<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996
Commission File Number 0-21177
NETSMART TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3680154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
146 Nassau Avenue, Islip, NY 11751
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 968-2000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X_ No__
Number of shares of common stock outstanding
as of November 11, 1996: 6,798,203
=========
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Netsmart Technologies, Inc.
Index
Part I: - Financial Information:
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 1-3
Consolidated Statements of Operations-
Nine Months Ended September 30, 1996 and September 30, 1995
and three months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 1996 and September 30, 1995. 5-6
Consolidated Statement of Stockholders' Equity-
Nine Months Ended September 30, 1996. 7-8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
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Netsmart Technologies, Inc.
Consolidated Balance Sheets
September 30, December 31,
1996 1995
Assets
Current Assets:
Cash $2,315,356
Accounts receivable- Net 2,392,608 $2,112,972
Costs and Estimated Profits in Excess
of Interim Billings 787,598 415,079
Other Current Assets 4,495 13,395
--------- ---------
Total current assets 5,500,057 2,541,446
--------- ---------
Property and Equipment - Net 310,390 347,239
--------- ---------
Other assets:
Capitalized Software Development
Costs 264,860
Investment in Joint Venture at Equity 235,815
Customer Lists 3,206,814 3,441,814
Other Assets 65,526 60,603
--------- ---------
Total Other Assets 3,773,015 3,502,417
--------- ---------
Total Assets $9,583,462 $6,391,102
========= =========
See Notes to Financial Statements.
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Netsmart Technologies, Inc.
Consolidated Balance Sheets
September 30, December 31,
1996 1995
Liabilities and Stockholders' Equity:
Current Liabilities:
Cash Overdraft $ 95,536
Notes Payable - Bank 79,000
Notes Payable - Other $ 448,740 1,002,301
Capitalized Lease Obligations 158,703 169,480
Accounts Payable 945,553 1,185,776
Accrued Expenses 1,502,136 1,323,249
Interim Billings in Excess of Costs
and Estimated
Profits 1,293,087 941,479
Due to Related Parties 46,610 167,000
Deferred Revenue 58,056 141,000
--------- ---------
Total Current Liabilities 4,452,885 5,104,821
--------- ---------
Capitalized Lease Obligations - Forward 20,421 33,060
--------- ---------
Subordinated Debt - Related Party - Forward 750,000
--------- ---------
Commitments and Contingencies - Forward
--------- ---------
Redeemable Preferred Stock:
Series B 6% Redeemable Preferred Stock;
80 Shares Authorized, Issued and Outstanding
in 1995 [Liquidation Preference and Redemption
Price of $96,000] - Forward 96,000
--------- ---------
See Notes to Financial Statements.
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Netsmart Technologies, Inc.
Consolidated Balance Sheets
September 30, December 31,
1996 1995
Total Current Liabilities - Forward $4,452,885 $5,104,821
--------- ---------
Capitalized Lease Obligations - Forwarded 20,421 33,060
--------- ---------
Subordinated Debt - Related Party - Forwarded 750,000
--------- ---------
Commitments and Contingencies - Forwarded -- --
--------- ---------
Redeemable Preferred Stock - Forwarded 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
at December 31, 1995 [Liquidation
Preference of $40,000] 4
Series D 6% Redeemable Preferred Stock $.01
Par Value 3,000 Shares Authorized, 1,210 and
2,210 Issued and Outstanding [Liquidation
Preference of $1,210,000 and $2,210,000] at
September 30, 1996 and December 31, 1995,
respectively 13 23
Additional Paid-in Capital - Preferred Stock
$39,996 - Series A at December 31, 1995;
$1,209,509 - Series D at September 30, 1996,
$2,209,498 - Series D at December 31, 1995 1,209,509 2,249,494
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued and Outstanding
6,798,203 Shares at September 30, 1996,
3,011,253 Shares at December 31, 1995 67,982 30,113
Additional Paid-in Capital - Common Stock 13,621,887 3,273,968
Accumulated Deficit (9,789,235) (5,146,381)
--------- ---------
Total Stockholders' Equity 5,110,156 407,221
--------- ---------
Total Liabilities and Stockholders' Equity $9,583,462 $6,391,102
========= =========
See Notes to Financial Statements.
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Netsmart Technologies, Inc.
Consolidated Statements of Operations
Nine months ended Three months ended
September 30, September 30,
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Software and Related
Systems and Services:
General $4,065,762 $3,315,716 $ 740,283 $1,343,728
Maintenance Contract
Services 890,018 771,367 317,186 258,849
--------- --------- --------- -------
Total Software and Related
Systems and Services 4,955,780 4,087,083 1,057,469 1,602,577
Data Center Services 1,543,100 1,309,901 505,853 447,148
--------- --------- --------- -------
Total Revenues 6,498,880 5,396,984 1,563,322 2,049,725
--------- --------- --------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 3,938,025 2,814,791 1,169,732 1,139,572
Maintenance Contract
Services 409,483 554,025 124,208 197,405
--------- --------- --------- -------
Total Software and Related
Systems and Services 4,347,508 3,368,816 1,293,940 1,336,977
Data Center Services 868,437 669,062 298,620 248,358
--------- --------- --------- -------
Total Cost of Revenues 5,215,945 4,037,878 1,592,560 1,585,335
--------- --------- --------- ---------
Gross Profit 1,282,935 1,359,106 (29,238) 464,390
Selling, General and
Administrative Expenses 1,489,141 2,283,380 555,156 1,100,252
Related Party Administrative
Expenses 24,000 13,500 15,000 4,500
Compensation expense -
Warrants and Options Granted 2,229,300 -- (769) --
Financing Cost 1,680,000 -- 1,680,000 --
Minority interest in loss
of subsidiary 109,185 -- 9,185 --
Research and Development -- 529,239 -- 194,052
--------- --------- --------- -------
Loss from Operations (4,248,691) (1,467,013) (2,287,810) (834,414)
Interest Expense 394,163 419,230 119,061 154,109
--------- --------- --------- -------
Net Loss $(4,642,854) $(1,886,243) $(2,406,871) $(988,523)
========= ========= ========= ========
Weighted average number of
shares of common stock 5,068,654 5,068,654
Loss per share $( .92) $( .48)
========= ========= ========= ========
See Notes to Financial Statements.
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Netsmart Technologies, Inc.
Consolidated Statements of Cash Flows
Nine months ended
September 30
1996 1995
---- ----
Operating Activities:
Net [Loss] $(4,642,854) $(1,886,000)
--------- ---------
Adjustments to Reconcile Net Income [Loss]
to Net Cash [Used for] Provided by
Operating Activities:
Depreciation and Amortization 348,190 498,000
Administrative Expenses 9,000 13,000
Compensation Expense -
Warrants and Options Granted 2,229,300
Expense related to issuance of
Common Stock related to Financing 1,680,000 --
Equity in Net Loss of Joint Venture 109,185 21,000
Write off of Deferred Public Offering Costs -- 460,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (279,636) 181,000
Costs and Estimated Profits in
Excess of Interim Billings (372,519) (40,000)
Other Current Assets 8,900 (21,000)
Other Assets (4,923) (1,000)
Increase [Decrease] in
Accounts Payable (240,223) 231,000
Accrued Expenses 178,887
Interim Billings in Excess of
Costs and Estimated Profits 351,608 (426,000)
Due to Related Parties (120,390) 586,000
Deferred Revenue (82,944) 328,000
--------- ---------
Total Adjustments 3,814,435 1,830,000
--------- ---------
Net Cash - Operating Activities -
Forward (828,419) (56,000)
--------- ---------
Investing Activities:
Acquisition of Property and
Equipment (62,401) (137,000)
Software Development Costs (278,800)
Acquisition of Software (345,000)
--------- ---------
Net Cash - Investing Activities -
Forward $ (686,201) $(137,000)
--------- ---------
See Notes to Financial Statements.
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Netsmart Technologies, Inc.
Consolidated Statements of Cash Flows
Nine months ended
September 30
1996 1995
---- ----
Net Cash - Operating Activities -
Forwarded $ (828,419) $ (56,000)
--------- ---------
Net Cash - Investing Activities -
Forwarded (686,201) (137,000)
--------- ---------
Financing Activities:
Proceeds from Short-Term Notes 500,000 659,000
Payment of Short-Term Notes (1,053,561) (190,000)
Payment of Bank Note Payable (79,000) (165,000)
Payment of Capitalized Lease
Obligations (23,416) (20,000)
Cash Overdraft (95,536) 38,000
Payment of short-term notes to
related party (750,000) --
Redemption of Series B Preferred Stock (96,000) --
Gross proceeds from Issuance of Stock 5,175,000 --
Cost associated with Issuance of Stock (1,347,511) --
Proceeds from warrant exercise 1,600,000
Deferred Public Offering Costs (129,000)
--------- ---------
Net Cash - Financing Activities 3,829,976 193,000
--------- ---------
Net Increase [Decrease] in Cash 2,315,356 --
Cash - Beginning of Periods -- --
--------- ---------
Cash - End of Periods $2,315,356 $ --
========= =========
Supplemental Disclosure of Cash Flow
Information Cash paid during the periods
for:
Interest $ 369,384 $ 213,000
========= =========
See Notes to Financial Statements.
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Netsmart Technologies, Inc.
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1996
Series A Preferred Stock at .01 Par Value: Shares Amount
------ ------
Beginning Balance 400 $ 4
Common Stock Issued in Exchange
for Series A Preferred Stock (400) (4)
--------- ---------
Ending Balance 400 $ 4
========= =========
Series D Preferred Stock at .01 Par Value
Beginning Balance 2,210 $23
Common Stock Issued in Exchange
for Series D Preferred Stock (1,000) (10)
--------- ---------
Ending Balance 1,210 $13
========= =========
Additional Paid-In Capital Preferred Stock
Beginning Balance -- $ 2,249,505
Common Stock Issued in Exchange for Series D
& A Preferred Stock -- (1,039,996)
--------- ---------
Ending Balance -- $ 1,209,509
========= =========
Common Stock $.01 Par Value Authorized
15,000,000 Shares
Beginning Balance 3,011,253 $ 30,113
Common Stock Issued in Exchange for Series D
& A Preferred Stock 1,168,200 11,681
Common Stock Issued - Initial Public Offering 1,293,750 12,938
Common Stock Issued Exercise of Warrants 800,000 8,000
Common Stock Issued Financing Costs 525,000 5,250
--------- ---------
Ending Balance 6,798,203 $ 67,982
========= =========
See Notes to Financial Statements.
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Netsmart Technologies, Inc.
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1996
Additional Paid-In Capital Common Stock Shares Amount
Beginning Balance -- $ 3,273,968
Common Stock Issued in Exchange for Series D & A
Preferred Stock -- 1,028,319
Allocated Related Party Administrative Expenses -- 9,000
Compensation from the Issuance of Warrants
and options -- 2,229,300
Common Stock Issued - Initial Public Offering -- 5,162,063
Common Stock Issued - Exercise of Warrants -- 1,592,000
Common Stock Issued - Financing Costs -- 1,674,750
Costs Associated with Issuance of Stock -- (1,347,513)
--------- ---------
Ending Balance -- $13,621,887
========= =========
Accumulated Deficit
Beginning Balance $(5,146,381)
Net Loss (4,642,854)
--------- ---------
Ending Balance -- $(9,789,235)
========= =========
Total Stockholders' Equity -- $ 5,110,156
========= =========
See Notes to Financial Statements.
-8-
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Netsmart Technologies, Inc.
Notes to Consolidated Financial Statements
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(1) In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company as
of September 30, 1996 and the results of its operations for the nine months
ended September 30, 1996 and 1995 and the changes in cash flows for the nine
months ended September 30, 1996 and 1995.
(2) The accounting policies followed by the Company are set forth in Notes 1 and
2 to the Company's consolidated financial statements as filed in its
Registration Statement on Form S-1, registration number 333-2550, which was
declared effective by the Securities and Exchange Commission on August 13, 1996.
During the nine months ended September 30, 1996, the Company reassigned
personnel to work on the IBN contract and the development of SmartCard products.
As a result, the applicable portion of their salaries and related expenses were
included as costs of revenue with respect to the work on the IBN contract and
capitalized software development costs with respect to their work in the
SmartCard product. As a result of such product development the Company incurred
$279,000 in capitalized software costs. No software development costs were
capitalized in the third quarter ended September 30, 1996.
During 1996 the Company recognized its 50% share of its loss in its joint
venture corporation with respect to the purchase of SATC software. The amount of
the loss was $109,000. Such amount has reduced the original investment in the
joint venture.
(3) The results of operations for the nine months ended September 30, 1996 and
1995 are not necessarily indicative of the results to be expected for the full
year.
(4) Loss per share - Loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding. For purposes
of computing weighted average number of shares of common stock outstanding the
Company has common stock equivalents. The common stock equivalents are assumed
converted to common stock, when dilutive. During periods of operations in which
losses were incurred, common stock equivalents were excluded from the weighted
average number of common shares outstanding because their inclusion would be
anti-dilutive.
(5) On August 19, 1996 the Company closed on a public offering whereby it sold
646,875 units at a price of $8 per unit for net proceeds of $3.8 million. Each
unit consisted of two shares of common stock and one Series A Redeemable Common
Stock Purchase Warrant.
On August 21, 1996 Series B Common Stock purchase warrants to purchase 800,000
shares of common stock at $2 per share were exercised and the Company received
$1,600,000 in gross and net proceeds.
In August 1996 the Company redeemed its Series B Redeemable Preferred stock in
the amount of $96,000 and converted its Series A Preferred stock into 43,200
Common Shares.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
- --------------------------------------------------------------------------------
During the quarter ending September 30, 1996, the Company issued 500,000 shares
of common stock to certain noteholders and 25,000 shares of common stock to the
Company's asset based lender as per the respective agreements. As a result of
such issuances the Company incurred a financing cost charge to operation in the
amount of $1,680,000.
Results of operations
Nine Months Ended September 30, 1996 and 1995
The Company's revenue for the nine months ended September 30, 1996 (the
"September 1996 period") was $6.5 million, an increase of $1.1 million, or 20%
from the revenue for the nine months ended September 30, 1995(the "September
1995 period"), which was $5.4 million. Approximately $1,389,000 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 September
1996 period, accounting for approximately 24.5% of revenue. Furthermore, through
September 30, 1996 IBN has generated revenue of $2.1 million, or approximately
92.9% of the Company's total revenue from the SmartCard Systems during the
September 1996 period and the year ended December 31, 1995, on a combined basis.
The revenue generated to date includes approximately $419,000 of guaranteed
royalties. As of September 30, 1996 the contract was more than 80% complete. The
Company is continuing to provide professional services to IBN, although no
revenue was recognized in the three months ended September 1996. The Company
intends to expand its marketing effort for its CarteSmart System; however, at
September 30, 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 September 1996 period,
accounting for $4.9 million or 75% 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 component of
revenue for the September 1996 period was data center (service bureau) revenue
which increased to $1,543,000 in the September 1996 period from $1,310,000 in
the September 1995 period, reflecting an increase of 18%. The turnkey systems
revenue decreased to $1,235,000 in the September 1996 period from $1,388,000 in
the September 1995 period, reflecting a decrease of 11%. Maintenance revenue
increased to $890,000 in the September 1996 period from $771,000 in the
September 1995 period, a 15% increase. Revenue from third party hardware and
software decreased to $919,000 in the September 1996 period from $1,576,000 in
the September 1995 period, a decrease of 42%. Sales of third party hardware and
software are made only in connection with the sales of turnkey systems. License
revenues increased to $309,000 in the September 1996 period from $138,000 in the
September 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 1996 installations at September 30, 1996 from the prior year should
enable the Company to increase the maintenance revenue in future periods.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations continued.
- --------------------------------------------------------------------------------
Revenue from contracts from government agencies represented 33% of revenue for
the nine months ended September 30, 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 nine months
ended September 30, 1996, contracts from government agencies accounted for
approximately 44% 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.
Gross profit decreased to $1.3 million in the September 1996 period from $1.4
million in the September 1995 period, a 6% decrease. The decrease in the gross
profit was a result of the Company not recognizing any revenue on the IBN
contract while continuing to incur costs associated with its completion.
Selling, general and administrative expenses were $1.5 million for the September
1996 period, a decrease of 35% from the $2.3 million for the September 1995
period. The decline reflected a reduction in executive compensation and a
reduction in staff as well as a one time charge in the September 1995 period of
a write off of deferred public offering costs in the amount of $460,000.
Amortization of customer lists was $235,000 in the September 1996 and September
1995 periods. At September 30, 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 lists 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 Creative Socio-Medics ("CSM").
During the September 1996 period, the Company incurred non-cash compensation
charges of $2.2 million arising out of the issuance by the Company of warrants
and options having exercise prices which were less than the market value of the
Common Stock at the date of approval by the board of directors. During September
1996 period, the Company issued 500,000 common shares to certain noteholders and
25,000 shares of common stock to the Company's asset based lender. As a result,
of such issuances, the Company incurred a financing cost charge to operations in
the amount of $1,680,000
During the September 1996 period the Company recognized its 50% share of its
loss in its joint venture corporation with respect to the purchase of SATC
software. The amount of such loss was $109,000.
During the September 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 the development of
SmartCard products. As a result, their salaries and related expenses were
included as costs of revenue with respect to the work on the IBN contract and
capitalized software development costs with respect to their work on the
SmartCard product. As a result of such product development the Company incurred
$279,000 in capitalized software costs. During the September 1995 period, the
Company incurred research and development expenses of $529,000.
Interest expense was $394,000 in the September 1996 period, a decrease of
$25,000, or 6% from the interest expense for the September
1995 period. The
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations continued.
- --------------------------------------------------------------------------------
most significant component of the interest expense 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.
As a result of the foregoing factors, the Company incurred a net loss of $4.6
million, or $.92 per share for the September 1996 period, as compared with a
loss of $1.9 million, or $.47 per share for the September 1995 period.
Three Months Ended September 30, 1996 and 1995
The Company's revenue for the three months ended September 30, 1996 (the
"September 1996 quarter") was $1.6 million, a decrease of $486,000, or 24% from
the revenue for the three months ended September 30, 1995(the "September 1995
quarter"), which was $2.1 million. In previous quarters a significant amount of
increased revenue was related to the Company's agreement with IBN. No revenue
was recognized with respect to this contract in the September 1996 quarter. This
accounted for approximately $110,000 of decreased revenue in the September 1996
quarter. As of September 30, 1996 the contract was more than 80% complete. The
Company is continuing to provide professional services to IBN, although no
revenue for such services was recognized in the September 1996 quarter. The
Company intends to expand its marketing effort for its CarteSmart System;
however, at September 30, 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 September 1996 quarter,
accounting for $1.6 million or 100% of revenue. The largest component of revenue
for the September 1996 quarter was data center (service bureau) revenue which
increased to $505,000 in the September 1996 quarter from $447,000 in the
September 1995 quarter, reflecting an increase of 13%. The turnkey systems
revenue decreased to $415,000 in the September 1996 quarter from $528,000 in the
September 1995 quarter, reflecting a decrease of 21%. Maintenance revenue
increased to $317,000 in the September 1996 quarter from $259,000 in the
September 1995 quarter, a 23% increase. Revenue from third party hardware and
software decreased to $256,000 in the September 1996 quarter from $681,000 in
the September 1995 quarter, a decrease of 62%. Sales of third party hardware and
software are made only in connection with the sales of turnkey systems. License
revenues increased to $69,000 in the September 1996 quarter from $25,000 in the
September 1995 quarter. 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 1996 installations at September 30, 1996 from the prior year should
enable the Company to increase the maintenance revenue in future quarters.
Revenue from contracts from government agencies represented 44% of revenue for
the three months ended September 30, 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 September 30, 1996, contracts from government agencies accounted for
approximately 44% 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
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations continued.
- --------------------------------------------------------------------------------
ability to be profitable.
The Company sustained a negative gross profit of $(29,000) in the September 1996
quarter as compared to gross profit of $464,000 in the September 1995 quarter, a
106% decrease. This is substantially the result of not recognizing any revenue
on the IBN contract, although payroll and consulting costs were expended on this
effort.
Selling, general and administrative expenses were $555,000 for the September
1996 quarter, a decrease of 50% from the $1.1 million for the September 1995
quarter. The decline reflected a reduction in executive compensation and a
reduction in staff as well as a one time charge in the September 1995 period of
a write off of deferred public offering costs in the amount of $460,000.
Amortization of customer lists was $78,000 in the September 1996 and September
1995 quarters. At September 30, 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 lists 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 September 1996 period, the Company issued 500,000 common shares to
selling shareholders and 25,000 shares to the Company's asset based lender. As a
result, the Company incurred a financing cost charge to operations in the amount
of $1,680,000.
During the September 1996 quarter the Company recognized its 50% share of its
loss in its joint venture corporation with respect to the purchase of SATC
software. The amount of such loss was $9,000.
During the September 1996 quarter, 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 the development of
SmartCard products. As a result, their salaries and related expenses were
included as costs of revenue with respect to the work on the IBN contract.
During the September 1995 quarter, the Company incurred research and development
expenses of $194,000.
Interest expense was $119,000 in the September 1996 quarter, a decrease of
$35,000, or 23% from the interest expense for the September 1995 quarter. The
most significant component of the interest expense 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.
As a result of the foregoing factors, the Company incurred a net loss of $2.4
million, or $.48 per share for the September 1996 quarter, as compared with a
loss of $989,000, or $.25 per share for the September 1995 quarter.
Liquidity and Capital Resources
On August 19, 1996 the Company closed on a public offering whereby it sold
646,875 units at a price of $8 per unit for a net proceeds of $3.8 million. Each
unit consisted of two shares of Common stock and one Series A Redeemable
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations continued.
- --------------------------------------------------------------------------------
Stock Purchase Warrant. On August 21, 1996, Series B Common Stock Purchase
Warrants to purchase 800,000 shares of common stock at $2 per share were
exercised and the Company received $1,600,000 in gross proceeds. The Company
believes that these receipts will be sufficient to enable it to operate without
additional funding for at least one year from the closing of the public
offering. As a result the Company's working capital deficit of $2.6 million at
December 31, 1995 was improved to a working capital surplus of $1 million at
September 30, 1996.
Since January 1, 1995 and prior to the public offering, 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 this agreement
was increased from $750,000 to $1.0 million and the percentage of eligible
receivables was increased from 75% to 80%. As of September 30, 1996 the
outstanding borrowings under this facility was $449,000.
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
completion of a public offering. These loans were repaid in August 1996.
At September 30, 1996, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $3.2 million, representing
approximately 82 days of revenue based on annualizing the revenue for the nine
month period. At December 31, 1995, accounts receivable and costs and estimated
profits in excess of interim billings were approximately $2.5 million,
representing 88 days of revenue. Accounts receivable at September 30, 1996
increased by $280,000 from $2,113,000 at December 31, 1995 to $2,393,000 at
September 30, 1996. At September 30, 1996 one customer accounted for 20% of the
total accounts receivable balance. No other customer accounted for more than 10%
of the accounts receivable balance.
Pursuant to employment agreements with six officers of the Company, the Company
is paying for 1996 base salaries of approximately $500,000. In addition the
Company has an agreement to pay an affiliate, consulting fees of $180,000 per
annum.
-14-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETSMART TECHNOLOGIES, INC.
Chairman of the Board November 14, 1996
/S/ (Principal Executive
- ------------------------- Officer)
Lewis S. Schiller
Chief Financial Officer November 14, 1996
/S/ (Principal Financial and
- ------------------------- Accounting Officer)
Anthony P. Grisanti
<PAGE>
Netsmart Technologies, Inc.
September 30, 1996
Exhibit 11.1 Calculation of Earnings per Share
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, 1996 September 30, 1996
-------------- -------------
Net Loss $(2,406,871) $(4,642,854)
======= =========
Loss Per Share - Note 1 $(.48) $(.92)
==== ====
Loss Per Share - Note 2 $(.35) $(.67)
==== ====
Note 1: Computed by dividing net loss by the weighted average number of common
shares (4,668,643) for all periods presented and adjusting such amounts by items
(i) and (ii) below. This results in 5,072,974 shares for all periods presented.
(i) Assumes that 104,952 Stock Incentive Plan stock options, issued in December
1995 outstanding at September 30, 1996 were exercised at the beginning of the
period and that all proceeds were used to purchase treasury stock at $10 per
common share resulting in a net increase in outstanding stock of 101,331 shares
for all periods presented.
(ii) Assumes common stock warrants to purchase an aggregate of 378,500 common
shares were exercised at the beginning of the period and that all proceeds were
used to purchase treasury stock at $10 per common share resulting in a net
increase in outstanding common stock of 303,000 shares for all periods
presented.
Note 2: Computed by dividing net loss by the weighted average number of common
shares (4,668,643) for all periods presented and adjusting it by items (i) to
(vi) below. This results in 6,922,869 shares for all period presented.
(i) Assumes that 104,952 Stock Incentive Plan stock options, issued in December
1995, outstanding at September 30, 1996 were exercised at beginning of the
period and that all proceeds were used to purchase treasury stock at $10 per
common share resulting in a net increase in outstanding stock of 101,331 shares
for all periods presented.
(ii) Assumes that 252,804 Stock Incentive Plan stock options, issued in January
1995, outstanding at September 30, 1996 were exercised at the beginning of the
period and that the proceeds were used to purchase treasury stock at $10 per
common share resulting in a net increase in outstanding of 246,939 shares for
all periods presented.
(iii) Assumes that 129,500 Stock incentive plan stock options issued in April
1996 outstanding at September 30, 1996 were exercised at the beginning of the
period and that all proceeds were used to purchased treasury stock at $10 per
common share resulting in a net increase in outstanding of 103,600 shares for
all periods presented.
<PAGE>
Note 2 continued:
(iv) Assumes common stock warrants, issued at various times, to purchase
1,716,250 common shares were exercised at the beginning of the period and that
all proceeds were used to purchase treasury stock at $10 per common share
resulting in a net increase in outstanding stock of 1,373,000 shares of all
periods presented.
(v) Assumes common stock warrants, issued at various times, to purchase 637,500
common shares were exercised at the beginning of the period and that all
proceeds were used to purchase treasury stock at $10 per common share resulting
in a net increase in outstanding stock of 318,750 shares for all periods
presented.
(vi) Assumes common stock warrants, issued at various times, to purchase
1,009,375, common shares were exercised at the time of issuance and that all
proceeds were used to purchase treasury stock at $10 per common share resulting
in a net increase in outstanding stock of 553,031 shares for all periods
subsequent to the time of issuance.
NOTE - THIS CALCULATION IS SUBMITTED IN ACCORDANCE WITH THE SECURITIES EXCHANGE
ACT OF 1934 RELEASE NO. 9083, ALTHOUGH IT IS CONTRARY TO PARA. 40 OF APB 15
BECAUSE IT MAY PRODUCE AN ANTI-DILUTIVE RESULT.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,315,307
<SECURITIES> 0
<RECEIVABLES> 2,392,608
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,500,057
<PP&E> 901,182
<DEPRECIATION> 590,792
<TOTAL-ASSETS> 9,583,462
<CURRENT-LIABILITIES> 4,452,885
<BONDS> 0
<COMMON> 67,551
0
17
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,583,462
<SALES> 6,498,880
<TOTAL-REVENUES> 6,498,880
<CGS> 5,215,945
<TOTAL-COSTS> 5,215,945
<OTHER-EXPENSES> 5,531,626
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 394,163
<INCOME-PRETAX> (4,642,854)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,642,854)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,642,854)
<EPS-PRIMARY> (.92)
<EPS-DILUTED> (.92)
</TABLE>
