SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K/A
Amendment No. 2
For the Year Ended December 31, 1998
Commission File No. 0-21177
NETSMART TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3680154
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
146 Nassau Avenue
Islip, New York 11751
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 968-2000
Purpose of Amendment: To correct Item 11, to correct the date of the report
of Richard A. Eisner & Company, LLP and to correct a typographical error in
the Statement of Operations.
<PAGE>
Part III
Item 11. Executive Compensation
Set forth below is information with respect to compensation paid or
accrued by the Company for 1998, 1997 and 1996 to its chief executive officer
and to each other officer whose salary and bonus for 1998 exceeded $100,000.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation (Awards)
Options, SARs
Name and Principal Position Year Salary Bonus(1) (Number)(2)
- --------------------------- ---- ------ ------ -------------
James L. Conway, CEO 1998 $161,563 $ 60,000 90,000
(from April 1998) and 1997 125,000 -- 89,582
president 1996 77,408 -- --
Lewis S. Schiller, CEO 1998 -- -- --
(prior to April 1998)(3) 1997 -- -- --
1996 -- -- --
Gerald O. Koop, chief 1998 92,700 126,305 80,000
executive officer of Creative 1997 90,000 158,094 --
Socio-Medics Corp. 1996 90,000 134,768 6,000
John F. Phillips, vice 1998 112,800 70,540 80,000
president - marketing 1997 109,500 89,657 --
1996 100,000 33,906 9,000
Anthony F. Grisanti, chief 1998 91,240 67,717 80,000
financial officer 1997 87,600 73,888 --
1996 80,000 23,500 5,000
(1) Includes commissions paid or accrued during 1998. In addition, during
1998, Mr. Koop earned commissions of $192,284 and Mr. Grisanti earned
commissions of $57,685. These commissions are based on contracts
entered into during 1998 and will be recognized through 2000 as revenue
on the contracts is recognized.
(2) Includes, for 1998, option grants which were made pursuant to an
amendment to the 1998 Long Term Incentive Plan. Such option grants are
subject to stockholder approval of such amendment. Options which were
repriced in 1998 are reflected in the year in which the options were
initially granted.
(3) Mr. Schiller resigned as an officer and director in April 1998. Mr.
Schiller has received no compensation from us. During 1998,
Consolidated Technology reported that Mr. Schiller's compensation for
1998 included salary of $138,000 and other annual compensation of $3.5
million, which represented $1.2 million paid to him and his designated
family members for his ownership in one of Consolidated Technology's
subsidiaries which was sold in 1998, $1.9 million for the
- 1 -
<PAGE>
purchase of his contract rights by the Company and $350,000 for other
payments due pursuant to a settlement agreement with Mr. Schiller. In
1997, Consolidated Technology paid Mr. Schiller $616,000 in salary and
$358,000 in other annual compensation, which represented commissions
paid to him on Consolidated Technology's investment activities.
In 1996, Consolidated paid Mr. Schiller salary of $286,000.
During 1998, our officers received compensation at rates of $160,000
for Mr. Conway, $112,800 for Mr. Phillips, $92,700 for Mr. Koop and $91,240 for
Mr. Grisanti. Mr. Phillips is also entitled to a commission of 2% of all data
center revenue. In addition, for 1998, we had a commission pool of up to 10%
of sales from new contracts. Mr. Koop received 2.5% of the first $9 million of
these new sales and 1% of these sales in excess of $9 million. Mr. Grisanti
received .75% of the first $9 million of these new sales and .3% of these sales
in excess of $9 million.
In July 1998, we entered into five-year employment agreements with
Messrs. James L. Conway, John F. Phillips, Gerald O. Koop and Anthony F.
Grisanti. Pursuant to these agreements, these officers receive the following
base salaries: Mr. Conway -- $160,000, Mr. Phillips -- $140,000, Mr. Koop --
$140,000, and Mr. Grisanti -- $120,000. The agreements provide for an annual
cost of living adjustment. Except for Mr. Conway, whose compensation became
effective July 1998, the salaries for the other officers became effective in
January 1999. The agreements provide that the executives are eligible to
participate in a bonus pool to be determined annually by the Compensation
Committee. The agreements also provide each of these officers with a $1,000 per
month automobile allowance. In the event of the officer's dismissal or
resignation or a material change in his duties or in the event of a termination
of employment by the executive or by us as a result of a change of control, the
officer may receive severance payments of between 24 and 36 months'
compensation. A month's compensation means the then current monthly salary plus
one-twelfth of the bonus for the prior year. The agreement with Mr. Conway
replaced an employment agreement dated August 1996. The agreements with Messrs.
Phillips and Grisanti replaced employment agreements dated June 1994.
The following table sets forth information concerning options granted
during the year ended December 31, 1998 pursuant to our long-term incentive
plans. No SARs were granted.
- 2 -
<PAGE>
<TABLE>
Option Grants in Year Ended December 31, 1998
<S> <C> <C> <C> <C> <C> <C>
% of Total Potential Realizable
Options Value at Assumed
Number of Granted to Annual Rates of Stock
Shares Employees Exercise Price Appreciation
Underlying in Fiscal Price Per Expiration
Name Options Granted Year Share Date 5%($) 10%($)
---- --------------- --------- --------- ---------- ----- ------
James L. Conway 40,000 5.2% $1.50 6/29/03 $16,400 $36,800
50,000(1) 6.5% 1.00 11/2/03 14,000 30,500
Lewis S. Schiller -- 0% -- -- -- --
Gerald O. Koop 30,000(2) 3.9% 1.50 6/29/03 12,420 27,480
50,000(1) 6.5% 1.00 11/2/03 14,000 30,500
John F. Phillips 30,000(2) 3.9% 1.50 6/29/03 12,420 27,480
50,000(1) 6.5% 1.00 11/2/03 14,000 30,500
Anthony F. Grisanti 30,000(2) 3.9% 1.50 6/29/03 12,420 27,480
50,000(1) 6.5% 1.00 11/2/03 14,000 30,500
(1) These options were granted pursuant to an amendment to our 1998
Long-Term Incentive Plan. The amendment is subject to stockholder
approval at our 1999 annual meeting of stockholders.
(2) These option grants do not include options which were repriced. Those
options are set forth in the Option Repricing Table.
On June 30, 1998, the compensation committee approved the repricing of
stock options held by employees, including options held by Messrs. Gerald O.
Koop, John F. Phillips and Anthony F. Grisanti. Options to purchase an aggregate
of 42,166 shares of common stock at $6.00 per share, which were granted in April
1996, were repriced at $1.50, which was the marked price of the common stock on
the date of the repricing. The grant of the new option and cancellation of the
old option were based on our improving results notwithstanding the decline in
the stock price. There were no repricings of options prior to 1998 at a time
when we were a reporting company. Set forth below is information concerning the
repricing of such options.
Option Repricing Table
Number of
Securities Market Price
Underlying of Stock at Exercise Price
Options Time of at Time of New Length of Original Term
Repriced or Repricing or Repricing or Exercise Remaining at Date of
Name Date Amended Amendment Amendment Price Repricing or Amendment
- ---- ---- ------- --------- --------- ----- ----------------------
Gerald O. Koop 6/30/98 6,000 $1.50 $6.00 $1.50 Two years, nine months
John F. Phillips 6/30/98 9,000 1.50 6.00 1.50 Two years, nine months
Anthony F. Grisanti 6/30/98 5,000 1.50 6.00 1.50 Two years, nine months
- 3 -
</TABLE>
<PAGE>
<TABLE>
The following table sets forth information concerning the exercise of
options and warrants during the year ended December 31, 1998 and the year-end
value of options held by our officers named in the Summary Compensation Table.
No stock appreciation rights ("SARs") have been granted.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
<S> <C> <C> <C> <C>
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options(1) at Fiscal Options at Fiscal
Year End Year End(2)
Shares
Acquired Value Exercisable/ Exercisable/
Name Upon Exercise Realized Unexercisable Unexercisable
---- ------------- -------- ------------- -------------
James L. Conway -- -- 97,249/70,000(3) $21,260/$99,410
Lewis S. Schiller -- -- 55,555/--(4) --/--
Gerald O. Koop -- -- 22,984/65,000 $26,019/$94,095
John F. Phillips -- -- 36,922/65,000 $49,586/$94,095
Anthony F. Grisanti -- -- 30,821/65,000 $40,359/$94,095
(1) The number of shares of Common Stock subject to options includes shares
of common stock issuable upon exercise of warrants. Options granted in
November 1998 pursuant to an amendment to our 1998 stock option plan
are unexercisable. Such options are subject to stockholder approval of
the amendment.
(2) The determination of "in the money" options at December 31, 1998, is
based on the closing price of the common stock on the Nasdaq SmallCap
Market on December 31, 1998, which was $2.563.
(3) Includes warrants to purchase 23,916 shares of common stock held by Mr.
Conway's wife, as to which he disclaims beneficial ownership.
(4) Does not include warrants held by DLB, Inc., which is owned by Mr.
Schiller's wife. Mr. Schiller disclaims beneficial ownership in DLB or
in any securities owned by DLB. Warrants held by Mr. Schiller include
warrants issued to him by us and warrants transferred to him by SIS
Capital.
- 4 -
</TABLE>
<PAGE>
1. Financial Statements
Report of Richard A. Eisner & Company, LLP
Report of Moore Stephens, P.C.
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996 Consolidated Statements of
Stockholders' Equity for the Years Ended December 31, 1998,
1997 and 1996 Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996 Notes to
Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
July 20, 1998 Change in Accountants
4. Exhibits
- 5 -
<PAGE>
NETSMART TECHNOLOGIES, INC.
AND SUBSIDIARY
F - 1
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Page to Page
------------
Independent Auditor's Report - Richard A. Eisner & Company, LLP.........F-3
Independent Auditor's Report - Moore Stephens, P.C......................F-4
Consolidated Balance Sheets.......................................F-5...F-6
Consolidated Statements of Operations.............................F-7...F-8
Consolidated Statements of Stockholders' Equity.........................F-9
Consolidated Statements of Cash Flows.............................F-10..F-12
Notes to Consolidated Financial Statements .......................F-13..F-28
. . . . . . . . . . .
F - 2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Netsmart Technologies, Inc.
Islip, New York
We have audited the accompanying consolidated balance sheet of Netsmart
Technologies, Inc. and its subsidiary as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated 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, 1998, and the results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
Certified Public Accountants
New York, New York
March 23, 1999
With respect to Note 17, April 8, 1999
F - 3
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Netsmart Technologies, Inc.
Islip, New York
We have audited the accompanying consolidated balance sheet of Netsmart
Technologies, Inc. and its subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated 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, 1997, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Moore Stephens, P.C.
Certified Public Accountants
Cranford, New Jersey
March 26, 1998
F - 4
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
------------
1 9 9 8 1 9 9 7
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 198,689 $ 854,979
Accounts Receivable - Net 3,600,025 2,182,418
Costs and Estimated Profits in Excess
of Interim Billings 2,899,695 542,324
Note Receivable 150,000 --
Other Current Assets 109,595 83,770
---------- ----------
Total Current Assets 6,958,004 3,663,491
---------- ----------
Property and Equipment - Net 354,036 308,583
---------- ----------
Other Assets:
Software Development Costs - Net 142,450 183,150
Customer Lists - Net 2,733,392 3,067,676
Other Assets 101,064 116,903
---------- ----------
Total Other Assets 2,976,906 3,367,729
---------- ----------
Total Assets $ 10,288,946 $ 7,339,803
========== ==========
See Notes to Consolidated Financial Statements.
F - 5
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
-----------
1 9 9 8 1 9 9 7
------- -------
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable $ 1,639,694 $ 935,177
Capitalized Lease Obligations 27,283 23,331
Accounts Payable 2,166,333 1,131,692
Accrued Expenses 1,178,893 1,041,120
Interim Billings in Excess of Costs and
Estimated Profits 1,803,999 951,885
Due to Related Parties 84,000 --
Deferred Revenue 47,619 117,080
----------- ---------
Total Current Liabilities 6,947,821 4,200,285
----------- ---------
Capitalized Lease Obligations 57,033 --
----------- ---------
Commitments and Contingencies (Note 13) -- --
Stockholders' Equity:
Preferred Stock, $.01 Par Value; Authorized 3,000,000
Series D 6% Redeemable Preferred Stock - $.01 Par
Value 3,000 Shares Authorized, 1,210 Issued and
Outstanding [Liquidation Preference of $1,210
and redemption value of $1,210,000] 12 12
Additional Paid-in Capital -
Series D Preferred Stock 1,209,509 1,209,509
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued 2,786,921 Shares
at December 31, 1998, 2,777,999 Shares at
December 31, 1997 27,869 27,780
Additional Paid-in Capital - Common Stock 17,203,904 17,195,668
Accumulated Deficit (15,097,202) (15,293,451)
---------- ----------
3,344,092 3,139,518
Less cost of 5,333 Common Shares held
in Treasury 60,000 --
---------- ---------
Total Stockholders' Equity 3,284,092 3,139,518
---------- ----------
Total Liabilities and Stockholders' Equity $ 10,288,946 $ 7,339,803
========== ==========
See Notes to Consolidated Financial Statements.
F - 6
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Revenues:
Software and Related
Systems and Services:
General $ 9,569,100 $ 4,119,780 $ 3,104,998
Maintenance Contract
Services 1,431,695 1,280,465 1,225,709
----------- --------- ---------
Total Software and Related
Systems and Services 11,000,795 5,400,245 4,330,707
Data Center Services 2,164,472 2,235,209 2,207,155
----------- --------- ---------
Total Revenues 13,165,267 7,635,454 6,537,862
----------- --------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 5,975,249 2,493,739 2,774,878
Maintenance Contract
Services 975,212 928,316 595,366
----------- --------- ---------
Total Software and Related
Systems and Services 6,950,461 3,422,055 3,370,244
Data Center Services 1,131,078 1,466,107 1,220,368
----------- --------- ---------
Total Cost of Revenues 8,081,539 4,888,162 4,590,612
----------- --------- ---------
Gross Profit 5,083,728 2,747,292 1,947,250
Selling, General and
Administrative Expenses 3,516,288 2,901,724 1,721,854
Related Party Administrative Expense 45,000 180,000 69,000
Stock Based Compensation -- -- 3,492,300
Research and Development 763,059 201,075 278,000
------------ --------- ---------
Income (Loss) from Continuing
Operations before Financing Costs
and Interest 759,381 (535,507) (3,613,904)
Financing Costs -- -- 1,692,000
Interest Expense 346,114 308,169 472,548
------------ --------- ---------
Income (Loss) from Continuing
Operations 413,267 (843,676) (5,778,452)
------------ --------- ---------
See Notes to Consolidated Financial Statements.
F - 7
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
Discontinued Operations:
Loss from Discontinued Operations (397,018) (2,615,049) (800,992)
Gain on Sale of Discontinued Operations 180,000 -- --
--------- --------- ----------
Loss from Discontinued Operations (217,018) (2,615,049) (800,992)
--------- --------- ----------
Net Income (Loss) 196,249 (3,458,725) (6,579,444)
Less Cumulative Preferred Stock
Dividends 72,600 (48,400)
--------- --------- ---------
Net Income (Loss) Applicable to
Common Stock $ 123,649 $(3,507,125) $(6,579,444)
========= ========= =========
Earnings Per Common Share:
Basic and Diluted:
Income (Loss) from Continuing
Operations $ .12 $ (.37) $ (3.36)
Income (Loss) from Discontinued
Operations (.08) (1.10) (.47)
--------- --------- --------
Net Income (Loss) $ .04 $ (1.47) $ (3.83)
========= ========= ========
Weighted Average Number of Shares of
Common Stock Outstanding 2,779,655 2,386,953 1,716,418
========= ========= =========
See Notes to Consolidated Financial Statements.
F - 8
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Additional Additional
Paid-in Paid-in Total
Series A Series D Capital Capital Stock-
Treasury Shares Preferred Stock Preferred Stock Preferred Common Stock Common Accumulate holders'
Shares Cost Shares Amount Shares Amount Stock Shares Amount Stock Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance- 400 $ 4 2,210 $ 22 $2,249,505 1,003,751 $10,038 $ 3,294,033 $(5,146,381) $ 407,211
December 31, 1995
Common Stock Issued
in Exchange for
Series D and
Series A Preferred Stock (400) (4) (1,000) (10) (1,039,996) 389,400 3,894 1,036,116 -- --
Allocated Related
Party Administrative
Expenses -- -- -- -- -- -- -- 9,000 -- 9,000
Compensation from
the Issuance of
Common Stock
Warrants and options -- -- -- -- -- -- -- 3,492,300 -- 3,492,300
Common Stock
Issued - Initial
Public Offering 431,250 4,312 5,170,689 5,175,001
Common Stock
Issued - Exercise
of Warrants 266,667 2,667 1,597,333 1,600,000
Common Stock
Issued -
Financing Costs 175,000 1,750 1,678,250 1,680,000
Costs Associated
with Issuance
of Stock (1,369,072) (1,369,072)
Net Loss -- -- -- -- -- -- -- -- (6,579,444) (6,579,444)
---- ---- ---- ---- --------- -------- ----- ---------- --------- ---------
Balance-
December 31, 1996 -- -- 1,210 12 1,209,509 2,266,068 22,661 14,908,649 (11,725,825) 4,415,006
Common Stock
Issued as Dividends 4,267 43 108,858 (108,901) --
on Preferred Stock
Common Stock
Issued - Exercise
of Options 54,926 549 40,363 40,912
Common Stock
Issued - Exercise
of Warrants 426,071 4,260 1,913,061 1,917,321
Cost Associated
with Exercise
of Warrants (74,995) (74,995)
Common Stock
Issued - Johnson
Acquisition 26,667 267 299,733 300,000
Net Loss (3,458,725) (3,458,725)
---- ---- ---- ---- --------- ------- ----- ------- --------- ---------
Balance -
December 31, 1997 -- -- 1,210 12 1,209,509 2,777,999 27,780 17,195,668 (15,293,451) 3,139,518
Common Stock
Issued - Exercise
of Options 8,922 89 8,326 8,325
Purchase of
Treasury Shares 5,333 $(60,000) (60,000)
Net Income 196,249 196,249
----- ------- ---- ---- ----- ---- -------- ------- ----- ------- ---------- -------
Balance -
December 31, 1998 5,333 $(60,000) -- $ -- 1,210 $ 12 $1,209,509 2,786,921 $27,869 $17,203,904 $(15,097,202 $3,284,092
===== ======== ==== ===== ====== ==== ========= ========= ====== ========== ========== =========
See Notes to Consolidated Financial Statements.
</TABLE>
F - 9
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Income (Loss) from Continuing Operations $ 413,267 $ (843,676) $ (5,778,452)
--------- ------- ---------
Adjustments to Reconcile Income
(Loss) from Continuing Operations to Net
Cash Used for Operating Activities:
Depreciation and Amortization 561,562 600,990 486,566
Administrative Expenses 9,000
Additional Compensation Related to the
issuance of Equity Instruments 3,492,300
Financing Expenses related to the issuance
of Common Stock 1,680,000
Cash Used in Discontinued Operations (367,018) (2,615,049) (800,992)
Write Off of Capitalized Software Cost
and Related Hardware 553,061
Equity in Net Loss of Joint Venture 287,131 264,085
Provision for Doubtful Accounts 60,000 60,000 60,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,477,607) 452,032 (231,478)
Costs and Estimated Profits in
Excess of Interim Billings (2,357,371) (20,538) (516,707)
Other Current Assets (25,825) (1,565) (68,810)
Other Assets 5,839 11,905 (10,502)
Increase [Decrease] in:
Accounts Payable 1,034,641 148,536 (202,620)
Accrued Expenses 102,773 50,045 (332,174)
Interim Billings in Excess of
Costs and Estimated Profits 852,114 (150,220) 160,626
Due to Related Parties (21,245) (143,458)
Deferred Revenue (69,461) (4,439) (52,580)
----------- ---------- ----------
Total Adjustments (1,680,353) (649,356) 3,793,256
----------- ---------- ----------
Net Cash Used For Operating Activities (1,267,086) (1,493,032) (1,985,196)
----------- ---------- ----------
Investing Activities:
Acquisition of Property and
Equipment (222,031) (216,041) (181,033)
Software Development Costs (462,000) (278,800)
Investment in Joint Venture (166,585) (384,631)
----------- ---------- ----------
Net Cash Used For Investing Activities (222,031) (844,626) (844,464)
----------- ---------- ----------
See Notes to Consolidated Financial Statements.
</TABLE>
F - 10
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Financing Activities:
Proceeds from Short-Term Notes 704,517 345,146 500,000
Payment of Short-Term Notes (912,270)
Payment of Bank Note Payable (79,000)
Proceeds of loans from Related Parties 140,000
Repayment of loans from related parties (56,000) (750,000)
Payment of Capitalized Lease Obligations (15,658) (34,063) (145,146)
Issuance of Common Stock in Public Offering 5,175,000
Proceeds from Warrant exercise 1,917,319 1,600,000
Proceeds from Stock Option Exercise 8,325 40,913
Purchase of Treasury Shares (25,000) --
Cash Overdraft (95,536)
Redemption of Series B Preferred Stock (96,000)
Costs associated with issuance of Stock (74,995) (1,369,071)
Other 76,643
-------- --------- ---------
Net Cash provided by Financing Activities 832,827 2,194,320 3,827,977
-------- --------- ---------
Net Increase [Decrease] in Cash (656,290) (143,338) 998,317
Cash - Beginning of Year 854,979 998,317 --
-------- --------- ---------
Cash - End of Year $ 198,689 $ 854,979 $ 998,317
======== ========= ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest $ 353,713 $ 352,837 $ 481,856
Income Taxes $ 16,934 $ -- $ --
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Year ended December 31, 1998:
5,333 shares of Common Stock were repurchased from Johnson Computing Systems
pursuant to the acquisition agreement, at a cost of $60,000 which was paid by
the issuance of a short term note.
Year ended December 31, 1997:
4,267 shares of common stock were issued to Series D Preferred stockholders as
dividends which were payable on October 31, 1996 and April 1, 1997. These shares
were valued at $108,900.
The Company issued 26,667 shares of common stock to acquire customer lists and
certain other assets of Johnson Computer Systems. These shares were valued at
$300,000.
F - 11
</TABLE>
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Year ended December 31, 1996:
The Company's principal stockholder SISC exchanged 1,000 shares of Series D
preferred stock for 375,000 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 14,400 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 .667 shares of common stock and Series A Common Stock
purchase warrant. The Company incurred a one time non-cash charge of $1,611,000.
Pursuant to a modification of an agreement with an asset based lender the
Company issued 8,333 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 80,667 shares of
common stock and recognized compensation expense of $154,800.
The Company granted 1,191,042 Series B Common Stock purchase warrants and
298,959 Series A Common Stock purchase warrants and recognized compensation
expense of $3,337,500.
See Notes to Consolidated Financial Statements.
F - 12
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #1
- --------------------------------------------------------------------------------
[1] The Company
The Company licenses and installs its proprietary software products, operates an
established service bureau and enters into long term maintenance agreements with
behavioral health organizations and methadone clinics and other substance abuse
facilities throughout the United States.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The financial statements include Netsmart
Technologies, Inc. ["Netsmart"], and its wholly-owned subsidiary, Creative
Socio-Medics Corp. ["CSM"] (collectively referred to as the Company). All
intercompany transactions are eliminated in consolidation. Certain amounts
have been reclassified in the prior years' statements to conform to the current
year's presentation.
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 $249,000 and $940,000 at December 31, 1998 and
1997 respectively.
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 or other security to support financial
instruments subject to credit risk. 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.
The Company's behavioral 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, 1998, 1997 and 1996,
approximately 52%, 35% and 31% respectively, of the Company's revenues were
generated from contracts with government agencies.
During the year ended December 31, 1998, one customer accounted for
approximately $2,113,000 or 16% of revenue. Accounts receivable of approximately
$853,000 and costs and estimated profits in excess of billings of $1,260,000
less $318,000 in interim billings in excess of costs and estimated profits were
due from this customer at December 31, 1998. Approximately $1,830,000 of such
amounts were subsequently collected in 1999. No one customer accounted for more
than 10% of revenues in 1997. During the year ended December 31, 1996, one
customer of the Company's discontinued Cartesmart division accounted for
approximately $1,879,000 or 22% of revenue. Accounts receivable of approximately
$473,000 were due from this customer at December 31, 1996. In 1997, receivables
from such customer in the amount of $745,000 were written off.
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, 1998
and 1997, cash and cash equivalent balances of $150,000 and
F - 13
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
$840,000 respectively, 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 - During 1997, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued SOP 97-2,
"Software Revenue Recognition." This SOP provides guidance on revenue
recognition on software transactions and is effective for transactions entered
into in fiscal years beginning after December 15, 1997. The company adopted SOP
97-2 in 1998. The adoption did not have a material impact on the financial
position or results of operations of the company. The Company recognizes revenue
principally from the licensing of its software, and from consulting and
maintenance services rendered in connection with such licensing activities.
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. The Company also derives revenue from the sale
of third party hardware and software. Consulting revenue is recognized when the
services are rendered. No revenue is recognized prior to obtaining a binding
commitment from the customer.
Software development revenue from time-and-materials contracts are recognized as
services are performed. Revenue 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.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance revenue, which consists solely of staff payroll and
applicable overhead, is expensed as incurred.
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 are as follows:
Equipment 3-5 Years
Furniture and Fixtures 5 Years
Leasehold Improvements 5 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
F - 14
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
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 provided on a product by product basis. The annual amortization
is 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.
The Company performs an annual review of the recoverability of such capitalized
software costs. At the time a determination is made that capitalized amounts are
not recoverable based on the estimated cash flows to be generated from the
applicable software net realizable value, any remaining capitalized amounts are
written off.
Information related to capitalized software costs applicable to continuing
operations is as follows:
Years ended December 31 1998 1997
----------------------- ---- ----
Beginning of Year $ 183,150 $ --
Capitalized -- 203,500
Amortization (40,700) (20,350)
--------- --------
Net $ 142,450 $ 183,150
--- ========= =========
Customer Lists - Customer lists represent a listing of customers obtained
through the acquisition of CSM to which the Company can market its products. It
also represents a listing of customers acquired from Johnson Computing Systems
("Johnson") in 1997. The gross costs of the customer list associated acquired
from Johnson was $255,409. Customer lists are being amortized on the
straight-line method over an estimated useful life of 12 years. Customer lists
at December 31, 1998 and 1997 are as follows:
December 31,
------------
1 9 9 8 1 9 9 7
------- -------
Customer Lists $ 4,106,223 $ 4,106,223
Less: Accumulated Amortization 1,372,831 1,038,547
--------- ---------
Net $ 2,733,392 $ 3,067,676
--- ========= =========
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
long lived assets at December 31, 1998 and believes that no impairment of these
assets has occurred.
F - 15
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
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 continues 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 are 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.
Earnings (Loss) Per Share - Basic earnings (loss) per common share is computed
by dividing income (loss) from continuing operations and net income (loss) after
each is adjusted for dividends accrued during the period on the Series D
cumulative preferred stock by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the amount of
earnings for the period available to each share of common stock outstanding
during the reporting period, giving effect to all potentially dilutive common
shares from the potential exercise of stock options and warrants.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e. improving earnings per share). The dilutive
effect of outstanding options and warrants and their equivalents are reflected
in dilutive earnings per share by the application of the treasury stock method.
Options and warrants will have a dilutive effect only when the average market
price of the common stock during the period exceeds the exercise price of the
options or warrants.
All per share information has been retroactively adjusted for the one-for-three
reverse stock split which became effective September 1998.
Allocated Related Party Administrative Expenses - During the first six months of
1996, certain administrative services were performed for the Company by a
principal shareholder. The fair value of such services, approximately $9,000,
was charged to related party administrative expenses, and, since the shareholder
will not be reimbursed for such charges, credited to additional paid-in capital.
(See Note 7)
Research and Development - Research and development costs are charged to expense
as incurred.
[3] Accounts Receivable
Accounts receivable is shown net of allowance for doubtful accounts of $372,797
and $348,029 at December 31, 1998 and 1997 respectively. The changes in the
allowance for doubtful accounts are summarized as follows:
<S> <C> <C> <C>
December 31,
------------
1998 1997 1996
---- ---- ----
Beginning Balance $348,029 $288,029 $346,263
Provision for Doubtful Accounts 60,000 60,000 60,000
Charge-offs (35,232) (118,234)
------- ------- -------
Ending Balance $372,797 $348,029 $288,029
======= ======= ========
F - 16
</TABLE>
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[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 8 1 9 9 7
------- -------
Costs Incurred on Uncompleted Contracts $ 4,259,190 $ 2,730,054
Estimated Profits 4,038,247 1,293,104
--------- ---------
Total 8,297,437 4,023,158
Billings to Date 7,201,741 4,432,719
--------- ---------
Net $ 1,095,696 $ (409,561)
--- ========= =========
Included in the accompanying balance sheet under the following captions:
Costs and estimated profits in excess of
interim billings $ 2,899,695 $ 542,324
Interim billings in excess of costs and
estimated profits (1,803,999) (951,885)
--------- --------
Net $ 1,095,696 $(409,561)
--- ========= ========
[5] Discontinued Operations
During 1998 the Company discontinued its CarteSmart division which included its
interest in a joint venture. On June 30, 1998 the Company sold this division,
with an option to purchase the Company's interest in the joint venture if the
other party to the venture did not elect to acquire the Company's interest, to
Granite Technologies, Inc. ("Granite"), a corporation formed by the former
management of the division. Granite issued to the Company its $500,000
promissory note and a 20% equity interest in Granite. Granite also agreed to pay
certain royalties to the Company and granted the Company a license with respect
to the CarteSmarte software. The note was subject to cancellation if the other
party to the joint venture elected to purchase the Company's interest. As the
Company does not have significant influence over the operations of Granite, the
20% interest is accounted for using the cost method.
As a result of the discontinuation of the CarteSmarte division, the financial
statements for the periods being reported have been restated to reflect the net
loss from the CarteSmart division as a loss from discontinued operations. The
revenues from the discontinued operations amounted to $33,000, $246,000 and
$2,003,000 in 1998, 1997 and 1996 respectively.
In October 1998 the other party to the joint venture exercised their right to
purchase the Company's interest in the joint venture for a $500,000 note. The
terms of the note require twenty four monthly principal payments of $15,000
each, commencing November 1,1998 and a $140,000 balloon payment due November 1,
2000. The note also bears interest at 5.66% per annum. All monthly payments have
been received through March 1999 on a timely basis and the Company has valued
the note at $180,000 which amount is reflected as a gain on sale of discontinued
operations.
During the fourth quarter of 1997 the Company had re-evaluated the
recoverability of its investment in the joint venture. A determination was made
that this investment would not be recoverable based upon estimated cash flows
and consequently the company wrote off $147,432, which reduced the carrying
value of the venture to zero.
F - 17
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[6] Property and Equipment
Property and equipment consist of the following:
December 31,
-----------
1 9 9 8 1 9 9 7
------- -------
Equipment, Furniture and Fixtures $ 672,692 $ 582,207
Leasehold Improvements 247,609 164,335
-------- ---------
Totals - At Cost 920,301 746,542
Less: Accumulated Depreciation 566,265 437,959
-------- ---------
Net $ 354,036 $ 308,583
--- ======== =========
Depreciation expense amounted to $176,578, $169,558, and $145,686, respectively
for the years ended December 31, 1998, 1997 and 1996.
[7] Related Party Transactions
[A] Related Party Administrative Expense - The Company had an agreement with its
principal stockholder, Consolidated and its subsidiary The Trinity Group, Inc.
("Trinity") pursuant to which the Company paid Trinity a monthly fee of $15,000
for general business, management and financial consulting services. This
agreement was mutually terminated, effective April 1, 1998. Pursuant to this
agreement, in 1998, 1997 and 1996 the Company charged $45,000, 180,000 and
$60,000 respectively to related party administrative expenses.
[B] Loans by Related Parties - During 1998 certain officers and employees of the
Company loaned the Company $140,000 for which the Company issued its 18%
installment notes. These loans are being repaid in five quarterly installments
commencing September 30, 1998 and ending September 30, 1999.
The amount payable at December 31, 1998 is $84,000.
[8] Notes Payable
Asset-Based Lender - The Company entered into an accounts receivable financing
arrangement with an asset-based lender. Borrowings under this facility were
$1,639,694 and $935,177 at December 31, 1998 and 1997, respectively. Under the
agreement, the Company can borrow up to 80% of eligible accounts receivable up
to $2 million, on which it pays interest at the annual rate of prime plus 5%.
This note is collateralized by all of the accounts receivable and property and
equipment of the Company.
In October 1998, the agreement with the asset based lender was modified to allow
the Company to borrow up to 80% of the amount of qualified accounts receivable
up to a maximum of $2 million. The previous amount of maximum borrowings was
capped at $1.5 million. The interest rate was reduced from prime plus 8 1/2 % to
prime plus 5%. In addition, the 5/8% fee previously paid on the face amount of
each invoice was eliminated.
The weighted average interest rate on short-term borrowings outstanding as of
December 31, 1998 and 1997 amounted to approximately 19% and 22%, respectively.
F - 18
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[9] Income Taxes
The Company utilizes an asset and liability approach to determine the extent of
any deferred income taxes, as described in Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." This method gives
consideration to the future tax consequences associated with differences between
financial statement and tax bases of assets and liabilities.
At December 31, 1998, the Company has net operating loss carryforwards of
$11,363,000 expiring by 2012. Pursuant to Section 382 of the Internal Revenue
Code regarding substantial changes in Company ownership, utilization of these
losses may be limited.
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
- ----------- ------
2008 315,000
2009 1,010,000
2010 3,847,000
2011 2,930,000
2012 3,261,000
---------
$11,363,000
The Deferred Tax Asset consists primarily of the following:
Benefit of federal and state net operating loss carryforwards $ 4,500,000
Benefit of stock based compensation awards 1,400,000
Less: Valuation Allowance (5,900,000)
---------
Net Deferred Tax Asset $ --
=========
The Company has provided a valuation allowance for the full amount of the
deferred tax asset of approximately $5,900,000 as its future utilization is
uncertain. The Valuation Allowance increased by $300,000, $900,000 and
$2,900,000 in 1998, 1997 and 1996 respectively.
The provision for income taxes varies from the amount computed by applying
statutory rates for the reasons summarized below:
1998 1997 1996
---- ---- ----
Provision Based on Statutory Rates 34% (34)% (34)%
State Taxes Net of Federal Benefit 6% (6)% (6)%
Increase in Valuation Allowance (40)% 40% 40%
---- ---- ----
Total -- % -- % -- %
==== ==== ====
[10] Capital Stock
At the close of business on September 14, 1998 a one for three reverse split
became effective. All common share and per common share data in the financial
statements and notes have been adjusted to reflect the one for three reverse
split.
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
F - 19
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- --------------------------------------------------------------------------------
[10] Capital Stock - [Continued]
action, in one or more distinct series. The Board of Directors is authorized to
determine the rights and preferences of the preferred stock. The Board of
Directors has authorized the issuance of Series A, Series B and Series D
preferred Stock. At December 31, 1998, only the Series D preferred stock was
outstanding. (See Note 17)
Preferred Stock -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. In the event of voluntary or involuntary
liquidation, the stockholders are entitled to receive $1.00 per share and all
accrued and unpaid dividends. On June 30, 1997, the Company paid the dividends
relating to the Series D preferred stock which were payable on October 1, 1996
and April 1, 1997. The dividends were paid through the issuance of 4,267 shares
of Common Stock and valued at the fair market value at the respective dates they
became payable. The Series D preferred stock is nonvoting except as is required
by law. No dividend has been paid since April 1, 1997 and at December 31, 1998,
the accrued cumulative dividends on the Series D Preferred Stock in arrears
aggregated were $108,900 or $90 per share.
Common Stock Issuances - On August 19, 1996, the Company completed a public
offering pursuant to which it received net proceeds of approximately $3.8
million from the sale of units comprised of an aggregate of 431,250 shares of
Common Stock and Series A Redeemable Common Stock Purchase Warrants ("Series A
Warrants") to purchase an aggregate of 215,625 shares of Common Stock at $13.50
per share through August 1999.
During a 90 period in 1997, the terms of the Series A Warrants were amended to
reduce the exercise price. During such period, the Company received net proceeds
of approximately $1.8 million from the issuance of an aggregate of 426,071
shares of Common Stock upon exercise of Series A Warrants.
In August 1996, holders of Series B Common Stock Purchase Warrants ("Series B
Warrants") to purchase an aggregate of 266,666 shares of Common Stock at $6.00
per share exercised such warrants. The Company received $1.6 million from the
sale of such shares. See Note 14 for information relating to the issuance of the
Series B Warrants.
Treasury Stock - Pursuant to the Johnson Computing Systems agreement, the
Company purchased from Johnson Computing Systems 5,333 shares of Common Stock
for $60,000. The shares are treated as treasury shares.
Stock Options - See Note 14 for information relating to the Company's 1993
Long-Term Incentive Plan.
F - 20
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------
[11] Capitalized Lease Obligations
Future minimum payments under capitalized lease obligations as of December 31,
1998 are as follows:
Year ending
December 31,
1999 $ 36,838
2000 25,041
2001 25,041
2002 18,780
---------
Total Minimum Payments 105,700
Less Amount Representing Interest at 13.8% Per annum 21,384
---------
Balance $ 84,316
------- =========
Capitalized lease obligations are collateralized by equipment which has a net
book value of $82,000 and $15,000 at December 31, 1998 and 1997, respectively.
Amortization of approximately $10,200 and $10,200 in 1998 and 1997,
respectively, has been included in depreciation expense.
[12] Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and debt maturing within one year the carrying amount approximated fair
value for these instruments because of their short maturities.
[13] Commitments and Contingencies
The Company leases space for its executive offices and facilities under
noncancellable operating leases expiring December 31, 2003. The Company also
leases additional office space on a month-to-month basis.
Minimum annual rentals under noncancellable operating leases (net of a sublease
to Granite) having terms of more than one year are as follows:
Years ending
- ------------
December 31,
- -----------
1999 $ 380,000
2000 389,000
2001 317,000
2002 329,000
2003 342,000
----------
Total $ 1,757,000
==========
Rent expense amounted to $349,000, $341,000 and $358,000 respectively, for the
years ended December 31, 1998, 1997 and 1996.
In July 1998, the Company entered into five-year employment agreements with its
president and chief executive officer, its vice president - marketing, the chief
executive officer of CSM and its chief financial officer, pursuant to which such
officers receive a base salary of $160,000, $140,000, $140,000 and $120,000,
respectively, with an annual cost of living adjustment. The agreements
F - 21
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- --------------------------------------------------------------------------------
[13] Commitments and Contingencies - [Continued]
provide that the executives are eligible to participate in a bonus pool to be
determined annually by the Compensation Committee. The agreements also provide
each of the executives with an automobile allowance. In the event the
executive's dismissal or resignation or a material change in his duties or in
the event of a termination of employment by the executive or the Company as a
result of a change of control, the executive may receive severance payments of
between 24 and 36 months' compensation.
[14] Stock-Based Compensation
Long Term Incentive Plans - The Company has two long-term incentive plans, the
1993 Long-Term Incentive Plan (the "1993 Plan"), as amended, and the 1998
Long-Term Incentive Plan (the "1998 Plan"), as amended. The Company may issue
170,333 and 280,000 shares of Common Stock pursuant to the 1993 Plan and 1998
Plan, respectively. In November 1998, the board of directors adopted an
amendment to the 1998 Plan (the "1998 Amendment"), subject to stockholder
approval, pursuant to which the number of shares subject to the 1998 Plan was
increased from 280,000 shares to 780,000 shares.
Officers and other key employees, consultants and directors (other than
non-employee directors) are eligible to receive options or other equity-based
incentives under the Plans. The 1993 Plan and the 1998 Plan (collectively, the
"Plans") are administered by the Compensation Committee of the board of
directors.
The 1998 Plan provides that each non-employee director automatically receives a
nonqualified stock option to purchase 5,000 shares of Common Stock on April 1 of
each year. However, if there are not sufficient shares available under the 1998
Plan, the non-employee director will receive a lesser number of shares. The 1998
Plan also provided for the grant on June 30, 1998, to each non-employee
director, other than the chairman of the board, of a non-qualified stock option
to purchase 10,000 shares of Common Stock, and to the chairman of the board, a
non-qualified stock option to purchase 35,000 shares of Common Stock.
Pursuant to the 1998 Amendment, the Company granted, subject to stockholder
approval of the 1998 Amendment, options to purchase 10,000 shares to each
non-employee director, other than the chairman of the board, and an option to
the chairman of the board to purchase 50,000 shares. The exercise price for such
options was $1.00 per share, which was the fair market value on the date of
grant.
In November 1998, the Committee reduced the exercise price of outstanding
options to purchase an aggregate of 43,167 shares of Common Stock, from $4.50
per share to $1.50 per share, which was in excess of the market price on the
date the Committee approved the reduction in the exercise price.
F - 22
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
A summary of the activity under the Company's stock option plans is as follows:
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
------------------------ ------------------------- --------------------------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
-------- -------- --------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning of
Year 148,780 $3.244 203,706 $2.57 123,039 $ .803
Granted During the Year 323,167(a) 1.50 -- -- 80,667 5.265
Canceled During the Year (80,667)(a) 9.60 -- -- -- --
Expired During the Years -- -- -- -- -- --
Exercised During the Year (8,922) .723 (54,926) .745 -- --
------- ------- -------
Outstanding - End of Year 382,358 $1.397 148,780 $3.244 203,706 $ 2.57
======= ===== ======= ===== ======= =====
Exercisable - End of Year 242,358 $1.338 108,447 $2.492 59,626 $ .803
======= ===== ======= ===== ======= =====
<FN>
___________________________
(a) Includes 43,167 shares granted upon cancellation of an equal number of
shares having an exercise price of $4.50 per share.
</FN>
The following table summarizes stock option information as of December 31, 1998:
Options Outstanding
-------------------
Weighted
--------
Average Remaining Options
----------------- -------
Exercise Prices Number Outstanding Contractual Life Exercisable
- --------------- ------------------ ---------------- -----------
$.696 34,576 1 Year 34,576
$1.035 24,615 1.9 Years 24,615
$1.50 43,167 2.3 Years 43,167
$1.50 280,000 4.4 Years 140,000
------- --------- -------
Totals 382,358 3.7 Years 242,358
======= ========= =======
Warrants Issued as Compensation - In February 1996, the Company issued an
aggregate of 1,051,250 Series B Common Stock Purchase Warrants, of which 838,750
are exercisable at $6.00 per share and 212,500 were exercisable at $15.00 per
share. These warrants were issued in connection with services rendered, which,
in the case of SISC, included the guarantee of certain notes payable. Although
the warrants were issued prior to a 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.
</TABLE>
F - 23
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
Of the warrants issued in February 1996, 262,500 warrants exercisable at $6.00
per share and 12,500 warrants exercisable at $15.00 per share were issued to
replace 275,000 warrants previously issued in October 1993. These warrants had
exercise prices ranging from $8.00 per share to $30.00 per share.
In July 1996, pursuant to a warrant exchange, (a) the holders of outstanding
warrants having a $6.00 exercise price exchanged one third of such warrants for
outstanding warrants to purchase, at an exercise price of $12.00 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 that had a $15.00 exercise price was reduced to $12.00.
Prior to the warrant exchange, there were outstanding warrants to purchase
838,750 shares of common stock at $6.00 per share and outstanding warrants to
purchase 879,167 shares of common stock at $15.00 per share outstanding. As a
result of the warrant exchange, there were outstanding warrants to purchase
559,167 shares of common stock at $6.00 per share and 631,877 shares of common
stock at $12.00 per share. These warrants were exercisable commencing February
13, 1997. An affiliate of the Company, a member of the board of directors and a
Company controlled by such director, were given permission to exercise options
in August 1996. This individual and entities exercised warrants to purchase
266,667 shares at $6.00 per share in August 1996. All of the remaining Series B
Common Stock Purchase Warrants expire on December 31, 1999. The Company recorded
compensation expenses of $3,337,500 in relation to the issuance of these
warrants.
In 1996 the Company issued 215,625 Series A Common Stock Purchase Warrants as a
part of its initial public offering of its securities. These warrants are
exercisable for the two year period commencing August 13, 1997 at a price of
$13.50 per share. In addition, the Company issued 83,333 Series A Common Stock
Purchase Warrants to various investors. These warrants have the same terms as
the warrants issued to the general public.
During 1997, the Company issued 23,333 Series C Common stock warrants in
exchange for the issuance of a research report on behalf of the Company. These
warrants were valued at $.90 per warrant which represented the fair value of the
services performed by the recipient. These warrants have an exercise price of
$15.00 which was the market value of the stock at the time of issuance and will
expire on December 31, 1999.
F - 24
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
A summary of warrant activity is as follows:
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
----------------------- ----------------------- ------------------------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning
of Year 1,033,632 $10.49 1,223,335 $10.93 275,000 $21.81
Granted or Sold During
the Year -- -- 23,333 15.00 1,490,002 10.00
Canceled During the Year -- -- -- -- (275,000) 21.81
Expired During the Year -- -- -- -- -- --
Exercised During the Year -- -- (213,036) 13.50 (266,667) 6.00
--------- ----- --------- -----
Outstanding - End of Year 1,033,632 $10.49 1,033,632 $10.49 1,223,335 $10.93
========= ===== ========= ===== ========= =====
Exercisable - End of Year 1,033,632 $10.49 1,033,632 $10.49 -- --
========= ===== ========= ===== ========= =====
The following table summarizes warrant information as of December 31, 1998:
Weighted
Average Remaining
Exercise Prices Shares Contractual Life
- --------------- ------ -----------------
$ 6.00 292,500 1 Year
$12.00 631,877 1 Year
$13.50 85,922 .7 Years
$15.00 23,333 1 Year
---------
Total 1,033,632 .9 Years
========= ========
[14] Stock-Based Compensation - [Continued]
The Company applies Accounting Principles Board Opinion ("APB") 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 $-- in 1998 and 1997 and $3,492,300 in 1996.
F - 25
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- --------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
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 $262,325
and $846,000 for the years ended December 31, 1998 and 1996 respectively and the
Company's net loss and net loss per share would have been as follows:
Year ended
-----------
December 31,
-----------
1998 1996
---- ----
Net Income (Loss) as Reported $196,249 $ (6,579,444)
======= =========
Pro Forma Net Loss $(66,076) $ (7,425,444)
======= =========
Net Income (Loss) Per Share as Reported $ .04 $ (3.83)
======= =========
Pro Forma Net Loss Per Share $ (.05) $ (4.33)
======= =========
There were no options or compensation based warrants issued in 1997 which were
accounted for under APB No. 25. 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:
1998 1996
---- ----
Expected Life (Years) 5 2
Interest Rate 5.51% 6.0%
Annual Rate of Dividends 0% 0%
Volatility 70% 67.9%
The weighted average fair value of options and warrants at date of grant using
the fair value based method during 1998, 1997 and 1996 is estimated at $.81, $--
and $3.99 respectively.
F - 26
</TABLE>
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #15
- --------------------------------------------------------------------------------
[15] Operating 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 that provide comprehensive
healthcare information technology solutions including billing, patient tracking
and scheduling for inpatient and outpatient environments, as well as clinical
documentation and medical record generation and management. 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 8 1 9 9 7 1 9 9 6
------- ------- -------
<S> <C> <C> <C>
Revenues:
Software and Related Systems and Services $11,000,795 $ 5,400,245 $ 4,330,707
Data Center Services 2,164,472 2,235,209 2,207,155
---------- ---------- ----------
Total Revenues $13,165,267 $ 7,635,454 $ 6,537,862
-------------- ========== ========== ===========
Gross Profit:
Software and Related Systems and Services $ 4,050,334 $ 1,978,190 $ 960,463
Data Center Services 1,033,394 769,102 986,787
---------- --------- ---------
Total Gross Profit $ 5,083,728 $ 2,747,292 $ 1,947,250
------------------ ========== ========= =========
Income [Loss] From Operations:
Software and Related Systems and Services $ 342,501 $ (448,801) $(3,516,099)
Data Center Services 416,880 (86,706) (97,805)
---------- --------- ---------
Total [Loss] From Operations $ 759,381 $ (535,507) $(3,613,904)
---------------------------- ========== ========= =========
Depreciation and Amortization:
Software and Related Systems and Services $ 468,840 $ 477,953 $ 367,984
Data Center Services 92,722 123,037 118,582
---------- -------- ---------
Total Depreciation and Amortization $ 561,562 $ 600,990 $ 486,566
----------------------------------- ========== ======== =========
Interest Expense:
Software and related systems and services $ 289,210 $ 220,774 $ 313,018
Data Center Services 56,904 87,395 159,530
---------- -------- ---------
Total Interest Expense $ 346,114 $ 308,169 $ 472,548
=========== ======== =========
Capital Expenditures:
Software and Related Systems and Services $ 188,570 $ 636,174 $ 444,516
Data Center Services 33,461 41,867 15,317
---------- -------- --------
Total Capital Expenditures $ 222,031 $ 678,041 $ 459,833
-------------------------- ========== ======== ========
Identifiable Assets:
Software and Related Systems and Services $ 7,740,018 $ 4,452,999 $ 5,052,671
Data Center Services 2,548,928 2,886,804 3,198,058
---------- --------- ---------
Total Identifiable Assets $10,288,946 $ 7,339,803 $ 8,250,729
------------------------- ============ ========= =========
F - 27
</TABLE>
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
- --------------------------------------------------------------------------------
[16] Johnson Acquisition
In October 1997, the Company purchased the customer list and certain other
assets of Johnson Computing Systems ("Johnson Computing"), for which it issued
26,667 shares of Common Stock, valued at $300,000. Pursuant to the agreement,
because the price of the Common Stock did not reach a certain price level, the
Company purchased 5,333 shares of Common Stock from Johnson Computing for
$60,000, which is payable in installments. Johnson Computing provided software
and related support for methadone clinics. The acquisition was accounted for as
a purchase and accordingly, the results of operations of the acquired entity
were included in the consolidated statements of operations from the date of
acquisition. The proforma results for 1997 and 1996, assuming this acquisition
has been made at the beginning of 1996, would not be materially different from
the reported results.
[17] Subsequent Event
On March 25, 1999, Netsmart and a group of purchasers, consisting principally of
Netsmart's management and directors, entered into an agreement with Consolidated
Technologies, Inc. Pursuant to the agreement, the purchasers are to buy from
Consolidated, in a private sale, an aggregate of 496,312 shares of Netsmart's
common stock for an aggregate purchase price of $1 million. On April 8, 1999,
248,156 of such shares were purchased by the management investors for $500,000.
The agreement also gives the purchasers the right to buy up to between 296,312
and 496,312 additional shares of Netsmart's common stock from Consolidated at
the same purchase price per share.
In addition, Consolidated agreed to transfer to Netsmart shares of Netsmart's
preferred stock (including the right to receive dividends thereon) and warrants
to purchase shares of Netsmart's common stock, for which Netsmart will issue
100,000 shares of its common stock to Consolidated. This exchange took place on
April 8, 1999.
F - 28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NETSMART TECHNOLOGIES, INC.
Dated: May 19, 1999 By /s/ James L. Conway
-------------------------------
James L. Conway, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/James L. Conway President, Chief Executive May 24, 1999
- ------------------------ Officer and Director (Principal
James L. Conway Executive Officer)
/s/Anthony F. Grisanti Chief Financial Officer May 24, 1999
- ------------------------ (Principal Financial and
Anthony F. Grisanti Accounting Officer)
/s/Edward D. Bright Director May 24, 1999
- ------------------------
Edward D. Bright
/s/John F. Phillips Director May 24, 1999
- ------------------------
John F. Phillips
/s/Gerald O. Koop Director May 24, 1999
- ------------------------
Gerald O. Koop
By: /s/ James L. Conway
Director -------------------
- ------------------------ Attorney-in-Fact
Joseph G. Sicinski May 19, 1999
Director
- ------------------------
Seymour Richter
<PAGE>
Netsmart Technologies, Inc.
Index to Exhibits
December 31, 1998
a) Exhibits
3.1(1) Restated Certificate of Incorporation, as amended, including
certificates of designation with respect to the Series A, B and D
Preferred Stock.
3.2(1) By-Laws
4.1(1) 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(2) Form of Amendment to the Warrant Agreement.
10.1(1) Employment Agreement dated June 16, 1994, between the Registrant and
Leonard M. Luttinger, as amended.
10.2(2) Employment Agreement dated as of August 15, 1996, between the
Registrant and James L. Conway.
10.3(1) Employment Agreement dated June 16, 1994, between the Registrant and
John F. Phillips, as amended.
10.4(1) Employment Agreement dated June 16, 1994, between the Registrant and
Anthony F. Grisanti.
10.6(1) 1993 Long-Term Incentive Plan.
10.7(1) Form of Series B Common Stock Purchase Warrant.
10.9(1) Agreement dated March 3, 1995 between CSM and United Credit
Corporation, as amended.
10.17(2) Amendment dated July 22, 1997, to March 3, 1995 agreement between
CSM and United Credit Corporation.
11.1 Computation of loss per share.
21.1 Subsidiaries of the Registrant.
24.1 Consent of Moore Stephens, P.C.
25.1 Powers of attorney (See Signature Page)
27.1 Financial data schedule.
_______________________
(1) Filed as an exhibit to the Registrant's registration statement on Form S-1,
File No. 333-2550, which was declared effective by the Commission on August 13,
1996, and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's registration statement on Form S-1,
File No. 333-32391, which was declared effective by the Commission on September
17, 1997, and incorporated herein by reference.
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - CALCULATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Years ended December 31,
1998 1997 1996
Average shares outstanding 2,779,655 2,386,953 1,716,418
dilutive effect of stock options
and warrants computed by use
of treasury stock method 85,338 0 0
Computation of Earnings Per
Share=Net Income/Average
common and common share
equivalent shares (1)$ 123,649 $(3,507,125) $(6,579,444)
outstanding 2,864,993 2,386,953 1,716,418
--------- --------- ---------
Earnings Per Share $ .04 $ (1.47) $ (3.83)
_________________
(1)After dividends on Series D Preferred Stock in the amount of $72,600
