UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-21177
NETSMART TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3680154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
146 Nassau Avenue, Islip, NY 11751
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 968-2000
Securities registered pursuant to Section 12(b) of the Act: ___
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Outstanding shares as of March 15, 2000
------------------- ---------------------------------------
Common Stock, par value 3,116,167
$.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X_ No__
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S - K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Part III is incorporated by reference from the registrant's definitive proxy
statement in connection with its 2000 Annual Meeting of Stockholders to be filed
within 120 days of the close of the registrant's fiscal year.
<PAGE>
PART I
Item 1. Business
Introduction
Netsmart Technologies, Inc. is a leader in the design, development,
implementation and licensing of management information systems for the
behavioral health care industry through our wholly-owned operating subsidiary,
Creative Socio-Medics. These products are supported under long-term maintenance
agreements. Our Windows and client server-based systems provide comprehensive
healthcare information technology solutions which include billing, patient
tracking and scheduling for inpatient and outpatient environments, as well as
clinical documentation and medical record generation and management. Our
marketing is directed primarily at such providers of behavioral health services
as state behavioral health agencies, mental health clinics, substance abuse
clinics, methadone maintenance clinics, psychiatric hospitals, and other
specialty care inpatient and outpatient providers.
We have an established nationwide customer base, including state agencies that
have responsibility for providing behavioral healthcare services in 14 states.
Revenue grew from $13.1 million in 1998 to $21.3 million in 1999, an increase of
61% , while income from continuing operations increased from $413,000 to $1.6
million.
Business Strategy
We believe that we are one of the most established suppliers of practice
management solutions to the behavioral health care industry. Our software
solutions are utilized by more than 500 provider institutions that employ
approximately 50,000 clinicians. Many of these facilities represent large
provider agencies such as state hospitals and behavioral health care networks.
We believe that a significant percentage of the mental health practitioners,
such as sole practitioners and small group practices and clinics, do not
effectively use automation in the management of their clinician practice,
principally because we believe that the available systems are expensive and are
not user-friendly.
We intend to expand our product line to integrate our enterprise-wide solutions
with Internet technology and provide application service provider solutions for
use by both large provider agencies and sole practitioners, smaller clinics and
group practices. We also plan to offer databases designed to provide all
clinicians with access to industry standard libraries via our planned
application service provider portal. We believe that these products can
significantly increase our potential client base and can provide us with a
source of ongoing revenue.
The two major segments of the behavioral healthcare marketplace that
underutilize information technologies are:
* Single to small psychiatric practices that cannot afford nor have the staff
to support traditional comprehensive client-server products.
* Clinicians who require decision support data guides to facilitate client
assessment, treatment guidelines for specific populations and documenting
patient progress and outcomes.
The Internet has emerged as the major structure for addressing and accessing new
markets, providing information, education, training and effective communication
and for making complex business operations more efficient and effective. The
behavioral healthcare marketplace is undergoing dramatic changes. The Internet
will allow the providers, payers and consumers to connect in more efficient and
cost effective ways. Providers will be faced with more complex methods and
systems of authorization management and claims processing, enhanced regulatory
and accreditation requirements, access to validated intervention and treatment
protocols and greater concern over delivery of care.
The next challenge for the Company is to increase market share and leverage this
opportunity with focus on practice management and decision support. The
application service provider solutions and Internet technology can further
expand our product suite.
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Practice Management Strategy - We plan to offer an Internet- enabled version of
its industry standard Behavioral Health Information System. This application
will be available to the more than 150,000 single and small behavioral health
practitioners that currently utilize manual or limited functionality personal
computer based systems. We plan to offer this product at a modest subscription
fee and a monthly transaction-based service charge. We believe that we can
attract an increased client base by offering:
* Our proven practice management applications to all providers, even the
single office practitioner.
* Client server, application service provider and Internet delivery
mechanisms.
Decision Support - By utilizing our client-server or web-enabled behavioral
health information system products, clinicians can access industry standard
decision support libraries. It is anticipated that initial offerings may include
applications such as:
* Treatment planning, progress notes and training curriculum.
* Outcome indicator instruments
Forward - Looking Statements
The statements in this Form 10-K Annual Report that are not descriptions of
historical facts may be forward- looking statements that are subject to risks
and uncertainties. In particular, statements in this Form 10-K Annual Report,
including any material incorporated by reference in this Form 10-K, that state
our intentions, beliefs, expectations, strategies, predictions or any other
statements relating to our future activities or other future events or
conditions are "forward-looking statements." Forward-looking statements are
subject to risks, uncertainties and other factors, including, but not limited
to, those identified under "Risk Factors," those described in Management's
Discussion and Analysis of Financial Conditions and Results of Operations and in
any other filings with the Securities and Exchange Commission, as well as
general economic conditions, any one or more of which could cause actual results
to differ materially from those stated in such statements.
Organization of the Company
We are a Delaware corporation formed in September 1992 under the name Medical
Services Corp. Our name was changed to Carte Medical Corporation in October
1993, CSMC Corporation in June 1995 and to Netsmart Technologies, Inc. in
February 1996. Our executive offices are located at 146 Nassau Avenue, Islip,
New York 11751, telephone (631) 968-2000. Reference to us and to Netsmart
include our subsidiary, Creative Socio-Medics, unless the context indicates
otherwise.
Risk Factors
If we are unable to obtain additional capital, we may not be able to develop our
business.
We had working capital of $2.0 million at December 31, 1999. We may require
additional capital in order to expand and develop our business and perform our
obligations under our agreements and purchase orders. We have no commitments
from any person to provide us with any such capital. Our business may suffer if
we do not obtain the capital when it is required.
Because we are particularly dependent upon government contracts, our business
- --------------------------------------------------------------------------------
may be impaired by policies relating to entitlement programs.
- -------------------------------------------------------------
We market our health information systems principally to behavioral health care
facilities, many of which are operated by government entities and include
entitlement programs. During 1999, we generated 55% of our revenue from
contracts with government agencies, as compared with 52% in 1998 and 35% in
1997. Government agencies generally have the right to cancel contracts at their
convenience. In addition, we may lose business if government agencies reduce
funding for entitlement programs.
Our business is based on providing systems relating to behavioral health
- --------------------------------------------------------------------------------
organizations, and changes in government regulation of health care industry may
- --------------------------------------------------------------------------------
affect the market for our systems.
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2
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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, and our systems are designed to
provide information based on these requirements. The adoption of new regulations
can have a significant effect upon the operations of health care providers,
particularly those operated by state agencies. We cannot predict the effect on
our business of future regulations by governments and payment practices by
government agencies. Furthermore, changes in regulations in the health care
field may force us to modify our health information systems to meet any new
record-keeping or other requirements. If that happens, we may not be able to
generate revenues sufficient to cover the costs of developing the modifications.
If we are not able to take advantage of technological advances, our business may
- --------------------------------------------------------------------------------
suffer.
- -------
Our customers require software which enables them to store, retrieve and process
very large quantities of data and to provide them with instantaneous
communications among the various data bases. Our business requires us to take
advantage of recent advances in software, computer and communications
technology. This technology has been developing at rapid rates in recent years,
and our future may be dependent upon our ability to use and develop or obtain
rights to products utilizing such technology. New technology may develop in a
manner which may make our software obsolete. Our inability to use new technology
would have a significant adverse effect upon our business.
Because of our size, we may have difficulty competing with larger companies that
- --------------------------------------------------------------------------------
offer similar services.
- -----------------------
Our customers in the human services market include entitlement programs, managed
care organizations and specialty care facilities which have a need for access to
information over a distributed data network. The software industry in general,
and the health information software business in particular, are highly
competitive. Other companies have the staff and resources to develop competitive
systems. We may not be able to compete successfully with such competitors. The
health information systems business is served by a number of major companies and
a larger number of smaller companies. We believe that price competition is a
significant factor in our ability to market our health information systems and
services.
Because we are dependent on our management, the loss of key executive officers
- --------------------------------------------------------------------------------
could harm our business.
- ------------------------
Our business is largely dependent upon our senior executive officers, Messrs.
James L. Conway, president and chief executive officer, Anthony F. Grisanti,
chief financial officer, John F. Philips, vice president -- marketing, and
Gerald O. Koop, vice president of the Company and chief executive officer of our
operating subsidiary, Creative Socio-Medics Corp. Although we have employment
agreements with these officers, the employment agreement do not guarantee that
the officers will continue with us. Our business may be adversely affected if
any of our key management personnel or other key employees left our employ.
Because we lack patent protection, we cannot assure you that others will not be
- --------------------------------------------------------------------------------
able to use our proprietary information in competition with us.
- ---------------------------------------------------------------
We have no patent or copyright protection for our proprietary software, and we
rely on non-disclosure agreements with our employees. Since our business is
dependent upon our proprietary products, the unauthorized use or disclosure of
this information could harm our business.
Our growth may be limited if we cannot make acquisitions.
- ---------------------------------------------------------
An important part of our growth strategy is to acquire other businesses that are
related to our current business. Such acquisitions may be made with cash or our
securities or a combination of cash and securities. To the extent that we
require cash, we may have to borrow the funds or issue equity. We have no
commitments from any financing source and we may not be able to raise any cash
necessary to complete an acquisition. If we fail to make any acquisitions, our
future growth may be limited. As of the date of this Form 10-K annual report, we
do not have any agreement or understanding, either formal or informal, as to any
acquisition.
If we make any acquisitions, they may disrupt or have a negative impact on our
- --------------------------------------------------------------------------------
business.
- ---------
If we make acquisitions, we could have difficulty integrating the acquired
companies' personnel and operations with our own. In addition, the key personnel
of the acquired business may not be willing to work for us. We
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cannot predict the affect expansion may have on our core business. Regardless of
whether we are successful in making an acquisition, the negotiations could
disrupt our ongoing business, distract our management and employees and increase
our expenses.
We do not anticipate paying dividends on our common stock.
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We presently intend to retain future earnings, if any, in order to provide funds
for use in the operation and expansion of our business and, accordingly, we do
not anticipate paying cash dividends on our Common Stock in the foreseeable
future.
The rights of the holders of common stock may be impaired by the potential
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issuance of preferred stock.
- ----------------------------
Our certificate of incorporation gives our board of directors the right to
create new series of preferred stock. As a result, the board of directors may,
without stockholder approval, 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. The possible impact on takeover attempts could adversely affect the
price of our common stock. Although we have no present intention to issue any
additional shares of preferred stock or to create any series of preferred stock,
we may issue such shares in the future. If we issue preferred stock in a manner
which dilutes the voting rights of the holders of the common stock, our listing
on The Nasdaq SmallCap Market may be impaired.
Shares may be issued pursuant to options which may affect the market price of
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our common stock.
- -----------------
We may issue stock upon the exercise of options to purchase up to an aggregate
799,192 shares of common stock pursuant to our long-term incentive plans. The
exercise of these options and the sale of the underlying shares of common stock
may have an adverse effect upon the price of our stock.
Behavioral Health Information Systems and Services
We develop, market and support computer software which enables behavioral health
care organizations to provide a full range of services in a network computing
environment.
Users typically purchase one of several behavioral healthcare information
systems, in the form of a perpetual license to use the system, as well as
purchasing professional services, support, and maintenance. In addition, we
offer third party hardware and software pursuant to value added resale
arrangements with third party vendors. The professional services include project
management, training, consulting and software development services, which are
provided either on a time and material basis or pursuant to a fixed-price
contract. The software development services may require the adaptation of health
care information technology systems to meet the specific requirements of the
customer.
Our typical license for a behavioral health information system ranges from
$10,000 to $100,000 for single facility healthcare organization to $250,000 to
$1,000,000 for multi-unit and state operated health care organizations. Revenue
from license fees were approximately $2,228,000, or 10.5% of revenue, for 1999,
$2,270,000, or 17.3% of revenue for 1998 and $737,000, or 9.6% of revenue, for
1997. Our 1999 Contracts had a longer term than our 1998 Contracts resulting in
a income recognition over a longer period. A customer's purchase order may also
include third party hardware or software. Revenue from hardware and third party
software accounted for approximately $5,915,000, or 27.8% of revenue, for 1999,
$2,610,000, or 19.8% of revenue, for 1998 and $1,078,000, or 14.1% of revenue,
for 1997.
In addition to our behavioral healthcare information systems and related
services, we offer processing services to substance abuse facilities and
maintain a data center facility at which its personnel perform data entry, data
processing and produce operations reports for smaller substance abuse clinics.
Our data center revenue was approximately $1,908,000, or 9.0% of revenue, for
1999, $2,164,000 or 16.4% of revenue, for 1998 and $2,235,000, or 29.3% of
revenue, for 1997.
Maintenance services have generated increasing revenue and have become a more
significant portion of our business since most purchasers of health care
information system licenses also purchase maintenance service.
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Maintenance revenue increases as existing customers purchase additional licenses
and new customers purchase their initial software licenses. By agreement with
our customers, we provide telephone help services and maintain and upgrade their
software. Maintenance contracts may require modifications to meet any new
federal and state reporting requirements which become effective during the term
of the maintenance contract. We do not maintain the hardware and third party
software sold to our customers, but we provide a telephone help line service for
certain third party software, which we license to our customers. Our maintenance
revenue was approximately $2,258,000, or 10.6% of revenue, for 1999, $1,432,000,
or 10.9% of revenue, for 1998 and $1,280,000, or 16.8% of revenue, for 1997.
Since maintenance revenues log license and implementation revenues this area
will substantially increase in 2000.
We currently offer four product modules that provide a range of core application
requirements for behavioral healthcare providers. These products consist of a
suite of complete information technology applications developed by us, together
with software provided by others which enables us to offer enterprise-wide
solutions to the behavioral health industry. The products will be offered in a
variety of delivery modes.
* Behavioral Healthcare Information System - This system is a
comprehensive solution providing patient management functions,
billing, tracking, scheduling, and reporting for inpatient treatment
facilities.
* Clinician Workstation - This workstation provides clinician with
documentation and medical record management including assessment,
care planning, progress notes and on-line medical records. The
clinician workstation is our electronic medical record system for
behavioral health, which integrates the clinical tools necessary for
an interdisciplinary approach to the delivery of human services.
* The M4 Clinical Management System - Pursuant to a joint marketing
agreement with Mallinckrodt Pharmaceutical Specialties, a division
of Mallinckrodt Inc., we offer a solution for dispensing, admissions
and medical records, counselor and reception/security specifically
for methadone clinics. M4 integrates with our other behavioral
health products.
* Managed Care Products - On January 25, 2000, we acquired the Connex
suite of managed care and employee assistance program information
systems from Behavioral Health Partners, Inc. These modules can be
installed on a personal computer, connected to a local or wide area
communications network or offered through the Internet in an
application service provider basis. The managed care and employee
assistance program modules include such features as service request
management, contact tracking (patients, providers, others), import
of eligibility information by contract, provider search by location,
specialty, contract, hospital privileges, claims adjudication and
payment.
All of these products have been accepted in the marketplace by an established
user base, and we believe that our Window-based products are Year 2000 ("Y2K")
compliant.
Markets and Marketing
The market for behavioral health information systems and related services
consists of both private and publicly operated providers offering hospital or
community-based outpatient behavioral healthcare services. These healthcare
providers require a healthcare information systems to administer their programs.
We believe that there are at least 15,000 behavioral healthcare providers in the
United States, including public and private hospitals, private and
community-based residential facilities and Federal, state and local governmental
agencies.
Many long-term behavioral healthcare facilities are operated by government
entities and include those operated as part of entitlement programs. During the
years ended December 31, 1999, 1998 and 1997, approximately 55.0%, 52.0% and
35.0%, respectively, of revenue was generated from contracts with government
agencies. Contracts with government agencies generally include provisions which
permit the contracting agency to cancel the contract for its convenience,
although we have not experienced a termination for convenience in the last five
years.
In addition to these major behavioral healthcare providers, there are a larger
number of sole practitioners, group practices and smaller clinics which may also
require behavioral healthcare facilities. We intend to market our Internet-based
systems to these potential customers.
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We believe that the demand for information technology solutions is increasing as
managed care exerts pressure on healthcare providers to lower healthcare
delivery costs while expanding the availability of services. In order to remain
competitive, the behavioral health delivery networks need detailed clinical and
management information systems that enable providers within the networks to
maintain a broad scope of accurate medical and financial information, manage
costs and deliver quality care efficiently. In addition, the need to upgrade
existing systems to meet the increased demand for data processing needs of
managed care and regulatory oversight has also resulted in an increased demand
for behavioral health care information technology. These data processing needs
include analysis of patient assessments, maintenance of patient records,
administration of patient treatment plans and the overall coordination of
patient case management.
We coordinate our marketing effort with the state agencies and other major users
of our systems. Our state agency clients formed a State Systems Association,
presently consisting of state organizations or agencies from 14 states. The
association's members work with our management to assess and determine future
requirements in both patient managed care coordination and regulatory reporting.
For the year ended December 31, 1999, one customer accounted for approximately
$3.8 million or 18% of our revenue. For the year ended December 31, 1998, this
same customer accounted for $2.1 million or 16% of our revenue. No one customer
accounted for more than 10% of revenue in 1997. See "Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations.
At December 31, 1999 and 1998, we had a backlog of orders, including ongoing
maintenance and data center contracts, for our behavioral health information
systems of $14.2 million and $16.8 million, respectively. A substantial amount
of the 1999 backlog is expected to be filled during 2000.
Product Development
We incurred product development costs relating to our behavioral health
information systems of approximately $800,000 in 1999, $763,000 in 1998 and
$201,000 in 1997, all of which was company-sponsored. In 1999, we incurred
capitalized software development costs of approximately $209,000 in connection
with the development of our proposed web portal services and application service
provider solutions for healthcare providers.
Competition
The healthcare software industry is highly competitive. Although we believe that
we can provide a health care facility or managed care organization with software
to enable it to perform its services more effectively, other software companies
provide comparable systems and also have the staff and resources to develop
competitive systems.
According to independent consulting reports, healthcare information technology
is an $18.0 billion industry served by numerous vendors. The dominant health
care information technology vendors have achieved annual sales of more than $1.0
billion by focusing on solutions for large medical/surgical health care
providers, such as large hospital systems and health maintenance organizations,
and, have not focused on the behavioral healthcare industry. We believe that
most of the presently available healthcare management software does not meet the
specific needs of the behavioral healthcare industry, and that the functionality
of our information systems are designed to meet the needs of this market.
However, the behavioral health information systems business is serviced by a
number of companies, some of which are better capitalized with larger
infrastructure than Netsmart, and we may not be able to continue to compete
effectively with such companies.
We have an established customer base of more than 400 clients nationwide,
including substantial private and government providers of behavioral health care
services. During 1998 and 1999, we signed contracts to provide our healthcare
information systems to ten state agencies responsible for administering
behavioral services, bringing the total of such state agencies to 14.
Government Regulations and Contracts
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.
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Although our business is aimed at meeting certain of the problems resulting from
government regulations and from efforts to reduce the cost of health care, we
cannot predict 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. Any change in the structure of
health care in the United States can have a material effect on companies
providing services to the health care industry, including those providing
software. Although we believe that the likely direction which may result from
the current study of the health care industry would be an increased trend to
managed care programs, thereby increasing the importance of automation, our
business may not benefit from any changes in the industry structure. Even if the
industry does evolve toward more healthcare 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, our 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 us to modify our behavioral health information systems to
meet any new record-keeping or other requirements imposed by changes in
regulations, and we may not be able to generate revenues sufficient to cover the
costs of developing the modifications.
A significant amount of our business has been with government agencies,
including specialized care facilities operated by, or under contract with,
government agencies. 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, government agencies generally include
provisions in their contracts which permit the contracting agency to cancel the
contract at its convenience. We have not experienced a termination for
convenience in the last five years.
Intellectual Property Rights
We have no patent rights for our behavioral health information system software,
but we rely upon copyright protection for our software, as well as
non-disclosure and secrecy agreements with our employees and third parties to
whom we disclose information. We may not be able to protect our proprietary
rights to our system and third parties may claim rights in the system.
Disclosure of the codes used in any proprietary product, whether or not in
violation of a non-disclosure agreement, could have a materially adverse affect
upon us, even if we are successful in obtaining injunctive relief. We must
continue to invest in product development, employee training, and client
support.
Employees
As of December 31, 1999, we had 138 employees, including four executive, nine
sales and marketing, 114 technical and eleven clerical and administrative
employees.
Executive Officers
Our executive officers are as follows:
Name Age Position
---- --- --------
Edward D. Bright 63 Chairman of the Board
James L. Conway 52 President and Chief Executive Officer
Anthony F. Grisanti 50 Chief Financial Officer, Treasurer and
Secretary
Gerald Koop 61 Chief Executive Officer of Creative
Socio-Medics
John F. Phillips 62 Vice President - Marketing
Mr. Edward D. Bright has been chairman of the board and a director of Netsmart
since April 1998. In April 1998, Mr. Bright was also elected as chairman,
secretary, treasurer and a director of Consolidated Technology Group Ltd., a
public company now known as The Sagemark Companies Ltd., which is engaged in
various lines of business, and a director of Trans Global Services, Inc., which
provides technical temporary staffing services. In April, 1999, Mr. Bright
resigned as a director of Consolidated Technology Group, Ltd.
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Mr. James L. Conway has been president and a director of Netsmart since January
1996 and chief executive officer since April 1998. From 1993 to April 1998 he
was president of S-Tech Corporation, a manufacturer of aircraft instruments for
the U.S. military and specialty vending equipment for postal, telecommunication
and other industries. Mr. Conway was previously Vice President and member of
the Board of ITT Credit Corporation, a wholly owned subsidiary of ITT. Mr.
Conway is also a director of Trans Global.
Mr. Gerald Koop has been a director of Netsmart since June 1998. He has held
management positions with our subsidiary, Creative Socio-Medics, for more than
the past five years, most recently as its chief executive officer, a position he
has held since 1996.
Mr. Anthony F. Grisanti has been treasurer of Netsmart since June 1994,
secretary since February 1995 and chief financial officer since January 1996. He
was chief financial officer of Creative Socio-Medics for more than five years
prior thereto.
Mr. John F. Phillips has been a director of Netsmart and vice president of
Creative Socio-Medics since June 1994, when Creative Socio-Medics was acquired
by us, and our vice president-marketing since 1996. He was also our vice
president -- marketing from June 1994 to January 1996. He was a senior executive
officer and director of Creative Socio-Medics and its parent company for more
than five years prior to June 1994, when it was acquired.
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<TABLE>
Item 2. Property
We lease office space at the following locations:
<S> <C> <C> <C> <C>
Location Purpose Space Annual Rental Expiration
- -------- ------- ----- ------------- ----------
146 Nassau Avenue Executive 18,000 $280,000, plus 4% 12/31/03
Islip, New York offices square feet annual increases
1335 Dublin Road Offices 3,500 $50,000 (1) 11/30/00
Columbus, Ohio square feet
18B Ledgebrook Run (2) 1,800 $21,000 (1) 10/31/02
Mansfield Center, Connecticut, square feet
7590 Fay Avenue Offices 1,800 $37,000, plus 6% 12/31/00
La Jolla, California square feet annual increases
- ----------
(1) These leases provide for an annual increase in rent for operating
expenses and real estate taxes.
(2) These offices are no longer being used by us, and the space is being
subleased at our cost.
We believe that our space is adequate for our immediate needs and that, if
additional space is required, it would be readily available on commercially
reasonable rates.
Item 3. Legal Proceedings
There are no material legal proceedings pending or threatened against us.
Item 4. Submission of Matters to a Vote of Security Holders
On November 18, 1999, we held our 1999 Annual Meeting of Stockholders.
The following individuals were elected as directors:
Name Number of Votes Broker Non Votes
Edward D. Bright 2,634,548 1,197,714
James L. Conway 2,634,548 1,197,714
John F. Phillips 2,634,548 1,197,714
Gerald O. Koop 2,634,548 1,197,714
Joseph G. Sicinski 2,633,948 1,197,714
The following proposals were approved as follows:
<S> <C> <C> <C> <C>
Broker
Votes For Votes Against Abstain Non Votes
Approval of the amendment
to the 1998 Long Term
Incentive Plan 1,346,088 297,040 7,430 1,197,714
Approval of the selection of
Richard H. Eisner & Co., LLP
as independent auditors for
1999 2,642,651 204,524 1,097 1,197,714
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on The Nasdaq SmallCap Market under the symbol NTST.
Set forth below is the reported high and low sales prices of the Common Stock
for each quarterly period during the past two years. Where applicable, the price
information has been retroactively adjusted to reflect the one-for-three reverse
stock split of our common stock which became effective September 1998.
Quarter Ending High Bid Low Bid
-------------- -------- -------
March 31, 1998 3.19 1.88
June 30, 1998 2.91 1.50
September 30, 1998 1.41 .81
December 31, 1998 3.13 .75
March 31, 1999 4.91 2.59
June 30, 1999 4.63 3.50
September 30, 1999 7.69 4.25
December 31, 1999 8.13 6.00
As of December 31, 1999, there were approximately 1,120 holders of record of our
common stock.
We have not paid any cash dividends to the holders of our common stock since our
organization.
10
<PAGE>
<TABLE>
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands except per share data)
Selected Statements
of Operations Data:
Revenue $ 21,252 $ 13,165 $ 7,635 $ 6,538 $ 6,751
Income (Loss) from Continuing
Operations before interest
and other financing costs 1,895 759 (536) (1) (3,614) (1,181)
Income (Loss) from Discontinued
Operations 180 (217) (2,615) (801) (252)
Net Income (Loss) 1,825 196 (3,459) (1&2) (6,579) (3) (2,850)
Per Share Data - Diluted:
Continuing Operations .47 .12 (.37) (3.36) (1.61)
Discontinued Operations .05 (.08) (1.10) (.47) (.16)
Net Income (loss) .52 .04 (1.47) (3.83) (1.77)
Weighted average number
of shares outstanding 3,516 2,865 2,387 1,716 1,607
Selected Balance
Sheet Data:
Working Capital (deficiency) 2,012 10 (537) 477 (2,562)
Total Assets 13,972 10,289 7,340 8,251 6,390
Total Liabilities 8,617 7,005 4,200 3,836 5,887
Redeemable Preferred Stock 96
Accumulated Deficit (13,272) (15,097) (15,293) (11,726) (5,147)
Stockholders' Equity 5,355 3,284 3,140 4,415 407
- ----------
(1)Includes $3,492 of non-cash compensation charges arising out of the
issuance by the Company of warrants and options having exercises prices which
were less than the market value of the Common Stock at the date of approval by
the board of directors.
(2)Includes $1,692 of non-cash costs associated with the issuance of
500,000 shares of common stock to certain noteholders and 25,000 shares of
common stock to the Company's asset based lender.
(3)Includes financing costs of $460 representing the write-off of deferred
financing costs relating to a proposed public offering scheduled for early 1995
but cancelled.
11
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
A significant portion of our revenue is derived from fixed price software
development contracts and licenses. We recognize this revenue on the estimated
percentage of completion basis. Since the billing schedules under the contracts
differ from the recognition of revenue, at the end of any period, these contacts
generally result in either costs and estimated profits in excess of billing or
billing in excess of cost and estimated profits. During 1999, we received
contracts that are larger than in previous years and they provide for a longer
time between milestone payments. As a result, both our costs and estimated
profits in excess of billings and our billings in excess of cost and estimated
profits have increased at December 31, 1999. The largest component of our
revenue is based upon the time spent by our technical personnel on a project. As
a result, during the third and fourth quarters, when many of our employees are
on vacation and holidays, our revenue could be affected.
In 1998, we evaluated our smart card business and determined that the cash
requirements did not justify the continued operations of the development of such
business in the increasingly competitive smart card market. As a result, we sold
our smart card division effective July 1, 1998, and we accounted for the
operations of this division as a discontinued operation. Accordingly, references
to our continuing operations relate to our behavioral health information systems
businesses.
Years Ended December 31, 1999 and 1998
Our revenue for 1999 was $21,252,000, an increase of $8,086,000, or 61%, from
our 1998 revenue, which was $13,165,000. The largest component of revenue in
1999 was turnkey systems labor revenue, which increased to $7,768,000 in 1999
from $3,664,000 in 1998, reflecting a 112% increase. This increase is
substantially the result of growth in the behavioral health information systems
business and our ability to provide the staff necessary to generate additional
revenue from our outstanding contracts. Revenue from third party hardware and
software increased to $5,915,000 in 1999 from $2,610,000 in 1998, which
represents an increase of 127%. Sales of third party hardware and software are
made in connection with the sales of turnkey systems. The data center (service
bureau) revenue decreased to $1,908,000 in 1999 from $2,164,000 in 1998,
reflecting a decrease of 12%. This decrease was substantially the result of a
special project performed for a client during 1998, which did not continue at
the same rate in 1999. License revenue decreased to $2,228,000 in 1999 from
$2,270,000 in 1998, reflecting a decrease of 2%. License revenue is generated as
part of a sale of a behavioral health information system pursuant to a contract
or purchase order that includes delivery of the system and maintenance. During
1999, our contracts generally had a longer term than our contracts in 1998,
resulting in the recognition of license revenue over a longer period. At
December 31, 1999, we had unrecognized license revenue of approximately $2.1
million, as compared with $1.8 million at December 31, 1998. We expect that we
will recognize this license revenue over the remaining terms of the contracts,
which we expect will be completed by December 31, 2000. However, it is possible
that a portion of the license revenue may not be recognized until a later date.
Maintenance revenue increased to $2,258,000 in 1999 from $1,432,000 in 1998,
reflecting an increase of 58%. Revenue from the sales of our small turnkey
division increased to $1,174,000 in 1999 from $1,025,000 in 1998, reflecting an
increase of 15%.
Revenue from contracts from government agencies represented 55% of revenue in
1999 and 52% of revenue in1998. This increase reflects an increase in our
contracts with state agencies.
Gross profit increased to $7,375,000 in 1999 from $5,084,000 in 1998, a 45%
increase. Our overall gross margin was 35% in 1999 compared to 39% in 1998. The
reduction in gross margin was substantially attributable to the increase in our
third party hardware and software revenue, which yields margins significantly
less than our margin from our behavioral health systems and services.
Additionally, in order to fill our backlog of orders for our behavioral health
systems, we hired additional technical personnel. Since there is a delay of
approximately nine months between the time we hire technical personnel and the
time we are able to generate revenue from their services, the increased staffing
costs had a negative impact upon our margins in 1999.
Selling, general and administrative expenses were $4,553,000 in 1999, an
increase of 29% from the $3,516,000 in 1998. This increase was substantially the
result of an increase in sales and marketing salaries and related direct selling
costs as well as an increase in the provision for incentive bonuses. These
increases were partially offset by a decrease in sales commissions.
12
<PAGE>
In 1999 we issued warrants for services rendered. We also extended one series of
our warrants for two months. An aggregate of $127,000 was charged to financing
costs for the warrant issuance and the warrant extension. We did not have a
similar charge item in 1998.
We incurred product development expenses of $800,000 in 1999, an increase of 5%
from the $763,000 in 1998. These expenses were related to our behavioral health
information systems products, including our clinician workstation, behavioral
health information system for Windows, managed care and methadone dispensing
products.
Interest expense was $250,000 in 1999, a decrease of $96,000, or 28%, from the
$346,000 in 1998. This decrease was the result of lower borrowings during 1999,
in addition to a reduced cost of borrowings. The most significant component of
the interest expense on an ongoing basis is the interest payable to our
asset-based lender. We paid interest on such loans at a rate equal to prime plus
5 %. In October 1999, we entered into a credit facility agreement with a new
asset-based lender. The interest rate of the new facility is 2% above the prime
rate.
Related party administrative expense was $45,000 in 1998. These charges were
incurred pursuant to a management services agreement with our then principal
stockholder to provide general business, management and financial consulting
services for a monthly fee of $15,000. This agreement was mutually terminated
effective April 1, 1998.
We recognized a gain of $180,000 from our discontinued operations in 1999. This
gain resulted from the reduction in our reserve against a promissory note
received from the sale of the discontinued operations. We reduced the reserve as
a result of our sale of our interest in the purchaser for a note. In 1998, we
recognized a net loss from our discontinued operations of $217,000.
As a result of the foregoing factors, in 1999 we generated a net income from
continuing operations of $1,645,000, or $.56 per share (basic) and $.47 per
share (diluted), a gain from discontinued operations of $180,000, or $.06 per
share (basic) and $.05 per share (diluted), and a net income of $1,825,000, or
$.62 per share (basic) and $.52 per share (diluted). For 1998, we generated net
income from continuing operations of $413,000, or $.12 per share (basic and
diluted), a loss from discontinued operations of $217,000, or $.08 per share
(basic and diluted), and net income applicable to common stock of $124,000, or
$.04 per share (basic and diluted).
Years Ended December 31, 1998 and 1997
Our revenue for 1998 was $13,165,000, an increase of $5,530,000, or 72%, from
our 1997 revenue of $7,635,000. The largest component of revenue in 1998 was
turnkey systems labor revenue which increased to $3,664,000 from $2,107,000 in
1997, reflecting a 74% increase. This increase is substantially the result of
growth in the behavioral health information systems business and our ability to
provide the staff necessary to generate additional revenue. The data center
(service bureau) revenue decreased to $2,165,000 in 1998 from $2,235,000 in
1997, reflecting a decrease of 3%. This decrease was substantially the result of
a special project performed for a client in 1997, which did not continue at the
same rate in 1998. License revenue increased to $2,270,000 in 1998 from $737,000
in 1997, which is an increase of 208%. License revenue is generated as part of a
sale of a behavioral health information system pursuant to a contract or
purchase order that includes delivery of the system and maintenance. Revenue
from third party hardware and software increased to $2,610,000 in 1998 from
$1,089,000 in 1997, which is an increase of 140%. Sales of third party hardware
and software are made in connection with the sales of turnkey systems.
Maintenance revenue increased to $1,432,000 in 1998 from $1,280,000 in 1997,
reflecting an increase of 12%. Revenue from the sales of our small turnkey
division (formerly our methadone division) was $1,025,000 in 1998. There was no
revenue for this division in 1997.
Revenue from contracts from government agencies represented 52% and 35% of
revenue in 1998 and 1997, respectively.
Gross profit increased to $5,084,000 in 1998 from $2,747,000 in 1997, a 85%
increase. The increase in the gross profit was substantially the result of the
increased license revenue, which provides higher margins.
13
<PAGE>
Selling, general and administrative expenses were $3,516,000 in 1998, an
increase of 21% from the $2,902,000 in 1997. This increase was substantially the
result of an increase in commissions expense, sales and marketing salaries,
advertising and related sales expenses which were partially offset by a decrease
in administrative expenses as well as other miscellaneous expenses, including a
reduction in related party administrative expenses.
Related party administrative expense was $45,000 in 1998 and $180,000 in 1997.
These charges were pursuant to a management services agreement with our then
principal stockholder for a monthly fee of $15,000. This agreement was mutually
terminated effective April 1, 1998.
During 1998, we incurred product development expenses of $763,000, an increase
of 279% from the $201,000 in 1997. These expenses were related to our behavioral
health information systems products such as our clinician workstation,
behavioral health information system for Windows, managed care and methadone
dispensing products.
Interest expense was $346,000 in 1998, an increase of $38,000, or 12% from the
$308,000 in 1997. This increase was the result of higher borrowings during 1998,
which were substantially off set by a reduction in the cost of borrowings. The
most significant component of the interest expense on an ongoing basis is the
interest payable to our asset-based lender. We paid interest on such loans at a
rate equal to prime plus 8-1/2 % plus a fee of 5/8% of the face amount of the
invoice for the first nine months of 1998. Effective October 1, 1998, we amended
the terms of our agreement with the asset-based lender and reduced the interest
rate from prime plus 8 1/2% to prime plus 5% and eliminated the 5/8% fee
previously paid on the face amount of each invoice.
The net loss from our discontinued operations, the smart card division, was
$217,000 in 1998, a decrease of $2,398,000 from the $2,615,000 in 1997. This
decrease is the result of a reduction of expenses in this division prior to the
sale of the division.
As a result of the foregoing factors, we generated a net income of $196,000, or
$.04 per share, in 1998 as compared with a net loss of $3.5 million, or $1.47
per share, in 1997.
Liquidity and Capital Resources
We had working capital of $2,012,000 at December 31, 1999 as compared to working
capital of $10,000 at December 31, 1998. Our cash position increased marginally
from $199,000 at December 31, 1998 to $205,000 at December 31, 1999. The
increase in working capital for 1999 was substantially due to the net income
after adding back depreciation and amortization.
Our principal source of funds, other than revenue, is an accounts receivable
financing agreement with an asset based lender which permits us to borrow up to
80% of eligible accounts receivable up to a maximum of $3.5 million. At December
31, 1999, the outstanding borrowings under this facility were $882,000 and the
maximum amount available under this formula was $2,314,000.
At December 31, 1999, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $10 million, representing
approximately 170 days of revenue based on annualizing the revenue for the year
ended December 31, 1999, although we cannot give any assurance that our revenue
will continue at the same level as the year ended December 31, 1999. Accounts
receivable at December 31, 1999 increased by $2,190,000 from $3,600,000 at
December 31, 1998 to $5,790,000 at December 31, 1999.
Our cash flow from operations was approximately $1.2 million for 1999, and,
based on our outstanding contracts and our continuing business, we believe that
our cash flow from operations, the availability under our financing agreement
and our cash on hand will be sufficient to enable us to continue to operate
without additional funding, although it is possible that we may need
additional funding if our business does not develop as we anticipate or if
our expenses, including our software development costs relating to our
expansion of our product line and our marketing cost for seeking to expand the
market for our products and services to include smaller clinics and facilities
and sole and group practitioners exceed our expectation.
14
<PAGE>
Furthermore, if we continue to grow at the existing rate into 2000 and beyond,
we may require additional funding. We are exploring various long term funding
possibilities, although we cannot give any assurances that we will be able to
obtain financing, and our failure to obtain financing could impair our ability
to grow.
An important part of our growth strategy is to acquire other businesses that are
related to our current business. Such acquisitions may be made with cash or our
securities or a combination of cash and securities. To the extent that we
require cash, we may have to borrow the funds or issue equity. We have no
commitments from any financing source and we may not be able to raise any cash
necessary to complete an acquisition. If we fail to make any acquisitions, our
future growth may be limited. As of the date of this Form 10-K annual report, we
do not have any agreement or understanding, either formal or informal, as to any
acquisition.
Year 2000 Compliance
The "Year 2000 Issue" refers generally to the problems that some software may
have in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
determine whether "00" means 1900 or 2000, which may result in computer and
other failures or the creation of erroneous results.
We believe that our present software products are Year 2000 compliant, and that
any changes which may be required to software which we have delivered in the
past would be made pursuant to new contracts with the clients to provide them
with a current version of our products.
We have defined Year 2000 compliant as the ability to:
* correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
* function according to the product documentation provided for this
date change, without changes in operation resulting from the
advent of a new century, assuming correct configuration;
* where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined and
predetermined manner;
* if the date elements in interfaces and data storage specify the
century, store and provide output of date information in ways
that are unambiguous as to century; and
* recognize year 2000 as a leap year.
To date, we have not experienced any material expense relating to Year 2000
compliance.
Forward Looking Statements
Statements in this Form 10-K include forward-looking statements that address,
among other things, our expectations with respect to the development of our
business. In addition to these statements, other information including words
such as "seek" "anticipate," "believe," "plan," "estimate," "expect," "intend"
and other similar expressions are forward looking statements. Actual results
could differ materially from those currently anticipated due to a number of
factors, including those identified in this Annual Report on Form 10-K for the
year ended December 31, 1999, in our other documents filed by us with the
Securities and Exchange Commission.
15
<PAGE>
Part IV
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data begin on page F-1 of this Form
10-K.
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure
As previously disclosed, we changed our accountants from Moore Stephens, P.C. to
Richard A. Eisner & Company, LLP commencing with the year ended December 31,
1998. There were no disagreements with Moore Stephens, P.C.
16
<PAGE>
1. Financial Statements
Report of Richard A. Eisner & Company, LLP
Report of Moore Stephens, P.C.
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 Consolidated Statements of
Stockholders' Equity for the Years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
July 20, 1998 Change in Accountants
4. Exhibits
<PAGE>
NETSMART TECHNOLOGIES, INC.
AND SUBSIDIARIES
F - 1
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 AUDITORS' REPORT
Board of Directors and Shareholders of
Netsmart Technologies, Inc.
Islip, New York
We have audited the accompanying consolidated balance sheet
of Netsmart Technologies, Inc. and subsidiary as of December 31, 1999 and
1998 and the related consolidated statements of operations, stockholders'
equity and cash flows for the years 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 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 subsidiaries as of December 31, 1999 and
1998, and the consolidated results of their operations and their consolidated
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
March 9, 2000
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 statements of operations,
stockholders' equity, and cash flows for Netsmart Technologies, Inc. and its
subsidiary for the year 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 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 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 results of operations
and cash flows of Netsmart Technologies, Inc. and its subsidiaries for the year
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 SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 204,989 $ 198,689
Accounts Receivable - Net 5,789,734 3,600,025
Costs and Estimated Profits in Excess
of Interim Billings 4,253,072 2,899,695
Note Receivable 150,000 150,000
Other Current Assets 167,516 109,595
----------- -----------
Total Current Assets 10,565,311 6,958,004
----------- -----------
Property and Equipment - Net 534,864 354,036
----------- -----------
Other Assets:
Software Development Costs - Net 310,722 142,450
Customer Lists - Net 2,399,108 2,733,392
Other Assets 162,472 101,064
----------- -----------
Total Other Assets 2,872,302 2,976,906
----------- -----------
Total Assets $13,972,477 $10,288,946
=========== ===========
See Notes to Consolidated Financial Statements.
F - 5
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
<S> <C> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable $ 882,404 $ 1,639,694
Capitalized Lease Obligations 25,385 27,283
Accounts Payable 2,562,087 2,166,333
Accrued Expenses 1,243,548 1,178,893
Interim Billings in Excess of Costs and Estimated
Profits 3,750,847 1,803,999
Due to Related Parties 84,000
Deferred Revenue 88,546 47,619
---------- ----------
Total Current Liabilities 8,552,817 6,947,821
---------- ----------
Capitalized Lease Obligations 64,627 57,033
---------- ----------
Commitments and Contingencies (Note 13)
Stockholders' Equity:
Preferred Stock, $.01 Par Value;
Authorized 3,000,000 shares
Series D 6% Redeemable Preferred Stock - $.01 Par
Value 3,000 Shares Authorized, none outstanding
at December 31, 1999, 1,210 Issued and
outstanding at December 31, 1998 [Liquidation
Preference of $1,210 and redemption value
of $1,210,000] 12
Additional Paid-in Capital - Series D Preferred Stock 1,209,509
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued 2,988,738 Shares
at December 31, 1999, 2,786,921 Shares at
December 31, 1998 29,887 27,869
Additional Paid-in Capital - Common Stock 18,657,579 17,203,904
Accumulated Deficit (13,272,433) (15,097,202)
---------- ----------
5,415,033 3,344,092
Less cost of 5,333 Common Shares held in
Treasury 60,000 60,000
---------- ----------
Total Stockholders' Equity 5,355,033 3,284,092
---------- ----------
Total Liabilities and Stockholders' Equity $ 13,972,477 $ 10,288,946
=========== ==========
See Notes to Consolidated Financial Statements.
F - 6
</TABLE>
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 9 1 9 9 8 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
Revenues:
Software and Related
Systems and Services:
General $17,085,603 $ 9,569,100 $ 4,119,780
Maintenance Contract
Services 2,257,869 1,431,695 1,280,465
---------- ----------- ----------
Total Software and Related
Systems and Services 19,343,472 11,000,795 5,400,245
Data Center Services 1,908,158 2,164,472 2,235,209
---------- ----------- ----------
Total Revenues 21,251,630 13,165,267 7,635,454
---------- ----------- -----------
Cost of Revenues:
Software and Related
Systems and Services:
General 11,054,960 5,975,249 2,493,739
Maintenance Contract
Services 1,713,759 975,212 928,316
---------- ----------- -----------
Total Software and Related
Systems and Services 12,768,719 6,950,461 3,422,055
Data Center Services 1,107,571 1,131,078 1,466,107
---------- ----------- -----------
Total Cost of Revenues 13,876,290 8,081,539 4,888,162
---------- ----------- -----------
Gross Profit 7,375,340 5,083,728 2,747,292
Selling, General and
Administrative Expenses 4,552,866 3,516,288 2,901,724
Financing Costs 127,000 -- --
Related Party Administrative Expense 45,000 180,000
Research and Development 800,470 763,059 201,075
---------- ----------- -----------
Income (Loss) from Continuing
Operations before Interest Expense 1,895,004 759,381 (535,507)
Interest Expense 250,235 346,114 308,169
---------- ----------- -----------
Income (Loss) from Continuing Operations 1,644,769 413,267 (843,676)
---------- ----------- -----------
See Notes to Consolidated Financial Statements.
F - 7
</TABLE>
<PAGE>
<TABLE>
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 9 1 9 9 8 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
Discontinued Operations:
Loss from Discontinued Operations - (397,018) (2,615,049)
Gain on Sale of Discontinued Operations 180,000 180,000 --
---------- --------- ---------
Income (Loss) from Discontinued Operations 180,000 (217,018) (2,615,049)
---------- --------- ---------
Net Income (Loss) 1,824,769 196,249 (3,458,725)
Less Cumulative Preferred Stock Dividends - 72,600 48,400
---------- --------- ---------
Net Income (Loss) Applicable to Common Stock $ 1,824,769 $ 123,649 $(3,507,125)
========== ========= =========
Earnings Per Share of Common Stock:
Basic:
Income (Loss) from Continuing Operations $ .56 $ .12 $ (.37)
Income (Loss) from Discontinued Operations .06 (.08) (1.10)
---------- --------- ---------
Net Income (Loss) $ .62 $ .04 $ (1.47)
========== ========= =========
Weighted Average Number of Shares of
Common Stock Outstanding 2,921,254 2,779,655 2,386,953
========== ========= =========
Diluted:
Income (Loss) from Continuing Operations $ .47 $ .12 $ (.37)
Income (Loss) from Discontinued Operations .05 (.08) (1.10)
---------- --------- ---------
Net Income (Loss) $ .52 $ .04 $ (1.47)
========== ========= =========
Weighted Average Number of Shares of
Common Stock Outstanding 3,516,317 2,864,993 2,386,953
========== ========= =========
See Notes to Consolidated Financial Statements.
F - 8
</TABLE>
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Additional
Paid-in Paid-in
Series D Capital Capital Total
-------- ------- ------- -----
Preferred Stock Preferred Common Stock Common Accumulated Treasury Shares Stockholders'
--------------- --------- ------------ ------ ----------- -------- ------ -------------
Shares Amount Stock Shares Amount Stock Deficit Shares Cost Equity
------ ------ ----- ------ ------ ----- ------- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 on 4,267 43 108,858 (108,901) --
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 8,236 8,325
Purchase of
Treasury Shares 5,333 $(60,000) (60,000)
Net Income 196,249 196,249
----- ---- --------- --------- ------ ---------- ---------- ----- ------- ---------
Balance -
December 31, 1998 1,210 12 1,209,509 2,786,921 27,869 17,203,904 (15,097,202) 5,333 (60,000) 3,284,092
Common Stock Issued -
Exercise of Options 99,317 993 112,554 113,547
Common Stock Issued -
Consultant 2,500 25 5,600 5,625
Common Stock Issued (1,210) (12) (1,209,509) 100,000 1,000 1,208,521 --
for Redemption of
Series D Preferred
Stock
Issuance and
Extension of
Warrants 127,000 127,000
Net Income 1,824,769 1,824,769
----- ---- --------- --------- ------ ---------- ---------- ----- ------- ---------
December 31, 1999 -- -- -- 2,988,738 $29,887 $18,657,579 $(13,272,433) 5,333 $(60,000) $5,355,033
===== ==== ========= ========= ====== ========== ========== ===== ======= =========
See Notes to Consolidated Financial Statements.
F - 9
</TABLE>
<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 9 1 9 9 8 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Income (Loss) from Continuing Operations $ 1,644,769 $ 413,267 $ (843,676)
--------- ---------- ----------
Adjustments to Reconcile Income
(Loss) from Continuing Operations to Net Cash
Provided by (Used for) Operating Activities:
Depreciation and Amortization 600,907 561,562 600,990
Financing Costs Related to Issuance
and Extension of Warrants 127,000
Financing Expenses related to the issuance
of Common Stock 5,625
Cash Used in Discontinued Operations (367,018) (2,615,049)
Write Off of Capitalized Software Cost
and Related Hardware 553,061
Equity in Net Loss of Joint Venture 287,131
Provision for Doubtful Accounts 84,000 60,000 60,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (2,273,709) (1,477,607) 452,032
Costs and Estimated Profits in
Excess of Interim Billings (1,353,377) (2,357,371) (20,538)
Other Current Assets (57,921) (25,825) (1,565)
Other Assets (61,408) 5,839 11,905
Increase [Decrease] in:
Accounts Payable 395,754 1,034,641 148,536
Accrued Expenses 64,655 102,773 50,045
Interim Billings in Excess of
Costs and Estimated Profits 1,946,848 852,114 (150,220)
Due to Related Parties (21,245)
Deferred Revenue 40,927 (69,461) (4,439)
--------- --------- ---------
Total Adjustments (480,699) (1,680,353) (649,356)
--------- --------- ---------
Net Cash Provided by (Used For)
Operating Activities 1,164,070 (1,267,086) (1,493,032)
--------- --------- ---------
Investing Activities:
Acquisition of Property and
Equipment (406,751) (222,031) (216,041)
Software Development Costs (208,972) (462,000)
Cash Provided by Discontinued Operations 180,000
Investment in Joint Venture (166,585)
--------- --------- ---------
Net Cash Used For Investing Activities (435,723) (222,031) (844,626)
--------- --------- ---------
See Notes to Consolidated Financial Statements.
F - 10
</TABLE>
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 9 1 9 9 8 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
Financing Activities:
Proceeds from Short-Term Notes 882,404 704,517 345,146
Payment of Short-Term Notes (1,639,694)
Proceeds from Capitalized Lease Obligation 40,000
Proceeds of loans from Related Parties 140,000
Repayment of loans from related parties (84,000) (56,000)
Payment of Capitalized Lease Obligations (34,304) (15,658) (34,063)
Proceeds from Warrant Exercise 1,917,319
Proceeds from Stock Option Exercise 113,547 8,325 40,913
Purchase of Treasury Shares (25,000)
Costs associated with issuance of Stock (74,995)
Other 76,643
--------- -------- ---------
Net Cash (Used in)provided by
Financing Activities (722,047) 832,827 2,194,320
--------- -------- ---------
Net Increase [Decrease] in Cash
and Cash Equivalents 6,300 (656,290) (143,338)
Cash and Cash Equivalents -
Beginning of Year 198,689 854,979 998,317
--------- -------- ---------
Cash and Cash Equivalents -
End of Year $ 204,989 $198,689 $ 854,979
========= ======== =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the years for:
Interest $ 262,884 $353,713 $ 352,837
Income Taxes $ 41,478 $ 16,934 $ --
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Year ended December 31, 1999:
Pursuant to a March 25, 1999 agreement between us, Consolidated Technology Group
Ltd., now known as The Sagemark Companies, SIS Capital Corp., a wholly-owned
subsidiary of Consolidated, and a group of purchasers, consisting principally of
the Company's management and directors, on April 8, 1999, Consolidated
transferred to us the 1,210 shares of the Company's Series D 6% Redeemable
Preferred Stock, including the right to receive $145,200 of accumulated
dividends, and warrants to purchase shares of our common stock in exchange for
which the Company issued 100,000 shares of common stock to SIS Capital. The
shares of Series D Preferred Stock and the annual dividends of $72,600
associated with the Series D Preferred Stock have been cancelled.
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.
F - 11
</TABLE>
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
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.
See Notes to Consolidated Financial Statements.
F - 12
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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"] as well as PsyMedX, a joint venture which Netsmart
owns 80% (collectively referred to as the Company). All intercompany
transactions are eliminated in consolidation.
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 $192,000 and $249,000 at December 31, 1999 and
1998 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, 1999, 1998 and 1997,
approximately 55%, 52% and 35% respectively, of the Company's revenues were
generated from contracts with government agencies.
During the year ended December 31, 1999, one customer accounted for
approximately $3,835,000 or 18% of revenue. Accounts receivable of approximately
$69,000 and costs and estimated profits in excess of billing of $1,805,000 less
$170,000 in interim billings in excess of costs and estimated profits were due
from this customer at December 31, 1999.
During the year ended December 31, 1998, the same 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. No one customer accounted for more
than 10% of revenues in 1997.
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, 1999
and 1998, cash and cash equivalent balances of $90,000 and
F - 13
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
$150,000 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.
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. Revenue from software package license
agreements without significant vendor obligations is recognized upon delivery of
the software. 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 SUBSIDIARIES
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 periodically performs reviews 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.
During 1999, the Company established PsyMedX, a joint venture with Pathware Inc.
The Company owns 80% of PsyMedX and Pathware, Inc. owns 20%. The agreement
focuses on a joint effort to develop and market web portal services and ASP
solutions for the behavioral healthcare providers, consumers and managers
throughout the United States. As of December 31, 1999, the Company has invested
approximately $209,000 in this venture which was expended for software
development costs.
Information related to capitalized software costs applicable to continuing
operations is as follows:
Years ended December 31 1999 1998
----------------------- ---- ----
Beginning of Year $142,450 $183,150
Capitalized 208,972 --
Amortization (40,700) (40,700)
------- -------
Net $310,722 $ 142,450
--- ======= ========
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 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, 1999 and 1998 are as follows:
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Customer Lists $4,106,223 $4,106,223
Less: Accumulated Amortization 1,707,115 1,372,831
--------- ---------
Net $2,399,108 $2,733,392
--- ========= =========
The Company has 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
F - 15
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
determined that expected future cash flows (undiscounted and without interest
charges) exceed the carrying value of the long lived assets at December 31, 1999
and believes that no impairment of these assets has occurred.
Stock Options and Similar Equity Instruments - 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 shares of
common stock 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.
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 $305,226
and $372,797 at December 31, 1999 and 1998 respectively. The changes in the
allowance for doubtful accounts are summarized as follows:
December 31,
-------------------------------
1999 1998 1997
---- ---- ----
Beginning Balance $ 372,797 $348,029 $288,029
Provision for Doubtful Accounts 84,000 60,000 60,000
Charge-offs (151,571) (35,232)
-------- ------- -------
Ending Balance $ 305,226 372,797 $348,029
======== ======= =======
F - 16
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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 9 1 9 9 8
------- -------
Costs Incurred on Uncompleted Contracts $12,582,652 $ 4,259,190
Estimated Profits 7,446,962 4,038,247
---------- ---------
Total 20,029,614 8,297,437
Billings to Date 19,527,389 7,201,741
---------- ---------
Net $ 502,225 $ 1,095,696
--- ========== =========
Included in the accompanying balance sheet under the following captions:
Costs and estimated profits in
excess of interim billings $ 4,253,072 $ 2,899,695
Interim billings in excess of
costs and estimated profits (3,750,847) (1,803,999)
---------- ---------
Net $ 502,225 $ 1,095,696
--- ========== =========
[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 an equity interest in Granite equal to 20% at the time of
transaction. Granite also agreed to pay certain royalties to the Company. The
note was subject to cancellation if the other party to the joint venture elected
to purchase the Company's interest. As the Company has virtually no influence
over the financing and operating policies of Granite, the interest in Granite
accounted for using the cost method.
As a result of the discontinuation of the CarteSmart 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 and $246,000 in
1998 and 1997 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. The Company valued the
note at $180,000 at December 31, 1998 based on managements estimates of future
collections on the note. As all payments have been received through February
2000 on a timely basis the company recognized an additional $180,000 of value in
1999.
During the fourth quarter of 1999, the Company was informed that a third party
made a $1.2 million investment in Granite. This transaction is not indicative of
the value of the Company's investment in Granite. The Company's cost basis of
its investment in Granite on its balance sheet is 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 9 1 9 9 8
------- -------
Equipment, Furniture and Fixtures $ 869,497 $ 672,692
Leasehold Improvements 264,153 247,609
--------- --------
Totals - At Cost 1,133,650 920,301
Less: Accumulated Depreciation 598,786 566,265
--------- --------
Net $ 534,864 $ 354,036
--- ========= ========
Depreciation expense amounted to $225,923, $176,578, and $169,558, respectively
for the years ended December 31, 1999, 1998 and 1997.
[7] Related Party Transactions
[A] Related Party Administrative Expense - The Company had an agreement with its
then principal stockholder, Consolidated Technology Group Ltd. (now known as The
Sagemark Companies Ltd.) 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, and 1997 the Company charged $45,000, and $180,000 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 were repaid in five quarterly installments
commencing September 30, 1998 and ending September 30, 1999.
[8] Notes Payable
Asset-Based Lender - In October 1999, the Company entered into a new two year
credit facility agreement with a Bank. Under this agreement, the Company can
draw up to 80% of eligible accounts receivable up to $3.5 million, on which it
pays interest at 2% above the prime rate. The credit facility with the Company's
prior lender limited the Company's availability to $2 million at 5% above the
prime rate. All of the accounts receivable and property and equipment of the
Company and its subsidiary collateralize the note. Borrowings under these
facilities were $882,404 and $1,639,694 at December 31, 1999 and 1998,
respectively.
The weighted average interest rate on short-term borrowings outstanding as of
December 31, 1999 and 1998 amounted to approximately 16% and 19% respectively.
F - 18
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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, 1999, the Company has net operating loss carryforwards of
$9,424,000 expiring by 2012. Pursuant to Section 382 of the Internal Revenue
Code regarding substantial changes in Company ownership, utilization of this net
operating loss carryforward is limited to $1,360,000 per year.
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
- ------------ ------
2010 3,233,000
2011 2,930,000
2012 3,261,000
---------
$9,424,000
=========
The Deferred Tax Asset consists primarily of the following:
Benefit of federal and state net operating loss carryforwards $ 3,770,000
Benefit of stock based compensation awards 1,400,000
Less: Valuation Allowance (5,170,000)
---------
Net Deferred Tax Asset $ --
- ----------------------- =========
The Company has provided a valuation allowance for the full amount of the
deferred tax asset of approximately $5,170,000 as its future utilization is
uncertain. The Valuation Allowance decreased by $730,000 in 1999 and increased
by $300,000 and $900,000 in 1998 and 1997 respectively.
The provision for income taxes varies from the amount computed by applying
statutory rates for the reasons summarized below:
1999 1998 1997
---- ---- ----
Provision Based on Statutory Rates 34% 34% (34)%
State Taxes Net of Federal Benefit 6% 6% (6)%
(Decrease) 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 of
the common stock became effective. All common stock and per shares of common
stock data in the financial statements and notes have been adjusted to reflect
this 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. No shares of any series of preferred stock were outstanding on
December 31, 1999.
Pursuant to a March 25, 1999, agreement between the Company, Consolidated
Technology Group Ltd. and a group of purchasers, consisting principally of the
Company's management and directors, on April 8, 1999, Consolidated transferred
to the Company the 1,210 shares of the Company's Series D 6% Redeemable
Preferred Stock, including the right to receive $145,200 of accumulated
dividends for which the Company issued 100,000 shares of common stock to
Consolidated. The shares of Series D Preferred Stock have been cancelled as well
as the annual dividends of $72,600 associated with the Series D Preferred Stock.
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 day 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 - In 1998, 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 and
1998 Long-Term Incentive Plans.
F - 20
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------
[11] Capitalized Lease Obligations
Future minimum payments under capitalized lease obligations as of December 31,
1999 are as follows:
Year ending
- -----------
December 31,
- ------------
2000 $ 35,862
2001 35,862
2002 27,515
2003 10,822
-------
Total Minimum Payments 110,061
Less Amount Representing Interest at
12.6% to 13.8% Per annum 20,049
-------
Balance $ 90,012
------- =======
Capitalized lease obligations are collateralized by equipment which has a net
book value of $97,000 and $82,000 at December 31, 1999 and 1998, respectively.
Amortization of approximately $19,329, $10,200 and $10,200 in 1999, 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, note
receivable, accounts payable and debt maturing within one year 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.
Minimum annual rentals under noncancellable operating leases (net of a sublease
to Granite in the amount of $21,000 per year through 2002) having terms of more
than one year are as follows:
Years ending
- ------------
December 31,
- ------------
2000 $ 389,000
2001 317,000
2002 329,000
2003 342,000
---------
Total $1,377,000
----- =========
Rent expense amounted to $388,000, $349,000 and $341,000 respectively, for the
years ended December 31, 1999, 1998 and 1997.
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. Bonuses awarded to these
executives aggregating $343,000 are included in accrued expenses at December 31,
1999. 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 three long-term incentive plans, the
1993 Long- Term Incentive Plan (the "1993 Plan"), as amended, the 1998 Long-Term
Incentive Plan (the "1998 Plan"), as amended, and the 1999 Long-Term Incentive
Plan (the "1999 Plan"). The 1999 plan was approved by the Board of Directors in
November 1999, covers 150,000 shares of common stock and is subject to
stockholder approval. No options have been granted under the 1999 Plan. The
Company may issue 170,333 and 780,000 shares of Common Stock pursuant to the
1993 Plan and 1998 Plan, respectively.
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, the 1998 Plan and the 1999 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.
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, and accordingly
did not result in any compensation charge.
F - 22
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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>
1999 1998 1997
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning of
Year 882,358 $1.172 148,780 $3.244 203,706 $2.57
Granted During the Year -- -- 823,167(a) 1.18 -- --
Canceled During the Year -- -- (80,667)(a) 9.60 -- --
Expired During the Years -- -- -- -- -- --
Exercised During the Year (99,317) $1.143 (8,922) .723 (54,926) .745
------- ----- ------- ----- ------ ----
Outstanding - End of Year 783,041 $1.176 882,358 $1.172 148,780 $3.244
======= ===== ======= ===== ======= =====
Exercisable - End of Year 783,041 $1.176 242,358 $1.338 108,447 $2.492
======= ===== ======= ===== ======= =====
(a) Includes under "Granted During the Year" 43,167 shares granted upon
cancellation of an equal number of shares having an exercise price of $4.50 per
share, and under "Cancelled During the Year" the cancellation of options to
purchase 43,167 shares.
The following table summarizes stock option information as of December 31, 1999:
Options Outstanding
-------------------
Weighted
--------
Average Remaining Options
----------------- -------
Exercise Prices Number Outstanding Contractual Life Exercisable
- --------------- ------------------ ---------------- -----------
$1.035 8,208 .9 Years 8,208
$1.50 32,333 1.3 Years 32,333
$1.50 242,500 3.4 Years 242,500
$1.00 500,000 3.8 Years 500,000
------- --------- -------
Totals 783,041 3.6 Years 783,041
======= ========= =======
Warrants Issued as Compensation - In February 1996, the Company issued Series B
Common Stock Purchase Warrants to purchase 1,051,250 shares of common stock, of
which warrants to purchase 838,750 shares were exercisable at $6.00 per share
and warrants to purchase 212,500 are exercisable at $15.00 per share,
subsequently adjusted to $12, see below. These warrants were issued in
connection with services rendered, which, in the case of SIS Capital, included
the guarantee of certain notes payable. Certain of the warrants initially had a
November 1998 expiration date, which was extended to December 31, 1999, which
was the expiration date of all of the warrants. In December 1999 the remaining
$6 and $12 warrants totaling 287,500 and 448,544, respectively, were extended to
February 29, 2000. The Company recognized a financing cost of $81,000 with
respect to this extension. In February 2000, these warrants were further
extended to April 30, 2000, which will result in a charge of $125,000 in the
first quarter of 2000.
F - 23
</TABLE>
<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. 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 were
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, 213,036 of these
warrants were exercised. The remainder expired in August 1999.
During 1997, the Company issued Series C Common stock warrants to purchase
23,333 shares of common stock for consulting services in connection with 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 expired on
December 31, 1999.
During 1999, the Company issued warrants to purchase 45,000 shares in connection
with a financial advisory agreement whereby the Company will pay consulting
fees in addition to the issuance of the warrants. These warrants were valued at
$.58 per warrant, which represented the cost of the services based upon the
contractual agreement. These warrants have an exercise price of $5.45, which
represented a 15% premium over the market value of the stock at the time of
issuance and will expire in October 2004.
During 1999, the Company issued 9,000 warrants for services rendered. These
warrants were valued at $2.20 per warrant based upon the Black-Scholes
calculation. These warrants have an exercise price of $4.20 per warrant, which
was the market value of the stock at the time of issuance and will expire in
October 2004.
F - 24
<PAGE>
<TABLE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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>
1999 1998 1997
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning
of Year 1,033,632 $10.49 1,033,632 $10.49 1,223,335 $10.93
Granted, Sold or Extended
During the Year 790,044 9.36 -- -- 23,333 15.00
Canceled During the Year (188,333) 11.84 -- -- -- --
Expired During the Year (845,299) 10.20 -- -- -- --
Exercised During the Year -- -- -- -- (213,036) 13.50
--------- ----- --------- ----- --------- -----
Outstanding - End of Year 790,044 $ 9.35 1,033,632 $10.49 1,033,632 $10.49
========= ===== ========= ===== ========= =====
Exercisable - End of Year 790,044 $ 9.35 1,033,632 $10.49 1,033,632 $10.49
========= ===== ========= ===== ========= =====
The following table summarizes warrant information as of December 31, 1999:
Weighted
--------
Average Remaining
-----------------
Exercise Prices Shares Contractual Life
- --------------- ------ ------------------
$ 6.00 287,500 .3 Year
$12.00 448,544 .3 Year
$ 5.45 45,000 4.7 Years
$ 4.20 9,000 4.7 Years
------- ---------
Total 790,044 .6 Years
======= =========
F - 25
</TABLE>
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- --------------------------------------------------------------------------------
[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.
There was no compensation cost recognized in income for stock based employee
compensation awards for 1999, 1998 and 1997.
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
$609,372 for the year ended December 31, 1998 and the Company's net loss and net
loss per share would have been as follows:
Year ended
-----------
December 31,
------------
1998
----
Net Income as Reported $ 196,249
=========
Pro Forma Net Loss $(413,123)
=========
Net Income Attributable to Common Stock $ 123,649
=========
Pro-Forma Net Income Attributable to Common Stock $(485,723)
=========
Net Income (Loss) Per Share as Reported $ .04
=========
Pro Forma Net Loss Per Share $ (.17)
=========
There were no options or compensation based warrants issued in 1999 or 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
----
Expected Life (Years) 5
Interest Rate 4.87%
Annual Rate of Dividends 0%
Volatility 70%
The weighted average fair value of options and warrants at date of grant using
the fair value based method during 1998 is estimated at $.74.
F - 26
<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 9 1 9 9 8 1 9 9 7
------- ------- -------
<S> <C> <C> <C>
Revenues:
- ---------
Software and Related Systems and Services $19,343,472 $11,000,795 $ 5,400,245
Data Center Services 1,908,158 2,164,472 2,235,209
---------- ---------- ----------
Total Revenues $21,251,630 $13,165,267 $ 7,635,454
-------------- ========== ========== ==========
Gross Profit:
- -------------
Software and Related Systems and Services $ 6,574,753 $ 4,050,334 $ 1,978,190
Data Center Services 800,587 1,033,394 769,102
---------- ---------- ----------
Total Gross Profit $ 7,375,340 $ 5,083,728 $ 2,747,292
------------------ ========== ========== ==========
Income [Loss] From Operations:
- ------------------------------
Software and Related Systems and Services $ 1,494,381 $ 342,501 $ (448,801)
Data Center Services 400,623 416,880 (86,706)
---------- ---------- ----------
Total Income [Loss] From Operations $ 1,895,004 $ 759,381 $ (535,507)
----------------------------------- ========== ========== ==========
Depreciation and Amortization:
- ------------------------------
Software and Related Systems and Services $ 356,191 $ 468,840 $ 477,953
Data Center Services 244,716 92,722 123,037
---------- ---------- ----------
Total Depreciation and Amortization $ 600,907 $ 561,562 $ 600,990
----------------------------------- ========== ========== ==========
Interest Expense:
- -----------------
Software and related systems and services $ 227,767 $ 289,210 $ 220,774
Data Center Services 22,468 56,904 87,395
---------- ---------- ----------
Total Interest Expense $ 250,235 $ 346,114 $ 308,169
========== ========== ==========
Capital Expenditures:
- ---------------------
Software and Related Systems and Services $ 595,747 $ 188,570 $ 636,174
Data Center Services 19,976 33,461 41,867
---------- ---------- ----------
Total Capital Expenditures $ 615,723 $ 222,031 $ 678,041
-------------------------- ========== ========== ==========
Identifiable Assets:
- --------------------
Software and Related Systems and Services $11,757,183 $ 7,740,018 $ 4,452,999
Data Center Services 2,215,294 2,548,928 2,886,804
---------- ---------- ----------
Total Identifiable Assets $13,972,477 $10,288,946 $ 7,339,803
------------------------- ========== ========== ==========
F - 27
</TABLE>
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
- --------------------------------------------------------------------------------
[16] Subsequent Event
In January 2000, the Company acquired the Connex suite of managed care and
employee assistance program (EAP) information systems from Behavioral Health
Partners, Inc. (BHPI). The acquisition price consisted of approximately $80,000
in cash and 15,528 shares of Netsmart's common stock valued at $100,000. The
purchase price was allocated to computer software in the amount of $180,000.
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.
Date: March 29, 2000 /s/ James L. Conway
-------------------
James L. Conway, President
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. Each person whose
signature appears below hereby authorizes Edward D. Bright, James L. Conway and
Anthony F. Grisanti or any 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
- --------- ----- ----
/s/ James L. Conway President, Chief Executive March 29, 2000
- ------------------------- Officer and Director (Principal
James L. Conway Executive Officer)
/s/ Anthony F. Grisanti Chief Financial Officer March 29, 2000
- ------------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)
/s/ Edward D. Bright Director March 29, 2000
- -------------------------
Edward D. Bright
/s/ John F. Phillips Director March 29, 2000
- -------------------------
John F. Phillips
/s/ Gerald Koop Director March 29, 2000
- -------------------------
Gerald Koop
/s/ Joseph Sicinski Director March 29, 2000
- -------------------------
Joseph Sicinski
<PAGE>
Netsmart Technologies, Inc.
Index to Exhibits
December 31, 1999
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
10.1 Employment Agreement dated July 1, 1998, between the Registrant and
James L. Conway.
10.2 Employment Agreement dated July 1, 1998, between the Registrant and
John F. Phillips.
10.3 Employment Agreement dated July 1, 1998, between the Registrant and
Gerald O. Koop.
10.4 Employment Agreement dated July 1, 1998, between the Registrant and
Anthony F. Grisanti.
10.5(1) 1993 Long-Term Incentive Plan.
10.6(2) 1998 Long-Term Incentive Plan.
10.7 1999 Long-Term Incentive Plan
10.8 1999 Employee Stock Purchase Plan
10.9 Agreement dated August 26, 1999, between the Registrant and Silicon
Valley Bank.
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 appendix the Registrant's proxy statement dated
September 30, 1999, relating to its 1999 Annual Meeting of
Stockholders and incorporated herein by reference.
NETSMART TECHNOLOGIES, INC.
EXHIBIT 10.7 - 1999 LONG-TERM INCENTIVE PLAN
- --------------------------------------------------------------------------------
1. Purpose; Definitions.
The purpose of the Netsmart Technologies, Inc. 1999 Long-Term Incentive
Plan (the "Plan") is to enable Netsmart Technologies, Inc. (the "Company") to
attract, retain and reward key employees of the Company and its Subsidiaries and
Affiliates, and others who provide services to the Company and its Subsidiaries
and Affiliates, and strengthen the mutuality of interests between such key
employees and such other persons and the Company's stockholders, by offering
such key employees and such other persons incentives and/or other equity
interests or equity-based incentives in the Company, as well as
performance-based incentives payable in cash.
For purposes of the Plan, the following terms shall be defined as set
forth below:
a. "Affiliate" means any corporation, partnership, limited liability
company, joint venture or other entity, other than the Company and its
Subsidiaries, that is designated by the Board as a participating employer under
the Plan, provided that the Company directly or indirectly owns at least 20% of
the combined voting power of all classes of stock of such entity or at least 20%
of the ownership interests in such entity.
b. "Board" means the Board of Directors of the Company.
c. "Book Value" means, as of any given date, on a per share basis (i)
the stockholders' equity in the Company as of the last day of the immediately
preceding fiscal year as reflected in the Company's consolidated balance sheet,
subject to such adjustments as the Committee shall specify at or after grant,
divided by (ii) the number of then outstanding shares of Stock as of such
year-end date, as adjusted by the Committee for subsequent events.
d. "Cause" means a felony conviction of a participant, or the failure of
a participant to contest prosecution for a felony, or a participant's willful
misconduct or dishonesty, or breach of trust or other action by which the
participant obtains personal gain at the expense of or to the detriment of the
Company or, if the participant has an employment agreement with the Company, a
Subsidiary or Affiliate, an event which constitutes "cause" as defined in such
employment agreement.
e. "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.
f. "Commission" means the Securities and Exchange Commission or any
successor thereto.
g. "Committee" means the Committee referred to in Section 2 of the Plan.
If at any time no Committee shall be in office, then the functions of the
Committee specified in the Plan shall be exercised by the Board.
h. "Company" means Netsmart Technologies, Inc., a Delaware corporation,
or any successor corporation.
i. "Deferred Stock" means an award made pursuant to Section 8 of the
Plan of the right to receive Stock at the end of a specified deferral period.
j. "Disability" means disability as determined under procedures
established by the Committee for purposes of the Plan.
k. "Early Retirement" means retirement, with the express consent for
purposes of the Plan of the Company at or before the time of such retirement,
from active employment with the Company and any Subsidiary or Affiliate pursuant
to the early retirement provisions of the applicable pension plan of such
entity.
l. "Exchange Act" means the Securities Exchange Act of 1934, as
amended, from time to time, and any successor thereto.
A-1
<PAGE>
m. "Fair Market Value" means, as of any given date, the market price of
the Stock as determined by or in accordance with the policies established by the
Committee in good faith; provided, that, in the case of an Incentive Stock
Option, the Fair Market Value shall be determined in accordance with the Code
and the Treasury regulations under the Code.
n. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
o. "Non-Employee Director" shall have the meaning set forth in Rule
16b-3 of the Commission pursuant to the Exchange Act or any successor definition
adopted by the Commission; provided that in the event that said rule (or
successor rule) shall not have such a definition, the term Non-Employee Director
shall mean a director of the Company who is not otherwise employed by the
Company or any Subsidiary or Affiliate.
p. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
q. "Normal Retirement" means retirement from active employment with the
Company and any Subsidiary or Affiliate on or after age 65.
r. "Other Stock-Based Award" means an award under Section 10 of the Plan
that is valued in whole or in part by reference to, or is otherwise based on,
Stock.
s. "Plan" means this Netsmart Technologies, Inc. 1999 Long-Term
Incentive Plan, as hereinafter amended from time to time.
t. "Restricted Stock" means an award of shares of Stock that is subject
to restrictions under Section 7 of the Plan.
u. "Retirement" means Normal Retirement or Early Retirement.
v. "Stock" means the Common Stock, par value $.01 per share, of the
Company or any class of common stock into which such common stock may hereafter
be converted or for which such common stock may be exchanged pursuant to the
Company's certificate of incorporation or as part of a recapitalization,
reorganization or similar transaction.
w. "Stock Appreciation Right" means the right pursuant to an award
granted under Section 6 of the Plan to surrender to the Company all (or a
portion) of a Stock Option in exchange for an amount equal to the difference
between (i) the Fair Market Value, as of the date such award or Stock Option (or
such portion thereof) is surrendered, of the shares of Stock covered by such
Stock Option (or such portion thereof), subject, where applicable, to the
pricing provisions in Paragraph 6(b)(ii) of the Plan and (ii) the aggregate
exercise price of such Stock Option or base price with respect to such award (or
the portion thereof which is surrendered).
x. "Stock Option" or "Option" means any option to purchase shares of
Stock (including Restricted Stock and Deferred Stock, if the Committee so
determines) granted pursuant to Section 5 of the Plan.
y. "Stock Purchase Right" means the right to purchase Stock pursuant to
Section 9 of the Plan.
z. "Subsidiary" means any corporation or other business association,
including a partnership (other than the Company) in an unbroken chain of
corporations or other business associations beginning with the Company if each
of the corporations or other business associations (other than the last
corporation in the unbroken chain) owns equity interests (including stock or
partnership interests) possessing 50% or more of the total combined voting power
of all classes of equity in one of the other corporations or other business
associations in the chain.
In addition, the terms "Change in Control," "Potential Change in
Control" and "Change in Control Price" shall have meanings set forth,
respectively, in Paragraphs 11(b), (c) and (d) of the Plan.
A-2
<PAGE>
2. Administration.
a. The Plan shall be administered by a Committee of not less than two
Non-Employee Directors, who shall be appointed by the Board and who shall serve
at the pleasure of the Board. If and to the extent that no Committee exists
which has the authority to so administer the Plan, the functions of the
Committee specified in the Plan shall be exercised by the Board. Notwithstanding
the foregoing, in the event that the Company is not subject to the Exchange Act
or in the event that the administration of the Plan by a Committee of
Non-Employee Directors is not required in order for the Plan to meet the test of
Rule 16b-3 of the Commission under the Exchange Act, or any subsequent rule,
then the Committee need not be composed of Non-Employee Directors.
b. The Committee shall have full authority to grant, pursuant to the
terms of the Plan, to officers and other persons eligible under Section 4 of the
Plan: Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred
Stock, Stock Purchase Rights and/or Other Stock-Based Awards. In particular, the
Committee shall have the authority:
i. to select the officers and other eligible persons to whom
Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred Stock,
Stock Purchase Rights and/or Other Stock-Based Awards may from time to time be
granted pursuant to the Plan;
ii. to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted
Stock, Deferred Stock, Stock Purchase Rights and/or Other Stock-Based Awards, or
any combination thereof, are to be granted pursuant to the Plan, to one or more
eligible persons;
iii. to determine the number of shares to be covered by each
such award granted pursuant to the Plan;
iv. to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted under the Plan, including, but not
limited to, the share price or exercise price and any restriction or limitation,
or any vesting, acceleration or waiver of forfeiture restrictions regarding any
Stock Option or other award and/or the shares of Stock relating thereto, based
in each case on such factors as the Committee shall, in its sole discretion,
determine;
v. to determine whether, to what extent and under what
circumstances a Stock Option may be settled in cash, Restricted Stock and/or
Deferred Stock under Paragraph 5(b)(x) or (xi) of the Plan, as applicable,
instead of Stock;
vi. to determine whether, to what extent and under what
circumstances Option grants and/or other awards under the Plan and/or other cash
awards made by the Company are to be made, and operate, on a tandem basis with
other awards under the Plan and/or cash awards made outside of the Plan in a
manner whereby the exercise of one award precludes, in whole or in part, the
exercise of another award, or on an additive basis;
vii. to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award under
this Plan shall be deferred either automatically or at the election of the
participant, including any provision for any determination or method of
determination of the amount (if any) deemed be earned on any deferred amount
during any deferral period;
viii. to determine the terms and restrictions applicable to
Stock Purchase Rights and the Stock purchased by exercising such Rights; and
ix. to determine an aggregate number of awards and the type of
awards to be granted to eligible persons employed or engaged by the Company
and/or any specific Subsidiary, Affiliate or division and grant to management
the authority to grant such awards, provided that no awards to any person
subject to the reporting and short-swing profit provisions of Section 16 of the
Exchange Act may be granted awards except by the Committee.
c. The Committee shall have the authority to adopt, alter and repeal
such rules, guidelines and practices governing the Plan as it shall, from time
to time, deem advisable; to interpret the terms and
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provisions of the Plan and any award issued under the Plan and any agreements
relating thereto, and otherwise to supervise the administration of the Plan.
d. All decisions made by the Committee pursuant to the provisions of the
Plan shall be made in the Committee's sole discretion and shall be final and
binding on all persons, including the Company and Plan participants.
3. Stock Subject to Plan.
a. The total number of shares of Stock reserved and available for
distribution under the Plan shall be one hundred fifty thousand (150,000) shares
of Common Stock. In the event that awards are granted in tandem such that the
exercise of one award precludes the exercise of another award then, for the
purpose of determining the number of shares of Stock as to which awards shall
have been granted, the maximum number of shares of Stock issuable pursuant to
such tandem awards shall be used.
b. Subject to Paragraph 6(b)(v) of the Plan, if any shares of Stock that
have been optioned cease to be subject to a Stock Option, or if any such shares
of Stock that are subject to any Restricted Stock or Deferred Stock award, Stock
Purchase Right or Other Stock-Based Award granted under the Plan are forfeited
or any such award otherwise terminates without a payment being made to the
participant in the form of Stock, such shares shall again be available for
distribution in connection with future awards under the Plan.
c. In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, stock distribution, reverse
split, combination of shares or other change in corporate structure affecting
the Stock, such substitution or adjustment shall be made in the aggregate number
of shares reserved for issuance under the Plan, in the base number of shares, in
the number and option price of shares subject to outstanding Options granted
under the Plan, in the number and purchase price of shares subject to
outstanding Stock Purchase Rights under the Plan, and in the number of shares
subject to other outstanding awards granted under the Plan as may be determined
to be appropriate by the Committee, in its sole discretion, provided that the
number of shares subject to any award shall always be a whole number. Such
adjusted option price shall also be used to determine the amount payable by the
Company upon the exercise of any Stock Appreciation Right associated with any
Stock Option.
4. Eligibility.
a. Officers and other key employees and directors of, and consultants
and independent contractors to, the Company and its Subsidiaries and Affiliates
(but excluding, except as to Paragraph 4(b) of the Plan, Non-Employee Directors)
who are responsible for or contribute to the management, growth and/or
profitability of the business of the Company and/or its Subsidiaries and
Affiliates are eligible to be granted awards under the Plan.
b. On each April 1 of each year, commencing April 1, 2000, each person
who is a Non-Employee Director on such date shall automatically be granted a
Non-Qualified Stock Option to purchase five thousand (5,000) shares of Common
Stock (or such lesser number of shares of Common Stock as remain available for
grant at such date under the Plan, divided by the number of Non-Employee
Directors at such date). Such Stock Options shall be exercisable at a price per
share equal to the greater of the Fair Market Value on the date of grant or the
par value of one share of Common Stock. The Non- Qualified Stock Options granted
pursuant to this Paragraphs 4(b) shall become exercisable as to all of the
shares subject thereto six (6) months from the date of grant, and shall expire
on the earlier of (i) five years from the date of grant, or (ii) seven (7)
months from the date such Non-Employee Director ceases to be a director if such
Non-Employee Director ceases to be a director other than as a result of his
death or Disability. The provisions of this Paragraph 4(b) may not be amended
more than one (1) time in any six (6) month period other than to comply with
changes in the Code or the Employee Retirement Income Security Act ("ERISA") or
the rules thereunder.
5. Stock Options.
a. Administration - Stock Options may be granted alone, in addition to
or in tandem with other awards granted under the Plan and/or cash awards made
outside of the Plan. Any Stock Option granted under the Plan shall be in such
form as the Committee may from time to time approve. Stock Options
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granted under the Plan may be of two types: (i) Incentive Stock Options and (ii)
Non-Qualified Stock Options. The Committee shall have the authority to grant to
any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types
of Stock Options (in each case with or without Stock Appreciation Rights).
b. Option Grants - Options granted under the Plan shall be subject to
the following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Committee, in
its sole discretion, shall deem desirable:
i. Option Price - The option price per share of Stock
purchasable under a Stock Option shall be determined by the Committee at the
time of grant.
ii. Option Term - The term of each Stock Option shall be fixed
by the Committee, but no Stock Option shall be exercisable more than ten (10)
years after the date the Option is granted.
iii. Exercisability - Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Committee at or after grant. If the Committee provides, in its sole
discretion, that any Stock Option is exercisable only in installments, the
Committee may waive such installment exercise provisions at any time at or after
grant in whole or in part, based on such factors as the Committee shall, in its
sole discretion, determine.
iv. Method of Exercise.
------------------
(A) Subject to whatever installment exercise provisions
apply under Paragraph 5(b)(iii) of the Plan, Stock Options may be exercised in
whole or in part at any time during the option period, by giving written
notice of exercise to the Company specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the purchase
price, either by check, note or such other instrument, securities or
property as the Committee may accept. As and to the extent determined by the
Committee, in its sole discretion, at or after grant, payments in full or
in part may also be made in the form of Stock already owned by the optionee or,
in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock
or Deferred Stock subject to an award hereunder (based, in each case, on the
Fair Market Value of the Stock on the date the option is exercised, as
determined by the Committee).
(B) If payment of the option exercise price of a
Non-Qualified Stock Option is made in whole or in part in the form of Restricted
Stock or Deferred Stock, the Stock issuable upon such exercise (and any
replacement shares relating thereto) shall remain (or be) restricted or
deferred, as the case may be, in accordance with the original terms of the
Restricted Stock award or Deferred Stock award in question, and any additional
Stock received upon the exercise shall be subject to the same forfeiture
restrictions or deferral limitations, unless otherwise determined by the
Committee, in its sole discretion, at or after grant.
(C) No shares of Stock shall be issued until full payment
therefor has been received by the Company. In the event of any exercise by note
or other instrument, the shares of Stock shall not be issued until such note
or other instrument shall have been paid in full, and the exercising
optionee shall have no rights as a stockholder until such payment is made.
(D) Subject to Paragraph 5(b)(iv)(C) of the Plan, an
optionee shall generally have the rights to dividends or other rights of a
stockholder with respect to shares subject to the Option when the optionee has
given written notice of exercise, has paid in full for such shares,
and, if requested, has given the representation described in Paragraph
14(a) of the Plan.
v. Non-Transferability of Options - No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee.
vi. Termination by Death - Subject to Paragraph 5(b)(ix) of the
Plan with respect to Incentive Stock Options, if an optionee's employment by the
Company and any Subsidiary or Affiliate terminates by reason of death, any Stock
Option held by such optionee may thereafter be exercised, to the extent such
option was exercisable at the time of death or on such accelerated basis as the
Committee may
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determine at or after grant (or as may be determined in accordance with
procedures established by the Committee), by the legal representative of the
estate or by the legatee of the optionee under the will of the optionee, for a
period of one year (or such other period as the Committee may specify at grant)
from the date of such death or until the expiration of the stated term of such
Stock Option, whichever period is the shorter.
vii. Termination by Reason of Disability or Retirement - Subject
to Paragraph 5(b)(ix) of the Plan with respect to Incentive Stock Options, if an
optionee's employment by the Company and any Subsidiary or Affiliate terminates
by reason of a Disability or Normal or Early Retirement, any Stock Option held
by such optionee may thereafter be exercised by the optionee, to the extent it
was exercisable at the time of termination or on such accelerated basis as the
Committee may determine at or after grant (or as may be determined in accordance
with procedures established by the Committee), for a period of one year (or such
other period as the Committee may specify at grant) from the date of such
termination of employment or until the expiration of the stated term of such
Stock Option, whichever period is the shorter; provided, however, that, if the
optionee dies within such one-year period (or such other period as the Committee
shall specify at grant), any unexercised Stock Option held by such optionee
shall thereafter be exercisable to the extent to which it was exercisable at the
time of death for a period of one year from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter. In the event of termination of employment by reason of Disability or
Normal or Early Retirement, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422 of the
Code, such Stock Option will thereafter be treated as a Non-Qualified Stock
Option.
viii. Other Termination - Unless otherwise determined by the
Committee (or pursuant to procedures established by the Committee) at or after
grant, if an optionee's employment by the Company and any Subsidiary or
Affiliate terminates for any reason other than death, Disability or Normal or
Early Retirement, the Stock Option shall thereupon terminate; provided, however,
that if the optionee is involuntarily terminated by the Company or any
Subsidiary or Affiliate without Cause, including a termination resulting from
the Subsidiary, Affiliate or division in which the optionee is employed or
engaged, ceasing, for any reason, to be a Subsidiary, Affiliate or division of
the Company, such Stock Option may be exercised, to the extent otherwise
exercisable on the date of termination, for a period of three months (or seven
months in the case of a person subject to the reporting and short-swing profit
provisions of Section 16 of the Exchange Act) from the date of such termination
or until the expiration of the stated term of such Stock Option, whichever is
shorter.
ix. Incentive Stock Options.
-----------------------
(A) Anything in the Plan to the contrary notwithstanding,
no term of the Plan relating to Incentive Stock Options shall be interpreted,
amended or altered, nor shall any discretion or authority granted under the
Plan be so exercised, so as to disqualify the Plan under Section 422 of the
Code, or, without the consent of the optionee(s) affected, to disqualify
any Incentive Stock Option under such Section 422.
(B) To the extent required for "incentive stock option"
status under Section 422(d) of the Code (taking into account applicable
Treasury regulations and pronouncements), the Plan shall be deemed to
provide that the aggregate Fair Market Value (determined as of the time of
grant) of the Stock with respect to which Incentive Stock Options are
exercisable for the first time by the optionee during any calendar year under
the Plan and/or any other stock option plan of the Company or any Subsidiary
or parent corporation (within the meaning of Section 425 of the Code) shall
not exceed $100,000. If Section 422 is hereafter amended to delete the
requirement now in Section 422(d) that the plan text expressly provide for
the $100,000 limitation set forth in Section 422(d), then this Paragraph 5(b)
(ix)(B) shall no longer be operative and the Committee may accelerate the dates
on which the incentive stock option may be exercised.
(C) To the extent permitted under Section 422 of the Code
or the applicable regulations thereunder or any applicable Internal Revenue
Service pronouncement:
(I) If (x) a participant's employment is
terminated by reason of death, Disability or Retirement and (y) the portion of
any Incentive Stock Option that is otherwise exercisable during the
post-termination period specified under Paragraphs 5(b)(vi) and (vii) of
the Plan, applied without regard to the $100,000 limitation contained in
Section 422(d) of the Code, is greater than the portion of
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such option that is immediately exercisable as an "incentive stock option"
during such post-termination period under Section 422, such excess shall be
treated as a Non-Qualified Stock Option; and
(II) if the exercise of an Incentive Stock Option
is accelerated by reason of a Change in Control, any portion of such option
that is not exercisable as an Incentive Stock Option by reason of the $100,000
limitation contained in Section 422(d) of the Code shall be treated as a
Non-Qualified Stock Option.
x. Buyout Provisions - The Committee may at any time offer to buy
out for a payment in cash, Stock, Deferred Stock or Restricted Stock an option
previously granted, based on such terms and conditions as the Committee shall
establish and communicate to the optionee at the time that such offer is made.
xi. Settlement Provisions - If the option agreement so provides
at grant or is amended after grant and prior to exercise to so provide (with the
optionee's consent), the Committee may require that all or part of the shares to
be issued with respect to the spread value of an exercised Option take the form
of Deferred or Restricted Stock which shall be valued on the date of exercise on
the basis of the Fair Market Value (as determined by the Committee) of such
Deferred or Restricted Stock determined without regard to the deferral
limitations and/or forfeiture restrictions involved.
6. Stock Appreciation Rights.
a. Grant and Exercise.
------------------
i. Stock Appreciation Rights may be granted in conjunction with
all or part of any Stock Option granted under the Plan. In the case of a
Non-Qualified Stock Option, such rights may be granted either at or after the
time of the grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of the grant of such Stock
Option.
ii. A Stock Appreciation Right or applicable portion thereof
granted with respect to a given Stock Option shall terminate and no longer be
exercisable upon the termination or exercise of the related Stock Option,
subject to such provisions as the Committee may specify at grant where a Stock
Appreciation Right is granted with respect to less than the full number of
shares covered by a related Stock Option.
iii. A Stock Appreciation Right may be exercised by an optionee,
subject to Paragraph 6(b) of the Plan, in accordance with the procedures
established by the Committee for such purpose. Upon such exercise, the optionee
shall be entitled to receive an amount determined in the manner prescribed in
said Paragraph 6(b). Stock Options relating to exercised Stock Appreciation
Rights shall no longer be exercisable to the extent that the related Stock
Appreciation Rights have been exercised.
b. Terms and Conditions - Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee, including the following:
i. Stock Appreciation Rights shall be exercisable only at such
time or times and to the extent that the Stock Options to which they relate
shall be exercisable in accordance with the provisions of this Section 6 and
Section 5 of the Plan; provided, however, that any Stock Appreciation Right
granted to an optionee subject to Section 16(b) of the Exchange Act subsequent
to the grant of the related Stock Option shall not be exercisable during the
first six months of its term, except that this special limitation shall not
apply in the event of death or Disability of the optionee prior to the
expiration of the six-month period. The exercise of Stock Appreciation Rights
held by optionees who are subject to Section 16(b) of the Exchange Act shall
comply with Rule 16b-3 thereunder to the extent applicable.
ii. Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in cash and/or shares of Stock equal in
value to the excess of the Fair Market Value of one share of Stock over the
option price per share specified in the related Stock Option multiplied by the
number of shares in respect of which the Stock Appreciation Right shall have
been exercised, with the Committee having the right to determine the form of
payment. When payment is to be made in shares of Stock, the number of shares to
be paid shall be calculated on the basis of the Fair Market Value of the shares
on the date of exercise. When payment is to be made in cash, such amount shall
be based upon the Fair Market
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Value of the Stock on the date of exercise, determined in a manner not
inconsistent with Section 16(b) of the Exchange Act and the rules of the
Commission thereunder.
iii. Stock Appreciation Rights shall be transferable only when
and to the extent that the underlying Stock Option would be transferable under
Paragraph 5(b)(v) of the Plan.
iv. Upon the exercise of a Stock Appreciation Right, the Stock
Option or part thereof to which such Stock Appreciation Right is related shall
be deemed to have been exercised only to the extent of the number of shares
issued under the Stock Appreciation Right at the time of exercise based on the
value of the Stock Appreciation Right at such time.
v. In its sole discretion, the Committee may grant Stock
Appreciation Rights that become exercisable only in the event of a Change in
Control and/or a Potential Change in Control, subject to such terms and
conditions as the Committee may specify at grant; provided that any such Stock
Appreciation Rights shall be settled solely in cash.
vi. The Committee, in its sole discretion, may also provide that,
in the event of a Change in Control and/or a Potential Change in Control, the
amount to be paid upon the exercise of a Stock Appreciation Right shall be based
on the Change in Control Price, subject to such terms and conditions as the
Committee may specify at grant.
7. Restricted Stock.
a. Administration - Shares of Restricted Stock may be issued either
alone, in addition to or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. The Committee shall determine the
eligible persons to whom, and the time or times at which, grants of Restricted
Stock will be made, the number of shares to be awarded, the price (if any) to be
paid by the recipient of Restricted Stock, subject to Paragraph 7(b) of the
Plan, the time or times within which such awards may be subject to forfeiture,
and all other terms and conditions of the awards. The Committee may condition
the grant of Restricted Stock upon the attainment of specified performance goals
or such other factors as the Committee may, in its sole discretion, determine.
The provisions of Restricted Stock awards need not be the same with respect to
each recipient.
b. Awards and Certificates.
-----------------------
i. The prospective recipient of a Restricted Stock award shall
not have any rights with respect to such award unless and until such recipient
has executed an agreement evidencing the award and has delivered a fully
executed copy thereof to the Company, and has otherwise complied with the
applicable terms and conditions of such award.
ii. The purchase price for shares of Restricted Stock may be
equal to or less than their par value and may be zero.
iii. Awards of Restricted Stock must be accepted within a period
of 60 days (or such shorter period as the Committee may specify at grant) after
the award date, by executing a Restricted Stock Award Agreement and paying the
price, if any, required under Paragraph 7(b)(ii).
iv. Each participant receiving a Restricted Stock award shall be
issued a stock certificate in respect of such shares of Restricted Stock. Such
certificate shall be registered in the name of such participant, and shall bear
an appropriate legend referring to the terms, conditions, and restrictions
applicable to such award.
v. The Committee shall require that (A) the stock certificates
evidencing shares of Restricted Stock be held in the custody of the Company
until the restrictions thereon shall have lapsed, and (B) as a condition of any
Restricted Stock award, the participant shall have delivered a stock power,
endorsed in blank, relating to the Restricted Stock covered by such award.
c. Restrictions and Conditions - The shares of Restricted Stock awarded
pursuant to this Section 7 shall be subject to the following restrictions and
conditions:
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i. Subject to the provisions of the Plan and the award agreement,
during a period set by the Committee commencing with the date of such award (the
"Restriction Period"), the participant shall not be permitted to sell, transfer,
pledge or assign shares of Restricted Stock awarded under the Plan. Within these
limits, the Committee, in its sole discretion, may provide for the lapse of such
restrictions in installments and may accelerate or waive such restrictions in
whole or in part, based on service, performance and/or such other factors or
criteria as the Committee may determine, in its sole discretion.
ii. Except as provided in this paragraph 7(c)(ii) and Paragraph
7(c)(i) of the Plan, the participant shall have, with respect to the shares of
Restricted Stock, all of the rights of a stockholder of the Company, including
the right to vote the shares and the right to receive any regular cash dividends
paid out of current earnings. The Committee, in its sole discretion, as
determined at the time of award, may permit or require the payment of cash
dividends to be deferred and, if the Committee so determines, reinvested,
subject to Paragraph 14(e) of the Plan, in additional Restricted Stock to the
extent shares are available under Section 3 of the Plan, or otherwise
reinvested. Stock dividends, splits and distributions issued with respect to
Restricted Stock shall be treated as additional shares of Restricted Stock that
are subject to the same restrictions and other terms and conditions that apply
to the shares with respect to which such dividends are issued, and the Committee
may require the participant to deliver an additional stock power covering the
shares issuable pursuant to such stock dividend, split or distribution. Any
other dividends or property distributed with regard to Restricted Stock, other
than regular dividends payable and paid out of current earnings, shall be held
by the Company subject to the same restrictions as the Restricted Stock.
iii. Subject to the applicable provisions of the award agreement
and this Section 7, upon termination of a participant's employment with the
Company and any Subsidiary or Affiliate for any reason during the Restriction
Period, all shares still subject to restriction will vest, or be forfeited, in
accordance with the terms and conditions established by the Committee at or
after grant.
iv. If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction Period,
certificates for an appropriate number of unrestricted shares, and other
property held by the Company with respect to such Restricted Shares, shall be
delivered to the participant promptly.
d. Minimum Value Provisions - In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
Stock Option or performance-based or other award designed to guarantee a minimum
value, payable in cash or Stock to the recipient of a Restricted Stock award,
subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.
8. Deferred Stock.
a. Administration - Deferred Stock may be awarded either alone, in
addition to or in tandem with other awards granted under the Plan and/or cash
awards made outside of the Plan. The Committee shall determine the eligible
persons to whom and the time or times at which Deferred Stock shall be awarded,
the number of shares of Deferred Stock to be awarded to any person, the duration
of the period (the "Deferral Period") during which, and the conditions under
which, receipt of the Stock will be deferred, and the other terms and conditions
of the award in addition to those set forth in Paragraph 8(b). The Committee may
condition the grant of Deferred Stock upon the attainment of specified
performance goals or such other factors or criteria as the Committee shall, in
its sole discretion, determine. The provisions of Deferred Stock awards need not
be the same with respect to each recipient.
b. Terms and Conditions - The shares of Deferred Stock awarded pursuant
to this Section 8 shall be subject to the following terms and conditions:
i. Subject to the provisions of the Plan and the award agreement
referred to in Paragraph 8(b)(vi) of the Plan, Deferred Stock awards may not be
sold, assigned, transferred, pledged or otherwise encumbered during the Deferral
Period. At the expiration of the Deferral Period (or the Elective Deferral
Period referred to in Paragraph 8(b)(v) of the Plan, where applicable), share
certificates representing the shares covered by the Deferred Stock award shall
be delivered to the participant or his legal representative.
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ii. Unless otherwise determined by the Committee at grant,
amounts equal to any dividends declared during the Deferral Period with respect
to the number of shares covered by a Deferred Stock award will be paid to the
participant currently, or deferred and deemed to be reinvested in additional
Deferred Stock, or otherwise reinvested, all as determined at or after the time
of the award by the Committee, in its sole discretion.
iii. Subject to the provisions of the award agreement and this
Section 8, upon termination of a participant's employment with the Company and
any Subsidiary or Affiliate for any reason during the Deferral Period for a
given award, the Deferred Stock in question will vest, or be forfeited, in
accordance with the terms and conditions established by the Committee at or
after grant.
iv. Based on service, performance and/or such other factors or
criteria as the Committee may determine, the Committee may, at or after grant,
accelerate the vesting of all or any part of any Deferred Stock award and/or
waive the deferral limitations for all or any part of such award.
v. A participant may elect to further defer receipt of an award
(or an installment of an award) for a specified period or until a specified
event (the "Elective Deferral Period"), subject in each case to the Committee's
approval and to such terms as are determined by the Committee, all in its sole
discretion. Subject to any exceptions adopted by the Committee, such election
must generally be made at least twelve months prior to completion of the
Deferral Period for such Deferred Stock award (or such installment).
vi. Each award shall be confirmed by, and subject to the terms
of, a Deferred Stock agreement executed by the Company and the participant.
c. Minimum Value Provisions - In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
Stock Option or performance-based or other award designed to guarantee a minimum
value, payable in cash or Stock to the recipient of a deferred stock award,
subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.
9. Stock Purchase Rights.
a. Awards and Administration - The Committee may grant eligible
participants Stock Purchase Rights which shall enable such participants to
purchase Stock (including Deferred Stock and Restricted Stock):
i. at its Fair Market Value on the date of grant;
ii. at a percentage of such Fair Market Value on such date,
such percentage to be determined by the Committee in its sole discretion;
iii. at an amount equal to Book Value on such date; or
iv. at an amount equal to the par value of such Stock on such
date.
The Committee shall also impose such deferral, forfeiture and/or other
terms and conditions as it shall determine, in its sole discretion, on such
Stock Purchase Rights or the exercise thereof. The terms of Stock Purchase
Rights awards need not be the same with respect to each participant. Each Stock
Purchase Right award shall be confirmed by, and be subject to the terms of, a
Stock Purchase Rights Agreement.
b. Exercisability - Stock Purchase Rights shall generally be exercisable
for such period after grant as is determined by the Committee not to exceed
sixty (60) days. However, the Committee may provide, in its sole discretion,
that the Stock Purchase Rights of persons potentially subject to Section 16(b)
of the Exchange Act shall not become exercisable until six months and one day
after the grant date, and shall then be exercisable for ten trading days at the
purchase price specified by the Committee in accordance with Paragraph 9(a) of
the Plan.
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<PAGE>
10. Other Stock-Based Awards.
a. Administration.
--------------
i. Other awards of Stock and other awards that are valued in
whole or in part by reference to, or are otherwise based on, Stock ("Other
Stock-Based Awards"), including, without limitation, performance shares,
convertible preferred stock (to the extent a series of preferred stock has been
or may be created by, or in accordance with a procedure set forth in, the
Company's certificate of incorporation), convertible debentures, warrants,
exchangeable securities and Stock awards or options valued by reference to Fair
Market Value, Book Value or performance of the Company or any Subsidiary,
Affiliate or division, may be granted either alone or in addition to or in
tandem with Stock Options, Stock Appreciation Rights, Restricted Stock, Deferred
Stock or Stock Purchase Rights granted under the Plan and/or cash awards made
outside of the Plan.
ii. Subject to the provisions of the Plan, the Committee shall
have authority to determine the persons to whom and the time or times at which
such award shall be made, the number of shares of Stock to be awarded pursuant
to such awards, and all other conditions of the awards. The Committee may also
provide for the grant of Stock upon the completion of a specified performance
period. The provisions of Other Stock-Based Awards need not be the same with
respect to each recipient.
b. Terms and Conditions - Other Stock-Based Awards made pursuant to
this Section 10 shall be subject to the following terms and conditions:
i. Subject to the provisions of the Plan and the award agreement
referred to in Paragraph 10(b)(v) of the Plan, shares of Stock subject to awards
made under this Section 10 may not be sold, assigned, transferred, pledged or
otherwise encumbered prior to the date on which the shares are issued, or, if
later, the date on which any applicable restriction, performance or deferral
period lapses.
ii. Subject to the provisions of the Plan and the award agreement
and unless otherwise determined by the Committee at grant, the recipient of an
award under this Section 10 shall be entitled to receive, currently or on a
deferred basis, interest or dividends or interest or dividend equivalents with
respect to the number of shares covered by the award, as determined at the time
of the award by the Committee, in its sole discretion, and the Committee may
provide that such amounts (if any) shall be deemed to have been reinvested in
additional Stock or otherwise reinvested.
iii. Any award under Section 10 and any Stock covered by any such
award shall vest or be forfeited to the extent so provided in the award
agreement, as determined by the Committee, in its sole discretion.
iv. In the event of the participant's Retirement, Disability or
death, or in cases of special circumstances, the Committee may, in its sole
discretion, waive in whole or in part any or all of the remaining limitations
(if any) imposed with respect to any or all of an award pursuant to this Section
10.
v. Each award under this Section 10 shall be confirmed by, and
subject to the terms of, an agreement or other instrument by the Company and by
the participant.
vi. Stock (including securities convertible into Stock) issued on
a bonus basis under this Section 10 may be issued for no cash consideration.
11. Change in Control Provisions.
a. Impact of Event - In the event of a "Change in Control," as defined
in Paragraph 11(b) of the Plan, or a "Potential Change in Control," as defined
in Paragraph 11(c) of the Plan, except to the extent otherwise determined by
the Committee or the Board at or after grant (subject to any right of
approval expressly reserved by the Committee or the Board at the time
of such determination), the following acceleration and valuation provisions
shall apply:
i. Any Stock Appreciation Rights outstanding for at least six
months and any Stock Options awarded under the Plan not previously exercisable
and vested shall become fully exercisable and vested, regardless of whether the
amendment to the Plan pursuant to which such Stock Options shall have been
A-11
<PAGE>
granted shall have been approved by stockholders; provided, however, that if
such stockholder approval shall not have been obtained prior to a Change of
Control or a Potential Change of Control, any Incentive Stock Options may, with
the consent of the holders thereof, be treated as Non-Qualified Stock Options.
ii. The restrictions and deferral limitations applicable to any
Restricted Stock, Deferred Stock, Stock Purchase rights and Other Stock-Based
Awards, in each case to the extent not already vested under the Plan, shall
lapse and such shares and awards shall be deemed fully vested, regardless of
whether the amendment to the Plan pursuant to which such Stock Options shall
have been granted shall have been approved by stockholders.
iii. The value of all outstanding Stock Options, Stock
Appreciation Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and
Other Stock-Based Awards, in each case to the extent vested (including such
rights which shall have become vested pursuant to Paragraphs 11(a)(i) and (ii)
of the Plan), shall be purchased by the Company ("cashout") in a manner
determined by the Committee, in its sole discretion, on the basis of the "Change
in Control Price" as defined in Paragraph 11(d) of the Plan as of the date such
Change in Control or such Potential Change in Control is determined to have
occurred or such other date as the Committee may determine prior to the Change
in Control, unless the Committee shall, contemporaneously with or prior to any
particular Change of Control or Potential Change of Control, determine that this
Paragraph 11(a)(iii) shall not be applicable to such Change in Control or
Potential Change in Control.
b. Definition of "Change in Control" - For purposes of Paragraph 11(a)
of the Plan, a "Change in Control" means the happening of any of the following:
i. When any "person" (as defined in Section 3(a)(9) of the
Exchange Act and as used in Sections 13(d) and 14(d) of the Exchange Act,
including a "group" as defined in Section 13(d) of the Exchange Act, but
excluding the Company and any Subsidiary and any employee benefit plan sponsored
or maintained by the Company or any Subsidiary and any trustee of such plan
acting as trustee) directly or indirectly becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of
securities of the Company representing twenty-five percent or more of the
combined voting power of the Company's then outstanding securities; provided,
however, that a Change of Control shall not arise if such acquisition is
approved by the board of directors or if the board of directors or the Committee
determines that such acquisition is not a Change of Control or if the board of
directors authorizes the issuance of the shares of Common Stock (or securities
convertible into Common Stock or upon the exercise of which shares of Common
Stock may be issued) to such persons; or
ii. When, during any period of twenty-four consecutive months
during the existence of the Plan, the individuals who, at the beginning of such
period, constitute the Board (the "Incumbent Directors") cease for any reason
other than death, Disability or Retirement to constitute at least a majority
thereof, provided, however, that a director who was not a director at the
beginning of such 24-month period shall be deemed to have satisfied such
24-month requirement (and be an Incumbent Director) if such director was elected
by, or on the recommendation of, or with the approval of, at least two-thirds of
the directors who then qualified as Incumbent Directors either actually (because
they were directors at the beginning of such 24-month period) or by prior
operation of this Paragraph 11(b)(ii); or
iii. The occurrence of a transaction requiring stockholder
approval for the acquisition of the Company by an entity other than the Company
or a Subsidiary through purchase of assets, or by merger, or otherwise.
c. Definition of Potential Change in Control - For purposes of
Paragraph 11(a) of the Plan, a "Potential Change in Control" means the happening
of any one of the following:
i. The approval by stockholders of an agreement by the Company,
the consummation of which would result in a Change in Control of the Company as
defined in Section 11(b) of the Plan; or
ii. The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the Company or a
Subsidiary or any Company employee benefit plan or any trustee of such plan
acting as such trustee) of securities of the Company representing five percent
or more of the combined voting power of the Company's outstanding securities and
the adoption by the Board of Directors
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<PAGE>
of a resolution to the effect that a Potential Change in Control of the Company
has occurred for purposes of the Plan.
d. Change in Control Price - For purposes of this Section 11, "Change in
Control Price" means the highest price per share paid in any transaction
reported on the principal stock exchange on which the Stock is traded or the
average of the highest bid and asked prices as reported by NASDAQ, or paid or
offered in any bona fide transaction related to a potential or actual Change in
Control of the Company at any time during the sixty-day period immediately
preceding the occurrence of the Change in Control (or, where applicable, the
occurrence of the Potential Change in Control event), in each case as determined
by the Committee except that, in the case of Incentive Stock Options and Stock
Appreciation Rights relating to Incentive Stock Options, such price shall be
based only on transactions reported for the date on which the optionee exercises
such Stock Appreciation Rights or, where applicable, the date on which a cashout
occurs under Paragraph 11(a)(iii).
12. Amendments and Termination.
a. The Board may amend, alter, or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made which would impair the
rights of an optionee or participant under a Stock Option, Stock Appreciation
Right (or Limited Stock Appreciation Right), Restricted or Deferred Stock award,
Stock Purchase Right or Other Stock-Based Award theretofore granted, without the
optionee's or participant's consent, and no amendment will be made without
approval of the stockholders if such amendment requires stockholder approval
under state law or if stockholder approval is necessary in order that the Plan
comply with Rule 16b-3 of the Commission under the Exchange Act or any
substitute or successor rule or if stockholder approval is necessary in order to
enable the grant pursuant to the Plan of options or other awards intended to
confer tax benefits upon the recipients thereof.
b. The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights or any holder without the holder's consent. The Committee may
also substitute new Stock Options for previously granted Stock Options (on a one
for one or other basis), including previously granted Stock Options having
higher option exercise prices.
c. Subject to the provisions of Paragraphs 12(a) and (b) of the Plan,
the Board shall have broad authority to amend the Plan to take into account
changes in applicable securities and tax laws and accounting rules, as well as
other developments, and, in particular, without limiting in any way the
generality of the foregoing, to eliminate any provisions which are not required
to included as a result of any amendment to Rule 16b-3 of the Commission
pursuant to the Exchange Act.
13. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained in this Plan shall
give any such participant or optionee any rights that are greater than those of
a general creditor of the Company. In its sole discretion, the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock or payments in lieu of or with respect
to awards under this Plan; provided, however, that, unless the Committee
otherwise determines with the consent of the affected participant, the existence
of such trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan.
14. General Provisions.
a. The Committee may require each person purchasing shares pursuant to a
Stock Option or other award under the Plan to represent to and agree with the
Company in writing that the optionee or participant is acquiring the shares
without a view to distribution thereof. The certificates for such shares may
include any legend which the Committee deems appropriate to reflect any
restrictions on transfer. All certificates or shares of Stock or other
securities delivered under the Plan shall be subject to such stock-transfer
orders and other restrictions as the Committee may deem advisable under the
rules, regulations, and other requirements of the Commission, any stock exchange
upon which the Stock is then listed, and any applicable Federal or state
securities law, and the Committee may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
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<PAGE>
b. Nothing contained in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases.
c. Neither the adoption of the Plan nor the grant of any award pursuant
to the Plan shall confer upon any employee of the Company or any Subsidiary or
Affiliate any right to continued employment with the Company or a Subsidiary or
Affiliate, as the case may be, nor shall it interfere in any way with the right
of the Company or a Subsidiary or Affiliate to terminate the employment of any
of its employees at any time.
d. No later than the date as of which an amount first becomes includible
in the gross income of the participant for Federal income tax purposes with
respect to any award under the Plan, the participant shall pay to the Company,
or make arrangements satisfactory to the Committee regarding the payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to such amount. Unless otherwise determined by the Committee,
withholding obligations may be settled with Stock, including Stock that is part
of the award that gives rise to the withholding requirement. The obligations of
the Company under the Plan shall be conditional on such payment or arrangements
and the Company and its Subsidiaries or Affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the participant.
e. The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or in Deferred Stock or other types
of Plan awards) at the time of any dividend payment shall only be permissible if
sufficient shares of Stock are available under Section 3 of the Plan for such
reinvestment (taking into account then outstanding Stock Options, Stock Purchase
Rights and other Plan awards).
15. Effective Date of Plan.
The Plan shall be effective as of the date the Plan is approved by the
Board, subject to the approval of the Plan by a majority of the votes cast by
the holders of the Company's Common Stock at the next annual or special meeting
of stockholders. Any grants made under the Plan prior to such approval shall be
effective when made (unless otherwise specified by the Committee at the time of
grant), but shall be conditioned on, and subject to, such approval of the Plan
by such stockholders.
16. Term of Plan.
Stock Option, Stock Appreciation Right, Restricted Stock award, Deferred
Stock award, Stock Purchase Right or Other Stock-Based Award may be granted
pursuant to the Plan, until ten (10) years from the date the Plan was approved
by the Board, unless the Plan shall be terminated by the Board, in its
discretion, prior to such date, but awards granted prior to such termination may
extend beyond that date.
A-14
NETSMART TECHNOLOGIES, INC.
EXHIBIT 10.8 - 1999 EMPLOYEE STOCK PURCHASE PLAN
- --------------------------------------------------------------------------------
1. Introduction
------------
(a) Purpose. The Netsmart Technologies, Inc. Employee Stock Purchase
Plan (the "Plan") is intended to provide a method whereby employees of Netsmart
Technologies, Inc. (the "Company") and its Participating Subsidiaries (as
defined below) will have an opportunity to acquire a proprietary interest in the
Company through the purchase of shares of the Common Stock of the Company.
(b) Rules of Interpretation. It is the intention of the Company to have
the Plan qualify as an "employee stock purchase plan" under Section 423 of the
Code (as defined below), although the Company makes no undertaking nor
representation to maintain such qualification. The provisions of the Plan shall
be construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.
2. Definitions
-----------
(a) "Board" shall mean the board of directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the committee appointed by the Board of
Directors in accordance with Paragraph 11(a) of the Plan.
(d) "Company" shall mean Netsmart Technologies, Inc., a Delaware
corporation.
(e) "Compensation" shall mean the gross cash compensation (including,
wage, salary and overtime earnings) paid by the Company or any Participating
Subsidiary to a participant in accordance with the terms of employment, but
excluding all bonus payments, expense allowances and compensation paid in a form
other than cash.
(f) "Common Stock" shall mean the Company's common stock, par value $.01
per share or any class of common stock into which such common stock may
hereafter be converted or for which such common stock may be exchanged pursuant
to the Company's certificate of incorporation or as part of a recapitalization,
reorganization or similar transaction.
(g) "Employee" shall mean any person who is classified as an employee
(within the meaning of Section 3401(c)of the Code) by the Company or any
Participating Subsidiary on the Company's payroll records during the relevant
participation period.
(h) "Offering," "Offering Commencement Date" and "Offering Termination
Date" shall have the meanings set forth in Paragraph 4(b) of the Plan.
(i) "Participant" shall mean a participant in the Plan as described
in Paragraph 4 of the Plan.
(j) "Participating Subsidiary" shall mean a Subsidiary of the Company
whose employees are entitled to participate in the Plan. The Committee shall
have the power and authority to determine which Subsidiaries shall be
Participating Subsidiaries.
(k) "Plan" shall mean the Netsmart Technologies, Inc. 1999 Employee
Stock Purchase Plan.
(l) "Plan Representative" shall mean any person designated from time to
time by the Committee to receive certain notices and take certain other
administrative actions relating to participation in the Plan.
(m) "Principal Market" shall mean the principal stock exchange or market
on which the Common Stock is traded. As of the date the Plan was adopted by the
Board, the Principal Market was the Nasdaq SmallCap Market.
<PAGE>
(n) "Subsidiary" shall mean any corporation or other business
association (other than the Company or any partnership, limited liability
company or other entity which is treated as a partnership for federal income tax
purposes) in an unbroken chain of corporations or other business associations
beginning with the Company if each of the corporations or other business
associations (other than the last corporation in the unbroken chain) owns equity
interests (including stock) possessing 50% or more of the total combined voting
power of all classes of equity in one of the other corporations or other
business associations in the chain.
3. Eligibility and Participation
-----------------------------
(a) Initial Eligibility. Each Employee who shall have completed six
consecutive months of employment with the Company or any Participating
Subsidiary and shall be employed by the Company or any Participating Subsidiary
on the date his or her participation in the Plan is to become effective shall be
eligible to participate in Offerings (as defined below) under the Plan which
commence after such six-month period has concluded. Persons who are not
Employees shall not be eligible to participate in the Plan. All Employees who
participate in the Plan shall have the same rights and privileges under the Plan
except for differences which are consistent with Section 423(b)(5) of the Code
and the regulations thereunder.
(b) Restrictions on Participation. Notwithstanding any provision of the
Plan to the contrary, no Employee shall be granted an option to purchase shares
of Common Stock under the Plan:
(i) if, immediately after the grant, such Employee would own
stock and/or hold outstanding options to purchase stock possessing 5% or more of
the total combined voting power or value of all classes of stock of the Company
or of any of its Subsidiary Corporations (for purposes of this paragraph, the
rules of Section 424(d) of the Code shall apply in determining stock ownership
of any Employee); or
(ii) which permits such Employee's rights to purchase stock under
all Employee stock purchase plans of the Company or any of its Subsidiaries to
accrue at a rate which exceeds $25,000 of fair market value of the stock
(determined at the time such option is granted) for each calendar year in which
such option is outstanding at any time.
(c) Commencement of Participation. An eligible Employee may become a
participant by completing an authorization for payroll deductions on the form
provided by the Company and filing the completed form with the Plan
Representative on or before the filing date set therefor by the Committee, which
date shall be at least 30 days prior to the Offering Commencement Date for the
next following Offering. Payroll deductions for a participant shall commence on
the next following Offering Commencement Date after the Employee's authorization
for payroll deductions becomes effective and shall continue until termination of
the Plan or the participant's earlier termination of participation in the Plan.
Each participant in the Plan shall be deemed to continue participation until
termination of the Plan or such participant's earlier termination of
participation in the Plan pursuant to Paragraph 8 of the Plan.
4. Stock Subject to the Plan and Offerings
---------------------------------------
(a) Stock Subject to the Plan. Subject to the provisions of Paragraph
12(d) of the Plan, the Board shall reserve for issuance under the Plan an
aggregate of one hundred fifty thousand (150,000) shares of Common Stock, which
shares shall be authorized but unissued shares of Common Stock or shares of
Common Stock held as treasury stock. The Board may, subject to stockholder
approval, from time to time reserve additional shares of Common Stock for
issuance pursuant to the Plan; provided, however, that at no time shall the
number of shares of Common Stock reserved be greater than permitted by
applicable law.
(b) Offerings. The Plan will be implemented by successive offerings of
the Company's Common Stock (the "Offerings"), which shall be for a period of
three, six or twelve months, as the Committee shall determine.. The first
Offering shall begin on a date determined at the discretion of the Committee.
Each successive Offering shall begin on a date determined at the discretion of
the Committee. The first day of each Offering shall be deemed the "Offering
Commencement Date" and the last day the "Offering Termination Date" for such
Offering. The Offering Commencement Date for any Offering shall not be earlier
than the Offering Termination Date of the preceding Offering.
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<PAGE>
5. Payroll Deductions
------------------
(a) Amount of Deduction. A Participant may elect payroll deductions of
any whole or half percentage from one percent (1 %) through five percent (5%) of
such Participant's Compensation for each pay period during an Offering.
(b) Participant's Account. All payroll deductions made for a
participant shall be credited to an account established for such participant
under the Plan. A participant may not make any separate cash payment into such
account.
(c) Changes in Payroll Deductions. A participant may reduce or increase
future payroll deductions (within the limits described in Paragraph 5(a) of the
Plan) by filing with the Plan Representative a form provided by the Company for
such purpose. The effective date of any increase or reduction in future payroll
deductions will be the first day of the next pay period succeeding processing of
the change form.
6. Granting of Option
------------------
(a) Number of Option Shares. On the Commencement Date of each Offering,
each participating Employee shall be deemed to have been granted an option to
purchase a maximum number of shares of Common Stock equal to (i) the sum of (x)
that percentage of the Employee's Compensation which the Employee has elected to
have withheld (but not in any case in excess of 5%) multiplied by the Employee's
Compensation during the Offering and (y) the amount of any accumulated payroll
deductions from a prior Offering held for the purchase of Common Stock pursuant
to Paragraph 7(c) of the Plan divided by (ii) the applicable Offering Price
determined as provided in Paragraph 6(b) of the Plan. Such number of shares
shall be finally determined at such time as the Offering Price is determined.
(b) Offering Price. The price of stock purchased with payroll deductions
(the "Offering Price") made during the initial Offering and any subsequent
Offerings shall be 85% of the lower of:
(i) the greater of (x) 90% of the closing price of the stock on
the Offering Commencement Date for such Offering or the nearest prior business
day on which trading occurred on the Principal Market, or (y) the average of the
closing prices of the Common Stock on the last five days preceding the Offering
Commencement Date on which trading occurred on the Principal Market; or
(ii) the greater of (x) 90% of the closing price on the Offering
Termination Date for such Offering or the nearest prior business day on which
trading occurred on the Principal Market, or (y) the average of the prices of
the stock on the last five days of the Offering on which trading occurred on the
Principal Market. For purposes of determining the average of the prices of stock
over a five-day period, the price of the Common Stock for any day shall be the
closing price of the Common Stock on the Principal Market on that day.
7. Exercise of Option
------------------
(a) Automatic Exercise. Each Participant's option to purchase Common
Stock with payroll deductions made during any Offering will be deemed to have
been exercised automatically on the applicable Offering Termination Date for the
purchase of the number of full shares of Common Stock which the accumulated
payroll deductions in the Participant's account at the time will purchase at the
applicable Offering Price. Notwithstanding the foregoing, in the event that the
number of shares to be purchased by all participants exceeds the maximum number
of shares which may be issued pursuant to the Plan, the number of shares to be
purchased by all participants shall be reduced proportionately, except that no
participant shall purchase less than one share of Common Stock.
(b) Withdrawal of Account. No Participant shall be entitled to withdraw
any amount from the accumulated payroll deductions in his or her account;
provided, however, that a participant's accumulated payroll deductions shall be
refunded to the Participant as and to the extent specified in Paragraph 8(a) of
the Plan upon termination of such Participant's participation in the Offering.
(c) Fractional Shares. Fractional shares of Common Stock will not be
issued under the Plan. Any accumulated payroll deductions which would have been
used to purchase fractional shares, unless refunded pursuant to Paragraph 7(b)
of the Plan, will be held for the purchase of Common Stock in the next
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<PAGE>
following Offering, without interest; provided, however, that the Committee may
elect to refund to the Participants all cash held in lieu of issuing fractional
shares.
(d) Exercise of Options. During a Participant's lifetime, options
held by a Participant shall be exercisable only by such Participant.
(e) Delivery of Stock. As promptly as practicable after the Offering
Termination Date of each Offering, the Company will deliver to each Participant
in such Offering a certificate for the shares of Common Stock purchased in the
Offering upon exercise of the Participant's option.
(f) Benefits of Section 423 of the Code. The Plan is intended to satisfy
the requirements of Section 423 of the Code. A Participant will not obtain the
benefits of this provision if such participant disposes of shares of Common
Stock acquired pursuant to the Plan within two (2) years from the Offering
Commencement Date of the Offering for which the options to purchase shares were
granted or within one (1) year from the date such Common Stock is purchased by
the participant, whichever is later.
8. Withdrawal
----------
(a) In General. A Participant may stop participating in the Plan at any
time by giving written notice to the Plan Representative. Upon processing of any
such written notice, no further payroll deductions will be made from the
Participant's Compensation during such Offering or thereafter, unless and until
such Participant elects to resume participation in the Plan by providing written
notice to the Plan Representative pursuant to Paragraph 3(c) of the Plan. Such
Participant's payroll deductions accumulated prior to processing of such notice
shall be applied toward purchasing full shares of Common Stock in the
then-current Offering as provided in Paragraph 7(a) of the Plan. Any cash
balance remaining after the purchase of shares in such Offering shall be
refunded promptly to such Participant.
(b) Effect on Subsequent Participation. A Participant's withdrawal from
any Offering will not have any effect upon such participant's eligibility to
participate in any succeeding Offering or in any similar plan which may
hereafter be adopted by the Company and for which such Participant is otherwise
eligible.
(c) Termination of Employment. Upon termination of a Participant's
employment with the Company or any Participating Subsidiary (as the case may be)
for any reason, including retirement or death, the participant's payroll
deductions accumulated prior to such termination, if any, shall be applied
toward purchasing full shares of Common Stock in the then-current Offering, and
any cash balance remaining after the purchase of shares in such Offering shall
be refunded to the Participant or, in the case of the Participant's death, to
the person or persons entitled thereto under Paragraph 12(a) of the Plan, and
the Participant's participation in the Plan shall be deemed to be terminated. In
the event that a Participant is employed by a Subsidiary which, during the term
of an Offering, ceases to be a Subsidiary, the Participant's employment shall be
deemed to have been terminated as of the date such entity ceased to be a
Subsidiary.
9. Interest
--------
(a) Payment of Interest. No interest will be paid or allowed on any
money paid into the Plan or credited to the account of or distributed to any
Participant.
10. Stock
-----
(a) Participant's Interest in Option Stock. No Participant will have any
interest in shares of Common Stock covered by any option held by such
Participant until such option has been exercised as provided in Paragraph 7(a)
of the Plan.
(b) Registration of Stock. Shares of Common Stock purchased by a
Participant under the Plan will be registered in the name of the Participant,
or, if the Participant so directs by written notice to the Plan Representative
prior to the Offering Termination Date applicable thereto, in the names of the
Participant and one such other person as may be designated by the Participant,
as joint tenants with rights of survivorship or as tenants by the entireties, to
the extent permitted by applicable law.
11. Administration
--------------
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<PAGE>
(a) Appointment of Committee. The Board shall appoint a committee (the
"Committee") to administer the Plan, which shall consist solely of no fewer than
three "nonemployee directors" (as defined in Rule 16b-3(a)(3) promulgated under
the Securities Act of 1933, as amended). If no committee is appointed by the
Board of Directors, then the Board shall serve as the Committee.
(b) Authority of Committee. Subject to the express provisions of the
Plan, the Committee shall have plenary authority in its discretion to interpret
and construe any and all provision of the Plan, to adopt rules and regulations
for administering the Plan, and to make all other determinations deemed
necessary or advisable for administering the Plan. The Committee's determination
of the foregoing matters shall be conclusive.
(c) Rules Governing the Administration of the Committee. The Board may
from time to time appoint members of the Committee in substitution for or in
addition to members previously appointed and may fill vacancies, however caused,
in the Committee. The Committee may select one of its members as its chairman,
shall hold its meetings at such times and places as it shall deem advisable, and
may hold telephonic meetings. All determinations of the Committee shall be made
by a majority of its members. A decision or determination reduced to writing and
signed by a majority of the members of the Committee shall be as fully effective
as if it had been made by a majority vote at a meeting duly called and held. The
Committee may appoint a secretary and shall make such rules and regulations for
the conduct of its business as it shall deem advisable.
12. Miscellaneous
-------------
(a) Designation of Beneficiary. A Participant may file with the Plan
Representative a written designation of a beneficiary who is to receive any
shares of Common Stock and/or cash under the Plan upon the Participant's death.
Such designation of beneficiary may be changed by the Participant at any time by
written notice to the Plan Representative. Upon the death of a Participant and
receipt by the Company of proof of identity and existence at the Participant's
death of a beneficiary validly designated by the participant under the Plan, and
subject to Paragraph 8 of the Plan above concerning withdrawal from the Plan,
the Company shall deliver such shares of Common Stock and/or cash to such
beneficiary. In the event of the death of a Participant lacking a beneficiary
validly designated under the Plan who is living at the time of such
Participant's death, the Company shall deliver such shares of Common Stock
and/or cash to the executor or administrator of the estate of the Participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares of Common
Stock and/or cash to the spouse or to any one or more dependents of the
Participant, in each case without any further liability of the Company
whatsoever under or relating to the Plan. No beneficiary shall, prior to the
death of the Participant by whom he or she has been designated, acquire any
interest in the shares of Common Stock and/or cash credited to the Participant
under the Plan.
(b) Transferability. Neither payroll deductions credited to any
Participant's account nor any option or rights with regard to the exercise of an
option or to receive Common Stock under the Plan may be assigned, transferred,
pledged, or otherwise disposed of in any way by the Participant other than by
will or the laws of descent and distribution. Any such attempted assignment,
transfer, pledge or other disposition shall be without effect, except that the
Company may, in its discretion, treat such act as an election to withdraw from
participation in the Plan in accordance with Paragraph 8(a) of the Plan.
(c) Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose. The Company
shall not be obligated to segregate such payroll deductions.
(d) Adjustment Upon Changes in Capitalization.
-----------------------------------------
(i) If, while any options are outstanding under the Plan, the
outstanding shares of Common Stock of the Company have increased, decreased,
changed into, or been exchanged for a different number or kind of shares or
securities of the Company through any reorganization, merger, recapitalization,
reclassification, stock split, reverse stock split or similar transaction,
appropriate and proportionate adjustments may be made by the Committee in the
number and/or kind of shares which are subject to purchase under outstanding
options and in the Offering Price or Prices applicable to such outstanding
options. In addition, in any such event, the number and/or kind of shares which
may be offered in the Offerings described in Paragraph 4 of the Plan shall also
be proportionately adjusted.
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<PAGE>
(ii) Upon the dissolution or liquidation of the Company, or upon
a reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon a sale of substantially all of the property or capital stock of the
Company to another corporation, the holder of each option then outstanding under
the Plan will thereafter be entitled to receive at the next Offering Termination
Date, upon the exercise of such option, for each share as to which such option
shall be exercised, as nearly as reasonably may be determined, the cash,
securities and/or property which a holder of one share of the Common Stock was
entitled to receive upon and at the time of such transaction. The Board shall
take such steps in connection with such transactions as the Board shall deem
necessary to assure that the provisions of this Paragraph 12(d) shall thereafter
be applicable, as nearly as reasonably may be determined, in relation to the
said cash, securities and/or property as to which each such holder of any such
option might hereafter be entitled to receive.
(e) Amendment and Termination. The Board shall have complete power and
authority to terminate or amend the Plan; provided, however, that the Board
shall not, without the approval of the stockholders of the Company, alter (i)
the aggregate number of shares of Common Stock which may be issued under the
Plan (except pursuant to Paragraph 12(d) of the Plan) or (ii) the class of
employees eligible to receive options under the Plan, other than to designate
additional Subsidiaries as Participating Subsidiarys, and provided further,
however, that no termination, modification, or amendment of the Plan may,
without the consent of an Employee then having an option under the Plan to
purchase shares of Common Stock, adversely affect the rights of such Employee
under such option.
(f) Effective Date. The Plan shall become effective as of November 18,
1999, subject to approval by the holders of a majority of the shares of Common
Stock present and represented at any special or annual meeting of the
stockholders of the Company duly held within twelve months after adoption of the
Plan. If the Plan is not so approved, the Plan shall not become effective.
(g) No Employment Rights. The Plan does not, directly or indirectly,
create in any person any right with respect to continuation of employment by the
Company or any Subsidiary, and it shall not be deemed to interfere in any way
with the Company's or any Subsidiary's right to terminate, or otherwise modify,
any employee's employment at any time.
(h) Effect of Plan. The provisions of the Plan shall, in accordance with
its terms, be binding upon, and inure to the benefit of, all successors of each
Employee participating in the Plan, including, without limitation, such
Employee's estate and the executors, administrators or trustees thereof, heirs
and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such Employee.
(i) Governing Law. The law of the State of New York will govern all
matters relating to this Plan except to the extent superseded by the federal
laws of the United States.
(j) Committee Rules for Foreign Jurisdictions. The Committee may adopt
rules or procedures relating to the operation and administration of the Plan to
accommodate the specific requirements of local laws and procedures; provided,
however, that any such rules or procedures do not result in an Offering Price
which is less than the lesser of an amount equal to 85% of the fair market value
of the stock on the Offering Commencement Date or 85% of the fair market value
of the stock on the Offering Termination Date. Without limiting the generality
of the foregoing, the Committee is specifically authorized to adopt rules and
procedures regarding handling of payroll deductions, payment of interest,
conversion of local currency, payroll tax, withholding procedures and handling
of stock certificates which vary with local requirements.
-6-
NETSMART TECHNOLOGIES, INC.
EXHIBIT 10.9 - AGREEMENT DATED AUGUST 26, 1999 BETWEEN
THE REGISTRANT AND SILICON VALLEY BANK
Loan and Security Agreement
Borrower: Netsmart Technologies, Inc.
Creative Socio-Medics Corp.
Address: 146 Nassau Avenue
Islip, New York 11751
Date: August 26, 1999
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named above
(jointly and severally, the "Borrower"), whose chief executive office is located
at the above address ("Borrower's Address"). The Schedule to this Agreement (the
"Schedule") shall for all purposes be deemed to be a part of this Agreement, and
the same is an integral part of this Agreement. (Definitions of certain terms
used in this Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 Loans. Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its sole discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing, and subject to deduction of any Reserves for accrued
interest and such other Reserves as Silicon deems proper from time to time.
1.2 Interest. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as the other Loans. Silicon may, in its discretion, charge interest to
Borrower's Deposit Accounts maintained with Silicon.
1.3 Overadvances. If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand. Without limiting Borrower's obliga tion to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay
Silicon interest on the outstanding amount of any Overadvance, on demand, at a
rate equal to the interest rate which would otherwise be applicable to the
Overadvance, plus an additional 2% per annum.
1.4 Fees. Borrower shall pay Silicon the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Silicon and are
not refundable.
1.5 Letters of Credit. At the request of Borrower, Silicon may, in
its sole discretion, issue or arrange for the issuance of letters of credit for
the account of Borrower, in each case in form
<PAGE>
and substance satisfactory to Silicon in its sole discretion (collectively,
"Letters of Credit"). The aggregate face amount of all outstanding Letters of
Credit from time to time shall not exceed the amount shown on the Schedule (the
"Letter of Credit Sublimit"), and shall be reserved against Loans which would
otherwise be available hereunder. Borrower shall pay all bank charges (including
charges of Silicon) for the issuance of Letters of Credit, together with such
additional fee as Silicon's letter of credit department shall charge in
connection with the issuance of the Letters of Credit. Any payment by Silicon
under or in connection with a Letter of Credit shall constitute a Loan hereunder
on the date such payment is made. Each Letter of Credit shall have an expiry
date no later than thirty days prior to the Maturity Date. Borrower hereby
agrees to indemnify, save, and hold Silicon harmless from any loss, cost,
expense, or liability, including payments made by Silicon, expenses, and
reasonable attorneys' fees incurred by Silicon arising out of or in connection
with any Letters of Credit. Borrower agrees to be bound by the regulations and
interpretations of the issuer of any Letters of Credit guarantied by Silicon and
opened for Borrower's account or by Silicon's interpretations of any Letter of
Credit issued by Silicon for Borrower's account, and Borrower understands and
agrees that Silicon shall not be liable for any error, negligence, or mistake,
whether of omission or commission, in following Borrower's instructions or those
contained in the Letters of Credit or any modifications, amendments, or
supplements thereto. Borrower understands that Letters of Credit may require
Silicon to indemnify the issuing bank for certain costs or liabilities arising
out of claims by Borrower against such issuing bank. Borrower hereby agrees to
indemnify and hold Silicon harmless with respect to any loss, cost, expense, or
liability incurred by Silicon under any Letter of Credit as a result of
Silicon's indemnification of any such issuing bank. The provisions of this Loan
Agreement, as it pertains to Letters of Credit, and any other present or future
documents or agreements between Borrower and Silicon relating to Letters of
Credit are cumulative.
2. SECURITY INTEREST.
2.1 Security Interest. To secure the payment and performance of all of
the Obligations when due, Borrower hereby grants to Silicon a security interest
in all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located: All Inventory, Equipment, Receivables, and
General Intangibles, including, without limitation, all of Borrower's Deposit
Accounts, and all money, and all property now or at any time in the future in
Silicon's pos session (including claims and credit balances), and all proceeds
(including proceeds of any insurance policies, proceeds of proceeds and claims
against third parties), all products and all books and records related to any of
the foregoing (all of the foregoing, together with all other property in which
Silicon may now or in the future be granted a lien or security interest, is
referred to herein, collectively, as the "Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 Corporate Existence and Authority. Borrower, if a corporation, is
and will continue to be, duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. Borrower is and will
continue to be qualified and licensed to do business in all ju risdictions in
which any failure to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized, (ii)
are enforceable against Borrower
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<PAGE>
in accordance with their terms (except as enforcement may be limited by
equitable principles and by bankruptcy, insolvency, reorganization, moratorium
or similar laws relating to creditors' rights generally), and (iii) do not
violate Borrower's articles or certificate of incorporation, or Borrower's
by-laws, or any law or any material agreement or instrument which is binding
upon Borrower or its property, and (iv) do not constitute grounds for
acceleration of any material indebtedness or obligation under any material
agreement or instrument which is binding upon Borrower or its property.
3.2 Name; Trade Names and Styles. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Silicon 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will in
the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 Place of Business; Location of Collateral. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Silicon at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 Title to Collateral; Permitted Liens. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Silicon now has,
and will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Silicon and the Collateral against all claims
of others. None of the Collateral now is or will be affixed to any real property
in such a manner, or with such intent, as to become a fixture. Borrower is not
and will not become a lessee under any real property lease pursuant to which the
lessor may obtain any rights in any of the Collateral and no such lease now
prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's
right to remove any Collateral from the leased premises. Whenever any Collateral
is located upon premises in which any third party has an interest (whether as
owner, mortgagee, beneficiary under a deed of trust, lien or otherwise),
Borrower shall, whenever requested by Silicon, use its best efforts to cause
such third party to execute and deliver to Silicon, in form acceptable to
Silicon, such waivers and subordinations as Silicon shall specify, so as to
ensure that Silicon's rights in the Collateral are, and will continue to be,
superior to the rights of any such third party. Borrower will keep in full force
and effect, and will comply with all the terms of, any lease of real property
where any of the Collateral now or in the future may be located.
3.5 Maintenance of Collateral. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Silicon in writing of any
material loss or damage to the Collateral.
3.6 Books and Records. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
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<PAGE>
3.7 Financial Condition, Statements and Reports. All financial
statements now or in the future delivered to Silicon have been, and will be,
prepared in conformity with generally accepted accounting principles and now and
in the future will completely and accurately reflect the financial condition of
Borrower, at the times and for the periods therein stated. Between the last date
covered by any such statement provided to Silicon and the date hereof, there has
been no material adverse change in the financial condition or business of
Borrower. Borrower is now and will continue to be solvent.
3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Silicon in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
3.9 Compliance with Law. Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, and all environmental matters.
3.10 Litigation. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Silicon in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
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<PAGE>
4. RECEIVABLES.
4.1 Representations Relating to Receivables. Borrower represents and
warrants to Silicon as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made, (i)
represent an undisputed bona fide existing un conditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, and (ii)
meet the Minimum Eligibility Requirements set forth in Section 8 below.
4.2 Representations Relating to Documents and Legal Compliance. Borrower
represents and warrants to Silicon as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all signatories and endorsers have the capacity to contract. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and endorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
4.3 Schedules and Documents relating to Receivables. Borrower shall
deliver to Silicon transaction reports and loan requests, schedules and
assignments of all Receivables, and schedules of collections, all on Silicon's
standard forms; provided, however, that Borrower's failure to execute and
deliver the same shall not affect or limit Silicon's security interest and other
rights in all of Borrower's Receivables, nor shall Silicon's failure to advance
or lend against a specific Receivable affect or limit Silicon's security
interest and other rights therein. Loan requests received after 12:00 Noon will
not be considered by Silicon until the next Business Day. Together with each
such schedule and assignment, or later if requested by Silicon, Borrower shall
furnish Silicon with copies (or, at Silicon's request, originals) of all
contracts, orders, invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Silicon an aged accounts receivable trial balance
in such form and at such intervals as Silicon shall request. In addition,
Borrower shall deliver to Silicon the originals of all instruments, chattel
paper, security agreements, guarantees and other documents and property
evidencing or securing any Receivables, immediately upon receipt thereof and in
the same form as received, with all necessary indorsements, all of which shall
be with recourse. * Borrower shall also provide Silicon with copies of all
credit memos within two days after the date issued.
* Upon Silicon's request,
4.4 Collection of Receivables. Borrower shall have the right to collect
all Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Silicon, and Borrower shall immediately deliver all such payments and proceeds
to Silicon in their original form, duly endorsed in blank, to be applied to the
Obligations in such order as Silicon shall determine. Silicon may, in its
discretion, require that all proceeds of Collateral be deposited by Borrower
into a lockbox account, or such other "blocked account" as Silicon may specify,
pursuant to a blocked account agreement in such form as Silicon
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<PAGE>
may specify. Silicon or its designee may, at any time, notify Account Debtors
that the Receivables have been assigned to Silicon.
4.5. Remittance of Proceeds. All proceeds arising from the disposition
of any Collateral shall be delivered, in kind, by Borrower to Silicon in the
original form in which received by Borrower not later than the following
Business Day after receipt by Borrower, to be applied to the Obligations in such
order as Silicon shall determine; provided that, if no Default or Event of
Default has occurred, Borrower shall not be obligated to remit to Silicon the
proceeds of the sale of worn out or obsolete equipment disposed of by Borrower
in good faith in an arm's length transaction for an aggregate purchase price of
$25,000 or less (for all such transactions in any fiscal year). Borrower agrees
that it will not commingle proceeds of Collateral with any of Borrower's other
funds or property, but will hold such proceeds separate and apart from such
other funds and property and in an express trust for Silicon. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
4.6 Disputes. Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit. Silicon may, at any time after the
occurrence of an Event of Default, settle or adjust disputes or claims directly
with Account Debtors for amounts and upon terms which Silicon considers
advisable in its reasonable credit judgment and, in all cases, Silicon shall
credit Borrower's Loan account with only the net amounts received by Silicon in
payment of any Receivables.
4.7 Returns. Provided no Event of Default has occurred and is
continuing, if any Account Debtor returns any Inventory to Borrower in the
ordinary course of its business, Borrower shall promptly determine the reason
for such return and promptly issue a credit memorandum to the Account Debtor in
the appropriate amount (sending a copy to Silicon). In the event any attempted
return occurs after the occurrence of any Event of Default, Borrower shall (i)
hold the returned Inventory in trust for Silicon, (ii) segregate all returned
Inventory from all of Borrower's other property, (iii) conspicuously label the
returned Inventory as Silicon's property, and (iv) immediately notify Silicon of
the return of any Inventory, specifying the reason for such return, the location
and condition of the returned Inventory, and on Silicon's request deliver such
returned Inventory to Silicon.
4.8 Verification. Silicon may, from time to time, verify directly with
the respective Account Debtors the validity, amount and other matters relating
to the Receivables, by means of mail, telephone or otherwise, either in the name
of Borrower or Silicon or such other name as Silicon may choose.
4.9 No Liability. Silicon shall not under any circumstances be
responsible or liable for any shortage or discrepancy in, damage to, or loss or
destruction of, any goods, the sale or other disposition of which gives rise to
a Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Silicon be
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<PAGE>
deemed to be responsible for any of Borrower's obligations under any contract or
agreement giving rise to a Receivable. Nothing herein shall, however, relieve
Silicon from liability for its own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 Financial and Other Covenants. Borrower shall at all times
comply with the financial and other covenants set forth in the Schedule.
5.2 Insurance. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require, and Borrower shall provide evidence of such insurance to
Silicon, so that Silicon is satisfied that such insurance is, at all times, in
full force and effect. All such insurance policies shall name Silicon as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such
insurance, Silicon shall apply such proceeds in reduction of the Obligations as
Silicon shall determine in its sole discretion, except that, provided no Default
or Event of Default has occurred and is continuing, Silicon shall release to
Borrower insurance proceeds with respect to Equipment totaling less than
$100,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Silicon may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Silicon may, but is
not obligated to, obtain the same at Borrower's expense. Borrower shall promptly
deliver to Silicon copies of all reports made to insurance companies.
5.3 Reports. Borrower, at its expense, shall provide Silicon with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Silicon shall from time to time reasonably
specify.
5.4 Access to Collateral, Books and Records. At reasonable times, and on
one Business Day's notice, Silicon, or its agents, shall have the right to
inspect the Collateral, and the right to audit and copy Borrower's books and
records. Silicon shall take reasonable steps to keep confidential all
information obtained in any such inspection or audit, but Silicon shall have the
right to disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The foregoing
inspections and audits shall be at Borrower's expense and the charge therefor
shall be $500 per person per day (or such higher amount as shall represent
Silicon's then current standard charge for the same), plus reasonable out of
pocket expenses. Borrower will not enter into any agreement with any accounting
firm, service bureau or third party to store Borrower's books or records at any
location other than Borrower's Address, without first obtaining Silicon's
written consent, which may be conditioned upon such accounting firm, service
bureau or other third party agreeing to give Silicon the same rights with
respect to access to books and records and related rights as Silicon has under
this Loan Agreement. Borrower waives the benefit of any accountant-client
privilege or other evidentiary privilege precluding or limiting the disclosure,
divulgence or delivery of any of its books and records (except that Borrower
does not waive any at torney-client privilege).
5.5 Negative Covenants. Except as may be permitted in the Schedule,
Borrower shall not, without Silicon's prior written consent, do any of the
following: (i) merge or consolidate with another corporation or entity*; (ii)
acquire any assets, except in the ordinary course of business; (iii)
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enter into any other transaction outside the ordinary course of business; (iv)
sell or transfer any Collateral, except for the sale of finished Inventory in
the ordinary course of Borrower's business, and except for the sale of obsolete
or unneeded Equipment in the ordinary course of business; (v) store any
Inventory or other Collateral with any warehouseman or other third party; (vi)
sell any Inventory on a sale-or-return, guaranteed sale, consignment, or other
contingent basis; (vii) make any loans of any money or other assets; (viii)
incur any debts, outside the ordinary course of business, which would have a
material, adverse effect on Borrower or on the prospect of repayment of the
Obligations; (ix) guarantee or otherwise become liable with respect to the
obligations of another party or entity; (x) pay or declare any dividends on
Borrower's stock (except for dividends payable solely in stock of Borrower);
(xi) redeem, retire, purchase or otherwise acquire, directly or indirectly, any
of Borrower's stock; (xii) make any change in Borrower's capital structure which
would have a material adverse effect on Borrower or on the prospect of repayment
of the Obligations; or (xiii) pay total compensation, including salaries, fees,
bonuses, commissions, and all other payments, whether directly or indirectly, in
money or otherwise, to Borrower's executives, officers and directors (or any
relative thereof) in an amount in excess of the amount set forth on the
Schedule; or (xiv) dissolve or elect to dissolve. Transactions permitted by the
foregoing provisions of this Section are only permitted if no Default or Event
of Default would occur as a result of such transaction.
* , provided that Silicon's prior written consent to any such merger or
consolidation shall not be unreasonably withheld
5.6 Litigation Cooperation. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to Silicon, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Silicon may deem them reasonably necessary in order
to prosecute or defend any such suit or proceeding.
5.7 Further Assurances. Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 Maturity Date. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 Early Termination. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days after
written notice of termination is given to Silicon; or (ii) by Silicon at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Silicon under
this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount
equal to * of the Maximum Credit Limit, provided that no termination fee shall
be charged if the credit facility hereunder is replaced with a new facility from
another division of Silicon Valley Bank. The
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termination fee shall be due and payable on the effective date of termination
and thereafter shall bear interest at a rate equal to the highest rate
applicable to any of the Obligations.
* one percent (1.0%)
6.3 Payment of Obligations. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, or on
any earlier effective date of termination, there are any outstanding Letters of
Credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Silicon's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Silicon's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Silicon, Silicon may, in its sole discretion, refuse to make any further Loans
after termination. No termination shall in any way affect or impair any right or
remedy of Silicon, nor shall any such termination relieve Borrower of any
Obligation to Silicon, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Silicon shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Silicon's security interests.
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7. EVENTS OF DEFAULT AND REMEDIES.
7.1 Events of Default. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower shall
give Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Silicon by Borrower or any
of Borrower's officers, employees or agents, now or in the future, shall be
untrue or misleading in a material respect; or (b) Borrower shall fail to pay
when due any Loan or any interest thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time shall exceed
the Credit Limit; or (d) Borrower shall fail to comply with any of the financial
covenants set forth in the Schedule or shall fail to perform any other
non-monetary Obligation which by its nature cannot be cured; or (e) Borrower
shall fail to perform any other non- monetary Obligation, which failure is not
cured within 5 Business Days after the date due; or (f) any levy, assessment,
attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made
on all or any part of the Collateral which is not cured within 10 days after the
occurrence of the same; or (g) any default or event of default occurs under any
obligation secured by a Permitted Lien, which is not cured within any applicable
cure period or waived in writing by the holder of the Permitted Lien; or (h)
Borrower breaches any material contract or obligation, which has or may
reasonably be expected to have a material adverse effect on Borrower's business
or financial condition; or (i) Dissolution, termination of existence, insolvency
or business failure of Borrower; or appointment of a receiver, trustee or
custodian, for all or any part of the property of, assignment for the benefit of
creditors by, or the commencement of any proceeding by Borrower under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or (j) the commencement of any proceeding against Borrower or
any guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any juris diction, now or in the future in effect, which is not cured
by the dismissal thereof within 30 days after the date commenced; or (k)
revocation or termination of, or limitation or denial of liability upon, any
guaranty of the Obligations or any attempt to do any of the foregoing, or
commencement of proceedings by any guarantor of any of the Obligations under any
bankruptcy or insolvency law; or (l) revocation or termination of, or limitation
or denial of liability upon, any pledge of any certificate of deposit,
securities or other property or asset of any kind pledged by any third party to
secure any or all of the Obligations, or any attempt to do any of the foregoing,
or commencement of proceedings by or against any such third party under any
bankruptcy or insolvency law; or (m) Borrower makes any payment on account of
any indebtedness or obligation which has been subordinated to the Obligations
other than as permitted in the applicable subordination agreement, or if any
Person who has subordinated such indebtedness or obligations terminates or in
any way limits his subordination agreement; or (n) there shall be * of more than
20% of the outstanding shares of stock of Borrower, in one or more transactions,
compared to the ownership of outstanding shares of stock of Borrower in effect
on the date hereof, without the prior written consent of Silicon; or (o)
Borrower shall generally not pay its debts as they become due, or Borrower shall
conceal, remove or transfer any part of its property, with intent to hinder,
delay or defraud its creditors, or make or suffer any transfer of any of its
property which may be fraudulent under any bankruptcy, fraudulent conveyance or
similar law; or (p) there shall be a material adverse change in Borrower's
business or financial condition; or (q) Silicon, acting in good faith and in a
commercially reasonable manner, deems itself insecure because of the occurrence
of an event prior to the effective date hereof of which Silicon had no knowledge
on the effective date or because of the occurrence of an event on or subsequent
to the effective date.
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Silicon may cease making any Loans hereunder during any of the above cure
periods, and thereafter if an Event of Default has occurred.
* an acquisition by any Person
7.2 Remedies. Upon the occurrence of any Event of Default, and at any
time thereafter, Silicon, at its option, and without notice or demand of any
kind (all of which are hereby expressly waived by Borrower), may do any one or
more of the following: (a) Cease making Loans or other wise extending credit to
Borrower under this Agreement or any other document or agreement; (b) Accelerate
and declare all or any part of the Obligations to be immediately due, payable,
and performable, notwithstanding any deferred or installment payments allowed by
any instrument evidencing or relating to any Obligation; (c) Take possession of
any or all of the Collateral wherever it may be found, and for that purpose
Borrower hereby authorizes Silicon without judicial process to enter onto any of
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain on the premises or
cause a custodian to remain on the premises in exclusive control thereof,
without charge for so long as Silicon deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Silicon seek to take possession of any
of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any
bond and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Silicon retain possession of, and not
dis pose of, any such Collateral until after trial or final judgment; (d)
Require Borrower to assemble any or all of the Collateral and make it available
to Silicon at places designated by Silicon which are reasonably convenient to
Silicon and Borrower, and to remove the Collateral to such locations as Silicon
may deem advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Silicon shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Silicon obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Silicon shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Silicon deems reasonable, or on Silicon's premises, or elsewhere and
the Collateral need not be located at the place of disposition. Silicon may
directly or through any affiliated company purchase or lease any Collateral at
any such public disposition, and if permissible under applicable law, at any
private disposition. Any sale or other disposition of Collateral shall not
relieve Borrower of any liability Borrower may have if any Collateral is
defective as to title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General Intangibles
comprising Collateral and, in connection therewith, Borrower irrevocably
authorizes Silicon to endorse or sign Borrower's name on all collections,
receipts, instruments and other documents, to take possession of and open mail
addressed to Borrower and remove therefrom payments made with respect to any
item of the Collateral or proceeds thereof, and, in Silicon's sole discretion,
to grant extensions of time to pay, compromise claims and settle Receivables and
the like for less than face value; (h) Offset against any sums in any of
Borrower's general, special or other Deposit Accounts with Silicon; and (i)
Demand and receive possession of any of Borrower's federal and state income tax
returns and the books and records utilized in the preparation thereof or
referring thereto. All reasonable attorneys'
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fees, expenses, costs, liabilities and obligations incurred by Silicon with
respect to the foregoing shall be added to and become part of the Obligations,
shall be due on demand, and shall bear interest at a rate equal to the highest
interest rate applicable to any of the Obligations. Without limiting any of
Silicon's rights and remedies, from and after the occurrence of any Event of
Default, the interest rate applicable to the Obligations shall be increased by
an additional four percent per annum.
7.3 Standards for Determining Commercial Reasonableness. Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by
Silicon, with or without the Collateral being present; (iv) The sale commences
at any time between 8:00 a.m. and 6:00 p.m; (v) Payment of the purchase price in
cash or by cashier's check or wire transfer is required; (vi) With respect to
any sale of any of the Collateral, Silicon may (but is not obligated to) direct
any prospective purchaser to ascertain directly from Borrower any and all
information concerning the same. Silicon shall be free to employ other methods
of noticing and selling the Collateral, in its discretion, if they are
commercially reasonable.
7.4 Power of Attorney. Upon the occurrence of any Event of Default,
without limiting Silicon's other rights and remedies, Borrower grants to Silicon
an irrevocable power of attorney coupled with an interest, authorizing and
permitting Silicon (acting through any of its employees, attorneys or agents) at
any time, at its option, but without obligation, with or without notice to
Borrower, and at Borrower's expense, to do any or all of the following, in
Borrower's name or otherwise, but Silicon agrees to exercise the following
powers in a commercially reasonable manner: (a) Execute on behalf of Borrower
any documents that Silicon may, in its sole discretion, deem advisable in order
to perfect and maintain Silicon's security interest in the Collateral, or in
order to exercise a right of Borrower or Silicon, or in order to fully
consummate all the transactions contemplated under this Agreement, and all other
present and future agreements; (b) Execute on be half of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of Silicon's Collateral or in which Silicon has an interest; (c) Execute
on behalf of Borrower, any invoices relating to any Receivable, any draft
against any Account Debtor and any notice to any Account Debtor, any proof of
claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or
other lien, or assignment or satisfaction of mechanic's, materialman's or other
lien; (d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into Silicon's
possession; (e) Endorse all checks and other forms of remittances received by
Silicon; (f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; (g)
Grant extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give Silicon the same rights of access and other rights with respect
thereto as Silicon
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has under this Agreement; and (k) Take any action or pay any sum required of
Borrower pursuant to this Agreement and any other present or future agreements.
Any and all reasonable sums paid and any and all reasonable costs, expenses,
liabilities, obligations and attorneys' fees incurred by Silicon with respect to
the foregoing shall be added to and become part of the Obligations, shall be
payable on demand, and shall bear interest at a rate equal to the highest
interest rate applicable to any of the Obligations. In no event shall Silicon's
rights under the foregoing power of attorney or any of Silicon's other rights
under this Agreement be deemed to indicate that Silicon is in control of the
business, management or properties of Borrower.
7.5 Application of Proceeds. All proceeds realized as the result of any
sale of the Collateral shall be applied by Silicon first to the reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon in the exercise of its rights under this Agreement, second to the
interest due upon any of the Obligations, and third to the principal of the
Obligations, in such order as Silicon shall determine in its sole discretion.
Any surplus shall be paid to Borrower or other persons legally entitled thereto;
Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in its
sole discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Silicon shall
have the option, exercisable at any time, in its sole discretion, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by Silicon of the cash
therefor.
7.6 Remedies Cumulative. In addition to the rights and remedies set
forth in this Agreement, Silicon shall have all the other rights and remedies
accorded a secured party under the California Uniform Commercial Code and under
all other applicable laws, and under any other instrument or agreement now or in
the future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Silicon to exercise any rights
or remedies shall not operate as a waiver thereof, but all rights and remedies
shall continue in full force and effect until all of the Obligations have been
fully paid and performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable.
--------------
"Affiliate" means, with respect to any Person, a relative, partner, shareholder,
director, officer, or employee of such Person, or any parent or subsidiary of
such Person, or any Person controlling, controlled by or under common control
with such Person.
"Business Day" means a day on which Silicon is open for business.
"Code" means the Uniform Commercial Code as adopted and in effect in the State
of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
"Default" means any event which with notice or passage of time or both, would
constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
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"Eligible Inventory" [NOT APPLICABLE].
"Eligible Receivables" means Receivables arising in the ordinary course of
Borrower's business from the sale of goods or rendition of services, which
Silicon, in its sole judgment, shall deem eligible for borrowing, based on such
considerations as Silicon may from time to time deem appropriate. Without
limiting the fact that the determination of which Receivables are eligible for
borrowing is a matter of Silicon's discretion, the following (the "Minimum
Eligibility Requirements") are the minimum requirements for a Receivable to be
an Eligible Receivable: (i) the Receivable must not be outstanding for more than
* days from its invoice date, (ii) the Receivable must not be due under a
fulfillment or requirements contract with the Account Debtor, (iii) the
Receivable must not be subject to any contingencies (including Receivables
arising from sales on consignment, guaranteed sale or other terms pursuant to
which payment by the Account Debtor may be conditional), (iv) the Receivable
must not be owing from an Account Debtor with whom the Borrower has any dispute
(whether or not relating to the particular Receivable), (v) the Receivable must
not be owing from an Affiliate of Borrower, (vi) the Receivable must not be
owing from an Account Debtor which is subject to any insolvency or bankruptcy
proceeding, or whose financial condition is not acceptable to Silicon, or which,
fails or goes out of a material portion of its business, (vii) the Receivable
must not be owing from the United States or any department, agency or
instrumentality thereof (unless there has been compliance, to Silicon's
satisfaction, with the United States Assignment of Claims Act), (viii) the
Receivable must not be owing from an Account Debtor located outside the United
States or Canada (unless pre-approved by Silicon in its discretion in writing,
or backed by a letter of credit satisfactory to Silicon, or FCIA insured
satisfactory to Silicon), (ix) the Receivable must not be owing from an Account
Debtor to whom Borrower is or may be liable for goods purchased from such
Account Debtor or otherwise**. Receivables owing from one Account Debtor will
not be deemed Eligible Receivables to the extent they exceed 25% of the total
Receivables outstanding. In addition, if more than *** of the Receivables owing
from an Account Debtor are outstanding more than 90 days from their invoice date
(without regard to unapplied credits) or are otherwise not eligible Receivables,
then all Receivables owing from that Account Debtor will be deemed ineligible
for borrowing. Silicon may, from time to time, in its discretion, revise the
Minimum Eligibility Requirements, upon written notice to the Borrower.
* 120
** , (x) the Receivable must not be owing from any state or local government, or
any department, agency or instrumentality thereof (unless there has been
compliance, to Silicon's satisfaction, with any applicable assignment of claims
statutes or other regulations)
*** 33%
"Equipment" means all of Borrower's present and hereafter acquired machinery,
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Event of Default" means any of the events set forth in Section 7.1 of this
Agreement.
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"General Intangibles" means all general intangibles of Borrower, whether now
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Silicon, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation life insurance, key
man insurance, credit insurance, liability insurance, property insurance and
other insurance), tax refunds and claims, computer programs, discs, tapes and
tape files, claims under guaranties, security interests or other security held
by or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
"Obligations" means all present and future Loans, advances, debts, liabilities,
obligations, guaranties, covenants, duties and indebtedness at any time owing by
Borrower to Silicon, whether evidenced by this Agreement or any note or other
instrument or document, whether arising from an extension of credit, opening of
a letter of credit, banker's acceptance, loan, guaranty, indemnification or
otherwise, whether direct or indirect (including, without limitation, those
acquired by assignment and any participation by Silicon in Borrower's debts
owing to others), absolute or contingent, due or to become due, including,
without limitation, all interest, charges, expenses, fees, attorney's fees,
expert witness fees, audit fees, letter of credit fees, collateral monitoring
fees, closing fees, facility fees, termination fees, minimum interest charges
and any other sums chargeable to Borrower under this Agreement or under any
other present or future instrument or agreement between Borrower and Silicon.
"Permitted Liens" means the following: (i) purchase money security interests in
specific items of Equipment; (ii) leases of specific items of Equipment; (iii)
liens for taxes not yet payable; (iv) additional security interests and liens
consented to in writing by Silicon, which consent shall not be unreasonably
withheld; (v) security interests being terminated substantially concurrently
with this Agreement; (vi) liens of materialmen, mechanics, warehousemen,
carriers, or other similar liens arising in the ordinary course of business and
securing obligations which are not delinquent; (vii) liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Silicon will have
the right to require, as a condition to its consent under subparagraph (iv)
above, that the holder of the additional security interest or lien
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sign an intercreditor agreement on Silicon's then standard form, acknowledge
that the security interest is subordinate to the security interest in favor of
Silicon, and agree not to take any action to enforce its subordinate security
interest so long as any Obligations remain outstanding, and that Borrower agree
that any uncured default in any obligation secured by the subordinate security
interest shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, government, or any
agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired accounts
(whether or not earned by performance), letters of credit, contract rights,
chattel paper, instruments, securities, securities accounts, investment
property, documents and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, all merchandise returned
to or repossessed by Borrower, and all rights of stoppage in transit and all
other rights or remedies of an unpaid vendor, lienor or secured party.
"Reserves" means, as of any date of determination, such amounts as Silicon may
from time to time establish and revise in good faith reducing the amount of
Loans, Letters of Credit and other financial accommodations which would
otherwise be available to Borrower under the lending formula(s) provided in the
Schedule: (a) to reflect events, conditions, contingencies or risks which, as
determined by Silicon in good faith, do or may affect (i) the Collateral or any
other property which is security for the Obligations or its value (including
without limitation any increase in delinquencies of Receivables), (ii) the
assets, business or prospects of Borrower or any Guarantor, or (iii) the
security interests and other rights of Silicon in the Collateral (including the
enforceability, perfection and priority thereof); or (b) to reflect Silicon's
good faith belief that any collateral report or financial information furnished
by or on behalf of Borrower or any Guarantor to Silicon is or may have been
incomplete, inaccurate or misleading in any material respect; or (c) in respect
of any state of facts which Silicon determines in good faith constitutes an
Event of Default or may, with notice or passage of time or both, constitute an
Event of Default.
Other Terms. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 Interest Computation. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Silicon on account of the Obligations three Business Days after
receipt by Silicon of immediately available funds, and, for purposes of the
foregoing, any such funds received after 12:00 Noon on any day shall be deemed
received on the next Business Day. Silicon shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Silicon in its sole discretion, and Silicon may charge
Borrower's loan account for the amount of any item of payment which is returned
to Silicon unpaid.
-16-
<PAGE>
9.2 Application of Payments. All payments with respect to the
Obligations may be applied, and in Silicon's sole discretion reversed and
re-applied, to the Obligations, in such order and manner as Silicon shall
determine in its sole discretion.
9.3 Charges to Accounts. Silicon may, in its discretion, require that
Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans. Silicon may also, in its discretion, charge any
monetary Obligations to Borrower's Deposit Accounts maintained with Silicon.
9.4 Monthly Accountings. Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Silicon), unless Borrower
notifies Silicon in writing to the contrary within * days after each account is
rendered, describing the nature of any alleged errors or admissions.
* sixty
9.5 Notices. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Silicon or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Silicon shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. * All notices shall be deemed to have been given upon delivery
in the case of notices personally delivered, or at the expiration of one
Business Day following delivery to the private delivery service, or two Business
Days following the deposit thereof in the United States mail, with postage
prepaid.
* Notices to Borrower shall be directed to the attention of Borrower's Chairman
of the Board, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, or Controller.
9.6 Severability. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 Integration. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Silicon and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
no oral understandings, representations or agreements between the parties which
are not set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.
9.8 Waivers. The failure of Silicon at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Silicon shall not waive
or diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Silicon shall be deemed to have been
waived by any act or knowledge of Silicon or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Silicon and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or
-17-
<PAGE>
dishonor, notice of payment and nonpayment, release, compromise, settlement,
extension or renewal of any commercial paper, instrument, account, General
Intangible, document or guaranty at any time held by Silicon on which Borrower
is or may in any way be liable, and notice of any action taken by Silicon,
unless expressly required by this Agreement.
9.9 No Liability for Ordinary Negligence. Neither Silicon, nor any of
its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Silicon shall be liable for any claims, demands,
losses or damages, of any kind whatsoever, made, claimed, incurred or suffered
by Borrower or any other party through the ordinary negligence of Silicon, or
any of its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Silicon, but nothing herein shall relieve
Silicon from liability for its own gross negligence or willful misconduct.
9.10 Amendment. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Silicon.
9.11 Time of Essence. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
9.12 Attorneys Fees and Costs. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; en force, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to Borrower. In satisfying Borrower's obligation
hereunder to reimburse Silicon for attorneys fees, Borrower may, for
convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas,
but Borrower acknowledges and agrees that Levy, Small & Lallas is representing
only Silicon and not Borrower in connection with this Agreement. If either
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party in such action shall be entitled to
recover its reasonable costs and attorneys' fees, including (but not limited to)
reasonable attorneys' fees and costs incurred in the enforcement of, execution
upon or defense of any order, decree, award or judgment. All attorneys' fees and
costs to which Silicon may be entitled pursuant to this Paragraph shall
immediately become part of Borrower's Obligations, shall be due on demand, and
shall bear interest at a rate equal to the highest interest rate applicable to
any of the Obligations.
9.13 Benefit of Agreement. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Silicon; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Silicon, and any prohibited
assignment shall be void. No consent by Silicon to any assignment shall release
Borrower from its liability for the Obligations.
-18-
<PAGE>
9.14 Joint and Several Liability. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.15 Limitation of Actions. Any claim or cause of action by Borrower
against Silicon, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Loan Agreement, or any
other present or future document or agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, occurred, done, omitted or suffered to be
done by Silicon, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by the filing of a
complaint within one year after the first act, occurrence or omission upon which
such claim or cause of action, or any part thereof, is based, and the service of
a summons and complaint on an officer of Silicon, or on any other person
authorized to accept service on behalf of Silicon, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Silicon in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.16 Paragraph Headings; Construction. Paragraph headings are only used
in this Agreement for convenience. Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any rule
of construction or otherwise.
9.17 Governing Law; Jurisdiction; Venue. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Silicon to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Silicon's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Santa Clara County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal de livery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
9.18 Mutual Waiver of Jury Trial. BORROWER AND SILICON EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
-19-
<PAGE>
Borrower:
NETSMART TECHNOLOGIES, INC.
By /s/ James L. Conway
President or Vice President
By /s/ Anthony F. Grisanti
Secretary or Ass't Secretary
Borrower:
CREATIVE SOCIO-MEDICS CORP.
By /s/ John F. Philllips
President or Vice President
By /s/ Anthony F. Grisanti
Secretary or Ass't Secretary
Silicon:
SILICON VALLEY BANK
By
Title
<PAGE>
Silicon Valley Bank
Schedule to
Loan and Security Agreement
Borrower: Netsmart Technologies, Inc.
Creative Socio-Medics Corp.
Address: 146 Nassau Avenue
Islip, New York 11751
Date: August 26, 1999
This Schedule forms an integral part of the Loan and Security Agreement between
Silicon Valley Bank and the above-borrowers (jointly and severally, "Borrower")
of even date.
1. CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of: (i) $3,500,000 at any
one time outstanding (the "Maximum Credit Limit"); or (ii) 80% of the amount of
Borrower's Eligible Receivables (as defined in Section 8 above).
Loans will be made to each Borrower based on the Eligible Receivables of each
Borrower, subject to the Credit Limit set forth above for all Loans to all
Borrowers combined.
Letter of Credit Sublimit
(Section 1.5):$300,000
2. INTEREST.
Interest Rate (Section 1.2):
A rate equal to the "Prime Rate" in effect from time to time, plus 2.0%
per annum. Interest shall be calculated on the basis of a 360-day year for the
actual number of days elapsed. "Prime Rate" means the rate announced from time
to time by Silicon as its "prime rate;" it is a base rate upon which other rates
charged by Silicon are based, and it is not necessarily the best rate available
at Silicon. The interest rate applicable to the Obligations shall change on each
date there is a change in the Prime Rate.
Minimum Monthly
Interest (Section 1.2): N/A.
<PAGE>
3. FEES (Section 1.4):
Loan Fee: $35,000, payable concurrently herewith.
Collateral Monitoring
Fee: $1,000, per month, payable in arrears (prorated for
any partial month at the beginning and at termination of this Agreement).
Unused Line Fee: In the event, in any calendar month (or portion
thereof at the beginning and end of the term hereof), the average daily
principal balance of the Loans outstanding during the month is less than the
amount of the Maximum Credit, Borrower shall pay Silicon an unused line fee in
an amount equal to 0.50% per annum on the difference between the amount of the
Maximum Credit and the average daily principal balance of the Loans outstanding
during the month, which unused line fee shall be computed and paid monthly, in
arrears, on the first day of the following month.
4. MATURITY DATE
(Section 6.1):Two years from the date of this Agreement.
5. FINANCIAL COVENANTS
(Section 5.1):Borrower shall comply with each of the following
covenant(s). Compliance shall be determined as of the end of each * , except as
otherwise specifically provided below:
* quarter
Minimum Tangible
Net Worth: Borrower shall maintain a Tangible Net Worth of not less than the
sum of:
(i) $836,300 plus
(ii) the sum of:
(a) 70% of all consideration received after the date of
this Agreement for equity securities and subordinated debt of the Borrower; plus
(b) 70% of the aggregate amount of net income earned by
Borrower subsequent to the date of this Agreement.
In no event shall the amount of this Minimum Tangible Net Worth covenant be
decreased.
Definitions. For purposes of the foregoing financial covenants, the
following terms shall have the following meanings:
<PAGE>
"Liabilities" shall have the meaning ascribed thereto by
generally accepted accounting principles.
"Tangible Net Worth" shall mean the excess of total assets over
total liabilities, determined in accordance with generally accepted accounting
principles, with the following adjustments:
(A) there shall be excluded from assets: (i) notes, accounts
receivable and other obligations owing to the Borrower from its officers or
other Affiliates, and (ii) all assets which would be classified as intangible
assets under generally accepted accounting principles, including without
limitation goodwill, licenses, patents, trademarks, trade names, copyrights,
capitalized software and organizational costs, licenses and franchises
(B) there shall be excluded from liabilities: all indebtedness
which is subordinated to the Obligations under a subordination agreement in form
specified by Silicon or by language in the instrument evidencing the
indebtedness which is acceptable to Silicon in its discretion.
6. REPORTING.
(Section 5.3):
Borrower shall provide Silicon with the following:
1. Monthly Receivable agings, aged by invoice date, within
fifteen days after the end of each month.
2. Monthly accounts payable agings, aged by invoice date, and
outstanding or held check registers, if any, within fifteen days after the end
of each month.
3. Monthly reconciliations of Receivable agings (aged by invoice
date), transaction reports, and general ledger, within fifteen days after the
end of each month.
5. Monthly unaudited financial statements* , as soon
as available, and in any event within thirty days after the end of each month.
* (excluding balance sheets)
6. Monthly Compliance Certificates, within thirty days after the
end of each month, in such form as Silicon shall reasonably specify, signed by
the Chief Financial Officer of Borrower, certifying that as of the end of such
month Borrower was in full compliance with all of the terms and conditions of
this Agreement, and setting forth calculations showing compliance with the
financial covenants set forth in this Agreement and such other information as
Silicon shall reasonably request, including, without limitation, a statement
that at the end of such month there were no held checks.
<PAGE>
7. Quarterly unaudited financial statements*, as soon as
available, and in any event within forty-five days after the end of each
fiscal quarter of Borrower**.
* (including balance sheets)
** except for the fiscal quarter ending on the last day of Borrower's fiscal
year, for which quarter such financial statement shall be provided to Silicon
within sixty days of the end of such fiscal quarter
8. Annual operating budgets (including income statements,
balance sheets and cash flow Statements, by month) for the upcoming fiscal
year of Borrower within thirty days * to the end of each fiscal year of
Borrower.
* following
9. Annual financial statements *, as soon as available,
and in any event within ** days following the end of Borrower's fiscal
year, certified by independent certified public accountants acceptable to
Silicon.
* (including balance sheets)
** 90
7. COMPENSATION
(Section 5.5):Without Silicon's prior written consent, Borrower shall
not pay total compensation, including salaries, withdrawals, fees, bonuses,
commissions, drawing accounts and other payments, whether directly or
indirectly, in money or otherwise, during any fiscal year to all of Borrower's
executives, officers and directors (or any relative thereof) as a group in
excess of * of the total amount thereof in the prior fiscal year.
* 125%
8. BORROWER INFORMATION:
Prior Names of
Borrower
(Section 3.2): None
Prior Trade
Names of Borrower
(Section 3.2): None
<PAGE>
Existing Trade
Names of Borrower
(Section 3.2): CSM
Other Locations and
Addresses (Section 3.3): 7590 Fay Ave., Suite 404, La Jolla, CA 92037
1335 Dublin Road, Suite 1061, Columbus, OH 43215
3005 Highway #66, Ashland, OR 97520
Material Adverse
Litigation (Section 3.10): None
9. OTHER COVENANTS
(Section 5.1):Borrower shall at all times comply with all of the
following additional covenants:
(1) Banking Relationship. Borrower shall at all times maintain its
primary banking relationship with Silicon.
(2) Subordination of Inside Debt. All present and future indebtedness of
the Borrower to its officers, directors and shareholders ("Inside Debt") shall,
at all times, be subordinated to the Obligations pursuant to a subordination
agreement on Silicon's standard form. Borrower represents and warrants that
there is no Inside Debt presently outstanding. Prior to incurring any Inside
Debt in the future, Borrower shall cause the person to whom such Inside Debt
will be owed to execute and deliver to Silicon a subordination agreement on
Silicon's standard form.
(3) Note Receivable from Oasis Technology Ltd. The Collateral
includes: (i) that certain note receivable due and owing to Borrower from
Oasis Technology Ltd. ("Oasis"), pursuant to the terms of a certain
Promissory Note dated October __, 1998, in the original principal amount of
$500,000 (which, together with all replacements and substitutions therefor is
hereinafter referred to as the "Note"); (ii) all collateral and
security for, and guarantees of, the Note, including but not limited to the
shares of common stock of Credit Card Acquisition Corporation ("CCAC")
purchased by Oasis from Borrower under the terms of a share purchase letter
agreement between Oasis and Borrower dated September 24, 1998 (the "Share
Purchase Agreement"), which shares have been pledged by Oasis to Borrower
pursuant to the terms of that certain Security Agreement dated
October __, 1998 between Borrower and Oasis, to secure Oasis' bligations to
<PAGE>
Borrower under the Note and the Share Purchase Agreement; and (iii) all rights
and remedies relating to, or arising out of, any and all of the foregoing, and
all proceeds thereof. Concurrently herewith, Borrower shall: (i) deliver to
Silicon the original Note, which shall be endorsed by Borrower to the order of
Silicon, together with all stock certificates representing the shares of common
stock of CCAC purchased by Oasis from Pledgor under the terms of the Share
Purchase Agreement; and (ii) cause Oasis to execute an Estoppel Statement and
Agreement in form and substance acceptable to Silicon in its discretion.
Borrower shall not agree to any amendments or modifications to, nor shall
Borrower waive any rights under, or enter into any agreements relating to, the
Note or any of the other Collateral described above in this paragraph (the
"Note Collateral"), without Silicon's prior written consent. Silicon may, from
time to time, request confirmation of the balances owing under, and any other
matters relating to, the Note and the Note Collateral from Oasis and any other
persons, by telephone or in writing, in Borrower's name, Silicon's name or
another name.
(4) Patents, Trademarks and Copyrights. Concurrently with the execution of this
Agreement, Borrower shall execute and deliver to Silicon, on Silicon's standard
form(s), any security agreement(s) and other documentation which Silicon deems
necessary for filing in the United States Patent and Trademark Office, the
United States Copyright Office, and any other governmental office, with respect
to Borrower's copyrights, patents, trademarks and related collateral. Within 90
days after the date hereof, Borrower shall (i) cause all of its computer
software, the licensing of which results in Receivables to be registered with
the United States Copyright Office, and (ii) execute such additional security
agreement(s) and other documentation which Silicon deems necessary for filing
with respect to such additional registered copyright(s).
<TABLE>
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - CALCULATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Years ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Average shares outstanding 2,921,254 2,779,655 2,386,953
Dilutive effect of stock options
and warrants computed by use
of treasury stock method 595,063 85,338 0
Computation of Earnings Per
Share=Net Income/Average
common and common share
equivalent shares $1,824,769 (1)$ 123,649 $(3,507,125)
outstanding 3,516,317 2,864,993 2,386,953
--------- --------- ---------
Earnings Per Share $ .52 $ .04 $ (1.47)
- --------
(1)After dividends on Series D Preferred Stock in the amount of $72,600
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 204,989
<SECURITIES> 0
<RECEIVABLES> 5,789,734
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,565,311
<PP&E> 534,864
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,972,477
<CURRENT-LIABILITIES> 8,552,817
<BONDS> 0
<COMMON> 29,887
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,325,146
<SALES> 21,251,630
<TOTAL-REVENUES> 0
<CGS> 13,876,290
<TOTAL-COSTS> 5,480,330
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250,235
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,644,769
<DISCONTINUED> 180,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,824,769
<EPS-BASIC> .62
<EPS-DILUTED> .52
</TABLE>
