As filed with the Securities and Exchange Commission on July 30 ,1997
Registration No. 333-
Securities and Exchange Commission
Washington, D.C. 20549
Form S-1
Registration Statement under the Securities Act of 1933
Netsmart Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 7872 13-3680154
(State or jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organiza Classification Code Number) Identification No.)
146 Nassau Avenue, Islip, New York 11751, (516) 968-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive officer)
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: (212) 233-5023
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]
<TABLE>
Calculation of Registration Fee
Maximum
Amount to Maximum Offer Aggregate Registration
Title of each class of securities to be Registereded Price Per Unit 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
- ------------------------------------ ----------- ------------ ---------- ---------- -------
</TABLE>
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.
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 Unit Purchase Options issued to the
underwriter of the Company's initial public offering and (c) 56,250 shares of
Common Stock issuable upon exercise of the 56,250 Warrants issuable upon
exercise of such Unit Purchase Options 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.
<PAGE>
Netsmart Technologies, Inc.
Cross-Reference Sheet Pursuant to Rule 404
Item No. Caption in Prospectus
1. Forepart of the RegistratioRegistration Statement Facing Page, Prospectus
Cover Page
and Outside Front Cover of Prospectus
2. Inside Front and Outside BaInsideeCover Page, Back Cover Page
Pages of Prospectus
3. Summary Information, Risk FProspectus Summary, Risk Factors
Ratio of Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering PCover Page, Risk Factors
6. Dilution Dilution
7. Selling Security Holders Cover Page, Unit Purchase Options
8. Plan of Distribution Cover Page, Unit Purchase Options, Description
of Securities
9. Description of Securities tDescriptioneofdSecurities
10. Interest of Named Experts aN.A.ounsel
11. Information with Respect to(a)-(cProspectus 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)-(kManagement
(l) Principal Stockholders
(m) Certain Transactions
12. Disclosure of Commission PoN.A.on on
Indemnification for Securities Act
Liabilities
- ---- ------------------------------------------
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION DATED JULY 29 , 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
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 Unit Purchase 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 $ ,
resulting in an exercise price of $ 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."
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 Unit
Purchase Options (the "Unit Purchase Options") granted to the Underwriter in
connection with the Company's initial public offering. The exercise price of the
Unit Purchase Options is $11.60 per Unit.
The Common Stock and Warrants are quoted on the Nasdaq SmallCap Market
under the symbols NTST and NTSTW,
respectively. On 1997, the last reported sale prices of the Common Stock and
Warrants were $ and $ ,
respectively.
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.
To the extent that Warrants are exercised, the Company will receive the
proceeds from the exercise of the Warrant. During the Special Exercise Period,
the Company will receive $ for each Warrant exercised, for which it will issue
two shares of Common Stock. 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.
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 5, 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 July 29 , 1997
<PAGE>
The Company is subject to certain informational requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith will
file reports and other information with the Securities and Exchange Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 or at the regional offices of the
Commission at Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661 and Seven World Trade Center, New York, New York 10048. Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
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 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.
2
<PAGE>
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 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, in June 1994 and transferred by such
subsidiary to the Company in September 1995.
For the three months ended March 31, 1997 and the year ended December 31,
1996, approximately 92% 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 June 30, 1997, approximately 45.9% of the Company's outstanding
Common Stock was owned by SIS Capital Corp. ("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: 1,793,750 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 Unit Purchase Options
issued in the Company's initial public offering. Pursuant
to the Unit Purchase Options, if the Unit Purchase Options
are exercised, the Warrants issuable upon exercise of the
Unit Purchase Options must be exercised immediately.
Description of Warrants:
Exercise of WarrantSubject to redemption by the Company, the
Warrants are exercisable during the two year period
commencing August 13, 1997.
Exercise during Special ExerDuring the Special
Exercise Period, the exercise price of the
Warrants is $ , for which the exercising
Warrant holder will receive two shares of
Common Stock, resulting in an exercise price of $
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.
3
<PAGE>
Redemption of WarraThe 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
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 Unit Purchase Options or
the Warrants issuable upon exercise of the Unit Purchase 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 Unit Purchase Options, or (b) the
issuance of 112,500 shares of Common Stock upon exercise of the Warrants
issuable upon exercise of the Unit Purchase Options during the Special
Exercise Period.
<TABLE>
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share amounts)
Statement of Operations Data1:
Three Months Ended March 31, Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue $1,572 $2,560 $8,541 $7,382 $2,924 $ 57
Net (loss) (653) (1,999) (6,579) (2,850) (1,751) (433)
(Loss) per share of Common
Stock (.10) (.42) (1.28) (.59) (.36) (.09)
Weighted average number of
shares outstanding 6,798 4,822 5,149 4,822 4,822 4,763
================= ========== ==================================== =======
4
</TABLE>
<PAGE>
Balance Sheet Data:
March 31, 1997
As Adjusted2 ActualDecember 31,1996
Working capital (deficiency) $ $ (446) $ 477
Total assets 7,436 8,251
Total liabilities 3,674 3,836
Accumulated deficit (12,379) (12,379) (11,726)
Stockholders' equity3 3,762 4,415
Net tangible book value (deficiency) per share
of Common Stock4 (.15) (.26)
- ---------------------------- --------------------------------
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.
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 $446,000 at March 31, 1997, as compared
to working capital of $477,000 at December 31, 1996. The $923,000 decrease in
working capital for the three months ended March 31, 1997 was substantially due
to the $639,000 net loss for the three months ended March 31, 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 $40,000 at March 31, 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 March 31,
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 March 31, 1997, IBN accounted for 21% 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 modest
payments on account during the second and third quarters 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,
however, 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 $653,000, or $.10 per share, for
the three months ended March 31, 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 March 31, 1997, the
Company sustained a cumulative loss of $12.3 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 March 31, 1997.
For the three months ended March 31, 1997 and the year ended December 31, 1996,
approximately 92% 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
5
<PAGE>
from the Company's CarteSmart System represented revenue from one customer, IBN,
and the contract with such customer is substantially complete. As of March 31,
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 $76,000, or 4.8%
of revenue, for the three months ended March 31, 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 $595,000 at March 31,
1997 and $749,000 at June 30, 1997. 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. The credit limit under
this facility is $750,000; however, the borrowings at March 31, 1997 and June
30, 1997 were the maximum borrowings available under the borrowing formula. 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, and
Mr. Leonard M. Luttinger, vice president of the Company. In addition, two
officers of CSM, including Mr. Anthony F. Grisanti, chief financial officer of
the Company, have issued their limited guaranty to the lender. The Company does
not believe that this facility is adequate for its current cash requirements,
and it is engaged in negotiations with respect to an agreement with another
asset-based lender with respect to an increased credit line.
Pursuant to employment agreements with four officers, the Company is
paying for 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 $ 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
March 31, 1997, except for the IBN contract, which generated revenue through
March 31, 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 March 31, 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
CarteSmart System to operate profitably over an extended period of time is
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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.
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 three months ended March 31, 1997 and the years
ended December 31, 1996 and 1995, approximately 33%, 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
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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 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. The Company's view that the complaint is
without merit is based on the difference in the technology used in the Onecard
software and the Company's CarteSmart software and the type of computer network
on which the software operates. An adverse decision in the
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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, including Trans Global. Mr.
Norman J. Hoskin, a director of the Company, is a director of Consolidated and
Trans Global. As of June 30, 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 has the
ability to elect all of the directors of the Company. As a result of SISC's
stock ownership and Mr. Schiller's position as chairman of the board, SISC has
effectively determined the terms and conditions of any transactions between the
two companies, including the number and price of shares issued to SISC and its
affiliates and terms of warrants and other securities issued to SISC, and SISC
continue to have this power. Mr. Schiller devotes only a limited amount of his
time to the business of the Company. Mr. Schiller does not have an employment
agreement with the Company; however, the Company has an agreement with Trinity,
a wholly-owned subsidiary of Consolidated, pursuant to which the Company pays
Trinity fees of $15,000 per month for the three-year period commencing September
1996. See "Certain Transactions."
As of June 30, 1997, the Company owed its asset-based lender approximately
$749,000 under an accounts receivable financing arrangement. The Company's
obligations to the asset-based lender are guaranteed by Messrs. Lewis S.
Schiller and Leonard M. Luttinger, chief executive officer and vice president,
respectively, of the Company. In addition, two officers of CSM, including Mr.
Anthony F. Grisanti, chief financial officer of the Company, have issued their
limited guaranty to the lender. The limited guaranty, which was required by the
lender as a condition to making the loan, applies in the event that the lender
incurs losses 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.
13. Continued control by SISC and management. At June 30, 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
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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.
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
Securities Exchange Act of 1934, as amended (the "Exchange Act"), may prohibit
the Underwriter from engaging in any market-making activities with regard to the
Company's securities for the period from nine business days (or such other
applicable period as 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 Unit Purchase Options to purchase 56,250 Units, each
Unit consisting of two shares of Common Stock and one Warrant. If such persons
exercise the Unit Purchase Option, the ability of the Underwriter to act as a
market maker may be affected. See "Unit Purchase Option."
17. Possible delisting from The Nasdaq System and market illiquidity. The
Common Stock and Warrants are presently included in The Nasdaq SmallCap Market.
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.
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There is not an active market for the Warrants. During the period from
January 1 to July 21, 1997, threre 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. 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. Commencing August
13, 1997, with the consent of the Underwriter, the Warrants may be redeemed by
the Company at a redemption price of $.05 per Warrant upon not more than 60 nor
less than 30 days' notice if the closing price of the Common Stock is at least
$9.00, subject to adjustment, during the 20 consecutive trading days ending
within ten days of the date of the Warrants are called for redemption.
Redemption of the Warrants could force the holders to exercise the Warrants and
pay the exercise price therefor at a time when it may be disadvantageous for the
holder to do so, to sell the Warrants at the then current market price when they
might otherwise wish to hold the Warrants, or to accept the redemption price,
which, at the time the Warrants are called for redemption, is likely to be
substantially less than the market value of the Warrants. The Company will not
call the Warrants for redemption except pursuant to a currently effective
prospectus and registration statement. See "Description of Securities -- Series
A Redeemable Common Stock Purchase Warrants."
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 $1.32, or 88%,from the $ 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
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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. 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 March 31,
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 March 31, 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 March 31, 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 March 31, 1997:
Offering price per share of Common Stock $ Net tangible book value per share at
March 31, 1997 $(.15) Increase per share attributable to sale of the Units
offered hereby Pro forma net tangible book value per share after Offering
Dilution to public investors $
===================================================== ======= =========
12
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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
Hi Low High Low
1996
Third Quarter
(from August 14) $13.25 $9 $7.50 $3.00
Fourth Quarter 13.25 3 7.00 1.00
1997
First Quarter 6.00 1.87 .62
Second Quarter 6.62 2.00 . 94
Third Quarter (through July 22 2.75 3.69 811 .811
- ----------------------------------------------------------
1 Represents the closing price on July 11, 1997, the only day during the
period on which trading in the Warrants was reported.
The closing price for the Common Stock on July 22, 1997 was $3.125. The
most recent closing price for the Warrants prior to such date was $.81 on July
11, 1997. 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.
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 $ 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 July 1, 1997. However, it is possible that conditions
may arise as a result of which the Company may require additional capital prior
to the
13
<PAGE>
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."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 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.
March 31, 1997
(Dollars in thousands)
Actual As Adjusted
Short-term debt:
Note payable -- asset-based lender1 $ 596 $
Capital lease obligations -- current maturities2 17
Due to related party3 35
--------
$648 $
Long-term debt:
Capital lease obligations -- long-term portion2 $ 14 $
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,
6,798,203 shares issued and outstanding and 8,604,755 outstanding as
adjusted5 68
Additional paid-in capital -- Common Stock 14,863
Accumulated deficit (12,379) (12,379)
Stockholders' equity 3,762
---------
Total capitalization $ 3,776 $
======== =
- ---------------------------------------------- -------------- --------------
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."
14
<PAGE>
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, 112,500 shares of Common
Stock issuable upon exercise of the Unit Purchase Options and 112,500
shares of Common Stock issuable upon exercise of the Warrants issuable
upon exercise of the Unit Purchase 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.
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Set forth below is selected financial data with respect to the Company for
the three months ended March 31, 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 Data1:
Three Months Ended March 31, Year Ended DecembeSeptember 9, 1992
(Inception) to
December 31, 1992
1997 1996 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
Revenue $1,572 $2,560 $8,541 $7,382 $2,924 $ 57 $ --
Net loss (653) (1,999)(6,579)(2,850) (1,751) (433) (133)
Net loss per share of Common
Stock (.10) (.42) (1.28) (.59) (.36) (.09) (.03)
Weighted average number of
shares outstanding 6,798 4,822 5,149 4,822 4,822 4,763 4,763
- ----------------- -------------------------------- ------- -------------------
Balance Sheet Data:
December 31,
March 31, 1997 1996 1995 1994
-------------- ---- ---- ----
Working capital (deficiency) $ (446) $ 477 $(2,562) $(4,037)
Total assets 7,436 8,251 6,390 7,193
Total liabilities 3,674 3,836 5,887 6,342
Redeemable Preferred Stock -- -- 96 96
Accumulated deficit (12,379) (11,726) (5,147) (2,297)
Stockholders' equity1 3,762 4,415 407 755
- ------------------------------------- ----------------- ---------
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.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Results of Operations
Three Months Ended March 31, 1997 and 1996
The Company's revenue for the three months ended March 31, 1997 (the
"March 1997 period") was $1.6 million, a decrease of $1.0 million, or 39% from
the revenue for the three months ended March 31, 1996 (the "March 1996 period")
which was $2.6 million. Approximately $857,000 of this decrease was the result
of a decline in revenue from IBN, which was $933,000 in the March 1996 period
and $76,000 in the March 1997 period. IBN represented the Company's most
significant customer in the March 1996 period , accounting for approximately
36.4% of revenue for the quarter. As of March 31, 1997, the contract was more
than 80% complete. The Company is continuing to provide professional services to
IBN, although revenues have declined substantially from the level during 1996.
The Company intends to expand its marketing effort for its CarteSmart System,
however, at March 31, 1997, the Company did not have any contracts for the
CarteSmart System. The remainder of the decrease in revenue for the March 1997
period was attributable to a decline in the Company's health information systems
divisions license revenue which was $70,000 for the March 1997 period, a
decrease of $98,000 or 58% from the revenue for the March 1996 period which was
$168,000. Although this decrease reflected reduced new business during the March
1997 period, the Company has experienced an increase in new order backlog in the
beginning of the second quarter. 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.
Revenue from the Company's health information systems continued to
represent the Company's principal source of revenue in March 1997 period,
accounting for $1.4 million, or 92% of revenue. The largest component of revenue
in the March 1997 period was data center (service bureau) revenue which
increased to $485,000 from $481,000 in the March 1996 period, reflecting a less
than 1% increase. The turnkey systems labor revenue decreased to $351,000 in the
March 1997 period from $410,000 in the March 1996 period, reflecting a decrease
of 15%. This decrease reflected reduced new business during the March 1997
period. The Company has experienced an increase in new business in the beginning
of the second quarter. Maintenance revenue increased to $324,000 in the March
1997 period from $289,000 in the March 1996 period, reflecting an increase of
12%. Revenue from third party hardware and software decreased to $212,000 in the
March 1997 period from $268,000 in the March 1996 period, a decrease of 21%.
Sales of third party hardware and software are made only in connection with the
sales of turnkey systems.
Revenue from contracts from government agencies represented 33% of revenue
for March 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 $157,000 in the March 1997 period from $663,000
in the March 1996 period, a 83% decrease. Gross margin decreased to 10% in the
March 1997 period from 26% in the March 1996 period. The decreases in both the
gross profit and gross margin were substantially the result of costs associated
with the IBN contract as well as a decrease in the health information systems
license revenue.
Selling, general and administrative expenses were $639,000 in the March
1997 period, an increase of 40% from the $455,000 in the March 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.
During the March 1996 period, the Company incurred non cash compensation
charges of $2.1 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 March 1997 period.
In the March 1997 period the Company recognized its 50% share of its loss
in its joint venture corporation with respect to the purchase of CCAC Software.
The amount of such loss was $58,000.
Interest expense was $68,000 in the March 1997 period, a decrease of
$58,000, or 46% from the $126,000 in the March 1996 period. This is a result of
less borrowings during the March 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, 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.
Related party administrative expense was $45,000 in the March 1997 period,
an increase of $40,000 from the $5,000 in the March 1996 period. This increase
was the result of an agreement with The Trinity Group to provide general
business, management and financial consulting services for a monthly fee of
$15,000.
16
<PAGE>
As a result of the foregoing factors, the Company incurred a net loss of
$653,000, or $.10, per share in the March 1997 period, as compared with a net
loss of $2.0 million, or $.42, per share in the March 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 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.
17
<PAGE>
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
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
18
<PAGE>
compensation for the Company's and CSM's officers following the June 1994
acquisition of CSM, $150,000 in legal expenses, a portion of which related to
the acquisition of CSM, and $313,000 of the amortization of customer lists
resulting from the CSM acquisition. Commencing July 1, 1994, general and
administrative expenses reflects the amortization of customer lists resulting
from the CSM acquisition.
Research and development was $699,000 and $367,000 for 1995 and 1994,
respectively, representing a 90.4% increase. The increase reflects research and
development for smart card and related products and the graphical interface for
the Company's health information systems.
During 1995, the Company incurred financing costs of $863,000,
representing the write-off of deferred financing costs relating to a proposed
initial public offering which had been scheduled for early 1995, but which had
been canceled. No such expenses were incurred in 1994.
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 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 March 31, 1997 and June 30, 1997, the outstanding
borrowings under this facility was $596,000 and $749,000, respectively.
The Company had a working capital deficit of $446,000 at March 31, 1997,
as compared to a working capital surplus of $477,000 at December 31, 1996. The
decrease in working capital for the three months ended March 31, 1997 was
substantially due to the net loss incurred for the three months ended March 31,
1997 as well as the Company's investment in its capitalized software project for
the customer activated terminals. The Company also invested an additional
$148,000 in its CCAC joint venture during the three months ended March 31, 1997.
The Company's cash balances were $40,000 at March 31, 1997 as compared to
$998,000 at December 31, 1996.
At March 31, 1997, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $3 million, representing
approximately 180 days of revenue based on annualizing the revenue for the three
months ended March 31, 1997, although no assurance can be given that revenue
will continue at the same level as the three month period. Accounts receivable
at March 31, 1997 decreased by $174,000 from $2.3 million at December 31, 1996
to $2.1 million at March 31, 1997. At March 31, 1997, IBN accounted for 21% of
the total gross accounts receivable balance. No other customer accounted for
more than 10% of the accounts receivable balance. A significant percentage of
such accounts receivable from IBN at March 31, 1997 had been outstanding for
more than nine months. Although the Company received modest payments on account
of such receivable during the second and third quarters of 1997, as of the date
of this Prospectus, the account receivable from IBN continued to represent a
significant portion of its accounts receivable.
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The Company is currently seeking to raise additional working capital. 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 three months
ended March 31, 1997 and the year ended December 31, 1996, approximately 92% 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 March
31, 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 March 31, 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 three months ended March 31, 1997 and the years
ended December 31, 1996 and 1995, the Company installed health information
systems with two, six and eleven customers, respectively. Revenue from the
licensing of such systems represented approximately $70,000, $329,000 and
$162,000, in the three months
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ended March 31, 1997 and the years ended December 31, 1996 and 1995,
respectively, accounting for approximately 4.5%, 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 three months ended March 31, 1997 and the years ended December
31, 1996 and 1995, revenue from hardware and third party software accounted for
approximately $212,000, $1.1 million and $2.1 million, representing 13.5%, 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
three months ended March 31, 1997 and the years ended December 31, 1996 and
1995, the Company's service bureau operation generated revenue of approximately
$485,000, $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.
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
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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 March 31, 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 $76,000, or 4.8% of revenue for the three months ended March 31,
1997 and $1.9 million, or 22.0% of revenue, for the year ended December 31,
1996. As of March 31, 1997, the agreement with IBN is more than 80% completed.
No assurance can be given that the Company will derive any significant revenue
from IBN. The system being 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.
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.
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The Company's health information systems are marketed principally to
specialized care facilities, many of which are operated by government entities
and include entitlement programs. During the three months ended March 31, 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 three
months ended March 31, 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 March 31,
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 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
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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.
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
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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 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 May 31, 1997, the Company had 74 employees, including four
executive, six marketing and marketing support, 57 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.
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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'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.
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. The Company is presently negotiating for a lease of
office space in the Hartford, Connecticut metropolitan area and it believes that
such space will be available on reasonable terms.
The Company believes that its space is adequate for its immediate needs
and that, if additional space is required, it would be readily available on
commercially reasonable terms.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position
Lewis S. Schiller 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 presidentof S-Tech Corporation
("S-Tech"), a wholly-owned subsidiary of Consolidated which manufactures
specialty vending equipment for postal,
26
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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 president and a director of the Company
since its organization in September 1992 until January 1996, when he became
chief operating officer. In October 1994 he became vice president of the
Smarcard 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.
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.
Annual Compensation Long-Term Compensation (Awards)
Name and Principal PoYearon Salary Bonus andRestricted StoOptions, SARs
Commission Awards (Dollars) (Number)
Lewis S. Schiller, CE1996 --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
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<PAGE>
- --------------------
John F. Phillips, chairman 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
- -------------------- ----- -------- ---------- ------------- -----------
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 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.
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<PAGE>
Option Grants in Last Fiscal Year
Percent of Total
Number of SharOptions Granted
Underlying to Employees Exercise Price
Name Options GranteFiscal Year1 Per Share Expiration Date
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 4/1/01
- ----------------------- ------------- ------------ ------------ -----------
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."
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."
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 atFiscal Options at Fiscal
Year End Year End1
Shares Acquired Value Exercisable/ Exercisable/
Name Upon Exercise Realized Unexercisable Unexercisable
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
- ----------------------- ------------- ----------- ------------- ------------
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.
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<PAGE>
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 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 an Interim Note for $54,000 from an unrelated party for $54,000. The
largest amounts owed by the Company at any one time to SISC during 1995 were
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
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<PAGE>
$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, and, at March 31,
1996 and July 17, 1996, the balance due to ACT was $232,000 and $256,000,
respectively, 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:
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.
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<PAGE>
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.
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 were approximately
$595,000 and $749,000 at March 31, 1997 and June 30, 1997, respectively.
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.
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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.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 30, 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:
Amount and Nature
Name and of Beneficial Percent of Ownership
Address1 Ownership2 Outstanding As Adjusted
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
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 Officers4,861,548 58.5% 48.1%
as a group (six individuals
owning stock, warrants or options)3, 6, 7, 8, 9, 10
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
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<PAGE>
(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.
UNIT PURCHASE OPTIONS
In connection with Company's initial public offering, the Company issued
to the Underwriter Unit Purchase Options to purchase from the Company, for
$11.60 per Unit, up to 56,250 Units. Each Unit consists of two shares of Common
Stock and one Warrant. The Units issuable upon exercise of the Unit Purchase
Options are substantially identical to the Units offered in the public offering,
except that, in the event that the Unit Purchase Options are exercised after the
redemption (but before the expiration) of the Warrants, the Warrants underlying
the Unit Purchase Options are immediately redeemable by the Company. The Unit
Purchase Options are exercisable for a four-year period commencing August 13,
1997, provided, that, if the Warrants expire prior to the exercise of the Unit
Purchase Options, upon such exercise the Company will issue two shares of Common
Stock and no Warrants. Prior to August 13, 1997, the Unit Purchase Options may
not be sold, transferred, assigned or hypothecated, except to the officers of
the Underwriter or to selling group members or officers or partners or members
thereof, all of which shall be bound by such restrictions. If any Unit Purchase
Options are transferred subsequent to August 12, 1997, such Unit Purchase
Options must be immediately exercised and, if not so exercised, will terminate.
The Unit Purchase Options contain anti-dilution provisions providing for
adjustment under certain circumstances similar to those applicable to the
Warrants. The holders of the Unit Purchase Options have no voting, dividend or
other rights as stockholders of the Company with respect to securities
underlying the Unit Purchase Options.
The Company has agreed during the term of the Unit Purchase Options and
for two years thereafter to give advance notice to the holders of the Unit
Purchase Options or underlying securities of its intention to file a
registration statement, and, in such case, the holders of the Unit Purchase
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
Unit Purchase Options and underlying Common Stock, including Common Stock issued
or issuable upon exercise of the Warrants issuable upon exercise of the Unit
Purchase Options, during the term of the Unit Purchase 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 Unit Purchase Options in filing a registration at the expense of the holders
of the Unit Purchase Options or underlying securities.
In the event that the Unit Purchase Option and the underlying Warrants are
exercised, the holders of the Unit Purchase 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 Unit Purchase 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.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Unit Purchase Options or underlying
securities may not simultaneously engage in market-making activities with
respect to any securities of the Company during
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<PAGE>
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 Unit Purchase
Options 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 Unit Purchase Options and broker-dealers, if any,
acting in connection with such sales might be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act and any commission received
by them and any profit on the resale of the securities might be deemed to be
underwriting discount and commissions under the Securities Act.
DESCRIPTION OF SECURITIES
Capital Stock
The Company is authorized to issue 3,000,000 shares of Preferred Stock,
par value $.01 per share, and 15,000,000 shares of Common Stock, par value $.01
per share. Holders of Common Stock are entitled to one vote for each share held
of record on all matters submitted to a vote of stockholders. Holders of Common
Stock are entitled to share in such dividends as the Board of Directors, in its
discretion, may declare from funds legally available. In the event of
liquidation, each outstanding share entitles its holder to participate ratably
in the assets remaining after payment of liabilities. There are presently
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.
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
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<PAGE>
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 Unit Purchase 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 $ , resulting in an exercise price of $
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 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
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<PAGE>
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.
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 Unit Purchase 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.
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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.
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NETSMART TECHNOLOGIES, INC.
- -------------------------------------------------------------------
INDEX
- -------------------------------------------------------------------
Page to Page
Independent Auditor's Report........................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
<PAGE>
[This page intentionally left blank]
F - 2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Netsmart Technologies, Inc.
New York, New York
We have audited the accompanying consolidated balance 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
<PAGE>
NETSMART TECHNOLOGIES, INC.
- -------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------
March 31, December 31,
1 9 9 7 1 9 9 6 1 9 9 5
[Unaudited]
Assets:
Current Assets:
Cash and Cash Equivalents $ 40,242 $ 998,317 $ --
Accounts Receivable - Net 2,109,916 2,284,450 2,112,000
Costs and Estimated Profits in Excess of
Interim Billings 984,075 931,786 415,000
Other Current Assets 79,318 82,205 14,000
------ ------ ------
Total Current Assets 3,213,551 4,296,758 2,541,000
--------- --------- ---------
Property and Equipment - Net 394,154 382,586 347,000
------- ------- -------
Other Assets:
Software Development Costs 495,480 250,920 --
Investment in Joint Venture at Equity 210,701 120,546 --
Customer Lists 3,050,814 3,128,814 3,442,000
Other Assets 71,104 71,105 60,000
------ ------ ------
Total Other Assets 3,828,099 3,571,385 3,502,000
--------- --------- ---------
Total Assets $7,435,804 $ 8,250,729$6,390,000
========== =====================
See Notes to Financial Statements.
F - 4
<PAGE>
NETSMART TECHNOLOGIES, INC.
- -------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------
March 31, December 31,
1 9 9 7 1 9 9 6 1 9 9 5
[Unaudited]
Liabilities and Stockholders' Equity:
Current Liabilities:
Cash Overdraft $ -- $ -- $ 95,000
Notes Payable - Bank -- -- 79,000
Notes Payable - Other 595,867 590,031 1,003,000
Capitalized Lease Obligations 17,289 41,449 169,000
Accounts Payable 1,080,034 983,156 1,186,000
Accrued Expenses 877,936 991,075 1,323,000
Interim Billings in Excess of Costs and Estimated
Profits 985,418 1,102,105 940,000
Due to Related Parties 35,029 23,542 167,000
Deferred Revenue 68,116 88,420 141,000
------ ------ -------
Total Current Liabilities 3,659,689 3,819,778 5,103,000
--------- --------- ---------
Capitalized Lease Obligations 14,422 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 March 31,
1997, December 31, 1996 and 1995, Respectively12 12 --
Additional Paid-in Capital - Preferred Stock [$40,000 Series A at December 31,
1995; $1,209,509 - Series D at March 31, 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 6,798,203 Shares at March 31, 1997 and December 31, 1996,
3,011,253
Shares at December 31, 1995 67,982 67,982 30,000
Additional Paid-in Capital - Common Stock14,863,32814,863,3283,274,000
Accumulated Deficit (12,379,138)(11,725,825)(5,147,000)
Total Stockholders' Equity 3,761,693 4,415,006 407,000
--------- --------- -------
Total Liabilities and Stockholders' Equity 7,435,804 8,250,729 $6,390,000
See Notes to Financial Statements.
F - 5
<PAGE>
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
------- ------- ------- ------- -------
[Cons] [Cons] [Cons [Cons] [Comb]
[Unaudited][Unaudited]
Revenues:
Software and Related Systems
and Services:
General $763,517 $1,790,000$5,108,095 $4,541,000 $1,539,000
Maintenance Contract Services323,773 289,000 1,225,709 1,099,000 501,000
Total Software and Related
Systems and Services 1,087,2902,079,0006,333,8045,640,000 2,040,000
Data Center Services 484,520 481,000 2,207,1551,742,000 884,000
------- ------- ------------------ -------
Total Revenues 1,571,8102,560,0008,540,9597,382,000 2,924,000
Cost of Revenues:
Software and Related Systems and
Services:
General 840,963 1,469,000 5,114,8823,986,000 1,669,000
Maintenance Contract Services233,575144,000595,366 743,000 449,000
Total Software and Related
Systems and Services 1,074,5381,613,0005,710,2484,729,000 2,118,000
Data Center Services 340,077 285,000 1,220,368 889,000 416,000
------- ------- -----------------------------
Total Cost of Revenues 1,414,6151,898,0006,930,6165,618,000 2,534,000
Gross Profit 157,195 662,000 1,610,3431,764,000 390,000
Provision for Doubtful Accounts-- -- 260,000 8,000 --
Selling, General and
Administrative Expenses 638,765 455,000 1,661,8542,472,000 1,495,000
Related Party Administrative
Expenses 45,000 5,000 69,000 18,000 19,000
Stock Based Compensation -- 2,075,000 3,492,300 -- --
Research and Development -- -- 278,000 699,000 367,000
-- -- ------- ------- -------
Loss from Operations -
Forward $(526,570)(1,873,000)(4,150,811)(1,433,000)(1,491,000)
See Notes to Financial Statements.
F - 6
<PAGE>
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
------- ------- ------- ------- -------
[Cons] [Cons} [Cons [Cons][Combined]
[Unaudited][Unaudited]
Loss from Operations -
Forwarded $(526,570)(1,873,000)(4,150,811)(1,433,000)(1,491,000)
Financing Costs -- -- 1,692,000 863,000 --
Interest Expense 68,436 126,000 472,548 355,000 71,000
Equity in Net Loss of Joint
Venture (58,307) -- 264,085 -- --
Related Party Interest Expense -- -- -- 199,000 189,000
-- -- -- ------- -------
Net Loss $(653,313)(1,999,000)(6,579,444)(2,850,000)(1,751,000)
Loss Per Share $ (.$0) (.4$) (1.$8) (.$9) (.36)
= ==== ==== ===== ==== ====
Number of Shares of
Common Stock 6,798,203 4,821,528 5,149,253 4,821,528 4,821,528
See Notes to Financial Statements.
F - 7
<PAGE>
NETSMART TECHNOLOGIES, INC.
- -------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------
F - 8
<PAGE>
NETSMART TECHNOLOGIES, INC.
- -------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------
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
------- ------- ------- ------- -------
[Cons][Cons] [Cons] [Cons][Combined]
[Unaudited][Unaudited]
Operating Activities:
Net Loss $(653,313)(1,999,000)(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 128,031 109,000 486,566 872,000 470,000
Administrative Expenses -- 5,000 9,000 18,000 19,000
Additional Compensation Related to the
issuance of Equity Instruments -- 2,075,000 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 --
Equity in Net Loss of Joint Venture 58,307-- 264,085 21,000 15,000
Provision for Doubtful Accounts-- -- 260,000 8,000 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 174,534 (217,000) (431,478) (388,000)(369,000)
Costs and Estimated Profits in
Excess of Interim Billings(52,289)(640,000)(516,707) 87,000 (233,000)
Other Current Assets 2,887 (5,000) (68,810) 10,000 45,000
Other Assets -- (1,000) (10,502) -- (3,000)
Increase [Decrease] in:
Accounts Payable 96,879 441,000 (202,620) 159,000 13,000
Accrued Expenses (113,139)(189,000)(332,174) 935,000 199,000
Interim Billings in Excess of
Costs and Estimated Profits(116,687)270,000160,626 (217,000) 413,000
Accrued Payroll Taxes and
Related Expenses -- -- -- -- (276,000)
Due to Related Parties 11,487 65,000 (143,458) 496,000 1,629,000
Deferred Revenue (20,304) (77,000) (52,580) 141,000 --
------- ------- ------- ------- --
Total Adjustments 169,706 1,836,000 4,594,2482,624,000 2,158,000
------- --------- ------------------ ---------
Net Cash - Operating Activities -
Forward (483,607)(163,000)(1,985,196)(226,000)407,000
Investing Activities:
Acquisition of Property and
Equipment (47,659) (20,000) (181,033) (138,000)(122,000)
Software Development Costs (258,500) -- (278,800) -- (177,000)
Investment in Joint Venture(148,462)(325,000)(384,631) -- (25,000)
Cash Acquired in Combination
with CSM -- -- -- -- 31,000
-- -- -- -- ------
Net Cash - Investing Activities -
Forward $(454,621)(345,000)$(844,464) $(138,000)$(293,000)
See Notes to Financial Statements.
F - 9
<PAGE>
NETSMART TECHNOLOGIES, INC.
- -------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------
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
------- ------- ------- ------- -------
[Cons] [Cons] [Cons][Cons) [Comb]
[Unaudited][Unaudited]
Net Cash - Operating Activities -
Forwarded $(483,607)(163,000)$(1,985,1$6)(226,00$)407,000
Net Cash - Investing Activities -
Forwarded (454,621)(345,000)(844,464) (138,000)(293,000)
-------- -------- -------- -------- --------
Financing Activities:
Proceeds from Short-Term Notes 5,836 764,000 500,000 831,000 200,000
Payment of Short-Term Notes -- (27,000) (912,270) (190,000) --
Payment of Bank Note Payable -- (50,000) (79,000) (175,000) (60,000)
Payment of Short-Term Notes
to Related Party -- -- (750,000) -- --
Payment of Capitalized Lease
Obligations (25,683) (6,000) (145,146) (29,000) (8,000)
Issuance of Common Stock -- -- 5,175,000 -- --
Proceeds from Warrant exercise -- -- 1,600,000 -- --
Cash Overdraft -- 12,000 (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 -- (114,000) -- (129,000)(283,000)
Net Cash - Financing Activities(19,847)579,0003,827,977364,000 (114,000)
Net [Decrease] Increase in Cash(958,075)71,000998,317 -- --
Cash - Beginning of Periods 998,317 -- -- -- --
------- -- -- -- --
Cash - End of Periods $40,242 $ 71,000 $998,317 $ -- $ --
======= = ====== ======== = == = ==
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest $90,722 $ 95,000 $481,856 $ 349,000 $ 76,000
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
<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
<PAGE>
NETSMART TECHNOLOGIES, INC.
- -------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Sheet #1
[Information as of and for the three months ended March 31, 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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[Information as of and for the three months ended March 31, 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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[Information as of and for the three months ended March 31, 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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[Information as of and for the three months ended March 31, 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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[Information as of and for the three months ended March 31, 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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[Information as of and for the three months ended March 31, 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 Accounts260,000 60,000 30,000
Recoveries -- -- --
Charge-offs (118,234) (51,579) (29,936)
Ending Balance $ 288,029 $146,263 $ 137,842
-------------- = ======= ======== = =======
F - 17
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #7
[Information as of and for the three months ended March 31, 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) $(525,000)
--- ========= =========
Included in the accompanying balance sheet under the following captions:
Costs and estimated profits in excess of i$terim billi$gs931,786415,000 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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #8
[Information as of and for the three months ended March 31, 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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #9
[Information as of and for the three months ended March 31, 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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #10
[Information as of and for the three months ended March 31, 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%590,031707,000
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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #11
[Information as of and for the three months ended March 31, 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 $8,200,000 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 $8,200,000
F - 22
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #12
[Information as of and for the three months ended March 31, 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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #13
[Information as of and for the three months ended March 31, 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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #14
[Information as of and for the three months ended March 31, 1997 and 1996 are
unaudited]
- -------------------------------------------------------------------
[12] Fair Value of Financial Instruments - [Continued]
Carrying Amount Fair Value
December 31, December 31,
1 9 9 6 1 9 9 5 1 9 9 6 1 9 9 5
------- ------- ------- -------
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
------ ======== ========== ======== ==========
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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #15
[Information as of and for the three months ended March 31, 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:
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
------- -------
Pro Forma Net Loss after Increase in Consulting
Expense and Executive Compensation Per Agreements
with SMI Corporation at $25,000 Per Mo$th(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)
= ==== = ====
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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #16
[Information as of and for the three months ended March 31, 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:
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
Years 357,756 $ .26206,250$ 5.33 -- $ --
Granted During the Years242,000 3.57357,756 .265206,250 5.33
Canceled During the Years -- -- (206,250) 5.33 -- --
Expired During the Years -- -- -- -- -- --
Exercised During the Years-- -- -- -- -- --
-- -- -- -- -- --
Outstanding - End of Years59$,7561.60357,75$ .265206,250 $ 5.33
--------------------------================== =========== = ====
Exercisable - End of Years17$,878.265 -- $ -- -- --
--------------------------=========== == = == == ==
F - 27
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #17
[Information as of and for the three months ended March 31, 1997 and 1996 are
unaudited]
- -------------------------------------------------------------------
[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
Options Issued with Exercise Price
Above Stock Price at Date o$ Grant5.$7 .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 Gran$ 2.0$ 1.78 $ -- $ --
The following table summarizes stock option information as of December 31, 1996:
Weighted
Average RemainingWeighted Average
Range of Exercise Prices Shares Contractual LifeExercise Price
$.232 to $.345 347,756 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
------ ======= = ====
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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #18
[Information as of and for the three months ended March 31, 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:
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 Years 825,000 $ 7.27825,000$ 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 Years3,670,000 3.64 825,000 7.27 825,000 $ 7.27
--------------------------==================== ======= ==== = ====
Exercisable - End of Years-- -- 825,000$ 7.27 825,000 $ 7.27
--------------------------== == ======== ==== ======= = ====
F - 29
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #19
[Information as of and for the three months ended March 31, 1997 and 1996 are
unaudited]
- -------------------------------------------------------------------
[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
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 Grant2.00 1.78 $ -- $ --
The following table summarizes warrant information as of December 31, 1996:
Weighted
Average Remaining Weighted Average
Range of Exercise Prices Shares Contractual LifeExercise Price
$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
----- ========= ====
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
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #20
[Information as of and for the three months ended March 31, 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:
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
------- ------- -------
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
F - 31
<PAGE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #21
[Information as of and for the three months ended March 31, 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 andExtinguishment 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 withRecourse". 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.
[18] Unaudited Interim Financial Statements
The financial statements for the three months ended March 31, 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.
. . . . . . . . . . .
F - 32
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus, and, if given
or made, such information or
representations must not be relied on as , having been
authorized by the Company Inc. or by the Underwriters. This Prospectus does not
constitute an offer to sell or solicitation of an
offer to buy any issuable securities offered hereby to
any person make any jurisdiction in which such offer
or Warrants ion was not authorized or in which the person making such
offer or56,250 Units, each Unit consisting of solicitation is not qualified to
do soone share of Common Stock one two anyone to whom it is unlawful to make
Series A Redeemable Common Stock such offer or solicitation. Neither Purchase
Warrants Each Unit Consists delivery of this Prospectus nor any saof two shares
of Common Stock and made hereunder shall, under any one circumstances, create
any implication Series A Redeemable Common Stock there has been no change in the
Purchase Warrant circumstances of the Company of the facts herein set forth
since the date of this Prospectus.
----------------
TABLE OF CONTENTS
Page
Prospectus Summary.............2
Risk Factors...................5
Dilution......................12
Market for Common Stock and Warrants:
Dividends.....................13
Use of Proceeds...............13
capitalization................14
Selected Financial Data ......15
Management's Discussion and Analysis of
Financial
Condition and Results of Operations16
Business......................20
Management....................27
Certain Transactions..........31
Principal Stockholders........34
Unit Purchase Options.........35
Description of Securities.....36
Legal Matters.................38
Experts...................... 38 july 29 , 1997
Additional Information ...... 39
Index to Financial StatementsF-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.
================================ ===================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
SEC registration fee $ 493.00
NASD registration fee
Nasdaq listing fee
Printing and engraving *
Accountants' fees and expenses *
Legal fees *
Transfer agent's and warrant agent's fees and expenses *
Blue Sky fees and expenses *
Miscellaneous . *
Total $150,000.00**
* To be supplied by amendment.
** Estimated
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law and Article EIGHTH of
the Company's Restated Certificate of Incorporation (Exhibit 3.1) provide for
indemnification of directors and officers of the Company under certain
circumstances.
Reference is made to Paragraphs 6 and 7 of the Underwriting Agreement
(Exhibit 1.1) with respect to indemnification of the Company and the
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.
<PAGE>
(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 $
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:
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.
II - 2
<PAGE>
Name Principal Amount ofShares of Consolidated Common
Notes Stock
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
- ------------------- ------------------ -------------------------- ----------
(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) 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
II - 3
<PAGE>
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 Corporatio$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.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
1.11 Form of Underwriting Agreement dated August 13, 1996 between the
Registrant and Monroe
Parker Securities, Inc..
1.21 Form of Underwriter's Option dated August 13, 1996.
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.
II - 4
<PAGE>
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.
4.2 Form of Amendment to the Warrant Agreement.
5.12 Opinion of Esanu Katsky Korins & Siger.
10.11 Employment Agreement dated June 16, 1994, between the Registrant
and Leonard M.luttinger, as amended.
10.2 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 , 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.
10.16 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.
11.1 Computation of loss per share.
24.1 Consent of Moore Stephens, P.C. (See Page II-7).
24.22 Consent of Esanu Katsky Korins & Siger (included in Exhibit 5.1).
25.1 Powers of attorney (See signature page).
27.12 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 To be filed by amendment.
II - 5
<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.
II - 6
<PAGE>
(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 - 7
<PAGE>
AMENDMENT
AMENDMENT, dated this day of , 1997, to a Warrant Agreement (the
"Agreement") dated as of August 13, 1996, by and between Netsmart Technologies,
Inc., a Delaware corporation (the "Company"), American Stock Transfer & Trust
Company (the "Warrant Agent"), and Monroe Parker Securities, Inc., a New York
corporation ("Monroe Parker").
W I T N E S S E T H:
WHEREAS, the Company, the Warrant Agent and Monroe Parker entered into the
Agreement in connection with the Company's initial public offering in August
1996; and
WHEREAS, pursuant to the Agreement, the Company issued Warrants to
purchase 896,875 shares of Common Stock and Warrants to purchase an additional
56,250 shares of Common Stock pursuant to the Unit Purchase Option granted to
Monroe Parker; and
WHEREAS, the Company desires to modify the exercise price and certain
other terms of the Warrants as provided in this Amendment;
WHEREFORE, the parties do hereby agree as follows:
1. All terms defined in the Agreement and used in this Amendment shall
have the same meanings in this Amendment as in the Agreement unless otherwise
provided in this Amendment.
2. During the Special Exercise Period, as hereinafter defined, the
Agreement shall be amended
as follows:
(a) The Purchase Price shall be reduced to dollars ($ ).
(b) Upon exercise of a Warrant to purchase one share (as presently
stated in the certificate for the Warrants) and payment of the Purchase Price
therefor as adjusted pursuant to Paragraph 2(a) of this Amendment, the Company
shall issue two shares of Common Stock, resulting in an effective Purchase Price
of dollars ($ ) per share.
3. Upon expiration of the Special Exercise Period, the provisions of
Paragraph 2 shall terminate and the Agreement shall continue in full force and
effect as if it had not been amended by this Amendment.
4. The holders of the Warrant shall not be required to exchange their
Warrant certificates as a result of this Amendment. Each Warrant shall, without
any action on the part of the holder, be entitled the benefits of this
Agreement.
5. The Special Exercise Period shall mean the period of 90 days commencing
on , 1997 and ending at 5:30 P.M. New York City time
, on , 1997; provided, that 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.
6. Except as amended by this Amendment, the Agreement shall continue in
full force and effect.
II - 8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
NETSMART TECHNOLOGIES, INC
By:
Lewis S. Schiller, CEO
AMERICAN STOCK TRANSFER &
TRUST COMPANY
By:
, Authorized Officer
MONROE PARKER SECURITIES, INC.
By:
, Authorized Officer
II - 9
EMPLOYMENT AGREEMENT
AGREEMENT dated as of August 15, 1996, by and between Netsmart
Technologies, Inc., a Delaware corporation with its principal office at 146
Nassau Avenue, Islip, NY 11751 (the "Company"), and James L. Conway, residing at
951 Roxbury Drive, Westbury, NY 11590 (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to obtain the benefits of Executive's
knowledge, skill and ability in connection with managing the operations of the
Company and to employ Executive on the terms and conditions hereinafter set
forth; and
WHEREAS, Executive desires to provide his services to the Company and to
accept employment by the Company on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the mutual promises set forth in the
agreement, the parties agree as follows:
1. Employment and Duties
(a) Subject to the terms and conditions hereinafter set forth, the
Company hereby employs the Executive as a president of the Company. During the
term of his employment pursuant to this Agreement (the "Term"), the Executive
shall report to the Company's Board of Directors (the "Board")' or such senior
executive officer as may be designated by the Board, and Executive shall perform
such duties and responsibilities customarily associated with such positions, and
shall have such other duties and responsibilities consistent with such position
as the Board may assign to him from time to time. The Company understands that
the executive also serves as the president of S-Tech, Inc. and will continue to
devote a portion of his time to that company.
(b) In addition, the Executive shall serve at no additional
compensation as a director of the Company, if elected, and in such executive
capacity or capacities with respect to any affiliate of the Company to which he
may be elected or appointed, provided that such duties are not inconsistent with
those of an executive officer of the Company. The Company agrees that, as long
as Executive shall be employed by the Company pursuant to this Agreement, the
Company shall include Executive as one of management's designees for director of
the Company.
(c) Unless terminated earlier as provided for in Paragraph 5 of this
Agreement, the Term shall be for an initial period commencing as of the date of
this Agreement and expiring on August 15, 2001.
2. Executive hereby accepts the employment contemplated by this Agreement.
During the Term, Executive shall report to the Board and shall devote
substantially all of his business time and attention to the performance of his
duties under this Agreement, and shall perform such duties diligently, in good
faith and in a manner consistent with the best interests of the Company.
II - 10
<PAGE>
3. Compensation and Other Benefits
(a) (i)For his services to the Company during the Term, the Company
shall pay Executive a salary ("Salary") at the annual rate of one hundred twenty
five thousand dollars ($125.000,00). Commencing August 15, 1996 and on each
August 15 thereafter during the Term of this Agreement, the Executive shall
receive an increase in Salary equal to the cost of living increase. The Salary
shall be payable in such installments as the Company regularly pays its
executive officers, but not less frequently than semi-monthly.
(iiThe cost of living increase shall be computed as follows:
(A) The cost of living index, as hereinafter defined, for
August commencing August 1996, shall be compared with the cost of living index
for August of the previous year. The
cost of living increase shall mean the percentage increase in
the cost of living index from the previous August to the August as of which the
computation is made. Such determination shall be made as soon as possible after
release of the cost of living index for the August as of which the computation
is being made, and the Company shall, on the next payroll date, pay to the
Executive any additional Salary accrued but not paid pending determination of
the cost of living increase.
(B) The cost of living index shall mean the "Consumers Price
Index for Urban Wage Earners and Clerical Workers (Revised Series)-New York
Metropolitan Area", published by the Bureau of Labor Statistics of the United
States Department of Labor. If the said cost of living index in its form as of
the date of this agreement or the calculation basis thereof shall be revised
therefrom or discontinued, the parties shall attempt in good faith to adjust the
provisions of this Paragraph 3(a).
(b) The Company shall also pay Executive a bonus (the "Bonus") equal
to five (5%) percent of the Company's income before income taxes per year for
the year ended December 31, 1996 and for each year thereafter during the Term of
this Agreement; provided that the Bonus shall not exceed three hundred (300%)
percent of the Executive's Salary for the year with respect to which it is paid.
If the Agreement terminates prior-to the end of a fiscal year (other than as a
result of a termination for cause), Executive shall be entitled to a Bonus for
such fiscal year on a pro rata basis, based upon the number of whole months that
Executive was employed by the Company. For purposes of calculating the Bonus,
income before income taxes shall be computed in accordance with generally
accepted accounting principles.
(c) In addition to Salary and Bonus, Executive shall receive the
following benefits:
(i) health insurance for the Executive, his dependents and, to the
extent permitted
by the Company's health insurer, his beneficiary, accident and life insurance
and officer's life insurance to the extent such benefits are currently in effect
or will be put into effect for executive offices during the term of this
Agreement;
(iiuse of a company-owned or leased automobile or an automobile
allowance of $1000 per month, including insurance, fuel, service and maintenance
costs, which shall be paid in accordance with the Company's policies on
automobile benefits; and
(iivacation in accordance with Company policy.
II - 11
<PAGE>
(d) In the event of a termination of Executive's employment as a
result of his death or Disability, as hereinafter defined, the Company shall
continue to pay to Executive or his beneficiary, his Salary at the annual rate
in effect at the date of death or termination resulting from Disability, until
the earlier of (i) two (2) years from the date of death or such termination or
(ii) August 15, 2001; provided, however, that the Company's obligations to make
such payments are contingent upon Executive having taken and passed a physical
for key man life insurance and the Company having been able to obtain such key
man insurance at standard rates. The beneficiary of Executive shall be the
person designated by Executive as the beneficiary by an instrument executed and
acknowledged by Executive; provided, that if Executive shall fail to designate a
beneficiary as provided in this Paragraph 3(d), the benefits of this Paragraph
3(d) or Paragraph 5(e) of this Agreement, shall not be payable by the Company.
4. Reimbursement of Expenses. The Company shall pay or reimburse
Executive, upon presentation of proper expense statements, for all authorized,
ordinary and necessary out-of-pocket expenses reasonably incurred by Executive
in connection with the performance of his services pursuant to this Agreement
hereunder in accordance with the Company's expense reimbursement policy.
5. Termination of Employment
(a) The Executive's employment hereunder shall terminate immediately
upon the death of the Executive.
(b) The Executive's employment may be terminable by the Executive
or the Company by not less than thirty
(30) days' written notice in the event of Executive's
Disability. The term "Disability" shall mean any illness, disability or
incapacity of the Executive which prevents him from substantially performing his
regular duties for a period of three (3) consecutive months or four (4) months,
even though not consecutive, in any twelve (12) month period.
(c) The Company may terminate Executive's employment, immediately and
without notice, for cause, in which event no further compensation shall be
payable to Executive. The term "Cause" shall mean (i) a material breach by the
Executive of Paragraph 6, 7, 8 and 10(a) of this Agreement, (ii) repeated acts
of dishonesty or deliberate misconduct, (iii) breach of trust or other action by
which Executive obtains personal gain at the expense of or to the detriment of
the Company, (iv) repeated failure to perform customary duties of his position
following notice from the Board (with Executive not participating or voting if
Executive is a director) or (v) conviction of the Executive of any felony or any
other crime relating to the performance of his duties.
(d) In the event that the Company terminates Executive's employment
other than as provided in Paragraphs 5(a), (b) and (c), the Company shall pay to
Executive as severance payments (i) his Salary as provided in this Agreement for
the balance of the term of this Agreement, which shall be paid at such times as
the Company pays its executive officers, and (ii) the Bonus paid to Executive
for the previous year, which shall be paid in twelve (12) equal monthly
installments.
(e) In the event of any termination of Executive's employment,
including termination for cause, Executive shall be entitled to all rights under
the Company's benefit plans which had vested as of the date of termination of
his employment. In addition, for a period of eighteen (18) months after such
termination, the Company shall provide Executive or his beneficiary (provided
that Executive shall have designated a beneficiary as provided in Paragraph 3(d)
of this Agreement) with the hospitalization, life insurance, medical and major
medical benefits which would have been provided to Executive if he had continued
in the employ of the Company, except that the Company shall not be required to
provide life coverage for any beneficiary of Executive.
II - 12
<PAGE>
6. Trade Secrets and Proprietary Information. Executive agrees that he
will not, during or after the Term of this Agreement or thereafter, use or
disclose to any person, firm, corporation, partnership, business trust,
individual or other business entity any trade secrets or proprietary information
concerning the Company's or any of its subsidiaries' products, services,
business, proposed products and services, marketing strategy and research and
development activities; except that nothing in this Agreement shall be construed
to prohibit him from using or disclosing such information if it shall become
public knowledge other than by or as a result of disclosure by a person not
having a right to make such disclosure and complying with legal process.
7. Covenant Not to Solicit or Compete. Executive recognizes that the scope
of the Company's business is international and is not limited to any single
state or region. Executive covenants and agrees that from the date hereof and
for a period of one (l) year after termination of this Agreement, he will not:
(a) engage in any business in the United States whether as officer,
director, consultant, partner, guarantor, principal, agent, employee, advisor or
in any manner, which directly competes with the business of the Company as it is
engaged in at the time of the termination of this Agreement, unless at the time
of such termination or thereafter during the non-competition period the Company
ceases to be engaged in such activity, provided, however, that nothing in the
Paragraph 7(a) shall be construed to prohibit Executive from owning an interest
of not more than five percent (5%) of any public company engaged in such
activities; or
(b) solicit any present customer (i.e., any customer to whom the
Company sold products or services during the twelve (12) for the sale of any
product or service then being sold or service then being offered by the Company
months prior to such termination) or any customer to whom the Company submitted
bids or proposals, or with whom the Company conducted negotiations, during such
twelve (12) month period.
8. Inventions and Discoveries. Executive agrees promptly to disclose in
writing to the Company any invention or discovery made by him during the Term,
whether or after working hours, in the any business in which the Company or any
of its subsidiaries in then engaged or which otherwise relates to any matter or
product or service dealt in by the Company or any subsidiary or relates in any
manner to the Company's or any subsidiary's businesses, and such inventions and
discoveries shall be the Company's sole property. Upon the Company's request,
Executive shall execute and assign to the Company all applications for
copyrights and patent letters of the United States and such foreign countries as
the Company may designate, and Executive shall execute and deliver to the
Company such other instruments as the Company deems necessary to vest in the
Company the sole ownership of all exclusive rights in and to such inventions and
discoveries, as well as the copyrights and/or patents. If services in connection
with applications for copyrights and/or patents are performed by Executive at
the Company's request after the termination of his employment, the Company shall
pay him reasonable compensation for such services rendered after termination of
this Agreement.
II - 13
<PAGE>
9. Injunctive Relief. Executive agrees that his violation or threatened
violation of any of the provisions of Paragraphs 6, 7 and 8 of this Agreement
shall cause immediate and irreparable harm to the Company. In the event of any
breach or threatened breach of said provisions, Executive consents to the entry
of preliminary and permanent injunctions by a court of competent jurisdiction
prohibiting such party from any violation or threatened violation of these
provision and compelling Executive to comply with these provisions. This
Paragraph 9 shall not affect or limit, and injunctive relief provided in this
Paragraph 9 shall be in addition to, any other remedies available to the Company
at law or in equity. In the event or any breach or threatened breach of said
provisions, Executive consents to the entry of preliminary and permanent
injunctions by a court of competent jurisdiction prohibiting such party from any
violation or threatened violation of these provisions and compelling Executive
to comply with these provisions. This Paragraph 9 shall not affect or limit, and
the injunctive relief provided in this Paragraph 9 shall be in addition to, any
other remedies available to the Company at law or in equity. In the event an
injunction is issued against any such conduct by Executive, the period referred
to in Paragraph 7 of this Agreement shall continue until the later of the
expiration of the period set forth therein or one (1) month from the date a
final judgment enforcing such provisions is entered and the time for appeal has
lapsed.
10. Indemnification. The Company shall provide Executive with payment
of legal fees and indemnification to the maximum extent permitted
by the Company's certificate of incorporation and the
Delaware General Corporation Law.
11. Miscellaneous
(a) Executive represents, warrants, covenants and agrees that he has
a right to enter into this Agreement, that he is not a party to any agreement or
understanding, oral or written, which would prohibit performance of his
obligations under this Agreement, and that he will not use in the performance of
his obligations hereunder any proprietary information of any other party which
he is legally prohibited from using.
(b) Executive will cooperate with the Company in connection with the
Company's application to obtain key-man life insurance on his life, on which the
Company will be the beneficiary. Such cooperation shall include the execution of
any applications or other documents requiring his signature and submission of
insurance applications and submission to a physical.
(c) Any notice under the provisions of this Agreement shall be given
in writing and by hand, overnight courier or messenger service, against signed
receipt or acknowledgment of receipt, registered or certified mail, return
receipt requested, or telecopier or similar means of communication if receipt is
acknowledged or if transmission is confirmed by mail as provided in this
Paragraph 7(d), to the parties at their respective addresses set forth at the
beginning of this Agreement or by telecopier to the Company at (212) 233-5023 or
to Executive at (516) 968-2123, with notice to the Company being sent to the
attention of the individual who executed this Agreement on behalf of the
Company. Either party may, by like notice, change the person, address or
telecopier number to which notice should be sent.
(d) If any term, covenant or condition of this Agreement or the
application thereof to any party or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Agreement, or the application of
such term, covenant or condition to parties or circumstances other than those as
to which it is held invalid or unenforceable, shall not be affected thereby and
each term, covenant or condition of this Agreement shall be valid and be
enforced to the fullest extent permitted by law, and any court having
jurisdiction may reduce the scope of any provision of this Agreement so that it
complies with applicable law.
(e) The Agreement constitutes the entire agreement of the Company and
Executive as to the subject matter hereof, superseding all prior written or
prior or contemporaneous oral understanding or agreements, including any
previous employment agreements, or understandings with respect to the subject
matter covered in this Agreement. This Agreement may not be modified or amended
nor may any right be waived, except by a writing which expressly refers to this
Agreement, states that it is intended to be a
II - 14
<PAGE>
modification, amendment or waiver and is signed by both parties in the case of a
modification or amendment or by the party granting the waiver. No course of
conduct or dealing in the case of a modification or amendment or by the party
granting the waiver. No course of conduct or dealing between the parties and no
custom or trade usage shall be relied upon to vary the terms of this Agreement.
The failure of a party to insist upon strict adherence to any term of this
Agreement on any occasion shall not be considered a waiver or deprive that party
of the right thereafter to insist upon strict adherence to that term or any
other term of this Agreement.
(f) Neither party hereto shall have the right to assign or transfer
any of its or his rights hereunder.
(g) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective heirs, successors, executors,
administrators and assigns.
(h) The headings in this Agreement are for convenience of reference
only and shall not affect in any way the construction or interpretation of this
Agreement.
(i) This Agreement shall be governed by and construed in accordance
with the laws of the State of New York applicable to contracts made and to be
performed wholly within such State, except that the provisions of Paragraph 10
shall be governed by the Delaware Corporation Law. Each of the parties hereby
(i) irrevocably consents and agrees that any legal or equitable action or
proceeding under or in connection with this Agreement shall be brought
exclusively in any Federal or state court in the County of New York, State of
New York, (ii) by execution and delivery of this Agreement, irrevocably submits
to and accepts, with respect to its properties and assets, generally and
unconditionally, the jurisdiction of the aforesaid court and (iii) agrees that
any action against such party may be commenced by service of process by any
method set forth in Paragraph 1 l(c) of this Agreement, other than by
telecopier, to such party as provided in said Paragraph 11 (c).
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
NETSMART TECHNOLOGIES, INC. NETSMART TECHNOLOGIES, INC.
By:/s/ Lewis S. Schiller By:/s/ James L. Conway
Name: Lewis S. Schiller (Company) Name: James L. Conway (Executive)
Tittle: Chief Executive Officer Title: President
Chairman of the Board
II - 15
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused 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 July, 1997
NETSMART TECHNOLOGIES, INC.
By:
Lewis S. Schiller
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Each person whose
signature appears below hereby authorizes Lewis S. Schiller and James L. Conway
or either of them acting in the absence of the others, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission.
Signature Title Date
Chairman of the Board, Chie July 29 , 1997
Lewis S. Schiller Executive Officer and Director
(Principal Executive Officer)
Treasurer and Chief Financi July 29 , 1997
Anthony F. Grisanti Officer (Principal Financial and
Accounting Officer)
Director July 29 , 1997
James L. Conway
Director July 29 , 1997
Leonard M. Luttinger
Director July 29 , 1997
John F. Phillips
Director July 29 , 1997
Norman J. Hoskin
Director July 29 , 1997
Storm R. Morgan
II - 16
<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.
Certified Public Accountants.
Cranford, New Jersey
July 29 , 1997
II - 17
<TABLE>
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - CALCULATION OF EARNINGS PER SHARE
- -------------------------------------------------------------------
Three months ended Years ended Years ended
March 31, 1997 March 31, December 31, 1996 December 31,
Primary EPS Fully Diluted EPS 1 9 9 6 Primary EPS Fully Diluted EPS 1995 1 9 9 4
[Unaudited] [Unaudited]
<S> <C> <C> <C> <C> <C> <C> <C>
Net Loss -
Historical (653,313)(653,313) (1,999,000)(6,579,444) (6,579,444)(2,850,000)(1,751,000)
Adjustments Per Modified
Treasury Stock Method 49,614 46,555 325,389 323,715
Adjusted Net Loss$- Primary (603,699) $(6,254,055)
Adjusted Net Loss -
Fully Diluted $(606,758) $(6,255,729)
========= ===========
Loss Per Share:
Loss Per Share$- Note (.06) $ (.41) (.75) $ (.59) (.36)
= ==== ========= ======= ====== =======
Loss Per Share - Assuming
Full Dilution - Note 2 $ (.06) (.35) $ (.75) (.52) (.31)
======= ======= ========== ===== =======
</TABLE>
Note 1:Computed by dividing net loss by the weighted average number of common
shares (6,798,203) for the three months ended March 31, 1997, (4,136,253)
for the three months ended March 31, 1996, (5,149,253) for the year ended
December 31, 1996 and (4,136,253) for the years ended December 31, 1995
and 1994, respectively, and adjusting it by items (i) to (vi) below using
the modified treasury stock method of calculating earnings per share.
(i) Assumes that 357,756 1995 Stock Incentive Plan stock options
outstanding at December 31, 1996 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, retire debt redeem preferred stock
and to invest the balance.
(ii)Assumes that 129,500 1995 Stock Incentive Plan stock options
outstanding at December 31, 1996 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 December 31,
1996 as quoted on the NASDAQ, retire debt and to invest the balance.
(iiiAssumes that 112,500 stock options outstanding at December 31, 1996
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 December 31, 1996 as quoted on the NASDAQ,
retire debt, redeem preferred stock and to invest the balance.
(vi)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, retire debt, redeem preferred stock
and to invest the balance.
(v) Assumes common stock purchase warrants to purchase an aggregate of
1,895,625 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, retire debt, redeem preferred stock and to invest the
balance.
(vi)Assumes that common stock purchase warrants to purchase 896,875
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 , retire debt redeem, preferred stock and to invest the
balance.
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. See Schedule 1.
<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 (6,798,203) for the three months ended March 31, 1997, (4,136,253)
for the three months ended March 31, 1996, (5,149,253) for the year ended
December 31, 1996 and (4,136,253) for the years ended December 31, 1995
and 1994, respectively, and adjusting it by items (i) to (vi) below using
the modified treasury stock method of calculating earnings per share.
(i) Assumes that 357,756 1995 Stock Incentive Plan stock options
outstanding at December 31, 1996 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 December 31,
1996 as quoted on the NASDAQ, retire debt redeem preferred stock and
to invest the balance.
(ii)Assumes that 129,500 1995 Stock Incentive Plan stock options
outstanding at December 31, 1996 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 December 31,
1996 as quoted on the NASDAQ, retire debt and to invest the balance.
(iiiAssumes that 112,500 stock options outstanding at December 31, 1996
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 December 31, 1996 as quoted on the NASDAQ,
retire debt, redeem preferred stock and to invest the balance.
(iv)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 December 31,
1996 as quoted on the NASDAQ, retire debt, redeem preferred stock and
to invest the balance.
(v) Assumes Series B common stock purchase warrants to purchase an
aggregate of 1,895,625 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 December 31, 1996
as quoted on the NASDAQ, retire debt, redeem preferred stock and to
invest the balance.
(vi)Assumes that stock options to purchase 896,875 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 December 31, 1996 as quoted on the NASDAQ , retire debt,
redeem preferred stock and to invest the balance.
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. See Schedule 2.
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.
<PAGE>
SCHEDULE 1
PRIMARY EARNINGS PER SHARE - MARCH 31, 1997
- -------------------------------------------------------------------
Weighted average # of shares o/s 3/31/97 6,798,203
Total issuable warrants and options Options pursuant to 1995 Stock Incentive
Plan 252,804 Options pursuant to 1995 Stock Incentive Plan 104,952 Options
pursuant to 1995 Stock Incentive Plan 129,500 Options to purchase stock 112,500
Series B Common Stock Purchase Warrants 877,500 Series B Common Stock Purchase
Warrants 1,895,625 Series A Common Stock Purchase Warrants 896,875
Total issuable 4,269,756
Total that can be reacquired:
(6,798,203 x 20%) 1,359,641
---------
Issued not reacquired 2,910,115
Proceeds Price # of shares
Options pursuant to 1995 Stock Incentive Pl$n .232 252,804 58,651
Options pursuant to 1995 Stock Incentive Plan .345 104,952 36,208
Options pursuant to 1995 Stock Incentive Plan 2.00 129,500 259,000
Options to purchase stock 5.37 112,500 604,125
Series B Common Stock Purchase Warrants 2.00 877,500 1,755,000
Series B Common Stock Purchase Warrants 4.00 1,895,625 7,582,500
Series A Common Stock Purchase Warrants 4.50 896,875 4,035,938
---------
14,331,422
Limitation
1,359,641 shares x 4.10 (avg FMV) 5,574,528
---------
Total proceeds remaining to retire debt, redeem preferred stock and interest
8,756,894
Outstanding debt and preferred stock redemption - A/P and accrued expenses
1,957,430 - Note payable 595,867 - Capitalized lease obligation 31,711 - Due to
related parties 35,029 - Preferred stock redemption 1,210,000
3,830,037
Remaining proceeds for cash 4,926,857
Net income effects of debt retirement at 2/15/97 interest expense per P&L =
68,436 for three months retired 2/15/97 - net interest expense 34,218
Cash invested in money market fund @ 2.5% interest for 1.5 months
4,926,857 @ 2.5% x 1.5/12 = 15,396
<PAGE>
SCHEDULE 1
PRIMARY EARNINGS PER SHARE - MARCH 31, 1997
[continued]
- -------------------------------------------------------------------
P&L impact
Reduction of interest expense34,218
Additional interest income15,396
49,614
Weighted average # of shares o/s 3/31/97 6,798,203
Options and warrants not reacquired 2,910,115
Total 9,708,318
March 31, 1997 Net loss per F/S (653,313)
Adjustment per modified treasury stock method49,614
Adjusted net loss (603,699)
Primary EPS (603,699)/9,708,318= (.06218369)
($.06)
<PAGE>
SCHEDULE 1
PRIMARY EARNINGS PER SHARE - DECEMBER 31, 1996
- -------------------------------------------------------------------
Weighted average # of shares o/s 12/31/96 5,149,253
Total issuable warrants and options Options pursuant to 1995 Stock Incentive
Plan 252,804 Options pursuant to 1995 Stock Incentive Plan 104,952 Options
pursuant to 1995 Stock Incentive Plan 129,500 Options to purchase stock 112,500
Series B Common Stock Purchase Warrants 877,500 Series B Common Stock Purchase
Warrants 1,895,625 Series A Common Stock Purchase Warrants 896,875
Total issuable 4,269,756
Total that can be reacquired:
(5,149,253 x 20%) 1,029,851
---------
Issued not reacquired 3,239,905
Proceeds Price # of shares
Options pursuant to 1995 Stock Incentive Plan .232 252,804 58,651
Options pursuant to 1995 Stock Incentive Plan .345 104,952 36,208
Options pursuant to 1995 Stock Incentive Plan 2.00 129,500 259,000
Options to purchase stock 5.37 112,500 604,125
Series B Common Stock Purchase Warrants 2.00 877,500 1,755,000
Series B Common Stock Purchase Warrants 4.00 1,895,625 7,582,500
Series A Common Stock Purchase Warrants 4.50 896,875 4,035,938
---------
14,331,422
Limitation
1,029,851 shares x 3.25 (avg FMV) 3,347,016
---------
Total proceeds remaining to retire debt, redeem preferred stock and interest
10,984,406
Outstanding debt and preferred stock redemption - A/P and accrued expenses
1,974,231 - Note payable 590,031 - Capitalized lease obligation 57,394 - Due to
related parties 23,542 - Preferred stock redemption 1,210,000
3,855,198
Remaining proceeds for cash 7,129,208
Net income effects of debt retirement at 7/1/96 interest expense per P&L =
472,548 for a fully year retired 7/1/96 - net interest expense 236,274
Cash invested in money market fund @ 2.5% interest for 6 months
7,129,208 @ 2.5% /2 89,115
<PAGE>
SCHEDULE 1
PRIMARY EARNINGS PER SHARE - DECEMBER 31, 1996
[continued]
- -------------------------------------------------------------------
P&L impact
Reduction of interest expense 236,274
Additional interest income 89,115
325,389
Weighted average # of shares o/s 12/31/96 5,149,253
Options and warrants not reacquired 3,239,905
Total 8,389,158
December 31, 1996 Net income per F/S (6,579,444)
Adjustment per modified
treasury stock method325,389
Adjusted net loss (6,254,055)
Primary EPS (6,254,055)/8,389,158= (.74549258)
($.75)
Total reacquired
Options pursuant to 1995 Stock Incentive Plan 3.25 252,804 821,613
Options pursuant to 1995 Stock Incentive Plan 3.25 104,952 341,094
Options pursuant to 1995 Stock Incentive Plan 3.25 129,500 420,875
Options to purchase stock 3.25 112,500 365,625
Series B Common Stock Purchase Warrants 3.25 877,500 2,851,875
Series B Common Stock Purchase Warrants 3.25 1,895,625 6,160,781
Series A Common Stock Purchase Warrants 3.25 896,875 2,914,844
---------
13,876,707
<PAGE>
SCHEDULE 2
FULLY DILUTED EARNINGS PER SHARE - MARCH 31, 1997
- -------------------------------------------------------------------
Weighted average # of shares o/s 3/31/97 6,798,203
Total issuable warrants and options
Options pursuant to 1995 Stock Incentive Plan 252,804
Options pursuant to 1995 Stock Incentive Plan 104,952
Options pursuant to 1995 Stock Incentive Plan 129,500
Options to purchase stock 112,500
Series B Common Stock Purchase Warrants 877,500
Series B Common Stock Purchase Warrants 1,895,625
Series A Common Stock Purchase Warrants 896,875
--------
Total issuable 4,269,756
Total that can be reacquired:
(6,798,203 x 20%) 1,359,641
---------
Issued not reacquired 2,910,115
Proceeds Price # of shares
Options pursuant to 1995 Stock Incentive Pl$n .232 252,804 58,651
Options pursuant to 1995 Stock Incentive Plan .345 104,952 36,208
Options pursuant to 1995 Stock Incentive Plan 2.00 129,500 259,000
Options to purchase stock 5.37 112,500 604,125
Series B Common Stock Purchase Warrants 2.00 877,500 1,755,000
Series B Common Stock Purchase Warrants 4.00 1,895,625 7,582,500
Series A Common Stock Purchase Warrants 4.50 896,875 4,035,938
---------
14,331,422
Limitation
1,359,641 shares x 4.82 (FMV at 12/31/96) 6,553,470
---------
Total proceeds remaining to retire debt, redeem preferred stock and interest
7,777,952
Outstanding debt and preferred stock redemption - A/P and accrued expenses
1,957,430 - Note payable 595,867 - Capitalized lease obligation 31,711 - Due to
related parties 35,029 - Preferred stock redemption 1,210,000
3,830,037
Remaining proceeds for cash 3,947,915
Net income effects of debt retirement at 2/15/97 interest expense per P&L =
68,436 for three months retired 2/15/97 - net interest expense 34,218
Cash invested in money market fund @ 2.5% interest for 1.5 months
3,947,915 @ 2.5% x 1.5/12 = 12,337
<PAGE>
SCHEDULE 2
FULLY DILUTED EARNINGS PER SHARE - MARCH 31, 1997
[continued]
- -------------------------------------------------------------------
P&L impact
Reduction of interest expense 34,218
Additional interest income 12,337
46,555
Weighted average # of shares o/s 3/31/97 6,798,203
Options and warrants not reacquired 2,910,115
Total 9,708,318
March 31, 1997 Net loss per F/S (653,313)
Adjustment per modified treasury stock method 46,555
Adjusted net loss (606,758)
Fully Diluted EPS (606,758)/9,708,318= (.06249878)
($.06)
<PAGE>
SCHEDULE 2
FULLY DILUTED EARNINGS PER SHARE - DECEMBER 31, 1996
- -------------------------------------------------------------------
Weighted average # of shares o/s 12/31/96 5,149,253
Total issuable warrants and options
Options pursuant to 1995 Stock Incentive Plan 252,804
Options pursuant to 1995 Stock Incentive Plan 104,952
Options pursuant to 1995 Stock Incentive Plan 129,500
Options to purchase stock 112,500
Series B Common Stock Purchase Warrants 877,500
Series B Common Stock Purchase Warrants 1,895,625
Series A Common Stock Purchase Warrants 896,875
--------
Total issuable 4,269,756
Total that can be reacquired:
(5,149,253 x 20%) 1,029,851
---------
Issued not reacquired 3,239,905
Proceeds Price # of shares
Options pursuant to 1995 Stock Incentive Pl$n .232 252,804 58,651
Options pursuant to 1995 Stock Incentive Plan .345 104,952 36,208
Options pursuant to 1995 Stock Incentive Plan 2.00 129,500 259,000
Options to purchase stock 5.37 112,500 604,125
Series B Common Stock Purchase Warrants 2.00 877,500 1,755,000
Series B Common Stock Purchase Warrants 4.00 1,895,625 7,582,500
Series A Common Stock Purchase Warrants 4.50 896,875 4,035,938
---------
14,331,422
Limitation
1,029,851 shares x 3.38 (FMV at 12/31/96) 3,480,896
---------
Total proceeds remaining to retire debt, redeem preferred stock 10,850,526
Outstanding debt and preferred stock redemption
- A/P and accrued expenses 1,974,231
- Note payable 590,031
- Capitalized lease obligation 57,394
- Due to related parties 23,542
- - Preferred stock redemption 1,210,000
3,855,198
Remaining proceeds for cash 6,995,328
Net income effects of debt retirement at 7/1/96 interest expense per P&L =
472,548 for a fully year retired 7/1/96 - net interest expense 236,274
Cash invested in money market fund @ 2.5% interest for 6 months
6,995,328 @ 2.5% /2 87,441
<PAGE>
SCHEDULE 2
FULLY DILUTED EARNINGS PER SHARE - DECEMBER 31, 1996
[continued]
- -------------------------------------------------------------------
P&L impact
Reduction of interest expense236,274
Additional interest income87,441
323,715
Weighted average # of shares o/s 12/31/96 5,149,253
Options and warrants not reacquired 3,239,905
Total 8,389,158
December 31, 1996 Net income per F/S (6,579,444) Adjustment per modified
treasury stock method323,715
Adjusted net loss (6,255,729)
Fully Diluted EPS (6,255,729)/8,389,158= (.74569211)
($.75)
Total reacquired
Options pursuant to 1995 Stock Incentive Plan 3.38 252,804 854,428
Options pursuant to 1995 Stock Incentive Plan 3.38 104,952 354,738
Options pursuant to 1995 Stock Incentive Plan 3.38 129,500 437,710
Options to purchase stock 3.38 112,500 380,250
Series B Common Stock Purchase Warrants 3.38 877,500 2,965,950
Series B Common Stock Purchase Warrants 3.38 1,895,625 6,407,213
Series A Common Stock Purchase Warrants 3.38 896,875 3,031,438
---------
14,431,777
<PAGE>
STOCKHOLDERS AGREEMENT
BETWEEN
1174378 ONTARIO INC.
AND
NETSMART TECHNOLOGIES, INC.
AND
CREDIT CARD ACQUISITION CORP.
AND
OASIS TECHNOLOGY HOLDINGS LTD.
AND
CONSOLIDATED TECHNOLOGY GROUP LTD.
AND
OASIS TECHNOLOGY LTD.
<PAGE>
TABLE OF CONTENTS
ARTICLE ONE - INTERPRETATION
Definitions................................................... 2
Accounting Principles ........................................ 3
Currency...................................................... 3
ARTICLE TWO - MANAGEMENT AND RESPONSIBILITIES
Stockholders' Enforcement..................................... 3
Corporation's Enforcement.................................... 3
Directors/Officers............................................ 3
Directors Enforcement......................................... 3
Stockholders Indemnity........................................ 4
Approval of Matters........................................... 4
Non-Competition............................................... 6
Funding....................................................... 6
ARTICLE THREE - DEALING WITH STOCK
No Transfer of Stock.......................................... 6
Endorsement on Certificates................................... 6
Issue of Additional Stock..................................... 7
Sale of Stock................................................. 7
Insolvency of a Stockholder................................... 8
Stockholder Controlled Company................................ 9
Exclusivity of Sections.......................................10
ARTICLE FOUR - CONFIDENTIAL INFORMATION
Definitions...................................................10
Obligation of Confidence......................................10
Reasonable Restriction........................................11
ARTICLE FIVE - GENERAL
Entire Agreement..............................................11
Amendments....................................................11
Waiver........................................................11
Notice........................................................11
Governing Law.................................................14
Assignment....................................................14
Successors....................................................14
Termination and Survival......................................14
Counterparts..................................................14
<PAGE>
II - 1
STOCKHOLDERS AGREEMENT
THIS AGREEMENT is made as of the 2nd day of September, 1996 between
1174378 ONTARIO INC., a corporation incorporated under the laws of the Province
of Ontario, ("OntCo"), NETSMART TECHNOLOGIES, INC., a corporation incorporated
under the laws of the State of Delaware ("Netsmart"), CREDIT CARD ACQUISITION
CORP., a corporation incorporated under the laws of the State of Delaware (the
"Corporation"), OASIS TECHNOLOGY HOLDINGS LTD., a corporation incorporated under
the laws of the Province of Ontario ("OTHL"), CONSOLIDATED TECHNOLOGY GROUP
LTD., a corporation incorporated under the laws of the State of Delaware
("CTOG"), and OASIS TECHNOLOGY LTD., a corporation incorporated under the laws
of the Province of Ontario ("Oasis").
WHEREAS, the authorized capital of the Corporation consists of one hundred
(100) shares without par value, of which 100 are issued and outstanding;
AND WHEREAS, at the date hereof, all of the issued stock of the
Corporation is beneficially owned by OntCo and Netsmart as follows:
STOCKHOLDERS COMMON STOCK
Netsmart 50
OntCo 50
AND WHEREAS, at the date hereof, all of the issued stock of OntCo and
Oasis is beneficially
owned by OTHL;
AND WHEREAS, at the date hereof, CTOG owns a majority of the issued stock
of Netsmart;
AND WHEREAS, OntCo, Netsmart, OTHL, Oasis, CTOG and the Corporation have
agreed to enter into this Agreement as being in their respective best interests
and for the purpose of providing for the operation of the Corporation;
NOW THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereto agree as follows:
<PAGE>
II - 2
ARTICLE ONE - INTERPRETATION
Definitions
1.01 In this Agreement:
(a) "Accountant" means the auditor or accountant, as the case may be, of
the Corporation
appointed from time to time;
(b) "Affiliate" means any corporation, other entity or person which
directly or indirectly controls a party, is controlled, directly or
indirectly, by a party or is under common control, directly or
indirectly, with a party.
(c) "Agreement" means this agreement and all schedules attached hereto
and all amendments made hereto and thereto by written agreement
between the Stockholders and the Corporation;
(d) "Business Day" means a day other than a Saturday, Sunday or statutory
holiday in the
State of Delaware;
(e) "Law" means the General Corporation Law of the State of Delaware, as
now enacted or as the same may from time to time be amended,
re-enacted or replaced;
(f) "Notice" has the meaning set out in Section 3.04(1);
(g) "Offered Stock" has the respective meanings set out in Sections
3.04(1) and 3.05(1);
(h) "Offeree" has the respective meanings set out in Sections 3.04(2)
and 3.05(1);
(i) "Offeror" has the respective meanings set out in Section 3.04(1)
and 3.05(1);
(j) "Party" has the meaning set out in Section 2.07;
(k) "Person" means an individual, a partnership, a corporation, a limited
liability partnership, a limited liability company, an association, a
joint stock company, a trust, a joint venture, a firm or an
unincorporated organization;
(1) "Stock" means the shares without par value of the Corporation that
the Stockholders at the date hereof or hereafter may beneficially
own; and
(m) "Stockholders" means OntCo and Netsmart, together with such other
Persons as may become stockholders in the Corporation and parties to
this Agreement, collectively and "Stockholder" means any one of such
Persons individually.
Accounting Principles
1.02 Wherever in this Agreement reference is made to generally accepted
accounting principles, such reference shall be deemed to be the generally
accepted accounting principles from time to time approved by the American
Institute of Certif~ed Public Accountants, or any successor institute,
applicable as at the date on which such calculation is made or required to be
made in accordance with generally accepted accounting principles.
Currency
1.03 All currency referred to in this Agreement is in United States dollars.
<PAGE>
II - 3
ARTICLE TWO - MANAGEMENT AND RESPONSIBILITIES
Stockholders' Enforcement
2.01 The Stockholders shall at all times comply with the provisions of this
Agreement and shall exercise the voting privileges in respect of their Stock so
as to cause the Corporation to comply with the provisions of this Agreement.
Corporation's Enforcement
2.02 The Corporation hereby acknowledges and confirms notification of the terms
of this Agreement and undertakes to carry out and comply with the provisions of
this Agreement to the extent that it has such capacity and power by law.
Directors/Officers
2.03 (1) The Bylaws of the Corporation shall provide that the Board of Directors
of the Corporation shall consist of four directors. Each Stockholder shall be
entitled to nominate two directors. No amendments shall be made to the number of
positions on the Board of Directors without the written consent of OntCo and
Netsmart at the time of such amendment.
(2) The Bylaws of the Corporation shall provide that a quorum of the Board
of Directors shall consist of four directors.
Directors Enforcement
2.04 Each of the Stockholders, so long as they or their nominees are directors
of the Corporation, to the extent that directors are permitted by law to bind
themselves, shall act and vote as directors, or shall cause their nominee to act
and vote as a director, in such manner as is required to carry out the purpose,
intent and provisions of this Agreement.
Stockholders Indemnity
2.05 The parties acknowledge and agree that no Stockholder is obligated in any
manner whatsoever to provide any guarantee or other security in respect of the
liabilities incurred by the Corporation and no Stockholder shall threaten,
coerce or unduly influence any other Stockholder to undertake such obligations
personally. If, however, the Stockholders do agree to provide guarantees or
other security in respect of liabilities incurred by the Corporation, such
obligations shall be undertaken by the Stockholders severally, rather than
jointly, whenever possible. To the extent that the Stockholders are required to
undertake any such obligations jointly, each Stockholder hereby indemnifies each
of the other Stockholders against any claims in excess of each Stockholder's
proportionate share of such liability which is attributable to a deficiency in
the amount contributed by such Stockholder. Each Stockholder's proportionate
share of such liability shall be determined by the percentage of the total
issued and outstanding Stock held by that Stockholder at the time the obligation
giving rise to the liabilities is exercised. Any Stockholder that fails to
satisfy its indemnity by way of cash or other security arrangements satisfactory
to the grantees of that indemnity shall be obliged to promptly transfer to such
grantees title to sufficient Stock of the Corporation of a value equal to the
outstanding deficiency as such value is determined in accordance with Section
3.05(2).
Approval of Matters
2.06 No action shall be taken on behalf of or by the Corporation with respect to
the following matters without the consent in writing of both OntCo and Netsmart
and the Bylaws of the Corporation shall incorporate such requirement:
(a) any change in the Certificate of Incorporation or By-laws of the
Corporation;
<PAGE>
II - 4
(b) any change in the authorized or issued capital stock of the
Corporation except as
expressly contemplated by this Agreement;
(c) the entering into of any agreement or the making of any offer or the
granting of any right capable of becoming an agreement to allot or
issue any capital stock of the Corporation except as expressly
contemplated by this Agreement;
(d) any action which may lead to or result in a material change in the
nature of the business
of the Corporation;
(e) the taking of any steps to wind up or terminate the corporate
existence of the
Corporation;
(f) the sale, lease, exchange or disposition of the entire undertaking or
property or assets of
the Corporation or any substantial part thereof;
(g) the making of, directly or indirectly, loans or advances to, or the
giving of security for or the guaranteeing of the debts of, any
person (except for cash advances made in the ordinary course of
business);
(h) the taking, holding, subscribing for or agreeing to the purchase of
capital stock of any
body corporate;
(i) the entering into of a merger or consolidation with any Person;
(j) the entering into of a partnership, or any arrangement for sharing of
profits. union of
interests, joint venture or reciprocal concession with any Person;
(k) the granting of any license, to anyone other than Netsmart or OntCo,
allowing a licensee to license "resellers" and/or "facility managers"
as such terms are def~ned in the Marketing and License Agreement
between Netsmart and the Corporation and the Marketing and License
Agreement between OntCo and the Corporation;
(l) any amendment of the Marketing and License Agreement between Netsmart
and the Corporation and of the Marketing and License Agreement
between OntCo and the Corporation;
(m) the entering into of any license except for the Corporation's
standard form of license
agreement;
(n) the entering into of any agreement other than in the ordinary course
of the Corporation's business;
(o) the borrowing of any money, the repayment of any loan, the giving of
any security or the making or incurring of any single capital
expenditure in excess of $10,000.00 or any related capital
expenditures, which, in the aggregate, are in excess of $10,000.00 in
any financial year of the Corporation;
(p) the declaration or payment of any dividend; or
(q) the election of officers.
Non-Competition
<PAGE>
II - 5
2.07 Subject to the prior written consent of the other Stockholder, no
Stockholder, OTHL, CTOG or Oasis (hereinafter defined as a "Party") shall,
anywhere in the world at any time during the period that a Party is a party to
this Agreement and for a period of 12 months thereafter, invest in any Person
that is a competitor of the Corporation in marketing, licensing, and
commercially exploiting card- based payment system authorization software or,
either independently or in partnership or jointly or in conjunction with any
Person, actively enhance a product which competes with the Corporation's product
offerings, other than by way of a passive investment in a Person that may have
existing maintenance obligations for a product which may compete with the
Corporation's product offerings. The restriction on investment referred to above
will not prohibit the ownership by any Party of up to 5% of the issued shares of
any corporation the shares of which are listed on any recognized stock exchange
in North America. Each of the Parties hereby confirms that all restrictions in
this Section 2.07 are reasonable and valid and all defenses to the strict
enforcement thereof are hereby waived by each Party.
Funding
2.08 (1) Funding of the Corporation will be supplied equally by the Stockholders
in accordance with a budget approved by the Board of Directors from time to time
for each fiscal quarter of the Corporation. The amounts, methods of payment and
security for payments shall be as determined by the Board of Directors.
(2) The Stockholders agree that any variance to the budget shall require
the approval of the Stockholders.
ARTICLE THREE - DEALING WITH STOCK
No Transfer of Stock
3.01 Except as expressly provided for in this Article Three, a Stockholder shall
not sell, transfer, assign, pledge, charge, mortgage or in any other way dispose
of or encumber its Stock or its rights under this Agreement without first
complying with all of the provisions of this Agreement unless, prior to the
disposition or encumbrances of their Stock, the other Stockholder has consented
in writing to such disposition or encumbrance.
Endorsement on Certificates
3.02 Stock certificates of the Corporation shall bear the following language
noted conspicuously either as an endorsement or on the face thereof:
"The stock represented by this certificate are subject to all
the terms and conditions of an agreement made as of September 2, 1996
a copy of which is on file at the office of the Corporation in New
York State."
Issue of Additional Stock
3.03 If any stock is to be issued by the Corporation, the Corporation shall
first offer such stock to the Stockholders by notice given to them of the
Corporation's intention to issue additional stock and the number thereof to be
so issued. The Stockholders shall have the right to purchase the stock so
offered pro rata based upon the number of Stock beneficially owned by the
Stockholders at the date notice is given of such offer. The Stockholders shall
have 20 Business Days from the date such notice is given in which to take up and
pay for all or any of the stock so offered. The stock that has not been taken up
and paid for within the said 20 Business Days shall be offered again by the
Corporation by notice given to each Stockholder who elected to take up and pay
for all of its pro rata share of the stock initially offered to it, and such
Stockholder shall have the right to purchase the stock so offered. Such
Stockholder shall have 20 Business Days from the date such subsequent notice is
given in which to take up and pay for all or any of the stock so offered. If all
of the Stock offered to such Stockholder is not taken up, the stock
<PAGE>
II - 6
not so taken up may be issued to such persons as the directors in their
discretion determine, provided that such persons agree to be bound by this
Agreement and to become parties hereto.
Sale of Stock
3.04 (1) If a Stockholder receives a bona fide arm's length written offer to
purchase all or substantially all of its Stock from a third party (the "Third
Party"), that Stockholder (the "Offeror") shall give notice of such proposed
purchase and sale (the "Notice") to the Corporation and to the other Stockholder
and shall set out in the Notice the number of its Stock that it desires to sell
(the "Offered Stock") and the price offered for the Stock by the Third Party.
(2) Upon the Notice being given, the other Stockholder (the "Offeree")
shall have the right to purchase all, but not less than all, of the Offered
Stock at the price set out in the Notice.
(3) Within 10 Business Days of having been given the Notice, the Offeree
shall give notice to the Offeror and to the Corporation at its office in New
York State. If the Offeree is willing to purchase all, but not less than all, of
the Offered Stock, the transaction of purchase and sale shall be completed
within 20 Business Days of the expiry of the 10 Business Day period specified in
this Section 3.04(3). The transaction shall be completed at the Corporation's
registered office where delivery of the Offered Stock shall be made by the
Offeror with good title, free and clear of all liens, charges and encumbrances,
against payment by certified cheque by the Offerees.
(4) If the Offeror makes default in transferring the Offered Stock to the
Offeree as provided for in this Section 3.04, the secretary of the Corporation
is authorized and directed to receive the purchase money and to thereupon cause
the name of the Offeree to be entered in the registers of the Corporation as the
holder of the Stock purchasable by it. The said purchase money shall be held in
trust by the Corporation on behalf of the Offeror and not commingled with the
Corporation's assets, except that any interest accruing thereon shall be for the
account of the Corporation. The receipt by the secretary of the Corporation for
the purchase money shall be a good discharge to the Offeree and, after its name
has been entered in the registers of the Corporation in exercise of the
aforesaid power, the validity of the proceedings shall not be subject to
question by any person. On such registration, the Offeror shall cease to have
any right to or in respect of the Offered Stock except the right to receive,
without interest, the purchase price received by the Secretary of the
Corporation.
(5) If the Offeree does not give notice in accordance with the provisions
of Section 3.04(3) that it is willing to purchase all of the Offered Stock, the
rights of the Offeree, subject as hereinafter provided, to purchase the Offered
Stock shall forthwith cease and the Offeror may sell the Offered Stock to the
Third Party for the price set out in the Notice provided that the Third Party
agrees prior to such transaction to be bound by this Agreement and to become a
party hereto in place of the Offeror with respect to the Offered Stock. If the
Offered Stock is not sold within a four month period after the expiration of the
ten day period described in Section 3.04(3) on such terms, the rights of the
Offeree pursuant to this Section 3.04 shall again take effect and so on from
time to time.
Insolvency of a Stockholder
3.05 (1) If any Stockholder makes an assignment for the benefit of creditors or
is the subject of any proceedings under any bankruptcy or insolvency law (the
"Offeror"), the other Stockholder (the "Offeree") shall have the right to
purchase all, but not less than all, of the Stock beneficially owned by the
Offeror (the "Offered Stock") for the price and upon the terms and conditions
determined in accordance with the provisions contained in this Section 3.05.
(2) Subject to the provisions of this Section 3.05(2), the price of the
Offered Stock shall be the value endorsed from time to time upon Schedule A
attached hereto. The Stockholders acknowledge that the present value of each of
the Stock owned by each of them is $6,500 and that such value is endorsed upon
Schedule A attached hereto as at the date hereof. Within 40 Business Days after
the end of each financial year of the Corporation, or as soon thereafter as may
be reasonably possible, the
<PAGE>
II - 7
Stockholders, acting unanimously, shall redetermine the value of such Stock for
the then current financial year and shall endorse such redetermined value with
their initials upon Schedule A attached hereto. If no revaluation has been made
within 6 months prior to the date the Notice is given, and in the absence of
mutual agreement otherwise, the price of the Offered Stock shall be the fair
value of the Offered Stock as at the end of the fiscal quarter of the
Corporation immediately preceding the fiscal quarter in which the Notice was
given as determined by the Accountant in accordance with generally accepted
accounting principles. Such determination shall be made in writing and given to
all of the Stockholders and to the Corporation within 20 Business Days of the
giving of the Notice or as soon thereafter as may be reasonably possible.
(3) For the purpose of determining such fair value, the Accountant may
appoint, at the expense of the Corporation, an independent valuer or appraiser
to assist the Accountant in such determination. The report of the Accountant,
when delivered to the Stockholders and to the Corporation, shall be conclusive
and binding upon all parties. All costs and charges associated with any
appraisal shall be borne by the Corporation.
(4) Within 10 Business Days of having been given the Notice, in the case
of the purchase price being determined as a result of an endorsement on Schedule
A attached hereto, or within 10 Business Days of having been given the
Accountant's report of the fair value of the Offered Stock, in the case of the
purchase price being determined by the Accountant, the Offeree shall give notice
to the Offeror and to the Corporation at its office in New York State. If the
Offeree is willing to purchase all, but not less than all, of the Offered Stock,
the transaction of purchase and sale shall be completed within 20 Business Days
of the expiry of the 10 Business Day period specified in this Section 3.05(4).
The transaction shall be completed at the Corporation's registered office where
delivery of the Offered Stock shall be made by the Offeror with good title, free
and clear of all liens, charges and encumbrances, against payment by certified
cheque by the Offeree.
(5) If the Offeror makes default in transferring the Offered Stock to the
Offeree as provided for in this Section 3.05, the secretary of the Corporation
is authorized and directed to receive the purchase money and to thereupon cause
the name of the Offeree to be entered in the registers of the Corporation as the
holder of the Stock purchasable by it. The said purchase money shall be held in
trust by the Corporation on behalf of the Offeror and not commingled with the
Corporation's assets, except that any interest accruing thereon shall be for the
account of the Corporation. The receipt by the secretary of the Corporation for
the purchase money shall be a good discharge to the Offeree and, after its name
has been entered in the registers of the Corporation in exercise of the
aforesaid power, the validity of the proceedings shall not be subject to
question by any person. On such registration, the Offeror shall cease to have
any right to or in respect of the Offered Stock except the right to receive,
without interest, the purchase price received by the Secretary of the
Corporation.
(6) If the Offeree does not give notice in accordance with the provisions
of Section 3.05(4) that it is willing to purchase all of the Offered Stock, the
rights of the Offeree, subject as hereinafter provided, to purchase the Offered
Stock shall forthwith cease.
Stockholder Controlled Company
3.06 (1) Notwithstanding any other provision of this Agreement, each Stockholder
shall be entitled after giving notice to the other Stockholder and to the
Corporation to sell, transfer and assign all, but not less than all of the Stock
beneficially owned by it to an Affiliate, provided the Affiliate has entered
into an agreement prior to such transaction not to sell, transfer or assign such
Stock except to another Affiliate and to become a party hereto.
(2) Notwithstanding the completion of any sale of the Stock by a
Stockholder to an Affiliate pursuant to Section 3.06(1), that Stockholder shall:
(i) not sell, transfer, assign, pledge, charge or in any way
dispose of or
encumber its shares of the Affiliate;
<PAGE>
II - 8
(ii) continue to be bound by all the obligations hereunder as if
it continued to be a Stockholder of the Corporation and
perform such obligations to the extent that the Affiliate
fails to do so; and
(iii)at all times be the legal and beneficial owner of stock
carrying at least 51% of the issued and outstanding voting
rights of the Affiliate, which shares shall be sufficient,
if exercised, to elect a majority of the board of directors
of the Affiliate.
Exclusivity of Sections
3.07 If any of Sections 3.03, 3.04 or 3.05 which are exclusive ("Stock Sale
Sections") are being relied on, no other Stock Sale Section may be relied on
until the Stock Sale Section being relied on has been fully complied with.
ARTICLE FOUR - CONFIDENTIAL INFORMATION
Definitions
4.01 In this Article Four "Confidential Information" shall mean all financial,
statistical and personnel information of the Corporation and all technical
information owned by the Corporation which shall include, but not be limited to,
information and documentation relating to or embodying the results of research,
development and experimentation in the area of computer hardware and/or
software, specifications, concepts, know-how or techniques relating thereto.
Confidential Information shall not include any data or information which can be
conclusively established (i) was known by any Stockholder prior to the
incorporation of the Corporation, (ii) was or becomes, without breach of this
Agreement, publicly disclosed, or (iii) is rightfully obtained from a third
party without any obligation of confidence.
Obligation of Confidence
4.02 Each Stockholder hereby agrees to hold in trust and confidence for the
Corporation all Confidential Information and, except with the prior written
consent of the other Stockholder, not to disclose or communicate directly or
indirectly either orally or in writing to anyone any Confidential Information
other than in the course of carrying out its responsibilities on behalf of the
Corporation. The obligations in this Article Four shall continue while each
Stockholder is a Stockholder of the Corporation and for a period of three years
after (i) such Stockholder ceases to be a Stockholder of the Corporation, or
(ii) the termination of this Agreement.
Reasonable Restriction
4.03 Each of the Stockholders hereby agree that all of the obligations and
restrictions in this Article Four are reasonable and valid and defenses to the
strict enforcement thereof are hereby waived by each Stockholder.
ARTICLE FIVE - GENERAL
Entire Agreement
5.01 This Agreement constitutes the entire agreement between the parties in
respect of the subject matter contained herein. There are no representations,
warranties, conditions or collateral agreements express or implied, oral or
written, statutory or otherwise except as set forth in this Agreement.
Amendments
<PAGE>
II - 9
5.02 No additions, deletions or modifications to this Agreement shall be
effective unless expressed in writing and approved by the written consent of all
the Stockholders of the Corporation at the effective date of such amendment.
Waiver
5.03 No waiver of any breach of any provision of this Agreement shall be
effective unless expressed in writing and signed by the party granting such
waiver. Unless otherwise expressly provided, the extent of any waiver granted
shall be restricted to the specific breach waived and shall not extend to any
further occurrence of such breach.
Notice
5.04 (1) All demands required or permitted to be given under this Agreement
shall be in writing and delivered by hand or facsimile or mailed by registered,
certif~ed mail or other receipt delivery service, return receipt requested, to
the recipient party at the address indicated below or at such other address as
such party shall, from time to time, designate in writing by the other parties
by written notice in the manner described in this paragraph. A facsimile will be
allowed only if the receiving machine confirms receipt through answerback and
the sending machine prints a paper copy of the answerback message.
<PAGE>
II - 10
To OntCo: 1174378 Ontario Inc.
c/o Oasis Technology Ltd.
100 Sheppard Avenue East
North York, Ontario, M2N 6N5
Fax: 416-228-8822
Attention: President
with a copy to:Adam D. Vereshack
McCarthy Tetrault
P.O. Box 48
Toronto Dominion Bank Tower
Toronto, Ontario, M5K 1E6
To Netsmart: Netsmart Technologies, Inc.
146 Nassau Avenue
Islip, New York, 11751
Fax: 516-968-2123
Attention: President
with a copy to:Oscar Schachter
315 East 65th Street
New York, N.Y. 10021
Fax: 212-472-5822
To the CorporatCredit Card Acquisition Corp.
c/o Netsmart Technologies, Inc.
146 Nassau Avenue
Islip, New York 11751
Fax: 516-968-2123
Attention: both Co-Presidents
with a copy to:1174378 Ontario Inc.
c/o Oasis Technology Ltd.
100 Sheppard Avenue East
North York, Ontario, M2N 6N5
Fax: 416-228-8822
and a copy to: Netsmart Technologies, Inc.
146 Nassau Avenue
Islip, New York 11751
Fax: 516-968-2123
To OTHL: Oasis Technology Holdings Ltd
c/o Oasis Technology Ltd.
100 Sheppard Avenue East
North York, Ontario, M2N 6N5
<PAGE>
II - 11
Fax: 416-228-8822
Attention: President
To CTOG: Consolidated Technology Group Ltd.
c/o Netsmart Technologies, Inc.
146 Nassau Avenue
Islip, New York 11751
Fax: 516-968-2123
Attention: President
To Oasis: Oasis Technology Ltd.
100 Sheppard Avenue East
North York, Ontario, M2N 6N5
Fax: 416-228-8822
Attention: President
(2) Any party may change its designated address for notice for a temporary
or permanent period upon giving three days' prior written notice of the
particulars in that regard to the other parties to this Agreement.
(3) Any notice given in the prescribed manner shall be deemed given upon
actual delivery to the person to whom notice is addressed or if mailed by
registered mail on the fifth Business Day following deposit in the mail. In the
event of a disruption of regular postal service, notices shall be given by
actual delivery as above and not by registered mail.
Governing Law
5.05 This Agreement shall be governed by and construed in accordance with the
laws in force in the State of Delaware. Any provision of this Agreement that is
contrary to or rendered unenforceable by the applicable law shall be deemed to
be modified to the extent necessary to comply with such law without invalidating
the remaining provisions of this Agreement.
Assignment
5.06 Except as may be expressly permitted under the terms of this Agreement, no
party to this Agreement shall be entitled to assign its rights or obligations
under this Agreement without the written consent of all other parties to this
Agreement.
Successors
5.07 This Agreement is binding upon and enures to the benefit of the parties
hereto and their respective successors and permitted assigns. The parties hereto
agree to undertake such further acts and execute such further documents and
assurances as may be necessary or expedient in order to carry out the purpose
and intent of this Agreement.
Termination and Survival
5.08 This Agreement shall terminate upon:
(a) the written agreement of all of the Stockholders;
<PAGE>
II - 12
(b) the dissolution or bankruptcy of the Corporation or the making by the
Corporation of an
assignment under the provisions of the Federal Bankruptcy Code; or
(c) one Stockholder becoming the beneficial owner of all of the Stock.
Notwithstanding any termination of this Agreement, Sections 2.07,
4.01, 4.02 and 4.03 shall remain in full force and effect.
Counterparts
5.09 This Agreement and any amendments may be executed in one or more
counterparts and upon execution such documents shall constitute one Agreement
binding upon all signing parties notwithstanding that each party may not be a
signatory to the original document or to the same counterpart.
IN WITNESS WHEREOF, each of the parties hereto have executed this
Agreement by the endorsement of the signature of its respective duly authorized
signing officer all effective as of the date first stated above.
1174378 ONTARIO INC. NETSMART TECHNOLOGIES, INC.
By: _________________________ By: _________________________
Name: _______________________ Name: ______________________
(print or type) (print or type)
Title: ________________________ Title: _______________________
CREDIT CARD ACQUISITION OASIS TECHNOLOGY HOLDINGS
CORP. LTD.
By: _________________________ By: _________________________
Name: _______________________ Name: ______________________
(print or type) (print or type)
Title: ________________________ Title: _______________________
And By: _____________________
Name: ______________________
(print or type)
Title: _______________________
<PAGE>
II - 13
CONSOLIDATED TECHNOLOGY OASIS TECHNOLOGY LTD.
GROUP LTD.
By: _________________________ By: _________________________
Name: ______________________ Name: _______________________
(print or type) (print or type)
Title: _______________________ Title: ________________________
<PAGE>
SCHEDULE A
The Stockholders agree that the value of each share of Stock is U.S.
$6,500 as of September 2, 1996.
