (other than a sale/leaseback, mortgage or other
financing transaction), the Company shall cause effective provision to be made
so that each holder of a Warrant then outstanding shall have the right
thereafter, by exercising such Warrant, to purchase the kind and number of
shares of stock or other securities or property (including cash) receivable
upon such reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance by a holder of the number of shares
of Common Stock that might have been purchased upon exercise of such Warrant
immediately prior to such reclassification, capital reorganization or other
change, consolidation, merger, sale or conveyance. Any such provisions shall
include provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Paragraph 9. The Company
shall not effect any such consolidation, merger or sale unless, prior to or
simultaneously with the consummation thereof, the successor (if other than the
Company) resulting from such consolidation or merger or the corporation
-11-
<PAGE> 215
purchasing assets or other appropriate corporation or entity shall assume, by
written instrument executed and delivered to the Warrant Agent, the obligation
to deliver to the holder of each Warrant such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holders may be
entitled to purchase and the other obligations under this Agreement. The
foregoing provisions shall similarly apply to successive reclassifications,
capital reorganizations and other changes of outstanding shares of Common
Stock and to successive consolidations, mergers, sales or conveyances. In the
event that, as a result of any merger, consolidation or similar transaction,
all of the holders of Common Stock receive and are entitled to receive no
consideration other than cash in respect of their shares of Common Stock,
then, at the effective time of the transaction, the rights to purchase Common
Stock pursuant to the Warrants shall terminate, and the holders of the
Warrants shall, notwithstanding any other provisions of this Agreement or the
Warrants, receive in respect of each Warrant to purchase one (1) share of
Common Stock, upon presentation of the Warrant Certificate, the amount by
which the consideration per share of Common Stock payable to the holders of
Common Stock at such effective time exceeds the Purchase Price in effect on
such effective date, without giving effect to the transaction. In the event
that, subsequent to the effective time, additional cash or other consideration
is payable to the holders of Common Stock of record as of the effective time,
the same consideration shall be payable to the holders of the Warrants to the
extent that the total cash then received by the holders of Common Stock
exceeds the Purchase Price in effect at such effective date, without giving
effect to the transaction, with the same effect as if the Warrants had been
exercised on and as of such effective time. In the event of any merger,
consolidation, sale or lease of substantially all of the Company's assets or
reorganization whereby the Company is not the surviving corporation, in lieu
of the foregoing provisions of this Paragraph 9(j), the Company may provide in
the agreement relating to the transaction that each Warrant shall become, be
converted into or be exchanged for, such securities of the surviving or
acquiring corporation or other entity as has a value equal to the value of the
Warrants, the value of the Warrants and securities being issued in exchange
therefor to be determined by the Company's Board of Directors, such
determination to be final, binding and conclusive on the Company and the
holders of the Warrants.
(k) Irrespective of any adjustments or changes in the Purchase Price or
the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Paragraphs 2(e) and 9(i) of this Agreement, continue to express
the Purchase Price per share, the number of shares purchasable thereunder and
the Redemption Price therefor as the Purchase Price per share, and the number
of shares purchasable and the Redemption Price therefore were expressed in the
Warrant Certificates when the same were originally issued.
(l) After any adjustment of the Purchase Price pursuant to this
Paragraph 9, the Company will promptly prepare a certificate signed by the
Chairman, President, Vice President or Treasurer, of the Company setting
forth: (i) the Purchase Price as so adjusted, (ii) the number of shares of
Common Stock purchasable upon exercise of each Warrant after such adjustment,
and, if the Company shall have elected to adjust the number of Warrants, the
number of Warrants to which the registered holder of each Warrant shall then
be entitled, and (iii) a brief statement of the facts accounting for such
adjustment. The Company will promptly file such certificate with the Warrant
Agent and cause a brief summary thereof to be sent by first class mail to the
Representative and to each registered holder of Warrants at his last address
-12-
<PAGE> 216
as it shall appear on the registry books of the Warrant Agent. No failure to
mail such notice nor any defect therein or in the mailing thereof shall affect
the validity thereof. The affidavit of an officer of the Warrant Agent or the
Secretary or an Assistant Secretary of the Company that such notice has been
mailed shall, in the absence of fraud, constitute prima facie evidence of the
facts stated therein.
(m) As used in this Paragraph 9, the term "Common Stock" shall mean and
include the Company's Common Stock authorized on the date of the original
issue of the Units and shall also include any capital stock of any class of
the Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include only shares of such class
designated in the Company's Certificate of Incorporation as Common Stock on
the date of the original issue of the Units or, in the case of any
reclassification, change, consolidation, merger, sale or conveyance of the
character referred to in Paragraph 9(j) of this Agreement, the stock,
securities or property provided for in such section or, in the case of any
reclassification or change in the outstanding shares of Common Stock issuable
upon exercise of the Warrants as a result of a subdivision or combination or
consisting of a change in par value, or from par value to no par value, or
from no par value to par value, such shares of Common Stock as so reclassified
or changed.
(n) Any determination as to whether an adjustment in the Purchase Price
in effect hereunder is required pursuant to this Paragraph 9, or as to the
amount of any such adjustment, if required, shall be binding upon the holders
of the warrants and the Company if made in good faith by the Board of
Directors of the Company.
(o) In lieu of an adjustment pursuant to Paragraph 9(b) of this
Agreement, if the Company shall grant to the holders of Common Stock, as such,
rights or warrants to subscribe for or to purchase, or any options for the
purchase of, Common Stock or securities convertible into or exchangeable for
or carrying a right, warrant or option to purchase Common Stock, the Company
may concurrently therewith grant to each Registered Holder as of the record
date for such transaction of the Warrants then outstanding, the rights,
warrants or options to which each Registered Holder would have been entitled
if, on the record date used to determine the stockholders entitled to the
rights, warrants or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise of his Warrants. If the Company exercises such
right no adjustment which otherwise might be called for pursuant to said
Paragraph 9(b) shall be made.
10. Fractional Warrants and Fractional Shares. If the number of shares of
Common Stock purchasable upon the exercise of each Warrant is adjusted
pursuant to Paragraph 9 of this Agreement, the Company nevertheless shall not
be required to issue fractions of shares, upon exercise of the Warrants or
otherwise, or to distribute certificates that evidence fractional shares.
With respect to any fraction of a share called for upon any exercise hereof,
the Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of such fractional share, determined as
follows:
-13-
<PAGE> 217
(a) If the Common Stock is listed on the New York or American Stock
Exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on [the Nasdaq Stock Market], the current value shall be the
reported last sale price of the Common Stock on such exchange or system on the
last business day prior to the date of exercise of this Warrant, or if no such
sale is made on such day, the average closing bid and asked prices for such
day on such exchange or system; or
(b) If the Common Stock is not listed or admitted to unlisted trading
privileges, the current value shall be the last reported bid price reported by
the National Quotation Bureau, Inc. on the last business day prior to the date
of the exercise of this Warrant; or
(c) If the Common Stock is not so listed or admitted to unlisted trading
privileges and bid prices are not so reported, the current value shall be an
amount determined in such reasonable manner as may be prescribed by the Board
of Directors of the Company.
11. Warrant Holders Not Deemed Stockholders. No holder of Warrants shall,
as such, be entitled to vote or to receive dividends or be deemed the holder
of Common Stock that may at any time be issuable upon exercise of such
Warrants for any purpose whatsoever, nor shall anything contained in this
Agreement be construed to confer upon the holder of Warrants, as such, any of
the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issue or reclassification of stock, change
of par value or change of stock to no par value, consolidation, merger or
conveyance or otherwise), or to receive notice of meetings, or to receive
dividends or subscription rights, until such Holder shall have exercised such
Warrants and been issued shares of Common Stock in accordance with the
provisions hereof.
12. Rights of Action. All rights of action with respect to this Agreement
are vested in the respective Registered Holders of the Warrants, and any
Registered Holder of a Warrant, without consent of the Warrant Agent or of the
holder of any other Warrant, may, in his own behalf and for his own benefit,
enforce against the Company his right to exercise his Warrants for the
purchase of shares of Common Stock in the manner provide in the Warrant
Certificate and this Agreement.
13. Agreement of Warrant Holders. Every holder of a Warrant, by his
acceptance of the Warrants, consents and agrees with the Company, the Warrant
Agent and every other holder of a Warrant that:
(a) The warrants are transferable only on the registry books of the
Warrant Agent by the Registered Holder thereof in person or by his attorney
duly authorized in writing and only if the Warrant Certificates representing
such Warrants are surrendered at the office of the Warrant Agent, duly
endorsed or accompanied by a proper instrument of transfer satisfactory to the
Warrant Agent and the Company in their sole discretion, together with payment
of any applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the holder and as the
absolute, true and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected by
-14-
<PAGE> 218
any notice or knowledge to the contrary, except as otherwise expressly
provided in Paragraph 7 of this Agreement.
14. Cancellation of Warrant Certificates. If the Company shall purchase or
acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and cancelled by it and retired.
15. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company, and its duties shall be determined solely by the
provisions of this Agreement. The Warrant Agent shall not, by issuing and
delivering Warrant certificates or by any other act hereunder be deemed to
make any representations as to the validity, value or authorization of the
Warrant Certificates or the Warrants represented thereby or of any securities
or other property delivered upon exercise of any Warrant or whether any stock
issued upon exercise of any Warrant is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be
made any adjustment of the Purchase Price or the Redemption Price provided in
this Agreement, or to determine whether any fact exists which may require any
such adjustments, or with respect to the nature or extent of any such
adjustment, when made, or with respect to the method employed in making the
same. It shall not (i) be liable for any recital or statement of facts
contained herein or for any action taken, suffered or omitted by it in
reliance on any Warrant Certificate or other document or instrument believed
by it in good faith to be genuine and to have been signed or presented by the
proper party or parties, (ii) be responsible for any failure on the part of
the Company to comply with any of its covenants and obligations contained in
this Agreement or in any Warrant Certificate, or (iii) be liable for any act
or omission in connection with this Agreement except for its own negligence or
wilful misconduct.
(c) The Warrant Agent may at any time consult with counsel satisfactory
to it (who may be counsel for the Company) and shall incur no liability or
responsibility for any action taken, suffered or omitted by it in good faith
in accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instrument, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed
by the Chairman of the Board, President, any Vice President, its Secretary, or
Assistant Secretary, unless other evidence in respect thereof is specifically
prescribed in this Agreement. The Warrant Agent shall not be liable for any
action taken, suffered or omitted by it in accordance with such notice,
statement, instruction, request, direction, order or demand believed by it to
be genuine.
(e) The Company agrees to pay the Warrant Agent reasonable compensation
for its services hereunder and to reimburse it for its reasonable expenses
hereunder; it further agrees to indemnify the Warrant Agent and save it
harmless against any and all costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties and powers
hereunder except losses, expenses and liabilities arising as a result of the
Warrant Agent's negligence or wilful misconduct.
-15-
<PAGE> 219
(f) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or wilful misconduct), after
giving thirty (30) days' prior written notice to the Company. At least
fifteen (15) days prior to the date such resignation is to become effective,
the Warrant Agent shall cause a copy of such notice of resignation to be
mailed to the Registered Holder of each Warrant Certificate at the Company's
expense. Upon such resignation, or any inability of the Warrant Agent to act
as such under this Agreement, the Company shall appoint a new warrant agent in
writing. If the Company shall fail to make such appointment within a period
of fifteen (15) days after it has been notified in writing of such resignation
by the resigning Warrant Agent, then the Registered Holder of any Warrant
Certificate may apply to any court of competent jurisdiction for the
appointment of a new warrant agent. Any new warrant agent, whether appointed
by the Company or by such a court, shall be a bank or trust company having a
capital and surplus, as shown by its last published report to its
stockholders, of not less than $10,000,000 or a stock transfer company. After
acceptance in writing of such appointment by the new warrant agent is received
by the Company, such new warrant agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named herein
as the Warrant Agent, without any further assurance, conveyance, act or deed;
but if for any reason, it shall be necessary or expedient to execute and
deliver any further assurance, conveyance, act or deed, the same shall be done
at the expense of the Company and shall be legally and validly executed and
delivered by the resigning Warrant Agent. Not later than the effective date
of any such appointment the Company shall file notice thereof with the
resigning Warrant Agent and shall forthwith cause a copy of such notice to be
mailed to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party or any corporation succeeding to the trust business of the Warrant Agent
shall be a successor warrant agent under this Agreement without any further
act, provided that such corporation is eligible for appointment as successor
to the Warrant Agent under the provisions of the preceding paragraph. Any
such successor warrant agent shall promptly cause notice of its succession as
warrant agent to be mailed to the Company and to the Registered Holder of each
Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of its
or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same
manner and to the same extent and with like effects as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
16. Modification of Agreement. The Warrant Agent and the Company may, by
supplemental agreement, make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or manifest mistake or error herein
contained; or (ii) that they may deem necessary or desirable and which shall
not adversely affect the interests of the holders of Warrant Certificates;
provided, however, that this Agreement shall not otherwise be modified,
supplemented or altered in any respect except with the consent in writing of
the Registered Holders of Warrant Certificates representing not less than
fifty percent (50%) of the Warrants then outstanding; and provided, further,
-16-
<PAGE> 220
that no change in the number or nature of the securities purchasable upon the
exercise of any Warrant, or the Purchase Price therefor, or the acceleration
of the Warrant Expiration Date, shall be made without the consent in writing
of the Registered Holder of the Warrant Certificate representing such Warrant,
other than such changes as are specifically prescribed by this Agreement as
originally executed or are made in compliance with applicable law; and
provided, further, that Paragraphs 4(b) and 4(c) may not be modified or
amended without the consent of the Monroe Parker.
17. Notices. All notices provided for in this Agreement shall be in
writing signed by the party giving such notice, and, unless otherwise
expressly provided in this Agreement, delivered personally or sent by
overnight courier or messenger against receipt thereof or sent by registered
or certified mail (air mail if overseas), return receipt requested, or by
facsimile transmission or similar means of communication. Notices sent by
facsimile transmission or similar means of communication shall be confirmed by
acknowledged receipt or by registered or certified mail, return receipt
requested. Notices shall be deemed to have been received on the date of
personal delivery or telecopy or, if sent by certified or registered mail,
return receipt requested, shall be deemed to be delivered on the third
business day after the date of mailing. Notices shall be sent to the
Registered Holders at their respective addresses on the Warrant Agent's
warrant register, to the Company at 146 Nassau Avenue, Islip, NY 11751,
telecopier (516) 968-2123, Attention: Mr. Lewis S. Schiller, Chairman of the
Board, to the Warrant Agent at its Corporate Office, telecopier (718) 236-
2641, and to the Representative at 2500 Westchester Avenue, Purchase, New York
10577, telecopier (914) 696-1797, Attention: Stephen J. Drescher, Director
Corporate Finance. Any party may, by like notice, change the address, person
or telecopier number to which notice should be given.
18. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements
entered and to be performed wholly within such State.
19. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Company and, the Warrant Agent and their respective successors
and assigns, and the holders from time to time of Warrant Certificates.
Nothing in this Agreement is intended or shall be construed to confer upon any
other person any right, remedy or claim, in equity or at law, or to impose
upon any other person any duty, liability or obligation.
20. Termination. This Agreement shall terminate at the close of business
on the Expiration Date of all the Warrants or such earlier date upon which all
Warrants have been exercised, except that the Warrant Agent shall account to
the Company for cash held by it, and the provisions of Paragraph 15 of this
Agreement shall survive any such termination.
21. Counterparts. This Agreement may be executed in several counterparts,
which taken together shall constitute a single document.
-17-
<PAGE> 221
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written.
NETSMART TECHNOLOGIES, INC
By:_/S/__________________
Lewis S. Schiller, CEO
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:_/S/______________
Authorized Officer
MONROE PARKER SECURITIES, INC.
By:_/S/_______________________
,Authorized Officer
-18-
<PAGE> 222
EXHIBIT A
[FORM OF FACE OF WARRANT CERTIFICATE]
No. WA ________Warrants
Void after ____________, 1999 or earlier upon redemption.
NETSMART TECHNOLOGIES, INC
SERIES A REDEEMABLE COMMON STOCK PURCHASE WARRANT
This certifies that FOR VALUE RECEIVED________________________or registered
assigns (the "Registered Holder") is the owner of the number of Common Stock
Purchase Warrants ("Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one (1) fully paid and nonassessable share of Common
Stock, par value $.01 per share ("Common Stock"), of Netsmart Technologies,
Inc., a Delaware corporation (the "Company"), at any time prior to the
Expiration Date (as hereinafter defined), upon the Subscription Form on the
reverse hereof duly executed, at the corporate office of American Stock
Transfer & Trust Company, as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $4.50, subject to adjustment as provided in
the Warrant Agreement (as hereinafter defined) (the "Purchase Price") in
lawful money of the United States of American in cash or by official bank or
certified check made payable to the order of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated as of
____________, 1996, by and among the Company, the Warrant Agent and Monroe
Parker Securities, Inc.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject
to modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued.
In the case of the exercise of less than all the Warrants represented hereby,
the Company shall cancel this Warrant Certificate upon the surrender hereof
and shall execute and deliver a new Warrant Certificates or Warrant
Certificates of like tenor, which the Warrant Agent shall countersign, for the
balance or such Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York City time) on
____________, 1999 or earlier upon redemption as hereinafter provided. If
such date shall in the State of New York be a holiday or a day on which the
banks are authorized to close, then the Expiration Date shall mean 5:00 P.M.
(New York City time) the next following day which in the State of New York is
not a holiday or a day on which banks are authorized to close. Under certain
circumstances as provided in the Warrant Agreement, the period during which
the Warrant may be exercised may be extended.
-19-
<PAGE> 223
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to
become effective and to keep such registration statement current while any of
the Warrants are outstanding. This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an
equal aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon payment by the Registered Holder
of any tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificate representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Commencing, ____________, 1996 or earlier as provided in the Warrant
Agreement, this Warrant may be redeemed at the option of the Company, at a
redemption price of $.05 per Warrant at any time, provided the Market Price
(as defined in the Warrant Agreement) for the Common Stock issuable upon
exercise of such Warrant shall equal or exceed 200% of the Purchase Price.
Notice of redemption shall be given not later than the thirtieth (30th) day
nor earlier than the sixtieth (60th) day before the date fixed for redemption,
all as provided in the Warrant Agreement. On and after 5:00 P.M. (New York
City time) on the business day immediately preceding the date fixed for
redemption, the Registered Holder shall have no rights with respect to this
Warrant except to receive the $.05 per Warrant upon surrender of this
Certificate. This Warrant may only be called for redemption if, on the date
the Warrant is called for redemption, the issuance of the shares of Common
Stock upon exercise of this Warrant, is subject to a current and effective
registration statement.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
The Company has agreed to pay a fee of 4% of the Purchase Price upon
certain conditions as specified in the Warrant Agreement upon the exercise of
this Warrant.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York applicable to agreements executed and
to be performed wholly within such State.
-20-
<PAGE> 224
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
NETSMART TECHNOLOGIES, INC
Dated:________________
By:_/S/_______________________
Lewis S. Schiller, Chairman
By:___________________________
[Seal]
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY as Warrant Agent
By:_/S/______________
Authorized Officer
-21-
<PAGE> 225
[FORM OF REVERSE OF WARRANT CERTIFICATE]
TRANSFER FEE: $4.00 PER CERTIFICATE ISSUED
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
_______________________________________
_______________________________________
_______________________________________
_______________________________________
[Please print or type name and address]
and be delivered to
_______________________________________
_______________________________________
_______________________________________
_______________________________________
[Please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
The undersigned represents that the exercise of the within Warrant was
solicited by a member of the National Association of Securities Dealers, Inc.
If not solicited by an NASD member, please write "unsolicited" in the space
below. Unless otherwise indicated by listing the name of another NASD member
firm, it will be assumed that the exercise was solicited by Monroe Parker
Securities, Inc.
__________________________________________________________________
(Name of NASD Member if other than Monroe Parker Securities, Inc.)
Dated:_________________
x_____________________________________________
______________________________________________
______________________________________________
Address
______________________________________________
Taxpayer Identification Number
______________________________________________
Signature Medallion Guaranteed:
-22-
<PAGE> 226
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED,_______________________________hereby sells, assigns and
transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
_______________________________________
_______________________________________
_______________________________________
_______________________________________
[Please print or type name and address]
___________of the Warrants represented by this Warrant Certificate, and hereby
irrevocably constitutes and
appoints______________________________________________ Attorney to transfer
his Warrant Certificate on the books of the Company, with full power of
substitution in the premises.
Dated:_______________
x_____________________________________
Signature Medallion Guaranteed
______________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO
THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND
MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF
THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE
OR MIDWEST STOCK EXCHANGE.
-23-
<PAGE> 227
Exhibit 10.18
SOFTWARE LICENSING AND SERVICE AGREEMENT
Agreement made this _____ day of April 1996, by and between Netsmart
Technologies Corp., a Delaware corporation with offices at 146 Nassau Avenue,
Islip, New York 11751, (hereinafter referred to as "Netsmart") and IBN
Limited, a Delaware corporation with offices at 1211 Avenue of the Americas,
New York, NY, 10036, (hereinafter referred to as "Licensee") .
1. PURPOSE OF AGREEMENT The purpose of this Agreement, and its attached
schedules, is to state the terms and conditions under which Netsmart will (i)
grant to Licensee a nonexclusive license to use and operate certain
proprietary computer programs and related documentation; (ii) give Licensee
the exclusive right to certain enhancements developed by Netsmart hereunder;
and (iii) provide certain project management, development, training, and
support services to Licensee and to provide for certain intellectual property
protection and non-compete provisions between the parties.
2. DEFINITIONS For the purpose of this Agreement, the following terms shall
be defined as indicated:
(a) "Netsmart Card Management Programs" shall mean the computer programs
and related documentation modified or developed by Netsmart to meet the
requirement of the Specification (as such term is hereinafter defined)
including all versions, corrections, enhancements, improvements and
derivatives of the Netsmart Card Management Programs. Such Netsmart Card
Management Programs are listed in Schedule 2(a) attached hereto.
(b) "Third Party Programs" shall mean the computer programs and related
documentation listed in Schedule 2(a) attached hereto including all versions,
corrections, enhancements, improvements and derivatives of the Third Party
Programs.
(c) "Licensed Programs" shall mean both the Netsmart Card Management
Programs and the Third Party Programs.
(d) "Host Licensed Programs" shall mean the Licensed Programs which
authorize and process the transactions which take place on the Licensee's
network of automated teller machines, point-of-sale devices and other end user
electronic devices in the Territory (as such term is hereinafter defined).
(e) "Client Licensed Programs" shall mean the Licensed Programs which
record the input and output activity of the automatic teller machines, point-
of-sale devices and other end user electronic devices in the Territory.
(f)"System" shall mean the Licensed Programs and the Hardware (as such term
is hereinafter defined).
(g) "Development Services" shall mean the software development services
performed or to be performed by Netsmart to develop, modify and enhance the
Licensed Programs in accordance with the requirements specified in the
Specification (as such term is hereinafter defined.)
(h) "Startup Services" shall mean the services performed by Netsmart to
assist Licensee in developing the business procedures and processes required
to operate an automated teller machine and point-of-sale system in the
Territory. The names of the persons who are performing the basic Startup
1
<PAGE> 228
Services are set forth in Schedule 2(h).
(i) "Installation Services" shall mean the installation and other services
to be provided by Netsmart described in Schedule 2(i).
(j) "Support Services" shall mean the maintenance and support services to
be purchased by Licensee and provided by Netsmart in accordance with Schedule
2(j) after acceptance of the Licensed Programs.
(k) "Services" shall mean the Startup Services, Development Services,
Installation Services and Support Services.
(l) "Charges" shall mean the amounts to be paid by Licensee for the
Licensed Programs and Services. The Charges and the time of their payment are
set forth in Schedule 2(l).
(m) "Implementation Plan" shall mean the plan and schedule developed by the
parties for installation and customization of the Licensed Programs as of the
date of this Agreement and attached hereto as Schedule 2(m).
(n) "Specification" shall mean the specifications and descriptions of the
Licensed Programs contained in the document which has been prepared by the
parties. The Specification shall be attached to the Agreement as Schedule
2(n).
(o) "Problems or Defects" shall mean any failure of the Licensed Programs
to operate in substantial conformance with the Specifications.
(p) "Hardware" shall mean the general description of the computer
equipment, communications equipment, and associated system software on which
the Licensed Programs shall run. Schedule 2(p) sets forth the Hardware
configuration.
(q) "Subcontractors" shall mean only Oasis Technology Ltd. and Product
Technology Inc.
(r) "Territory" shall mean the States of the Former Soviet Union. A list of
the States in the Former Soviet Union is attached hereto as Schedule 2(r).
(s) "Purpose" shall mean the use of the Licensed Programs in a multi-bank
network environment (i) to issue cards with an embedded microchip or other
information storage and retrieval mechanism for use in automated teller
machines, point-of-sale devices and other end user electronic equipment in the
Territory; and/or (ii) to implement and support an automated teller
machine/point-of-sale/smart card network in the Territory, it being understood
that support of such network may take place outside the Territory.
(t) "Licensed Program Enhancements" shall mean the modifications,
enhancements, and improvements made to the Licensed Programs as part of the
Development Services which are listed in Schedule 2(t) attached hereto, and
such modifications, enhancements and improvements to the Licensed Programs
made hereafter at the request of Licensee which contain substantive new
functionality.
3. EXCLUSIVITY AND NON-COMPETITION COVENANT Netsmart agrees that, (i) except
as provided in paragraph 13, and (ii) further provided that at least one
million (1,000,000) cards are being issued on an annual calendar year basis,
averaged over each successive two (2) calendar years commencing with the
calendar years 1998 and 1999, then during the term of this Agreement it will
<PAGE> 229
not provide to, or support the use of any of the Licensed Programs by, any
organization for use in the Territory where the use of the Licensed Programs
is for the Purpose. The foregoing shall not prevent Netsmart or the owners of
the Third Party Programs from supplying the Licensed Programs; (i) to
individual banks in the
2
Territory for the purpose of setting up their own network, which network shall
not service other banks in the Territory, of automated teller machines, point-
of-sale devices or other end user electronic equipment; or (ii) to existing
customers with whom Netsmart or the owners of the Third Party Programs have
already entered into license agreements which permit the use of the Licensed
Programs in the Territory. Attached hereto as Schedule 3 is a list of such
existing customers.
4. HARDWARE Licensee shall not change the configuration of the Hardware
prior to acceptance of the Licensed Programs in accordance with Section 9(a)
except with the prior approval of Netsmart, which shall not be unreasonably
withheld or delayed.
5. CHARGES AND PAYMENT TERMS
(a) Licensee agrees to pay Netsmart the Charges, including the Maximum
Royalties as set forth in paragraph I(d) of Schedule 2(l), which Maximum
Royalty shall not exceed the amount of Four Million Four Hundred Thousand
Dollars ($4,400,000) payable pursuant to Section I(b) and I(c) of Schedule
2(l) for the use of the first copy of the Host Licensed Programs. Such Charges
shall be paid at the times set forth in Schedule 2(l) in consideration of the
licenses granted hereunder for the Licensed Programs and the Services to be
performed by Netsmart.
(b) Commencing on the fifth anniversary of the date of execution of this
Agreement and on each anniversary date thereafter, Netsmart shall have the
right to increase the royalties set forth in Schedule 2(l) for the Licensed
Programs. The amount of such annual increase shall be limited to the amount of
the United States Consumer Price Index increase over the year prior to the
anniversary date. For such purpose the date of the execution of this Agreement
shall be deemed to occur on the first day of the month following the actual
execution of this Agreement, unless the execution date occurred on the first
day of a month.
(c) Invoices shall be paid on the terms set forth in Schedule 2(l).
Thereafter, any outstanding balance shall bear interest at the rate of 1-1/2%
per month.
6. LICENSED PROGRAMS
(a) Netsmart hereby grants Licensee a perpetual non-exclusive, non-
transferable license to use the Licensed Programs for the Purpose upon payment
of the Charges, and an exclusive license (except as may otherwise be provided
in paragraph 13 hereof) to use the Licensed Program Enhancements for the
Purpose upon payment of the Charges.
(b) Nothing in this Agreement shall be deemed to convey any title or
ownership interest in the Licensed Programs to Licensee. Licensee acknowledges
Netsmart's rights and the rights of the owners of the Third Party Programs to
the Licensed Programs and that the Licensed Programs are trade secrets and
unpublished works on which Netsmart and such third parties hold and shall hold
<PAGE> 230
the sole and exclusive copyright. At the request of Netsmart and without cost
to Licensee, Licensee shall cooperate with Netsmart to protect the rights of
Netsmart and the third parties in the Licensed Programs and shall not sell,
disclose, lease, sublease, lend or otherwise make the Licensed Programs
available to others.
(c) The Licensed Programs shall be used only for the Purpose and shall be
installed only on the Hardware, as such Hardware may be upgraded by Licensee
from time to time after the Acceptance Date, as such term is hereafter defined
in paragraph 9(d). The Host Licensed Programs may be installed on one Central
Processing Unit ("CPU") which may contain multiple processors, in the New York
Metropolitan area ("Principal CPU") and on a
3
second CPU which may contain multiple processors outside the Territory which
shall be used only as a standby site in the event the Principal CPU is not
operational. In addition, Licensee shall have the option, which it may
exercise by giving Netsmart not less than ten (10) days written notice, to
install additional copies of the Host Licensed Programs on CPUs located in the
Territory. Each such notice shall specify the location and configuration of
the CPU(s) concerned and shall be accompanied by payment of the additional fee
set forth in Schedule 2(l) for such additional license(s).
(d) The Client Licensed Programs may be installed only on CPUs, automated
teller machines, point of sale devices and other end user electronic devices
located in the Territory, provided that copies of the Client Licensed Programs
may be installed on a CPU outside the Territory for testing and demonstration
purposes.
(e) No copies of the Licensed Programs may be made by Licensee without the
prior written consent of Netsmart except for backup purposes in accordance
with normal data processing practices. Licensee agrees to reproduce in all
such backup copies any copyright notices and/or other proprietary-legends,
regardless of form (provided it reasonably conforms to standard industry
practice), contained in, affixed to, or appearing on the Licensed Programs.
7. TAXES The Charges set forth in this Agreement do not include any taxes.
Where applicable, there shall be added to such Charges amounts equal to any
taxes (however designated, levied, or based) on such Charges including, but
not limited to, state and local sales, privilege, use or excise taxes, but not
including taxes based on Netsmart's net income or charges for patent
application or copyright registration or recording.
8. DEVELOPMENT AND IMPLEMENTATION
(a) The parties have completed and agreed upon the Specification which is
attached hereto as Schedule 2(n). The Specification has been prepared based on
the agreed upon functionality of the System as of the date of this Agreement.
(b) The parties may amend the Specification subsequent to the date of this
Agreement, to incorporate new functionality to be included in the Development
Services, to amend the design of the System then included in the
Specification, or to change the manner in which the Development Services are
performed. Each such amendment shall be incorporated in a Change Order in the
form attached hereto as Schedule 8(b) or in such other form as may be agreed
to by the parties in writing which shall detail the cost agreed to be paid by
Licensee to Netsmart to perform the Development Services described in the
<PAGE> 231
Change Order and the change, if any, which the performance of such Development
Services will cause in the Implementation Plan.
(c) In the event that such amendment to the Specification or design of the
System or change in the manner in which the Development Services are performed
results in a reduction in the scope of effort on the part of Netsmart, the
parties shall agree upon a reduction in the cost of the Development Services
and shall prepare a Change Order reflecting such reduction.
(d) The parties shall each sign any Change Order prepared pursuant to
paragraph 8(b) and (c) which shall thereupon become part of this Agreement.
(e) Netsmart personnel have commenced the Development Services specified in
the Specification, and shall continue to complete the Development Services in
accordance with the Implementation Plan.
(f) All modifications, enhancements and improvements made to the Licensed
Programs
4
as part of the Development Services, with the exception of the Licensed
Program Enhancements, are deemed to be part of the Licensed Programs and
belong to the respective owners of the Licensed Programs. The Licensed Program
Enhancements shall belong to Licensee and shall not be relicensed by Netsmart,
except as provided in paragraph 13.
9. INSTALLATION AND ACCEPTANCE
(a) Netsmart shall deliver and install the Licensed Programs in agreed upon
phases over the period detailed in the Implementation Plan. The Licensed
Programs shall be deemed to be completely installed when Netsmart has
certified to Licensee in writing that the Licensed programs are installed and
are ready for acceptance testing.
(b) Licensee shall have the right to test the Licensed Programs prior to
acceptance to determine that the Licensed Programs are in substantial
conformance with the Specifications. Such testing shall be
performed by Licensee during the thirty (30) day period ("Test Period")
following completion of the installation of the Licensed Programs and
Netsmart's certification referred to on Section 9(a).
(c) Promptly after the execution of this Agreement the parties shall
jointly develop a test plan and procedures ("Test Plan") which shall be used
to determine that the Licensed Programs meet the Specification. Upon
completion of the Test Plan it shall be executed by the parties and shall
become a part of this Agreement.
(d) During the thirty (30) day Test Period Licensee shall promptly notify
Netsmart of any Problems or Defects in the Licensed Programs and Netsmart
shall promptly correct such Problems or Defects and resubmit the corrected
Licensed Programs to Licensee for retesting. The Test Period of shall be
extended by the number of days required by Netsmart to correct the Problems or
Defects if the Problem or Defect prevented Licensee from continued testing
while being corrected, or by a period of five (5) days if Licensee was able to
continue testing other areas of the Licensed Programs during the correction
period. If Licensee fails to notify Netsmart of a Problem or Defect which has
not been corrected at the end of the Test Period, the Licensed Programs shall
be deemed to have been accepted (Acceptance Date). Use of the Licensed
<PAGE> 232
Programs for issuance of ATM cards to persons other than employees of Licensee
or persons employed by the bank used for Licensee's pilot testing of the
Licensed Programs shall constitute acceptance of the portion of the Licensed
Programs which are used for such issuance and use of ATM cards and such
issuance date shall be deemed to be the Acceptance Date for such portion of
the Licensed Programs. Use of other portions of the Licensed Programs for
productive purposes shall similarly constitute acceptance of such portions of
the Licensed Programs.
10. WARRANTY
(a) Netsmart represents and warrants that it has the right to grant the
licenses granted to Licensee hereunder, and that to the best of Netsmart's
knowledge the Licensed Programs do not infringe upon or violate any presently
issued patent rights of any third party and do not infringe upon or violate
the copyright, trademarks, or trade secret right of any third party. In the
event of any such claim by any third party against Licensee, Licensee shall
promptly notify Netsmart and Netsmart shall defend such claim, in Licensee's
name but at Netsmart's expense, and shall indemnify Licensee against any
liability, including but not limited to attorneys' fees and disbursements,
arising out of such claim, provided such claim is not based on changes in the
Licensed Programs made by anyone other than Netsmart or the owner of the Third
Party Program concerned or is not based on the combination of the Licensed
Programs with programs other than the Licensed Programs or with hardware. In
the event such an infringement is found and Netsmart cannot either
5
procure the right to continued use of the Licensed Programs for Licensee, or
replace or modify the Licensed Programs with non-infringing programs which
conform with the applicable Specification, then either party may terminate the
licenses granted herein for the Licensed Program(s) concerned. In the event
that Licensee is prevented from using the System for its intended Purpose by
reason of the infringement of a presently issued United States patent,
provided such infringement is not based on changes in the Licensed Programs
made by anyone other than Netsmart or the owner of the Third Party Program
concerned or is not based on the combination of the Licensed Programs with
programs other than the Licensed Programs or with hardware, Netsmart shall
refund to Licensee all of the Charges paid by Licensee to Netsmart hereunder.
(b) Netsmart warrants that the Licensed Programs will conform in all
material respects with their Specifications. After acceptance of the Licensed
Programs by Licensee as provided in paragraph 9, Netsmart will correct any
Problems or Defects in accordance with the Support Services provisions set
forth in Schedule 2(j). In the event a Licensed Program is modified in any way
by anyone other than Netsmart, except if Netsmart has approved such
modification in advance, in writing, or the modification is to make changes in
screens, reports, and similar input or output forms which are made through the
use of functionality in the Licensed Programs which is intended to be under
Licensee's control, the limited warranty provided hereunder with respect to
such Licensed Program shall immediately be terminated and of no effect.
(c) The foregoing shall be Netsmart's sole liability with regard to errors
or malfunctions in the Licensed Programs or Netsmart's performance or
nonperformance of its obligations under this Agreement. Except as may
otherwise be specifically provided in this Agreement, Netsmart shall in no
event be liable to Licensee, its employees, agents or clients, for any
damages, loss of profit, goodwill or other special or consequential damages or
losses or injury to property, death or injury to any person suffered by
<PAGE> 233
Licensee, its affiliates, clients or others as a result of use or inability to
use the Licensed Programs by Licensee, its affiliates, or others, even if
Netsmart has been advised of the possibility of such loss or damage.
(d) Licensee understands and agrees that it is and shall be solely
responsible for establishing and maintaining a procedure for reconstruction
and/or recompilation of any and all data lost or destroyed during the use of
the Licensed Programs, or storage of the data. Netsmart shall assist Licensee
in establishing such procedures. Netsmart shall not be liable under any
circumstances for any damages caused by or arising from such lost or destroyed
data provided that the same was not caused by or did not arise from an act or
omission of Netsmart or any defect in the Licensed Programs. Netsmart shall
use its best efforts, on a time and material basis to assist Licensee in
reconstruction and/or recompilation of such data.
(f) Neither party shall be liable to the other in any manner for any loss
or damage of any nature whatsoever incurred or suffered as a result of any
failures or delays in performance by it due to any cause or circumstance
beyond its control.
11. LIMITATION OF WARRANTY THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER
WARRANTIES AND CONDITIONS EXPRESS OR IMPLIED, WHETHER IN RELATION TO THE
LICENSED PROGRAMS, OR THE PROVISION OF ANY SERVICES INCLUDING, BUT NOT LIMITED
TO, THOSE CONCERNING MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
12. DEFAULT If either party is in default of any of its material obligations
hereunder, and has not commenced cure within ten (10) days and effected cure
within thirty (30) days of receipt of written notice of default from the other
party ("non defaulting party"), then the non-defaulting party may terminate
the Agreement on written notice to
6
the defaulting party. Failure by Netsmart to deliver the Licensed Programs in
accordance with the Implementation Plan shall constitute an event of default
which may be noticed to Netsmart in accordance with this paragraph 12,
provided that any delay attributed to an event which is described in paragraph
10(f) or which is attributed to the failure of Licensee to perform its
obligations as set forth in the Implementation Plan shall extend the time
schedule for the performance of Netsmart's obligations by a like period.
13. CONSEQUENCES OF TERMINATION
(a) Within thirty (30) days of the date of termination of this Agreement by
either party pursuant to Section 12 "Default", Licensee shall erase from all
computer storage any image or copies of the Licensed Programs and shall
certify in writing to Netsmart that the original and all copies of such
property have been destroyed.
(b) In the event that this Agreement is terminated pursuant to paragraph 12
due to the default of Licensee, the restrictions on Netsmart with regard to
its licensing the Licensed Programs, and the Licensed Program Enhancements, as
set forth in paragraph 3 and 8(f) respectively, shall cease and Netsmart will
have the right to license the Licensed Programs and the Licensed Program
Enhancements as it may decide in its sole discretion.
(c) Notwithstanding any termination of this Agreement for any reason, the
terms and conditions set forth in the following paragraphs of this agreement
<PAGE> 234
shall survive and shall be binding on representatives, successors, heirs and
assignees of the parties:
(i) Section 11: "Limitation of Warranty"
(ii) Section 14: "Protection of Proprietary Rights"
(iii) Section 18: "General Provisions"
14. PROTECTION OF PROPRIETARY RIGHTS Each party shall take adequate steps
and security precautions which shall include written confidentiality
agreements with its employees, agents and consultants to prevent unauthorized
disclosure of information which is proprietary to the other party including,
without limitation in the case of Licensee, the Licensed Programs and in the
case of Netsmart, confidential information concerning the existence or nature
of the Licensee's project which is the subject of this Agreement and to
maintain the confidentiality of such information, including but not limited
to: (1) instructing its employees having access to such information not to
copy or duplicate the same or any part thereof and to withhold disclosure or
access or reference thereto from unauthorized third parties; (2) effecting
sufficient security measures.
15. ESCROW Netsmart and Licensee agree on the provisions of the Source Code
Escrow Agreement attached hereto as Schedule 15. Netsmart and Licensee shall
take all necessary steps following execution of this Agreement to effectuate
the terms of the Source Code Escrow Agreement, including, without limitation,
Netsmart's deposit of the source code of the Licensed Programs with the escrow
agent named in the Source Code Escrow Agreement within ten (10) days following
completion and acceptance of the Licensed Programs.
16. SUBCONTRACT Netsmart shall enter into subcontract agreements with the
Subcontractors which shall incorporate the provisions of paragraphs 3 and 14
within thirty (30) days following the execution of this Agreement. Other than
consultants who may perform Services on its behalf, or the third party
software systems listed in the Schedule of Hardware, Netsmart shall not use
any other subcontractors to provide computer programs to Licensee hereunder,
except with Licensee's consent which shall not be unreasonably delayed or
withheld.
17. NON-HIRING During the term of this Agreement and for a period of one (1)
year
7
following its termination, neither party shall, directly or indirectly,
solicit, hire as an employee, or retain as a consultant an employee or
consultant of the other party or any person who was an employee or consultant
of the other party at any time during the two(2) year period immediately prior
to the date such employee or consultant is solicited, hired or retained.
18. GENERAL PROVISIONS
(a) This Agreement shall be construed in accordance with the laws of the
State of New York.
(b) This Agreement and the schedules and exhibits attached hereto contain
the entire understanding of the parties with respect to the matter contained
herein. There are no promises, covenants or undertakings contained in any
other writing or oral communication. In the event of any conflict between or
among the documents comprising this Agreement, the later or latest shall
prevail.
<PAGE> 235
(c) This Agreement may not be modified except in a writing signed by
authorized representatives of the parties.
(d) Any notices required or permitted to be sent hereunder shall be sent,
Certified or Registered Mail, Return Receipt Requested. Notices shall be sent
to the addresses first set forth above or to such other address as a party may
designate by notice pursuant hereto. Notices to Netsmart shall be sent
"Attention: President" .Notices shall be effective upon the date when
delivery is either effected or refused.
(e) A waiver of a breach or default under this Agreement shall not be a
waiver of any subsequent default. Failure of either party to enforce
compliance with any term or condition of this Agreement shall not constitute a
waiver of such term or condition.
(f) In the event that either party shall cease conducting business in the
normal course, becomes insolvent, makes a general assignment for the benefit
of creditors, suffers or permits the appointment of a receiver for its
business or assets, or avails itself of, or becomes subject to, any proceeding
under a Bankruptcy Act or any other statute of any state relating to
insolvency or the protection of rights of creditors, then (at the option of
the other party) this Agreement shall terminate and be of no further force and
effect and any property or rights of such other party, whether tangible or
intangible, shall forthwith be returned to it or certified destroyed.
(g) This contract may not be assigned by either party without the written
consent of the other party, which consent shall not be unreasonably withheld,
except to an assignee who acquires all or substantially all of the assets of
the assignor or to a subsidiary or affiliate of Licensee which is under common
control with the Licensee provided that any such assignee shall agree to be
bound by the terms of this Agreement.
IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the
date first above written.
NETSMART TECHNOLOGIES CORPORATION IBN LIMITED
By _____________________ By ___________________
8
Title __________________ Title ________________
9
<PAGE> 236
SCHEDULE 2(a)
Netsmart Card Management Programs and THIRD PARTY PROGRAMS
DESCRIPTION
Netsmart Card Management Programs
CarteSmart Software as developed by Netsmart in accordance with the
Specification.
THIRD PARTY PROGRAMS
Oasis Technology, Ltd.
IST/Share System, Version 3
Product Technologies, Inc.
SmartCity, Version 1
10
<PAGE> 237
SCHEDULE 2(h)
STARTUP SERVICES
1. Basic Startup Services- To be performed by the following persons
commencing November 1, 1995:
(a) Raj Doodnauth- for 150 days, at a rate of $1500 a day.
(b) Michael Libbee- for 150 days, at a rate of $1000 a day.
(c) Pat Carnes- for 90 days, at a rate of $800 a day.
2. Optional Startup Services-as mutually agreed by the parties.
In addition, Licensee shall pay the reasonable travel and living expenses of
persons performing Startup Services
11
<PAGE> 238
SCHEDULE 2(i)
INSTALLATION SERVICES
The description of installation services and the training services to be
performed by Netsmart will be prepared by the parties following the execution
of this Agreement. Such installation and training services are to be performed
by Netsmart only in the New York metropolitan area. Any installation or
training services outside the New York metropolitan area are to be paid for
separately and in accordance with paragraphs V and VII of Schedule 2(l)
12
<PAGE> 239
SCHEDULE 2(j)
SUPPORT SERVICES
The Support Services described in this Schedule shall be performed by Netsmart
subject to the terms and conditions of the Licensing and Service Agreement.
(a) Netsmart will maintain the then current version of the Licensed
Programs in substantial conformance with its Specifications as amended from
time to time by Netsmart and Licensee. Netsmart will use all possible efforts
in the case of Priority 1 Problems defined in section (b) below, and its best
efforts in the case of Priority 2 and Priority 3 Problems also defined in
section (b) below, to either:
(i) correct any reproducible Problems or Defects in the then current or
immediately prior release of Licensed Programs by Netsmart which prevent it
from operating in substantial conformance with said Specifications; or
(ii) provide a commercially reasonable alternative that will
substantially conform with the Specifications; and
(b) If analysis by Netsmart indicates that a reported problem is caused by
a reproducible Problem or Defect, Netsmart will provide Support Services in
accordance with the following prioritization of reported problems:
Priority 1 will be assigned when the Licensed Programs or a material
Licensed Program functional component is not operational, such as smart card
screen input/update/inquiry. All possible efforts will be made to correct
Priority 1 problems within two (2) business days or if it is not possible
because of the nature of the Problem or Defect to complete such correction in
such two (2) business days, Netsmart will provide a plan for such correction
within such two (2) business days. In the event that Netsmart is unable to
correct a Problem or Defect despite using all possible efforts, Licensee shall
have the right to correct such Problem or Defect, and for such purpose shall
have access to the applicable source code of the Licensed Programs in
accordance with the Escrow Agreement entered into by the parties pursuant to
paragraph 15. Upon correction of the Problem or Defect, Netsmart shall pay for
the cost incurred by Licensee in making such correction plus one hundred
(100%) percent of such cost.
Priority 2 will be assigned for less critical functions, such as low
impact screens and report printing errors. Best efforts will be made to
correct Priority 2 Problems or Defects within five (5) business days or if it
is not possible because of the nature of the Problem or Defect to complete
such correction in such five (5) business days, Netsmart will provide a plan
for such correction, within five (5) business days.
Priority 3 will be assigned to problems not having a major impact on
the Licensee's ability to run the Licensed Program. Best efforts will be made
to provide a corrective plan within ten (10) working days which shall contain
the scheduled date for the implementation of the correction.
(c) Licensee shall maintain a test system which is distinct from its
production system. Licensee shall insure that Netsmart will have access to
Licensee's test system. Netsmart shall advise Licensee if it is unable to
duplicate a Problem or Defect in the
13
<PAGE> 240
test system, in which event Licensee shall allow Netsmart access to the
production system under conditions which are controlled by Licensee.
(d) On a timely basis Netsmart will also provide Licensee with:
(i) such updates as are distributed without charge to other clients
which reflect modifications and incremental improvements made to the Licensed
Programs;
(ii) an opportunity to obtain enhancements to the Licensed Programs for
which charges are imposed on the best terms and at the most favored price such
enhancements are made available to any two other licensees of Netsmart;
(iii) telephone support to answer Licensee's questions about the
Licensed Programs and their use.
(e) Licensee shall make requests for Support Services by giving Netsmart
verbal or written notice specifying a problem caused by a defect in the
Licensed Programs. In making a verbal request for Support Services, Licensee
shall provide Netsmart within twenty four (24) hours after such verbal notice,
written information and documentation as may be reasonably prescribed by
Netsmart. Written notice may be made by electronic mail or facsimile.
(f) Netsmart will make technical support personnel available from 9:00 a.m.
to 5:30 p.m., Netsmart local time Monday through Friday, exclusive of IBN
holidays, which shall not exceed twelve (12) days a year.
(g) If reasonable analysis by Netsmart indicates that a reported error or
malfunction is caused by a problem related to equipment used by Licensee, the
equipment's system software, or applicable software other than the Licensed
Programs, or Licensee's misuse or modification of the Licensed Programs,
Netsmart's responsibility shall be limited to the correction of the portion,
if any, of the problem caused by the Licensed Programs. In that event,
Licensee shall, at Netsmart's option, pay Netsmart for the cost of analyzing
the reported error at Netsmart's then prevailing time-and-materials rate.
(h) Netsmart shall provide and Licensee shall purchase the Support Services
during the term of the Software Licensing Service Agreement, provided Netsmart
is not in default of the terms of Support Services Schedule and has not
received notice of such default pursuant to in paragraph 12.
(i) In the event Licensee fails to pay the Charges when due, except for
amounts disputed by Licensee in good faith, Netsmart may refuse to provide
Support Services until Licensee makes payment of the Charges for the period
when Support Services were discontinued, as well as the Charges for the then
current period, and any cost for bringing the Licensed Programs up to
Netsmart's then-current level and certifying that it is again eligible for
maintenance hereunder.
(j) Charges for Support Services are specified in Schedule 2(l).
14
<PAGE> 241
SCHEDULE 2(l)
CHARGES
DESCRIPTION
I. LICENSED PROGRAMS
(a) One Time License Fee $None
(b) Royalty for the Netsmart Card Management Programs:
(i) Per Card Fee-On a per card issued basis
CARD QUANTITY LICENSE CHARGE PER CARD
- ------------------------ -----------------------
1 - 1,000,000 U.S.$0.70
1,000,001 - 2,000,000 0.45
2,000,001 - 3,000,000 0.25
3,000,001 - 4,000,000 0.15
4,000,001 - ABOVE 0.10
(ii) A minimum royalty will be paid to Netsmart based on the issuance
of 1,000,000 cards. "Issuance" shall include the issuance or reissuance of
cards which are intended or capable of use by the Licensed Programs, for any
reason other than due to the fault of Netsmart. Such royalty shall be paid to
Netsmart in twelve (12) equal monthly installments over the twelve (12) month
period from the Acceptance Date of the Licensed Programs or any part thereof
pursuant to paragraph 9 of this Agreement. The first installment shall be paid
within thirty (30) days after such Acceptance Date and the remaining
installments shall be paid on the following eleven (11) monthly anniversary
dates of the Acceptance Date.
(iii) After the first 1,000,000 cards have been issued Licensee shall
pay, on a calendar quarterly basis, the royalty set forth in the schedule in
paragraph I(b)(i) above based on the cumulative number of cards issued from
the date on which cards are first issued with respect to which royalties are
payable up to the end of the calender quarter concerned. Such royalty shall be
paid by Licensee within forty five (45) days after the end of each calendar
quarter and shall be accompanied by a royalty statement certified by the Chief
Financial Officer of Licensee.
(iv) Netsmart shall have the right to audit, through an independent
Certified Public Accountant retained at its expense, the applicable records of
Licensee in order to verify the statements rendered hereunder. Such audit may
be conducted after proper notice to Licensee and shall be conducted during
regular business hours at Licensee's office. In no event shall an audit with
respect to any royalty statement commence later than eighteen (18) months from
the date of the statement involved, nor shall audits be made hereunder more
frequently than annually. In the event such report finds that royalties have
been understated by ten (10%) percent or more, Licensee shall pay for the cost
of such audit.
(c) Royalty for the IST/Share Programs:
(i) For each ATM unit networked to the Hardware
<PAGE> 242
ATM QUANTITY LICENSE CHARGE PER ATM
- ------------------- ----------------------
1 - 1,000 U.S. $500.00
15
1,001 - 2,000 300.00
2,001 - 3,000 150.00
3,001 - ABOVE 75.00
(ii) A minimum royalty will be paid to Netsmart based on the
installation of 1,500 units. Such royalty shall be paid to Netsmart
concurrently with the payment of the guaranteed royalties for cards set forth
in paragraph I(b)(ii) above.
(iii) After the first 1,500 units have been installed Licensee shall
pay, on a calendar quarterly basis, the royalty set forth in the schedule in
paragraph I(c)(i) above based on the cumulative number of ATMs installed from
the date of installation of the first ATM up to the end of the calender
quarter concerned. Such royalty shall be paid by Licensee within forty five
(45) days after the end of each calendar quarter and shall be accompanied by a
royalty statement certified by the Chief Financial Officer of Licensee.
(iv) Netsmart shall have the right to audit, through an independent
Certified Public Accountant retained at its expense, the applicable records of
Licensee in order to verify the statements rendered hereunder. Such audit may
be conducted after proper notice to Licensee and shall be conducted during
regular business hours at Licensee's office. In no event shall an audit with
respect to any royalty statement commence later than eighteen (18) months from
the date of the statement involved, nor shall audits be made hereunder more
frequently than annually. In the event such report finds that royalties have
been understated by ten (10%) percent or more, Licensee shall pay for the cost
of such audit.
(d) Maximum Royalties
The maximum amount of royalties payable pursuant to Section I(b) and I(c) for
the use of the first copy of the Host Licensed Programs shall be a total of
Four Million Four Hundred Thousand Dollars ($4,400,000). Royalties in excess
of Four Million Four Hundred Thousand Dollars ($4,400,000) shall be paid only
pursuant to Section IX below.
II. STARTUP SERVICES
Netsmart shall bill on a bi-weekly basis for all Startup Services performed at
the billing rates set forth in Schedule 2(h). Such invoices shall be paid by
Licensee within ten (10) days after they are rendered. In the event Licensee
disputes any portion of the bill it shall pay the undisputed portion within
such ten (10) day period and the remainder after the dispute is resolved. Each
invoice shall be accompanied by a schedule showing the Netsmart staff
performing the Startup Services and the number of days of Startup Services
rendered by each of them.
III. DEVELOPMENT SERVICES PAYMENT - $390,000
$322,000 of the Development Services Payment has been paid prior to the
execution of this Agreement. The remainder of $68,000 shall be paid upon
acceptance of the Licensed Programs as set forth in paragraph 9 of the
Agreement.
<PAGE> 243
IV. INSTALLATION SERVICES PAYMENT
Included in I(b) and (c) above.
V. TRAVEL AND LIVING EXPENSES
To be charged at most economic rates and billed monthly for
16
expenses incurred in providing Services hereunder.
VI. SUPPORT SERVICES
(a) Charges for Support Services for the Netsmart Card Management Programs
are $60,000 per annum plus $4,000 per annum for each multiple of 200 branch
bank processors or part thereof on which Licensed Programs are installed.
(b) Support Services for the Oasis Technology Limited Third Party Programs
are $60,000 per annum plus $4,000 per annum for each multiple of 200 branch
bank processors or part thereof on which Licensed Programs are installed.
(c) Support Services for the Product Technology Inc. Third Party Programs
is $120 per annum for each of the first 500 point of sale devices installed by
Licensee's customers, $30 per annum for each of the next 4,500 such point of
sale devices, $12 per annum for each of the next 50,000 point of sale devices,
$9.50 per annum for each of the next 50,000 point of sales devices, and $7 per
annum for all point of sale devices in excess of 105,000.
(d) The amounts set forth in paragraphs (b) and (c) above shall be paid
quarterly within forty-five (45) days after the end of each calendar quarter,
and shall be accompanied by a statement of the bank branch processors and the
number of installed point of sale devices, certified by an officer of
Licensee.
(e) Netsmart shall have the right to increase the annual charges for
Support Services set forth above and in paragraph IX(d) as of the first
anniversary of the Acceptance Date, by the cost of living for the New York
metropolitan area as determined by the United States Department of Labor for
the calendar year ending prior to such anniversary date. Such increases may be
made on an annual basis commencing with the first anniversary date of the
Acceptance Date. Netsmart shall give Licensee notice of any such increase
within forty-five (45) days after such anniversary date.
(f) Netsmart shall have the right to audit, through an independent
Certified Public Accountant retained at its expense, the applicable records of
Licensee in order to verify the statements rendered hereunder. Such audit may
be conducted after proper notice to Licensee and shall be conducted during
regular business hours at Licensee's office. In no event shall an audit with
respect to any royalty statement commence later than eighteen (18) months from
the date of the statement involved, nor shall audits be made hereunder more
frequently than annually. In the event such report finds that royalties have
been understated by ten (10%) percent or more, Licensee shall pay for the cost
of such audit.
VII. ADDITIONAL SERVICES
Additional services are available upon request on a time and materials basis,
at Netsmart's then current daily rate charged to other clients, payable
<PAGE> 244
fifteen (15) days after billing. Netsmart's current daily rate is $1,000 per
day.
VIII. COMMUNICATION CHARGES
The Charges do not include costs of tele-communication between Netsmart's
computer and Licensee's computer which will be billed monthly, at Netsmart's
actual charges by the tele-communication carrier concerned.
17
IX. ADDITIONAL HOST LICENSED PROGRAMS
Licensee shall have the right to install additional copies of the Host
Licensed Programs on CPUs other than on the Licensee's production CPU and
backup CPU which are located in New York City. Netsmart will allow Licensee
two options to in this regard:
(a) a license fee of $200,000 per additional processor for each of the
first and second additional copies of the Host Licensed Programs; a license
fee of $150,000 for each of the third and fourth copies of the Host Licensed
Programs; and a license fee of $100,000 for each additional Host Licensed
Program after the fifth license. If multiple processors and multiple copies of
the Host Licensed Programs are located at one site, a license would be
required for each copy of the Host Licensed Programs; or
(b) a license fee which would give Licensee the right to have an unlimited
number of processing sites using multiple copies of the Host Licensed Programs
based on a change in the per ATM charge. The revised pricing would be:
ATM Quantity License Charge Per ATM
- -------------------- ----------------------
1 - 1,000 US $ 1,000
1,001 - 2,000 $ 600
2,001 - 3,000 $ 300
3,001 - above $ 150
(c) As of the date of this Agreement, Licensee will be deemed to have
elected the option set forth in IX(a) above. Licensee shall have the right to
elect the second option set forth in IX(b) above by giving written notice to
Netsmart at any time prior to the eighteenth (18th) monthly anniversary date
of this Agreement.
(d) Support Services are not included in either of the above options. The
maintenance charge for the first copy of the Oasis Technology Ltd. Third Party
Programs is $60,000 a year as provided in paragraph VI(b) above. The charge
for additional copies, would be $30,000 for each of the next three (3) sites
at which one or more additional copies of the Oasis Technology Ltd. Third
Party Programs are installed and $15,000 for each additional site at which one
or more copies of the Oasis Technology Ltd. Third Party Programs are
installed. Charges for additional copies of the Netsmart Card Management
Programs shall be the same as those for the Oasis Technology Ltd. Third Party
Programs.
18
<PAGE> 245
SCHEDULE 2(m)
IMPLEMENTATION PLAN
The following is the delivery plan for the implementation of the System. The
cost of implementation in the FSU is not included in the license or services
prices included in this Agreement. CSMC would be willing to provide
implementation resources and services at a daily cost of $1,000 to $1,500 plus
expenses. The delivery plan is separated in Phase 1 and Phase 2. The delivery
dates for each of the two phases would be mutually determined and agreed to
between CSMC and Licensee:
Phase 1 delivery is as follows:
1. Installation of the Central Authorization Host in New York with the
following features as specified in Functional Specifications:
IST Software on Oracle Relational Database Management System running on
IBM RS 6000.
SmartCity Central Management System (CMS) on Sybase Relational Database
Management System running on SCO UNIX Platform and interfaced to IST.
CA MasterPiece 2000 General Ledger on Oracle Relational Database
Management System running on IBM RS 6000 and interfaced to IST.
Liquidity Management System against the Subscriber Banks on the IBN
Network.
Racal RG 7400 Host Security Module (HSM) interfaced to IST.
Security Access Module (SAM) interfaced to SmartCity for single Bank
Identification Number (BIN).
Interface to the Subscriber Bank Branch Platform in FSU via TCP/IP
Protocol.
File output in DataCard 9000 format for SmartCard manufacture.
2. Delivery of the applications for the Subscriber Bank Branch Platform in FSU
with the following features as described in Functional Specifications:
19
Data Entry software for generation, tracking and management of Card
Application from a PC Workstation.
Interface via TC500 protocol and Diebold 911/912 Emulation to IBM ATM
Model 4783 to provide the following transactions using the Smart Card:
Fast Cash Withdrawal from the Electronic Transaction Account (ETA) at
the Central Authorization Host in New York
Variable amount Withdrawal from the Electronic Transaction Account (ETA)
at the Central Authorization Host in New York
Balance Inquiry on the Electronic Transaction Account (ETA) at the
Central Authorization Host in New York
<PAGE> 246
History Inquiry (Last Ten Transaction) on the Electronic Transaction
Account (ETA) at the Central Authorization Host in New York
Interface via serial connection to the Branch POS (BPOS) Terminal to
provide the following transactions using the Smart Card:
Initial PINing of Customer Card (card Activation)
PIN Change Transaction
Unlocking of Purses on Smart Card
Crediting of any of four Purses (Purse 1= Russian Rouble; Purse 2 =
US Dollars; Purse 3 = Ukrainian Karbovanet and Purse 4 = Any other
currency) from the Electronic Transaction Account (ETA) at the
Central Authorization Host in New York
Purse Balance Inquiry on any of the four Purses
Downloading of merchant transactions from the Merchant Transaction
Transport Card (MTTC)
20
Uploading of hot card list to the Merchant Hot List Card (MHLC)
Interface to the Central Authorization Host in New York by VSAT via
TCP/IP Protocol
3. Delivery of the applications for the Merchant POS terminal with the
following features as specified in Functional Specifications:
Merchant POS (MPOS) Application to run on the Verifone Omni 395
Terminal, SC 450 PIN Pad and P250 Printer. The MPOS will perform the
following transactions:
Debit Purse (one of four purses) after Purchase Transaction
Purse Balance Inquiry on four purses
Generation of Transaction Report
Change Language
Print Duplicate Receipt
Print Last Transaction
Register Operator
Change Operator Password
Operate in Debug Mode
Download merchant transaction to Merchant Transaction Transport Card
(MTTC)
Upload hot card list from Merchant Hot List Card (MHLC)
<PAGE> 247
Maintain at least one backup files of merchant transactions
Phase 2 delivery is as follows:
1. Installation of additional software at the Central Authorization Host in
New York with the following features as specified in Functional
Specifications:
Multiple currency tables to handle Currency Exchange
21
Inquiry Transaction at the ATM
SmartCity Central Management System (CMS) on Oracle Relational Database
Management System running on RS 6000 Platform and interfaced to IST.
SmartCity Central Management System (CMS) to address up to eight purses
Security Access Module (SAM) interfaced to SmartCity for multiple Bank
Identification Numbers (BINs).
2. Delivery of additional applications for the ATM in FSU with the following
features as specified in Functional Specifications:
Variable amount Withdrawal by a Foreign Cardholder
Credit Purse from the Electronic Transaction Account (ETA) at the
Central Authorization Host in New York
Credit Electronic Transaction Account (ETA) at the Central Authorization
Host in New York from designated Purse (Debit Purse)
Purse Balance Inquiry on any of the eight Purses
Transfer Funds from Purse to Purse
Currency Exchange Rate Inquiry for up to ten currencies against the home
currency
3. Delivery of additional applications for the Branch POS in FSU with the
following features as specified in Functional Specifications:
Crediting of any of eight Purses from the Electronic Transaction Account
(ETA) at the Central Authorization Host in New York
Purse Balance Inquiry on any of the eight Purses
Transfer Funds from Purse to Purse (eight purses)
Credit Electronic Transaction Account (ETA) at the Central Authorization
Host in New York from of the designated eight Purses (Debit Purse)
22
4. Delivery of the additional applications for the Merchant POS terminal with
the following features as specified in Functional Specifications:
Debit Purse (one of eight purses) after Purchase Transaction
<PAGE> 248
Purse Balance Inquiry on eight purses
23
<PAGE> 249
SCHEDULE 2(n)
SPECIFICATIONS
24
<PAGE> 250
SCHEDULE 2(p)
HARDWARE
HARDWARE DESCRIPTION
Host System - New York
IBM RS6000 Model J30
AIX Version 4.1.4
Oracle Version 7.2
Racal RG7000
Bank Branch
IBM RS6000 Model 43P
AIX Version 4.1.4
IBM 4783 ATM (with TCS912)
Verifone Omni 395 POS Terminal
Verifone SC450 PIN Pad
Verifone P250 Printer
Merchant Location
Verifone Omni 395 POS Terminal
Verifone SC450 PIN Pad
Verifone P250 Printer
Smart Card
Gemplus PCOS 1K Card
25
<PAGE> 251
SCHEDULE 2(r)
STATES OF THE FORMER SOVIET UNION
Armenia
Azerbaijan
Belarus
Estonia
Georgia
Kazakistan
Kyrgistan
Latvia
Lithuania
Moldova
Russia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
26
<PAGE> 252
Schedule 2(t)
The following are the applications features included in the Licensed Products
which constitute Licensed Program Enhancements as of the date of this
Agreement:
1. ATM Screens and Receipts as specified in the Functional Specifications in
the following languages:
Armenian
Azerbaijani
Byelorussian
English
Estonian
Finnish
Georgian
German
Italian
Kazakh
Kyrgyz
Latvian
Lithuanian
Moldovan
Romanian
Russian
Spanish
Turkmenian
Ukrainian
Uzbek
27
<PAGE> 253
2. Liquidity Management System to manage Licensee Clearing and Settlement
Risks against Subscriber Banks who are members of the IBN Network.
3. Transaction Fees Schedule levied against the Cardholder accounts.
4. Discount Fees Schedule levied against the Merchants.
The Source Code of the above Licensed Program Enhancements shall belong to
Licensee to the extent that such Source Code is severable from the Source
Code of the Licensed Programs and can be used as independent programs.
28
<PAGE> 254
Schedule 3
Existing Agreements
AT&T
Citicorp
Dacom
DataCard
Data General
Digital Equipment
Diners
Discover
Electronic Data Systems
Europay
First Data Resources
Fujitsu
Jemplus
IBM
ICL
Information Technologies
MasterCard
NCR
Oracle
29
<PAGE> 255
Perot Systems
PSP
Pyramid
Sequent
Siemens-Nixdorf
Sun
Sybase
Unisys
Verifone
Visa
30
<PAGE> 256
Schedule 8(b)
Change Order Form
1. Requestor_________________________________
2. Description of Change (attach specification or detailed description if
appropriate)_____________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
3. Agreed Upon Cost_________________
4. Change in Implementation Plan (if any)_____________________________________
______________________________________________________________________________
______________________________________________________________________________
5. Date___________________
6. Signature:
IBN Netsmart
__________________________ ____________________
by by
31
<PAGE> 257
Schedule 15
Escrow Agreement
32
<PAGE> 258
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1
______________________________________________________________________________
Three Months Ended Years Ended
March 31, December 31,
_____________________ _________________________________
1996 1995 1995 1994 1993
_________ _________ _________ _________ _________
Net Income [Loss] $ 76,000 $ (558,000) $2,828,000)$(1,751,000) $ (433,000)
========= ========= ========= ========== =========
Net Income [Loss]
Per Share -
Note 1 $ .02 $ (.12) $ (.59) $ (.36) $ (.09)
========= ========= ========= ========= =========
Net Income [Loss]
Per Share -
Note 2 $ .01 $ (.10) $ (.51) $ (.31) $ (.08)
========= ========= ========= ========= =========
Note 1: Computed by dividing net loss by the weighted average number of
common shares (4,136,253) for all periods presented except the year ended
December 31, 1993 which is 4,077,753 common shares and adjusting such amounts
by items (i) and (ii) below. This results in 4,821,528 shares for all periods
presented except the year ended December 31, 1993 which is 4,763,028 shares.
(i) Assumes that 104,952 Stock Incentive Plan stock options, issued in
December 1995, outstanding at December 31, 1995 were exercised at the
beginning of 1993 and that all proceeds were used to purchase treasury stock
at $4.00 per common share resulting in a net increase in outstanding stock of
95,900 shares for all pension presented.
(ii) Assumes common stock warrants to purchase an aggregate of 1,178,750
common shares were exercised at the beginning of 1993 and that all proceeds
were used to purchase treasury stock at $4.00 per common share resulting in a
net increase in outstanding common stock of 589,375 shares for all periods
presented.
Note 2: Computed by dividing net loss by the weighted average number of
common shares (4,136,253) for all periods presented except for the year
December 31, 1993 which is 4,077,753 common shares and adjusting it by item
(i) to (v) below. This results in 5,632,981 shares for all period presented
except the year ended December 31, 1993 which is 5,574,481 shares.
(i) Assumes that 104,952 Stock Incentive Plan stock options, issued in
December 1995, outstanding at December 31, 1995 were exercised at beginning of
1993 and that all proceeds were used to purchase treasury stock at $4.00 per
common share resulting in a net increase in outstanding stock of 95,900 shares
for all periods presented.
<PAGE> 259
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1
______________________________________________________________________________
(ii) Assumes that 252,804 Stock Incentive Plan stock options, issued in
January 1995, outstanding at December 31, 1995 were exercised at the beginning
of 1993 and that the proceeds were used to purchase treasury stock at $4.00
per common share resulting in a net increase in outstanding of 238,142 shares
for all periods presented.
(iii) Assumes common stock warrants, issued at various times, to purchase
2,516,250 common shares were exercised at the beginning of 1993 and that all
proceeds were used to purchase treasury stock at $4.00 per common share
resulting in a net increase in outstanding stock of 1,258,125 shares of all
periods presented.
(iv) Assumes common stock warrants, issued at various times, to purchase
637,500 common shares were exercised at beginning of 1993 and that all
proceeds were used to purchase treasury stock at $4.00 per common share
resulting in a net decrease in outstanding stock of 159,375 shares for all
periods presented.
(v) Assumes that the following convertible preferred shares were converted
to common stock at the beginning of 1993 as follows:
Preferred Shares Conversion Rate Common Shares
________________ _______________ _____________
Series A Preferred 400 108.00 43,200
Series B Preferred 80 259.20 20,736
------
63,936
======
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AND THE STATEMENT OF OPERATIONS FILED AS PART OF THE
REGISTRATION STATEMENT REPORT ON FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH REGISTRATION STATEMENT ON FORM S-1.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 71,000
<SECURITIES> 0
<RECEIVABLES> 2,475,000
<ALLOWANCES> 146,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,474,000
<PP&E> 838,000
<DEPRECIATION> 502,000
<TOTAL-ASSETS> 7,674,000
<CURRENT-LIABILITIES> 6,311,000
<BONDS> 0
<COMMON> 41,000
0
0
<OTHER-SE> 447,000
<TOTAL-LIABILITY-AND-EQUITY> 7,674,000
<SALES> 0
<TOTAL-REVENUES> 2,560,000
<CGS> 1,898,000
<TOTAL-COSTS> 460,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126,000
<INCOME-PRETAX> 76,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 76,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 76,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
