-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J1UgTWM1fC79EFSTqAgujchNCEXUwQrSzKLlAphItciogsy43B8PDbeRHDi0j3JA R0pQMHowcvdC9AUlAufmKw== 0001011028-99-000023.txt : 19990811 0001011028-99-000023.hdr.sgml : 19990811 ACCESSION NUMBER: 0001011028-99-000023 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETSMART TECHNOLOGIES INC CENTRAL INDEX KEY: 0001011028 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 133680154 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-21177 FILM NUMBER: 99683006 BUSINESS ADDRESS: STREET 1: 146 NASSAU AVE CITY: ISLIP STATE: NY ZIP: 11751 BUSINESS PHONE: 5169682000 MAIL ADDRESS: STREET 1: 146 NASSAU AVE STREET 2: 146 NASSAU AVE CITY: ISLIP STATE: NY ZIP: 11751 10-K/A 1 1998 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K/A Amendment No. 3 For the Year Ended December 31, 1998 Commission File No. 0-21177 NETSMART TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) Delaware 13-3680154 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 146 Nassau Avenue Islip, New York 11751 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 968-2000 Purpose of Amendment: To provide additional disclosure in Note 14 of Notes to Consolidated Financial Statements. Part IV Item 8. Financial Statements and Supplementary Data The financial statements begin on Page F-1. 1. Financial Statements Report of Richard A. Eisner & Company, LLP Report of Moore Stephens, P.C. Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements 2. Financial Statement Schedules None 3. Reports on Form 8-K July 20, 1998 Change in Accountants 4. Exhibits NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY F - 1 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- INDEX - -------------------------------------------------------------------------------- Page to Page ------------ Independent Auditor's Report - Richard A. Eisner & Company, LLP.........F-3 Independent Auditor's Report - Moore Stephens, P.C......................F-4 Consolidated Balance Sheets.......................................F-5...F-6 Consolidated Statements of Operations.............................F-7...F-8 Consolidated Statements of Stockholders' Equity.........................F-9 Consolidated Statements of Cash Flows.............................F-10..F-12 Notes to Consolidated Financial Statements .......................F-13..F-28 . . . . . . . . . . . F - 2 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Netsmart Technologies, Inc. Islip, New York We have audited the accompanying consolidated balance sheet of Netsmart Technologies, Inc. and its subsidiary as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Netsmart Technologies, Inc. and its subsidiary as of December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Richard A. Eisner & Company, LLP Certified Public Accountants New York, New York March 23, 1999 With respect to Note 17, April 8, 1999 F - 3 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Netsmart Technologies, Inc. Islip, New York We have audited the accompanying consolidated balance sheet of Netsmart Technologies, Inc. and its subsidiary as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Netsmart Technologies, Inc. and its subsidiary as of December 31, 1997, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Moore Stephens, P.C. Certified Public Accountants Cranford, New Jersey March 26, 1998 F - 4 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- December 31, ------------ 1 9 9 8 1 9 9 7 ------- ------- Assets: Current Assets: Cash and Cash Equivalents $ 198,689 $ 854,979 Accounts Receivable - Net 3,600,025 2,182,418 Costs and Estimated Profits in Excess of Interim Billings 2,899,695 542,324 Note Receivable 150,000 -- Other Current Assets 109,595 83,770 ---------- ---------- Total Current Assets 6,958,004 3,663,491 ---------- ---------- Property and Equipment - Net 354,036 308,583 ---------- ---------- Other Assets: Software Development Costs - Net 142,450 183,150 Customer Lists - Net 2,733,392 3,067,676 Other Assets 101,064 116,903 ---------- ---------- Total Other Assets 2,976,906 3,367,729 ---------- ---------- Total Assets $ 10,288,946 $ 7,339,803 ========== ========== See Notes to Consolidated Financial Statements. F - 5 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- December 31, ----------- 1 9 9 8 1 9 9 7 ------- ------- Liabilities and Stockholders' Equity: Current Liabilities: Notes Payable $ 1,639,694 $ 935,177 Capitalized Lease Obligations 27,283 23,331 Accounts Payable 2,166,333 1,131,692 Accrued Expenses 1,178,893 1,041,120 Interim Billings in Excess of Costs and Estimated Profits 1,803,999 951,885 Due to Related Parties 84,000 -- Deferred Revenue 47,619 117,080 ----------- --------- Total Current Liabilities 6,947,821 4,200,285 ----------- --------- Capitalized Lease Obligations 57,033 -- ----------- --------- Commitments and Contingencies (Note 13) -- -- Stockholders' Equity: Preferred Stock, $.01 Par Value; Authorized 3,000,000 Series D 6% Redeemable Preferred Stock - $.01 Par Value 3,000 Shares Authorized, 1,210 Issued and Outstanding [Liquidation Preference of $1,210 and redemption value of $1,210,000] 12 12 Additional Paid-in Capital - Series D Preferred Stock 1,209,509 1,209,509 Common Stock - $.01 Par Value; Authorized 15,000,000 Shares; Issued 2,786,921 Shares at December 31, 1998, 2,777,999 Shares at December 31, 1997 27,869 27,780 Additional Paid-in Capital - Common Stock 17,203,904 17,195,668 Accumulated Deficit (15,097,202) (15,293,451) ---------- ---------- 3,344,092 3,139,518 Less cost of 5,333 Common Shares held in Treasury 60,000 -- ---------- --------- Total Stockholders' Equity 3,284,092 3,139,518 ---------- ---------- Total Liabilities and Stockholders' Equity $ 10,288,946 $ 7,339,803 ========== ========== See Notes to Consolidated Financial Statements. F - 6 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- Y e a r s e n d e d D e c e m b e r 3 1, 1 9 9 8 1 9 9 7 1 9 9 6 ------- ------- ------- Revenues: Software and Related Systems and Services: General $ 9,569,100 $ 4,119,780 $ 3,104,998 Maintenance Contract Services 1,431,695 1,280,465 1,225,709 ----------- --------- --------- Total Software and Related Systems and Services 11,000,795 5,400,245 4,330,707 Data Center Services 2,164,472 2,235,209 2,207,155 ----------- --------- --------- Total Revenues 13,165,267 7,635,454 6,537,862 ----------- --------- --------- Cost of Revenues: Software and Related Systems and Services: General 5,975,249 2,493,739 2,774,878 Maintenance Contract Services 975,212 928,316 595,366 ----------- --------- --------- Total Software and Related Systems and Services 6,950,461 3,422,055 3,370,244 Data Center Services 1,131,078 1,466,107 1,220,368 ----------- --------- --------- Total Cost of Revenues 8,081,539 4,888,162 4,590,612 ----------- --------- --------- Gross Profit 5,083,728 2,747,292 1,947,250 Selling, General and Administrative Expenses 3,516,288 2,901,724 1,721,854 Related Party Administrative Expense 45,000 180,000 69,000 Stock Based Compensation -- -- 3,492,300 Research and Development 763,059 201,075 278,000 ------------ --------- --------- Income (Loss) from Continuing Operations before Financing Costs and Interest 759,381 (535,507) (3,613,904) Financing Costs -- -- 1,692,000 Interest Expense 346,114 308,169 472,548 ------------ --------- --------- Income (Loss) from Continuing Operations 413,267 (843,676) (5,778,452) ------------ --------- --------- See Notes to Consolidated Financial Statements. F - 7 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - -------------------------------------------------------------------------------- Y e a r s e n d e d D e c e m b e r 3 1, 1 9 9 8 1 9 9 7 1 9 9 6 ------- ------- ------- Discontinued Operations: Loss from Discontinued Operations (397,018) (2,615,049) (800,992) Gain on Sale of Discontinued Operations 180,000 -- -- --------- --------- ---------- Loss from Discontinued Operations (217,018) (2,615,049) (800,992) --------- --------- ---------- Net Income (Loss) 196,249 (3,458,725) (6,579,444) Less Cumulative Preferred Stock Dividends 72,600 (48,400) --------- --------- --------- Net Income (Loss) Applicable to Common Stock $ 123,649 $(3,507,125) $(6,579,444) ========= ========= ========= Earnings Per Common Share: Basic and Diluted: Income (Loss) from Continuing Operations $ .12 $ (.37) $ (3.36) Income (Loss) from Discontinued Operations (.08) (1.10) (.47) --------- --------- -------- Net Income (Loss) $ .04 $ (1.47) $ (3.83) ========= ========= ======== Weighted Average Number of Shares of Common Stock Outstanding 2,779,655 2,386,953 1,716,418 ========= ========= ========= See Notes to Consolidated Financial Statements. F - 8 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- Additional Additional Paid-in Paid-in Total Series A Series D Capital Capital Stock- Treasury Shares Preferred Stock Preferred Stock Preferred Common Stock Common Accumulate holders' Shares Cost Shares Amount Shares Amount Stock Shares Amount Stock Deficit Equity Balance- 400 $ 4 2,210 $ 22 $2,249,505 1,003,751 $10,038 $ 3,294,033 $(5,146,381) $ 407,211 December 31, 1995 Common Stock Issued in Exchange for Series D and Series A Preferred Stock (400) (4) (1,000) (10) (1,039,996) 389,400 3,894 1,036,116 -- -- Allocated Related Party Administrative Expenses -- -- -- -- -- -- -- 9,000 -- 9,000 Compensation from the Issuance of Common Stock Warrants and options -- -- -- -- -- -- -- 3,492,300 -- 3,492,300 Common Stock Issued - Initial Public Offering 431,250 4,312 5,170,689 5,175,001 Common Stock Issued - Exercise of Warrants 266,667 2,667 1,597,333 1,600,000 Common Stock Issued - Financing Costs 175,000 1,750 1,678,250 1,680,000 Costs Associated with Issuance of Stock (1,369,072) (1,369,072) Net Loss -- -- -- -- -- -- -- -- (6,579,444) (6,579,444) ---- ---- ---- ---- --------- -------- ----- ---------- --------- --------- Balance- December 31, 1996 -- -- 1,210 12 1,209,509 2,266,068 22,661 14,908,649 (11,725,825) 4,415,006 Common Stock Issued as Dividends 4,267 43 108,858 (108,901) -- on Preferred Stock Common Stock Issued - Exercise of Options 54,926 549 40,363 40,912 Common Stock Issued - Exercise of Warrants 426,071 4,260 1,913,061 1,917,321 Cost Associated with Exercise of Warrants (74,995) (74,995) Common Stock Issued - Johnson Acquisition 26,667 267 299,733 300,000 Net Loss (3,458,725) (3,458,725) ---- ---- ---- ---- --------- ------- ----- ------- --------- --------- Balance - December 31, 1997 -- -- 1,210 12 1,209,509 2,777,999 27,780 17,195,668 (15,293,451) 3,139,518 Common Stock Issued - Exercise of Options 8,922 89 8,326 8,325 Purchase of Treasury Shares 5,333 $(60,000) (60,000) Net Income 196,249 196,249 ----- ------- ---- ---- ----- ---- -------- ------- ----- ------- ---------- ------- Balance - December 31, 1998 5,333 $(60,000) -- $ -- 1,210 $ 12 $1,209,509 2,786,921 $27,869 $17,203,904 $(15,097,202 $3,284,092 ===== ======== ==== ===== ====== ==== ========= ========= ====== ========== ========== ========= See Notes to Consolidated Financial Statements.
F - 9 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- Y e a r s e n d e d D e c e m b e r 3 1, 1 9 9 8 1 9 9 7 1 9 9 6 ------- ------- ------- Operating Activities: Income (Loss) from Continuing Operations $ 413,267 $ (843,676) $ (5,778,452) --------- ------- --------- Adjustments to Reconcile Income (Loss) from Continuing Operations to Net Cash Used for Operating Activities: Depreciation and Amortization 561,562 600,990 486,566 Administrative Expenses 9,000 Additional Compensation Related to the issuance of Equity Instruments 3,492,300 Financing Expenses related to the issuance of Common Stock 1,680,000 Cash Used in Discontinued Operations (367,018) (2,615,049) (800,992) Write Off of Capitalized Software Cost and Related Hardware 553,061 Equity in Net Loss of Joint Venture 287,131 264,085 Provision for Doubtful Accounts 60,000 60,000 60,000 Changes in Assets and Liabilities: [Increase] Decrease in: Accounts Receivable (1,477,607) 452,032 (231,478) Costs and Estimated Profits in Excess of Interim Billings (2,357,371) (20,538) (516,707) Other Current Assets (25,825) (1,565) (68,810) Other Assets 5,839 11,905 (10,502) Increase [Decrease] in: Accounts Payable 1,034,641 148,536 (202,620) Accrued Expenses 102,773 50,045 (332,174) Interim Billings in Excess of Costs and Estimated Profits 852,114 (150,220) 160,626 Due to Related Parties (21,245) (143,458) Deferred Revenue (69,461) (4,439) (52,580) ----------- ---------- ---------- Total Adjustments (1,680,353) (649,356) 3,793,256 ----------- ---------- ---------- Net Cash Used For Operating Activities (1,267,086) (1,493,032) (1,985,196) ----------- ---------- ---------- Investing Activities: Acquisition of Property and Equipment (222,031) (216,041) (181,033) Software Development Costs (462,000) (278,800) Investment in Joint Venture (166,585) (384,631) ----------- ---------- ---------- Net Cash Used For Investing Activities (222,031) (844,626) (844,464) ----------- ---------- ---------- See Notes to Consolidated Financial Statements.
F - 10 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- Y e a r s e n d e d D e c e m b e r 3 1, 1 9 9 8 1 9 9 7 1 9 9 6 ------- ------- ------- Financing Activities: Proceeds from Short-Term Notes 704,517 345,146 500,000 Payment of Short-Term Notes (912,270) Payment of Bank Note Payable (79,000) Proceeds of loans from Related Parties 140,000 Repayment of loans from related parties (56,000) (750,000) Payment of Capitalized Lease Obligations (15,658) (34,063) (145,146) Issuance of Common Stock in Public Offering 5,175,000 Proceeds from Warrant exercise 1,917,319 1,600,000 Proceeds from Stock Option Exercise 8,325 40,913 Purchase of Treasury Shares (25,000) -- Cash Overdraft (95,536) Redemption of Series B Preferred Stock (96,000) Costs associated with issuance of Stock (74,995) (1,369,071) Other 76,643 -------- --------- --------- Net Cash provided by Financing Activities 832,827 2,194,320 3,827,977 -------- --------- --------- Net Increase [Decrease] in Cash (656,290) (143,338) 998,317 Cash - Beginning of Year 854,979 998,317 -- -------- --------- --------- Cash - End of Year $ 198,689 $ 854,979 $ 998,317 ======== ========= ========== Supplemental Disclosure of Cash Flow Information: Cash paid during the periods for: Interest $ 353,713 $ 352,837 $ 481,856 Income Taxes $ 16,934 $ -- $ -- Supplemental Disclosures of Non-Cash Investing and Financing Activities: Year ended December 31, 1998: 5,333 shares of Common Stock were repurchased from Johnson Computing Systems pursuant to the acquisition agreement, at a cost of $60,000 which was paid by the issuance of a short term note. Year ended December 31, 1997: 4,267 shares of common stock were issued to Series D Preferred stockholders as dividends which were payable on October 31, 1996 and April 1, 1997. These shares were valued at $108,900. The Company issued 26,667 shares of common stock to acquire customer lists and certain other assets of Johnson Computer Systems. These shares were valued at $300,000. F - 11
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- Year ended December 31, 1996: The Company's principal stockholder SISC exchanged 1,000 shares of Series D preferred stock for 375,000 shares of common stock. As a result of this exchange the aggregate redemption price of the Series D preferred stock was reduced to $1,210,000. The Series A preferred stock was converted into 14,400 shares of common stock in a transaction valued at $43,200. Pursuant to an agreement with four accredited investors, the Company issued 250,000 units composed of .667 shares of common stock and Series A Common Stock purchase warrant. The Company incurred a one time non-cash charge of $1,611,000. Pursuant to a modification of an agreement with an asset based lender the Company issued 8,333 common shares to such lender and incurred a one-time non-cash finance charge of $81,000. The Company granted stock options to purchase an aggregate of 80,667 shares of common stock and recognized compensation expense of $154,800. The Company granted 1,191,042 Series B Common Stock purchase warrants and 298,959 Series A Common Stock purchase warrants and recognized compensation expense of $3,337,500. See Notes to Consolidated Financial Statements. F - 12 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #1 - -------------------------------------------------------------------------------- [1] The Company The Company licenses and installs its proprietary software products, operates an established service bureau and enters into long term maintenance agreements with behavioral health organizations and methadone clinics and other substance abuse facilities throughout the United States. [2] Summary of Significant Accounting Policies Principles of Consolidation - The financial statements include Netsmart Technologies, Inc. ["Netsmart"], and its wholly-owned subsidiary, Creative Socio-Medics Corp. ["CSM"] (collectively referred to as the Company). All intercompany transactions are eliminated in consolidation. Certain amounts have been reclassified in the prior years' statements to conform to the current year's presentation. Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents totaled approximately $249,000 and $940,000 at December 31, 1998 and 1997 respectively. Concentration of Credit Risk - The Company extends credit to customers which results in accounts receivable arising from its normal business activities. The Company does not require collateral or other security to support financial instruments subject to credit risk. The Company routinely assesses the financial strength of its customers and based upon factors surrounding the credit risk of the customers believes that its accounts receivable credit risk exposure is limited. The Company's behavioral health information systems are marketed to specialized care facilities, many of which are operated by government entities and include entitlement programs. During the years ended December 31, 1998, 1997 and 1996, approximately 52%, 35% and 31% respectively, of the Company's revenues were generated from contracts with government agencies. During the year ended December 31, 1998, one customer accounted for approximately $2,113,000 or 16% of revenue. Accounts receivable of approximately $853,000 and costs and estimated profits in excess of billings of $1,260,000 less $318,000 in interim billings in excess of costs and estimated profits were due from this customer at December 31, 1998. Approximately $1,830,000 of such amounts were subsequently collected in 1999. No one customer accounted for more than 10% of revenues in 1997. During the year ended December 31, 1996, one customer of the Company's discontinued Cartesmart division accounted for approximately $1,879,000 or 22% of revenue. Accounts receivable of approximately $473,000 were due from this customer at December 31, 1996. In 1997, receivables from such customer in the amount of $745,000 were written off. The Company places its cash and cash equivalents with high credit quality financial institutions. The amount on deposit in any one institution that exceeds federally insured limits is subject to credit risk. At December 31, 1998 and 1997, cash and cash equivalent balances of $150,000 and F - 13 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 - -------------------------------------------------------------------------------- [2] Summary of Significant Accounting Policies - [Continued] $840,000 respectively, were held at a financial institution in excess of federally insured limits. The Company believes no significant concentration of credit risk exists with respect to these cash equivalents. Revenue Recognition - During 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 97-2, "Software Revenue Recognition." This SOP provides guidance on revenue recognition on software transactions and is effective for transactions entered into in fiscal years beginning after December 15, 1997. The company adopted SOP 97-2 in 1998. The adoption did not have a material impact on the financial position or results of operations of the company. The Company recognizes revenue principally from the licensing of its software, and from consulting and maintenance services rendered in connection with such licensing activities. Revenue from software package license agreements without significant vendor obligations is recognized upon delivery of the software. Information processing revenues are recognized in the period in which the service is provided. Maintenance contract revenue is recognized on a straight-line basis over the life of the respective contract. The Company also derives revenue from the sale of third party hardware and software. Consulting revenue is recognized when the services are rendered. No revenue is recognized prior to obtaining a binding commitment from the customer. Software development revenue from time-and-materials contracts are recognized as services are performed. Revenue from fixed price software development contracts and revenue under license agreements which require significant modification of the software package to the customer's specifications, are recognized on the estimated percentage-of-completion method. Using the units-of- work performed method to measure progress towards completion, revisions in cost estimates and recognition of losses on these contracts are reflected in the accounting period in which the facts become known. Contract terms provide for billing schedules that differ from revenue recognition and give rise to costs and estimated profits in excess of billings, and billings in excess of costs and estimated profits. Deferred revenue represents revenue billed and collected but not yet earned. The cost of maintenance revenue, which consists solely of staff payroll and applicable overhead, is expensed as incurred. Property and Equipment and Depreciation - Property and equipment is stated at cost less accumulated depreciation. Depreciation of property and equipment is computed by the straight-line method at rates adequate to allocate the cost of applicable assets over their expected useful lives. Amortization of leasehold improvements is computed using the shorter of the lease term or the expected useful life of these assets. Estimated useful lives are as follows: Equipment 3-5 Years Furniture and Fixtures 5 Years Leasehold Improvements 5 Years Capitalized Software Development Costs - Capitalization of computer software development costs begins upon the establishment of technological feasibility. Technological feasibility for the Company's computer software products is generally based upon achievement of a detail program design free of high risk development issues. The establishment of technological feasibility and the F - 14 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 - -------------------------------------------------------------------------------- [2] Summary of Significant Accounting Policies - [Continued] ongoing assessment of recoverability of capitalized computer software development costs requires considerable judgement by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life and changes in software and hardware technology. Amortization of capitalized computer software development costs commences when the related products become available for general release to customers. Amortization is provided on a product by product basis. The annual amortization is the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product. The Company performs an annual review of the recoverability of such capitalized software costs. At the time a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software net realizable value, any remaining capitalized amounts are written off. Information related to capitalized software costs applicable to continuing operations is as follows: Years ended December 31 1998 1997 ----------------------- ---- ---- Beginning of Year $ 183,150 $ -- Capitalized -- 203,500 Amortization (40,700) (20,350) --------- -------- Net $ 142,450 $ 183,150 --- ========= ========= Customer Lists - Customer lists represent a listing of customers obtained through the acquisition of CSM to which the Company can market its products. It also represents a listing of customers acquired from Johnson Computing Systems ("Johnson") in 1997. The gross costs of the customer list associated acquired from Johnson was $255,409. Customer lists are being amortized on the straight-line method over an estimated useful life of 12 years. Customer lists at December 31, 1998 and 1997 are as follows: December 31, ------------ 1 9 9 8 1 9 9 7 ------- ------- Customer Lists $ 4,106,223 $ 4,106,223 Less: Accumulated Amortization 1,372,831 1,038,547 --------- --------- Net $ 2,733,392 $ 3,067,676 --- ========= ========= On January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 established accounting standards for the impairment of long-lived assets and certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. Management has determined that expected future cash flows (undiscounted and without interest charges) exceed the carrying value of the long lived assets at December 31, 1998 and believes that no impairment of these assets has occurred. F - 15 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 - -------------------------------------------------------------------------------- [2] Summary of Significant Accounting Policies - [Continued] Stock Options and Similar Equity Instruments - On January 1, 1996, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", for stock options and similar equity instruments (collectively, "Options") issued to employees, however, the Company continues to apply the intrinsic value based method of accounting for options issued to employees prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" rather than the fair value based method of accounting prescribed by SFAS No. 123. SFAS No. 123 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from non-employees. Those transactions are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Earnings (Loss) Per Share - Basic earnings (loss) per common share is computed by dividing income (loss) from continuing operations and net income (loss) after each is adjusted for dividends accrued during the period on the Series D cumulative preferred stock by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the amount of earnings for the period available to each share of common stock outstanding during the reporting period, giving effect to all potentially dilutive common shares from the potential exercise of stock options and warrants. The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an antidilutive effect on earnings per share (i.e. improving earnings per share). The dilutive effect of outstanding options and warrants and their equivalents are reflected in dilutive earnings per share by the application of the treasury stock method. Options and warrants will have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the options or warrants. All per share information has been retroactively adjusted for the one-for-three reverse stock split which became effective September 1998. Allocated Related Party Administrative Expenses - During the first six months of 1996, certain administrative services were performed for the Company by a principal shareholder. The fair value of such services, approximately $9,000, was charged to related party administrative expenses, and, since the shareholder will not be reimbursed for such charges, credited to additional paid-in capital. (See Note 7) Research and Development - Research and development costs are charged to expense as incurred. [3] Accounts Receivable Accounts receivable is shown net of allowance for doubtful accounts of $372,797 and $348,029 at December 31, 1998 and 1997 respectively. The changes in the allowance for doubtful accounts are summarized as follows: December 31, ------------ 1998 1997 1996 ---- ---- ---- Beginning Balance $348,029 $288,029 $346,263 Provision for Doubtful Accounts 60,000 60,000 60,000 Charge-offs (35,232) (118,234) ------- ------- ------- Ending Balance $372,797 $348,029 $288,029 ======= ======= ======== F - 16
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 - -------------------------------------------------------------------------------- [4] Costs and Estimated Profits in Excess of Interim Billings and Interim Billings in Excess of Costs and Estimated Profits Costs, estimated profits, and billings on uncompleted contracts are summarized as follows: December 31, 1 9 9 8 1 9 9 7 ------- ------- Costs Incurred on Uncompleted Contracts $ 4,259,190 $ 2,730,054 Estimated Profits 4,038,247 1,293,104 --------- --------- Total 8,297,437 4,023,158 Billings to Date 7,201,741 4,432,719 --------- --------- Net $ 1,095,696 $ (409,561) --- ========= ========= Included in the accompanying balance sheet under the following captions: Costs and estimated profits in excess of interim billings $ 2,899,695 $ 542,324 Interim billings in excess of costs and estimated profits (1,803,999) (951,885) --------- -------- Net $ 1,095,696 $(409,561) --- ========= ======== [5] Discontinued Operations During 1998 the Company discontinued its CarteSmart division which included its interest in a joint venture. On June 30, 1998 the Company sold this division, with an option to purchase the Company's interest in the joint venture if the other party to the venture did not elect to acquire the Company's interest, to Granite Technologies, Inc. ("Granite"), a corporation formed by the former management of the division. Granite issued to the Company its $500,000 promissory note and a 20% equity interest in Granite. Granite also agreed to pay certain royalties to the Company and granted the Company a license with respect to the CarteSmarte software. The note was subject to cancellation if the other party to the joint venture elected to purchase the Company's interest. As the Company does not have significant influence over the operations of Granite, the 20% interest is accounted for using the cost method. As a result of the discontinuation of the CarteSmarte division, the financial statements for the periods being reported have been restated to reflect the net loss from the CarteSmart division as a loss from discontinued operations. The revenues from the discontinued operations amounted to $33,000, $246,000 and $2,003,000 in 1998, 1997 and 1996 respectively. In October 1998 the other party to the joint venture exercised their right to purchase the Company's interest in the joint venture for a $500,000 note. The terms of the note require twenty four monthly principal payments of $15,000 each, commencing November 1,1998 and a $140,000 balloon payment due November 1, 2000. The note also bears interest at 5.66% per annum. All monthly payments have been received through March 1999 on a timely basis and the Company has valued the note at $180,000 which amount is reflected as a gain on sale of discontinued operations. During the fourth quarter of 1997 the Company had re-evaluated the recoverability of its investment in the joint venture. A determination was made that this investment would not be recoverable based upon estimated cash flows and consequently the company wrote off $147,432, which reduced the carrying value of the venture to zero. F - 17 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 - -------------------------------------------------------------------------------- [6] Property and Equipment Property and equipment consist of the following: December 31, ----------- 1 9 9 8 1 9 9 7 ------- ------- Equipment, Furniture and Fixtures $ 672,692 $ 582,207 Leasehold Improvements 247,609 164,335 -------- --------- Totals - At Cost 920,301 746,542 Less: Accumulated Depreciation 566,265 437,959 -------- --------- Net $ 354,036 $ 308,583 --- ======== ========= Depreciation expense amounted to $176,578, $169,558, and $145,686, respectively for the years ended December 31, 1998, 1997 and 1996. [7] Related Party Transactions [A] Related Party Administrative Expense - The Company had an agreement with its principal stockholder, Consolidated and its subsidiary The Trinity Group, Inc. ("Trinity") pursuant to which the Company paid Trinity a monthly fee of $15,000 for general business, management and financial consulting services. This agreement was mutually terminated, effective April 1, 1998. Pursuant to this agreement, in 1998, 1997 and 1996 the Company charged $45,000, 180,000 and $60,000 respectively to related party administrative expenses. [B] Loans by Related Parties - During 1998 certain officers and employees of the Company loaned the Company $140,000 for which the Company issued its 18% installment notes. These loans are being repaid in five quarterly installments commencing September 30, 1998 and ending September 30, 1999. The amount payable at December 31, 1998 is $84,000. [8] Notes Payable Asset-Based Lender - The Company entered into an accounts receivable financing arrangement with an asset-based lender. Borrowings under this facility were $1,639,694 and $935,177 at December 31, 1998 and 1997, respectively. Under the agreement, the Company can borrow up to 80% of eligible accounts receivable up to $2 million, on which it pays interest at the annual rate of prime plus 5%. This note is collateralized by all of the accounts receivable and property and equipment of the Company. In October 1998, the agreement with the asset based lender was modified to allow the Company to borrow up to 80% of the amount of qualified accounts receivable up to a maximum of $2 million. The previous amount of maximum borrowings was capped at $1.5 million. The interest rate was reduced from prime plus 8 1/2 % to prime plus 5%. In addition, the 5/8% fee previously paid on the face amount of each invoice was eliminated. The weighted average interest rate on short-term borrowings outstanding as of December 31, 1998 and 1997 amounted to approximately 19% and 22%, respectively. F - 18 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7 - -------------------------------------------------------------------------------- [9] Income Taxes The Company utilizes an asset and liability approach to determine the extent of any deferred income taxes, as described in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This method gives consideration to the future tax consequences associated with differences between financial statement and tax bases of assets and liabilities. At December 31, 1998, the Company has net operating loss carryforwards of $11,363,000 expiring by 2012. Pursuant to Section 382 of the Internal Revenue Code regarding substantial changes in Company ownership, utilization of these losses may be limited. The expiration dates of net operating loss carryforwards are as follows: December 31, Amount - ----------- ------ 2008 315,000 2009 1,010,000 2010 3,847,000 2011 2,930,000 2012 3,261,000 --------- $11,363,000 The Deferred Tax Asset consists primarily of the following: Benefit of federal and state net operating loss carryforwards $ 4,500,000 Benefit of stock based compensation awards 1,400,000 Less: Valuation Allowance (5,900,000) --------- Net Deferred Tax Asset $ -- ========= The Company has provided a valuation allowance for the full amount of the deferred tax asset of approximately $5,900,000 as its future utilization is uncertain. The Valuation Allowance increased by $300,000, $900,000 and $2,900,000 in 1998, 1997 and 1996 respectively. The provision for income taxes varies from the amount computed by applying statutory rates for the reasons summarized below: 1998 1997 1996 ---- ---- ---- Provision Based on Statutory Rates 34% (34)% (34)% State Taxes Net of Federal Benefit 6% (6)% (6)% Increase in Valuation Allowance (40)% 40% 40% ---- ---- ---- Total -- % -- % -- % ==== ==== ==== [10] Capital Stock At the close of business on September 14, 1998 a one for three reverse split became effective. All common share and per common share data in the financial statements and notes have been adjusted to reflect the one for three reverse split. Capital Stock - The Company is authorized to issue 3,000,000 shares of preferred stock, par value $.01 per share, and 15,000,000 shares of common stock, par value $.01 per share. The Company's Board of Directors is authorized to issue preferred stock from time to time without stockholder F - 19 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8 - -------------------------------------------------------------------------------- [10] Capital Stock - [Continued] action, in one or more distinct series. The Board of Directors is authorized to determine the rights and preferences of the preferred stock. The Board of Directors has authorized the issuance of Series A, Series B and Series D preferred Stock. At December 31, 1998, only the Series D preferred stock was outstanding. (See Note 17) Preferred Stock -The Series D preferred stock is 6% redeemable preferred stock. The stockholders are entitled to receive a $60.00 per share annual dividend when and as declared by the Board of Directors. Dividends are cumulative and accrue from October 1, 1995. Dividends are payable semi-annually on April 1 and October 1. The stock is redeemable at the option of the Company for $1,000 per share commencing October 1, 1998. In the event of voluntary or involuntary liquidation, the stockholders are entitled to receive $1.00 per share and all accrued and unpaid dividends. On June 30, 1997, the Company paid the dividends relating to the Series D preferred stock which were payable on October 1, 1996 and April 1, 1997. The dividends were paid through the issuance of 4,267 shares of Common Stock and valued at the fair market value at the respective dates they became payable. The Series D preferred stock is nonvoting except as is required by law. No dividend has been paid since April 1, 1997 and at December 31, 1998, the accrued cumulative dividends on the Series D Preferred Stock in arrears aggregated were $108,900 or $90 per share. Common Stock Issuances - On August 19, 1996, the Company completed a public offering pursuant to which it received net proceeds of approximately $3.8 million from the sale of units comprised of an aggregate of 431,250 shares of Common Stock and Series A Redeemable Common Stock Purchase Warrants ("Series A Warrants") to purchase an aggregate of 215,625 shares of Common Stock at $13.50 per share through August 1999. During a 90 period in 1997, the terms of the Series A Warrants were amended to reduce the exercise price. During such period, the Company received net proceeds of approximately $1.8 million from the issuance of an aggregate of 426,071 shares of Common Stock upon exercise of Series A Warrants. In August 1996, holders of Series B Common Stock Purchase Warrants ("Series B Warrants") to purchase an aggregate of 266,666 shares of Common Stock at $6.00 per share exercised such warrants. The Company received $1.6 million from the sale of such shares. See Note 14 for information relating to the issuance of the Series B Warrants. Treasury Stock - Pursuant to the Johnson Computing Systems agreement, the Company purchased from Johnson Computing Systems 5,333 shares of Common Stock for $60,000. The shares are treated as treasury shares. Stock Options - See Note 14 for information relating to the Company's 1993 Long-Term Incentive Plan. F - 20 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9 - -------------------------------------------------------------------------------- [11] Capitalized Lease Obligations Future minimum payments under capitalized lease obligations as of December 31, 1998 are as follows: Year ending December 31, 1999 $ 36,838 2000 25,041 2001 25,041 2002 18,780 --------- Total Minimum Payments 105,700 Less Amount Representing Interest at 13.8% Per annum 21,384 --------- Balance $ 84,316 ------- ========= Capitalized lease obligations are collateralized by equipment which has a net book value of $82,000 and $15,000 at December 31, 1998 and 1997, respectively. Amortization of approximately $10,200 and $10,200 in 1998 and 1997, respectively, has been included in depreciation expense. [12] Fair Value of Financial Instruments The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and debt maturing within one year the carrying amount approximated fair value for these instruments because of their short maturities. [13] Commitments and Contingencies The Company leases space for its executive offices and facilities under noncancellable operating leases expiring December 31, 2003. The Company also leases additional office space on a month-to-month basis. Minimum annual rentals under noncancellable operating leases (net of a sublease to Granite) having terms of more than one year are as follows: Years ending - ------------ December 31, - ----------- 1999 $ 380,000 2000 389,000 2001 317,000 2002 329,000 2003 342,000 ---------- Total $ 1,757,000 ========== Rent expense amounted to $349,000, $341,000 and $358,000 respectively, for the years ended December 31, 1998, 1997 and 1996. In July 1998, the Company entered into five-year employment agreements with its president and chief executive officer, its vice president - marketing, the chief executive officer of CSM and its chief financial officer, pursuant to which such officers receive a base salary of $160,000, $140,000, $140,000 and $120,000, respectively, with an annual cost of living adjustment. The agreements F - 21 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10 - -------------------------------------------------------------------------------- [13] Commitments and Contingencies - [Continued] provide that the executives are eligible to participate in a bonus pool to be determined annually by the Compensation Committee. The agreements also provide each of the executives with an automobile allowance. In the event the executive's dismissal or resignation or a material change in his duties or in the event of a termination of employment by the executive or the Company as a result of a change of control, the executive may receive severance payments of between 24 and 36 months' compensation. [14] Stock-Based Compensation Long Term Incentive Plans - The Company has two long-term incentive plans, the 1993 Long-Term Incentive Plan (the "1993 Plan"), as amended, and the 1998 Long-Term Incentive Plan (the "1998 Plan"), as amended. The Company may issue 170,333 and 280,000 shares of Common Stock pursuant to the 1993 Plan and 1998 Plan, respectively. In November 1998, the board of directors adopted an amendment to the 1998 Plan (the "1998 Amendment"), subject to stockholder approval, pursuant to which the number of shares subject to the 1998 Plan was increased from 280,000 shares to 780,000 shares. Officers and other key employees, consultants and directors (other than non-employee directors) are eligible to receive options or other equity-based incentives under the Plans. The 1993 Plan and the 1998 Plan (collectively, the "Plans") are administered by the Compensation Committee of the board of directors. The 1998 Plan provides that each non-employee director automatically receives a nonqualified stock option to purchase 5,000 shares of Common Stock on April 1 of each year. However, if there are not sufficient shares available under the 1998 Plan, the non-employee director will receive a lesser number of shares. The 1998 Plan also provided for the grant on June 30, 1998, to each non-employee director, other than the chairman of the board, of a non-qualified stock option to purchase 10,000 shares of Common Stock, and to the chairman of the board, a non-qualified stock option to purchase 35,000 shares of Common Stock. Pursuant to the 1998 Amendment, the Company granted, subject to stockholder approval of the 1998 Amendment, options to purchase 10,000 shares to each non-employee director, other than the chairman of the board, and an option to the chairman of the board to purchase 50,000 shares. The exercise price for such options was $1.00 per share, which was the fair market value on the date of grant. In November 1998, the Committee reduced the exercise price of outstanding options to purchase an aggregate of 43,167 shares of Common Stock, from $4.50 per share to $1.50 per share, which was in excess of the market price on the date the Committee approved the reduction in the exercise price. F - 22 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11 - -------------------------------------------------------------------------------- [14] Stock-Based Compensation - [Continued] A summary of the activity under the Company's stock option plans is as follows: 1998 1997 1996 ------------------------ ------------------------- -------------------------- Weighted Weighted Weighted -------- -------- -------- Average Average Average -------- -------- -------- Exercise Exercise Exercise -------- -------- -------- Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding - Beginning of Year 148,780 $3.244 203,706 $2.57 123,039 $ .803 Granted During the Year 823,167(a) 1.18 -- -- 80,667 5.265 Canceled During the Year (80,667)(a) 9.60 -- -- -- -- Expired During the Years -- -- -- -- -- -- Exercised During the Year (8,922) .723 (54,926) .745 -- -- ------- ------- ------- Outstanding - End of Year 882,358 $1.172 148,780 $3.244 203,706 $ 2.57 ======= ===== ======= ===== ======= ===== Exercisable - End of Year 242,358 $1.338 108,447 $2.492 59,626 $ .803 ======= ===== ======= ===== ======= ===== ___________________________ (a) Includes 43,167 shares granted upon cancellation of an equal number of shares having an exercise price of $4.50 per share. The following table summarizes stock option information as of December 31, 1998: Options Outstanding ------------------- Weighted -------- Average Remaining Options ----------------- ------- Exercise Prices Number Outstanding Contractual Life Exercisable - --------------- ------------------ ---------------- ----------- $.696 34,576 1 Year 34,576 $1.035 24,615 1.9 Years 24,615 $1.50 43,167 2.3 Years 43,167 $1.50 280,000 4.4 Years 140,000 $1.00 500,000 4.8 Years -- ------- --------- ------- Totals 882,358 4.3 Years 242,358 ======= ========= ======= Warrants Issued as Compensation - In February 1996, the Company issued an aggregate of 1,051,250 Series B Common Stock Purchase Warrants, of which 838,750 are exercisable at $6.00 per share and 212,500 were exercisable at $15.00 per share. These warrants were issued in connection with services rendered, which, in the case of SISC, included the guarantee of certain notes payable. Although the warrants were issued prior to a three-for-four reverse split, which was effective in February 1996, the number of shares issuable upon exercise of the warrants, but not the exercise price, was adjusted for the reverse split. Certain of the warrants initially had a November 1998 expiration date, which was extended to December 31, 1999, which is the expiration date of all of the warrants.
F - 23 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12 - -------------------------------------------------------------------------------- [14] Stock-Based Compensation - [Continued] Of the warrants issued in February 1996, 262,500 warrants exercisable at $6.00 per share and 12,500 warrants exercisable at $15.00 per share were issued to replace 275,000 warrants previously issued in October 1993. These warrants had exercise prices ranging from $8.00 per share to $30.00 per share. In July 1996, pursuant to a warrant exchange, (a) the holders of outstanding warrants having a $6.00 exercise price exchanged one third of such warrants for outstanding warrants to purchase, at an exercise price of $12.00 per share, 150% of the number of shares of common stock issuable upon exercise of the outstanding warrants that were exchanged, and (b) the exercise price of the outstanding warrants that had a $15.00 exercise price was reduced to $12.00. Prior to the warrant exchange, there were outstanding warrants to purchase 838,750 shares of common stock at $6.00 per share and outstanding warrants to purchase 879,167 shares of common stock at $15.00 per share outstanding. As a result of the warrant exchange, there were outstanding warrants to purchase 559,167 shares of common stock at $6.00 per share and 631,877 shares of common stock at $12.00 per share. These warrants were exercisable commencing February 13, 1997. An affiliate of the Company, a member of the board of directors and a Company controlled by such director, were given permission to exercise options in August 1996. This individual and entities exercised warrants to purchase 266,667 shares at $6.00 per share in August 1996. All of the remaining Series B Common Stock Purchase Warrants expire on December 31, 1999. The Company recorded compensation expenses of $3,337,500 in relation to the issuance of these warrants. In 1996 the Company issued 215,625 Series A Common Stock Purchase Warrants as a part of its initial public offering of its securities. These warrants are exercisable for the two year period commencing August 13, 1997 at a price of $13.50 per share. In addition, the Company issued 83,333 Series A Common Stock Purchase Warrants to various investors. These warrants have the same terms as the warrants issued to the general public. During 1997, the Company issued 23,333 Series C Common stock warrants in exchange for the issuance of a research report on behalf of the Company. These warrants were valued at $.90 per warrant which represented the fair value of the services performed by the recipient. These warrants have an exercise price of $15.00 which was the market value of the stock at the time of issuance and will expire on December 31, 1999. F - 24 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13 - -------------------------------------------------------------------------------- [14] Stock-Based Compensation - [Continued] A summary of warrant activity is as follows: 1998 1997 1996 ----------------------- ----------------------- ------------------------ Weighted Weighted Weighted -------- -------- -------- Average Average Average ------- ------- ------- Exercise Exercise Exercise -------- -------- -------- Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding - Beginning of Year 1,033,632 $10.49 1,223,335 $10.93 275,000 $21.81 Granted or Sold During the Year -- -- 23,333 15.00 1,490,002 10.00 Canceled During the Year -- -- -- -- (275,000) 21.81 Expired During the Year -- -- -- -- -- -- Exercised During the Year -- -- (213,036) 13.50 (266,667) 6.00 --------- ----- --------- ----- Outstanding - End of Year 1,033,632 $10.49 1,033,632 $10.49 1,223,335 $10.93 ========= ===== ========= ===== ========= ===== Exercisable - End of Year 1,033,632 $10.49 1,033,632 $10.49 -- -- ========= ===== ========= ===== ========= ===== The following table summarizes warrant information as of December 31, 1998: Weighted Average Remaining Exercise Prices Shares Contractual Life - --------------- ------ ----------------- $ 6.00 292,500 1 Year $12.00 631,877 1 Year $13.50 85,922 .7 Years $15.00 23,333 1 Year --------- Total 1,033,632 .9 Years ========= ======== [14] Stock-Based Compensation - [Continued] The Company applies Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related interpretations, for stock options issued to employees in accounting for its stock options plans. Total compensation cost recognized in income for stock based employee compensation awards was $-- in 1998 and 1997 and $3,492,300 in 1996. F - 25 NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14 - -------------------------------------------------------------------------------- [14] Stock-Based Compensation - [Continued] If the Company had accounted for the issuance of all options and compensation based warrants pursuant to the fair value based method of SFAS No. 123, the Company would have recorded additional compensation expense totaling $609,372 and $846,000 for the years ended December 31, 1998 and 1996 respectively and the Company's net loss and net loss per share would have been as follows: Year ended ----------- December 31, ----------- 1998 1996 ---- ---- Net Income (Loss) as Reported $ 196,249 $ (6,579,444) ======= ========= Pro Forma Net Loss $(413,123) $ (7,425,444) ======= ========= Net Income (Loss) Per Share as Reported $ .04 $ (3.83) ======= ========= Pro Forma Net Loss Per Share $ (.17) $ (4.33) ======= ========= There were no options or compensation based warrants issued in 1997 which were accounted for under APB No. 25. The fair value of options and warrants at date of grant was estimated using the Black-Scholes fair value based method with the following weighted average assumptions: 1998 1996 ---- ---- Expected Life (Years) 5 2 Interest Rate 4.87% 6.0% Annual Rate of Dividends 0% 0% Volatility 70% 67.9% The weighted average fair value of options and warrants at date of grant using the fair value based method during 1998, 1997 and 1996 is estimated at $.74, $-- and $3.99 respectively. F - 26
NETSMART TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS, Sheet #15 - -------------------------------------------------------------------------------- [15] Operating Segments The Company currently classifies its operations into two business segments: (1) Software and Related Systems and Services and (2) Data Center Services. Software and Related Systems and Services is the design, installation, implementation and maintenance of computer information systems that provide comprehensive healthcare information technology solutions including billing, patient tracking and scheduling for inpatient and outpatient environments, as well as clinical documentation and medical record generation and management. Data Center Services involve company personnel performing data entry and data processing services for customers. Intersegment sales and sales outside the United States are not material. Information concerning the Company's business segments is as follows: Y e a r s e n d e d --------------------- D e c e m b e r 31, ------------------- 1 9 9 8 1 9 9 7 1 9 9 6 ------- ------- ------- Revenues: Software and Related Systems and Services $11,000,795 $ 5,400,245 $ 4,330,707 Data Center Services 2,164,472 2,235,209 2,207,155 ---------- ---------- ---------- Total Revenues $13,165,267 $ 7,635,454 $ 6,537,862 -------------- ========== ========== =========== Gross Profit: Software and Related Systems and Services $ 4,050,334 $ 1,978,190 $ 960,463 Data Center Services 1,033,394 769,102 986,787 ---------- --------- --------- Total Gross Profit $ 5,083,728 $ 2,747,292 $ 1,947,250 ------------------ ========== ========= ========= Income [Loss] From Operations: Software and Related Systems and Services $ 342,501 $ (448,801) $(3,516,099) Data Center Services 416,880 (86,706) (97,805) ---------- --------- --------- Total [Loss] From Operations $ 759,381 $ (535,507) $(3,613,904) ---------------------------- ========== ========= ========= Depreciation and Amortization: Software and Related Systems and Services $ 468,840 $ 477,953 $ 367,984 Data Center Services 92,722 123,037 118,582 ---------- -------- --------- Total Depreciation and Amortization $ 561,562 $ 600,990 $ 486,566 ----------------------------------- ========== ======== ========= Interest Expense: Software and related systems and services $ 289,210 $ 220,774 $ 313,018 Data Center Services 56,904 87,395 159,530 ---------- -------- --------- Total Interest Expense $ 346,114 $ 308,169 $ 472,548 =========== ======== ========= Capital Expenditures: Software and Related Systems and Services $ 188,570 $ 636,174 $ 444,516 Data Center Services 33,461 41,867 15,317 ---------- -------- -------- Total Capital Expenditures $ 222,031 $ 678,041 $ 459,833 -------------------------- ========== ======== ======== Identifiable Assets: Software and Related Systems and Services $ 7,740,018 $ 4,452,999 $ 5,052,671 Data Center Services 2,548,928 2,886,804 3,198,058 ---------- --------- --------- Total Identifiable Assets $10,288,946 $ 7,339,803 $ 8,250,729 ------------------------- ============ ========= ========= F - 27
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16 - -------------------------------------------------------------------------------- [16] Johnson Acquisition In October 1997, the Company purchased the customer list and certain other assets of Johnson Computing Systems ("Johnson Computing"), for which it issued 26,667 shares of Common Stock, valued at $300,000. Pursuant to the agreement, because the price of the Common Stock did not reach a certain price level, the Company purchased 5,333 shares of Common Stock from Johnson Computing for $60,000, which is payable in installments. Johnson Computing provided software and related support for methadone clinics. The acquisition was accounted for as a purchase and accordingly, the results of operations of the acquired entity were included in the consolidated statements of operations from the date of acquisition. The proforma results for 1997 and 1996, assuming this acquisition has been made at the beginning of 1996, would not be materially different from the reported results. [17] Subsequent Event On March 25, 1999, Netsmart and a group of purchasers, consisting principally of Netsmart's management and directors, entered into an agreement with Consolidated Technologies, Inc. Pursuant to the agreement, the purchasers are to buy from Consolidated, in a private sale, an aggregate of 496,312 shares of Netsmart's common stock for an aggregate purchase price of $1 million. On April 8, 1999, 248,156 of such shares were purchased by the management investors for $500,000. The agreement also gives the purchasers the right to buy up to between 296,312 and 496,312 additional shares of Netsmart's common stock from Consolidated at the same purchase price per share. In addition, Consolidated agreed to transfer to Netsmart shares of Netsmart's preferred stock (including the right to receive dividends thereon) and warrants to purchase shares of Netsmart's common stock, for which Netsmart will issue 100,000 shares of its common stock to Consolidated. This exchange took place on April 8, 1999. F - 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NETSMART TECHNOLOGIES, INC. Dated: August 9, 1999 By /s/ James L. Conway ------------------------------- James L. Conway, President and CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/James L. Conway President, Chief Executive August 9, 1999 - ------------------------ Officer and Director (Principal James L. Conway Executive Officer) /s/Anthony F. Grisanti Chief Financial Officer August 9, 1999 - ------------------------ (Principal Financial and Anthony F. Grisanti Accounting Officer) /s/Edward D. Bright Director August 9, 1999 - ------------------------ Edward D. Bright /s/John F. Phillips Director August 9, 1999 - ------------------------ John F. Phillips /s/Gerald O. Koop Director August 9, 1999 - ------------------------ Gerald O. Koop By: /s/ James L. Conway Director ------------------- - ------------------------ Attorney-in-Fact Joseph G. Sicinski August 9, 1999 -----END PRIVACY-ENHANCED MESSAGE-----