<PAGE>
As filed with the Securities and Exchange Commission on August 1, 1996
Registration No. 333-2550
Securities and Exchange Commission
Washington, D.C. 20549
Amendment No. 2
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 Alexander Bienenstock, Esq.
Netsmart Technologies, Inc. Singer, Bienenstock, Zamansky,
Ogele & Selengut, LLP.
146 Nassau Avenue 40 Exchange Place; 20th floor
Islip, NY 11751 New York, NY 10005
(516) 968-2000 (212) 809-8550
Fax: (516) 968-2123 Fax: (212) 344-0394
<PAGE>
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 Cover Prospectus Cover Page
of Prospectus
2. Inside Front and Outside Bank Inside Cover Page, Back Cover Page
Cover Pages of Prospectus
3. Summary Information, Risk Factors Prospectus Summary, Risk Factors
and Ratio of Earnings to Fixed
Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page, Risk Factors, Underwriting
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 be Description of Securities
Registered
10. Interest of Named Experts and N.A.
Counsel
11. Information with Respect to the (a)-(c) Prospectus Summary, Business
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
Positionon Indemnification
for Securities Act Liabilities
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION DATED AUGUST 1, 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 $4,050,000
(footnotes on page 2)
The Units are being offered, subject to prior sale, when, as and if
delivered to and accepted by the Underwriter and subject to the approval of
certain legal matters by counsel and certain other conditions. The Underwriter
reserves the right to withdraw, cancel or modify the Offering and to reject any
order in whole or in part. It is expected that delivery of the certificates
representing the Common Stock and Warrants comprising the Units will be made
against payment therefor at the offices of the Underwriter at 2500 Westchester
Avenue, Purchase, New York 10577 on , 1996.
Monroe Parker Securities, Inc.
The date of this Prospectus is , 1996
<PAGE>
(footnotes from Cover Page)
(1) Excludes additional compensation to be received by the Underwriter in
the form of (a) a non-accountable expense allowance equal to 3% of the
gross proceeds of this Offering ($.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.
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>
(Continued from Cover Page)
PROSPECTUS SUBJECT TO COMPLETION DATED AUGUST 1, 1996
Netsmart Technologies, Inc.
800,000 Series B Common Stock Purchase 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") comprising such
Units, which are to be sold by certain selling stockholders (the "Selling
Stockholders") of Netsmart Technologies, Inc. (the "Company"), are subject to a
one-year unconditional lock-up and, accordingly, may not be transferred during
the one-year period commencing on the date of this Prospectus. During the month
following the expiration of such one-year period, such securities may be sold by
the Selling Stockholders only with the consent of Monroe Parker Securities,
Inc., the underwriter (the "Underwriter") of the Company's initial public
offering. 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 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) during 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.
(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
<PAGE>
(Continued from Cover Page)
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 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 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>
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 --
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 the assets of Old 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. As a result of the
acquisition, the Company's principal business became the sale and license of
health information systems and related services. Following the acquisition, the
Company continued the development of its CarteSmart System software, and, during
the period from the summer of 1994 until mid 1995, it developed certain
enhancements to its health information systems.
An initial version of the Company's CarteSmart technology was first
used in a pilot program in Europe in 1993 by an affiliate of a health insurer in
The Netherlands. 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.
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<PAGE>
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.
The Company has an agreement 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. 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 June 30, 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.
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. Prior to the acquisition of the assets of Old CSM,
Old CSM was engaged in the business in which it is presently engaged, which is
health care systems and related services. The Company's executive offices are
located at 146 Nassau Avenue, Islip, New York 11751, telephone (516) 968-2000.
As of July 29, 1996, approximately 75.7% 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 a proposed 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>
THE OFFERING
Securities Offered by
the Company: 562,500 Units at $8.00 per Unit. Each Unit
consists of two 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 by
Selling Security Holders: The Prospectus, with a different cover page,
relates to (i) the sale by SISC, Bridge Ventures,
Inc. ("Bridge Ventures") and Saggi Capital Corp.
("Saggi"), (SISC, Bridge Ventures and Saggi, 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, subject to a one-year
unconditional lock-up. Accordingly, neither the
Units being offered by the Selling Stockholders
nor the securities comprising such Units may be
transferred during the one-year period commencing
on the date of this Prospectus. During the month
following the expiration of such one-year period,
such securities may be sold by the Selling
Stockholders only with the consent of the
Underwriter. 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.
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, 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 Warrants The Warrants are redeemable by the Company
commencing 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
- 5 -
<PAGE>
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.
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 Stock1
3,573,125 Series B Common Stock Purchase
Warrants ("Outstanding Warrants")(2)
As Adjusted(3):
5,786,253 shares of Common Stock1
812,500 Series A Common Stock Purchase
Warrants
3,573,125 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,
3,573,125 shares of Common Stock issuable pursuant to the Outstanding
Warrants, 43,200 shares of Common 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
1,667,500 shares of Common Stock at $2.00 per share and 1,895,625
shares of Common Stock at $4.00 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.
- 6 -
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION
Statement of Operations Data(1):
- --------------------------------
Three Months Ended March 31, Year Ended December 31,
---------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $2,560,000 $1,427,000 $7,382,000 $2,924,000 $ 57,000
Net (loss) 1,999,000 (558,000) (2,850,000) (1,751,000) (433,000)
Pro forma adjustments to expense(2) 45,000 684,000
Pro forma net (loss) (2,044,000) (3,534,000)
Pro forma (loss) per share
of Common Stock (.42) (.73)
Weighted average number
of shares outstanding(3) 4,821,528 4,821,528 4,821,528 4,821,528 4,763,028
Balance Sheet Data:
- -------------------
March 31, 1996 December 31,
------------------------------ ------------------------------
As Adjusted(4) Actual 1995 1994
-------------- ------------ ------------ ------------
Working capital (deficiency) $ 217,000 $(3,162,000) $(2,562,000) $(4,037,000)
Total assets 10,238,000 7,999,000 6,390,000 7,193,000
Total liabilities 6,275,000 7,415,000 5,887,000 6,342,000
Redeemable Preferred Stock -- 96,000 96,000 96,000
Accumulated deficit (8,826,000) (7,146,000) (5,147,000) (2,297,000)
Stockholders' equity(5) 4,013,000 488,000 407,000 755,000
Net tangible book value (deficiency)
per share of Common Stock(6) .09 (.73) (.74) (.94)
</TABLE>
(1) Statement of operations data includes the operations of CSM commencing
July 1, 1994.
(2) Reflects the effect on a pro forma basis for the three months ended March
31, 1996 and the year ended December 31, 1995 if certain additional
compensation payable after completion of this Offering were in effect for
such periods. See Notes 11 and 14 of Notes to Netsmart Technologies, Inc.
Consolidated Financial Statements.
(3) All shares of Common Stock issued prior to the date of this Prospectus are
treated as outstanding since inception.
(4) 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."
(5) Stockholders' equity includes $1,250,000 additional paid-in capital
relating to Preferred Stock.
(6) Excludes the amount allocated to the liquidation preferences of the Series
A and D Preferred Stock.
- 7 -
<PAGE>
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. The Company sustained losses of $2.0 million, or $.41 per
share, for the three months ended March 31, 1996, $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 $7.1 million. If
certain additional compensation expenses had been incurred during the three
months ended March 31, 1996 and the year ended December 31, 1995, the Company's
pro forma net loss for such periods would have been $2.0 million, or $.42 per
share, and $3.5 million, or $.73 per share, respectively. See Notes 11 and 14 of
Notes to Netsmart Technologies, Inc. Consolidated Financial Statements. The loss
for the quarter ended March 31, 1996, reflects a non-cash charge of $2.1 million
of compensation expense resulting from the issuance in February 1996 of
Outstanding Warrants at exercise prices below the market price on the date of
grant. See Note 5 of Notes to Netsmart Technologies, Inc. Consolidated Financial
Statements. The Company anticipates that, as a result of the April 1996 grant of
options at exercise prices below the fair market value at the date of grant, it
will incur a similar charge in the amount of $155,000. See Note 17 of Notes to
Netsmart Technologies, Inc. Consolidated Financial Statements. 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.
Substantially all of the Company's revenue through December 31, 1995
and 63.2% of its revenue during the three months ended March 31, 1996, 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 $3.2 million. The Company's assets at March 31, 1996
include intangible assets of $4.0 million relating to customer lists purchased
as part of the acquisition of Old CSM ($3.4 million) and the SATC Software
($650,000). 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 these assets, which represent
approximately 50.2% 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 and to generate revenue from applications using
the SATC Software.
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.
- 8 -
<PAGE>
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.
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 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 $850,000 at July 18, 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 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 a proposed 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 proposed agreement also
contemplates payment of 6% of smart card and related revenues generated by the
Company. Pursuant to an agreement with SMI, 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."
- 9 -
<PAGE>
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."
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. A pilot program is designed to
prove the technology without any commitment by the contracting party to the full
implementation of the program. 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 third quarter of 1996, and the Company has an agreement with IBN to
develop a CarteSmart System based installation, for which the initial module was
delivered in May 1996. 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 June 30, 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
- 10 -
<PAGE>
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."
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,
totalling 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 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 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's view that the complaint is without merit is based on the
difference in the technology used in the Onecard software and the Company's
CarteSmart software and the type of computer network on which the software
operates. 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.
- 11 -
<PAGE>
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 offer and promote smart card programs by which a person can have his
or her 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 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 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 arrangement 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. The
complaint seeks injunctive relief and damages, including punitive damages, of
$130 million based on various allegations, including
- 12 -
<PAGE>
appropriation of Onecard's trade secrets. The Company believes that the action
is without merit, and it will vigorously defend the action. The Company's view
that the complaint is without merit is based on the difference in the technology
used in the Onecard software and the Company's CarteSmart software and the type
of computer network on which the software operates. 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."
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 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 July 29, 1996, Holdings, the largest stockholder of the Company, owned
approximately 75.7% 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-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 July 18, 1996, the Company owed its asset-based lender
approximately $850,000 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, which was required by the lender
as a condition to making the loan, applies in the event that the lender incurs
losses are a result of an account receivable not being a bona fide receivable or
the Company failing promptly to pay over to the asset-based lender the proceeds
from receivables which are received by the Company. The Company does not believe
that any of its receivables are not bona fide.
- 13 -
<PAGE>
The Company has a proposed 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 contemplates 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.
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
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 July 29, 1996, 78.0% of the outstanding shares of Common
Stock were owned by Holdings (75.7%) 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 56.0% 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
835,000 shares of Common Stock at $2.00 per share and 650,000 shares of Common
Stock at $4.00 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.
- 14 -
<PAGE>
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 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
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.
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
- 15 -
<PAGE>
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 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 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. The Underwriter anticipates that it will be permitted
to sell the Units in the following states: California, Colorado, Connecticut,
Delaware, Florida, Georgia, Illinois, Kansas, Louisiana, Maryland, Michigan, New
York, Rhode Island and Utah. There is no assurance that, at the time a holder of
Warrants desires to exercise the Warrants, that such holder will reside in a
state in which the underlying Common Stock may be issued, even if the
Underwriter is able to sell the Units in such 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.
- 16 -
<PAGE>
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 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 1,667,500 shares of Common
Stock at an exercise price of $2.00 per share and 1,895,625 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 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 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.
- 17 -
<PAGE>
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.
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
-----
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."
- 18 -
<PAGE>
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.
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)
(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 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.
- 19 -
<PAGE>
(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 July 18, 1996, the outstanding balance due the asset-based
lender was $850,000.
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 proposed 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 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
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 -
<PAGE>
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.
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
========== ==========
(1) Represents demand loans made by ACT to the Company. See "Use of
Proceeds," "Certain Transactions" and Note 5 of Notes to Netsmart
Technologies, Inc. Consolidated Financial Statements.
- 21 -
<PAGE>
(2) Represents secured notes due to an asset-based lender, which are
guaranteed by officers of the Company. The amount outstanding on July
18, 1996 was $850,000. 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%. The note has been paid. 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) 3,573,125 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 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 (a) an increase of $1,680,000 in additional paid-in capital
and (b) an increase of $1,680,000 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 and the incurrence by the
Company of financing costs of $1,680,000.
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 -
<PAGE>
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.
Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31, September 9, 1992
---------------------------- ------------------------ (Inception) to
1996 1995 1995 1994 1993 December 31, 1992
---- ---- ---- ---- ---- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $2,560 $1,427 $7,382 $2,924 $ 57 $ --
Net (loss) (1,999) (558) (2,850) (1,751) (433) (113)
Pro forma adjustments
to expenses(1) 45 684
Pro forma net (loss) (2,044) (3,534)
Pro forma (loss) per
share of Common Stock (.42) (.73)
Weighted average
number of shares
outstanding 4,822 4,822 4,822 4,822 4,763 4,763
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
March 31, 1996 1995 1994 1993
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Working capital (deficiency) $(3,162) $(2,562) $(4,037) $(938)
Total assets 7,999 6,390 7,193 585
Total liabilities 7,416 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)
</TABLE>
(1) Reflects the effect on a pro forma basis for the three months ended
March 31, 1996 and the year ended December 31, 1995 if certain
additional compensation payable after completion of this Offering were
in effect for such periods. See Notes 11 and 14 of Notes to Netsmart
Technologies, Inc. Consolidated Financial Statements.
- 23 -
<PAGE>
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. In addition, the
Company is continuing to provide professional services to IBN, although revenues
from such services will decline from the level in the March 1996 period. 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. However, as a result
of the increase of revenue from SmartCard Systems, principally from IBN, revenue
from health information systems and services declined as a percentage of total
revenue. Except for revenue from the IBN contract, the largest components of
revenue for the March 1996 period were data center (service bureau) 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 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 increased proportion of higher margin revenue from
sales of the CarteSmart System as compared with lower margin sales of third
party hardware and software had a positive effect upon the Company's overall
gross margin.
- 24 -
<PAGE>
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 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 incurred noncash compensation
charges of $2.1 million arising out of the issuance by the Company of
Outstanding Warrants having exercise prices which were less than the market
value of the Common Stock at the date of approval by the board of directors. See
Note 5 of Notes to Netsmart Technologies, Inc. Consolidated Financial
Statements. The Company believes that the principal reason for the loss for the
March 1996 period was such $2.1 million compensation expense. Absent such
charge, the Company would have generated net income of $76,000 for the period.
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 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 incurred a net loss
of $2.0 million, or $.41 per share, for the March 1996 period, as compared with
a loss of $558,000, or $.12 per share, for the March 1995 period. If certain
additional compensation expenses had been incurred during the March 1996 period,
the pro forma net loss would have been $2.0 million, or $.42 per share. See
Notes 11 and 14 of Notes to Netsmart Technologies, Inc. Consolidated Financial
Statements.
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.
The Company is aware of a recently announced joint venture involving
Visa, MasterCard and certain major banks with respect to smart cards. See
"Business -- Competition." The Company believes that such venture is a pilot
program which
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is to demonstrate the capability of smart card technology, and that, if
successful, will result in increased competition in the financial services
industry as more companies seek to take advantage of smart card technology.
Although the Company is marketing its CarteSmart System to the financial
services market, except for the agreement with IBN, the Company does not have
any orders from companies in such market. However, no assurance can be given as
to the ability of the Company to market its products and services to such
market.
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 $90,000 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 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
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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 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 cancelled. No such expenses were incurred in 1994.
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. If certain additional compensation expenses were
incurred during the year, the pro forma loss would have been $3.5 million, or
$.73 per share. See Note 11 of Notes to Netsmart Technologies, Inc. Consolidated
Financial Statements.
In addition, at December 31, 1995 and 1994, the estimated profit
included in cost and estimated profit in excess of interim billings and interim
billings in excess of cost and estimated profit decreased substantially from
approximately $1.4 million to approximately $500,000. See Note 2 of Notes to
Netsmart Technologies, Inc. Consolidated Financial Statements. This decrease
reflected a reduction in the number of contracts that have billing schedules
which differ from revenue recognition. As a result of a reduced number of such
contracts at December 31, 1995, the estimated profits from such contracts
declined.
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
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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
At March 31, 1996, the Company had a working capital deficiency of
approximately $3.2 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 July 18, 1996, the outstanding borrowings under such facility were
$972,000 and $850,000, respectively. The
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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 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.
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 anticipates that the costs relating to its joint venture
with Oasis relating to the SATC Software, the Company will be covered by
business generated by the marketing of such software and related products and
services. The Company believes that the Company's share of the costs incurred by
such venture through June 30, 1996 was approximately $100,000. To the extent
that such costs are not covered by such sales, a portion of the proceeds of this
Offering allocated to working capital may be used for such purpose.
The Company's continuing obligations include a consulting agreement
with Trinity, pursuant to which the Company is to pay Trinity annual consulting
fees of $180,000, and a proposed agreement with SMI pursuant to which SMI is to
receive annual payments in the range of $300,000 to $684,000. The Company
anticipates that it will pay the fees to Trinity from operations. The Company
anticipates that the fees due to SMI will be generated by revenue from contracts
with parties introduced to the Company by SMI. The Company is presently
marketing its services to certain of such parties, although no agreements have
been signed and no assurance can be given that the Company will enter into any
agreements with any such parties or that any such contracts will be profitable
to the Company after giving effect to the payments due to SMI. However, to the
extent that the SMI relationship does not generate profitable business to the
Company, it can reduce the scope of activity
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so that its payments will be on the lower end of the compensation range.
Notwithstanding the foregoing, to the extent that the Company does not generate
sufficient revenue from operations to any obligations the Company has to Trinity
and SMI, a portion of the proceeds of this Offering allocated to working capital
may be used for such purposes.
The Company has agreements with certain officers and officers of
subsidiaries pursuant to which such persons are entitled to bonuses based the
Company's income before income taxes. The Company does not believe that its
liquidity will be adversely affected by such bonuses, since such bonuses are not
payable unless the Company generates income, and no assurance is given that the
Company can or will generate income. Although it is possible that income before
income taxes may exceed cash flow, for the short-term the Company does not
believe that any obligations to such individuals will have any impact upon its
liquidity. For 1996, the Company's income before income taxes will be affected
by non-cash charges, including (i) financing costs from the issuance of Units
and Common Stock to the holders of the January 1996 Interim Notes and the
Company's asset-based lender, (ii) compensation charges resulting from the
issuance of options at prices which are below the fair market value on the date
of grant and (iii) amortization of customer lists relating to the acquisition of
assets of Old CSM.
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. Although no such agreements are in
negotiations as of the date of this Prospectus, any agreements which the Company
may enter into may impact the Company's liquidity. However, the impact upon the
Company's liquidity or whether the impact will increase or decrease liquidity
over the short or long term cannot now be determined.
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 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.
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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."
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 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
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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 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 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
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and to the Albert Einstein School of Medicine. Although the pilot program in The
Netherlands was successful technically, the program was not expanded, because,
in the Company's opinion, the ability of the project to demonstrate that it
reduced costs was not satisfactorily proven under the system of insurance
reimbursement practices in The Netherlands. 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
continuing to provide consulting services in San Diego relating to a possible
expansion of CarteSmart program, and it is negotiating for an expansion of the
program to include all health services for the county. 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
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 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 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 more encompassing agreement with IBM, which
superseded the prior agreements, 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 agreement with Fiton pursuant to which
the SATC Software is to be acquired provides for royalty payments to Fiton based
on licenses of the SATC Software, with certain minimum royalties due in 2003.
The agreement also gives Fiton certain rights in Central America. 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 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
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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.
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.
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
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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.
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 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 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.
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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."
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.
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
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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 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 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. The Company believes that such venture is a pilot program to
demonstrate the capability of smart card technology, and that, if successful,
increased competition for smart card systems in the financial services industry
will result as more companies seek to take advantage of smart card technology.
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 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.
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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.
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 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. 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.
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<PAGE>
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 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
- 39 -
<PAGE>
subsidiaries of Consolidated. Mr. Schiller has held such positions for more than
the past five years. Since May 1995, Mr. 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.
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
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<PAGE>
of law, (iii) for any transaction from which the director derived an improper
personal benefit, or (iv) for certain conduct prohibited by law. The Certificate
of Incorporation also contains broad indemnification provisions. These
provisions do not affect the liability of any director under Federal or
applicable state securities' laws.
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.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation (Awards)
------------------- -------------------------------
Name and Principal Position Year Salary Bonus Restricted Stock Options, SARs
- --------------------------- ---- ---------- --------- ---------------- -------------
Awards (Dollars) (Number)
---------------- -----------
<S> <C> <C> <C> <C> <C>
Lewis S. Schiller, CEO 1995 --(1) -- -- 52,500
(through June 1994) 1994 --(1) -- -- --
1993 --(1) -- -- --
Leonard M. Luttinger, 1995 $125,000 -- -- 176,768
President 1994 113,390 -- -- 15,000(2)2
1993 110,423 $24,000 $4,065(3) --
Edward D. Bright, CEO of 1995 127,627 -- -- 38,768
CSM, CEO of the Company 1994 115,203 -- --(4) 15,000(2)
(from July 1994 to December 1993 104,507 -- -- --
1995)
John F. Phillips, chairman of 1995 123,900 -- -- 38,768
the board of CSM, vice 1994 108,416 -- --(4) 15,000(2)
chairman and vice president 1993 109,226 -- -- --
-- marketing
</TABLE>
(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.
- 41 -
<PAGE>
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 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 arrangement and a proposed 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 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
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<PAGE>
conditions. 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 fair value of the Common Stock was $3.20 on the date of grant, and, as a
result, during the quarter ending June 30, 1996, the Company will incur
compensation expense of $155,000. See Note 17 of Notes to Netsmart Technologies,
Inc. Consolidated Financial Statements.
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.
Option Grants in Last Fiscal Year
Percent of Total
Number of Shares Options Granted Exercise
Underlying to 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% .2323 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% .2323 1/31/00
18,710 3.1% .345 12/31/00
John F. Phillips 20,058 3.3% .2323 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 formally issued in February 1996. In
July 1996, pursuant to the warrant exchange described under "Certain
Transaction -- Issuance of Warrants," the exercise price of those
Outstanding Warrants having a $5.00 exercise price was reduced to
$4.00, and the 12,500 Outstanding Warrants with a $2.00 exercise price
were exchanged for Outstanding Warrants to purchase 18,750 shares of
Common Stock at $4.00 per share.
(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."
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<PAGE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options at Fiscal Options at Fiscal
Shares Year End Year End1
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
(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 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.
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<PAGE>
In June 1993, SISC transferred 4,253 shares to a nonaffiliated party.
During the period from November 1993 and March 1994, SISC transferred an
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 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 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
- 45 -
<PAGE>
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 July 17, 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 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 3,573,125
Outstanding Warrants, of which 1,667,500 are exercisable at $2.00 per share and
1,895,625 are exercisable at $4.00 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. Since the fair value of
the Common Stock on the date of board approval was $3.20 per share, the Company
incurred a compensation expense of $2.1 million as a result of the issuance of
Outstanding Warrants at $2.00 per share. See Notes 11 and 14 of Notes to
Netsmart Technologies, Inc. Consolidated Financial Statements. 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 has transferred Outstanding Warrants to purchase 700,417 shares of
Common Stock to Mr. Lewis S. Schiller (206,250 warrants), E. Gerald Kay (100,000
warrants), James Conway (25,000 warrants), two officers and one director of
Consolidated (156,667 warrants), SMI (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
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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. Bridge Ventures transferred Outstanding Warrants to purchase 67,500
shares of Common Stock at $2.00 per share and 67,500 shares of Common Stock at
$5.00 per share to Saggi, and SMACS transferred Outstanding Warrants to purchase
18,750 shares of Common Stock at $2.00 per share and 93,750 shares of Common
Stock at $5.00 per share to Saggi. As a result of such transfers, Saggi holds
Outstanding Warrants to purchase 86,250 shares of Common Stock at $2.00 and
161,250 shares of Common Stock at $5.00 per share. See "Selling Security
Holders."
In July 1996, pursuant to a warrant exchange, (a) the holders of
Outstanding Warrants having a $2.00 exercise price exchanged one third of such
warrants for Outstanding Warrants to purchase, at an exercise price of $4.00 per
share, 150% of the number of shares of Common Stock issuable upon exercise of
the Outstanding Warrants that were exchanged, and (b) the exercise price of the
Outstanding Warrants having a $5.00 exercise price was reduced to $4.00. Prior
to the warrant exchange, there were Outstanding Warrants to purchase 2,516,250
shares of Common Stock at $2.00 per share and Outstanding Warrants to purchase
637,500 shares of Common Stock at $5.00 per share outstanding. As a result of
the warrant exchange, there are Outstanding Warrants to purchase 1,677,500
shares of Common Stock at $2.00 per share and 1,895,625 shares of Common Stock
at $4.00 per share.
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.
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
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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. Trinity's business is providing management
and related services, including services relating to the structure or
restructure of an organization, for companies which are affiliated with
Consolidated as well as non-affiliated entities.
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 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.
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. The Company has a proposed
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
contemplates 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. Such commissions, if received, could be paid by smart card vendors and
certain equipment vendors in connection with smart card based programs. Those
instances in which SMI would receive 100% of the commissions are expected to
relate to certain limited circumstances in which SMI introduced both the client
and the equipment vendor to the Company. SMI has experience in the development,
marketing and sales of advanced electronic financial transaction processing
systems for point of sale applications, including automated teller machines.
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.
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 $850,000 at March 31, 1996 and July 18, 1996, respectively.
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As of June 30, 1996, SISC transferred 25,000 shares and 75,000 shares
of Common Stock to Messrs. James L. Conway, president of the Company, and Storm
R. Morgan, a director of the Company. Such shares were transferred in respect of
services rendered by such individuals to affiliates of Consolidated other than
the Company, 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."
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 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
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<PAGE>
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 July 29, 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) 3,232,758 78.0% 56.0%
160 Broadway
New York, NY 10038
SIS Capital Corp.(4) 3,132,758 75.7% 54.3%
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
Storm R. Morgan(8) 75,000 1.8% 1.3%
E. Gerald Kay(9) 52,920 1.3% *
James L. Conway(10) 25,000 * *
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)
* Less than 1%.
(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 July 29, 1996. Information as to ownership of Outstanding Warrants
by each person named in the table is set forth in the footnotes.
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(3) Includes (a) 100,000 shares of Common Stock owned by Mr. Schiller, (b)
3,122,390 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 835,000 shares of Common Stock at
$2.00 per share and 650,000 shares of Common Stock at $4.00 per share,
and Mr. Schiller holds Outstanding Warrants to purchase 66,667 shares
of Common Stock at $2.00 per share and 102,500 shares of Common Stock
and $4.00 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 July 29, 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 July 29, 1996 would be
3,472,358, or 83.7% of the outstanding shares of Common Stock at such
date, and 60.2% as adjusted.
(4) Includes (a) 3,122,390 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 835,000 shares of Common Stock at $2.00 per share and
650,000 shares of Common Stock at $4.00 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 70,833 shares of
Common Stock at $2.00 and 53,126 shares of Common Stock at $4.00 per
share owned by DLB.
(6) Includes 4,029 shares of Common Stock issuable upon exercise of
outstanding options. In addition, Mr. Luttinger owns Outstanding
Warrants to purchase 25,000 shares of Common Stock at $2.00 per share
and 131,250 shares of Common Stock at $4.00 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) Mr. Morgan holds Outstanding Warrants to purchase 150,000 shares of
Common Stock at $2.00 per share and 112,500 shares of Common Stock at
$4.00 per share, and SMI, of which Mr. Morgan is sole stockholder and
an officer and director, owns outstanding Warrants to purchase 41,667
shares of Common Stock at $2.00 per share and 31.250 shares of Common
Stock at $4.00 per share.
(9) 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 66,667 shares of Common
Stock at $2.00 per share and 50,000 shares of Common Stock at $4.00 per
share.
(10) Mr. Conway holds Outstanding Warrants to purchase 100,000 shares of
Common Stock at $2.00 per share and 168,750 shares of Common Stock at
$4.00 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, Bridge Ventures and Saggi, 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
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to expire unexercised. The Outstanding Warrants have an exercise price of $2.00
per share. SISC may exercise 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 835,000 shares of Common
Stock at $2.00 per share and 650,000 shares of Common Stock at $4.00 per share.
Bridge Ventures owns Outstanding Warrants to purchase 45,000 shares of Common
Stock at $2.00 per share and 101,250 shares of Common Stock at $4.00 per share.
In addition, SMACS Holdings, Inc. ("SMACS"), an affiliate of Bridge Ventures,
holds Outstanding Warrants to purchase 12,500 shares of Common Stock at $2.00
per share and 103,125 shares of Common Stock at $4.00 per share, and Mr. Harris
Freedman, an officer of Bridge Ventures and SMACS, owns 47,736 shares of Common
Stock. Saggi owns Outstanding Warrants to purchase 57,500 shares of Common Stock
at $2.00 per share and 204,375 shares of Common Stock at $4.00 per share. Ms.
Sharon Will, an officer of Saggi, owns 7,079 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.
Amount and Nature Shares
Name and of Beneficial Being Percent of Ownership
Address Ownership Offered Outstanding As Adjusted
- ------- ----------------- --------- ----------- -----------
SIS Capital Corp. 4,617,758(1) 750,000 63.4% 53.1%(2)
160 Broadway
New York, NY 10038
Bridge Ventures, Inc. 149,250(3) 25,000 2.5% 2.1%
545 Madison Avenue
New York, NY 10022
Saggi Capital Corp. 386,125(4) 25,000 6.3% 5.8%
208 East 51st Street
New York, New York 10022
(1) Includes (a) 1,485,000 shares of Common Stock issuable upon exercise of
the Outstanding Warrants, (b) 3,122,390 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."
(2) If the over-allotment option is exercised in full, SISC's percent of
ownership on an as adjusted basis would be 51.9%.
(3) Represents 149,250 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.
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(4) Represents 386,125 shares of Common Stock issuable upon exercise of
Outstanding Warrants owned by Saggi. Shares owned by Saggi do not
include securities owned by Ms. Sharon Will, who is an officer of
Saggi.
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 Units and the Common Stock
and Warrants comprising the Warrants being offered by the Selling Stockholders
are subject to a one-year unconditional lock-up and, accordingly, may not be
transferred by the Selling Stockholders during the one-year period commencing on
the date of this Prospectus. During the month following the expiration of such
one-year period, such securities may be sold by the Selling Stockholders only
with the consent of the Underwriter. They have further agreed that, during the
13-month period commencing on the date of this Prospectus, 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
(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.
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).
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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. 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 July 29, 1996, there were
reserved for issuance 3,573,125 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.
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
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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
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 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 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
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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.
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, 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
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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 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.
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 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.
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Series B Common Stock Purchase Warrants
As of the date of this Prospectus, there were Outstanding Warrants to
purchase 1,667,500 shares of Common Stock at $2.00 per share and 1,895,625
shares of Common Stock at $4.00 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 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.
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 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 of
the Common Stock. 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.
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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.
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.
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. If the Underwriter's
Options are transferred subsequent to the one-year period commencing on the date
of this Prospectus, they must be immediately exercised and, if not so exercised,
they will terminate. 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
of the Company with respect to securities underlying the Underwriter's Options.
The holders of the Underwriter's Options have
- 59 -
<PAGE>
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 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.
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.
- 60 -
<PAGE>
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 Moore Stephens, 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. On July 1, 1996, the firm of Mortenson and Associates, P.C. changed
its name to Moore Stephens, P.C.
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 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.
- 61 -
<PAGE>
[This page intentionally left blank]
- 62 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page to Page
Netsmart Technologies, Inc.
Independent Auditor's Report F-3
Balance Sheets F-4 -- F-6
Statements of Operations F-7 -- F-8
Statements of Stockholders' Equity F-9
Statements of Cash Flows F-10 -- F-11
Notes to Financial Statements F-12 -- F-29
Creative Socio-Medics Corp.
Report of Independent Auditors F-30
Statements of Operations F-31
Statement of Changes in Capital (Deficiency) F-32
Statements of Cash Flows F-33 -- F-34
Notes to Financial Statements F-35 -- F-36
F-1
<PAGE>
[This page intentionally left blank]
F-2
<PAGE>
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>
NETSMART TECHNOLOGIES, INC.
BALANCE SHEETS
March 31, December 31,
---------- ------------
1 9 9 6 1 9 9 5 1 9 9 4
---------- ---------- ----------
[Consolidated] [Consolidated] [Combined]
[Unaudited]
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
Software 650,000 -- --
Other Assets 61,000 60,000 60,000
--------- ---------- ----------
Total Other Assets 4,189,000 3,502,000 4,586,000
--------- ---------- ----------
Total Assets $7,999,000 $6,390,000 $7,193,000
========== ========== ==========
See Notes to Financial Statements.
F-4
<PAGE>
NETSMART TECHNOLOGIES, INC.
BALANCE SHEETS
March 31, December 31,
---------- ------------
1 9 9 6 1 9 9 5 1 9 9 4
---------- ---------- ----------
[Consolidated] [Consolidated] [Combined]
[Unaudited]
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 1,459,000 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 6,636,000 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>
NETSMART TECHNOLOGIES, INC.
BALANCE SHEETS
March 31, December 31,
1996 1995 1994
---------- ---------- ----------
[Consolidated] [Consolidated] [Combined]
[Unaudited]
Total Current Liabilities - Forwarded $6,636,000 $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 Issued
and Outstanding [Liquidation
Preference of $2,210 and $1,210]
at December 31, 1995 and March 31,
1996, Respectively -- -- --
<PAGE>
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
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 6,343,000 3,274,000 3,001,000
Accumulated Deficit (7,146,000) (5,147,000) (2,297,000)
----------- ----------- -----------
Total Stockholders' Equity 488,000 407,000 755,000
----------- ----------- -----------
Total Liabilities and Stockholders'
Equity $ 7,999,000 $ 6,390,000 $ 7,193,000
============ ============ ===========
See Notes to Financial Statements.
F-6
<PAGE>
NETSMART TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Years ended
March 31, December 31,
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- ----------
[Consolidated] [Combined] [Consolidated] [Combined]
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C> <C>
Revenues:
Software and Related Systems and Services:
General $ 1,790,000 $ 755,000 $ 4,541,000 $ 1,539,000 $ 57,000
Maintenance Contract Services 289,000 252,000 1,099,000 501,000 --
----------- ----------- ----------- ----------- ---------
Total Software and Related Systems and Services 2,079,000 1,007,000 5,640,000 2,040,000 57,000
Data Center Services 481,000 420,000 1,742,000 884,000 --
----------- ----------- ----------- ----------- ---------
Total Revenues 2,560,000 1,427,000 7,382,000 2,924,000 57,000
----------- ----------- ----------- ----------- ---------
Cost of Revenues:
Software and Related Systems and Services:
General 1,469,000 711,000 3,986,000 1,669,000 20,000
Maintenance Contract Services 144,000 192,000 743,000 449,000 --
----------- ----------- ----------- ----------- ---------
Total Software and Related Systems and Services 1,613,000 903,000 4,729,000 2,118,000 20,000
Data Center Services 285,000 207,000 889,000 416,000 --
----------- ----------- ----------- ----------- ---------
Total Cost of Revenues 1,898,000 1,110,000 5,618,000 2,534,000 20,000
----------- ----------- ----------- ----------- ---------
Gross Profit 662,000 317,000 1,764,000 390,000 37,000
Selling, General and Administrative Expenses 455,000 593,000 2,480,000 1,495,000 358,000
Related Party Administrative Expenses 5,000 4,000 18,000 19,000 18,000
Compensation [Note 5] 2,075,000 -- -- -- --
Research and Development -- 156,000 699,000 367,000 --
----------- ----------- ----------- ----------- ---------
Loss from Operations (1,873,000) (436,000) (1,433,000) (1,491,000) (339,000)
Financing Costs -- -- 863,000 -- 7,000
Interest Expense 126,000 70,000 355,000 71,000 87,000
Related Party Interest Expense -- 52,000 199,000 189,000 --
----------- ----------- ----------- ----------- ---------
Net Loss [Continued]: Historical - Forward $(1,999,000) $ (558,000) $(2,850,000) $(1,751,000) $(433,000)
=========== =========== =========
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
NETSMART TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Years ended
March 31, December 31,
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- ----------
[Consolidated] [Combined] [Consolidated] [Combined]
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C> <C>
Net Loss [Continued]: Historical - Forwarded $(1,999,000) $ (558,000) $(2,850,000) $(1,751,000) $(433,000)
=========== =========== =========
Pro Forma Adjustments to Expense [Notes 11 and 14C] 45,000 684,000
----------- -----------
Pro Forma Net Loss $(2,044,000) $(3,534,000)
=========== ===========
Pro Forma Loss Per Share $ (.42) $ (.73)
=========== ===========
Number of Shares of Common Stock 4,821,528 4,821,528
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE>
NETSMART TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series D Additional Common Stock $.01 Additional
Prfd Stock Prfd Stock Paid-in Par Value Auth- Paid-in Total
at .01 at .01 Capital orized 15,000,000 Capital Stock-
Par Value Par Value Preferred Shares Common Accumulated holders'
Shs Amnt Shs Amnt Stock Shs Amnt Stock Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1992 400 $ -- -- $ -- $ 40,000 967,467 $ 10,000 $ 3,000 $ (113,000) $(60,000)
Common Stock issued as part of
units for cash in January 1993 -- -- -- -- -- 4,536 -- 1,000 -- 1,000
Common Stock Transferred by SISC
in connection with interim notes
in October and November 1993 -- -- -- -- -- -- -- 7,000 -- 7,000
Common Stock Issued for Debt in
October 1993 -- -- -- -- -- 78,000 1,000 17,000 -- 18,000
Allocated Related Party Administrative
Expenses -- -- -- -- -- -- 18,000 -- 18,000 --
Net Loss -- -- -- -- -- -- -- -- (433,000) (433,000)
--- ---- ----- ---- ---------- --------- -------- ---------- ----------- ---------
Balance - December 31, 1993 400 -- -- -- 40,000 1,050,003 11,000 46,000 (546,000) (449,000)
Allocated Related Party Administrative
Expenses -- -- -- -- -- -- -- 19,000 -- 19,000
Combination with CSM -- -- -- -- -- -- -- 2,936,000 -- 2,936,000
Net Loss -- -- -- -- -- -- -- -- (1,751,000)(1,751,000)
--- ---- ----- ---- ---------- --------- -------- ---------- ---------- ----------
Balance - December 31, 1994 [Combined] 400 -- -- -- 40,000 1,050,003 11,000 3,001,000 (2,297,000) 755,000
Allocated Related Party Administrative
Expenses -- -- -- -- -- -- -- 18,000 -- 18,000
Common Stock Issued to Affiliate -- -- -- -- -- 825,000 8,000 (8,000) -- --
Common Stock and Preferred Stock Issued
to Affiliate -- -- 2,210 -- 2,210,000 1,125,000 11,000 241,000 -- 2,462,000
Common Stock Issued to Officer for
Services -- -- -- -- -- 11,250 -- 22,000 -- 22,000
Net Loss -- -- -- -- -- -- -- -- (2,850,000)(2,850,000)
--- ---- ----- ---- ---------- --------- -------- ---------- ---------- ----------
Balance - December 31, 1995
[Consolidated] 400 -- 2,210 -- 2,250,000 3,011,253 30,000 3,274,000 (5,147,000) 407,000
Common Stock Issued in Exchange for
Series D Preferred Stock -- -- (1,000) -- (1,000,000) 1,125,000 11,000 989,000 -- --
Allocated Related Party Administrative
Expenses -- -- -- -- -- -- -- 5,000 -- 5,000
Compensation from the Issuance of Common
Stock Warrants -- -- -- -- -- -- -- 2,075,000 -- 2,075,000
Net Loss -- -- -- -- -- -- -- -- (1,999,000)(1,999,000)
--- ---- ----- ---- ---------- --------- -------- ---------- ---------- ----------
Balance - March 31, 1996 [Consolidated]
[Unaudited] 400 $ -- 1,210 $ -- $1,250,000 4,136,253 $ 41,000 $6,343,000 $(7,146,000) $488,000
=== ==== ===== ==== ========== ========= ======== ========== =========== ========
</TABLE>
See Notes to Financial Statements.
F-9
<PAGE>
NETSMART TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended Y e a r s e n d e d
March 31, D e c e m b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 5 1 9 9 4 1 9 9 3
------- ------- ------- ------- -------
[Consolidated] [Combined] [Consolidated] [Combined]
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net [Loss] $ (1,999,000) $ (558,000) $ (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 109,000 131,000 872,000 470,000 8,000
Financing Costs -- -- -- -- 7,000
Administrative Expenses 5,000 4,000 18,000 19,000 18,000
Additional Compensation 2,075,000 -- 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 (217,000) 636,000 (388,000) (369,000) --
Costs and Estimated Profits in
Excess of Interim Billings (640,000) (102,000) 87,000 (233,000) --
Other Current Assets (5,000) 10,000 10,000 45,000 4,000
Other Assets (1,000) -- -- (3,000) --
Increase [Decrease] in:
Accounts Payable 441,000 (384,000) 159,000 13,000 45,000
Accrued Expenses 136,000 350,000 935,000 199,000 16,000
Interim Billings in Excess of
Costs and Estimated Profits 270,000 (552,000) (217,000) 413,000 --
Accrued Payroll Taxes and
Related Expenses -- -- -- (276,000) 217,000
Due to Related Parties 65,000 209,000 496,000 1,629,000 314,000
Deferred Revenue (77,000) -- 141,000 -- --
--------------- ---------------- --------------- --------------- -------------
Total Adjustments 2,161,000 302,000 2,624,000 2,158,000 629,000
--------------- ---------------- --------------- --------------- -------------
Net Cash - Operating Activities - Forward 162,000 (256,000) (226,000) 407,000 196,000
--------------- ---------------- --------------- --------------- -------------
Investing Activities:
Acquisition of Property and Equipment (20,000) (4,000) (138,000) (122,000) (19,000)
Software Development Costs -- -- -- (177,000) (426,000)
Investment in Joint Venture -- -- -- (25,000) --
Acquisition of Software (650,000) -- -- -- --
Cash Acquired in Combination with CSM -- -- -- 31,000 --
--------------- ---------------- --------------- --------------- -------------
Net Cash - Investing Activities - Forward $ (670,000) $ (4,000) $ (138,000) $ (293,000) $ (445,000)
</TABLE>
See Notes to Financial Statements.
F-10
<PAGE>
NETSMART TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended Years ended
March 31, December 31,
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
[Consolidated] [Combined] [Consolidated] [Combined]
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C> <C>
Net Cash - Operating Activities - Forwarded $ 162,000 $ (256,000) $ (226,000) $ 407,000 $ 196,000
--------------- --------------- --------------- --------------- -------------
Net Cash - Investing Activities - Forwarded (670,000) (4,000) (138,000) (293,000) (445,000)
--------------- --------------- --------------- --------------- -------------
Financing Activities:
Proceeds from Short-Term Notes 764,000 492,000 831,000 200,000 216,000
Payment of Short-Term Notes (27,000) (67,000) (190,000) -- --
Payment of Bank Note Payable (50,000) (110,000) (175,000) (60,000) --
Payment of Capitalized Lease
Obligations (6,000) (5,000) (29,000) (8,000) --
Issuance of Preferred Stock -- -- -- -- 24,000
Issuance of Common Stock -- -- -- -- 1,000
Cash Overdraft 12,000 (35,000) 56,000 37,000 2,000
Deferred Public Offering Costs (114,000) (15,000) (129,000) (283,000) --
--------------- --------------- --------------- --------------- -------------
Net Cash - Financing Activities 579,000 260,000 364,000 (114,000) 243,000
--------------- --------------- --------------- --------------- -------------
Net Increase [Decrease] in Cash 71,000 -- -- -- (6,000)
Cash - Beginning of Periods -- -- -- -- 6,000
--------------- --------------- --------------- --------------- -------------
Cash - End of Periods $ 71,000 $ -- $ -- $ -- $ --
=============== =============== =============== =============== =============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest $ 95,000 $ -- $ 349,000 $ 76,000 $ 2,000
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.
</TABLE>
See Notes to Financial Statements.
F-11
<PAGE>
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.
<PAGE>
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.
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
financials 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.
F-12
<PAGE>
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]
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 fair value was determined based on the average trading price of
Consolidated common stock for a period before and after the acquisition date.
The $2,700,000 is recorded as additional paid-in capital since such amount will
not be reimbursed.
<PAGE>
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
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 fair
value was determined based on the financial condition of the Company at the time
the options were granted. 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.
F-13
<PAGE>
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]
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 $ (.44) $ (.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.
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.
<PAGE>
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. Revenues in 1993 pertained to
one customer.
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. No revenue is recognized prior to obtaining a binding commitment from
the customer.
F-14
<PAGE>
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]
Revenue Recognition [Continued] - 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.
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.
<PAGE>
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
F-15
<PAGE>
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]
computed by the straight-line method at rates adequate to allocate the cost of
applicable assets over their expected useful lives. Amortization of leasehold
improvements is computed using the shorter of the lease term or the expected
useful life of these assets.
Estimated useful lives range from 2 to 10 years as follows:
Equipment 2-5 Years
Furniture and Fixtures 5-7 Years
Leasehold Improvements 8-10 Years
Capitalized Software Development Costs - Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Technological feasibility for the Company's computer software products is
generally based upon achievement of a detail program design free of high risk
development issues. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized computer software
development costs requires considerable judgement by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technology.
Amortization of capitalized computer software development costs commences when
the related products become available for general release to customers.
Amortization is to be provided on a 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.
<PAGE>
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. The Company believes that the change in the life of the customer lists
reflects frequent changes which have occurred in the software industry and are
likely to occur in the future. This may affect the cash flow to be generated by
the customer list. 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:
December 31,
1995 1994
Customer Lists $ 3,851,000 $ 3,851,000
Less: Accumulated Amortization 409,000 96,000
-------------- ----------------
F-16
<PAGE>
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]
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 at or below the Initial Public Offering price within
one year of the filing of the registration statement, are 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, retroactively, 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.
<PAGE>
[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.
F-17
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #7
[Information as of and for the Periods Ended
March 31, 1996 and 1995 are Unaudited]
[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.
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.
<PAGE>
[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
F-18
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #8
[Information as of and for the Periods Ended
March 31, 1996 and 1995 are Unaudited]
[5] Related Party Transactions [Continued]
notes for the years ended December 31, 1995 and 1994 amounted to $199,000 and
$189,000, respectively.
[B] Loans by Related Parties [Continued] - In connection with the issuance by
the Company of its Interim Notes [the "Interim Notes"] in July and August 1993,
SISC, in anticipation of the Company's receipt of the proceeds of such loans,
advanced the Company, on a non-interest bearing basis, $79,000, which was repaid
by the Company in August 1993. Such advance was used by the Company to pay the
principal on a $50,000 demand note and interest of $2,000 and to pay normal
operating expenses. In connection with the Interim Notes, SISC transferred to
the lenders an aggregate of 15,120 shares of common stock for $.232 per share.
In connection with the agreement of the holders of the Interim Notes to extend
the maturity date of the notes to the earlier of September 30, 1994, or three
days after the Company completes its initial public offering, SISC transferred
an aggregate of 9,375 shares of common stock to such noteholders. The Company
incurred a charge of $7,000 against operations for financing costs in
conjunction with the issuance of stock by SISC. The Interim Notes 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].
<PAGE>
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-19
<PAGE>
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]
[C] Other Matters [Continued] - The following is a schedule of warrants:
<TABLE>
<CAPTION>
No. of FMV at Compensation No. of Warrants
Date of Grant Warrants Issued Exercise Price Date of Grant Recorded Exercised
------------- --------------- -------------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
February 1996 1,728,750 2.00 $ 3.20 $ 2,075,000 --
February 1996 [Originally
Issued in October 1993] 787,500 2.00 .232 -- --
February 1996 600,000 5.00 3.20 --
February 1996 [Originally
Issued in October 1993] 37,500 5.00 .232 -- --
--------------- -------------
Totals 3,153,750 2,075,000
------ ============== =============
</TABLE>
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. No compensation was recorded for such
warrants issued.
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.
<PAGE>
[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 Lendor - 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 then chief
executive officer and the treasurer of the Company have issued their limited
guaranty to the lender.
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
F-20
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #10
[Information as of and for the Periods Ended
March 31, 1996 and 1995 are Unaudited]
[6] Notes Payable [Continued]
currently in default. In addition, the Company owes a $12,500 extension fee to
the holder of the December 1994 Interim Notes.
Investors [Continued] - 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.
<PAGE>
[7] Income Taxes
The Company utilizes an asset and liability approach to determine the extent of
any deferred income taxes, as described in Statement No. 109, "Accounting for
Income Taxes" of the Financial Accounting Standards Board. This method gives
consideration to the future tax consequences associated with differences between
financial statement and tax bases of assets and liabilities.
For financial reporting purposes at December 31, 1995, the Company has net
operating loss carryforwards of $5,147,000 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. Based
on this and the fact that the Company has generated operating losses through
December 31, 1995, the deferred tax asset of approximately $1,800,000 is offset
by an allowance of $1,800,000.
F-21
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #11
[Information as of and for the Periods Ended
March 31, 1996 and 1995 are Unaudited]
[7] Income Taxes [Continued]
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
==============
[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.
<PAGE>
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.
F-22
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #12
[Information as of and for the Periods Ended
March 31, 1996 and 1995 are Unaudited]
[8] Capital Stock [Continued]
The Company has granted to the holders of the Series A preferred stock and
Series B preferred stock and certain warrant holders, with respect to their
warrants, certain piggyback registration rights following the Company's initial
public offering, with respect to the shares of common stock issuable upon
conversion or exercise of the preferred stock or warrants.
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
------- ================
<PAGE>
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:
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.
F-23
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #13
[Information as of and for the Periods Ended
March 31, 1996 and 1995 are Unaudited]
[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, 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,
F-24
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #14
[Information as of and for the Periods Ended
March 31, 1996 and 1995 are Unaudited]
[11] Commitments and Contingencies [Continued]
1995, 1994 and 1993 assuming the above management services agreement and
employment agreement and the management service agreement with SMI Corporation
[See Note 14C] 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)
============= ============= =============
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
============= ============= =============
Compensation was calculated based on the average [$42,000 per month] of the
range [$25,000 to $59,000] payable to SMI Corporation [See Note 14] under such
management service agreement.
<PAGE>
The following presents the pro forma net loss, for all periods, using the
minimum and maximum amounts payable to SMI Corporation:
Years ended
December 31,
1995 1994 1993
------------- ------------- -------------
Pro Forma Net Loss after Increase
in Consulting Expense and
Executive Compensation Per
Agreements with SMI Corporation
at $25,000 Per Month $ (3,330,000) $ (2,270,000) $ (947,000)
============= ============= =============
Net Loss Per Share $ (.69) $ (.47) $ (.20)
============= ============= =============
Pro Forma Net Loss after Increase
in Consulting Expense and
Executive Compensation Per
Agreements with SMI Corporation
at $59,000 Per Month $ (3,738,000) $ (2,768,000) $ (1,355,000)
============= ============= =============
Net Loss Per Share $ (.78) $ (.56) $ (.28)
============= ============= =============
F-25
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #15
[Information as of and for the Periods Ended
March 31, 1996 and 1995 are Unaudited]
[11] Commitments and Contingencies [Continued]
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, deems it remote that such action will result in a
material loss to Company, and 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.
<PAGE>
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] Industry Segment
The Company currently classifies its operations into two business segments: (1)
Software and Related Systems and Services and (2) Data Center Services. Software
F-26
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #16
[Information as of and for the Periods Ended
March 31, 1996 and 1995 are Unaudited]
[13] Industry Segment [Continued]
and Related Systems and Services is the design, installation, implementation and
maintenance of computer information systems. Data Center Services involve
company personnel performing data entry and data processing services for
customers. Intersegment sales and sales outside the United States are not
material. Information concerning the Company's business segments is as follows:
Years ended
December 31,
1995 1994 1993
------------- ------------- -------------
Revenues:
Software and Related Systems
and Services $ 5,640,000 $ 2,040,000 $ 57,000
Data Center Services 1,742,000 884,000 --
------------- ------------- -------------
Total Revenues $ 7,382,000 $ 2,924,000 $ 57,000
-------------- ============= ============== =============
Gross Profit:
Software and Related Systems
and Services $ 911,000 $ (78,000) $ 37,000
Data Center Services 853,000 468,000 --
------------- -------------- -------------
Total Gross Profit $ 1,764,000 $ 390,000 $ 37,000
------------------ ============= ============== =============
Loss [Income] From Operations:
Software and Related Systems and
Services $ 1,692,000 $ 1,649,000 $ 339,000
Data Center Services (259,000) (158,000) --
------------- -------------- -------------
Total Loss From Operations $ 1,433,000 $ 1,491,000 $ 339,000
-------------------------- ============= ============== =============
<PAGE>
Depreciation and Amortization:
Software and Related Systems
and Services $ 765,000 $ 401,000 $ 8,000
Data Center Services 107,000 69,000 --
------------- -------------- -------------
Total Depreciation and
Amortization $ 872,000 $ 470,000 $ 8,000
------------ ============= ============== =============
Capital Expenditures:
Software and Related Systems
and Services $ 46,000 $ 119,000 $ 19,000
Data Center Services 92,000 3,000 --
------------- -------------- -------------
Total Capital Expenditures $ 138,000 $ 122,000 $ 19,000
-------------------------- ============= ============== =============
Identifiable Assets:
Software and Related Systems
and Services $ 3,699,000 $ 4,261,000
Data Center Services 2,691,000 2,932,000
------------- --------------
Total Identifiable Assets $ 6,390,000 $ 7,193,000
------------------------- ============= ==============
[14] Subsequent Events
[A] 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.
F-27
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #17
[Information as of and for the Periods Ended
March 31, 1996 and 1995 are Unaudited]
[14] Subsequent Events [Continued]
[B] The Company intends to enter into a joint venture with Oasis Technology,
Ltd. ["Oasis"] 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.
[C] 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.
For the three months ended March 31,1996, the Company incurred, and paid,
$177,000 of compensation expense pursuant to its contract with SMI Corporation.
[D] 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 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.
<PAGE>
[E] 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.
[F] 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.
[15] 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.
F-28
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #18
[Information as of and for the Periods Ended
March 31, 1996 and 1995 are Unaudited]
[15] New Authoritative Accounting Pronouncements [Continued]
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.
[16] 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.
[17] 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 $3.20 per share. The Company will incur a charge to expense of $155,000 at
the date of grant.
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-29
<PAGE>
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-30
<PAGE>
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-31
<PAGE>
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-32
<PAGE>
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-33
<PAGE>
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-34
<PAGE>
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-35
<PAGE>
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-36
<PAGE>
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 562,500 Units
information or representations must not be relied
on as having been authorized by the Company or by NETSMART TECHNOLOGIES
the Underwriter. This Prospectus does not Inc.
constitute an offer to sell or a solicitation of
an offer to buy any securities offered hereby to (Each Unit Consists of
any person in any jurisdiction in which such offer two shares of Common
or solicitation was not authorized or in which the Stock and one Series A
person making such offer or solicitation is not Redeemable Common Stock
qualified to do so or to anyone to whom it is Purchase Warrant)
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.......................................18
Use of Proceeds................................19
Capitalization.................................21
Selected Financial Data .......................23
Management's Discussion and Analysis of Financial
Condition and Results of Operations............24
Business.......................................30
Management.....................................39
Certain Transactions...........................44
Interim Financings.............................49 PROSPECTUS
Principal Stockholders.........................50
Selling Security Holders.......................51
Description of Securities......................54
Underwriting...................................59
Legal Matters..................................61
Experts........................................61
Additional Information ........................61 MONROE PARKER
Index to Financial Statements..................F-1 SECURITIES, Inc.
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. , 1996
<PAGE>
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 Registrant's Restated Certificate of Incorporation (Exhibit 3.1) provide
for indemnification of directors and officers of the Registrant under certain
circumstances.
Reference is made to Paragraphs 6 and 7 of the Underwriting Agreement
(Exhibit 1.1) with respect to indemnification of the Registrant 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.
(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
<PAGE>
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.
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>
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 July 1996, pursuant to a warrant exchange, (a) the holders of
Outstanding Warrants having a $2.00 exercise price exchanged one third of such
warrants for Outstanding Warrants to purchase, at an exercise price of $4.00 per
share, 150% of the number of shares of Common Stock exchanged, and (b) the
exercise price of the Outstanding Warrants having a $5.00 exercise price was
reduced to $4.00. Prior to the warrant exchange, there were Outstanding Warrants
to purchase 2,516,250 shares of Common Stock at $2.00 per share and Outstanding
Warrants to purchase 637,500 shares of Common Stock at $5.00 per share
outstanding. As a result of the warrant exchange, there are Outstanding Warrants
to purchase 1,677,500 shares of Common Stock at $2.00 per share and 1,895,625
shares of Common Stock at $4.00 per share.
(j) 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.
Name Principal Amount of Notes Shares of Consolidated 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
(k) At September 30, 1995, the Registrant owed SISC approximately
$3.0 million plus interest of $388,000. At September 30, 1995:
II-3
<PAGE>
(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.
(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.
(l) 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.
(m) 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.
(n) 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.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1.1 Form of Underwriting Agreement.
1.2 Form of Underwriter's Option.
1.3(2) 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.
II-4
<PAGE>
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(2) By-Laws
4.1(2) 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.
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.
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(2) 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 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
, 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 Moore Stephens, 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.
27.1 Financial data schedule.
(1) To be filed by amendment.
(2) Previously filed.
(b) Financial Statement Schedules
None
II-5
<PAGE>
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 the th day of July,
1996
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
- --------------- By: /S/ LEWIS S. SCHILLER
James L. Conway ---------------------
Lewis S. Schiller
Attorney in Fact
Leonard M. Luttinger Director July 30, 1996
- --------------------
Leonard M. Luttinger
John F. Phillips Director
- ----------------
John F. Phillips
- -------------
E. Gerald Kay Director
Storm R. Morgan Director
- ---------------
Storm R. Morgan
II-6
<PAGE>
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.
On July 1, 1996, the firm of Mortenson and Associates, P.C. changed its
name to Moore Stephens, P.C.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
July 30, 1996
II-7
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in 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
July 30, 1996
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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
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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 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.
(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
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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 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.
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
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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 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 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
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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 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.
(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
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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 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 condition (financial or
otherwise), business, property, prospective results of operations, or net worth
of the Company and its Subsidiaries taken as a whole.
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(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.
(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.
(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
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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
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 as you may request, at least two full business days prior to the
Closing Dates. Time shall be of the
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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
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.
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
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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 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.
(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
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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.
(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 the accounts of the Company and its
subsidiary or subsidiaries are consolidated in reports furnished to its
stockholders generally.
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(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.
(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
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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 of Common Stock of the
Company. During the two year period from the First Closing Date, the
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Company will not, without the prior written consent of the Underwriter, publicly
or privately offer or sell any of its securities under the Act.
(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 the Warrant was solicited by a member of the National
Association of Securities Dealers, Inc. and
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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 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
contemplated by the Commission; any request on the part of the
Commission for
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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 (a) has been duly incorporated and
is a validly existing corporation in good standing under the
laws of the State of Delaware with full corporate power and
authority to own its properties and to conduct its business
as set forth in the Registration Statement and Prospectus,
(b) has authorized capital stock as of March 31, 1996 as set
forth in the Prospectus under the caption "Capitalization"
and (c) is duly licensed or qualified as a foreign
corporation in all jurisdictions in which by reason of
owning or leasing real property in such jurisdiction it is
required to be so licenced or qualified except where failure
to be so qualified or licensed would have no material
adverse effect.
(ii) All of the outstanding shares of Common Stock
and Preferred Stock (a) are duly and validly authorized and
issued and outstanding, fully paid and non-assessable, (b)
do not have any, and were not issued in violation of any,
preemptive rights under the Company's certificate of
incorporation or by-laws or any other agreement known to
such counsel and (c) conform to the respective descriptions
set forth in the Prospectus (excluding the financial
statements).
(iii) The Company has authorized and reserved for
issuance the shares of Common Stock issuable (a) upon
exercise of the outstanding options or warrants (other than
the Warrants) in accordance with the terms of the applicable
options or warrants, (b) upon exercise of the Warrants
pursuant to the terms of the Warrants and the Warrant
Agreement and (c) upon conversion of the outstanding
Preferred Stock when converted in accordance with the terms
of the applicable certificates of designation, and when
issued upon such exercise or conversion, such shares of
Common Stock will be duly and validly authorized and issued,
fully paid and non-assessable.
(iv) The shares of Common Stock offered pursuant to
the Prospectus as part of the Units, when issued upon
payment of the consideration for the Units provided for in
this Agreement, (a) will be duly and validly authorized and
issued, fully paid and non-assessable, (b) will not have
been issued in violation of the pre-emptive rights pursuant
to the
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Company's certificate of incorporation or any
agreement known to such counsel and (c) are not
subject to any restrictions on voting or transfer
other than as may be imposed by the Act.
(v) The Warrants and the Unit Purchase Option
conform to the description thereof that are contained in the
Prospectus (excluding financial statements) and, when issued
as provided in this Agreement will constitute the valid,
binding and enforceable obligations of the Company, subject
to bankruptcy, insolvency and other laws of general
applications affecting the enforceability of creditors'
rights and subject to the discretionary nature of any
remedies in the nature of equitable relief in any action,
legal or equitable, and except that no opinion is given with
respect to the indemnification and contribution provisions
of the Unit Purchase Option.
(vi) To the best of such counsel's knowledge,
neither the filing of the Registration Statement nor the
offering 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, relating to
the registration under the Act of any shares of Common
Stock.
(vii) To the best of such counsel's knowledge, no
consents, approvals, authorizations or orders of agencies,
officers or other regulatory authorities are necessary for
the valid authorization, issue or sale of the Securities
pursuant to this Agreement, except such as may be required
under the Act or state securities or blue sky laws.
(viii) The certificates evidencing the shares of
Common Stock are in proper legal form.
(ix) This Agreement, the Warrant Agreement, the M/A
Agreement and the Consulting Agreement have been duly
authorized and executed by the Company and constitute the
valid and binding agreement of the Company, subject to
bankruptcy, insolvency and other laws of general
applications affecting the enforceability of creditors'
rights and subject to the discretionary nature of any
remedies in the nature of equitable relief in any action,
legal or equitable, and except that no opinion is given with
respect to the provisions of Sections 6 and 7 of this
Agreement.
(x) The Company has full power and lawful authority
to authorize, issue and sell the Securities on the terms and
conditions set forth in this Agreement and in the
Registration Statement and Prospectus, and the execution and
delivery of this Agreement, the Warrant Agreement, the Unit
Purchase Option, the M/A Agreement and the Consulting
Agreement and the
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consummation of the transactions contemplated hereby
and thereby will not conflict with, or constitute a
default under, any indenture, mortgage, deed or
trust, note or any other agreement or instrument
known to such counsel to which the Company is now a
party or by which it or its business or its
properties are bound, the certificate of
incorporation and by-laws of the Company or, to the
best of such counsel's knowledge, any law, order,
rule or regulation, writ, injunction or decree of any
government, governmental instrumentality, or court
having jurisdiction over the Company or its business
or properties.
(xi) Such counsel knows of no actions, suits or
proceedings at law or in equity of a material nature
pending, or to such counsel's knowledge, threatened, against
the Company or any of its Subsidiaries before or by any
state commission, regulatory body, or administrative agency
or other governmental body, wherein an unfavorable ruling,
decision or finding would materially adversely affect the
business or financial condition of the Company and its
Subsidiaries taken as a whole or which question either (a)
the validity of the Securities, this Agreement, the Warrant
Agreement, the Unit Purchase Option, the M/A Agreement or
the Consulting Agreement, or (b) 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, which are not disclosed in or
contemplated by the Prospectus.
(xii) The shares of Common Stock issuable upon
exercise of the Unit Purchase Option and upon exercise of
the Warrants issuable upon exercise of the Unit Purchase
Option have been duly and validly authorized for issuance,
and when issued pursuant to the terms of the Unit Purchase
Option and/or the Warrant Agreement, as the case may be,
will be validly issued, fully paid and non-assessable; the
Warrants issuable upon such exercise as provided in the Unit
Purchase Option will constitute the valid and binding
obligations of the Company, subject to bankruptcy,
insolvency and other laws of general applications affecting
the enforceability of creditors' rights and subject to the
discretionary nature of any remedies in the nature of
equitable relief in any legal or equitable action.
(xiii) The Registration Statement has become
effective under the Act and, to the best of such counsel's
knowledge, no order suspending the effectiveness of the
Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or
contemplated under the Act.
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Furthermore, the Registration Statement and the
Prospectus (except as to the financial statements and other
financial information contained therein and thereto, as to
which no opinion is expressed), comply as to form in all
material respects with the requirements of the Act and the
rules and regulations (the "Rules") of the Commission under
the Act. In passing upon the form of such documents, such
counsel has assumed the correctness and completeness of the
statements made or included therein by the Company and takes
no responsibility for the accuracy, completeness or fairness
of the statements contained therein except insofar as such
statements relate to the description of the Securities or
relate to such counsel. However, in the course of the
preparation by the Company of the Registration Statement and
the Prospectus, such counsel had conferences with officers
and directors of the Company with a view to imparting to
them a clear understanding of the requirements of the Act
and the Rules with reference to the preparation of
registration statements and prospectuses, and such counsel's
examination of the Registration Statement and the Prospectus
and their discussions in the above-mentioned conferences did
not disclose to such counsel any information which gave such
counsel reason to believe that the Registration Statement,
as of the Effective Date (except as to the financial
statements and other financial information contained
therein, as to which no opinion is expressed), contained any
untrue statement of a material fact 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 (except as to the financial statements and other
financial information contained therein, as to which no
opinion is expressed) contained any untrue statement of a
material fact or omitted to state a material fact necessary
to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
Such counsel have reviewed all contracts filed as exhibits
to the Registration Statement, and such counsel does not
know of any agreements to which the Company is a party
required to be filed as exhibits to the Registration
Statement which have not been so filed.
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 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
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Closing Date, with respect to the validity of the issuance of the Units, the
form of 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 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
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subject (as of the date hereof and as of the Option Closing Date) to the
following additional conditions:
(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 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
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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 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.
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,
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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
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 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
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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) 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.
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
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<PAGE>
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 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.
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
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<PAGE>
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 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.
(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.
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<PAGE>
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 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 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
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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, 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
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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: _______________________________
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: _______________________________
Authorized Officer
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We hereby agree to be bound by the provisions of Sections 3(l)
and (p), and 12 hereof.
____________________________
Lewis S. Schiller
SIS CAPITAL CORP.
and
CARTE MEDICAL HOLDINGS, INC.
By:___________________________
Authorized Officer
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Exhibit 1.2
Option to Purchase Units
NETSMART TECHNOLOGIES, INC.
Unit Purchase Option
Dated: , 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 S-1, 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>
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
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<PAGE>
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; and after such one-year period, such a transfer may
occur provided the Option is exercised immediately upon transfer, and if not
exercised immediately on transfer, the Option shall terminate. 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
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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 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
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<PAGE>
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, 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
notified to assume the 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
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<PAGE>
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 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
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<PAGE>
on terms as nearly equivalent as practicable to the provisions with respect to
the Common Stock contained in this Paragraph 9.
(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:________________________
Lewis S. Schiller, CEO
______________________________
Anthony F. Grisanti, Secretary
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<PAGE>
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: , 19 .
______________________________
By:___________________________
Address:______________________________
______________________________
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<PAGE>
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: , 19 .
______________________________
By:___________________________
Signature Medallion Guaranteed
______________________________
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<PAGE>
Exhibit 10.23
PURCHASE AGREEMENT
THIS AGREEMENT ("Agreement") is made as of the 7th day of February
1996 by and among CreditCard Acquisition Corp., a Delaware Corporation with
offices at 146 Nassau Avenue, Islip, New York 11751 ("CCAC"), Fiton Business,
S.A., a Corporation organized in the British Virgin Islands with offices at
Pasea State Road, Tortola, British Virgin Islands ("Fiton"), Oasis Technology
Ltd. ("Oasis"), Consolidated Technology Group Ltd. ("COTG") and CSMC Corp.
(collectively with Oasis and COTG, the "Guarantors").
WHEREAS, Fiton is the owner of certain source code and related
documentation used as a credit card administrator generally known as Sistema
Administrador de Tarjeta de Credito;
WHEREAS, CCAC wishes to purchase all right and title to Sistema
Administrador de Tarjeta de Credito, under the terms and conditions of this
Agreement;
AND WHEREAS, in order to induce Fiton to enter this Agreement with
CCAC, the Guarantors, as affiliates of CCAC, are willing to guarantee CCAC's
performance hereunder.
NOW THEREFORE, in consideration of the premises and terms and
conditions contained herein, the parties agree as follows:
1. Purchase and Sale
(A) The following terms are defined for purposes of this Agreement:
(i) "Current SATC" shall mean the current version of Sistema
Administrator de Target de Credito as delivered by Fiton under this Agreement,
whose general functionality is described in Schedule A hereto. The parties
acknowledge that Current SATC exists in the Spanish language only and that Fiton
has no obligation hereunder to provide translated versions.
(ii)"SATC" shall mean Current SATC and all enhancements,
modifications and derivative works of Current SATC, including all documentation
relating thereto.
(iii)"Affiliate" shall mean, in the case of CCAC, a company which
directly or indirectly or through one or more intermediaries, controls or is
controlled by, or is under common control. For purposes of this definition
control shall mean the direct or indirect power to appoint a majority of
directors of, or otherwise control the administration or policy of another.
(iv) "End User" shall mean a person or entity that acquires SATC
for use rather than for resale or distribution and has no right to sublicense
SATC.
(v) "Taxes" shall mean all federal, state, local and foreign
taxes, and other assessments of a similar nature (whether imposed directly or
through withholding), including any interest, additions to tax, or penalties
applicable thereto.
(B) All references to money herein are in U.S. dollars.
<PAGE>
(C) Subject to the complete payment of the Purchase Price (as defined
herein), Fiton hereby agrees to sell and transfer to CCAC all its right, title
and interest in Current SATC, including, without limitation, all copyrights,
patent rights and trade secret rights, source code and documentation for all
versions existing as of the date hereof of Current SATC described in Schedule A
hereto, for a purchase price of six hundred fifty thousand dollars ($650,000)
("Purchase Price"). Effective as of the date the final installment of the
Purchase Price is paid by CCAC, Fiton agrees to execute such documents as are
necessary to transfer to CCAC the sole and exclusive worldwide right to use,
produce, reproduce, transfer, convey, license, commercially exploit, enhance,
modify, develop derivative works, and otherwise exploit SATC and its technology
as the owner thereof ("Transfer of Title"). Fiton will own title to all
enhancements, modifications and derivative works of SATC until the final
installment of the Purchase Price is paid by CCAC. From the date hereof until
Transfer of Title and subject to all provisions of this Agreement CCAC shall
have the right to sublicense for those purposes set forth in Paragraph 13(A)
herein. Promptly after the execution of this Agreement, Fiton shall execute a
Transfer of Title document which shall be held in escrow by the Escrow Agent (as
defined herein) until complete payment pursuant to this Paragraph.
(D) The Purchase Price shall be payable as follows:
(i) The amount of three hundred and twenty-five thousand dollars
($325,000) shall be paid by wire transfer in immediately available funds to a
bank account designated by Fiton on the date of execution of this Agreement by
both parties. The parties acknowledge that Fiton has delivered to CCAC a copy of
the source code and documentation for all versions of Current SATC.
(ii) The amount of seventy-five thousand dollars ($75,000) shall
be paid by wire transfer on or before April 1, 1996.
(iii) The amount of seventy-five thousand dollars ($75,000) shall
be paid by wire transfer on or before May 1, 1996.
(iv) The amount of one hundred seventy-five thousand dollars
($175,000) shall be paid by wire transfer on or before September 1, 1996.
(E) CCAC and its Affiliates shall be liable for and shall pay all
Taxes arising from or otherwise incurred in connection with the purchase and
sale of Current SATC or the payment of any of the amounts (including Taxes)
required by this Paragraph 1. To the best of Fiton's knowledge, there is no tax
in either Guatemala or the British Virgin Islands that arises from this purchase
and sale.
2. Royalties
(A) In addition to the Purchase Price set forth in Paragraph 1 above
CCAC shall pay Fiton a royalty of ten percent (10%) ("Royalty") of the Net
Receipts (as hereinafter defined) received by CCAC or its Affiliates as license
fees from licenses granted for SATC, increased by the amount of any Taxes
incurred as a result of the payment or receipt of any of the amounts (including
Taxes) required by this Paragraph 2(A). Such Royalty shall be paid by CCAC on
all such licenses entered into during the seven (7) year period commencing with
the date hereof ("Royalty Period"). CCAC agrees that any maintenance fees
charged in connection with any license granted by it hereunder shall not exceed
15% of the license fee charged.
<PAGE>
(B) "Net Receipts" shall mean the amounts received by CCAC or its
Affiliates under Paragraph 2(A) as license fees less all taxes, duties or other
levies (except based upon the net income of CCAC or its Affiliates) resulting
from the licensing of SATC, including but not limited to property, sales, goods
and use or other taxes paid by CCAC and which are not recoverable by it, and
less any commissions or royalties paid by CCAC or its Affiliates to distributors
or agents or Affiliates which license SATC directly or indirectly on behalf of
CCAC.
(C) CCAC shall provide quarterly financial statements to Fiton
certified by the Chief Financial Officer of CCAC commencing with the first
calendar quarter ending after the date of this Agreement reflecting the Net
Receipts under Paragraph 2(A) including but not limited to (i) the total number
of licenses entered into during such calendar quarter, (ii) amounts received by
CCAC from such licenses, (iii) which amounts are attributable to licenses in the
United States, and (iv) the basis for CCAC's calculation of Net Receipts.
Contemporaneously with such quarterly financial statements, CCAC shall pay any
Royalty due to Fiton by wire transfer. Such quarterly statements shall be
provided by CCAC within forty-five (45) days after the end of each calendar
quarter during the Royalty Period. If the Royalty Period does not end on the
last day of a calendar quarter, the final Royalty statement shall be rendered
for the partial quarter ending on the last day of the Royalty Period.
(D) Fiton shall have the right, which it may exercise once during each
consecutive twelve (12) month period during the seven (7) year period following
the date of execution of this Agreement, to request an audit of the books and
records of CCAC. Such request shall be made in writing and shall provide
reasonable advance notice to CCAC to prepare for such audit. The audit shall be
conducted by a Certified Public Accountant selected by Fiton and reasonably
acceptable to CCAC at the expense of Fiton. If any such audit determines that
CCAC has underpaid the Royalties for the period under audit by more than five
percent (5%), CCAC shall pay for the cost of the audit.
(E) Attached hereto as Schedule B is a projection by CCAC of the
number of licenses it estimates will be entered into during each year of the
Royalty Period. Notwithstanding any other provision of this Agreement, CCAC
shall in any event pay to Fiton royalties on a minimum of fifty (50) licenses
("Minimum Royalties". Such Minimum Royalties shall be calculated as follows: at
the end of the Royalty Period CCAC shall provide a statement to Fiton indicating
the total number of licenses entered into by CCAC during the Royalty Period, and
the average of all license fees received therefor. The amount due to Fiton shall
be the product of such average multiplied by the differential between fifty (50)
and the actual number of licenses entered into by CCAC during the Royalty
Period. The statement referred to in this Paragraph 2(E) shall be accompanied by
a bank draft for this amount due.
(F) To guarantee CCAC's performance of its obligations under this
Agreement each of the Guarantors shall execute and deliver to Fiton a guaranty,
guaranteeing CCAC's obligations, which guaranty is in the form attached as
Schedule D hereto.
3. Prior Licenses of Current SATC Granted by Fiton
Fiton has prior to the date hereof granted certain licenses for
Current SATC none of which grant the right to further sublicense the rights to
use Current SATC. Fiton shall have the continuing right to provide consulting
services, maintenance and customization work to such licensees and to collect
amounts due from such licensees and to retain such amount due for its own
account.
<PAGE>
4. Warranties of Fiton
Fiton warrants and represents to CCAC that:
(A) Fiton has good and sufficient power, authority and right to enter
into and deliver this Agreement and to transfer the legal and beneficial title
and ownership of Current SATC to CCAC free and clear of all liens, charges,
encumbrances and any other rights of others;
(B) Other than those licenses referenced in Paragraph 3, there is no
contract, option or any other right of another binding upon or which at any time
in the future may become binding upon Fiton to sell, transfer, assign, pledge,
mortgage or in any other way dispose of or encumber Current SATC;
(C) Neither the entering into nor the delivery of this Agreement nor
the completion of the transactions contemplated hereby by Fiton will result in
the violation of:
(i) Any of the provisions of the incorporating
documents or by-laws of Fiton;
(ii) Any agreement or other instrument to which
Fiton is a party or by which Fiton is
bound; or
(iii)Any applicable law, rule or regulation of
the British Virgin Islands or Guatemala;
(D) No other party has any right to grant licenses or sublicenses to
Current SATC or to sell or transfer any rights to Current SATC;
(E) All necessary action has been taken by the Stockholders, Board of
Directors and Officers of Fiton to adopt and approve the execution of this
Agreement;
(F) No approval is required to be obtained by Fiton from any
governmental authority in the British Virgin Islands or Guatemala for it to
execute this Agreement and to transfer title to Current SATC to CCAC;
(G) Current SATC does not infringe upon any copyright or trade secret
rights of any third party, and to Fiton's knowledge does not infringe upon any
patent rights of any third party. Fiton is not party to any pending suit or
action in which SATC is the subject of any claim of infringement nor has Fiton
received any letter containing any such claim;
(H) The source code and internal documentation of Current SATC is
confidential and proprietary to Fiton and has not been generally published or
distributed to the public by Fiton, nor, to the best of Fiton's knowledge, has
the source code and internal documentation of Current SATC been generally
published or distributed to the public by any employees or third parties. The
parties hereby acknowledge that Fiton has distributed the source code and
documentation of Current SATC to End Users for such End Users' internal use, and
that such distribution does not violate the terms of this Paragraph.
(I) Current SATC was developed by individuals who have no claim of
ownership or other rights in Current SATC;
(J) Fiton is not a party to or bound by any contract or commitment
which would require CCAC to pay any royalty, license fee or management fee
pertaining to Current SATC.
<PAGE>
5. Warranties of CCAC and the Guarantors
Each of CCAC and the Guarantors represents and warrants to Fiton that:
(A) Each of CCAC and the Guarantors is a Corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
their respective incorporation;
(B) Each of CCAC and the Guarantors has good and sufficient power,
authority and right to enter into and deliver this Agreement. Neither CCAC nor
any of the Guarantors has any existing lien arrangement with any creditor to
which lien SATC would become subject upon the execution of this Agreement;
(C) Neither the entering into nor the delivery of this Agreement nor
the completion of the transactions contemplated hereby by CCAC or any of the
Guarantors will result in the violation of:
(i) Any of the provisions of the
incorporating documents or by-laws of any
of CCAC or any of the Guarantors;
(ii) Any agreement or other instrument to
which CCAC or any of the Guarantors is
a party or by which they are bound; or
(iii)Any applicable law, rule or regulation
of the United States or Canada;
(D) All enhancements, modifications and derivative works of current
SATC made by CCAC will not infringe upon any copyright, trade secret, patent for
other intellectual property rights of any third party. The terms of this
Paragraph 5(C) shall remain in effect until execution of a Reseller Agreement
pursuant to Paragraph 11 of this Agreement.
(E) This Agreement has been duly authorized, executed and delivered by
each of CCAC and the Guarantors and constitutes the legal, valid and binding
obligation of CCAC and each of the Guarantors, enforceable in accordance with
its terms;
(F) No consent, approval, authorization or other order of any person
is required for the execution and delivery of this Agreement.
6. Confidentiality, Non-Disclosure and Non-Compete
(A) This Agreement shall be considered a confidential and proprietary
document. Except as otherwise herein provided, the parties agree that neither
this Agreement nor any specific provision hereof shall be disclosed to any third
party without the prior written consent of the other party hereto, except as
required to allow either party to comply with any reporting obligations such
party may have under law.
(B) Prior to Transfer of Title, CCAC agrees (i) to furnish to Fiton,
within ten (10) days of the date hereof, a complete list of all those employees
of CCAC or its Affiliates, and independent contractors or other parties who have
access to SATC source code, and (ii) to update such list monthly. CCAC further
agrees that all such employees, independent contractors or other parties shall
execute confidentiality agreements substantially in the form attached hereto as
Schedule C.
<PAGE>
(C) Fiton agrees that CCAC's plans for SATC are confidential. Fiton
agrees that Fiton shall never directly or indirectly disclose to any third party
that Current SATC was used as the core of any CCAC products except when Fiton
and the third party are bound by a mutual confidentiality agreement. Fiton,
however, may advise a customer that CCAC purchased software from Fiton.
(D) Fiton shall not for a period of seven (7) years from the date of
the execution of this Agreement by both parties develop itself or assist any
other party in developing a credit card administrator having substantially the
same functionality as SATC. Notwithstanding the foregoing, if Fiton shall not
have received $150,000 in Royalties by the end of the first five (5) years from
the date of the execution of this Agreement, the terms of this Paragraph 6(D)
shall no longer apply.
7. Support
Fiton agrees to provide one of its employees experienced in Current
SATC to CCAC in Toronto, Canada, for a period of four (4) months from February
5, 1996 (plus any business days on which such employee is not available for such
assistance), to assist in understanding Current SATC, at a charge of twenty
thousand dollars ($20,000) payable by CCAC in four equal installments of five
thousand dollars ($5,000) on the last day of the fourth, eighth, twelfth and
sixteenth weeks worked during such period, plus reasonable travel and living
expenses of such employee, including living expenses of such employee, including
living expenses incurred on non-business days. Fiton shall use commercially
reasonable efforts to provide Juan Carlos Soria as such employee. If requested
by Fiton, CCAC shall pay, in advance, for up to four round trips between North
America and Guatemala, plus one such round trip for each employee's immediate
family members as well as any other trips requested by CCAC. CCAC may request
and Fiton shall use its best efforts to supply additional support beyond the
four (4) month period at a daily rate of four hundred dollars ($400), plus
reasonable travel and living expenses.
8. Indemnity and Limitation of Liability
(A)(1) Fiton shall indemnify and hold harmless CCAC with respect to
any damages, claims, liabilities or costs, including reasonable legal fees,
incurred by CCAC to the extent that Current SATC as delivered infringes any
patent, copyright, trade secret, industrial or other intellectual property right
of any third party (an "Infringement"). This indemnity shall not extend to any
enhancements, modifications or derivative works of Current SATC made by CCAC or
its Affiliates or any third party working at the direction of CCAC, nor to
damages, claims, liabilities or costs because SATC is used in combination with
any other computer software. Each party shall promptly notify the other in
writing of any action, claim or demand in connection with an Infringement and
upon such notification Fiton at its sole option shall take control of any such
action. CCAC shall provide reasonable assistance to Fiton. Neither party shall
have any indemnification obligations under this Paragraph if notice is not given
promptly upon receipt of any claim. CCAC shall also be entitled at its option
and expense to participate in Infringement actions and all related settlement
negotiations.
<PAGE>
(2) CCAC shall indemnify and hold harmless Fiton with respect to
any damages, claims, liabilities or costs, including reasonable legal fees,
incurred by Fiton to the extent that any enhancements or modifications made by
CCAC to SATC, or derivative works developed by CCAC therefor, infringe any
patent, copyright, trade secret, industrial or other intellectual property right
of any third party. The terms of this Paragraph 8(A) shall remain in effect
until the letter of execution of a Reseller Agreement pursuant to Paragraph 1 of
this Agreement or transfer of title, CCAC shall also indemnify Fiton for any
breach of a confidentiality agreement executed pursuant to Paragraph 6(B).
(B) IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, SPECIAL
OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE
PERFORMANCE OR BREACH THEREOF, EVEN IF THE PARTY CONCERNED HAS BEEN ADVISED OF
THE POSSIBILITY THEREOF. EXCEPT FOR LIABILITY ARISING FROM WILLFUL BREACH OF
PARAGRAPH 12, FITON'S LIABILITY TO CCAC HEREUNDER, IF ANY, SHALL IN NO EVENT
EXCEED THE TOTAL OF THE FEES PAID HEREUNDER BY CCAC.
(C) EXCEPT AS OTHERWISE EXPRESSLY WARRANTED HEREIN, SATC IS PROVIDED
ON AN "AS IS" BASIS, AND THERE ARE NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING
BUT NOT LIMITED TO, ANY WARRANTIES OR MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. WITHOUT LIMITING THE FOREGOING, FITON SHALL HAVE NO
LIABILITY FOR ANY CLAIMS BY CCAC OR ANY THIRD PARTIES BASED ON INACCURACIES OF
DATA ALLEGEDLY RESULTING FROM SATC.
(D) In no event does Fiton make any warranties regarding, nor shall
Fiton be liable to CCAC for any damages arising out of consulting or other
services provided by Fiton to CCAC pursuant to Paragraph 7, unless such damages
are caused by the gross negligence of Fiton.
9. Escrow
Promptly after the execution of this Agreement, the parties will enter
into an agreement ("Escrow Agreement"), pursuant to which Fiton shall deliver a
complete copy of the Current SATC source code in machine-readable form to the
designated escrow agent. The escrow costs shall be paid by CCAC. The source code
may be released from escrow only pursuant to the Escrow Agreement. Once every
quarter from the date hereof and until Transfer of Title, if CCAC has made any
enhancements, modifications or derivative works of SATC during the quarter, it
shall deliver a copy of SATC source code, including such enhancements,
modifications or derivative works, to the designated escrow agent (the "Escrow
Agent").
10. Non-Hiring
Neither party nor any of its Affiliates shall directly nor indirectly
employ or seek to employ any person who is employed by the other party or any
Affiliate of the other party nor induce any such person to leave such employment
without the prior consent of the other party for a period of three (3) years
from the date thereof.
11. Reseller Agreement
(A) Upon Transfer of Title, the parties will enter into an agreement
("Reseller Agreement") pursuant to which Fiton will be granted a license, to new
versions of SATC developed by CCAC and the right to sublicense such new versions
to End Users anywhere in the world for a ten (10 year term. CCAC may terminate
this license after five (5) years if Fiton has begun selling a product
competitive with SATC. Fiton's license shall be exclusive with respect to
Central America and Panama and non-exclusive with respect to the rest of the
world.
(B) Fiton will receive a discount of thirty percent (30%) off the
standard license fee charged by CCAC for SATC End User licenses.
<PAGE>
(C) In addition to the rights set forth in Paragraphs 11(A) and 11(B)
above, the Reseller Agreement shall include only the usual and customary terms
and conditions found in agreements of this type, including no sales quota, and
including the same warranty of and indemnity for intellectual property
infringement of enhancements, modifications and derivative works of SATC as
contained in Paragraphs 5(D) and 8(A) of this Agreement.
12. Rights to Current SATC
Notwithstanding anything to the contrary in this Agreement and
effective as of Transfer of Title, CCAC shall grant to Fiton a perpetual,
royalty-free and free of any and all other fee or cost to Fiton whatsoever,
exclusive (including as to CCAC) right to license, distribute and customize
Current SATC to or for End Users in Central and South America on an exclusive
basis.
13. CCAC Agreements
(A) Prior to Transfer of Title, CCAC agrees to provide to Fiton all
agreements it proposes to enter into pertaining to SATC, whether licensing,
distribution, development or otherwise, for Fiton's reasonable written approval
of all terms therein relating to intellectual property or confidentiality, prior
to execution thereof by CCAC.
(B) Prior to Transfer of Title Fiton shall be named as a third party
beneficiary in any agreement entered into by CCAC or its Affiliates related to
SATC.
14 Termination by Fiton Prior to Transfer of Title
In the event that CCAC or the Guarantors fail to make any payment to
Fiton when due as required under paragraph 1(D) herein, all rights of CCAC in
and to SATC shall cease immediately upon the due date of such payment, and CCAC,
its successor or the Guarantors shall promptly, at Fiton's request, either (a)
destroy or (b) return to Fiton: all copies in any media of SATC in CCAC's
possession and control, including but not limited to all source code,
modifications thereof, and all related documentation, together with any other
materials or confidential information of Fiton in CCAC's possession, and all
information in CCAC's knowledge or possession sufficient to identify any persons
or entities who have been provided by CCAC or its agents with any copies of the
foregoing materials. Nothing in this paragraph shall limit any remedies
available to Fiton under this agreement or under applicable law for CCAC's
breach of this Agreement, and any monies paid to Fiton by CCAC under this
Agreement prior to the effective date of termination under this paragraph shall
be non-refundable.
15. Further Assurances
Fiton and CCAC shall each, from time to time, execute and deliver all
such further documents and instruments and do all acts and things as the other
may, either before or after the sale of SATC, reasonably required to effectively
carry out or better evidence or perfect the full intent and meaning of this
Agreement including, without limitation, the execution of any bill of sale
documents as may be requested by CCAC.
<PAGE>
16. Disclaimer of UN Convention on Sale of Goods
Pursuant to Article 6 of the United Nations Convention on Contracts
for the International Sale of Goods, the parties agree that such Convention
shall not apply to this Agreement.
17. Amendments and Waiver
No modification of or amendment to this Agreement shall be valid or
binding unless set forth in writing and duly executed by both of the parties
hereto and no waiver of any breach of any term or provision of this Agreement
shall be effective or binding unless made in writing and signed by the party
purporting to give the same and, unless otherwise provided, shall be limited to
the specific breach waived.
18. Notices
Any notice required or permitted to be sent under this Agreement must
be in writing and delivered by hand or facsimile or by an internationally
recognized courier or other receipted delivery service excluding the postal
service, return receipt requested, to the recipient party at the address
indicated above, to the attention of the President in the case of CCAC and to
the attention of Alfonso Carrillo M. in the case of Fiton. Notice properly sent
will be effective when: (a) delivered by hand; (b) sent by facsimile; or (C)
deposited with a recognized international courier company. A facsimile will be
allowed only if the receiving machine confirms receipt through answer back and
the sending machine prints a paper copy of the answer back message.
19. Survival
It is agreed that the provisions of this Agreement with the exception
of the provisions of Paragraph 1(D) shall not terminate on payment and shall
remain in full force and effect and shall not be affected, impaired or
invalidated by such payment.
20. Severability
If any term, provision, covenant or condition of this Agreement is
held by a court of competent jurisdiction to be invalid or unenforceable, the
remainder of this provisions shall remain in full force and effect and shall not
be affected, impaired or invalidated thereby.
21. Assignment
This Agreement and any rights granted hereunder shall not be assigned,
encumbered by security interest or otherwise transferred by CCAC without the
prior written consent of Fiton. Notwithstanding the foregoing, CCAC may assign
all of its rights or obligations under this Agreement to any successor to all or
substantially all of CCAC's assets, provided that such successor agrees in
writing to assume all obligations of CCAC under this Agreement and to be bound
by its terms.
22. Limitations Period
All claims under this Agreement must be brought within three (3) years
of the date thereof, except in the case of claims related to Royalties or to
Paragraph 12, which claims must be brought within two (2) years of the date of
claim arises. All claims not made within these periods shall be deemed waived.
<PAGE>
23. Governing Law
This Agreement shall be governed by, subject to and interpreted in
accordance with the laws in force in the State of New York without regard to the
conflicts provisions thereof. Any legal proceedings relating to the subject
matter of this Agreement shall be submitted to the exclusive jurisdiction of the
courts of the State of New York and the parties hereby submit to the
jurisdiction of the courts of the State of New York. Service of process in any
such proceeding may be undertaken by giving notice to the respective party in
the manner prescribed in this Agreement.
24. Arbitration
Any controversy or claim arising out of or relating to this Agreement,
or the breach thereof, shall be settled by binding arbitration conducted before
a single arbitrator acceptable to both parties familiar with the law and
industry as it pertains to data processing. If the parties cannot agree on the
arbitrator, the parties shall request that the American Arbitration Association
appoint three (3) arbitrators. The site of the arbitration shall be New York,
New York. The arbitration shall be conducted in accordance with the then
prevailing Commercial Arbitration Rules of the American Arbitration Association,
and judgment on the award rendered by the arbitrator shall be binding and
conclusive, and may be entered in any court having jurisdiction thereof. Each
party shall bear its own costs and expenses, including fees and expenses of
counsel, associated with the arbitration. The arbitrator is not permitted to
award punitive or exemplary damages, or any other damages not permitted by this
Agreement. Notwithstanding anything to the contrary set forth herein, no party
shall be required to submit any dispute or disagreement regarding the
interpretation of any provision of this Agreement, the performance by any party
of its obligations under this Agreement or a default hereunder to the mechanisms
set forth in the Paragraph 24 to the extent that such submission is seeking
solely equitable relief from irreparable harm.
25. Force Majeure
Neither party shall be responsible for its failure to perform an
obligation hereunder if such failure is due to an act of God or other event
beyond human control.
26. Entire Agreement
This Agreement and the documents referenced herein contain the entire
agreement between the parties with respect to the subject matter thereof as of
their dates and supersede all other prior agreements, negotiations,
representations and proposal, written or oral, relating to their subject matter.
<PAGE>
27. Counterparts
This Agreement can be executed in any number of counterparts, each of
which shall constitute an original and all of which when taken together shall
constitute one and the Same Agreement.
IN WITNESS WHEREOF the parties hereto have duly executed this
Agreement as of the date first written above.
FITON BUSINESS, S.A. CREDITCARD ACQUISITON CORP.
By: _______________________ By: ________________________
Name: _____________________ Name: ______________________
Title: ____________________ Title: _____________________
GUARANTORS:
OASIS TECHNOLOGY LTD. CONSOLIDATED TECHNOLOGY GROUP LTD.
By: _______________________ By: ________________________
Name: _____________________ Name: ______________________
Title: ____________________ Title: _____________________
By: __________________________
Name: ________________________
CSMC CORP
Title: _______________________
<PAGE>
SCHEDULE A
GENERAL FUNCTION OF CURRENT SATC
SCHEDULE B
PROJECTION OF END USER LICENSES
YEAR NUMBER OF LICENSES
1 2
2 8
3 8
4 8
5 8
6 8
7 8
<PAGE>
SCHEDULE C
CONFIDENTIALITY AND WORK PRODUCT AGREEMENT
CreditCard Acquisition Corp., a Delaware Corporation (the "Company"),
owns, uses or is developing various technology pertaining to a credit card
administration system (the "Project").
I have been engaged as an employee/independent contractor of the
Company to perform services relating to the Project.
Intending to be legally bound, for good and valuable consideration the
sufficiency of which is hereby acknowledged, I and the Company agree as follows
(the "Agreement"):
1. I acknowledge and agree that during the scope and course of my work
for the Company, I will be provided with or otherwise be exposed to or receive
certain confidential and proprietary information ("Confidential Information") of
the Company or of third parties, particularly Fiton Business, S.A. ("Fiton").
Such Confidential Information may include, but is not limited to, know-how,
ideas, plans, designs and process, including material compositions, circuit
schematics, specifications and functional specifications, software, firmware,
assembly drawings, manufacturing techniques, business plans, marketing plans,
studies, financial information and plans, and other information. To protect the
Company's investment and absolute ownership interests of whatever nature in the
Confidential Information, the Company does not wish to make the Confidential
Information generally public or common knowledge. I acknowledge the Company's
need for and right to this protection.
2. I will not disclose, duplicate or otherwise make available, using
any medium or means, to any other person or entity any portion of the
Confidential Information, nor allow any other person or entity to copy,
reproduce or disclose, in whole or in part, the Confidential Information in its
original form or as it may be modified, amended or otherwise enhanced. I agree
to make user of the Confidential Information only in the context of my work on
the Project or as the Company may otherwise specifically authorize in writing.
3. Any improvements, inventions, copyrightable materials, techniques,
know-how, processes or other intellectual property made or prepared during the
course of my duties or primarily at the direction of the Company or for Company
purposes, whether accomplished during normal working hours or any other time,
belong exclusively to the Company or, as designated by Company to Fiton. All
materials prepared by me for or relating to the Project, including written or
graphic materials, shall be done as "work made for hire" as defined and used in
the Copyright Act of 1976, and the Company or Fiton will solely retain and own
all rights in any such materials.
4. I agree that this Agreement is for the benefit of the Company and
Fiton and may be enforced by the Company or Fiton. In the event of my breach or
threatened breach of any provision of this Agreement, I agree that the remedy at
law will be inadequate, and in addition to any of the rights and remedies
available at law or otherwise, the Company or Fiton shall be entitled to
equitable relief in the form of a temporary or permanent injunction without the
necessity of proving actual damages.
5. This Agreement is in addition to any other contractual agreements
between myself and the Company.
6. Upon termination of my employment or contract with the Company, I
will promptly return to the Company all matter relating to the Project,
including all documents, diskettes or other materials, including hand-written
notes, containing or consisting of Confidential Information.
<PAGE>
7. This Agreement shall survive the termination of my employment or
other relationship with the Company.
IN WITNESS WHEREOF, the Company has executed this Agreement by a duly
authorized officer and I have signed and my signature has been witnessed as
indicated below.
CREDITCARD ACQUISITION CORP. EMPLOYEE/INDEPENDENT CONTRACTOR
By: ______________________ ________________________
Name: ____________________ Name:___________________
Title: ___________________ Title: _________________
Date: ____________________ Date: __________________
<PAGE>
SCHEDULE D
FORM OF GUARANTY
FOR VALUE RECEIVED, and in consideration of and as an inducement to
Fiton Business, S.A., a British Virgin Islands Corporation ("Fiton") to enter
into and perform the Purchase Agreement (The "Purchase Agreement") dated as of
February 6, 1996 among CreditCard Acquisition Corp., a Delaware Corporation
("CCAC"), Oasis Technology Ltd., a Canadian Corporation ("Oasis"), Consolidated
Technology Group Ltd., a Delaware Corporation ("COTG"), CSMC Corp., ("CSMC") a
Delaware Corporation ("Creative", and collectively with Oasis and COTG, the
Guarantors") and Fiton, each of the Guarantors hereby jointly and severally
guarantees to Fiton the full and complete performance and observance of all of
the covenants, representations, warranties and indemnities, and prompt and full
payment, when due, of all of the obligations of CCAC under the Purchase
Agreement required to be performed, observed and paid by CCAC and its successors
and assigns.
This is an irrevocable and unconditional guarantee of payment and
performance and not of collection. Each of the Guarantors may, at the option of
Fiton, be joined in any action or proceeding commenced by Fiton against CCAC in
connection with the based upon the Purchase Agreement or any term, covenant or
condition thereof. Recovery may be had against any of the Guarantors in such
action or proceeding or in any independent action or proceeding against any of
the Guarantors without Fiton first asserting, prosecuting, or exhausting any
remedy or claim against CCAC or any of the other Guarantors or any other
guarantor. There shall be no requirement of any notice to any of the Guarantors
of non-payment, non-performance or non-observance by CCAC, or proof thereof,
whereby to charge any of the Guarantors therefor, all of which each of the
Guarantors hereby waives.Each of the Guarantors shall perform its obligations
hereunder upon demand. Each of the Guarantors hereby agrees that this Guarantee
shall remain and continue in full force and effect notwithstanding any waiver,
amendment, modification, extension or substitution of or for the Purchase
Agreement until (i) the Purchase Price (as defined in the Purchase Agreement)
has been paid in full in accordance with the terms and conditions of the
Purchase Agreement, and (ii) CACC has paid an amount equal to US $150,000 for
Royalties (as defined in the Purchase Agreement) in accordance with the terms
and conditions set forth in Section 2 thereof; provided, however, that this
Guarantee shall remain in full force and effect in connection with any
infringement or any claim of infringement based on or arising out of any
modifications, enhancements or derivative works developed by CCAC to the Current
SATC (as defined in the Purchase Agreement). This Guarantee shall be binding
upon each the Guarantors and its heirs, beneficiaries, personal representatives,
successors and assigns. No assignment of this Guarantee through operation of law
or otherwise shall relieve Oasis, COTG or Creative from their obligations
hereunder.
<PAGE>
Each of the Guarantors hereby consents and agrees to submit to the
jurisdiction of the courts of the State of New York and of the federal courts of
the United States sitting in the State of New York in any action or proceeding
brought by Fiton to enforce this Guarantee.
IN WITNESS WHEREOF, each of the undersigned has executed this
Guarantee this ___ day of February, 1996.
OASIS TECHNOLOGY LTD.
- ---------------------------
Name:
Title:
CONSOLIDATED TECHNOLOGY GROUP LTD.
- ---------------------------
Name: Lewis S. Schiller
Title: Chairman & CEO
CREATIVE SOCIO-MEDICS CORP.
- ----------------------------
Name:
Title:
FIRST AMENDMENT made as of the 19th day of March 1996 to an agreement
("Agreement") made as of the 7th day of February 1996 by and among CreditCard
Acquisition Corp. a Delaware Corporation with offices at 146 Nassau Avenue,
Islip, New York 11751 ("CCAC"), Fiton Business, S.A., a corporation organized in
the British Virgin Islands with offices at Pasea State Road, Tortola, BVI
("Fiton"), Oasis Technology Ltd., (Oasis"), Consolidated Technology Group Ltd.
("COTG"), and CSMC Corp. (collectively with Oasis and COTG, the "Guarantors").
WHEREAS the parties to the Agreement wish to modify it in certain
regards as set forth in this First Amendment;
NOW THEREFORE, in consideration of the premises and terms and
conditions contained herein, the parties agree as follows:
1. Defined Terms
All terms defined in the Agreement shall have the same meaning when
used in this First Amendment.
<PAGE>
2. Amended Paragraphs
(A) The first sentence of Paragraph 1(C) of the agreement is hereby
amended to read as follows:
"Subject to the complete payment of the Purchase Price (as defined
herein), Fiton hereby agrees to sell and transfer to CCAC all its right, title
and interest in Current SATC, including, without limitation, all copyrights,
patent rights and trade secret rights, source code and documentation for all
versions existing as of the date hereof of Current SATC described in Schedule A
hereto, for a purchase price of seven hundred fifty thousand dollars ($750,000)
("Purchase Price"); provided however that subject to timely payment by wire
transfer of the Final Payment as defined in Paragraph 1(D) (iv) herein and of
the prior payments set forth in Paragraphs 1(D) (ii-iii) herein, the Purchase
Price shall be six hundred and fifty thousand dollars ($650,000)."
(B) Paragraph 1(D) (iv) is hereby amended to read as follows:
"The amount of two hundred and seventy-five thousand dollars
($275,000) (the "Final Payment") shall be paid by wire transfer on September 2,
1996; provided however that if such Final Payment is paid by wire transfer
before September 2, 1996, and if all prior payments as set forth in Paragraphs
1(D) (i-iii) have been timely paid, such Final Payment shall be reduced to one
hundred and seventy-five thousand dollars $175,000)."
(C) The last sentence of Paragraph 2(A) of the Agreement is hereby
amended to read as follows:
"CCAC agrees that the maintenance fees charged for licenses granted by
it for SATC shall not exceed twenty-five percent (25%) of the sum of (i) the
license fees charged by CCAC to a sublicense of SATC, and (ii) fees charged by
CCAC for modifications to SATC made for such sublicensee."
(D) Paragraph 8(A) of the Agreement is hereby amended by numbering the
first subparagraph of paragraph 8(A) as "8(A)(i)" and numbering the second
subparagraph of Paragraph 8(A) as "8(A)(ii)" and changing the next to last
sentence of Paragraph 8(A)(ii) to read as follows:
"The terms of this Paragraph 8(A) shall remain in effect until title
to SATC has passed to CCAC."
(E) The last sentence of Paragraph 11(A) of the Agreement is hereby
amended, and an additional sentence is added at the end of Paragraph 11(A), to
read as follows:
"Fiton's license shall be exclusive with respect to Belize, Costa
Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama ("Exclusive
Territory"), and non-exclusive with respect to the rest of the world, provided
that CCAC may grant only to its World-Wide Resellers (as such term is
hereinafter defined) the right to market and sublicense new versions of SATC in
the Exclusive Territory. "World Wide Resellers" shall mean only those CCAC
resellers who are granted the right to market and sublicense new versions of
SATC on a world-wide basis, provided that (i) no such World Wide Reseller shall
have its principal offices in the Exclusive Territory and (ii) no such World
Wide Reseller shall derive a majority of its sales from the Exclusive
Territory."
<PAGE>
(F) Paragraph 11(B) of the Agreement is hereby amended to read as
follows:
"Fiton will receive a discount off the standard license fee charged by
CCAC for SATC End User licenses based on the level of maintenance, professional
service and customization support to be provided by Fiton to the End User. In no
event shall such discount be less then thirty percent (30%), nor shall Fiton be
required to pay to CCAC or any Affiliate any fee or expense in order to enter
into or perform under the Reseller Agreement or to retain any discount level,
including but not limited to fees for training performed at the facilities of
CCAC or those of its Affiliates or at the facilities and Oasis, provided the
Fiton shall pay CCAC its Affiliates and Oasis for any consulting services
requested by Fiton and for any expenses incurred by CCAC, its Affiliates, or
Oasis at the request of Fiton. A schedule of the discount levels will be
attached to the Reseller Agreement."
(G) The reference in Paragraph 11(C) to "Paragraphs 5(C) and 8(A) of
this Agreement" shall be amended to "Paragraphs 5(D) and 8(A)(ii) of this
Agreement."
(H) Paragraph 12 of the Agreement is hereby amended by changing the
period at the end thereof to a comma and adding the following language:
"...., provided that any customizations requested by an End User and
made by Fiton to Current SATC shall be licensed only to the End User for whom
such customizations are made, and shall not be incorporated in the version of
Current SATC which is licensed to other End Users."
(I) Paragraph 13(B) of the Agreement is hereby deleted and the
following is substituted in lieu thereof:
"Until the Transfer of Title Fiton shall have a lien on the agreements
entered into by CCAC or its Affiliates related to SATC and, concurrently with
the execution of this First Amendment CCAC will enter into a Pledge Agreement in
the form attached hereto as Schedule E to secure such lien(s), and shall execute
such other documents including UCC filings which are required to evidence such
lien(s). Such documents, in recordable form, shall be executed by CCAC
concurrently with the execution of this Amendment, and thereafter as necessary
pursuant to Paragraph 15 hereof. In addition, no term in any such agreement
shall restrict the lien rights contemplated herein, and CCAC shall use its best
efforts to include a right of assignment in all such agreements."
(J) Paragraph 14 of the Agreement is hereby amended by adding the
following sentence at the end thereof:
"Notwithstanding anything to the contrary contained in the previous
sentence, CCAC, its successor of the Guarantors shall not be required to return
to Fiton any modifications that are not derivative of and do not incorporate
SATC source code."
(K) A new paragraph 28 is hereby added to the Agreement to read as
follows:
<PAGE>
28. Amounts Owed by Ingenieria de Software, S.A.
Oasis hereby forgives the indebtedness of Ingenieria de Software,
S.A., in the amount of fifteen thousand dollars ($15,000) now owing to Oasis,
provided however that in consideration of such forgiveness, Fiton agrees that
neither it nor any of its share owners shall have any claim nor make any demand
against CCAC or the Guarantors for any legal fees incurred by Fiton or such
share owners in consummating this Agreement and any amendments thereto."
3. Ratification of Agreement
Except as amended in this First Amendment the Agreement is hereby
ratified and confirmed and shall continue in full force and effect.
IN WITNESS WHEREOF the parties hereeeeto have executed this First
Amendment as of the date first above written.
FITON BUSINESS, S.A. CREDITCARD ACQUISITION CORP.
By:________________________ By:__________________________
Name: _____________________ Name: _______________________
Title: ____________________ Title: ______________________
GUARANTORS:
OASIS TECHNOLOGY LTD. CONSOLIDATED TECHNOLOGY GROUP LTD.
By: _______________________ By: _________________________
Name: _____________________ Name: _______________________
Title: ____________________ Title: ______________________
CSMC CORP.
By: _______________________
Name: _____________________
Title: ____________________
<PAGE>
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1
<TABLE>
<CAPTION>
Three months ended Years ended
------------------ ------------
March 31, December 31,
--------- -------------
1996 1995 1995 1994 1993
------------ ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Net Loss - Historical $(1,999,000) $ (558,000) $(2,850,000) $(1,751,000) $(433,000)
============ =========== ============ ============ ==========
Pro Forma Adjustments $ 45,000 $ 684,000
------------ ------------
Pro Forma Net Loss $(2,044,000) $(3,534,000)
============ ============
Pro Forma Loss Per Share - Note 1 $ (.42) $ (.73)
============ ============
Pro Forma Loss Per Share - Note 2 $ (.36) $ (.62)
============ ============
</TABLE>
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.
<PAGE>
(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.
(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> 7,999,000
<CURRENT-LIABILITIES> 6,636,000
<BONDS> 0
<COMMON> 41,000
0
0
<OTHER-SE> 447,000
<TOTAL-LIABILITY-AND-EQUITY> 7,999,000
<SALES> 0
<TOTAL-REVENUES> 2,560,000
<CGS> 1,898,000
<TOTAL-COSTS> 460,000
<OTHER-EXPENSES> 2,075,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126,000
<INCOME-PRETAX> (1,999,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,999,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,999,000)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>