091297.13:54
As filed with the Securities and Exchange Commission on September 15, 1997
Registration No. 333-32391
Securities and Exchange Commission
Washington, D.C. 20549
Amendment No. 1
To
Form S-1
Registration Statement under the Securities Act of 1933
Netsmart Technologies, Inc.
(Exact name of registrant as specified in its charter)
Asher S. Levitsky P.C.
Esanu Katsky Korins & Siger
605 Third Avenue
New York, New York 10158
(212) 953-6000
Fax: (212) 953-6899
(Name, address and telephone number of
agent for service) Copies to:
Lewis S. Schiller, Chief Executive Officer
Netsmart Technologies, Inc.
146 Nassau Avenue
Islip, NY 11751
(516) 968-2000
Fax: (516) 968-2123
Approximate date of proposed sale to the public: As soon as practical on or
after the effective date of this Registration Statement. If any securities being
registered on this Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act, check the following box. [x]
Calculation of Registration Fee
<TABLE>
Maximum
Amount to be Maximum Offering Aggregate Registration
Title of each class of securities to be registered Registered Price Per Unit1 Offering Price Fee
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share2 953,125 Shs. $3.00 $2,859,375 $866.48
Series B Common Stock Purchase Warrants3 74,200 Shs. .75 55,650 16.86
Common Stock, par value $.01 per share4 74,200 Shs. 2.75 204,500 61.84
$945.18*
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Of which $866.48 has been paid.
1 Estimated solely for purposes of computation of the registration fee pursuant
to Rule 457.
2 Represents additional shares of Common Stock issuable upon exercise of
953,125 Series A Common Stock Purchase Warrants (the "Warrants")
resulting from the amendment to the Warrant Agreement to increase the
number of shares of Common Stock issuable upon exercise of the Warrants.
4 Represents Series B Common Stock Purchase Warrants ("Series B Warrants")
held by selling security holders. See "Selling Security Holders."
4 Represents shares of Common Stock issuable upon the exercise of Series B
Warrants held by selling security holders.
In addition, (a) 896,875 shares of Common Stock issuable upon exercise
of 896,875 outstanding Warrants, (b) 112,500 shares of Common Stock and 56,250
Warrants issuable upon exercise of the Underwriter's Options issued to the
underwriter of the Company's initial
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<PAGE>
public offering, (c) 56,250 shares of Common Stock issuable upon exercise of the
56,250 Warrants issuable upon exercise of such Underwriter's Options and (d)
500,000 shares of Common Stock and 250,000 Warrants issued to the holders of the
Company's promissory notes were registered pursuant to a registration statement
(the "IPO Registration Statement") on Form S-1, File No. 333-2550, which was
declared effective on August 13, 1996. This registration statement constitutes a
post-effective amendment to the IPO Registration Statement and the Prospectus
included in this registration statement also relates to the IPO Registration
Statement.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
Netsmart Technologies, Inc.
Cross-Reference Sheet Pursuant to Rule 404
<TABLE>
<S> <C>
Item No. Caption in Prospectus
1. Forepart of the Registration Statement Registration Statement Facing Page, Prospectus Cover Page
and Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Inside Cover Page, Back Cover Page
Pages of Prospectus
3. Summary Information, Risk Factors and Prospectus Summary, Risk Factors
Ratio of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page, Risk Factors
6. Dilution Dilution
7. Selling Security Holders Cover Page, Selling Security Holders
8. Plan of Distribution Cover Page, Selling Security Holders, Description of Securities
9. Description of Securities to be Description of Securities
Registered
10. Interest of Named Experts and Counsel N.A.
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 Position on N.A.
Indemnification for Securities Act
Liabilities
- ------------------------------------------------------------------------------
</TABLE>
- 3 -
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<PAGE>
PROSPECTUS SUBJECT TO COMPLETION DATED SEPTEMBER , 1997
Netsmart Technologies, Inc.
1,793,750 shares of Common Stock issuable upon exercise of Series A Redeemable
Common Stock Purchase Warrants 56,250 Units, each Unit consisting of one share
of Common Stock two Series A Redeemable Common Stock Purchase Warrants
500,000 shares of Common Stock and 250,000 Warrants
74,200 shares of Common Stock
This Prospectus relates to the shares of Common Stock of Netsmart
Technologies, Inc. (the "Company") issuable upon exercise of 896,875 Series A
Redeemable Common Stock Purchase Warrant (the "Warrants") which are currently
outstanding. 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 August 13, 1997. The Warrants are redeemable by the Company, with the
consent of Monroe Parker Securities, Inc., the underwriter of the Company's
initial public offering (the "Underwriter"), 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."
During a period of 90 days (the "Special Exercise Period") commencing on
the date of this Prospectus and ending at 5:30 P.M. New York City time, on ,
1997, the Company will amend the terms of the Warrants, including any Warrants
issued pursuant to the Underwriter's Options. Under these amended terms, if any
Warrants are exercised during the Special Exercise Period, the holders may
purchase, upon exercise of each Warrant, two shares of Common Stock for
$3.00 , resulting in an exercise price of $1.50 per share. The Company has the
right, in its discretion, to extend the Special Exercise Period on one or more
occasions for up to 30 days in the aggregate. Upon the expiration of the
Special Exercise Period, the exercise price and terms will revert to their
original terms. See "Description of Securities -- Series A Redeemable
Common Stock Purchase Warrants."
Pursuant to the underwriting agreement between the Company and the
Underwriter relating to the Company's initial public offering, the Underwriter
has been engaged as Warrant solicitation agent, but the Underwriter has agreed
to waive the 4% Warrant solicitation fee.
This Prospectus also relates to 56,250 Units, each Unit consisting of
two shares of Common Stock and one Warrant, issuable upon the exercise of the
Underwriter's Options (the "Underwriter's Options") granted to the Underwriter
in connection with the Company's initial public offering. The exercise price of
the Underwriter's Options is $11.60 per Unit.
This Prospectus also relates to (i) the sale by the Underwriter of
500,000 shares of Common Stock and 250,000 Warrants which the Underwriter
purchased or may purchase from four stockholders who acquired such shares of
Common Stock and Warrants in connection with an interim financing prior to the
Company's initial public offering, and (ii) the sale by an officer-director of
the Company and a director of the Company of an aggregate of 74,200 Series B
Common Stock Purchase Warrants ("Series B Warrants") and 74,200 shares of Common
Stock issuable upon exercise of such Series B Warrants; provided, that such
persons may not sell such Series B Warrants or shares of Common Stock prior to
August 13, 1998 without the prior consent of the Underwriter. See "Selling
Security Holders."
The Common Stock and Warrants are quoted on the Nasdaq SmallCap Market
under the symbols NTST and NTSTW,
respectively. On September , 1997, the last reported sale prices of the
Common Stock and Warrants were $ and $ , respectively.
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," WHICH BEGINS ON PAGE 6, 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 , 1997
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<PAGE>
To the extent that Warrants or Series B Warrants are exercised, the
Company will receive the proceeds from the exercise of such warrants. During the
Special Exercise Period, the Company will receive $3.00 for each Warrant
exercised, for which it will issue two shares of Common Stock. The exercise
price of the Series B Warrants is $2.00 per share. The Company cannot predict
the extent to which Warrants will be exercised during the Special Exercise
Period. Regardless of whether any Warrants are exercised, the Company
will incur expenses of approximately $150,000.
The Company is subject to certain informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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 Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of such
site is http//www.sec.gov.
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.
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.
Prospective investors are cautioned that the statements in this
Prospectus that are not descriptions of historical facts may be forward looking
statements that are subject to risks and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors,
including those identified under "Risk Factors" and elsewhere in this Prospectus
or in documents incorporated by reference in this Prospectus. In exercising
Warrants, either during or after the Special Exercise Period, prospective
investors should assume that no Warrants will be exercised other than those
previously exercised and those being exercised by the investor.
THE COMPANY
Netsmart Technologies, Inc. (the "Company") develops, markets and
supports computer software designed 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 database 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 system -- the
sponsor, which is the party that maintains the data base, such as a managed care
organization or financial institution, the users, who are the individuals who
use the system, and may be the subscribers of a managed care organization or the
bank card or credit card holders of a financial network, and the service
providers, who are those who provide goods or services to the users, such as
physicians, pharmacies, banks and merchants who provide goods, services or funds
to bank card or credit card holders.
The Company's principal services are its health information systems,
which are marketed principally to specialized care facilities, many of which are
operated by government entities and include entitlement programs, principally in
the behavioral health field. 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.
The Company has developed proprietary network technology utilizing smart
cards which it is seeking to market as part of its health information systems.
It is also seeking to market products utilizing its smart card technology in the
financial field. A smart card is a plastic card about the size of a standard
credit card which contains a single embedded microprocessor chip with both data
storage and computing capabilities. The smart card software provides access to
the information stored in the chip, the ability to update stored
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<PAGE>
information and includes security elements to restrict unauthorized access to or
modification of certain information stored on the card utilizing a smart card
reader system. The smart card reader system and the software provides the
ability to include information on both the smart card and the organization's
computer system. The Company also offers network applications which use
telecommunications rather than smart cards to obtain access to and manage data.
The Company's principal source of revenue is its health information
systems and related services which are marketed by its subsidiary, Creative
Socio-Medics Corp. ("CSM"). CSM was acquired in June 1994 by a wholly-owned
subsidiary of SIS Capital Corp. ("SISC") from Creative Socio-Medics Corp.
("Old CSM"), which is a wholly-owned subsidiary of Advanced Computer Techniques,
Inc. ("ACT"), a nonaffiliated party. SISC transferred such subsidiary to the
Company in September 1995.
For the six months ended June 30, 1997 and the year ended December 31,
1996, approximately 95% and 76% of revenue was derived from health information
systems and services. Substantially all of the Company revenue through December
31, 1995 was derived from health information systems and services. The only
significant revenue derived from the Company's smart card products, known as its
CarteSmart System, represented revenue from one customer, IBN, Inc. ("IBN"), and
the contract with IBN is substantially complete. The agreement with IBN relates
to a CarteSmart license and the implementation by IBN of a system, which
includes such software, for financial institutions in the former Soviet Union.
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"), unless
the context indicates otherwise. The Company's executive offices are located at
146 Nassau Avenue, Islip, New York 11751, telephone (516) 968-2000.
As of August 31, 1997, approximately 45.9% of the Company's outstanding
Common Stock was owned by SISC, which is a wholly-owned subsidiary of
Consolidated Technology Group Ltd. ("Consolidated"), a public company. See
"Certain Transactions" and "Principal Stockholders." Mr. Lewis S. Schiller,
chairman of the board and a director of the Company, is also chairman of the
board, chief executive officer and a director of Consolidated and SISC. Mr.
Schiller is also chairman of the board of Trans Global Services, Inc.
("Trans Global"), a public-held subsidiary of Consolidated. Mr. Norman J.
Hoskin, a director of the Company, is also a director of Consolidated and Trans
Global.
THE OFFERING
Securities Offered by the Compan1,793,750 shares of Common
Stock issuable upon exercise of outstanding
Warrants, during the Special Exercise Period,
which is the 90 day period commencing on the
date of this Prospectus and ending at 5:30 P.M.,
New York City time, on , 1997, which period may
be extended by the Company for up to 30 days in
the aggregate. Upon the expiration of the
Special Exercise Period, the Company will be
offering 896,875 shares of Common Stock issuable
upon exercise of the Warrants. See "Description
of Securities -- Series A Redeemable Common
Stock Purchase Warrants."
Securities Offered by
the Underwriter: 56,250 Units, each Unit consisting
of two shares of Common Stock and one Warrant,
which are issuable to the Underwriter pursuant
to the Underwriter's Options issued in the
Company's initial public offering. Pursuant to
the Underwriter's Options, if the Underwriter's
Options are exercised, the Warrants issuable
upon exercise of the Underwriter's Options must
be exercised immediately.
500,000 shares of Common Stock and 250,000
Warrants which were purchased or may be
purchased by the Underwriter from four
stockholders who acquired such shares and
Warrants in connection with an interim financing
prior to the Company's initial public offering.
See "Selling Security Holders."
Securities Offered by Affiliates74,200 shares of Common
Stock issuable upon exercise of Series B
Warrants held by Mr. James L. Conway, president
and a director of the Company (43,100 shares),
and Mr. Storm Morgan, a director of the Company
(31,100 shares). See "Selling Security Holders."
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<PAGE>
The Series B Warrants which may be sold by
Messrs. Conway and Morgan have an exercise price
of $2.00 per share, expire on December 31, 1999
and are not redeemable. Prior to August 13,
1998, such Series B Warrants and the shares of
Common Stock issuable upon exercise of such
Series B Warrants may not be sold without the
consent of the Underwriter. There is no public
market for, and there is not expected to be any
public market for, the Series B Warrants. The
Series B 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 Series B Warrants
must, within a short period, either exercise the
Series B Warrants or permit them to expire
unexercised.
Description of Warrants:
Exercise of Warrants Subject to redemption by the Company, the
Warrants are exercisable during the two-year
period commencing August 13, 1997.
Exercise during Special
Exercise Period During the Special Exercise Period, the exercise
price of the Warrants is $3.00, for which the
exercising Warrant holder will receive two
shares of Common Stock, resulting in an
exercise price of $1.50 per share of Common
Stock.
Exercise Subsequent to
Special Exercise Period Subsequent to the expiration of the
Special Exercise Period, the exercise price of
the Warrants will be $4.50 per share, subject to
adjustment, for which the exercising Warrant
holder will receive one share of Common Stock.
Redemption of Warrants The Warrants are redeemable by the
Company commencing August 13, 1997 with the
consent of the Underwriter, at $.05 per Warrant,
on not more than 60 nor less than 30 days
written notice, provided that the closing bid
price of the Common Stock is at least $9.00 per
share, subject to adjustment, during 20
consecutive trading days ending within ten days
of the date the Warrants are called for
redemption.
Exercise Procedure The Warrants may be exercised by surrender of
the Warrant certificate evidencing the Warrants
being exercised at the Company's transfer agent,
American Stock Transfer & Trust Company, the
Warrant Agent, with the exercise form on the
reverse side of the Warrant certificate
completed and exercised as indicated on the
certificate, accompanied by full payment of the
exercise price in cash or by certified or
official bank check. Only those Warrants which
have been properly completed and are received by
the Warrant Agent accompanied by full payment of
the exercise price in cash or certified or
official bank check by 5:30 P.M., New York City
time on the last day of the Special Exercise
Period will be entitled to the reduced exercise
price.
Use of Proceeds: The net proceeds of this Offering will be used
for working capital and other corporate
purposes.
Risk Factors: Purchase of the shares of Common Stock 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
Warrants NTSTW
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<PAGE>
Common Stock Outstanding:
At the date of this Prospectus:
6,811,005 shares of Common Stock1
As Adjusted2:
8,604,755 shares of Common Stock
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,
2,773,125 shares of Common Stock issuable pursuant to the Company's
Series B Common Stock Purchase Warrants ("Series B Warrants") or any
shares of Common Stock issuable upon exercise of the Warrants, the
Underwriter's Options or the Warrants issuable upon exercise of the
Underwriter's Options.
2 Reflects the issuance of the 1,793,750 shares of Common Stock issuable
upon exercise of outstanding Warrants during the Special Exercise
Period, and does not reflect (a) the issuance of 112,500 shares of
Common Stock and 56,250 Warrants upon exercise of the Underwriter's
Options, (b) the issuance of 112,500 shares of Common Stock upon
exercise of the Warrants issuable upon exercise of the Underwriter's
Options during the Special Exercise Period or (c) the issuance of any
shares of Common Stock upon exercise of Series B Warrants.
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share amounts)
Statement of Operations Data1:
<TABLE>
Six Months Ended June 30, Year Ended December 31,
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue $3,313 $4,936 $8,541 $7,382 $2,924 $ 57
Net (loss) (1,240) (2,236) (6,579) (2,850) (1,751) (433)
(Loss) per share of Common (.18) (.46) (1.28) (.59) (.36) (.09)
Stock
Weighted average number of
shares outstanding 6,800 4,822 5,149 4,822 4,822 4,763
============================ ======================= =========================================
</TABLE>
Balance Sheet Data:
<TABLE>
June 30, 1997
As Adjusted2 Actual December 31,1996
<S> <C> <C> <C>
Working capital (deficiency) $ 1,461 $ (1,079) $ 477
Total assets 10,113 7,573 8,251
Total liabilities 4,397 4,397 3,836
Accumulated deficit (13,075) (13,075) (11,726)
Stockholders' equity3 5,715 3,175 4,415
Net tangible book value (deficiency)
per share of Common Stock4 .08 (.27) (.04)
- --------------------------------------- --------- ------- -------
</TABLE>
1 Statement of operations data includes the operations of CSM commencing July 1,
1994.
2 As adjusted to reflect, on a proforma basis, the exercise of the 896,875
Warrants during the Special Exercise Period and the receipt by the Company
of the net proceeds from such exercise. There is no assurance that any of such
Warrants will be exercised. See "Use of Proceeds" and "Capitalization."
3 Stockholders' equity includes $1,210 additional paid-in capital relating to
Preferred Stock.
4 Excludes the amount allocated to the liquidation preferences of the Series D
Preferred Stock.
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<PAGE>
RISK FACTORS
The purchase of the shares of Common Stock upon exercise of the Warrants
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. Working capital deficiency; need for significant additional funds.
The Company had a working capital deficit of $1.1 million at June 30, 1997, as
compared to working capital of $477,000 at December 31, 1996. The $1.6 million
decrease in working capital for the six months ended June 30, 1997 was
substantially due to the $1.2 million net loss for the six months ended June 30,
1997 as well as the Company's investment in capitalized software. The Company
also invested approximately $148,000 in its joint venture for the development of
credit card acceptance software known as its "CCAC Software," which was
purchased during 1996. The Company's cash balances were $22,000 at June 30, 1997
as compared to $998,000 at December 31, 1996. The Company has continued to incur
losses, as a result of which its working capital deficiency has increased since
June 30, 1997. As a result of its low cash position and its working capital
deficiency, the Company requires immediate and significant additional funds for
its operations. Furthermore, at June 30, 1997, IBN accounted for 15% of the
Company's gross accounts receivable balance. A significant percentage of such
accounts receivable from IBN at such date had been outstanding for more than
nine months. Although the Company received a modest payment on account during
the third quarter of 1997, as of the date of this Prospectus, the account
receivable from IBN continues to represent a significant portion of its accounts
receivable.
The Company cannot predict the extent to which Warrants will be
exercised. If the Company does not receive significant proceeds from the
exercise of Warrants, it will require funding from other sources, and no
assurance can be given as to the availability or terms of any such financing. If
sufficient funds are not available to the Company, it may be necessary for the
Company to reduce or curtail operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
2. History of losses. The Company has had significant losses since its
organization and losses are continuing. The Company commenced operations in
September 1992. The Company sustained losses of $1.2 million, or $.18 per share,
for the six months ended June 30, 1997, $6.6 million, or $1.28 per share, for
the year ended December 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 June 30, 1997, the
Company sustained a cumulative loss of $13.1 million. Commencing July 1, 1994,
the Company's financial statements include the operations of CSM.
The Company's health information systems and related services have
represented the Company's principal source of revenue through June 30, 1997. For
the six months ended June 30, 1997 and the year ended December 31, 1996,
approximately 95% and 76% of the Company's revenue was derived from health
information systems and services. Substantially all of the Company revenue
through December 31, 1995 was derived from health information systems and
services. The only significant revenue derived from the Company's CarteSmart
System represented revenue from one customer, IBN, and the contract with such
customer is substantially complete. As of June 30, 1997, the Company did not
have any backlog for its CarteSmart System, and no assurance can be given that
the Company will have any other significant customers for such services. Revenue
from IBN was approximately $95,000, or 2.9% of revenue, for the six months ended
June 30, 1997 and $1.9 million, or 22.0% of revenue, for the year ended December
31, 1996. The agreement with IBN relates to a CarteSmart license and the
implementation by IBN of a system, which includes such software, for financial
institutions in the former Soviet Union. Except for the revenue from IBN,
substantially all of the Company's revenue has been derived from its 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.
Any CarteSmart revenue which is generated 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.
3. Substantial capital requirements of the Company. Since January 1,
1996, the Company's principal source of funds has been its initial public
offering in August 1996 and the exercise of warrants, which generated net
proceeds of approximately $5.4 million, of which approximately $2.1 million was
used to pay loans, including approximately $750,000 to pay the Company's
indebtedness due to SISC, $96,000 to redeem preferred stock and $250,000 to pay
a fee to an affiliate of a director. The Company has an accounts receivable
financing with an asset-based lender. Borrowings under this facility were
$703,000 at June 30, 1997 and $895,000 at September 1, 1997. The Company can
borrow up to 80% of eligible receivables, and it pays interest at the annual
rate of prime plus 8 1/2% and a fee equal to .625% of the amount of the invoice.
Pursuant to the agreement, the minimum monthly interest payment is $10,000. The
credit limit under this facility was $750,000 prior to August 1, 1997, at which
time the credit limit was increased to $1.25 million. The borrowings at June 30,
1997 and September 1, 1997 were $703,000 and $895,000, respectively. At such
dates the maximum availability under the credit line, based on the borrowing
formula, was $750,000 and $895,000, respectively.
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Unless the Company is able to generate more eligible receivables, it will not be
able to increase its borrowings. The Company's obligations under this facility
are guaranteed by Mr. Lewis S. Schiller, chairman of the board and chief
executive officer of the Company. In addition, Mr. Anthony F. Grisanti, chief
financial officer of the Company, has issued his limited guaranty to the lender.
Pursuant to employment agreements with four officers, the Company is
paying 1997 base salaries of $459,000. In addition, the Company has an agreement
to pay Trinity, a wholly-owned subsidiary of Consolidated, consulting fees of
$180,000 per annum. The Company has an oral agreement with SMI Corporation
("SMI"), of which Mr. Storm R. Morgan, a director of the Company, is sole
stockholder and an officer and director, pursuant to which the Company pays SMI
$9,000 per month, on a month-to-month basis, for which SMI provides the services
of Mr. Morgan on an as-needed basis. Mr. Morgan is not required to devote any
minimum amount of time to the business of the Company. See "Management" and
"Certain Transactions." The aggregate annual payments under such agreements at
the present rates of compensation are $747,000. In addition, the Company has
agreements with other key employees pursuant to which it pays annual salaries of
approximately $352,000.
In connection with the services rendered for IBN, the Company engaged a
software consulting firm to provide certain services. The Company owes such firm
approximately $250,000, and has agreed to pay such amount in monthly
installments in increasing amounts over a ten-month period commencing June 1997.
The Company has agreed to pay $100,000 from the proceeds from the exercise of
the Warrants on account of its obligations to such firm.
To the extent that the Company does not generate sufficient cash flow
from operations to pay its contractual obligations, proceeds from the exercise
of the Warrants may be used for such purposes. See "Use of Proceeds."
The Company cannot predict the extent to which Warrants will be
exercised. If all of the Warrants are exercised during the Special Exercise
Period, the Company will receive net proceeds of approximately $2.5 million.
The Company believes that such proceeds will provide it with sufficient cash to
meet its current operating requirements through June 1998. However, if
significantly less than all of the Warrants are exercised, the Company
anticipates that it will require significant additional funds prior to such
time, and no assurance can be given as to the availability or terms of any
required funding.
4. Limited use of CarteSmart software; need to customize software. As of
June 30, 1997, except for the IBN contract, which generated revenue through June
30, 1997 of $2.4 million and is substantially complete, 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. As of June 30, 1997, the Company had no backlog
for its CarteSmart System, and no assurance can be given that the Company will
be successful in its efforts to market such system. The failure of the Company
to have an established user base for the CarteSmart System may adversely affect
its ability to market the CarteSmart System. The ability of the Company to
operate its CarteSmart business 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 limited experience 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.
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6. Litigation and potential claim. In March 1997, an action was
commenced against the Company and certain of its officers, directors and
stockholders by Onecard Health Services Corporation in the Supreme Court of the
State of New York, County of New York. The named defendants include, in addition
to the Company, Messrs. Lewis S. Schiller, chief executive officer and a
director of the Company; Leonard M. Luttinger, vice president -- smart card
operations and a director of the Company; Thomas L. Evans, who was formerly vice
president of the Company, Consolidated and certain of its subsidiaries, 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. 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 asserted affirmative defenses. The Company has demanded that
the plaintiff particularize the broad allegations of the complaint and the
produce documents referred to in the complaint. 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.
In June 1994, SISC, through a subsidiary, 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 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. No formal or
informal claim has been made against Consolidated, SISC or the Company and the
Company does not believe that it has any liability arising out of any such
concern or related claim. However, no assurance can be given that the Company,
SISC, Consolidated or their officers and directors will not be subject to
liability or that such liability will not be material.
7. 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 six months ended June 30, 1997 and the years
ended December 31, 1996 and 1995, approximately 32%, 31%, and 54%, respectively,
of the Company's revenues was generated from contracts with government agencies.
The Company's largest customer for the year ended December 31, 1996 was IBN,
which generated revenue of approximately $1.9 million, or 22% of revenue. 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 10% 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.
8. 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 joint
venture among Visa, MasterCard and certain major banks relating to the
development of a smart card based system and the entry of American Express in
the smart card business 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
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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., although the Company
believes that such companies market their products to segments of the heath care
field other than the behavioral field. 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."
9. Dependence on management. The Company's business is largely dependent
upon its senior executive officers, Messrs. James L. Conway, president, Leonard
M. Luttinger, vice president, and John F. Phillips, vice president -- marketing
of the Company and president of CSM. The Company has employment agreements with
Messrs. Conway, Luttinger, Phillips and Anthony F. Grisanti. Mr. Grisanti is
chief financial officer of the Company, respectively. 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 the services of
its senior executive officers. Pursuant to the underwriting agreement relating
to the Company's initial public offering, 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 and Luttinger; however, such insurance has not
yet been obtained.
10. 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, certain of
its officers and others. 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. In addition, the Company believes that there
is a difference in the technology used in the Onecard software and the Company's
CarteSmart software and in the type of computer network on which the software
operates. An adverse decision in the Onecard litigation could have a material
adverse effect upon the Company's business and financial condition. See "Risk
Factors 6. -- Litigation and Potential Claim."
11. 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.
12. Conflicts of interest; proceeds to benefit affiliates. 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 a result of holding such
positions, Mr. Schiller may be in a position to determine the terms and
conditions of transactions between the Company and Consolidated, SISC and their
affiliates. In addition, Mr. Norman J. Hoskin, a director of the Company, is a
director of Consolidated and Trans Global. As of August 31, 1997, SISC, the
largest stockholder of the Company, owned approximately 45.9% of the outstanding
Common Stock of the Company and Mr. Schiller owned approximately 1.4% of the
Common Stock. As a result, SISC may have the ability to elect all of the
directors of the Company. In addition, Mr. Schiller is chief executive officer
of the Company, SISC and Consolidated. 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 pays Trinity fees of $15,000 per month for the three-year period
commencing September 1996. See "Certain Transactions."
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As of June 30, 1997 and September 1, 1997, the Company owed its
asset-based lender approximately $703,000 and $895,000 under an accounts
receivable financing arrangement. The Company's obligations to the asset-based
lender are guaranteed by Mr. Lewis S. Schiller, chief executive officer of the
Company. In addition, Mr. Anthony F. Grisanti, chief financial officer of the
Company, has issued his 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 as 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.
The Company has an oral agreement with SMI pursuant to which the Company
paid SMI approximately $620,000 during 1996 and currently pays SMI $9,000 per
month, for which SMI provides the services of Mr. Morgan on an as-needed basis.
During 1996, SMI also provided the services of up to six other individuals who
performed management-level or other key services to the Company on a full-time
basis.
Pursuant to employment, consulting and other agreements with officers
and other related parties, the total annualized defined payments to such persons
are $747,000. 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."
The Series D Preferred Stock, which is owned by SISC, is redeemable at
the option of the Company for $1,000 per share commencing October 1, 1998,
except that, prior to October 1, 1998, the Company may redeem shares of Series D
Preferred Stock from 50% of the net proceeds from the sale by the Company of its
equity securities, including the issuance of shares of Common Stock issued upon
exercise of the Warrants. However, the Company has agreed not to apply any
proceeds from the exercise of Warrants during the Special Exercise Period to
redeem the Series D Preferred Stock.
Mr. Schiller's employment agreement with Consolidated also provides
that, in the event of a merger or other sale by the Company of its business, he
is entitled to receive 20% of the gross profit, as defined, from any sale. Ms.
Grazyna B. Wnuk, secretary and a director of Consolidated, has an employment
agreement with Consolidated which provided that, in the event of such a
transaction, she is entitled to 1% of such gross profit. To the extent that any
such payments are made by the Company, the amount payable to the stockholders
will be reduced. As of the date of this Prospectus, the Company has not
conducted any formal or informal negotiations or discussions with respect to any
such transaction. See "Certain Transactions."
13. Continued control by SISC and management. At August 31, 1997, 47.4%
of the outstanding shares of Common Stock were owned by SISC (45.9%) and Mr.
Lewis S. Schiller (1.5%), chief executive officer of the Company and of SISC and
50.0% of such shares were owned by the Company's officers and directors and
their affiliates, including SISC. Mr. Schiller, as the chief executive officer
of Consolidated and SISC, has the right to vote the shares owned by SISC. If the
shares owned by DLB, which is controlled by Mr. Schiller's wife, are included,
the percentage would be 53.5%. If the 1,793,750 shares of Common Stock are
issued upon exercise of the outstanding Warrants, SISC and Mr. Schiller would
own 37.5% of the Common Stock, all officers and directors as a group would own
39.3%, and all officers and directors and DLB would own 42.3 %. In addition,
SISC holds Series B Warrants to purchase 15,000 shares of Common Stock at $2.00
per share and 550,000 shares of Common Stock at $4.00 per share, and the other
officers and directors of the Company also hold Series B Warrants. Accordingly,
SISC 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. See "Certain Transactions" and "Principal Stockholders."
14. Broad discretion as to use of proceeds; potential unspecified
acquisitions and change in use of proceeds. Substantially all of the net
proceeds from the issuance of Common Stock upon exercise of the Warrants are
allocated to working capital and other corporate purposes. Accordingly,
management will have broad discretion with respect to the expenditure of such
net proceeds. Purchasers of the Common Stock issued upon exercise of the
Warrants 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 from the sale of Common Stock upon
exercise of the Warrants 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.
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15. Arbitrary offering price and terms. The terms of the Warrants during
the Special Exercise Period 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.
16. Possible restrictions on market-making activities in Company's
securities. The Underwriter has advised the Company that it makes and intends to
continue to make a market in the Company's securities. Regulation M under the
Exchange Act, may prohibit the Underwriter from engaging in any market-making
activities with regard to the Company's securities for the period of up to nine
business days (or such other applicable period as Regulation M 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.
Any temporary cessation of such market-making activities could have an adverse
effect on the market price of the Company's securities.
The Underwriter holds Underwriter's Options to purchase 56,250 Units,
each Unit consisting of two shares of Common Stock and one Warrant and has
purchased or may purchase 500,000 shares of Common Stock and 250,000 Warrants
from four stockholders. If the Underwriter exercise the Underwriter's Option or
distributes any of such securities, the ability of the Underwriter to act as a
market maker may be affected. See "Selling Security Holders."
17. Possible delisting from The Nasdaq System and market illiquidity.
The Common Stock and Warrants are presently included in The Nasdaq SmallCap
Market. The continued listing of the Common Stock and Warrants on The Nasdaq
SmallCap Market is subject to the Company meeting the Nasdaq maintenance
requirements, pursuant to which the Company must, among other conditions, either
maintain net tangible assets (i.e., total assets less liabilities and goodwill)
of $2 million, or a market capitalization of $35 million or net income of
$500,000 for two of the last three years. The Company will also be required to
meet certain corporate governance requirements. If the Company is unable to
satisfy Nasdaq's requirements for continued listing, the Common Stock and
Warrants 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 shares of Common Stock and Warrants were
sold to customers of the Underwriter in the Company's initial public offering
and customers of the Underwriter may own a significant number of shares of
Common Stock and Warrants. Such customers may engage in the sale or purchase of
the securities through or with the Underwriter. Although they have no obligation
to do so, the Underwriter presently makes a market in the Common Stock and
Warrants. The Underwriter may be a dominating influence in the trading of such
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.
There is not an active market for the Warrants. During the period from
January 1 to September 5, 1997, there has been little, if any reported trading
in the Warrants, and no assurance can be given that any active trading market in
the Warrants will develop. See "Market for Common Stock and Warrants;
Dividends."
18. Risks of low-priced stocks; penny stock regulations. If the
Company's securities were delisted from The Nasdaq SmallCap Market (See "Risk
Factors -- 17. Possible delisting of securities from The Nasdaq System and
market illiquidity") they may become subject to Rule 15g-9 under the Exchange
Act, which imposes additional sales practice requirements on broker-dealers
which sell such securities to persons other than established customers and
institutional accredited investors. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the rule may affect the ability of broker-dealers to sell
the Company's Common Stock and Warrants and may affect the ability of purchasers
in this Offering to sell any of the Common Stock or Warrants acquired pursuant
to this Prospectus in the secondary market.
The Commission's regulations define a "penny stock" to be any equity
security that has a market price (as therein defined) less than $5.00 per share
or with an exercise price of less than $5.00 per share, subject to certain
exceptions. The penny stock restrictions will not apply to the Company's Common
Stock, Units and Warrants if the Common Stock is listed on The Nasdaq SmallCap
Market and has certain price and volume information provided on a current and
continuing basis or meet certain minimum net tangible assets or average revenue
criteria. There can be no assurance that the Company's securities will qualify
for exemption from these restrictions.
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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.
19. Potential adverse effect of redemption of Warrants. The Warrants may
be redeemed, with the consent of the Underwriter, 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."
20. 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. 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 on April 1 and October 1 of each
year commencing October 1, 1996. Dividends on the Series D Preferred Stock may
be paid either in cash or in shares of Common Stock. The dividends payable on
October 1, 1996 and April 1, 1997 were paid through the issuance of 12,802
shares of Common Stock. See "Description of Securities."
21. Dilution. A purchaser of Common Stock upon exercise of the Warrants
during the Special Exercise Period will experience immediate and substantial
dilution of $1.42 , or 95%, from the $1.50 per share exercise price of the
Common Stock issued upon such exercise, based upon the exercise of all
of the 896,875 outstanding Warrants. If less than all of the
outstanding Warrants are exercised, the dilution would be greater. See
"Dilution."
22. Shares eligible for future sale. All of the presently issued and
outstanding shares of Common Stock were either registered pursuant to Securities
Act or issued as "restricted securities" pursuant to an exemption from
registration and may be sold pursuant to Rule 144 of the Commission under the
Securities Act. In connection with the Company's initial public offering, the
holders of substantially all of the outstanding shares of Common Stock which had
been issued prior to such offering, have agreed not to sell any of their shares
(other than shares acquired in the public market) until August 13, 1998, without
the consent of the Underwriter. SISC and the Company's officers, directors and
key employees have agreed that, if the Company receives at least $1,000,000 from
the exercise of the Warrants, they will not sell any of their shares (other than
shares acquired in the public market) until August 13, 1999, without the consent
of the Underwriter, except that, commencing August 13, 1998, certain officers,
directors and key employees may sell 639,300 shares of Common Stock.
23. 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 487,256 shares are subject to outstanding options. The
Company has issued Series B Warrants to purchase 877,500 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 $4.00 per share. 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 Series B Warrants have agreed not to sell the
Common Stock issuable upon such conversion or exercise until August 13, 1998
without the prior approval of the Underwriter. The holders of Series B Warrants
have demand and piggyback registration rights commencing August 13, 1998 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.
24. 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.
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<PAGE>
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. Furthermore, the issuance of
Preferred Stock in a manner which dilutes the voting rights of the holders of
Common Stock may adversely affect the listing of the Common Stock on The Nasdaq
SmallCap Market.
25. Forward-looking statements. Prospective investors are cautioned that
the statements in this Prospectus that are not descriptions of historical facts
may be forward looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those identified under "Risk Factors" and elsewhere
in this Prospectus or in documents incorporated by reference in this Prospectus.
DILUTION
The net tangible book value of the Company's Common Stock at June 30,
1997 was approximately $(.15) 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 D Preferred Stock. Without taking into effect any
change in net tangible book value of the Company after June 30, 1997 other than
as a result of the sale of the 1,793,750 shares of Common Stock upon exercise of
the 896,875 outstanding Warrants during the Special Exercise Period, after
deducting fees and other estimated expenses of the Offering, the Company's net
tangible book value as of June 30, 1997 would have been approximately $ per
share. This amount represents an immediate increase in net tangible book value
per share of approximately $ 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 $
to the purchasers of the Common Stock.
The following table illustrates the dilution of one share of Common
Stock as of June 30, 1997:
<TABLE>
<S> <C> <C>
Offering price per share of Common Stock $1.50
Net tangible book value per share at June 30, 1997 $(.27)
Increase per share attributable to sale of the Units offered hereby .35
Pro forma net tangible book value per share after Offering .08
Dilution to public investors $1.42
====================================================================== ========== =========
</TABLE>
MARKET FOR COMMON STOCK AND WARRANTS; DIVIDENDS
The Company's Common Stock and Warrants have been traded on The Nasdaq
SmallCap Market since the Company's initial public offering on August 13, 1996
under the symbols "NTST" and "NTSTW," respectively. The high and low sales
prices for the Company's Common Stock and Warrants since August 14, 1996, as
reported by Nasdaq, are as follows:
Common Stock Warrants
High Low High Low
1996
Third Quarter (from August 14) $13.25 $9.00 $7.50 $3.00
Fourth Quarter 13.25 3.00 7.00 1.00
1997
First Quarter 6.00 2.62 1.87 .62
Second Quarter 6.62 3.00 2.00 .94
Third Quarter (through September 12) 4.12 2.00 1.501 .751
- ------------------------------------- ----------------- -----------------
1 There has been no regular market for the Warrants. During the third
quarter of 1997, through September 8, trading on the warrants was only reported
on five days.
The reported closing prices for the Common Stock on September 12, 1997
was $4.125 and $1.375, respectively. The closing price for the Warrants on
September 5, 1997 was $.75. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
As of June 30, 1997, the Company believes that there were approximately
347 record holders of the Common Stock.
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<PAGE>
The Company has paid no dividends on its Common Stock since inception,
and does not expect to pay any dividends for the foreseeable future. See
"Description of Securities -- Series D Preferred Stock" in connection with
dividends payable with respect to the Series D Preferred Stock.
USE OF PROCEEDS
The Company intends to utilize any net proceeds received from the
exercise of the Warrants for working capital and other corporate purposes. Since
there is no assurance that any Warrants will be exercised, the net proceeds
could range from zero to approximately $2.5 million.
In connection with the services rendered for IBN, the Company owes a
software consulting firm approximately $250,000, which it has agreed to pay in
monthly installments in increasing amounts over a ten-month period commencing
June 1997. The Company has agreed to pay $100,000 from the proceeds from the
exercise of the Warrants on account of its obligations to such firm.
None of the net proceeds from the exercise of the Warrants are allocated
to pay obligations to any officers, directors or principal stockholders or their
affiliates. The Company has employment agreements with four executive officers
of the Company pursuant to which it is paying base salaries during 1997 at the
aggregate annual rate of $459,000. In addition, the Company has an agreement
with Trinity pursuant to which the Company pays Trinity $180,000 per year and an
oral agreement with SMI pursuant to which it pays SMI compensation of $9,000 per
month for the services, on an as-needed basis, of Mr. Storm R. Morgan, a
director of the Company. The aggregate annual payments under such agreements and
arrangements at the present rates of compensation are $747,000. The Company also
has employment agreements with four other key employees pursuant to which it
pays annual compensation at the annual rate of $352,000. The total payments
under such agreements are at the current annual rate of approximately $1.1
million.
In the event that the Company does not generate sufficient cash flow
from operations to pay its contractual obligations, a portion the proceeds from
the exercise of the Warrants may be used to make such payments. See "Certain
Transactions."
Management will have broad discretion to determine the use the proceeds
of this Offering. 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, if all of the outstanding Warrants are
exercised during the Special Exercise Period, the Company will have sufficient
funds to satisfy the Company's presently estimated cash requirements for the
twelve months beginning September 1, 1997. However, it is possible that
conditions may arise as a result of which the Company may require additional
capital prior to the expiration of such one-year period even if all of the
outstanding Warrants are exercised. Furthermore, unless a significant portion of
the Warrants are exercised during the Special Exercise Period, the Company
anticipates that it will require additional funds in the near future. 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 from the exercise of the
Warrants 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, in the past, engaged
in negotiations 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."
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
June 30, 1997 and as adjusted to reflect the exercise of 896,875 Warrants during
the Special Exercise Period. No assurance can be given that any or a significant
portion of the Warrants will be exercised.
<TABLE>
June 30, 1997
(Dollars in thousands)
Actual As Adjusted
<S> <C> <C>
Short-term debt:
Note payable -- asset-based lender1 $703 $703
Capital lease obligations -- current maturities2 22 22
Due to related party3 72 72
---- ----
$797 $797
==== ====
Long-term debt:
Capital lease obligations -- long-term portion2 $ 10 $ 10
Stockholders' equity:
Preferred Stock, par value $.01 per share, 3,000,000 shares authorized, of
which:
3,000 shares authorized and 1,210 shares issued, outstanding and
designated at Series D 6% Redeemable Cumulative Preferred Stock, with a
liquidation preference of $1,210,000 and certain optional redemption
rights4 -- --
Additional paid-in capital -- Preferred Stock 1,210 1,210
Common Stock, par value $.01 per share, 15,000,000 shares authorized,
6,811,005 shares issued and outstanding and 8,604,755 outstanding as
adjusted5 68 86
Additional paid-in capital -- Common Stock 14,972 17,494
Accumulated deficit (13,075) (13,075)
-------- --------
Stockholders' equity 3,175 5,715
-------- --------
Total capitalization $ 3,185 $ 5,725
======== =======
- --------------------------------------------
</TABLE>
1 Represents secured notes due to an asset-based lender, which are
guaranteed by officers of the Company. See Note 8 of Notes to
Consolidated Financial Statements.
2 See Note 11 of Notes to Consolidated Financial Statements.
3 Represents money advanced by SISC and its affiliates.
4 The liquidation preference of the Series D Preferred Stock is $1.00 per
share. The redemption price is $1,000 per share, or an aggregate of
$1,210,000. See "Description of Securities -- Series D Preferred Stock."
5 Does not include an aggregate of 2,864,750 shares of Common Stock
reserved as follows: (a) 2,773,125 shares issuable upon exercise of the
Series B 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. In addition, there are
reserved (i) 1,793,750 shares issuable upon exercise of the outstanding
Warrants, which are treated as outstanding on an as-adjusted basis, (ii)
112,500 shares of Common Stock issuable upon exercise of the
Underwriter's Options and (iii) 112,500 shares of Common Stock issuable
upon exercise of the Warrants issuable upon exercise of the
Underwriter's Options. See "Management -- Long Term Incentive Plan,"
"Certain Transactions," "Description of Securities."
See "Business -- Property" and Notes 9 and 11 of Notes to Consolidated
Financial Statements for information concerning the Company's long-term lease
obligations.
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<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Set forth below is selected financial data with respect to the Company
for the six months ended June 30, 1997 and 1996 and the years ended December 31,
1996, 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 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 the
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 1:
<TABLE>
Six Months Ended June 30, Year Ended December 31,September 9, 1992
------------------------- ----------------------------------- -
(Inception) to
December 31, 1992
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $3,313 $4,936 $8,541 $7,382 $2,924 $ 57 $ --
Net loss (1,240) (2,236) (6,579) (2,850) (1,751) (433) (133)
Net loss per share of
Common Stock (.18) (.46) (1.28) (.59) (.36) (.09) (.03)
Weighted average number of
shares outstanding 6,800 4,822 5,149 4,822 4,822 4,763 4,763
- ------------------------ -------- ------- ------- ------ ------ -------- -------
Balance Sheet Data:
</TABLE>
<TABLE>
December 31,
June 30, 1997 1996 1995 1994
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Working capital (deficiency) $ (1,079) $ 477 $(2,562) $(4,037)
Total assets 7,573 8,251 6,390 7,193
Total liabilities 4,397 3,836 5,887 6,342
Redeemable Preferred Stock -- -- 96 96
Accumulated deficit (13,075) (11,726) (5,147) (2,297)
Stockholders' equity1 3,175 4,415 407 755
- ---------------------------------- --------- --------- -------- ---------
</TABLE>
1 Includes the operations of CSM since July 1, 1994.
2 Stockholders' equity includes $1,210 allocable to the additional paid in
capital of the Series D Preferred Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Results of Operations
Six Months Ended June 30, 1997 and 1996
The Company's revenue for the six months ended June 30, 1997 (the "June
1997 period") was $3.3 million, a decrease of $1.6 million, or 33% from the
revenue for the six months ended June 30, 1996 (the "June 1996 period") which
was $4.9 million. Approximately $1.5 million of this decrease was the result of
a decline in revenue from IBN, which was $1.6 million in the June 1996 period
and $95,000 in the June 1997 period. IBN represented the Company's most
significant customer in the June 1996 period, accounting for approximately 32.3%
of revenue for the period. As of June 30, 1997, the contract was substantially
complete. The Company is no longer providing professional services to IBN. The
Company intends to expand its marketing effort for its CarteSmart System,
however, at June 30, 1997, the Company did not have any significant contracts
for the CarteSmart System. The remainder of the decrease in revenue for the June
1997 period was attributable to a modest decline in revenue from the Company's
health information systems divisions.
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<PAGE>
Revenue from the Company's health information systems continued to
represent the Company's principal source of revenue in June 1997 period,
accounting for $3.1 million, or 95% of revenue. The largest component of revenue
in the June 1997 period was data center (service bureau) revenue which decreased
approximately 2% to $1.0 million in the June 1997. The turnkey systems revenue
decreased to $812,000 in the June 1997 period from $829,000 in the June 1996
period, reflecting a decrease of 1%. Maintenance revenue increased to $666,000
in the June 1997 period from $573,000 in the June 1996 period, reflecting an
increase of 16%. License revenue decreased to $145,000 in the June 1997 period
from $240,000 in the June 1996 period, a decrease of 40%. License revenue is
generated as part of a sale of a turnkey system pursuant to a contract or
purchase order that includes development of a turnkey system and maintenance.
Third party hardware and software revenue decreased to $489,000 in the June 1997
period from $663,000 in the June 1996 period, reflecting a decrease of 26%.
Sales of third party hardware and software are made only in connection with the
sales of turnkey systems. Although the decrease in revenue from health
information systems reflected reduced new business during the June period, the
Company has experienced an increase in new order backlog during the second
quarter. However, no assurance can be given that the increase in new orders will
generate any increase in revenue.
Revenue from contracts from government agencies represented 32% of
revenue for June 1997 period. The Company believes that contracts with
government agencies, including entitlement programs, will continue to represent
an important part of the Company's business.
Gross profit decreased to $422,000 in the June 1997 period from $1.3
million in the June 1996 period, a 68% decrease. The decrease in the gross
profit was substantially the result of the reduction in revenue from the IBN
contract as well as a decrease in the health information systems license
revenue. The gross margin decreased from 26.7% in the June 1996 period to 12.7%
for the June 1997 period. The decrease in gross margin resulted from continuing
costs relating to the IBN contract, including consulting costs, which were in
excess of the revenue level derived from such agreement.
Selling, general and administrative expenses were $1.3 million in the
June 1997 period, an increase of 41% from the $934,000 in the June 1996 period.
This increase was the result of an increase in personnel and salaries in the
sales and marketing and administrative areas as well as an increase in other
direct sales expenses and insurance. Increased compensation to officers and
directors accounted for approximately $46,000 of the increase in selling,
general and administrative expenses.
During the June 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. No such charges
were incurred during the June 1997 period.
In the June 1997 period the Company recognized its 50% share of its loss
in its joint venture corporation with respect to the development of CCAC
Software, which was purchased in 1996. The Company's share of such loss was
$104,000 for the June 1997 period as compared to $100,000 for the June 1996
period.
Interest expense was $151,000 in the June 1997 period, a decrease of
$124,000, or 45%, from the $275,000 in the June 1996 period. This is a result of
a decrease in the average borrowings during the June 1997 period. The most
significant component of the interest expense on an ongoing basis is the
interest payable to the Company's asset-based lender. The Company pays interest
on such loan at a rate equal to the greater of 18% per annum or prime plus 8%
plus a fee of 1% of the face amount of the invoice. Effective August 1, 1997,
the Company's agreement with its asset-based lender was revised to reduce the
interest rate to prime plus 8 1/2% plus a fee of .625% of the face amount of the
invoice, with a minimum monthly interest payment of $10,000.
Related party administrative expense was $90,000 in the June 1997
period, an increase of $81,000 from the $9,000 in the June 1996 period. This
increase was the result of an agreement with The Trinity Group, a subsidiary of
Consolidated, to provide general business, management and financial consulting
services for a monthly fee of $15,000.
The Company did not incur any research and development costs in the June
1997 or 1996 periods.
As a result of the foregoing factors, the Company incurred a net loss of
$1.2 million, or $.18 per share, in June 1997 period, as compared with a net
loss of $2.2 million, or $.46 per share, in June 1996 period.
Years Ended December 31, 1996 and 1995
The Company's revenue for 1996 was $8.5 million, an increase of $1.1
million, or 15% from the revenue for 1995 which was $7.4 million. Approximately
$1.6 million of the increase in revenue was generated pursuant to the Company's
agreement with IBN. IBN represented the Company's most significant customer for
1996, accounting for approximately 22% of revenue. Furthermore, through December
31, 1996, IBN has generated revenue of $2.4 million, or approximately 89.6% of
the Company's total revenue from the CarteSmart systems during the two years
ended December 31, 1996 and 1995 on a combined basis. The revenue generated to
date
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<PAGE>
includes approximately $419,000 of guaranteed royalties. The Company intends to
expand its marketing effort for its CarteSmart System, however, at December 31,
1996, the Company did not have any significant contracts for the CarteSmart
system.
Revenue from the Company's health information systems continued to
represent the Company's principal source of revenue in 1996, accounting for $6.5
million or 76% of revenue. However, as a result of the increase of revenue from
CarteSmart 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 in 1996 was data
center (service bureau) revenue which increased to $2,207,000 in 1996 from $1.7
million in 1995, reflecting an increase of 27%. The turnkey systems revenue
decreased to $1.7 million in 1996 from $1.8 million in 1995, reflecting a
decrease of 6%. Maintenance revenue increased to $1.2 million in 1996 from $1.1
million in 1995, reflecting a 11% increase. Revenue from third party hardware
and software decreased to $1.1 million in 1996 from $2.1 million in 1995, a
decrease of 48%. Sales of third party hardware and software are made only in
connection with the sales of turnkey systems. License revenue increased to
$329,000 in 1996 from $162,000 in 1995. License revenue is generated as part of
a sale of a turnkey system pursuant to a contract or purchase order that
includes development of a turnkey system and maintenance. The Company believes
that the increase in 1996 installations should enable the Company to increase
the maintenance revenue in future periods.
Revenue from contracts from government agencies represented 31% of
revenue for 1996 . The Company believes that such contracts will continue to
represent an important part of its business, particularly its health information
systems business. In 1996, contracts from government agencies accounted for
approximately 40% of its revenue from health information systems.
Gross profit decreased to $1.3 million in 1996 from $1.8 million in
1995, a 24% decrease. The decrease in the gross profit was substantially the
result of costs associated with the completion of the IBN contract.
Selling, general and administrative expenses were $1.9 million in 1996,
a decrease of 24% from the $2.5 million in 1995. The decline was substantially
the result of a one time charge in 1995 of a write off deferred public offering
costs in the amount of $460,000 as well as a reduction in executive compensation
and a reduction in staff. In addition, during 1995, the Company expensed
approximately $313,000 of capitalized software development costs relating to an
earlier version of the CarteSmart System, which amount is included in selling,
general and administrative expenses for the year..
During 1996, the Company incurred non cash compensation charges of $3.5
million arising out of the issuance by the Company of warrants and options
having exercise prices which were less than the market value of the Common Stock
at the date of approval by the board of directors. During 1996, the Company
issued 500,000 common shares to certain noteholders and 25,000 common shares to
the Company's asset based lender. As a result of such issuance, the Company
incurred a financing cost charge to operations of approximately $1.7 million.
In 1996, the Company incurred $278,000 for research and development
relating to the development of applications for the CarteSmart System in the
financial services industry. The results of such effort were employed in the
work on the IBN agreement. The Company also incurred $279,000 in capitalized
software development relating to such product. The research and development
expenses in 1996 reflected a decrease of $421,000, or 60.2%, from 1995, during
which the Company incurred research and development expenses of $699,000,
relating principally to the CarteSmart System and development of a graphical
interface for the Company's health information systems.
In 1996, the Company recognized its 50% share of its loss in its joint
venture corporation with respect to the purchase of the CCAC Software. The
amount of such loss was $264,000.
Interest expense was $473,000 in 1996, a decrease of $81,000, or 15%
from the interest expense in 1995. The most significant component of the
interest expense on an ongoing basis is the interest payable to the Company's
asset-based lender, which it pays interest equal to the greater 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
$6.6 million, or $1.29 per share in 1996 as compared with a net loss of $2.9
million, or $.73 per share in 1995.
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 operation 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
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<PAGE>
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% 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 project ($90,000) in 1994. The overall increase in
revenue reflects the inclusion of CarteSmart Systems revenue combined with the
revenue from the Colorado agreement.
Both the increase in revenue and the change in revenue mix reflected
increased revenue resulting from an enhanced marketing effort following the June
1994 acquisition of CSM. During the second half of 1994, the Company received
significant purchase orders from the State of Colorado for its Department of
Human Services and the State of Oklahoma. The Colorado order covered the
purchase of the Company's health information system, including software,
consulting services and hardware, at a total purchase price of approximately
$1.2 million. Of the purchase price, approximately $700,000 represented the
purchase price of the software and consulting services, and the balance
represents the cost of the hardware. In July 1994, the Company received a
purchase order from a state agency of the State of Oklahoma for a health
information system which includes the graphical interface. The order called for
the installation of the system in ten hospitals for a purchase price of
approximately $430,000. The Company is continuing to market its health
information systems to entitlement programs. It believes that the inclusion of
the graphical and smart card functions, which were implemented during the second
half of 1994 and the first half of 1995, will assist it in marketing its
products to entitlement programs. It also believes that the successful pilot
project for the smart card interface in San Diego provides the Company with an
important tool in marketing this function to both new and existing clients. The
Company is commencing a marketing effort for its CarteSmart System directed at
the financial services industry and educational institutions. However, in the
industries to which the Company is marketing its products, there is typically a
long selling cycle, as a result of which the Company must continue to support
its marketing effort for a significant period before any revenue is realized.
Gross profit increased to $1.8 million in 1995 from $390,000 in 1994, an
increase of 352%, which reflected an increase in the gross margin to 23.9% in
1995 from 13.3% in 1994. The increase in gross profit resulted from both the
improved gross margin and the inclusion of twelve months of CSM operations in
1995 and six months of such operations in 1994. The improved margin reflects the
significant increase in CarteSmart revenue, on which the Company realized a
higher margin than on its health information systems and services. However, the
amortization of capitalized software costs of $419,000 during 1995 is reflected
as a cost of revenue, which offset the higher margin for the CarteSmart System.
During 1995, the Company changed its CarteSmart System from a DOS-based system
to a Windows-based system. The capitalized costs related to the DOS-based
system. As a result, at December 31, 1995, the Company wrote off the unamortized
software development costs, which increased cost of revenue. In addition, the
Company expensed the development of the Windows-based system, which was charged
to research and development. The gross profit for 1995 benefitted from the gross
margin for maintenance services. During 1995, the gross profit from maintenance
services increased to $356,000 from $52,000 in 1994, reflecting an increase in
the gross margin from such services to 32.4% for 1995 from 10.4% for 1994. The
increase in margin resulted from increased services performed on a time and
materials basis as well as a reduction in staff as the Company was able to
perform the same services with a smaller staff.
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.
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During 1995, the Company incurred financing costs of $863,000,
representing the write-off of deferred financing costs relating to a proposed
initial public offering which had been scheduled for early 1995, but which had
been canceled. No such expenses were incurred in 1994.
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 $72,700 annual dividends payable on the 1,210
shares of Series D Preferred Stock will be significantly less than the interest
paid on the debt.
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.
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. 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.
Liquidity and Capital Resources
Since January 1, 1996, the Company's principal source of funds has been
its initial public offering in August 1996 and the August 1996 exercise of
warrants, which generated net proceeds of approximately $5.4 million, of which
approximately $2.1 million was used to pay loans, including approximately
$750,000 to pay the Company's indebtedness due to SISC, $96,000 to redeem
preferred stock and $250,000 to pay a fee to an affiliate of a director.
Except for its initial public offering and the issuance of stock upon
exercise of warrants, the Company's principal source of funds, other than
revenue, is an accounts receivable financing agreement with an asset based
lender whereby it may borrow up to 80% of eligible accounts receivable up to a
maximum of $750,000. As of June 30, 1997 and September 1, 1997, the outstanding
borrowings under this facility were $703,000 and $895,000, respectively. Based
on the borrowing formula, the maximum available was $750,000 at June 30, 1997
and $895,000 at September 1, 1997. Effective August 1, 1997, the Company's
agreement with its asset-based lender was revised to increase the credit limit
to $1.25 million and to reduce the interest rate to prime plus 8 1/2% (with a
minimum monthly interest payment of $10,000) plus a fee of .625% of the face
amount of the invoice. Because the Company's availability under its borrowing
formula is based on eligible accounts receivable, unless the Company is able to
generate more eligible receivables, it will not be able to increase its
borrowings.
The Company had a working capital deficit of $1.1 million at June 30,
1997, as compared to working capital of $477,000 at December 31, 1996. The $1.6
million decrease in working capital from December 31, 1996 to June 30, 1997 was
substantially due to the net loss incurred for during the June 1997 period as
well as the Company's investment in capitalized software. The Company also
invested an additional $148,000 in its CCAC joint venture during the June 1997
period. The Company's cash balances were $22,000 at June 30, 1997 as compared to
$998,000 at December 31, 1996.
At June 30, 1997, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $3.2 million, representing
approximately 174 days of revenue based on annualizing the revenue for the June
1997 period, although no assurance can be given that revenue will continue at
the same level as the June 1997 period. Accounts receivable at June 30, 1997
increased by $147,000 from $2.3 million at December 31, 1996 to $2.4 million at
June 30, 1997. At June 30, 1997, IBN accounted for 15% of the total gross
accounts receivable balance. A significant percentage of such accounts
receivable from IBN at June 30, 1997 had been outstanding for more than nine
months. One other customer accounted for 16% of the total gross accounts
receivable balance. However, cash received from this customer in July 1997
reduced the account receivable balance to less than 10% of the Company's
accounts receivable. No other customer accounted for more than 10% of the
accounts receivable at June 30, 1997.
The Company is currently seeking to raise additional working capital. In
the event that the Company does not raise sufficient capital from the sale of
the shares of Common Stock upon exercise of the Warrants, it will require
significant additional capital from
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other sources. No assurance can be given as to the ability of the Company to
obtain additional working capital and failure to obtain additional working
capital could have a material adverse affect on the Company and its financial
condition.
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 typically three parties in the Company's network system -- the
sponsor, which is the party that maintains the data base, such as a managed care
organization or financial institution, the users, who are the individuals who
use the system, and may be the subscribers of a managed care organization or the
bank card or credit card holders of a financial network, and the service
providers, who are those who provide goods or services to the users, such as
physicians, pharmacies, banks and merchants who provide goods, services or funds
to bank card or credit card holders.
The Company's principal services are its health information systems,
which are marketed principally to specialized care facilities, many of which are
operated by government entities and include entitlement programs. 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.
The Company has developed proprietary network technology utilizing smart
cards which it markets in the health care, financial and education fields as the
CarteSmart System. A smart card is a plastic card about the size of a standard
credit card which contains a single embedded microprocessor chip with both data
storage and computing capabilities. The smart card software provides access to
the information stored in the chip, the ability to update stored information and
includes security elements to restrict unauthorized access to or modification of
certain information stored on the card utilizing a smart card reader system. The
smart card reader system and the software provides the ability to include
information on both the smart card and the organization's computer system. The
Company also offers network applications which use telecommunications rather
than smart cards to obtain access to and manage data.
The Company's principal source of revenue is its health information
systems and related services which are marketed by CSM. For the six months ended
June 30, 1997 and the year ended December 31, 1996, approximately 95% and 76% of
revenue was derived from health information systems and services. Substantially
all of the Company revenue through December 31, 1995 was derived from health
information systems and services. The only significant revenue derived from the
Company's CarteSmart System represented revenue from one customer, IBN, and the
contract with IBN is substantially complete. As of June 30, 1997, the Company
did not have any significant backlog for its CarteSmart System.
Health Information Systems and Services
The Company, through its human services division, offers its customers a
range of health information systems which were developed. 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 the
Company's business, revenue from the license of such systems has not represented
a major component of its revenues. The price for a license for health
information systems can range from $25,000 to $250,000. Through June 30, 1997,
the price of all licenses issued by the Company has been in the lower portion of
the price range. The license payment reflects principally the number of users,
and, accordingly, a state agency which requires a large number of installations
would be charged a higher license fee than an agency that operated only one or
two installations. During the six months ended June 30, 1997 and the years ended
December 31, 1996 and 1995, the Company installed health information systems
with six, six and eleven customers, respectively. Revenue from the licensing of
such systems represented approximately $145,000, $329,000 and
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$162,000, in the six months ended June 30, 1997 and the years ended December 31,
1996 and 1995, respectively, accounting for approximately 4.4%, 3.9% and 2.2% of
revenue for such periods.
The Company offers software systems 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 six months ended June 30, 1997 and the years ended December
31, 1996 and 1995, revenue from hardware and third party software accounted for
approximately $489,000, $1.1 million and $2.1 million, representing 14.8%, 13.0%
and 29.1%, 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
six months ended June 30, 1997 and the years ended December 31, 1996 and 1995,
the Company's service bureau operation generated revenue of approximately $1.0
million, $2.2 million and $1.7 million, respectively, representing approximately
30.8%, 25.8% and 23.6%, of the Company'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 the Company's revenues in such periods. The Company intends to
augment the marketing effort for the service bureau, although no assurance can
be given that such operations will continue to be profitable.
Maintenance services have generated increasing revenue and are becoming
a more significant portion of the Company's business. Since purchasers of health
information system licenses typically purchase maintenance service, maintenance
revenue increases as new customers obtain licenses for its health information
services. Under its maintenance contracts, which are executed on an annual
basis, the Company maintains its software and provides certain upgrades. Its
obligations under the maintenance contract may require the Company to make any
modifications necessary to meet new Federal reporting requirements. The Company
does not maintain the hardware and third party software sold to its customers.
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 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 that 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 limited experience 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.
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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. 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 can also include information on each prescription which
the patient is taking. A smart card is different from a magnetic stripe card in
that it has an updatable data storage capacity, which a magnetic stripe card
does not.
To date, the Company has not generated any significant revenue from the
license of its CarteSmart software other than pursuant to its agreement with
IBN. The Company is marketing its CarteSmart System to entitlement programs and
managed care organizations; however, as of June 30, 1997, except for a pilot
project in San Diego County, California, 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.
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. 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. The
Company's only significant customer for its CarteSmart System was IBN, and no
assurance can be given that the Company will have any other significant
customers for such services. The agreement with IBN relates to a CarteSmart
license and the implementation by IBN of a system, which includes such software,
for financial institutions in the former Soviet Union. Revenue from IBN was
approximately $95,000, or 2.9% of revenue for the six months ended June 30, 1997
and $1.9 million, or 22.0% of revenue, for the year ended December 31, 1996. As
of June 30, 1997, the agreement with IBN was substantially completed, and the
Company does not anticipate that it will render any additional professional
services pursuant to the IBN agreement. No assurance can be given that the
Company will derive any significant revenue from IBN. The system delivered to
IBN includes IST/Share Financial Transaction System software of Oasis
Technologies, Inc. ("Oasis") and other third party software which the Company is
integrating with its CarteSmart software to complete the IBN system. Mr. Storm
R. Morgan, a director of the Company, is senior vice president of, and has an
equity interest in, Oasis.
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,
purchased the CCAC Software, which processes retail plastic card transactions
and merchant transactions. The purchase price was $650,000, of which $325,000
was paid by the Company and the remaining $325,000 was paid by Oasis or its
affiliates. The CCAC 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. See "Business
- -- Product Development."
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.
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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 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 six months ended June 30, 1997 and
the years ended December 31, 1996 and 1995, approximately 33%, 31% and 54%,
respectively, of the Company's revenue 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.
No customer accounted for 10% of the Company's revenue for the six
months ended June 30, 1997. For the year ended December 31, 1996, one customer,
IBN, accounted for more than 10% of the Company's revenue. IBN accounted for
revenue of approximately $1.9 million, representing 22.0% of revenue for the
year.
For the year ended December 31, 1995, one customer accounted for more
than 10% of the Company's revenue. The State of Colorado generated revenue of
approximately $1.4 million, representing 18.5% of revenue for the year.
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.
Through June 30, 1997, no revenue has been generated as a result of this
agreement.
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 December 31, 1996 and 1995, the Company had a backlog of orders,
including ongoing maintenance and data center contracts, in the aggregate amount
of $3.7 million and $4.2 million, respectively. Substantially all of the
December 31, 1996 backlog is expected to be filled during 1997. Substantially
all of the December 31, 1995 backlog was filled during 1996. All of the backlog
at both dates relates to health information sales and services.
The Company's sales force is comprised of three full-time sales
representatives, as well as Mr. Leonard M. Luttinger, vice president, John F.
Phillips, vice president - marketing, and Storm R. Morgan, who provides advisory
services on an as-needed basis through SMI. 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
During 1996, the Company incurred $278,000 for research and development
relating to the development of applications for the CarteSmart System in the
financial services industry. The results of such effort were employed in the
work on the IBN agreement. The Company also incurred $279,000 in capitalized
software development relating to such product. During 1995 and 1994, the Company
incurred research and development expenses of $699,000 and $367,000, relating
principally to the CarteSmart System and development of a graphical interface
for the Company's health information systems. The Company is continuing the
development and enhancement of the CarteSmart System, and six of its employees
are engaged in such activities. The Company intends to develop a product based
on both the CCAC 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
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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 may offer packages
which include smart cards and other network services. No assurance can be given
that the Company will be able to compete successfully with such competitors. The
Company believes the health insurance industry is developing switching software
to be used in transmitting claims from health care providers to the insurers,
and insurers or managed care organizations may also develop or license or
purchase from others the software to process such claims, which would compete
with certain functions of the CarteSmart System. The health information systems
business is highly competitive, and is serviced by a number of major companies
and a larger number of smaller companies, many of which are better capitalized,
better known and have better marketing staffs than the Company, and no assurance
can be given that the Company will be able to compete effectively with such
companies. Major vendors of health information systems include Shared Medical
Systems Corp. and HBO Corp., although the Company believes that such companies
market their products to segments of the heath care field other than the
behavioral field. The Company believes that price competition is a significant
factor in its ability to market its health information systems and services.
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 to 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 CCAC
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 an increasingly active role in developing and
marketing smart card based products. No assurance can be given as to the ability
of the Company to compete in this industry. Furthermore, the joint venture among
Visa, MasterCard and certain major banks relating to the development of a smart
card based system and the entry of American Express in the smart card business
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.
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<PAGE>
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.
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, vice
president of the Company, and Thomas L. Evans, who was formerly a vice president
of the Company, were employed by Onecard Corporation, a subsidiary or affiliate
of 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's joint
venture with Oasis and its affiliates to purchase and develop the CCAC
- 26 -
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<PAGE>
Software and its joint marketing agreement with Oasis are other examples of such
agreements. Although the Company is engaged in negotiations and performing its
due diligence investigations with respect to a potential acquisition, the
Company has not entered into any letters of intent or agreements with respect to
any such arrangements or transactions. Furthermore, no assurance can be given
that any agreement which the Company enters into will generate any revenue to
the Company. To the extent that the Company enters into an agreement with an
affiliated party, the terms and conditions of such agreement will be on terms at
least as favorable to the Company as those the Company could achieve in
negotiations at arm's length with an independent third party. If any such
agreement is with an affiliated party, the Company will seek the approval of a
majority of the directors who have no affiliation with the other party.
Employees
As of July 31, 1997, the Company had 75 employees, including four
executive, six marketing and marketing support, 58 technical and seven clerical
and administrative employees. The Company's employees are not represented by a
labor union, and the Company believes that its employee relations are good.
Litigation
In March 1997, an action was commenced against the Company and certain
of its officers, directors and stockholders by Onecard Health Services
Corporation in the Supreme Court of the State of New York, County of New York.
The named defendants include, in addition to the Company, Messrs. Lewis S.
Schiller, chief executive officer and a director of the Company, Leonard M.
Luttinger, vice president and a director of the Company, Thomas L. Evans, who
was a vice president of the Company, Consolidated and certain of its
subsidiaries, 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. 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 has filed an answer denying all of the plaintiffs'
allegations and has asserted affirmative defenses. In addition, the Company
believes that there is a difference in the technology used in the Onecard
software and the Company's CarteSmart software and in the type of computer
network on which the software operates. The Company has demanded that the
plaintiff particularize the broad allegations of the complaint and the produce
documents referred to in the complaint. 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.
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 also leases approximately 1,800 square feet of office
space in La Jolla, California pursuant to a lease which terminates on March 31,
1999, at a minimum annual rental of $31,000, subject to fixed annual increases
of 4%. The Company occupies, on a month-to-month basis, an aggregate of
approximately 1,500 square feet of office space in Wethersfield, Connecticut at
a monthly rental of $2,000 and has signed a lease for approximately 1,750 square
feet of office space in Tolland, Connecticut at an annual rental of
approximately $21,000. Occupancy in the Tolland office is scheduled for November
1997.
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.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position
Lewis S. Schiller 66 Chairman of the Board, Chief
Executive Officer and Director
James L. Conway 49 President and Director
Leonard M. Luttinger 48 Vice President and Director
Anthony F. Grisanti 47 Chief Financial Officer,
Treasurer and Secretary
John F. Phillips 57 Vice President -- Marketing
and Director
Norman J. Hoskin 61 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, in addition to the Company, magnetic
resonance imaging centers, telecommunications and various manufacturing
operations. Mr. Schiller has held such positions for more than the past five
years. Mr. Schiller is also chairman of the board, chief executive officer and
a director of Trans Global Services, Inc., a contract engineering company which
is a public subsidiary of SISC. Mr. Schiller devotes only a portion 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.
From 1990 to 1993, he was a consultant to General Aero Products Corp. ("General
Aero"), a Long Island based defense manufacturing firm as debtor in possession
of General Aero following its filing under Chapter 11 of the Federal Bankruptcy
Act in 1989. Mr. Conway devotes approximately 80% to 90% of his time to the
business of the Company.
Mr. Leonard M. Luttinger has been a director of the Company since its
organization in September 1992 and was president from September 1992 until
January 1996, when he became chief operating officer. In October 1996, he became
vice president of the Smartcard Division. From March 1991 to September 1992, Mr.
Luttinger was vice president of smart card systems for Onecard, a corporation
engaged in the development of smart-card technology. From June 1966 to February
1991, he was employed at Unisys, a computer corporation, and its predecessor
Burroughs Corporation, in various capacities, including manager of semiconductor
and memory products and manager of scientific systems.
Mr. Anthony F. Grisanti has been treasurer of the Company since June
1994, secretary since February 1995 and chief financial officer since January
1996. He was chief financial officer of CSM and ACT for more than five years
prior thereto.
Mr. John F. Phillips has been a director of the Company and vice
president of CSM since June 1994, when CSM was acquired. He 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. Norman J. Hoskin has been a director of the Company since July 1997.
He is chairman of Atlantic Capital Group, a financial advisory services company,
a position he has held for more than the past five years. He is also chairman of
the board and a director of Tapistron International, Inc., a high tech
manufacturer of carpeting, and is a director of Consolidated and Trans Global.
Mr. Hoskin is also a director of Aqua Care Systems, Inc., a water media
filtration and remediation company, and Spintek Gaming, Inc., a manufacturer of
gaming equipment.
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.
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.
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<PAGE>
Messrs. Phillips and Grisanti resigned as officers of ACT and Old CSM in
June 1994, at the time of the sale by Old CSM of its assets. Although Mr.
Phillips continues to serve as a director of ACT, he anticipates that such
service will not require any significant amount of his business time and effort.
The Company's Certificate of Incorporation includes certain provisions,
permitted under Delaware law, which provide that a director of the Company shall
not be personally liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for any transaction from which
the director derived an improper personal benefit, or (iv) for certain conduct
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, 1996, 1995 and 1994. Information
with respect to Mr.
Phillips reflects, for 1994, the combined compensation received from the Company
and Old CSM.
<TABLE>
Annual Compensation Long-Term Compensation (Awards)
Name and Principal Position Year Salary Bonus and Restricted Stock Options, SARs
Commission Awards (Dollars) (Number)
<S> <C> <C> <C> <C> <C>
Lewis S. Schiller, CEO 1996 --1 -- -- 166,6672
1995 --1 -- -- --
1994 --1 -- -- --
Leonard M. Luttinger, 1996 $ 62,500 $67,262 -- 156,2502
President 1995 125,000 -- -- 26,768
1994 113,390 24,000 -- 15,0003
John F. Phillips, chairman of 1996 100,000 33,906 -- 27,000
the board of CSM, vice 1995 123,900 -- -- 38,768
chairman and vice president - 1994 108,416 -- --4 15,0003
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 years ended
December 31, 1996 and 1995, the period from August 1, 1994 to December
31, 1994 and the fiscal year ended July 31, 1994, the total compensation
paid or accrued by Consolidated to Mr. Schiller was $340,000, $250,000,
$94,000 and $181,451, respectively.
2 Represents Series B Warrants issued in February and July 1996. The
Series B Warrants issued in July 1996 were issued pursuant to the
warrant exchange. See "Certain Transactions."
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 and
Phillips pursuant to the Company's 1993 Long-Term Incentive Plan. In
January 1995, these options were canceled 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) and Phillips (20,058 shares).
See "Management -- Long-Term Incentive Plan."
3 Represents the value of 17,752 shares of Common Stock transferred to Mr.
Luttinger by SISC.
4 In June 1994, in connection with the acquisition of Old CSM, SISC (a)
granted Mr. Phillips an option to purchase 66,000 shares of the
Company's Common Stock owned by SISC at $.232 per share for the five
year period commencing June 1994 and (b) transferred 40,000 shares of
Consolidated common stock to Mr. Phillips.
In June 1994, at the closing of the acquisition of CSM, the Company
entered into five-year employment agreements with Messrs. Leonard M. Luttinger,
John F. Phillips and Anthony F. Grisanti, which provide for annual base salaries
of $125,000, $125,000 and $80,000, respectively. The agreement with Mr.
Luttinger replaced a prior agreement and increased his compensation. The
agreements provide for an annual cost of living adjustment, an automobile
allowance and a bonus of 4% of income before income taxes
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<PAGE>
for Messrs. Luttinger and Phillips and 2% of income before income taxes for Mr.
Grisanti. The maximum bonus is 300% of salary for Messrs. Luttinger and Phillips
and 200% of salary for Mr. Grisanti. For 1996, Messrs. Luttinger and Phillips
agreed to reduced base salaries of $62,500 and $100,000, respectively, with
certain incentives if certain targets are attained. For 1997, Mr. Phillips
agreed to a reduced base salary of $109,000 plus commissions. In August 1996,
the Company entered into an agreement with Mr. James L. Conway pursuant to which
it pays him an annual salary of $125,000, subject to a cost of living adjustment
an automobile allowance and a bonus of 5% of income before income taxes up to a
maximum of 300% of his salary. Prior to August 1996, Mr. Conway received a
salary of $52,000 per year. The aggregate annual base salaries for 1997 under
these agreements is $459,000. 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 September 1996. See "Certain Transactions."
The annual salary payable by Consolidated to Mr. Schiller pursuant to
his employment agreement with Consolidated was $250,000, subject to a cost of
living increase, prior to September 1, 1996. Effective September 1, 1996, Mr.
Schiller's annual salary from Consolidated was increased to $500,000. In
addition, Mr. Schiller receives incentive compensation from Consolidated based
on the results of Consolidated's operations and owns 10% of Consolidated's or
SISC's equity interest in each of their operating subsidiaries and investments.
Pursuant to such agreement, Mr. Schiller received 10% of SISC's equity interest
in the Company and other subsidiaries of SISC. In addition, Mr. Schiller is
entitled to 20% of SISC's gross profit in the event of any sale of any of its
subsidiaries.
In January 1996, Mr. Storm R. Morgan was elected a director of the
Company. At the time of his election, he was an advisor of the Company. During
1996, the Company operated under an oral agreement pursuant to which the Company
paid to SMI, of which Mr. Morgan is the sole stockholder, an officer and
director, $619,700 for services provided by Mr. Morgan from on an as-needed
basis and for up to six persons who served in management-level or other key
positions for the Company on a full-time basis. These individuals provided
marketing, support and technical services to the Company. Mr. Morgan was not
required to devote any minimum amount of time to the business of the Company. In
1996, the Company also paid SMI commissions of $11,750 and paid SMI a $250,000
fee for services related to the Company's agreement with IBN. See "Certain
Transactions."
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 Series B
Warrants to such persons. All of such options and Series B Warrants were granted
prior to the Company's initial public offering.
Option Grants in Last Fiscal Year
<TABLE>
Percent of Total
Number of Shares Options Granted
Underlying to Employees in Exercise Price
Name Options Granted Fiscal Year1 Per Share Expiration Date
<S> <C> <C> <C> <C>
Lewis S. Schiller 66,6672 5.9% $2.00 12/31/99
100,0002 8.8% 4.00 12/31/99
Leonard M. Luttinger 25,0002 2.2% 2.00 12/31/99
131,2502 11.5% 4.00 12/31/99
John F. Phillips 27,000 2.4% 2.00 4/01/01
- -------------------------------- --------------- ------------ ------------- ----------
</TABLE>
1 The percentage is based upon the total number of stock options granted
(129,500) and Series B Warrants issued (1,008,334) to individuals who,
at the time of issuance, were officers, directors or employees of the
Company.
2 Represents Series B Warrants.
In July 1996, the Company effected a warrant exchange with the holders
of the Series B Warrants. Pursuant to the warrant exchange, (a) the holders of
Series B Warrants having a $2.00 exercise price exchanged one third of such
warrants for Series B 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 Series B Warrants that were exchanged, and (b) the exercise price of the
Series B Warrants having a $5.00 exercise price was reduced to $4.00. At the
time of the warrant exchange Mr. Schiller owned Series B Warrants (which had
been either issued to him by the Company or transferred to him by SISC) to
purchase 100,000 shares of Common Stock at $2.00 per share and 50,000 shares of
Common Stock at $5.00 per share. Pursuant to the warrant exchange, Mr. Schiller
received Series B Warrants to purchase 66,667 shares of Common Stock at $2.00
per share and 100,000 shares of Common Stock at $4.00 per share. Pursuant to the
warrant exchange, Mr. Luttinger exchanged Series B Warrants to purchase 37,500
shares of Common Stock at $2.00 per share and 112,500 shares of Common Stock at
$5.00 per share for Series B 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. See
"Certain Transactions -- Issuance of Warrants."
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<PAGE>
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."
<TABLE>
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
Year End Year End1
Shares Acquired Value Exercisable/ Exercisable/
Name Upon Exercise Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Lewis S. Schiller -- -- 166,667/ $91,667/
-- --
Leonard M. Luttinger -- -- 17,412/ 53,669/
9,354 28,343
John F. Phillips -- -- 29,412/ 91,385/
22,854 46,905
- -------------------------- --------------- --------- ------------- -------------
</TABLE>
1 The determination of "in the money" options at December 31, 1996, is
based on the closing price of the Common Stock on the Nasdaq SmallCap
Market on December 31, 1996, which was $3.375.
See "Certain Transactions" for information relating to the repricing of
certain Series B Warrants.
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 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
- 31 -
57046
<PAGE>
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 canceled previously granted options to purchase 206,250 shares
at an exercise price of $5.33 per share which were granted in 1994.
CERTAIN TRANSACTIONS
Loan and Equity Transactions
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 $54,000 note from an unrelated party. The largest amounts
owed by the Company at any one time to SISC during 1995 was approximately $3.0
million, which was outstanding on September 30, 1995. 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 was paid in August 1996.
(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. SISC holds 1,210 shares of Series D Preferred Stock, which provides for
an annual dividends in the aggregate amount of $72,600. Such dividend may be
paid in cash or in shares of Common Stock. The Company issued 5,542 and 7,260
shares of Common Stock in payment of dividends of $72,600 and $36,300 which were
due on October 1, 1996 and April 1, 1997, respectively. SISC transferred an
aggregate of 1,280 shares of such Common Stock to Mr. Lewis S. Schiller pursuant
to Mr. Schiller's employment agreement with Consolidated.
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. The largest amount
due ACT was $256,000, which was paid from the proceeds of the Company's initial
public offering in August 1996. Mr. John F. Phillips, a director of the Company,
is a director of ACT, and ACT is the parent of Old CSM.
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.
At the time of the Company's initial public offering in August 1996,
there were outstanding 80 shares of Series B Preferred Stock, which had a
redemption price of $1,200 per share. Such shares were owned by SISC, which
owned 40 shares, Mr. E. Gerald Kay, who was at the time a director of the
Company, who owned 20 shares, and one non-affiliated person who owned 20 shares.
All of the shares of Series B Preferred Stock were redeemed from the proceeds of
the Company's initial public offering. Pursuant to such redemption, SISC and Mr.
Kay received $48,000 and $24,000, respectively.
Issuance of Warrants
In February 1996, the Company issued an aggregate of 3,573,125
Outstanding Warrants, of which 1,677,500 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 certain of the Company's promissory notes. The fair value of the
Common Stock on the date of board approval was $3.20 per share, and the Company
incurred a compensation expense of $2.1 million as a result of the issuance of
Series B Warrants at $2.00 per share. See Notes 11 and 14 of Notes to
Consolidated Financial Statements. The Outstanding Warrants expire on December
31, 1999. The Series B Warrants, which, with respect to SISC and SMACS, replaced
the warrants previously granted at a higher price, were issued in February 1996
to the following persons:
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<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
========= =======
- --------------------------------------------- -------------- ----------
SISC has transferred Series B Warrants to purchase 700,417 shares of
Common Stock to Mr. Lewis S. Schiller (206,250 warrants), James Conway (25,000
warrants), E. Gerald Kay, who was, at the time, a director of the Company
(100,000 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 10% of Consolidated's or
SISC's or their subsidiaries' interest in equity securities owned by them. The
transfer of the Series B 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 Series B 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 and
director of Consolidated. Mr. Schiller and DLB disclaim any beneficial interest
in the shares owned by the Schillers' adult children.
Bridge Ventures, Inc. ("Bridge") transferred Series B 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 Capital Corp. ("Saggi"), and SMACS
transferred Series B 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 held 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.
In July 1996, pursuant to a warrant exchange, (a) the holders of Series
B Warrants having a $2.00 exercise price exchanged one third of such warrants
for Series B 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 Series B
Warrants that were exchanged, and (b) the exercise price of the Series B
Warrants having a $5.00 exercise price was reduced to $4.00. Prior to the
warrant exchange, there were Series B Warrants to purchase 2,516,250 shares of
Common Stock at $2.00 per share and Series B Warrants to purchase 637,500 shares
of Common Stock at $5.00 per share outstanding. As a result of the warrant
exchange, there were Series B 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 IPO Registration Statement also includes the 800,000 Series B
Warrants with an exercise price of $2.00 per share. In August 1996, SISC, Bridge
and Saggi sold Series B Warrants to purchase 750,000 shares, 25,000 shares and
25,000 shares, respectively, pursuant to such registration statement, and such
Series B Warrants were exercised in August 1996.
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
August 1, 1996 for general business, management and financial consulting
services. Neither Mr. Lewis S. Schiller, chairman of the board of the Company,
Consolidated, SISC and Trinity, nor any other employee of Consolidated, SISC or
Trinity receives any compensation from the Company for services rendered by him,
and the fee reflects compensation for services rendered and to be rendered by
Trinity to the Company. 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 10% of SISC's equity position in its
subsidiaries, including the Company, for 110% of SISC's cost. Pursuant to this
agreement, Mr. Schiller acquired from SISC an aggregate of 460,509 shares of
Common Stock. Mr. Schiller's employment agreement with Consolidated also
provides that, in the event of a merger or other sale by the Company of its
business, he is entitled to receive 20% of the gross profit, as defined, from
any sale. Ms. Grazyna B. Wnuk, secretary and a director of Consolidated, has an
employment agreement with Consolidated which provides that, in the event of such
a transaction, she is entitled to 1% of such gross profit. To the extent that
any such payments are made by the Company, the amount payable to the
stockholders will be reduced. As of the date of this Prospectus, the Company has
not conducted any formal or informal negotiations or discussions with respect to
any such transaction.
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<PAGE>
In January 1996, the Company issued 11,250 shares of Common Stock to Mr.
Thomas L. Evans, who was then vice president of the Company, for services
rendered by him. The fair value of such shares was 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 had an oral
agreement with SMI, of which Mr. Morgan is sole stockholder, an officer and a
director, pursuant to which the Company pays SMI an aggregate of $619,700 during
1996. Such compensation related to the services performed by Mr. Morgan on a
part time basis and by up to six other individuals who performed services at a
management level or other key position for the Company on a full-time basis.
Effective in February 1997, the Company has an oral agreement pursuant to which
it pays SMI $9,000 per month, for which SMI will provide to the Company the
services of Mr. Morgan on an as-needed basis. Mr. Morgan is not required to
devote any minimum amount of time to the business of the Company. In addition,
during 1996, the Company paid SMI a fee of $250,000 for services relating to the
Company's agreement with IBN. 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 and its affiliates formed a joint
venture to develop the CCAC Software. The joint venture is engaged in the
development of enhancements to the CCAC Software to enable it to interface with
Oasis' IST/Share as well as the Company's own CarteSmart System software. The
cost of the development of the CCAC Software is shared equally by Oasis and the
Company. Each party has the right to market the CCAC Software, and the proceeds
from any sales, after deducting a sales commission payable to the party which
makes the sale and any operating expenses, is shared equally by the Company and
Oasis. The purchase price of the CCAC Software was $650,000, of which $325,000
was paid by each of the Company and Oasis.
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 was $703,000 at June
30, 1997. Effective August 1, 1997, the maximum borrowings, subject to the
borrowing formula, was increased from $750,000 to $1,200,000, the interest rate
was reduced and the guarantees of Messrs. Luttinger and Bright were eliminated.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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.
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.
It is the Company's policy that all future transactions with affiliates
are to be on terms no less favorable than could be obtained from an unaffiliated
third party and must be approved by a majority of the directors, including a
majority of disinterested idrectors.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of August 31, 1997 and as adjusted to
give effect to the sale of the 1,793,750 shares of Common Stock issuable upon
exercise of the 896,875 outstanding Warrants during the Special Exercise Period,
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, based upon information provided
by such persons:
<TABLE>
Amount and Nature
Name and of Beneficial Percent of Ownership
Address1 Ownership2 Outstanding As Adjusted
<S> <C> <C> <C>
Lewis S. Schiller3 3,962,459 52.5% 42.4%
160 Broadway
New York, NY 10038
SIS Capital Corp.4 3,693,512 50.1% 40.3%
160 Broadway
New York, NY 10038
DLB, Inc.5 361,536 5.2% 4.1%
One Butler Road
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<PAGE>
Scarsdale, New York 10583
Storm R. Morgan6 307,000 4.3% 3.5%
James L. Conway7 293,750 4.2% 3.3%
Leonard M. Luttinger8 231,662 3.3% 2.6%
John F. Phillips9 108,912 1.6% 1.3%
All Directors and Officers 4,861,548 58.5% 48.1%
as a group (six individuals
owning stock, warrants or options)3, 6, 7, 8, 9, 10
</TABLE>
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.
3 Includes (a) 101,280 shares of Common Stock owned by Mr. Schiller, (b)
167,667 shares of Common Stock issuable upon exercise of Series B
Warrants held by Mr. Schiller which are exercisable at $2.00 per share
(67,000 shares) and $4.00 per share (100,000 shares), (c) 3,128,512
shares of Common Stock owned by SISC, of which Mr. Schiller is the chief
executive officer and has the power to vote the shares, and (d) 565,000
shares of Common Stock issuable upon exercise of Series B Warrants owned
by SISC. Includes 151,920 shares of Common Stock owned by SISC, 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 June 30,
1997, DLB owned 237,577 shares of Common Stock and Series B Warrants to
purchase 123,959 shares of Common Stock. 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 June 30, 1997 would be
4,312,473, or 56.2% of the outstanding shares of Common Stock at such
date, and 45.6% as adjusted.
4 Represents (a) 3,128,512 shares of Common Stock owned by SISC and (b)
565,000 shares of Common Stock issuable upon exercise of Series B
Warrants owned by SISC which are exercisable at $2.00 per share (15,000
shares) and $4.00 per share (550,000 shares). The shares owned by SISC
include 151,920 shares of Common Stock which are subject to options
granted by SISC in connection with the acquisition of CSM to one
director/officer of the Company, one officer of the Company and one
officer of CSM.
5 Includes 123,959 shares of Common Stock issuable upon exercise of Series
B Warrants owned by DLB which are exercisable at $2.00 per share (70,833
shares) and $4.00 per share (53,126 shares).
6 Includes 262,500 shares of Common Stock issuable upon exercise of Series
B Warrants owned by Mr. Morgan which are exercisable at $2.00 per share
(150,000 shares) and $4.00 per share (112,500 shares).
7 Includes 268,750 shares of Common Stock issuable upon exercise of Series
B Warrants owned by Mr. Conway, which are exercisable at $2.00 per share
(100,000 shares) and $4.00 per share (168,750 shares).
8 Includes (a) 156,250 shares of Common Stock issuable upon exercise of
Series B Warrants owned by Mr. Luttinger, which are exercisable at $2.00
per share (25,000 shares) and $4.00 per share (112,500 shares) and (b)
17,412 shares of Common Stock issuable upon the exercise of options held
by Mr. Luttinger.
9 Represents (a) 66,000 shares of Common Stock issuable upon exercise of
an option granted by SISC to Mr. Phillips and (b) 42,912 shares of
Common Stock issuable upon exercise of outstanding options held by Mr.
Phillips.
10 Information with respect to all officers and directors as a group also
includes 35,287 shares of Common Stock issuable upon exercise of options
held by another officer.
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<PAGE>
SELLING SECURITY HOLDERS
Sales of Securities by the Underwriter
Underwriter's Options
In connection with Company's initial public offering, the Company issued
Underwriter's Options to purchase from the Company, for $11.60 per Unit, up to
56,250 Units to the Underwriter. Each Unit consists of two shares of Common
Stock and one Warrant. The Underwriter's Options are exercisable for a four-year
period commencing August 13, 1997. 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. If the Warrants expire prior to the exercise of the Underwriter's
Options, upon exercise of the Underwriter's Options, the Company will issue two
shares of Common Stock and no Warrants. If any Underwriter's Options are
transferred, such Underwriter's Options must be immediately exercised and, if
not so exercised, will terminate. The Underwriter's Options contain
anti-dilution provisions providing for adjustment under certain circumstances
similar to those applicable to the Warrants. 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 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.
In the event that the Underwriter's Option and the underlying Warrants
are exercised, the holders of the Underwriter's Options may sell their
securities directly to purchasers, through broker-dealers acting as agents for
such holders, including the Underwriter, or to broker-dealers who may purchase
securities 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 holders of the Underwriter's Options 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). To the extent that any such
securities are acquired by the Underwriter for its own account, it may sell such
securities as principal to customers of such firm or to market-makers in the
securities.
Securities Purchased from Security Holders
Prior to the Company's initial public offering, the Company borrowed
$500,000 from four accredited investors, to whom it issued its promissory notes
due January 31, 1997 or earlier upon completion of the Company's initial public
offering. The notes were paid in August 1996, upon completion of the Company's
initial public offering. At such time, the Company issued to the noteholders an
aggregate of 500,000 shares of Common Stock and 250,000 Warrants. Such shares of
Common Stock and Warrants were registered in the registration statement relating
to the Company's initial public offering. Set forth below is information
concerning the noteholders:
Name Number of Shares1 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
20 English Woods
Rochester, NY 14626
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.
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57046
<PAGE>
The Underwriter has purchased the 300,000 shares of Common Stock and
150,000 Warrants from 360 Central Corporation, and it may purchase additional
shares of Common Stock and/or Warrants from the other persons named above in
negotiated transactions. The Underwriter has placed the securities it purchased
and will place any additional securities it purchases in an investment account.
The Underwriter may, from time to time, sell such securities either to its
customers or others on negotiated terms and/or sell such securities in open
market transactions. To the extent that the Underwriter is acting as a market
maker in the Common Stock or Warrants, it may sell such securities in such
capacity.
Sales by Related Parties
Mr. James L. Conway, president and a director of the Company, and Mr.
Storm Morgan, a director of the Company, may sell pursuant to this Prospectus,
Series B Warrants to purchase 43,100 shares and 31,100 shares of Common Stock,
respectively, or the shares of Common Stock issuable upon exercise of such
Series B Warrants commencing August 13, 1998, or earlier with the consent of the
Underwriter. In addition, Messrs. Conway and Morgan own 25,000 shares and 44,500
shares of Common Stock, respectively, which they may sell pursuant to Rule 144
of the Commission under the Securities Act commencing August 13, 1998, or
earlier with the consent of the Underwriter.
The Series B Warrants have an exercise price of $2.00 per share, expire
on December 31, 1999 and are not redeemable. Prior to August 13, 1998, the
shares of Common Stock issuable upon exercise of the Series B Warrants may not
be sold without the consent of the Underwriter. There is no public market for,
and there is not expected to be any public market for, the Series B Warrants.
The Series B 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 Series B Warrants must,
within a short period, either exercise the Series B Warrants or permit them to
expire unexercised.
Set forth below is information as to the stock ownership of Messrs.
Conway and Morgan as of August 25, 1997 and as adjusted for the shares of Common
Stock which may be sold by them pursuant to this Prospectus or pursuant to Rule
144, commencing August 13, 1998, or earlier with the consent of the Underwriter.
The percentages as adjusted do not give any effect to any shares of Common Stock
which may be issued by the Company upon exercise of the Warrants.
<TABLE>
Amount and Nature Shares
Name and of Beneficial Being Percent of Ownership
Address1 Ownership Offered2 Outstanding As Adjusted5
<S> <C> <C> <C> <C>
James L. Conway 293,7503 68,100 4.2% 3.2%
Storm Morgan 307,0004 50,000 4.3% 3.6%
</TABLE>
1 The address of each such person is c/o Netsmart Technologies, Inc.,
146 Nassau Avenue, Islip, New York 11751.
2 Includes shares of Common Stock issuable upon exercise or Series B
Warrants being sold pursuant to this Prospectus (43,100 shares by Mr.
Conway and 31,100 shares by Mr. Morgan) and shares of Common Stock being
sold pursuant to Rule 144 of the Commission (25,000 shares by Mr. Conway
and 44,500 shares by Mr. Morgan). Messrs. Conway and Morgan have advised
the Company that they anticipate that they will sell the shares which
may be sold pursuant to Rule 144 prior to selling shares issuable upon
exercise of the Series B Warrants.
3 Includes 268,750 shares of Common Stock issuable upon exercise of Series
B Warrants owned by Mr. Conway, which are exercisable at $2.00 per share
(100,000 shares) and $4.00 per share (168,750 shares).
4 Includes 262,500 shares of Common Stock issuable upon exercise of Series
B Warrants owned by Mr. Morgan which are exercisable at $2.00 per share
(150,000 shares) and $4.00 per share (112,500 shares).
5 If all of the Outstanding Warrants were exercised during the Special
Exercise Period, the as adjusted percentages for Messrs. Conway and
Morgan would be 2.6% and 2.9%, respectively.
The Company will not receive any proceeds from the sale of shares of
Common Stock by Messrs. Conway or Morgan other than the $2.00 per share exercise
price of the Series B Warrants to the extent that any of such warrants are
exercised.
Messrs. Conway and Morgan have advised the Company that any transfer of
the Series B Warrants will be either a sale in transactions at negotiated prices
or by gift. They have advised the Company with respect to the underlying shares
of Common Stock,
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57046
<PAGE>
that such sale may be effected from time to time in transactions (which may
include block transactions) by or for their accounts on The Nasdaq SmallCap
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.
Messrs. Conway and Morgan may effect such transactions by selling their
securities directly to purchasers, through broker-dealers, which may include the
Underwriter, acting as their agents or to broker-dealers, which may include the
Underwriter, who may purchase shares as principals and thereafter sell the
securities from time to time on The Nasdaq SmallCap Market, in negotiated
transactions or otherwise. Such broker-dealers, if any, may receive compensation
in the form of discounts, concessions or commissions from them 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). Neither Mr. Conway nor Mr.
Morgan has any understanding or agreement with any broker-dealer with respect to
any sale of the securities which may be sold by them.
Restrictions on Market Making Activities by the Underwriter
Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the Underwriter's Options or underlying
securities or other securities of the issuer, including a distribution of
securities purchased from stockholders, 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 such securities, it will not be
able to make a market in the Company's Common Stock or Warrants during the
applicable restrictive period. In addition, the holders of the Underwriter's
Options and other selling security holders, including Messrs. Conway and Morgan,
will be subject to the applicable provisions of the Exchange Act and the rules
and regulations thereunder, including without limitation Regulation M, which
provisions may limit the timing of the purchases and sales of shares of the
Company's securities by such holders.
The holders of the Underwriter's Options and broker-dealers, if any,
acting in connection with such sales, and the Underwriter, in selling shares
securities purchased from stockholders, 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
6,811,005 shares of Common Stock outstanding, and, if all of the 1,793,750
shares of Common Stock are issued upon exercise of the Warrants during the
Special Exercise Period, there will be 8,604,755 shares of Common Stock
outstanding.
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. Except as set
forth in this Prospectus, 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.
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57046
<PAGE>
There is one series of Preferred Stock which is authorized -- the Series
D Preferred Stock. Set forth below is information concerning each the Series D
Preferred Stock.
Series D Preferred Stock
The Series D Preferred Stock consists of a maximum of 3,000 shares, of
which 1,120 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, quarterly 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.
The holders of the Series D Preferred Stock have no voting rights, other than as
required by applicable law.
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, after payment has been made on any security of the
Company, if any, which ranks senior to the Series D Preferred Stock, holders of
shares of Series D Preferred Stock will be entitled to receive from the assets
of the Company $1.00 per share plus accrued and unpaid dividends to the payment
date, before any payment or distribution is made to holders of shares of Common
Stock or any other series or class of stock hereafter issued which ranks junior
as to liquidation rights to the Series D Preferred Stock. The Series D Preferred
Stock is on a parity with the Series A and B Preferred Stock as to dividends and
upon liquidation or dissolution of the Company.
The Series D Preferred Stock is redeemable at the option of the Company
for $1,000 per share commencing October 1, 1998, except that, prior to October
1, 1998, the Company may redeem shares of Series D Preferred Stock from 50% of
the net proceeds from the sale by the Company of its equity securities,
including the issuance of convertible securities and shares of Common Stock
issued upon exercise of warrants or options. However, the Company has agreed not
to apply any proceeds from the exercise of Warrants during the Special Exercise
Period 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 Series B Warrants, with each share of
Series D Preferred Stock 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 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.
During the Special Exercise Period, which is the 90 day period
commencing on the date of this Prospectus and ending at 5:30 P.M., New York City
time, on , 1997, the Company will amend the terms of the Warrants, including any
Warrants issued pursuant to the Underwriter's Options. Under these amended
terms, if any Warrants are exercised during the Special Exercise Period, the
holders may purchase two shares of Common Stock for $3.00 , resulting in an
exercise price of $1.50 per share. The Company has the right, in its
discretion, to extend the Special Exercise Period on one or more occasions
for up to 30 days in the aggregate. Upon the expiration of the Special
Exercise Period, the exercise price and terms will revert to their original
terms.
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 American Stock Transfer &
Trust Company, 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.
The Company may, with the consent of the Underwriter, call the Warrants
for redemption, 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
- 39 -
57046
<PAGE>
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.
Series B Common Stock Purchase Warrants
As of the date of this Prospectus, there were Series B Warrants to
purchase 877,500 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 Series B Warrants.
The Series B Warrants may be exercised until December 31, 1999. The
holders of the Series B Warrants have demand and piggyback registration rights
with respect to stock issuable upon issuance of the Series B Warrants commencing
August 13, 1998 or earlier with the consent of the Underwriter and the managing
underwriter of the subsequent offering. The Company has no right to redeem the
Series B Warrants. In the event that the Series B Warrants are transferred
pursuant to an effective registration statement, the Series B 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 Series B Warrant or permit it to
expire unexercised.
The Series B 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 Series B 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 Series B 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 Series B 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 Series D 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 D Preferred Stock.
Shares Eligible for Future Sale
All of the presently issued and outstanding shares of Common Stock were
either registered pursuant to Securities Act or issued as "restricted
securities" pursuant to an exemption from registration and may be sold pursuant
to Rule 144 of the Commission under the Securities Act. In connection with the
Company's initial public offering, the holders of substantially all of the
outstanding shares of Common Stock which had been issued prior to such offering,
have agreed not to sell any of their shares (other than shares acquired in the
public market) until August 13, 1998, without the consent of the Underwriter.
SISC and the Company's officers, directors and key employees have agreed that,
if the Company receives at least $1,000,000 from the exercise of the Warrants,
they will not sell any of their shares (other than shares acquired in the public
market) until August 13, 1999, without the consent of the Underwriter, except
that, commencing August 13, 1998, certain officers, directors and key employees
may sell 639,300 shares of Common Stock.
- 40 -
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<PAGE>
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.
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 issuable upon exercise of the
Warrants and the Units issuable pursuant to the Underwriter's Options.
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, 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.
- 41 -
57046
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-3
Balance Sheets F-4
Statements of Operations F-6
Statements of Stockholders' Equity F-8
Statements of Cash Flows F-9
Notes to Financial Statements F-12
F-1
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<PAGE>
[This page intentionally left blank]
F-2
57046
<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 sheets of
Netsmart Technologies, Inc. [formerly CSMC Corporation] and its subsidiary as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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 its subsidiary as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey March 6, 1997, except as to Note 5, for which the date is
April 8, 1997
F-3
57046
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC.
- ----------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------
June 30, December 31,
-------- ------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
[Unaudited]
Assets:
Current Assets:
<S> <C> <C> <C>
Cash and Cash Equivalents $ 22,395 $ 998,317 $ --
Accounts Receivable - Net 2,431,572 2,284,450 2,112,000
Costs and Estimated Profits in Excess of
Interim Billings 778,014 931,786 415,000
Other Current Assets 77,146 82,205 14,000
------------- ------------ -------------
Total Current Assets 3,309,127 4,296,758 2,541,000
------------- ------------ -------------
Property and Equipment - Net 390,537 382,586 347,000
------------- ------------ -------------
Other Assets:
Software Development Costs 665,652 250,920 --
Investment in Joint Venture at Equity 164,669 120,546 --
Customer Lists 2,972,814 3,128,814 3,442,000
Other Assets 69,723 71,105 60,000
------------- ------------ -------------
Total Other Assets 3,872,858 3,571,385 3,502,000
------------- ------------ -------------
Total Assets $ 7,572,522 $ 8,250,729 $ 6,390,000
============= ============ =============
</TABLE>
See Notes to Financial Statements.
F-4
57046
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC.
- ----------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------
June 30, December 31,
-------- ------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
[Unaudited]
Liabilities and Stockholders' Equity:
Current Liabilities:
<S> <C> <C> <C>
Cash Overdraft $ -- $ -- $ 95,000
Notes Payable - Bank -- -- 79,000
Notes Payable - Other 703,111 590,031 1,003,000
Capitalized Lease Obligations 21,951 41,449 169,000
Accounts Payable 1,485,602 983,156 1,186,000
Accrued Expenses 886,252 991,075 1,323,000
Interim Billings in Excess of Costs and Estimated
Profits 1,150,306 1,102,105 940,000
Due to Related Parties 71,780 23,542 167,000
Deferred Revenue 68,641 88,420 141,000
------------- ------------ -------------
Total Current Liabilities 4,387,643 3,819,778 5,103,000
------------- ------------ -------------
Capitalized Lease Obligations 9,761 15,945 34,000
------------- ------------ -------------
Subordinated Debt - Related Party -- -- 750,000
------------- ------------ -------------
Commitments and Contingencies -- -- --
------------- ------------ -------------
Redeemable Preferred Stock:
Series B 6% Redeemable Preferred Stock; 80 Shares
Authorized, Issued and Outstanding at
December 31, 1995 [Liquidation Preference
and Redemption Price of $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 at December 31, 1995 [Liquidation
Preference of $40,000] -- -- --
Series D 6% Redeemable Preferred Stock - $.01
Par Value 3,000 Shares Authorized, 1,210,
1,210 and 2,210 Issued and Outstanding
[Liquidation Preference of $1,210,000,
$1,210,000 and $2,210,000 at June 30, 1997,
December 31, 1996 and 1995, Respectively] 12 12 --
Additional Paid-in Capital - Preferred Stock
[$40,000 Series A at December 31, 1995; $1,209,509
- Series D at June 30, 1997 and December 31,
1996 $2,210,000 - Series D at December 31, 1995] 1,209,509 1,209,509 2,250,000
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued and Outstanding
6,811,005 Shares at June 30, 1997, 6,798,203 Shares
at December 31, 1996, and 3,011,253 Shares at
December 31, 1995 68,110 67,982 30,000
Additional Paid-in Capital - Common Stock 14,972,100 14,863,328 3,274,000
Accumulated Deficit (13,074,613) (11,725,825) (5,147,000)
------------- ------------ -------------
Total Stockholders' Equity 3,175,118 4,415,006 407,000
------------- ------------ -------------
Total Liabilities and Stockholders' Equity $ 7,572,522 $ 8,250,729 $ 6,390,000
============= ============ =============
See Notes to Financial Statements.
</TABLE>
F-5
57046
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC.
- ----------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------
Six months ended Y e a r s e n d e d
June 30, D e c e m b e r 3 1,
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5 1 9 9 4
------- ------- ------- ------- -------
[Consolidated][Consolidated][Consolidated][Consolidated][Combined]
[Unaudited] [Unaudited]
Revenues:
Software and Related Systems
and Services:
<S> <C> <C> <C> <C> <C>
General $1,627,826 $ 3,325,479 $ 5,108,095 $ 4,541,000 $ 1,539,000
Maintenance Contract Services 665,941 572,832 1,225,709 1,099,000 501,000
---------- ------------ ----------- ------------ -----------
Total Software and Related
Systems and Services 2,293,767 3,898,311 6,333,804 5,640,000 2,040,000
Data Center Services 1,019,286 1,037,247 2,207,155 1,742,000 884,000
---------- ------------ ----------- ------------ -----------
Total Revenues 3,313,053 4,935,558 8,540,959 7,382,000 2,924,000
---------- ------------ ----------- ------------ -----------
Cost of Revenues:
Software and Related Systems and
Services:
General 1,670,506 2,768,293 5,114,882 3,986,000 1,669,000
Maintenance Contract Services 480,989 285,275 595,366 743,000 449,000
---------- ------------ ----------- ------------ -----------
Total Software and Related
Systems and Services 2,151,495 3,053,568 5,710,248 4,729,000 2,118,000
Data Center Services 739,276 569,817 1,220,368 889,000 416,000
---------- ------------ ----------- ------------ -----------
Total Cost of Revenues 2,890,771 3,623,385 6,930,616 5,618,000 2,534,000
---------- ------------ ----------- ------------ -----------
Gross Profit 422,282 1,312,173 1,610,343 1,764,000 390,000
Provision for Doubtful Accounts -- -- 260,000 8,000 --
Selling, General and
Administrative Expenses 1,317,297 933,985 1,661,854 2,472,000 1,495,000
Related Party Administrative
Expenses 90,000 9,000 69,000 18,000 19,000
Stock Based Compensation -- -- 3,492,300 -- --
Warrants and Options Granted -- 2,230,069 -- -- --
Research and Development -- -- 278,000 699,000 367,000
---------- ------------ ----------- ------------ -----------
Loss from Operations -
Forward $ (985,015) $ (1,860,881) $(4,150,811) $ (1,433,000) $(1,491,000)
See Notes to Financial Statements.
</TABLE>
F-6
57046
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC.
- ----------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------
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 7 1 9 9 6 1 9 9 6 1 9 9 5 1 9 9 4
------- ------- ------- ------- -------
[Consolidated][Consolidated][Consolidated][Consolidated][Combined]
[Unaudited] [Unaudited]
Loss from Operations -
<S> <C> <C> <C> <C> <C>
Forwarded $ (985,015) $ (1,860,881) $(4,150,811) $ (1,433,000) $(1,491,000)
Financing Costs -- -- 1,692,000 863,000 --
Interest Expense 150,534 275,102 472,548 355,000 71,000
Equity in Net Loss of Joint
Venture 104,339 100,000 264,085 -- --
Related Party Interest Expense -- -- -- 199,000 189,000
----------- ------------ ----------- ------------ -----------
Net Loss $(1,239,888) $ (2,235,983) $(6,579,444) $ (2,850,000) $(1,751,000)
=========== ============ =========== ============ ===========
Loss Per Share $ (.18) $ (.46) $ (1.28) $ (.59) $ (.36)
=========== ============ =========== ============ ===========
Number of Shares of
Common Stock 6,800,032 4,821,528 5,149,253 4,821,528 4,821,528
=========== ============ =========== ============ ===========
See Notes to Financial Statements.
</TABLE>
F-7
57046
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC.
- ----------------------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------
Series A Series D Additional Common Stock Additional
Pfd Stock Pfd Stock Paid-in $.01 Par Value Paid-in
at .01 at .01 Capital Authorized Capital Total
Par Value Par Value Preferred 15,000,000 Shares Common Accumulated Stockholders'
Shrs Amt Shrs Amt Stock Shares Amount Stock Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 and Series A Preferred
Stock (400) (4)(1,000) (10) (1,039,996) 1,168,200 11,681 1,028,329 -- --
Reclassification -- 4 -- 22 (495) -- 113 (42) 619 221
Allocated Related Party
Administrative Expenses -- -- -- -- -- -- -- 9,000 --
9,000
Compensation from the Issuance of
Common Stock Warrants -- -- -- -- -- -- -- 3,492,300 -- 3,492,300
Common Stock Issued - Initial Public
Offering -- -- -- -- -- 1,293,750 12,938 5,162,063 -- 5,175,001
Common Stock Issued - Exercise of
Warrants -- -- -- -- -- 800,000 8,000 1,592,000 -- 1,600,000
Common Stock Issued - Financing Costs -- -- -- -- -- 525,000 5,250 1,674,750 -- 1,680,000
Costs Associated with Issuance of
Stock -- -- (1,369,072) -- (1,369,072)
Net Loss -- -- -- -- -- -- -- -- (6,579,444)(6,579,444)
---------------------------------------------------------------------------------------------
Balance - December 31, 1996
[Consolidated] -- -- 1,210 12 1,209,509 6,798,203 67,982 14,863,328 (11,725,825) 4,415,006
Preferred Stock Dividend -- -- -- -- -- 12,802 128 108,772 (108,900) --
Net Loss -- -- -- -- -- -- -- -- (1,239,888)(1,239,888)
--- --- ------ ----- --------- --------- ------- ----------- ----------- ----------
Balance - June 30, 1997
[Consolidated]
[Unaudited] -- $-- 1,210 $12 $1,209,509 6,811,005 $68,110 $14,972,100$(13,074,613)$3,175,118
===== === ======== === ========= ========= ======= ======================= ==========
See Notes to Financial Statements.
</TABLE>
F-8
57046
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC.
- ----------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------
Six months ended Y e a r s e n d e d
June 30, D e c e m b e r 3 1,
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5 1 9 9 4
------- ------- ------- ------- -------
[Consolidated][Consolidated][Consolidated][Consolidated][Combined]
[Unaudited] [Unaudited]
Operating Activities:
<S> <C> <C> <C> <C> <C>
Net Loss $(1,239,888) $ (2,235,983) $(6,579,444) $ (2,850,000) $(1,751,000)
----------- ------------ ----------- ------------ -----------
Adjustments to Reconcile Net Loss to
Net Cash [Used for] Provided by
Operating Activities:
Depreciation and Amortization 278,401 220,096 486,566 872,000 470,000
Administrative Expenses -- 9,000 9,000 18,000 19,000
Additional Compensation Related to the
issuance of Equity Instruments -- -- 3,492,300 22,000 236,000
Financing Expenses related to the issuance
of Common Stock -- -- 1,680,000 -- --
Write Off of Deferred Public Offering
Costs -- -- -- 460,000 --
Warrants and Options Granted -- 2,230,069 -- -- --
Equity in Net Loss of Joint Venture 104,339 100,000 264,085 21,000 15,000
Provision for Doubtful Accounts -- -- 260,000 8,000 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (147,122) (643,521) (431,478) (388,000) (369,000)
Costs and Estimated Profits in
Excess of Interim Billings 153,772 (583,675) (516,707) 87,000 (233,000)
Other Current Assets 5,059 514 (68,810) 10,000 45,000
Other Assets 1,382 (2,522) (10,502) -- (3,000)
Increase [Decrease] in:
Accounts Payable 502,446 1,076,559 (202,620) 159,000 13,000
Accrued Expenses (104,823) 131,168 (332,174) 935,000 199,000
Interim Billings in Excess of
Costs and Estimated Profits 48,201 522,907 160,626 (217,000) 413,000
Accrued Payroll Taxes and
Related Expenses -- -- -- -- (276,000)
Due to Related Parties 48,238 (55,265) (143,458) 496,000 1,629,000
Deferred Revenue (19,779) (100,782) (52,580) 141,000 --
----------- ------------ ----------- ------------ -----------
Total Adjustments 870,114 2,904,548 4,594,248 2,624,000 2,158,000
----------- ------------ ----------- ------------ -----------
Net Cash - Operating Activities -
Forward (369,774) 668,565 (1,985,196) (226,000) 407,000
----------- ------------ ----------- ------------ -----------
Investing Activities:
Acquisition of Property and
Equipment (83,083) (35,020) (181,033) (138,000) (122,000)
Software Development Costs (462,000) (278,800) (278,800) -- (177,000)
Investment in Joint Venture (148,462) (650,000) (384,631) -- (25,000)
Cash Acquired in Combination
with CSM -- -- -- -- 31,000
----------- ------------ ----------- ------------ -----------
Net Cash - Investing Activities -
Forward $ (693,545) $ (963,820) $ (844,464) $ (138,000) $ (293,000)
See Notes to Financial Statements.
</TABLE>
F-9
57046
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC.
- ----------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------
Six months ended Y e a r s e n d e d
June 30, D e c e m b e r 3 1,
1 9 9 7 1 9 9 6 1 9 9 6 1 9 9 5 1 9 9 4
------- ------- ------- ------- -------
[Consolidated][Consolidated][Consolidated][Consolidated][Combined]
[Unaudited][Unaudited]
Net Cash - Operating Activities -
<S> <C> <C> <C> <C> <C>
Forwarded $ (369,774) $ 668,565 $(1,985,196) $ (226,000) $ 407,000
---------- ------------ ----------- ------------ -----------
Net Cash - Investing Activities -
Forwarded (693,545) (963,820) (844,464) (138,000) (293,000)
---------- ------------ ----------- ------------ -----------
Financing Activities:
Proceeds from Short-Term Notes -- -- 500,000 831,000 200,000
Payment of Short-Term Notes 113,080 540,800 (912,270) (190,000) --
Payment of Bank Note Payable -- (79,000) (79,000) (175,000) (60,000)
Payment of Short-Term Notes
to Related Party -- -- (750,000) -- --
Payment of Capitalized Lease
Obligations (25,683) (9,448) (145,146) (29,000) (8,000)
Issuance of Common Stock -- -- 5,175,000 -- --
Proceeds from Warrant exercise -- -- 1,600,000 -- --
Cash Overdraft -- 31,583 (95,536) 56,000 37,000
Redemption of Series B Preferred Stock -- -- (96,000) -- --
Costs associated with issuance of Stock -- -- (1,369,071) -- --
Deferred Public Offering Costs -- (188,373) -- (129,000) (283,000)
---------- ------------ ----------- ------------ -----------
Net Cash - Financing Activities 87,397 295,562 3,827,977 364,000 (114,000)
---------- ------------ ----------- ------------ -----------
Net [Decrease] Increase in Cash (975,922) 307 998,317 -- --
Cash - Beginning of Periods 998,317 -- -- -- --
---------- ------------ ----------- ------------ -----------
Cash - End of Periods $ 22,395 $ 307 $ 998,317 $ -- $ --
========== ============ =========== ============ ===========
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the periods for:
Interest $ 178,357 $ 193,972 $ 481,856 $ 349,000 $ 76,000
</TABLE>
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During the year ended December 31, 1996, the Company had the following:
SISC exchanged 1,000 shares of Series D preferred stock for 1,125,000 shares of
common stock. As a result of this exchange the aggregate redemption price of the
Series D preferred stock was reduced to $1,210,000. The Series A preferred stock
was converted into 43,200 shares of common stock in a transaction valued at
$43,200.
Pursuant to an agreement with four accredited investors, the Company issued
250,000 units composed of two shares of common stock and one Series A Common
Stock purchase warrant. The Company incurred a one time non-cash charge of
$1,611,000.
See Notes to Financial Statements.
F-10
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Supplemental Disclosures of Non-Cash Investing and Financing Activities
[Continued]:
Pursuant to a modification of an agreement with an asset based lender the
Company issued 25,000 common shares to such lender and incurred a one-time
non-cash finance charge of $81,000.
The Company granted stock options to purchase an aggregate of 242,000 shares of
common stock and recognized compensation expense of $154,800.
The Company granted 3,573,125 Series B Common Stock purchase warrants and
896,875 Series A Common Stock purchase warrants and recognized compensation
expense of $3,337,500.
During the year ended December 31, 1995, the Company had the following:
1) $388,000 of accrued interest owed to SISC was exchanged for 1,125,000
shares of common stock.
2) $2,210,000 of SISC debt was exchanged for 2,210 shares of Series D
Preferred Stock.
3) 825,000 shares of common stock were issued to Holdings as follows:
A) 750,000 shares were issued in connection with the transfer of the
Acquisition Corp. stock to CSMC.
B) 75,000 shares were issued in respect of certain indebtedness
guaranteed by Consolidated.
See Notes to Financial Statements.
F-11
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #1
[Information as of and for the six months ended June 30, 1997 and 1996
are unaudited]
- --------------------------------------------------------------------------------
[1] Financial Statement Presentation, Organization and Nature of Operations
The financial statements as of December 31, 1996 and 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, 1996 was primarily directed at managed care
organizations and methadone clinics and other substance abuse facilities
throughout the United States. 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 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.
In April 1994, Netsmart entered into an Agreement and Plan of Reorganization
[the "Purchase Agreement"] among Consolidated, Netsmart, CSM Acquisition Corp.
["Acquisition Corp."], a wholly-owned subsidiary of Consolidated, Creative
Socio-Medics ["Old CSM"], and Advanced Computer Techniques, Inc. ["ACT"], Old
CSM's parent.
Pursuant to the Purchase Agreement, in June 1994, Acquisition Corp. acquired the
assets and assumed liabilities of Old CSM in exchange for 800,000 shares of
Consolidated's common stock and $500,000 cash which was advanced by Netsmart
from a loan from SISC. The following summarizes the purchase price allocated to
acquired assets at fair value:
Cash $ 500,000
Stock of Consolidated 2,700,000
------------
Purchase Cost $ 3,200,000
------------- ============
Allocated to:
Customer Lists $ 3,851,000
Accounts Receivable 1,363,000
Costs and Estimated Profits in Excess of
Billings 269,000
Property and Equipment 261,000
Other Assets 213,000
Liabilities Assumed (2,757,000)
------------
Total $ 3,200,000
----- ============
F-12
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[1] Financial Statement Presentation, Organization and Nature of Operations
[Continued]
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.
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.
The following pro forma unaudited results assumes the acquisition of CSM had
occurred at the beginning of 1994:
Year ended
December 31,
1994
Net Revenues $ 5,050,000
=============
Net Loss $ (2,136,000)
=============
Loss Per Share $ (.44)
=============
Number of Shares of Common Stock 4,821,528
=============
[2] Summary of Significant Accounting Policies
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents totaled approximately $1,000,000 at December 31, 1996.
F-13
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Concentration of Credit Risk - The Company extends credit to customers which
results in accounts receivable arising from its normal business activities. The
Company does not require collateral from its customers. The Company routinely
assesses the financial strength of its customers and based upon factors
surrounding the credit risk of the customers believes that its accounts
receivable credit risk exposure is limited. Such estimate of the financial
strength of such customers may be subject to change in the near term.
The Company's health information systems are marketed to specialized care
facilities, many of which are operated by government entities and include
entitlement programs. During the years ended December 31, 1996, 1995 and 1994,
approximately 31%, 54% and 49% of the Company's revenues were generated from
contracts with government agencies.
During the year ended December 31, 1996 and 1995, one customer accounted for
approximately $1,879,000 and $1,400,000 or 22% and 19% respectively of revenue.
Accounts receivable of approximately $473,000 and $336,000 were due from this
customer at December 31, 1996 and 1995. No one customer accounted for more than
10% of revenues in 1994.
The Company places its cash and cash equivalents with high credit quality
financial institutions. The amount on deposit in any one institution that
exceeds federally insured limits is subject to credit risk. At December 31,
1996, cash and cash equivalent balances of $1,000,000 were held at a financial
institution in excess of federally insured limits. The Company believes no
significant concentration of credit risk exists with respect to these cash
equivalents.
Revenue Recognition - The Company 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.
Revenues from fixed price software development contracts and revenue under
license agreements which require significant modification of the software
package to the customer's specifications, are recognized on the estimated
percentage-of-completion method. Using the units-of-work performed method to
measure progress towards completion, revisions in cost estimates and recognition
of losses on these contracts are reflected in the accounting period in which the
facts become known. Contract terms provide for billing schedules that differ
from revenue recognition and give rise to costs and estimated profits in excess
of billings, and billings in excess of costs and estimated profits. It is
reasonably possible that the amount of costs and estimated profits in excess of
billing and billings in excess of costs and estimated profits may be subject to
change in the near term. Revenue from software package license agreements
without significant vendor obligations is recognized upon delivery of the
software. Information processing revenues are recognized in the period in which
the service is provided. Maintenance contract revenue is recognized on a
straight-line basis over the life of the respective contract. Software
development revenues from time-and-materials contracts are recognized as
services are performed.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance revenue, which consists solely of staff payroll, is
expensed as incurred.
F-14
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Direct Costs - Direct costs generally represent labor costs related to licensing
and consulting agreements.
Property and Equipment and Depreciation - Property and equipment is stated at
cost less accumulated depreciation. Depreciation of property and equipment is
computed by the straight-line method at rates adequate to allocate the cost of
applicable assets over their expected useful lives. Amortization of leasehold
improvements is computed using the shorter of the lease term or the expected
useful life of these assets.
Estimated useful lives range from 2 to 10 years as follows:
Equipment 2-5 Years
Furniture and Fixtures 5-7 Years
Leasehold Improvements 8-10 Years
Capitalized Software Development Costs - Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Technological feasibility for the Company's computer software products is
generally based upon achievement of a detail program design free of high risk
development issues. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized computer software
development costs requires considerable judgement by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in 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.
During 1996, the Company assigned personnel to develop SmartCard products. As a
result, the applicable portion of cost of coding and testing subsequent to the
establishment of technological feasibility were capitalized as software costs
with respect to the work on the SmartCard product. As a result of such product
development the Company incurred $556,800 in software costs. Software costs of
$278,000 prior to technological feasibility, were recorded as research and
development expenses. Amortization, using the straight-line method over five
years of capitalized software development costs amounted to $27,880 for the year
ended December 31, 1996 and has been included in cost of revenues.
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
previously 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 and $221,000 at December 31, 1995 and 1994,
respectively. Amortization expense has been included in cost of revenues for all
periods.
F-15
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
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 change in the period of amortization reflects changes in
technology which became important in the health care industry subsequent to the
acquisition of CSM in June 1994. The development of Window-based applications,
particularly Windows 95, which had not been developed at the time of the
acquisition, together with the possibility of other changes in the software and
communications industry, represent developments that the Company feels require a
change in the amortization period to twelve years. Such change has been
accounted for as a change in accounting estimate. The effect of this change was
to increase amortization by $120,000 in 1995.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". SFAS No. 121 established
accounting standards for the impairment of long-lived assets and certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable intangibles to be
disposed of. Management has determined that expected future cash flows
[undiscounted and without interest charges] exceed the carrying value of the
intangibles at December 31, 1996 and believes that no impairment of these assets
has occurred. It is at least reasonably possible that management's estimate of
expected future cash flows may change in the near term. This may result in an
accelerated amortization method or write-off of the customer lists.
Customer lists at December 31, 1996 and 1995 are as follows:
December 31,
1 9 9 6 1 9 9 5
Customer Lists $ 3,850,814 $ 3,851,000
Less: Accumulated Amortization 722,000 409,000
------------ ------------
Net $ 3,128,814 $ 3,442,000
--- ============ ============
Cost Associated With Public Offerings - In 1996, the Company completed a public
offering of its securities [See Note 10]. Costs of $1,370,000 associated with
the offering were offset against total gross proceeds of $5,175,000. In early
1995, the Company withdrew a registration statement following the termination of
a previous public offering. Costs of $460,000, associated with that offering,
were expensed, and included in financing costs, in 1995.
Stock Options and Similar Equity Instruments - On January 1, 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation", for stock
options and similar equity instruments [collectively,"Options"] issued to
employees, however, the Company will continue to apply the intrinsic value based
method of accounting for options issued to employees prescribed by Accounting
Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to
Employees" rather than the fair value based method of accounting prescribed by
SFAS No. 123. SFAS No. 123 also applies to transactions in which an entity
issues its equity instruments to acquire goods or services from non-employees.
Those transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.
F-16
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
Loss Per Share - Loss per share is computed by dividing the net loss for the
period by the weighted average number of shares of common stock 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. 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.
Investment in Joint Venture - The Company's investment in a joint venture [See
Note 16] is accounted for under the equity method.
Allocated Related Party Administrative Expenses - During the first six months of
1996 and all of 1995 and 1994, certain administrative services were performed
for the Company by Consolidated and its subsidiaries. The fair value of such
services, approximately $9,000, $18,000 and $19,000, respectively, was charged
to related party and administrative expenses, and, since Consolidated will not
be reimbursed for such charges, credited to additional paid-in capital [See Note
7].
Research and Development - Expenditures for research and development costs for
the year ended December 31, 1996, 1995 and 1994 amounted to $278,000, $699,000
and $367,000, respectively.
[3] Accounts Receivable
Accounts receivable is shown net of allowance for doubtful accounts of $288,029,
$146,263 and 137,842 at December 31, 1996, 1995 and 1994 respectively. The
changes in the allowance for doubtful accounts are summarized as follows:
December 31,
-------------------------
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
Beginning Balance $ 146,263 $ 137,842 $ 137,778
Provision for Doubtful Accounts 260,000 60,000 30,000
Recoveries -- -- --
Charge-offs (118,234) (51,579) (29,936)
------------ ------------ ------------
Ending Balance $ 288,029 $ 146,263 $ 137,842
-------------- ============ ============ ============
F-17
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #7
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[4] Costs and Estimated Profits in Excess of Interim Billings and Interim
Billings in Excess of Costs and Estimated Profits
Costs, estimated profits, and billings on uncompleted contracts are summarized
as follows:
December 31,
1 9 9 6 1 9 9 5
Costs Incurred on Uncompleted Contracts $ 3,483,918 $ 2,588,000
Estimated Profits 652,749 491,000
------------- ------------
Total 4,136,667 3,079,000
Billings to Date 4,306,986 3,604,000
------------- ------------
Net $ (170,319) $ (525,000)
--- ============= ============
Included in the accompanying balance sheet under the following captions:
Costs and estimated profits in excess of
interim billings $ 931,786 $ 415,000
Interim billings in excess of costs and
estimated profits (1,102,105) 940,000
------------- ------------
Net $ (170,319) $ (525,000)
--- ============= ============
[5] Going Concern Considerations
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The Company has
sustained losses since inception and the accumulated deficit at December 31,
1996 is $11,725,825. 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, 1996 through loans from principal stockholders, an
asset-based lender and others, and from the sale of stock [See Notes 7 and 8].
All these factors had raised substantial doubt about the ability of the Company
to continue as a going concern.
Such substantial doubt has been alleviated due to the Company's ability to
secure contracts, such as the agreement effective April 8, 1997 with Health
System Design Corporation, which will allow the Company to provide the "Provider
Management Information System" to the nearly 600 Provider Agencies in the State
of Ohio. Management believes that the gross profit from this contract in 1997
will range from $567,000 to $2.3 million. The Company believes that the $567,000
gross profit can be attained with the existing staff.
There can be no assurances that management's plans to reduce operating losses by
increasing revenues to fund operations will be successful. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
F-18
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #8
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[6] Property and Equipment
Property and equipment consist of the following:
December 31,
1 9 9 6 1 9 9 5
Equipment, Furniture and Fixtures $ 538,634 $ 674,000
Leasehold Improvements 164,335 164,000
----------- -----------
Totals - At Cost 702,969 838,000
Less: Accumulated Depreciation 320,383 491,000
----------- -----------
Net $ 382,586 $ 347,000
--- =========== ===========
Depreciation expense amounted to $145,686, $140,000, and $69,000, respectively
for the years ended December 31, 1996, 1995 and 1994.
[7] Related Party Transactions
[A] Issuance of Stock at Organization - In connection with the organization of
the Company in September 1992, the Company issued 824,256 shares of common stock
as follows: 582,072 shares of common stock to SISC, for $1,300, 112,584 shares
to DLB, Inc. ["DLB"] for $6,700, and 43,200 shares of common stock for nominal
consideration to each of DLB and two individuals, one of whom became a director
in June 1994. DLB is controlled by the wife of the chairman of the board who is
also the chairman of the board of Consolidated. The chairman of the board
disclaims any beneficial interest in any securities owned by DLB.
Also in connection with the organization of the Company, the Company acquired
all of the capital stock of LMT in exchange for 129,600 shares of common stock
and 400 shares of Series A 4% Convertible Redeemable preferred stock, par value
$.01 per share ["Series A preferred stock"]. The 400 shares of Series A
preferred stock are convertible into 43,200 shares of common stock [See Note
10]. LMT was a shell corporation with no operating business. The shares of
common stock issued included 60,480 to the chief operating officer of the
Company and 25,920 to the vice-president of the Company. The remaining 43,200
and all of the shares of Series A preferred stock were issued to a non-related
individual. The Company expensed the value of the Series A preferred stock
($40,000). The issuance of the common stock was treated as compensation valued
at $.01 per share. In August 1996 the Company converted its Series A Preferred
stock into 43,200 Common Shares.
[B] Loans by Related Parties - At September 30, 1995, the total indebtedness due
SISC was $2,960,000 plus interest of $388,000. As of such date, (i) the interest
was exchanged for 1,125,000 shares of common stock, (ii) $2,210,000 of the debt
was exchanged for 2,210 shares of Series D 6% preferred stock ["Series D
preferred stock"], having a liquidation price of $1.00 per share and a
redemption price of $1,000 per share, and (iii) the remaining $750,000 due SISC
is represented by the Company's 10% subordinated note due January 15, 1997 or
earlier upon the completion of the Company's initial public offering. In
conjunction with the September 30, 1995 debt restructuring, $136,000 which was
previously recorded as paid-in capital, was reclassified to debt owed to SISC.
The Series D preferred stock may be redeemed at the option of the Company
commencing October 1, 1998, and is redeemable at any time after issuance from
50% of the proceeds of any over allotment on the Company's initial public
offering or other issuance of equity securities subsequent to the completion of
the Company's initial public offering.
At December 31, 1994, SISC has advanced $2,626,000 which are in the form of
demand notes bearing interest at 10%. This amount includes a $97,000 note due to
DLB, Inc. which was purchased by SISC in April 1994. Interest expense on these
notes for the years ended December 31, 1996, 1995 and 1994 amounted to $10,125,
$199,000 and $189,000, respectively.
F-19
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #9
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[7] Related Party Transactions [Continued]
[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 were paid in
full in 1996.
During the period from January to June 1994, SISC advanced an aggregate of
$330,000 to CSM. As a result of the acquisition, such obligations are included
in the principal amount of the Company's obligations to SISC, which were
approximately $2.6 million at December 31, 1994. Included in the advances by
SISC to the Company were $300,000 which was used to pay payroll taxes and
interest and $500,000 which was used in connection with the purchase of CSM.
At December 31, 1995 and 1994, ACT [the parent of Old CSM] loaned $167,000 and
$58,000 to the Company in the form of demand notes bearing interest at 10% per
annum. These loans were paid in full in 1996.
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.
The Company has an agreement with Consolidated and its subsidiary The Trinity
Group, Inc. ["Trinity"] pursuant to which the Company will pay Trinity a monthly
fee of $15,000 for a three-year term commencing on the first day of the month in
which the Company receives the proceeds from the Offering for general business,
management and financial consulting services. Pursuant to this agreement, in
1996 the Company charged $60,000 to related party administrative expenses.
The Company entered into an agreement with SMI Corporation ["SMI"], pursuant to
which the company would pay SMI compensation of $25,000 to $59,000 per month for
which SMI would provide persons to serve in management-level or other key
positions for the Company. In addition, the Company is to pay SMI 6% of the
revenues generated from Smart Card and related services. The agreement would
continue until December 31, 2000. The sole stockholder of SMI, Mr. Storm Morgan
was elected as a director of the Company in January 1996. For the year ended
December 31, 1996, the Company incurred and paid, $619,700 of compensation
expense pursuant to its agreement with SMI as well as an additional $250,000 for
services. In February of 1997 the Company modified the agreement whereby the
monthly fees were reduced to $9,000 and all commission arrangements were
canceled.
[8] Notes Payable
Bank - Notes payable to bank in the amount of $79,000, at December 31,1995 were
payable on demand. The notes had a interest rate of 1-1/2% over the bank's prime
rate and were collateralized by the assets of CSM. The loan was paid in full in
1996. The prime rate at December 31, 1996 was approximately 8.25%.
F-20
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #10
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[8] Notes Payable [Continued]
Asset-Based Lender - In February 1995, the Company entered into an accounts
receivable financing with an asset-based lender. Borrowings under this facility
were $590,000 and $707,000 at December 31, 1996 and 1995 respectively. The
Company can borrow up to 80% 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.
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 for the
period up to the public offering at which point the terms would revert to the
agreement of a maximum borrowing of $750,000. In consideration, the Company,
upon completion of the public offering paid the asset based lender a $25,000 fee
and issued it 25,000 shares of the Company's common stock. The Company incurred
a one time non-cash finance charge of approximately $81,000.
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. The balance of these notes were paid in full in 1996 as well as a $12,500
extension fee to the holders of the December 1994 Interim Notes. In connection
with the agreement of the holders of the 1993 Interim Notes to extend the
maturity date of the notes to the earlier of September 30, 1994, or three days
after the Company completes its initial public offering. SISC transferred an
aggregate of 9,375 shares of common stock to such noteholders. The Company
incurred a charge of $7,000 against operations for financing costs in
conjunction with the issuance of stock by SISC.
In connection with the issuance of the December 1994 Interim Notes: (i)
Consolidated issued the lender 85,000 shares of its stock, (ii) the Company
issued to SISC outstanding warrants to purchase 300,000 shares of common stock
at $2.00 per share, and (iii) the Company issued 75,000 shares of common stock
to Holdings. The Company incurred charges totaling $103,000 against operations
for financing costs in conjunction with the issuances of stock. Such charges
were recorded as intercompany charges due to SISC and Consolidated by the
Company.
Notes payable consist of the following:
December 31,
1 9 9 6 1 9 9 5
Bank - payable on demand with interest at 1-1/2%
over the bank's prime rate which was 8.5% at
December 31, 1995. $ -- $ 79,000
Investors - interest at 10%. -- 296,000
Asset-Based Lender - payable on demand with interest
at the greater of 18% per annum or prime plus 8% 590,031 707,000
----------- -------------
Totals $ 590,031 $ 1,082,000
------ =========== =============
The weighted average interest rate on short-term borrowings outstanding as of
December 31, 1996 and 1995 amounted to approximately 22% and 17%, respectively.
F-21
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #11
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[8] Notes Payable [Continued]
In January 1996, the Company borrowed $500,000 from four accredited investors.
In connection with such loans, the Company issued its 8% promissory notes due
January 31, 1997, which were subsequently paid from the proceeds of the
Company's initial public offering. The Company also agreed to issue and register
with the Securities Act one unit for each $2.00 principal amount of notes. The
unit issued to the noteholders mirrored the units issued in the initial public
offering which consisted of two shares of the Company's Common Stock and one
Series A Redeemable Common Stock Purchase Warrant. The Company incurred a one
time non-cash finance charge of $1,611,000 upon the issuance of these units.
[9] Income Taxes
The Company utilizes an asset and liability approach to determine the extent of
any deferred income taxes, as described in SFAS 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, 1996, the Company has net
operating loss carryforwards of $8,300,000 expiring by 2011. Pursuant to Section
382 of the Internal Revenue Code regarding substantial changes in Company
ownership, utilization of these losses may be limited. Based on this and the
fact that the Company has generated operating losses through December 31, 1996,
the deferred tax asset of approximately $3,300,000 is offset by an allowance of
$3,300,000.
A deferred tax asset of approximately $1,400,000, related to stock-based
compensation awards, has been offset by a valuation allowance of $1,400,000 due
to the uncertainty of its realization.
Deferred Tax Asset
Federal and State Net Operating Loss Carryforwards $ 3,300,000
Stock Based Compensation Awards 1,400,000
Less: Valuation Allowance (4,700,000)
-------------
Net Deferred Tax Asset $ --
---------------------- =============
The Valuation Allowance increased by $2,900,000 in 1996.
The provision for income taxes varies from the amount computed by applying
statutory rates for the reasons summarized below:
Provision Based on Statutory Rates 34 %
State Taxes Net of Federal Benefit 6 %
Increase in Valuation Allowance (40)%
-----
Total -- %
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
2011 3,153,000
------------
Total $ 8,300,000
----- ============
F-22
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #12
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[10] Capital Stock
Capital Stock - The Company is authorized to issue 3,000,000 shares of preferred
stock, par value $.01 per share, and 15,000,000 shares of common stock, par
value $.01 per share. The Company's Board of Directors is authorized to issue
preferred stock from time to time without stockholder action, in one or more
distinct series. The Board of Directors is authorized to 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.
Preferred Stock - The Series A preferred stock is 4% convertible redeemable
preferred stock. The stockholders are entitled to receive a $4.00 per share
annual dividend when and as declared by the Board of Directors. Dividends are
fully cumulative and accrue from October 1, 1992. Dividends are payable annually
on March 1. The stock is redeemable at the option of the Company at any time at
which the Company has consolidated net worth of at least $2,500,000 at a price
of $1,000 per share plus accrued dividends. Each share of Series A preferred
stock is convertible into 108 shares of common stock at the discretion of the
stockholder. In the event of involuntary or voluntary liquidation, the
stockholders are entitled to receive $100 per share and all accrued and unpaid
dividends. As of December 31, 1995, approximately $4,000 of dividends [$10 per
share] were in arrears. In August 1996 the Company converted its Series A
Preferred stock into 43,200 Common Shares.
The Series B preferred stock is 6% redeemable convertible preferred stock. The
stockholders are entitled to receive a $72.00 per share annual dividend when and
as declared by the Board of Directors. Dividends are fully cumulative and accrue
from April 1, 1993. Dividends are payable annually on March 1. The stock is
redeemable at the discretion of the Company at any time at which the Company has
consolidated net worth of at least $5,000,000 at a price of $1,200 per share
plus accrued dividends. Each share of Series B preferred stock is convertible
into 259.2 shares of common stock at the discretion of the stockholders. In the
event of involuntary or voluntary liquidation, the stockholders are entitled to
receive $1,200 per share and all accrued and unpaid dividends. Each holder of
Series B preferred stock has the right, following the Company's initial public
offering, to require the Company to redeem all of the shares of Series B
preferred stock owned by such holder at a redemption price equal to $1,200 per
share. As of December 31, 1995, approximately $11,000 [$138 per share] of
dividends were in arrears. In August 1996 the Company redeemed its Series B
Redeemable Preferred stock in the amount of $96,000.
The Series D preferred stock is 6% redeemable preferred stock. The stockholders
are entitled to receive a $60.00 per share annual dividend when and as declared
by the Board of Directors. Dividends are cumulative and accrue from October 1,
1995. Dividends are payable semi-annually on April 1 and October 1. The stock is
redeemable at the option of the Company for $1,000 per share commencing October
1, 1998. Earlier redemption is permitted under certain circumstances. In the
event of voluntary or involuntary liquidation, the stockholders are entitled to
receive $1.00 per share and all accrued and unpaid dividends.
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.
The Series A, Series B and Series D preferred stock are nonvoting except as is
required by law.
F-23
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #13
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[10] Capital Stock - [Continued]
The Company has granted to the holders of the Series A preferred stock and
Series B preferred stock and certain warrant holders, with respect to their
warrants, certain piggyback registration rights following the Company's initial
public offering, with respect to the shares of common stock issuable upon
conversion or exercise of the preferred stock or warrants.
On August 19, 1996 the Company closed on a public offering whereby it sold
646,875 units at a price of $8 per unit for net proceeds of approximately $3.8
million. Each unit consisted of two shares of common stock and one series A
Redeemable Common Stock Purchase Warrant.
On August 21, 1996 Series B Common Stock purchase warrants to purchase 800,000
shares of common stock at $2 per share were exercised and the Company received
$1,600,000 in gross and net proceeds.
See Note 7 for additional information relating to the issuance of common stock
and preferred stock in connection with the Company's organization and in
connection with certain financings.
See Note 14 for information relating to the Company's 1993 Long-Term Incentive
Plan.
[11] Capitalized Lease Obligations
Future minimum payments under capitalized lease obligations as of December 31,
1996 are as follows:
Year ending
December 31,
1997 $ 43,225
1998 16,854
------------
Total Minimum Payments 60,079
Less Amount Representing Interest at Rates Ranging from
11% to 12% Per annum 2,685
------------
Balance $ 57,394
------- ============
Capitalized lease obligations are collateralized by equipment which has a net
book value of $25,000 and $64,000 at December 31, 1996 and 1995, respectively.
Amortization of approximately $30,700 and $40,000 in 1996 and 1995,
respectively, has been included in depreciation expense.
[12] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted SFAS No. 107, which requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed therein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement. The following table
summarizes financial instruments by individual balance sheet accounts as of
December 31, 1996 and 1995:
F-24
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #14
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[12] Fair Value of Financial Instruments - [Continued]
<TABLE>
Carrying Amount Fair Value
December 31, December 31,
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------- ------- ------- -------
<S> <C> <C> <C> <C>
Debt Maturing Within One Year $ 590,000 $ 1,082,000 $ 590,000 $ 1,082,000
Long-Term Debt -- 750,000 -- 750,000
----------- ----------- ----------- ------------
Totals $ 590,000 $ 1,832,000 $ 590,000 $ 1,832,000
------ =========== =========== =========== ============
</TABLE>
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.
[13] Commitments and Contingencies
The Company leases space for its executive offices and facilities under
noncancellable operating leases expiring March 31, 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,
1997 $ 280,000
1998 293,000
1999 52,000
-----------
Total $ 625,000
----- ===========
Rent expense amounted to $358,000, $309,000 and $148,000 respectively, for the
years ended December 31, 1996, 1995 and 1994.
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
[See Note 7].
At the time of the acquisition of CSM, the Company entered into five-year
employment agreements with its current chief operating officer [formerly the
president] and vice president, which replaced employment agreements then in
effect, and the three individuals who had been officers of CSM. The agreements
provide for salaries of $125,000, $85,000, $125,000, $125,000 and $80,000,
respectively, subject to cost of living increases. The agreements also provide
for bonuses based upon a percentage of income before income taxes. The officers
are also provided with an automobile or an automobile allowance.
In January 1996, the vice-president's base salary was increased from $85,000 to
$100,000. Also, for 1996, the chief operating officer and two other officers,
whose base salaries were $125,000 each, agreed to reduce their base salaries to
$62,000, $100,000 and $100,000, with certain incentives if certain targets are
attained. The current president who is not one of the five individuals
previously mentioned, was compensated during 1996 at the annual rate of $52,000
prior to the public offering and $125,000 subsequent to the public offering.
F-25
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #15
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- -------------------------------------------------------------------------------
[13] Commitments and Contingencies - [Continued]
The following presents the pro forma net loss, for all periods, using the
minimum and maximum amounts payable to SMI Corporation:
<TABLE>
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 5 1 9 9 4
------- -------
<S> <C> <C>
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)
============= =============
Net Loss Per Share $ (.69) $ (.47)
============= =============
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)
============= =============
Net Loss Per Share $ (.78) $ (.56)
============= =============
</TABLE>
The proforma disclosure is not representative of the potential impact on
proforma earnings for years since the agreement was subsequently modified [see
Note 7B].
On or about September 29, 1995, an action was commenced against the Company by
the filing of a summons with notice in the Supreme Court of the State of New
York, County of New York. The action was commenced by Jacque W. Pate, Jr.,
Melvin Pierce, Herbert A. Meisler, John Gavin, Elaine Zanfini, individually and
derivatively as shareholders of Onecard Health Systems Corporation and Onecard
Corporation, which corporations are collectively referred to as "Onecard." The
named defendants include, in addition to the Company, officers and directors of
the Company, its principal stockholder and the parent of its principal
stockholder. A complaint was served on November 15, 1995. The complaint makes
broad claims respecting alleged misappropriation of Onecard's trade secrets,
corporate assets and corporate opportunities, breach of fiduciary relationship,
unfair competition, fraud, breach of trust and other similar allegations,
apparently arising at the time of, or in connection with the organization of,
the Company in September 1992. The complaint seeks injunctive relief and
damages, including punitive damages, of $130 million. In September 1996 the
above action was dismissed.
In March 1997, the plaintiff has refiled a new action with the same allegations
and stating claims that were at the basis of the original complaint. Such action
is in the amount of $130,000,000. The Company contends that the technology and
software were created from a "clean office start" and the action is without
merit and frivolous. No assessment as to any outcome can be made at this time as
the matter is in its very preliminary stages. The Company denies any allegation
of wrongdoing and intends to vigorously defend the action.
[14] Stock-Based Compensation
In July 1993, the Company adopted, by action of the board of directors and
stockholders, the 1993 Long-term Incentive Plan [the "Plan"]. The Plan was
amended in October 1993, April 1994, October 1994 and February 1996. These
amendments increased the number of shares available for grant pursuant to the
plan. The Plan does not have an expiration date.
The Plan is authorized to grant options or other equity-based incentives for
511,000 shares of the common stock. If shares subject to an option under the
Plan cease to be subject to such options, or if shares awarded under the Plan
are forfeited, or otherwise terminated without a payment being made to the
participant in the form of stock, such shares will again be available for future
distribution under the Plan.
F-26
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #16
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
Awards under the Plan may be made to key employees, including officers of and
consultants to the Company, its subsidiaries and affiliates, but may not be
granted to any director unless the director is also an employee of or consultant
to the Company or any subsidiaries or affiliates. The Plan imposes no limit on
the number of officers and other key employees to whom awards may be made;
however, no person shall be entitled to receive in any fiscal year awards which
would entitle such person to acquire more than 3% of the number of shares of
common stock outstanding on the date of grant.
In January 1995, the Board granted, to various employees, stock options to
purchase an aggregate of 252,804 shares of common stock at $.232 per share, and
in December 1995 the Board granted, to various employees, stock options to
purchase an aggregate of 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. These options
expire on January 31, 2000 and December 31, 2000, respectively. In connection
with certain of the January 1995 option grants, the Board canceled previously
granted options to purchase 206,250 shares at an exercise price of $5.33 per
share which were granted in 1994. In April 1996, the Company granted stock
options to purchase an aggregate of 129,500 shares of common stock at an
exercise price of $2.00 per share and recognized compensation expense of
$154,800. The options are exercisable as to 50% of the shares on the first and
second anniversaries of the date of grant and expire in April 2001.
In addition, the Company granted to the underwriter, for nominal consideration,
options to purchase 56,250 units, consisting of two common shares, and one
purchase warrant, for a four year period commencing August 13, 1997 at a price
of $5.37.
A summary of the activity under the Company's stock option plan is as follows:
<TABLE>
1 9 9 6 1 9 9 5 1 9 9 4
------------------- ------------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding - Beginning of
<S> <C> <C> <C> <C> <C> <C>
Years 357,756 $ .265 206,250 $ 5.33 -- $ --
Granted During the Years 242,000 3.57 357,756 .265 206,250 5.33
Canceled During the Years -- -- (206,250) 5.33 -- --
Expired During the Years -- -- -- -- -- --
Exercised During the Years -- -- -- -- -- --
-------- ------- -------- -------- --------- --------
Outstanding - End of Years 599,756 $ 1.60 357,756 $ .265 206,250 $ 5.33
-------------------------- ======== ======= ======== ======== ========= ========
Exercisable - End of Years 178,878 $ .265 -- $ -- -- --
-------------------------- ======== ======= ======== ======== ========= ========
</TABLE>
F-27
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #17
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
<TABLE>
1 9 9 6 1 9 9 5
------------------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Fair Exercise Fair
<S> <C> <C> <C> <C>
Price Value Price Value
Options Issued with Exercise Price
Above Stock Price at Date of Grant $ 5.37 $ .93 $ -- $ --
Options Issued with Exercise Price
Equal to Stock Price at Date of Grant -- -- $ .265 $ .14
Options Issued with Exercise Price Below
Stock Price at Date of Grant $ 2.00 $ 1.78 $ -- $ --
</TABLE>
The following table summarizes stock option information as of December 31, 1996:
<TABLE>
Weighted
Average Remaining Weighted Average
Range of Exercise Prices Shares Contractual Life Exercise Price
<S> <C> <C> <C> <C>
$.232 to $.345 357,756 3.4 Years $ .265
$2.00 129,500 4.3 Years 2.00
$5.37 112,500 4.7 Years 5.37
----------- ---------
Totals 599,756 3.8 Years $ 1.60
------ =========== =========
</TABLE>
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. The warrants became exercisable six months from the
completion of the Company's initial public offering or earlier with the consent
of the Company and the underwriter and expire on November 30, 1998.
In February 1996, the Company issued an aggregate of 3,153,750 Series B
Warrants, of which 2,526,250 are exercisable at $2.00 per share and 637,500 are
exercisable at $5.00 per share. These warrants were issued in connection with
services rendered, which, in the case of SISC, included the guarantee of the
December 1995 Interim Notes, and, in certain instances the terms of the warrants
were revised. Although the warrants were issued prior to the three-for-four
reverse split, which was effective in February 1996, the number of shares
issuable upon exercise of the warrants, but not the exercise price, was adjusted
for the reverse split. Certain of the warrants initially had a November 1998
expiration date, which was extended to December 31, 1999, which is the
expiration date of all of the warrants.
Of the warrants issued in February 1996, 787,500 warrants exercisable at $2.00
per share and 37,500 warrants exercisable at $5.00 per share were issued to
replace 825,000 warrants previously issued in October 1993. These warrants had
exercise prices ranging from $2.67 per share to $10.00 per share.
F-28
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #18
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
In July 1996, pursuant to a warrant exchange, (a) the holders of outstanding
warrants having a $2.00 exercise price exchanged one third of such warrants for
outstanding warrants to purchase, at an exercise price of $4.00 per share, 150%
of the number of shares of common stock issuable upon exercise of the
outstanding warrants that were exchanged, and (b) the exercise price of the
outstanding warrants have a $5.00 exercise price was reduced to $4.00. Prior to
the warrant exchange, there were outstanding warrants to purchase 2,516,250
shares of common stock at $2.00 per share and outstanding warrants to purchase
2,637,500 shares of common stock at $5.00 per share outstanding. As a result of
the warrant exchange, there are outstanding warrants to purchase 1,677,500
shares of common stock at $2.00 per share and 1,895,625 shares of common stock
at $4.00 per share. This warrants may be exercised commencing February 13, 1997
or earlier if approved by the company and the underwriter. An affiliate of the
Company, a member of the board of the directors and a Company controlled by such
directors, were given permission to exercise options in August 1996. This
individual and entities exercised warrants to purchase 800,000 shares at $2.00
per share in August 1996. All of the warrants expire on December 31, 1999. These
warrants are Series B Common Stock Purchase Warrants. The Company recorded
compensation expenses of $3,337,500 in relation to the issuance of these
warrants.
The Company issued 646,875 Series A Common Stock Purchase Warrants as a part of
its initial public offering of its securities. These warrants are exercisable
for two year period commencing August 13, 1997 at a price of $4.50.
In addition, the Company issued 250,000 Series A Common Stock Purchase Warrant
to various accredited investors [See Note 8]. These warrants have the same term
as the warrants issued to the general public.
A summary of warrant activity is as follows:
<TABLE>
1 9 9 6 1 9 9 5 1 9 9 4
------------------- ------------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding - Beginning
of Years 825,000 $ 7.27 825,000 $ 7.27 825,000 $ 7.27
Granted or Sold During
the Years 4,470,000 3.35 -- -- -- --
Canceled During the Years (825,000) 7.27 -- -- -- --
Expired During the Years -- -- -- -- -- --
Exercised During the Years (800,000) 2.00 -- -- -- --
--------- ------- -------- -------- --------- --------
Outstanding - End of Years 3,670,000 $ 3.64 825,000 $ 7.27 825,000 $ 7.27
-------------------------- ========= ======= ======== ======== ========= ========
Exercisable - End of Years -- -- 825,000 $ 7.27 825,000 $ 7.27
-------------------------- ========= ======= ======== ======== ========= ========
</TABLE>
F-29
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #19
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
<TABLE>
[14] Stock-Based Compensation - [Continued]
1 9 9 6 1 9 9 5
------------------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Fair Exercise Fair
Price Value Price Value
<S> <C> <C> <C> <C>
Warrants Issued with Exercise Price
Above Stock Price at Date of Grant $ 4.16 $ 1.04 $ -- $ --
Warrants Issued with Exercise Price
Equal to Stock Price at Date of Grant $ -- $ -- $ -- $ --
Warrants Issued with Exercise Price
Below Stock Price at Date of Grant $ 2.00 $ 1.78 $ -- $ --
</TABLE>
The following table summarizes warrant information as of December 31, 1996:
<TABLE>
Weighted
Average Remaining Weighted Average
Range of Exercise Prices Shares Contractual Life Exercise Price
<S> <C> <C> <C>
$2.00 877,500 3.0 Years 2.00
$4.00 1,895,625 3.0 Years 4.00
$4.50 896,875 1.7 Years 4.50
----------- ---------
Total 3,670,000 2.7 Years 3.64
----- =========== =========
</TABLE>
The Company applies accounting principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, for stock options issued
to employees in accounting for its stock options plans. Total compensation cost
recognized in income for stock based employee compensation awards was $3,492,300
If the Company had accounted for the issuance of all options and compensation
based warrants pursuant to the fair value based method of SFAS No. 123, the
Company would have recorded additional compensation expense totaling $846,000
and $50,000 for the years ended December 31, 1996 and 1995, respectively, and
the Company's net loss and net loss per share would have been as follows:
Years ended
December 31,
1 9 9 6 1 9 9 5
------- -------
Net Loss as Reported $ (6,579,444) $ (2,850,000)
============== ==============
Pro Forma Net Loss $ (7,425,444) $ (2,900,000)
============== ==============
Net Loss Per Share as Reported $ (1.28) $ (.59)
============== ==============
Pro Forma Net Loss Per Share $ (1.44) $ (.60)
============== ==============
F-30
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #20
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
The fair value of options and warrants at date of grant was estimated using the
Black-Scholes fair value based method with the following weighted average
assumptions:
1 9 9 6 1 9 9 5
------- -------
Expected Life [Years] 2 3
Interest Rate 6.0% 6.0%
Annual Rate of Dividends 0% 0%
Volatility 67.9% 69.6%
The weighted average fair value of options and warrants at date of grant using
the fair value based method during 1996 and 1995 is estimated at $1.33 and $.14,
respectively.
[15] Industry Segments
The Company currently classifies its operations into two business segments: (1)
Software and Related Systems and Services and (2) Data Center Services. Software
and Related Systems and Services is the design, installation, implementation and
maintenance of computer information systems. Data Center Services involve
company personnel performing data entry and data processing services for
customers. Intersegment sales and sales outside the United States are not
material. Information concerning the Company's business segments is as follows:
<TABLE>
Y e a r s e n d e d
D e c e m b e r 31,
1 9 9 6 1 9 9 5 1 9 9 4
<S> <C> <C> <C>
------- ------- -------
Revenues:
Software and Related Systems and Services $ 6,333,804 $ 5,640,000 $ 2,040,000
Data Center Services 2,207,155 1,742,000 884,000
------------ ------------- ------------
Total Revenues $ 8,540,959 $ 7,382,000 $ 2,924,000
-------------- ============ ============= ============
Gross Profit:
Software and Related Systems and Services $ 623,456 $ 911,000 $ (78,000)
Data Center Services 986,787 853,000 468,000
------------ ------------- ------------
Total Gross Profit $ 1,610,243 $ 1,764,000 $ 390,000
------------------ ============ ============= ============
Income [Loss] From Operations:
Software and Related Systems and Services $ (4,053,006) $ (1,692,000)$ (1,649,000)
Data Center Services (97,805) 259,000 158,000
------------ ------------- ------------
Total [Loss] From Operations $ (4,150,811) $ (1,433,000)$ (1,491,000)
---------------------------- ============ ============= ============
Depreciation and Amortization:
Software and Related Systems and Services $ 367,984 $ 765,000 $ 401,000
Data Center Services 118,582 107,000 69,000
------------ ------------- ------------
Total Depreciation and Amortization $ 486,566 $ 872,000 $ 470,000
----------------------------------- ============ ============= ============
Capital Expenditures:
Software and Related Systems and Services $ 165,716 $ 46,000 $ 119,000
Data Center Services 15,317 92,000 3,000
------------ ------------- ------------
Total Capital Expenditures $ 181,033 $ 138,000 $ 122,000
-------------------------- ============ ============= ============
Identifiable Assets:
Software and Related Systems and Services $ 4,119,943 $ 3,625,000
Data Center Services 2,607,693 2,691,000
------------ -------------
Total Identifiable Assets $ 6,727,636 $ 6,316,000
------------------------- ============ =============
</TABLE>
F-31
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #21
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[16] Joint Venture
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 and paid in three installments during 1996.
The Company entered into a joint venture with Oasis Technology, Ltd. ["Oasis"]
pursuant to which the joint venture corporation (50% owned by the Company) 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. Oasis did pay the $325,000 during 1996. The Company accounts
for its interest in the Joint Venture on the equity method. During 1996 the
Company recognized $264,085 of its share of losses related to this joint venture
and contributed an additional $59,631 in cash to fund ongoing costs.
[17] New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 125. "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". SFAS No. 125
is effective for transfers and servicing of financing assets and extinguishment
of liabilities occurring after December 31, 1996. The provision of SFAS No. 125
must be applied prospectively; retroactive application is prohibited and early
application is not allowed. SFAS No. 125 supersedes SFAS No. 77, "Reporting by
Transferors for Transfers of Receivables with Recourse". While both SFAS No.
125 and SFAS No. 77 required a surrender of "control" or financial assets to
recognize a sale, the SFAS No. 125 requirements of sale are generally more
stringent. SFAS No. 125 is not expected to have a material impact on the
Company because the Company hasn't been recognizing sales under SFAS No. 77 and
will also not be under SFAS No. 125. Some provisions of SFAS No. 125, which are
unlikely to apply to the Company, have been deferred by the FASB.
The FASB has issued SFAS No. 128 "Earnings Per Share" and SFAS 129 "Disclosure
of Information About Capital Structure". Both are effective for financial
statements issued for periods ending after December 15, 1997. SFAS No. 128
simplifies the computation of earning per share by replacing the presentation of
primary earnings per share with a presentation of basic earnings per share. The
statement requires dual presentation of basic and diluted earnings per share by
entities with complex capital structures. Basic earnings per share includes no
dilution an is computed by dividing income available to common stockholders by
the weighted average number of shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity similar to fully diluted earnings per share.
While the Company has not analyzed SFAS No. 128 sufficiently to determine its
long-term impact on per share reported amounts, SFAS No. 128 should not have a
significant effect on historically reported per share loss amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
F-32
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #22
[Information as of and for the six months ended June 30, 1997 and 1996 are
unaudited]
- --------------------------------------------------------------------------------
[18] Unaudited Interim Financial Statements
The financial statements for the six months ended June 30, 1997 and 1996 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.
[19] Subsequent Events [Unaudited]
On June 30, 1997, the Company paid dividends relating to the Series D Preferred
Stock which were payable on October 1, 1996 and April 1, 1997. The dividends
were paid through the issuance 12,802 shares of common stock and valued at the
fair market value at the respective dates they became payable. This resulted in
an increase of $108,900 in the accumulated deficit with a corresponding increase
in common stock and additional paid-in capital - common stock in the amounts of
$128 and $108,772, respectively.
. . . . . . . . . . .
F-33
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - CALCULATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
<TABLE>
Six Months Ended
June 30, 1997
Primary EPS Fully Diluted EPS
<S> <C> <C>
Net Loss $ (1,239,887) $ (1,239,887)
Dividend Adjustment -- --
------------ -------------
Adjusted Net Loss $ (1,239,887) $ (1,239,887)
============ =============
Loss Per Share:
Loss Per Share - Note 1 $ (.18)
============
Loss Per Share - Assuming Full
Dilution - Note 2 $ (.16)
=============
</TABLE>
Note 1: Computed by dividing net loss by the weighted average number of
common shares (6,800,032) for the six months ended June 30, 1997.
Adjusting it by items (i) to (iv) below using the treasury stock method
of calculating earnings per share.
(i) Assumes that 369,117 1995 stock options issued in 1995 and
outstanding at June 30, 1997 were exercised at the beginning of
the period and that the proceeds were used to purchase treasury
stock at the average market price of the Company's common stock
for the period as quoted on the NASDAQ SmallCap Market, retire
debt, redeem preferred stock and to invest the balance, if
appropriate.
(ii) Assumes that 129,500 1996 stock options issued in 1996 and
outstanding at June 30, 1997 were exercised at the beginning of
the period and that the proceeds were used to urchase treasury
stock at the average market price of the Company's common stock
for the period as quoted on the NASDAQ SmallCap Market, retire
debt, redeem preferred stock, and to invest the balance, if
appropriate.
(iii) Assumes Series B common stock purchase warrants to purchase and
aggregate of 877,500 common shares were exercised at the
beginning of the period and that the proceeds were used to
purchase treasury stock at the average market price of the
Company's common stock for the period as quoted on the NASDAQ
SmallCap Market, retire debt, redeem preferred stock and to
invest the balance, if appropriate.
(iv) Assumes common stock purchase warrants to purchase an aggregate
of 56,250 shares were exercised at the beginning of the period
and that the proceeds were used to purchase treasury stock at the
average market price of the Company's common stock for the period
as quoted on the NASDAQ SmallCap Market, retire debt, redeem
preferred stock and to invest the balance, if appropriate.
The proceeds received from the above transactions would then be used to purchase
treasury stock up to 20%, retire debt, redeem preferred stock and the remaining
balance invested.
F-34
57046
<PAGE>
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - COMPUTATION OF EARNINGS PER SHARE [CONTINUED]
- --------------------------------------------------------------------------------
Note 2: Computed by dividing net loss by the weighted average number of
common shares (7,727,641) for the six months ended June 30, 1997
adjusting it by items (i) to (iv) below using the treasury stock method
of calculating earnings per share.
(i) Assumes that 369,117 1995 stock options issued in 1995 and
outstanding at June 30, 1997 were exercised at the beginning of
the period and that the proceeds were used to purchase treasury
stock at the market price of the Company's common stock at June
30, 1997 as quoted on the NASDAQ SmallCap Market, retire debt,
redeem preferred stock and to invest the balance, if appropriate.
(ii) Assumes that 129,500 1996 stock options issued in 1996 and
outstanding at June 30, 1997 were exercised at the beginning of
the period and that the proceeds were used to purchase treasury
stock at the market price of the Company's common stock at June
30, 1997 as quoted on the NASDAQ SmallCap Market, retire debt,
redeem preferred stock and to invest the balance, if appropriate.
(iii) Assumes Series B common stock purchase warrants to purchase and
aggregate of 877,500 common shares were exercised at the
beginning of the period and that the proceeds were used to
purchase treasury stock at the market price of the Company's
common stock at June 30, 1997 as quoted on the NASDAQ SmallCap
Market, retire debt, redeem preferred stock and to invest the
balance, if appropriate.
(iv) Assumes that stock options to purchase 56,250 shares were
exercised at the beginning of the period and that the proceeds
were used to purchase treasury stock at the market price of the
Company's common stock at June 30, 1997 as quoted on the NASDAQ
SmallCap Market, retire debt, redeem preferred stock and to
invest the balance, if appropriate.
The proceeds received from the above transactions would then be used to purchase
treasury stock up to 20%, retire debt, redeem preferred stock and the remaining
balance invested.
Note: This calculation is submitted in accordance with the Securities Act of
1934 Release No. 9083 although it is contrary to Para. 40 of APB 15 because it
may produce an anti-dillutive result.
F-35
57046
<PAGE>
<TABLE>
<S> <C>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus, and, if given
or made, such information or representations must not be relied on as having
been authorized by the
Company or by the Underwriter. This Prospectus Netsmart Technologies,
does not constitute an offer to sell or a solicitation Inc.
of an offer to buy any securities offered hereby to
any person in any jurisdiction in which such offer 1,793,750 shares of Common Stock issuable
or solicitation was not authorized or in which the upon exercise of Series A Redeemable
person making such offer or solicitation is not Common Stock Purchase Warrants
qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation. 56,250 Units, each Unit consisting of one share
Neither the delivery of this Prospectus nor any of Common Stock one two Series A
sale made hereunder shall, under any Redeemable Common Stock Purchase
circumstances, create any implication that there Warrants Each Unit Consists of two shares of
has been no change in the circumstances of the Common Stock and one
Company of the facts herein set forth since the Series A Redeemable Common Stock
date of this Prospectus. Purchase Warrant
---------------------- 500,000 shares of Common Stock and
250,000 Series A Common Stock Purchase
Warrants
TABLE OF CONTENTS
Page 74,200 shares of Common Stock
Prospectus Summary..........................2
Risk Factors................................6
Dilution...................................13
Market for Common Stock and Warrants;
Dividends.................................13
Use of Proceeds............................14
Capitalization.............................15
Selected Financial Data ...................16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................16
Business...................................21
Management.................................28
Certain Transactions.......................33
Principal Stockholders.....................36
Selling Security Holders...................37 ----------------------
Description of Securities..................40 PROSPECTUS
Legal Matters..............................42
Experts................................... 42 ----------------------
Additional Information ................... 42
Index to Financial Statements.............F-1
----------------------
Until , 1997 (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.
, 1997
</TABLE>
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
SEC registration fee $ 945.18
NASD registration fee --
Nasdaq listing fee 1,000.00*
Printing and engraving 6,000.00*
Accountants' fees and expenses 35,000.00*
Legal fees 50,000.00*
Transfer agent's and warrant agent's fees and expenses 2,000.00*
Blue Sky fees and expenses 20,000.00*
Miscellaneous 35,954.82*
---------------
Total $150,000.00*
* Estimated
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law and Article EIGHT
of the Company's Restated Certificate of Incorporation (Exhibit 3.1) provide for
indemnification of directors and officers of the Company under certain
circumstances.
Reference is made to Paragraphs 6 and 7 of the Underwriting Agreement
(Exhibit 1.1) with respect to indemnification of the Company and the
Underwriters. In addition, the Series B 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 July 1, 1994. All securities issued were restricted
securities and the certificates bore restrictive legend.
(a) All share and per share information in this Item 15 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.
(b) During 1993, 1994 and 1995, the Company issued an aggregate of
3,153,750 Series B Warrants, of which 2,516,250 were exercisable at $2.00 per
share and 637,500 were 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 certain notes issued by the Registrant in December
1994, and, in certain instances the terms of the Series B 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 Series B Warrants, but not the exercise price, was adjusted for
the reverse split. Certain of the Series B Warrants initially had a November
1998 expiration date, which was extended to December 31, 2000, which is the
expiration date of all of the Series B Warrants. The Series B Warrants were
issued in February 1996 as follows:
57046
<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
========= =======
- --------------------------------------------------------------------------------
(c) In July 1996, pursuant to a warrant exchange, (a) the holders of
Series B Warrants having a $2.00 exercise price exchanged one third of such
warrants for Series B 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 Series B Warrants having a $5.00 exercise price was
reduced to $4.00. Prior to the warrant exchange, there were Series B Warrants to
purchase 2,516,250 shares of Common Stock at $2.00 per share and Series B
Warrants to purchase 637,500 shares of Common Stock at $5.00 per share
outstanding. As a result of the warrant exchange, there were Series B 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 holders of the Series B Warrants
which participated in the warrant exchange included the holders named in
Paragraph (b) of this Item 15 and their transferees.
(d) 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 Note. 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 Note. 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. 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.
<TABLE>
Name Principal Amount of Notes Shares of Consolidated Common Stock
<S> <C> <C>
Joseph Brussese $ 25,000 7,500
Bernard Savetz 25,000 7,500
Ruth Wolf 25,000 7,500
Larry Pallini 15,000 4,500
Jeffrey Schwartz 15,000 4,500
Rosemary G. Barsky 12,500 3,750
Alvin I. Lebenfeld 12,500 3,750
Ronald S. Levine 12,500 3,750
Irwin Pincus 12,500 3,750
David Schiffman 12,500 3,750
Michael Friedman 10,000 3,000
Steven L. Tillman 10,000 3,000
Robert Friedman 6,250 1,875
Lawrence Lupo 6,250 1,875
-------- ------
$200,000 60,000
</TABLE>
- --------------------------------------------------------------------------------
(e) At September 30, 1995, the Registrant owed SISC approximately
$3.0 million plus interest of $388,000. At September 30, 1995:
(i) Holdings transferred to the Registrant all of the stock of
CSM in exchange for 750,000 shares of Common Stock in accordance with the
Registrant's agreement with SISC.
II-2
57046
<PAGE>
(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.
(f) In January 1996, SISC exchanged 1,000 shares of Series D
Preferred Stock for 1,125,000 shares of Common Stock.
(g) In January 1996, the Company issued to Mr. Thomas Evans, who was
then vice president of the Company, 11,250 shares of Common Stock for services
rendered.
(h) In January 1996, the Company 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 Company's
initial public offering. Pursuant to the subscription agreement, if the Company
effects its initial public offering prior to the maturity date of the January
1996 Interim Notes, the Company 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. 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
------------------------ ----------------
In August 1996, the Company issued to the holders of the January
1996 Interim Notes the following shares of Common Stock and Warrants. Such
securities were issued pursuant to a registration statement, and, accordingly,
are not restricted securities.
Name Common Stock Warrants
360 Central Corporation 300,000 150,000
Charles S. Junger 100,000 50,000
Steven Capizzi 50,000 25,000
Kenneth Lipson 50,000 25,000
------------------------ --------- ----------
(i) In August 1996, the Company issued to three designees of United
Credit Corporation ("United"), the Company's asset-based lender, an aggregate of
25,000 shares of Common Stock. The designees, who were officers and directors of
United, are Leonard R. Landis (10,000 shares), Donald M. Landis (10,000 shares)
and Dean I. Landis (5,000 shares).
(j) The Company issued to SISC 5,542 and 7,260 shares of Common Stock in
payment of the dividends payable with respect to the Series D Preferred Stock
which were due on October 1,1996 and April 1, 1997, respectively.
The issuances described in Paragraphs (b) through (j), other than the
securities described in Paragraph (g) which were registered pursuant to the
Securities Act, 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.
II-3
57046
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
2.11 Plan and Agreement of Reorganization ("Purchase Agreement") dated
as of April 13, 1994, by and among Consolidated Technology Group
Ltd., CSM Acquisition Corp., the Registrant, Creative Socio-Medics
Corp.
("Old CSM"), and Advanced Computer Techniques, Inc. ("ACT")
2.21 Amendment dated April 13, 1994 to the Purchase Agreement.
2.31 Disclosure Letter to the Plan and Agreement of Reorganization
("Purchase Agreement") dated as of April 13, 1994, by and among
Consolidated Technology Group Ltd., CSM Acquisition Corp., the
Registrant, Old CSM, and ACT.
2.41 Second Amendment dated June 16, 1994 to the Purchase Agreement.
2.51 Agreement dated October 26, 1994, between the Registrant and
Consolidated Technology Group, Ltd. ("Consolidated") relating to
the plan and agreement of reorganization dated as of April 13,
1994, as amended, among the Registrant, Consolidated, CSM
Acquisition Corp., Creative Socio-Medics Corp. and Advanced
Computer Techniques, Inc.
2.61 Letter agreement dated December 5, 1994, between the
Registrant and Consolidated.
3.11 Restated Certificate of Incorporation, as amended, including
certificates of designation with respect to the Series A, B and D
Preferred Stock.
3.21 By-Laws
4.11 Form of Warrant Agreement dated August 13, 1996, among the
Registrant, American Stock Transfer & Trust Company, as Warrant
Agent, and Monroe Parker Securities, Inc., to which the form of
Series A Redeemable Common Stock Purchase Warrant is included as
an exhibit.
4.22 Form of Amendment to the Warrant Agreement.
5.1 Opinion of Esanu Katsky Korins & Siger.
10.11 Employment Agreement dated June 16, 1994, between the Registrant
and Leonard M. Luttinger, as amended.
10.22 Employment Agreement dated as of August 15, 1996, between the
Registrant and James L. Conway.
10.31 Employment Agreement dated June 16, 1994, between the Registrant
and John F. Phillips, as amended.
10.41 Employment Agreement dated June 16, 1994, between the Registrant
and Anthony F. Grisanti.
10.51 Agreement dated March 1, 1996 between the Registrant and The
Trinity Group, Inc.
10.61 1993 Long-Term Incentive Plan.
10.71 Form of Series B Common Stock Purchase Warrant.
10.81 Form of Option Agreement from SIS Capital Corp. to certain
officers of Old CSM.
10.91 Agreement dated March 3, 1995 between CSM and United Credit
Corporation, as amended.
10.101 Software licensing and service agreement dated April 27, 1996
between the Registrant and IBN Limited.
10.111 Letter agreement dated February 28, 1996 between the Registrant
and Oasis Technology Ltd. ("Oasis) relating to the a proposed
joint venture.
10.121 Source code license agreement dated November 10, 1995 between the
Registrant and Oasis.
10.131 Software marketing and distribution agreement between the
Registrant and Oasis.
10.141 Joint marketing letter agreement dated March 31, 1995 between the
Registrant and Oasis.
10.151 Agreement dated February 7, 1996 between the Credit Card
Acquisition Corp. and Fiton Business, S.A.
10.162 Stockholders agreement dated as of September 2, 1996 between
the Registrant, Consolidated Technology Group Ltd. 1174378 Ontario
Inc. and Credit Card Acquisition Corp. (a subsidiary of the
Registrant), Oasis Technologies Holdings, Ltd. and Oasis
Technology Ltd.
10.17 Amendment dated July 22, 1997, to March 3, 1995 agreement between
CSM and United Credit Corporation.
10.181 Form of Underwriting Agreement dated August 13, 1996 between the
Registrant and Monroe Parker Securities, Inc. (initially filed as
Exhibit 1.1).
10.191 Form of Underwriter's Option dated August 13, 1996 (initially
filed as Exhibit 1.2).
11.1 Computation of loss per share.
24.1 Consent of Moore Stephens, P.C. (See Page II-7).
24.2 Consent of Esanu Katsky Korins & Siger (included in Exhibit 5.1).
25.12 Powers of attorney
27.1 Financial data schedule.
1 Filed as an exhibit to the Registrant's registration statement on Form S-1,
File No. 333-2550, which was declared effective by the Commission on August
13, 1996, and incorporated herein by reference.
2 Previously filed
II-4
57046
<PAGE>
(b) Financial Statement Schedules
None
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To remove from the registration statement by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriters to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officer 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.
(6) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the issuer under Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(7) For determining any liability under the Securities Act, to treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-5
57046
<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 this the th day of
September, 1997
NETSMART TECHNOLOGIES, INC.
By: 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
Lewis S. Schiller Executive Officer and Director
(Principal Executive Officer)
Anthony F. Grisanti Treasurer and Chief Financial
Anthony F. Grisanti Officer (Principal Financial and
Accounting Officer)
James L. Conway Director
James L. Conway
By: LEWIS S. SCHILLER
Leonard M. Luttinger Director Lewis S. Schiller
Leonard M. Luttinger Attorney-in-Fact
September , 1997
John F. Phillips Director
John F. Phillips
Norman J. Hoskin Director
Norman J. Hoskin
Storm R. Morgan Director
Storm R. Morgan
II-6
57046
<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, 1997, except as to Note 5, for which the date is April 8,
1997, accompanying the financial statements of Netsmart Technologies, Inc., and
to the use of our name, and the statements with respect to us as appearing under
the heading "Experts" in the Prospectus.
MOORE STEPHENS, P.C.
Cranford, New Jersey
September , 1997
II-7
57046
<PAGE>
Securities and Exchange Commission
September 16, 1997
Page 1
Exhibit 5.1
September 17, 1997
Securities and Exchange Commission 13146-08
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Netsmart Technologies, Inc.
File Number 333-32391
Gentlemen:
We refer to the above-captioned registration statement on Form S-1 (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"), filed by Netsmart Technologies, Inc., a Delaware corporation (the
"Company"), with the Securities and Exchange Commission. Terms defined in the
Registration Statement and not otherwise defined in this Opinion shall have the
same meanings in this Opinion as in the Registration Statement.
We have examined the originals or photocopies or certified copies of
such records of the Company, certificates of officers of the Company and public
officials, and other documents as we have deemed relevant and necessary as a
basis for the opinion hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as certified copies or photocopies and the authenticity of the
originals of such latter documents.
Based on our examination mentioned above, we are of the opinion that the
securities being registered to be sold by the Company pursuant to the
Registration Statement are duly authorized and will be, when sold in the manner
described in the Registration Statement, legally and validly issued.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm under "Legal Matters" in
the related Prospectus. In giving the foregoing consent, we do not hereby admit
that we are in the category of persons whose consent is required under Section 7
of the Act or the rules and regulations of the Securities and Exchange
Commission.
Very truly yours,
ESANU KATSKY KORINS & SIGER, LLP
58149
<PAGE>
United Credit Patriot Funding
Since 1987
15 West 44th Street, New York, NY 10036-6611 * Telephone (212) 843-0808 * Fax
(212) 843-0817
- --------------------------------------------------------------------------------
July 22, 1997
Creative Socio-Medics Corp.
146 Nassau Avenue
Islip, New York 11751
Ladies and Gentlemen:
It is a pleasure to confirm the arrangements reached with Anthony
Grisanti on the telephone for the continuation of the financing arrangements
between your Company (the "Borrower") and us.
Effective August 1, 1997, the Security Agreement between the Borrower
and us dated March 3, 1995 as heretofore amended is further amended in the
following respects:
1. Paragraph FIRST (b) is changed to read as follows:
"The "borrowing base" shall mean an amount equal to 80% of the
net security value of accounts as defined in Subparagraph
THIRTEENTH (b) hereof, minus any amounts past due in accordance
with the terms of this Agreement, and the "permissible line"
shall mean $1,250,000.00 during the year ending July 31, 1998 and
$1,500,000.00 during each subsequent year."
2. Paragraph FIRST (c) is changed to read as follows:
"The Borrower shall pay United basic interest on the daily unpaid
cash balances outstanding during each month at a rate equal to
the highest New York City prime rate in effect during such month
as generally reported, plus 8.5% per annum."
3. Paragraph FIRST (d) is changed to read as follows:
"The Borrower shall pay United as a commitment fee for United's
agreements hereunder (i) $6,669.00 as of August 1, 1997 and
$15,000.00 as of August 1st of each year thereafter unless this
Agreement has theretofore been terminated, plus (ii) $10,000.00
per month for each month from August 1997 through July 1998 and
$12,500.00 each month thereafter, beginning August, 1998, that
this
/continued
<PAGE>
Creative Socio-Medics Corp. -2- July 22, 1997
Agreement is to remain in effect, as stated below or as renewed
or extended, against which monthly minimum, or commitment fee,
the interest charge under Paragraph "FIRST (c)" shall be applied;
but interest or fees charged in connection with any "overadvance"
as referred to in subparagraph "SIXTH A" or any "installment
loan" as defined in subparagraph "THIRTEENTH (c)," or any other
fees payable hereunder, shall not be so applied;"
4. Paragraph FIRST (e) is changed to read as follows:
"This Agreement shall remain in effect to July 31, 1999."
5. Reference in Paragraph SIXTH C to a collateral management fee of
1% of sales is changed to reference to a collateral management
fee of 5/8ths of 1% of sales.
6. Paragraph THIRTEENTH B is amended by changing the clause
designated "(x)" to read as follows:
"accounts 120 days or older from invoice date and all purported
accounts which represent a breach of the terms of this
Agreement."
You agree that our statement to you as of June 30, 1997 is correct and
that the amounts therein set forth as owing were, in fact owing, free of all
offsets, deductions, counterclaims and defenses.
If the foregoing correctly sets forth our understanding, please so
indicate below and return two copies of this letter, so endorsed, to us.
Sincerely,
UNITED CREDIT CORPORATION
By /s/ Donald M. Landis
Donald M. Landis
AGREED:
CREATIVE SOCIO-MEDICS CORP.
By: /s/ Lewis S. Schiller
Lewis S. Schiller
Name
Chairman, CEO
Title
<PAGE>
