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, 2000
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 February 7, 2001
------------------- -----------------------------------------
Common Stock, par value 3,498,098
$.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 2001 Annual Meeting of Stockholders to be filed
within 120 days of the close of the registrant's fiscal year.
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 and public healthcare industry through our wholly-owned operating
subsidiary, Creative Socio-Medics Corp. These products are supported under
long-term maintenance agreements. Our ASP 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 and public health services as state and county behavioral health,
public health and substance abuse agencies, psychiatric hospitals, methadone
maintenance clinics, and other speciality care inpatient and outpatient
providers.
We have an established nationwide customer base, including state agencies that
have responsibility for providing behavioral or public healthcare services in 14
states.
Business Strategy
We believe that we are one of the most established suppliers of practice
management solutions to the behavioral and public healthcare services 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 healthcare networks.
The behavioral and public healthcare industry will be required to update or
replace their existing information processing solutions to comply with the
emerging federal data standards requirements. The two most influential standards
for this sector are:
* The Federal Health Insurance Portability and Accountability Act -
which focuses on the privacy and security of healthcare information
* Decision Support 2000+ - Center for Mental Health Services data
standards for state operated/funded facilities
We intend to capitalize on the increased demand for information systems driven
by these federal initiatives by:
* Offering end-to-end solutions meeting the federal data standards to
all market segments.
* Providing technology features that maximize end user effectiveness.
Our product suite Avatar, coupled with our best-of-breed partners offers
comprehensive enterprise-wide solutions for all provider types within this
sector. Our Electronic Medical Record, Avatar-CWS, selected for the prestigious
Davies Award, is the first for a behavioral/public health application.
Avatar-CWS is the platform for accommodating the emerging federal data
standards. Avatar is available in both client/server and ASP/internet deployment
options.
On the technology front, we will be expanding the Avatar product line to include
three broad-base distribution vehicles:
* Web Portal: Avatar will be offered through a web portal to provide
single and small practice groups access on a subscription basis.
* Smart Card: Our pilot project in patient access for treatment
services in methadone maintenance will be expanded to provide a
secure link between multi-service agencies, such as court diversion
and treatment.
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* Palm Pilot: Connectivity of Avatar and Palm Pilots will extend the
distribution of clinical record keeping to the point of service
between clinician and consumer.
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. Our website is located at www.csmcorp.com. Neither the Information
contained in our website nor the information contained in any Internet website
is a part of this Form 10-K Annual Report.
Risk Factors
If we are unable to obtain additional capital, we may not be able to develop our
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business.
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We had working capital of $5.9 million at December 31, 2000. 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
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may be impaired by policies relating to entitlement programs.
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We market our health information systems principally to behavioral health
facilities, many of which are operated by government entities and include
entitlement programs. During 2000, we generated 51% of our revenue from
contracts with government agencies, as compared with 55% in 1999 and 52% in
1998. 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
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organizations, and changes in government regulation of health care industry may
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affect the market for our systems.
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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.
2
If we are not able to take advantage of technological advances, our business may
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suffer.
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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
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offer similar services.
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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
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could harm our business.
------------------------
Our business is largely dependent upon our senior executive officers, Messrs.
James L. Conway, chief executive officer, Gerald O. Koop, president, Anthony F.
Grisanti, chief financial officer, and John F. Philips, vice president --
marketing. Although we have employment agreements with these officers, the
employment agreement do not guarantee that the officers will continue with us,
and each of these officers has the right to terminate his employment with us on
90 days notice. 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
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able to use our proprietary information in competition with us.
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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.
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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. Our stock price may adversely affect our
ability to make acquisitions for equity or to raise funds for acquisition
through the issues of equity securities. 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
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business.
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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, and our officers may
exercise their rights to terminate their employment with us. We 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.
3
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.
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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.
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We may issue stock upon the exercise of options to purchase up to an aggregate
809,718 shares of common stock pursuant to our long-term incentive plans, all of
which were outstanding at February 28, 2001. 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.
Health and Human Services Systems and Services
We develop, market and support computer software which enables behavioral/public
healthcare organizations to provide a full range of services in a network
computing environment.
Users typically purchase one of several 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 health information system ranges from $10,000 to
$100,000 for a single facility healthcare organization to $250,000 to $1,000,000
for multi-unit care organizations such as those run by state agencies. Revenue
from license fees were approximately $2,603,000, or 12.9% of revenue, for 2000,
$2,228,000, or 10.5% of revenue, for 1999 and $2,270,000, or 17.3% of revenue,
for 1998. A customer's purchase order may also include third party hardware or
software. Revenue from hardware and third party software accounted for
approximately $4,158,000, or 20.6% of revenue, for 2000, $5,915,000, or 27.8% of
revenue, for 1999 and $2,610,000, or 19.8% of revenue, for 1998. Revenue from
turnkey systems labor accounted for approximately $6,502,000, or 32.2% of
revenue, for 2000, $7,768,000, or 36.6% of revenue, for 1999 and $3,664,000, or
27.8% of revenue in 1998.
In addition to our behavioral/public healthcare information systems and related
services, we offer processing services to substance abuse facilities and
maintain a data center facility at which our personnel perform data entry, data
processing and produce operations reports for smaller substance abuse clinics.
Our data center revenue was approximately $2,263,000, or 11.2% of revenue, for
2000, $1,908,000, or 9% of revenue, for 1999 and $2,164,000, or 16.4% of
revenue, for 1998.
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. Maintenance
revenue increases as existing customers purchase additional licenses and new
customers purchase
4
their initial software licenses. By agreement with our customers, we provide
telephone help services and maintain and upgrade their software. Maintenance
contracts may require us to make 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 $3,521,000, or 17.5% of revenue, for 2000, $2,258,000, or 10.6% of
revenue, for 1999 and $1,432,000, or 10.9% of revenue, for 1998.
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.
* Avatar - Practice Management: This system is a comprehensive
solution providing patient management functions, billing, tracking,
scheduling, and reporting for inpatient treatment facilities.
* Avatar - Clinician Workstation: This workstation provides a
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.
* Avatar - M4: 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. We can integrate M4 with our other behavioral health
products.
* Avatar - Managed Care: 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.
Markets and Marketing
The market for behavioral/public health information systems and related services
consists of both private and publicly operated providers offering hospital or
community-based outpatient behavioral/public healthcare services. These
healthcare providers require a healthcare information system to administer their
programs. We believe that there are at least 15,000 behavioral/public 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/public healthcare facilities are operated by
government entities and include those operated as part of entitlement programs.
During the years ended December 31, 2000, 1999 and 1998, approximately 51.0%,
55.0% and 52.0%, 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/public healthcare providers, there are a
larger number of sole practitioners, group practices and smaller clinics which
may also require behavioral/public healthcare facilities. We intend to market
our Internet-based systems to these potential customers.
We believe that the demand for information technology solutions is increasing as
a result of:
1. new federal initiatives for data standards
2. continuous pressure from managed care to reduce healthcare delivery
costs while expanding the availability of services.
5
In order to remain competitive, the behavioral/public 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/public healthcare 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.
No customer accounted for 10% or more of our revenue in 2000. 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.
We had a backlog of orders, including ongoing maintenance and data center
contracts for our behavioral health information systems of $14.4 million at
December 31, 2000 and $14.2 million at December 31, 1999. A substantial amount
of the 2000 backlog is expected to be filled during 2001.
Product Development
We incurred product development costs relating to our behavioral health
information systems of approximately $1,360,000 in 2000, $800,000 in 1999 and
$763,000 in 1998, all of which was company-sponsored. In 2000, we incurred
capitalized software development costs of approximately $219,000 in connection
with the development of our proposed web portal services and application service
provider solutions for healthcare providers. During 2000, we also incurred
capitalized software development costs of $334,000 associated with our
acquisition of the Connex suite of managed care and employee assistance program
information systems. Included in these costs is $100,000 of valued assigned to
the 15,528 shares of our common stock which we issued to acquire the Connex
suite.
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/public healthcare industry. We believe
that most of the presently available healthcare management software does not
meet the specific needs of the behavioral/public 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 we, 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 healthcare services.
During the past three years, we signed contracts to provide our healthcare
information systems to twelve state agencies responsible for administering
behavioral services, bringing the total of such state agencies to 16.
Government Regulations and Contracts
The federal and state governments have adopted numerous regulations relating to
the health care industry,
6
including regulations relating to the payments to health care providers for
various services. The adoption of new regulations can have a significant effect
upon the operations of health care providers and insurance companies. Although
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, 2000, we had 130 employees, including four executive, eleven
sales and marketing, 104 technical and eleven clerical and administrative
employees.
Executive Officers
Our executive officers are as follows:
Name Age Position
---- --- --------
Edward D. Bright 64 Chairman of the Board
James L. Conway 53 Chief Executive Officer
Gerald Koop 62 President
Anthony F. Grisanti 51 Chief Financial Officer, Treasurer and
Secretary
John F. Phillips 63 Vice President - Marketing
Mr. Edward D. Bright has been chairman of the board and a director since April
1998. In April 1998, Mr. Bright was also elected as chairman, secretary,
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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. Mr. Bright is also Chairman of Sagemark.
Mr. James L. Conway has been a director since January 1996 and chief executive
officer since April 1998 and president from January 1996 until February 2001.
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 Services,
Inc., which provides technical temporary staffing services.
Mr. Gerald O. Koop has been a director since June 1998 and president since
February 2001. 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 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 and vice president - marketing since
June 1996. He has been and vice president of Creative Socio-Medics since June
1994. 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.
Item 2. Property
We lease office space at the following locations:
Location Purpose Space Annual Rental Expiration
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146 Nassau Avenue Executive 18,000 $303,000, plus 4% 12/31/03
Islip, New York offices square feet annual increases
1335 Dublin Road Offices 3,500 $51,000 11/30/01
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 $44,000, plus 6% 12/31/01
La Jolla, California square feet annual increases
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(1) This lease provides 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
In October 2000, our subsidiary, Creative Socio-Medics, commenced an action
against the City of Richmond, in the Supreme Court of the State of New York,
County of Suffolk, which action was subsequently removed to the United States
District Court for the Eastern District of New York, for failure to pay more
than $1 million
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pursuant a contract we have with Richmond. Richmond advised the court that it
intended to move to dismiss the complaint for lack of personal jurisdiction in
New York and improper venue. The parties are currently engaged in discovery on
jurisdictional issues. In November 2000, Richmond filed a complaint in the
Circuit Court for the City of Richmond, Richmond, Virginia, alleging, among
other things, that the contract with Creative Socio-Medics was procured through
fraudulent misrepresentations concerning the nature of the work to be performed
and the price for the services and that Creative Socio-Medics failed to perform
its obligations under the agreement, seeking damages of $373,000 and a finding
that it owes no additional amounts to Creative Socio-Medics. The parties entered
into a stipulation staying the Richmond action until a determination of
Richmond's jurisdictional challenges to the New York action. We believe that we
have valid claims against Richmond and we intend to vigorously pursue those
claims. We also believe that the allegations contained in Richmond's complaint
are without merit and we intend to vigorously defend against those claims.
In November 2000, Creative Socio-Medics commenced an action against Insight
Recovery Center Inc., in the Supreme Court of the State of New York County of
Suffolk, which action was subsequently removed to the United State District
Court of the Eastern District of New York. The complaint alleges breach of
contract in failing to pay $147,406 pursuant to an agreement with Insight
Recovery Center. Insight Recovery Center has not filed an answer to the
complaint and advised Creative Socio-Medics that it intended to challenge
jurisdiction in New York. Also in November 2000, Insight Recovery Center filed a
complaint against Creative Socio-Medics in the Circuit Court for the County of
Genessee, Michigan, which action was removed to the United States District Court
for the District of Michigan alleging, among other claims, fraudulently
inducement and breach of contract. Creative Socio-Medics has not filed an answer
to that complaint and advised Insight Recovery Center that it intended to
challenge jurisdiction in Michigan. However, prior to any motion being made, the
parties have agreed in principle to a settlement, which provides, among other
things, for a payment by Insight Recovery Center to Creative Socio-Medics and
for Creative Socio-Medics to perform services and provide product over an
extended period of time at stated rates. If the settlement in principle is not
implemented for any reason and the actions go forward, we believe that we have
valid claims against Insight Recovery Center and we intend to vigorously pursue
those claims. We also believe that the allegations contained in Insight's
complaint are without merit and we intend to vigorously defend against those
claims.
In June 2000, Psychiatric Solutions, Inc. commenced an action against Creative
Socio-Medics, Inc. in the Chancery Court in the State of Tennessee, Davidson
County, alleging that Creative Socio-Medics breached its agreement with
Psychiatric Solutions and made material representations regarding the
capabilities of the Creative Socio-Medics programs. The complaint sought damages
of in excess of $2 million. Although we believe that the action was without
merit, we settled the action by paying $37,500 to Psychiatric Solutions.
Item 4. Submission of Matters to a Vote of Security Holders
On December 21, 2000, we held our 2000 annual meeting of stockholders.
The following individuals were elected as directors:
Name Number of Votes Broker Non Votes
Edward D. Bright 3,096,975 1,667,349
James L. Conway 3,096,975 1,667,349
John F. Phillips 3,096,975 1,667,349
Gerald O. Koop 3,096,975 1,667,349
Joseph G. Sicinski 3,096,975 1,667,349
9
The following proposals were approved as follows:
Broker
Votes For Votes Against Abstain Non Votes
Approval of the amendment
to the 1999 Long Term
Incentive Plan 1,345,702 139,943 5,758 1,667,349
Approval of the 1999
Stock Purchase Plan 1,384,837 100,624 5,942 1,667,349
Approval of the selection of
Richard A. Eisner & Co., LLP
as independent auditors for
2000 3,089,906 1,432 46,556 1,667,349
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 our Common Stock
for each quarterly period during the past two years.
Quarter Ending High Bid
-------------- ---- ---
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
March 31, 2000 11.75 5.25
June 30, 2000 11.38 4.00
September 30, 2000 5.69 3.31
December 31, 2000 4.13 1.50
As of December 31, 2000, there were approximately 1,950 holders of record of our
common stock. The closing price of our common stock was $2.25 per share on March
20, 2001. These quotations reflect inter- dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
We have not paid any cash dividends to the holders of our common stock since our
organization.
We did not sell any unregistered securities during 2000.
10
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands except per share data)
Selected Statements
of Operations Data:
Revenue $20,171 $21,252 $ 13,165 $ 7,635 $ 6,538
Income (Loss) from Continuing
Operations before interest
and other financing costs 2,141(1) 1,895 759 (536) (3,614)(2)
Income (Loss) from Discontinued
Operations 70 180 (217) (2,615) (801)
Net Income (Loss) 2,386(1) 1,825 196 (3,459) (6,579)(2,3)
Per Share Data - Diluted:
Continuing Operations .61 .47 .12 (.37) (3.36)
Discontinued Operations .02 .05 (.08) (1.10) (.47)
Net Income (loss) .63 .52 .04 (1.47) (3.83)
Weighted average number
of shares outstanding 3,771 3,516 2,865 2,387 1,716
Selected Balance
Sheet Data:
Working Capital (deficiency) 5,858 2,012 10 (537) 477
Total Assets 15,301 13,972 10,289 7,340 8,251
Total Liabilities 5,997 8,617 7,005 4,200 3,836
Accumulated Deficit (10,886) (13,272) (15,097) (15,293) (11,726)
Stockholders' Equity 9,304 5,355 3,284 3,140 4,415
----------
(1)Includes benefit of net operating loss in the amount of $494,000.
(2)Includes $3,492 of non-cash compensation charges arising from the
issuance by the Company of warrants and options having exercise prices which
were less than the market value of the Common Stock at the date of approval
by the board of directors.
(3)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.
All per share information has been retroactively adjusted for the
one-for-three reverse stock split which became effective September 1998.
11
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
contracts generally result in either costs and estimated profits in excess of
billing or billing in excess of cost and estimated profits. 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.
Additionally, during 2000, we implemented an increased product enhancement
effort relating principally to new product functionality, technology upgrades
and the addition of clinical content. We also undertook the development of a
significant upgrade to our core product, which resulted in a migration to
leading edge technologies. We allocated to these projects personnel who had
previously performed services for clients which generated revenue.
Years Ended December 31, 2000 and 1999
Our revenue for 2000 was $20,171,000, a decrease of $1,081,000, or 5%, from our
1999 revenue, which was $21,252,000. The largest component of revenue was
turnkey systems labor revenue, which decreased to $6,502,000 in 2000, from
$7,768,000 in 1999, reflecting a 16% decrease. This decrease reflects the
allocation of personnel to our product enhancement efforts instead of services
under the contracts. Revenue from third party hardware and software decreased to
$4,158,000 in 2000 from $5,915,000 in 1999, which represents a decrease of 30%.
Sales of third party hardware and software are made in connection with the sales
of turnkey systems. These sales are typically made at lower gross margins than
our behavioral health systems and services revenue. The data center (service
bureau) revenue increased to $2,263,000 in 2000 from $1,908,000 in the 1999,
reflecting an increase of 19%. This increase is substantially the result of work
being performed for one particular client. There are no assurances that revenue
will continue at this rate for this client. License revenue increased to
$2,603,000 in 2000 from $2,228,000 in 1999, reflecting an increase of 17%.
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. Maintenance revenue increased to
$3,521,000 in 2000 from $2,258,000 in 1999, reflecting an increase of 56%. As
turnkey systems are completed, they are transitioned to the maintenance
division. During 2000 we completed the turnkey systems for approximately 32 new
clients, for which we are performing maintenance services. Revenue from the
sales of our small turnkey division decreased to $1,124,000 in 2000 from
$1,174,000 in 1999, reflecting a decrease of 4%.
Revenue from contracts from government agencies represented 51% of revenue in
2000 and 55% of revenue in 1999. This decrease reflects both the completion of
contracts with government agencies and recognition of revenue from a substantial
contract with a private institution.
Gross profit increased to $8,215,000 in 2000 from $7,375,000 in 1999, reflecting
an 11% increase. Our overall gross margin was 41% in 2000 compared to 35% in
1999. The increase in gross margin was substantially attributable to the
decrease in our third party hardware and software revenue, which yields margins
significantly less than revenue from our behavioral health systems and services,
and the increase in maintenance revenue, which generates a higher gross margin
since the core costs and infrastructure investment have previously been
established.
Selling, general and administrative expenses were $4,534,000 in 2000, a decrease
of 1/2 % from the $4,553,000 in 1999.
In 2000 we issued warrants for services rendered. We also extended one series of
our warrants for fourteen months. An aggregate of $181,000 was charged to
operations for the warrant issuance and the warrant extension. As a result of
the extension of the warrants in 2000, we raised additional equity of $1,153,000
from the exercise of the warrants. In 1999 we issued warrants for services
rendered. We also extended one series of warrants for two months. An aggregate
of $127,000 was charged to operations for the warrant issuance and the warrant
extension.
12
We incurred product development expenses of $1,360,000 in 2000, an increase of
70% from the $800,000 in 1999. Research and development expenses increased in
2000 as a result of several major product initiatives. These initiatives include
the repositioning of all of our products to a client environment that will
facilitate alternative system delivery methods, including Internet and
application service provider channels. Additionally, we significantly upgraded
our core product to provide them with more current technologies and to integrate
them with customer specific requirements.
Interest expense was $161,000 in 2000, a decrease of $89,000, or 36%, from the
$250,000 in 1999. This decrease was the result of lower borrowings during 2000,
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 1999. In October 1999, we entered into a new credit facility agreement.
The interest rate of the new facility is 2% above the prime rate. During 2000,
we paid all our outstanding borrowings from the lender, and, at December 31,
2000, there were no outstanding obligations to the lender. This facility
remains available under the same terms and conditions if we need to borrow in
the future.
We recognized a gain of $70,000 from our discontinued operations in 2000. 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 1999, we
recognized a gain from our discontinued operations of $180,000.
We have a net operating loss tax carry forward of approximately $7 million.
However, in 2000, we provided for income taxes in the amount of $157,000. This
provision was based upon federal alternative minimum tax calculations as well as
for certain state taxes where we do not have any net operating loss carry
forwards. In addition, we recognized a partial tax benefit in the amount of
$494,000 principally related to our net operating loss carry forwards.
As a result of the foregoing factors, in 2000 we generated a net income from
continuing operations of $2,316,000, or $.69 per share (basic) and $.61 per
share (diluted), a gain from discontinued operations of $70,000, or $.02 per
share (basic and diluted), and a net income of $2,386,000, or $.71 per share
(basic) and $.63 per share (diluted). For 1999, we generated 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).
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. 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%.
13
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.
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).
Liquidity and Capital Resources
We had working capital of $5.9 million at December 31, 2000 as compared to
working capital of $2 million at December 31, 1999. Our cash position increased
from $205,000 at December 31, 1999 to $2.4 million at December 31, 2000. The
increase in working capital for 2000 was substantially due to net income after
adding back depreciation and amortization as well as from capital received from
the exercise of warrants and options totaling $1.3 million.
14
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, 2000, there were no outstanding borrowings under this facility and the
maximum amount available to borrow under this formula was $1.3 million.
At December 31, 2000, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $8.5 million, representing
approximately 156 days of revenue based on annualizing the revenue for the year
ended December 31, 2000, although no assurance can be given that revenue will
continue at the same level as the year ended December 31, 2000.
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 costs for seeking to expand the market for our
products and services to include smaller clinics and facilities and sole group
practitioners exceed our expectation.
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.
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 under
"Risk Factors" and elsewhere, and in other documents which we file with the
Securities and Exchange Commission.
15
Netsmart Technologies, Inc.
Quarterly Summary
Unaudited
In thousands, except per share data amounts
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
2000 (a)
Total revenue $ 5,601 $ 4,909 $ 5,099 $ 4,562
Gross profit 2,085 2,142 1,884 2,104
Net income from continuing operations 437 453 451 975
Discontinued operations - - - 70
Net income 437 453 451 1,045
Per share amounts:
Net earnings - Basic:
Continuing operations $ 0.14 $ 0.13 $ 0.13 $ 0.28
Discontinued operations $ - $ - $ - $ 0.02
-------- -------- --------- ---------
$ 0.14 $ 0.13 $ 0.13 $ 0.30
======== ======== ========= =========
Net earnings - Diluted:
Continuing operations $ 0.12 $ 0.12 $ 0.12 $ 0.25
Discontinued operations $ - $ - $ - $ 0.02
-------- -------- -------- --------
$ 0.12 $ 0.12 $ 0.12 $ 0.27
1999
Total revenue $ 5,235 $ 5,572 $ 5,240 $ 5,205
Gross profit 1,788 1,957 1,866 1,764
Net income from continuing operations 327 413 444 461
Discontinued operations - - - 180
Net income 327 413 444 641
Per share amounts:
Net earnings - Basic:
Continuing operations $ 0.11 $ 0.14 $ 0.15 $ 0.15
Discontinued operations $ - $ - $ - $ 0.06
-------- -------- -------- --------
$ 0.11 $ 0.14 $ 0.15 $ 0.12
======== ======== ======== ========
Net earnings - Diluted:
Continuing operation $ 0.11 $ 0.12 $ 0.13 $ 0.13
Discontinued operations $ - $ - - 0.05
-------- -------- -------- --------
$ 0.11 $ 0.12 $ 0.13 $ 0.18
======== ======== ======== ========
(a) Includes the benefit of a net operating loss in the amount of $494 in the fourth quarter of 2000.
16
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
None
Part III
Items 10, 11, 12, and 13.
The information called for by Item 10 (Directors and Executive Officers),
Item II (Executive Compensation), Item 12 (Security Ownership of Certain
Beneficial Owners and Management), and Item 13 (Certain Relationships and
Related Transactions) is incorporated herein by reference from our definitive
proxy statement for the Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the year ended December 31, 2000.
Part IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.
17
1. Financial Statements
Report of Richard A. Eisner & Company, LLP
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for the Years Ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
None
4. Exhibits
3.1(1) Restated Certificate of Incorporation, as amended
3.2(1) By-Laws
10.1 Employment Agreement dated January 1, 2001, between the
Registrant and James L. Conway.
10.2 Employment Agreement dated January 1, 2001, between the
Registrant and John F. Phillips.
10.3 Employment Agreement dated January 1, 2001, between the
Registrant and Gerald O. Koop.
10.4 Employment Agreement dated January 1, 2001, 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(3) 1999 Long-Term Incentive Plan.
10.8(3) 1999 Employee Stock Purchase Plan
10.9(4) Agreement dated August 26, 1999, between the Registrant
and Silicon Valley Bank.
21.1 Subsidiaries of the Registrant.
25.1 Powers of attorney (See Signature Page)
----------
(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.
(3) Filed as an appendix the Registrant's proxy statement dated
November 9, 2000, relating to its 2000 Annual Meeting of Stockholders and
incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999 and incorporated herein by reference.
18
NETSMART TECHNOLOGIES, INC.
AND SUBSIDIARIES
F - 1
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
INDEX
--------------------------------------------------------------------------------
Page to Page
Independent Auditors' Report.......................................F-3
Consolidated Balance Sheets........................................F-4......F-5
Consolidated Statements of Income..................................F-6......F-7
Consolidated Statements of Stockholders' Equity....................F-8
Consolidated Statements of Cash Flows..............................F-9......F-11
Notes to Consolidated Financial Statements ........................F-12.....F-28
. . . . . . . . . . .
F - 2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Netsmart Technologies, Inc.
Islip, New York
We have audited the accompanying consolidated balance sheets of
Netsmart Technologies, Inc. and subsidiaries as of December 31, 2000 and 1999
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three year period ended December 31, 2000.
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, 2000 and
1999, and the consolidated results of their operations and their consolidated
cash flows for each of the years in the three year period ended December 31,
2000, in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 27, 2001
F - 3
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
December 31,
------------
2 0 0 0 1 9 9 9
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 2,418,947 $ 204,989
Accounts Receivable - Net 4,688,598 5,789,734
Costs and Estimated Profits in Excess
of Interim Billings 4,068,255 4,253,072
Note Receivable - 150,000
Deferred taxes 494,000 -
Other Current Assets 144,942 167,516
----------- -----------
Total Current Assets 11,814,742 10,565,311
----------- -----------
Property and Equipment - Net 512,281 534,864
----------- -----------
Other Assets:
Software Development Costs - Net 822,645 310,722
Customer Lists - Net 2,064,832 2,399,108
Other Assets 86,213 162,472
----------- -----------
Total Other Assets 2,973,690 2,872,302
----------- -----------
Total Assets $ 15,300,713 $ 13,972,477
=========== ===========
See Notes to Consolidated Financial Statements.
F - 4
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
December 31,
------------
2 0 0 0 1 9 9 9
------- -------
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable $ -- $ 882,404
Capital Lease Obligations 35,756 25,385
Accounts Payable 807,298 2,562,087
Accrued Expenses 1,154,647 1,243,548
Interim Billings in Excess of Costs and Estimated
Profits 3,350,697 3,750,847
Deferred Revenue 608,444 88,546
----------- -----------
Total Current Liabilities 5,956,842 8,552,817
----------- -----------
Capital Lease Obligations - Less current portion
included above 40,458 64,627
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock - $.01 Par Value, 3,000,000
Shares Authorized; None issued and outstanding
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued 3,524,692 shares
at December 31, 2000, 2,988,738 shares at
December 31, 1999 35,246 29,887
Additional Paid in Capital 20,454,391 18,657,579
Accumulated Deficit (10,886,414) (13,272,433)
----------- -----------
9,603,223 5,415,033
Less cost of shares of Common Stock held
in treasury - 28,038 shares at December 31,
2000 and 5,333 shares at December 31, 1999 299,810 60,000
----------- -----------
Total Stockholders' Equity 9,303,413 5,355,033
----------- -----------
Total Liabilities and Stockholders' Equity $ 15,300,713 $ 13,972,477
=========== ==========
See Notes to Consolidated Financial Statements.
F - 5
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
Year ended December 31,
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Revenues:
Software and Related
Systems and Services:
General $14,387,256 $17,085,603 $ 9,569,100
Maintenance Contract
Services 3,520,717 2,257,869 1,431,695
---------- ---------- -----------
Total Software and Related
Systems and Services 17,907,973 19,343,472 11,000,795
Data Center Services 2,262,676 1,908,158 2,164,472
---------- ---------- -----------
Total Revenues 20,170,649 21,251,630 13,165,267
---------- ---------- ----------
Cost of Revenues:
Software and Related
Systems and Services:
General 8,645,275 11,054,960 5,975,249
Maintenance Contract
Services 2,285,663 1,713,759 975,212
---------- ---------- ----------
Total Software and Related
Systems and Services 10,930,938 12,768,719 6,950,461
Data Center Services 1,024,523 1,107,571 1,131,078
---------- ---------- ----------
Total Cost of Revenues 11,955,461 13,876,290 8,081,539
---------- ---------- ----------
Gross Profit 8,215,188 7,375,340 5,083,728
---------- ---------- ----------
Selling, General and
Administrative Expenses 4,533,829 4,552,866 3,516,288
Cost of Warrants Issued and
Their Extensions 181,000 127,000 -
Related Party Administrative Expense - - 45,000
Research and Development 1,359,781 800,470 763,059
---------- ---------- ----------
Total 6,074,610 5,480,336 4,324,347
---------- ---------- ----------
Income from Continuing Operations
before Interest Expense 2,140,578 1,895,004 759,381
Interest Expense 161,386 250,235 346,114
---------- ---------- ----------
Income from Continuing Operations
before income tax benefit 1,979,192 1,644,769 413,267
Income Tax Benefit (336,827) - -
---------- ---------- ----------
Income from Continuing Operations 2,316,019 1,644,769 413,267
---------- ---------- ----------
See Notes to Consolidated Financial Statements.
F - 6
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
Year ended December 31,
-----------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Discontinued Operations:
Loss from Discontinued Operations - (397,018)
Gain on Sale of Discontinued Operations 70,000 180,000 180,000
---------- ---------- ----------
Income (Loss) from Discontinued Operations 70,000 180,000 (217,018)
---------- ---------- ----------
Net Income 2,386,019 1,824,769 196,249
Less Cumulative Preferred Stock Dividends - - 72,600
---------- ---------- ----------
Net Income Applicable to Common Stock $ 2,386,019 $ 1,824,769 $ 123,649
========== ========== ==========
Earnings Per Share of Common Stock:
Basic:
Income from Continuing Operations $ .69 $ .56 $ .12
Income (Loss) from Discontinued Operations .02 .06 (.08)
---------- ---------- ----------
Net Income $ .71 $ .62 $ .04
========== ========== ==========
Weighted Average Number of Shares of
Common Stock Outstanding 3,367,005 2,921,254 2,779,655
========== ========== ==========
Diluted:
Income from Continuing Operations $ .61 $ .47 $ .12
Income (Loss) from Discontinued Operations .02 .05 (.08)
---------- ---------- ----------
Net Income $ .63 $ .52 $ .04
========== ========== ==========
Weighted Average Number of Shares of
Common Stock Outstanding 3,770,992 3,516,317 2,864,993
========== ========== ==========
See Notes to Consolidated Financial Statements.
F - 7
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
------ ------ ----- ------ ------ ----- ------- ------ ---- ------
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
for Redemption of
Series D Preferred
Stock (1,210) (12) (1,209,509) 100,000 1,000 1,208,521 -
Issuance and
Extension of Warrants 127,000 127,000
Net Income 1,824,769 1,824,769
----- ---- ---------- --------- ------ ---------- ----------- ------ -------- ---------
- - - 2,988,738 29,887 18,657,579 (13,272,433) 5,333 (60,000) 5,355,033
Balance -
December 31, 1999
Common Stock Issued -
Exercise of Options 328,321 3,283 378,258 22,705 (239,810) 141,731
Common Stock Issued -
Exercise of Warrants 192,105 1,921 1,137,709 1,139,630
Common Stock Issued -
Acquisition 15,528 155 99,845 100,000
Issuance and Extension
of Warrants 181,000 181,000
Net Income 2,386,019 2,386,019
----- ---- ---------- --------- ------ ---------- ----------- ------ -------- ---------
Balance -
December 31, 2000 - $ - $ - 3,524,692 $35,246 $20,454,391 $(10,886,414) 28,038 $(299,810) $9,303,413
===== ==== ========== ========= ====== ========== ========== ====== ======== =========
See Notes to Consolidated Financial Statements.
F - 8
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Year ended December 31,
----------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Operating Activities:
Income from Continuing Operations $ 2,316,019 $ 1,644,769 $ 413,267
---------- ---------- -----------
Adjustments to Reconcile Income
from Continuing Operations to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 717,776 600,907 561,562
Financing Costs Related to Issuance
and Extension of Warrants 181,000 127,000
Financing Expenses related to the issuance
of Common Stock 5,625
Cash Used in Discontinued Operations (397,018)
Provision for Doubtful Accounts 330,000 84,000 60,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 771,136 (2,273,709) (1,477,607)
Costs and Estimated Profits in
Excess of Interim Billings 184,817 (1,353,377) (2,357,371)
Other Current Assets 22,574 (57,921) (25,825)
Deferred Taxes (494,000) - -
Other Assets 76,259 (61,408) 5,839
Increase [Decrease] in:
Accounts Payable (1,754,789) 395,754 1,034,641
Accrued Expenses (88,901) 64,655 102,773
Interim Billings in Excess of
Costs and Estimated Profits (400,150) 1,946,848 852,114
Deferred Revenue 519,898 40,927 (69,461)
---------- ---------- -----------
Total Adjustments 65,620 (480,699) (1,710,353)
---------- ---------- -----------
Net Cash Provided by (Used In)
Operating Activities 2,381,639 1,164,070 (1,297,086)
---------- ---------- -----------
Investing Activities:
Acquisition of Property and
Equipment (236,740) (406,751) (222,031)
Software Development Costs (536,100) (208,972)
Cash Provided by Discontinued Operations 220,000 180,000 30,000
---------- ---------- -----------
Net Cash Used In Investing Activities (552,840) (435,723) (192,031)
---------- ---------- -----------
See Notes to Consolidated Financial Statements.
F - 9
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Year ended December 31,
----------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Financing Activities:
Proceeds from Short-Term Notes 882,404 704,517
Payment of Short-Term Notes (882,404) (1,639,694)
Proceeds from Capitalized Lease Obligation 13,249 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 (27,047) (34,304) (15,658)
Net Proceeds from Warrant Exercise 1,139,630
Net Proceeds from Stock Option Exercise 141,731 113,547 8,325
Purchase of Treasury Shares (25,000)
Other 76,643
--------- --------- ---------
Net Cash Provided by (Used in)
Financing Activities 385,159 (722,047) 832,827
--------- --------- ---------
Net Increase [Decrease] in Cash
and Cash Equivalents 2,213,958 6,300 (656,290)
Cash and Cash Equivalents -
Beginning of Year 204,989 198,689 854,979
--------- --------- ---------
Cash and Cash Equivalents -
End of Year $ 2,418,947 $ 204,989 $ 198,689
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the years for:
Interest $ 172,556 $ 262,884 $ 353,713
Income Taxes $ 157,173 $ 41,478 $ 16,934
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Year ended December 31, 2000:
The Company issued 15,528 shares of common stock to acquire the Connex suite of
managed care and employee assistance program information systems software. These
shares were valued at $100,000 which was the market value on date of grant.
During 2000, stock options to purchase 328,321 shares were exercised, and
proceeds of $381,541 includes $239,810 representing the market value of 22,705
shares of the Company's common stock which was received for the exercise price
of certain of these options.
Year ended December 31, 1999:
Pursuant to a March 25, 1999 agreement between the Company, Consolidated
Technology Group Ltd. ("Consolidated"), 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 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, and warrants to purchase shares of our common
stock in exchange for which the Company issued 100,000 shares of
F - 10
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 were
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.
See Notes to Consolidated Financial Statements.
F - 11
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 in which Netsmart
owns an 80% interest (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 $363,000 and $192,000 at December 31, 2000 and
1999 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, 2000, 1999 and 1998,
approximately 51%, 55% and 52% respectively, of the Company's revenues were
generated from contracts with government agencies.
During the year ended December 31, 2000, no one customer accounted for more than
10% of revenue. During the year ended December 31, 1999 and 1998, one customer
accounted for approximately $3,835,000 and $2,113,000, respectively, or 18% and
16%, respectively 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.
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, 2000
and 1999, cash and cash equivalent balances of $2.2 million and $90,000
respectively, were held at a financial institution in excess of federally
insured limits.
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. 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
F - 12
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
--------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
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 which is recognized based upon the terms of
each contract. 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
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.
F - 13
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
--------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
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 2000, the Company acquired the Connex suite of managed care and employee
assistance program information systems. The acquisition price consisted of
approximately $47,000 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 $147,000. During 2000, the Company made additional enhancements to the
purchased software in the amount of $270,000. The Company has amortized $83,000
of these total costs during 2000. As of December 31, 2000, the Company has
invested approximately $417,000 on this effort of which $334,000 remains
capitalized.
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/public healthcare providers, consumers and managers
throughout the United States. As of December 31, 2000, the Company has invested
approximately $428,000 in this venture which is reflected as software
development costs.
Information related to capitalized software costs applicable to continuing
operations is as follows:
Year ended December 31, 2000 1999 1998
----------------------- ---- ---- ----
Beginning of Year $ 310,722 $ 142,450 $ 183,150
Capitalized 636,100 208,972 -
Amortization (124,177) (40,700) (40,700)
-------- -------- --------
Net $ 822,645 $ 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.
Customer lists are being amortized on the straight-line method over an estimated
useful life of 12 years.
Customer lists at December 31, 2000 and 1999 are as follows:
December 31,
------------
2 0 0 0 1 9 9 9
------- -------
Customer Lists $4,106,223 $4,106,223
Less: Accumulated Amortization 2,041,391 1,707,115
--------- ---------
Net $2,064,832 $2,399,108
--- ========= =========
Amortization expense amounted to 334,276, 334,284 and 334,284, respectively, for
the years ended December 31, 2000, 1999 and 1998.
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
determined that
F - 14
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
--------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
expected future cash flows (undiscounted and without interest charges) exceed
the carrying value of the long lived assets at December 31, 2000 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 has elected 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 Per Share - Basic earnings per share of common stock is computed by
dividing income from continuing operations and net income, after dividends
accrued during 1998 for the Series D cumulative preferred stock outstanding, by
the weighted average number of shares of common stock 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. The Company had potentially dilutive options and warrants
outstanding of 974,275, 978,022 and 1,830,652 at December 31, 2000, 1999 and
1998, respectively.
All per share information has been retroactively adjusted for the one-for-three
reverse stock split which became effective September 1998.
F - 15
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
--------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Numerator:
Income from continuing operations $2,316,019 $1,644,769 $ 413,267
Less cumulative preferred stock dividends 72,600
--------- --------- ---------
Income available to common stockholders 2,316,019 1,644,769 340,667
Discontinued operations:
Loss from discontinued operations (397,018)
Gain on sale of discontinued operations 70,000 180,000 180,000
--------- --------- ---------
Net income available to common stockholders
after assumed conversions $2,386,019 $1,824,769 $ 123,649
========= ========= =========
Denominator:
Weighted average shares 3,367,005 2,921,254 2,779,655
--------- --------- ---------
Effect of dilutive securities:
Employee stock options 403,987 584,075 85,338
Stock warrants - 10,988 -
--------- --------- ---------
Dilutive potential common shares 403,987 595,063 85,338
--------- --------- ---------
Denominator for diluted earnings per
share-adjusted weighted average shares
after assumed conversions 3,770,992 3,516,317 2,864,993
========= ========= =========
Research and Development - Research and development costs are charged to expense
as incurred.
Advertising - Advertising costs are expensed as incurred. Advertising expense
amounted to $226,024, $89,488 and $71,908 for the three years ended December 31,
2000, 1999 and 1998, respectively.
[3] Accounts Receivable
Accounts receivable is shown net of allowance for doubtful accounts of $370,222
and $305,226 at December 31, 2000 and 1999 respectively. The changes in the
allowance for doubtful accounts are summarized as follows:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Beginning Balance $ 305,226 $ 372,797 $ 348,029
Provision for Doubtful Accounts 330,000 84,000 60,000
Charge-offs (265,004) (151,571) (35,232)
------- ------- -------
Ending Balance $ 370,222 $ 305,226 $ 372,797
======= ======= =======
F - 16
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
--------------------------------------------------------------------------------
[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,
------------
2 0 0 0 1 9 9 9
------- -------
Costs Incurred on Uncompleted Contracts $ 15,063,888 $ 12,582,652
Estimated Profits 9,368,984 7,446,962
---------- ----------
Total 24,432,872 20,029,614
Billings to Date 23,715,314 19,527,389
---------- ----------
Net $ 717,558 $ 502,225
--- ========== ==========
Included in the accompanying balance sheet under the following captions:
Costs and estimated profits in excess of
interim billings $ 4,068,255 $ 4,253,072
Interim billings in excess of costs and
estimated profits (3,350,697) (3,750,847)
---------- ----------
Net $ 717,558 $ 502,225
--- ========== ==========
[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 is
accounted for using the cost method. The Company has been informed that as of
December 31, 2000, its 20% interest in Granite has been diluted to 13% as a
result of additional equity issued by Granite to third parties.
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 in 1998.
In October 1998, the other party to the joint venture exercised its right to
purchase the Company's interest in the joint venture for a $500,000 note. The
terms of the note required 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 based on managements estimates of future collections on the
note. Collections have exceeded management's expectations of collectibility and
therefore the Company has recognized additional gain on sale of discontinued
operations.
F - 17
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
--------------------------------------------------------------------------------
[6] Property and Equipment
Property and equipment consist of the following:
December 31,
------------
2 0 0 0 1 9 9 9
------- -------
Equipment, Furniture and Fixtures $1,082,773 $ 869,497
Leasehold Improvements 282,589 264,153
--------- ---------
Totals - At Cost 1,365,362 1,133,650
Less: Accumulated Depreciation 853,081 598,786
--------- ---------
Net $ 512,281 $ 534,864
--- ========= =========
Depreciation expense amounted to $259,323, $225,923, and $176,578, respectively
for the years ended December 31, 2000, 1999 and 1998.
[7] Related Party Transactions
Related Party Administrative Expense - The Company had an agreement with its
then 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, the Company charged $45,000 to related party administrative
expenses.
[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. All of the accounts receivable and
property and equipment of the Company and its subsidiaries collateralize the
note. The Company had no borrowings under this facility at December 31, 2000 and
$882,404 at December 31, 1999. The amount available under the credit facility at
December 31, 2000 was $1.3 million.
The weighted average interest rate on short-term borrowings outstanding as of
December 31, 1999 amounted to approximately 16%.
[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, 2000, the Company has net operating loss carryforwards of
$6,517,000 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 approximately $1,360,000 per year,
plus any prior years' amounts not utilized.
The Company's provision for taxes includes Federal alternative minimum taxes
after utilizing its net operating loss as well as certain state and local taxes.
F - 18
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
--------------------------------------------------------------------------------
[9] Income Taxes - [Continued]
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
----------- ------
2010 $ 326,000
2011 2,930,000
2012 3,261,000
-----------
$ 6,517,000
===========
Provision for income taxes consists of the following:
Year ended December 31,
----------------------
2000 1999 1998
---- ---- ----
Current:
Federal $ 43,280 $ - $ -
State 113,893 - -
-------- -------- -------
157,173 - -
-------- -------- -------
Deferred:
Federal (442,000) - -
State (52,000) - -
-------- -------- -------
(494,000) - -
-------- -------- -------
Total $ (336,827) $ - $ -
======== ======== =======
The Company realized tax benefits of approximately $938,000, $909,000, and
$121,000, during the years ended December 31, 2000, 1999 and 1998, respectively,
from the utilization of net operating loss carry forward.
The difference between income taxes at the statutory Federal income tax rate and
income taxes reported in the income statement is as follows:
Year ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
Income taxes at the federal statutory rate 34% 34% 34%
State and local income taxes net of Federal taxes 5% 6% 6%
Nondeductible expenses 5%
Utilization of net operating loss carryforward (46)% (53)% (29)%
Federal Minimum Tax 2% 3%
(Decrease) increase in valuation allowance (25)% 10% (11)%
Other 8%
------ ------ ------
(17)% 0% 0%
====== ====== ======
F - 19
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
--------------------------------------------------------------------------------
[9] Income Taxes - [Continued]
Significant components of the Company's deferred tax assets are comprised of the
following:
December 31,
------------
2000 1999
---- ----
Net operating loss carryforward $ 2,233,000 $ 3,346,000
Allowance for doubtful accounts 141,000 116,000
Accrued vacation and bonuses 363,000 296,000
Alternative minimum tax credit carryforward 83,000 43,000
Benefit of stock based compensation awards 1,400,000 1,400,000
---------- ----------
Total deferred tax assets 4,220,000 5,201,000
Valuation allowance (3,726,000) (5,201,000)
---------- ----------
Net deferred tax assets $ 494,000 $ -
========== ==========
The Company has provided a valuation allowance in the amount of $3,726,000 of
the deferred tax asset of approximately $4,220,000. The valuation allowance
decreased by $1,475,000 at December 31, 2000. The Company believes that based
upon its average income over its past three years, that it is more likely than
not, to use at least a portion of its net operating loss carryforward. The
valuation allowance (decreased) increased by ($699,000) and $300,000 at
December 31, 1999 and 1998 respectively.
[10] Stockholders' Equity
The Company is authorized to issue 3,000,000 shares of preferred stock, par
value $.01 per share, and 15,000,000 shares of common stock, par value $.01 per
share. The Company's Board of Directors is authorized to issue preferred stock
from time to time without stockholder action, in one or more distinct series.
The Board of Directors is authorized to determine the rights and preferences of
the preferred stock when issued. 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, 2000.
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 share data in the
financial statements and notes have been adjusted to reflect this reverse split.
Pursuant to a March 25, 1999, agreement between the Company, Consolidated 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.
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
F - 20
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
--------------------------------------------------------------------------------
[10] Stockholders' Equity - [Continued]
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.
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.
During 2000, Series B Warrants to purchase an aggregate of 192,105 shares of
Common Stock at $6 per share were exercised. The Company received $1.2 million
from the exercise of the 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.
During 2000, stock options to purchase 328,321 shares were exercised, and the
Company received gross proceeds of $381,541. Pursuant to the option grants,
employees have the right to pay for the exercise price of the option by
delivering shares of common stock owned by them. During 2000, the Company
received 22,705 shares, having a value of $239,810, as the exercise price of the
options.
Stock Options - See Note 14 for information relating to the Company's 1993, 1998
and 1999 Long-Term Incentive Plans.
On December 21, 2000, the shareholders of the Company approved the 1999 Employee
Stock Purchase Plan. The plan reserves 150,000 shares of common stock. The Plan
provides eligible employees with the opportunity to purchase shares of common
stock at a discounted price through regular payroll deductions. No options have
been issued as of December 31, 2000 under this plan.
[11] Capital Lease Obligations
Future minimum payments under capital lease obligations as of December 31, 2000
are as follows:
Year ending
-----------
December 31,
-----------
2001 $ 42,759
2002 33,263
2003 10,822
--------
Total Minimum Payments 86,844
Less Amount Representing Interest at
4.9% to 13.8% Per annum 10,630
--------
Balance $ 76,214
========
Capital lease obligations are collateralized by equipment which has a net book
value of $90,000 and $97,000 at December 31, 2000 and 1999, respectively.
Amortization of $25,054, $19,329 and $10,200 in 2000, 1999 and 1998,
respectively, has been included in depreciation expense.
F - 21
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
--------------------------------------------------------------------------------
[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 approximate the
fair value of these instruments because of their short maturities.
[13] Commitments and Contingencies
Leases
------
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 of $21,000 per year through 2002) having terms of more than one year
are as follows:
Years ending
------------
December 31,
-----------
2001 $ 412,000
2002 329,000
2003 342,000
---------
Total $1,083,000
----- =========
Rent expense amounted to $464,000, $388,000 and $349,000 respectively, for the
years ended December 31, 2000, 1999 and 1998.
Employment Agreement
In July 1998, the Company entered into five-year employment agreements with its
four executive officers pursuant to which such officers receive an aggregate
annual base salaries of $560,000, with an annual cost of living adjustment.
In January 2001, the Company entered into employment agreements with these
officers for terms of two or three years with the right of the employee to
extend the agreement for an additional year. The aggregate base compensation for
these officers for 2001 is $596,000, subject to annual increases equal to the
greater of 5% or the increase in the cost of living increases. Each of the
officers also has the right, at any time on 90 days notice, to terminate his
full time employment and continue as a part- time consultant at an annual salary
of $75,000 for five years following the expiration or termination of his
employment. The agreements also provide the officers with an automobile
allowance. In the event of a change of control, the executive may receive
severance payments of between 42 and 48 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 shareholders in
December 2000 and provides for the issuance of 300,000 shares of common stock.
The Company may issue 17,833, 790,000 and 300,000 shares of Common Stock
pursuant to the 1993 Plan, the 1998 Plan, and the 1999 Plan respectively.
F - 22
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
--------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
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 and 1999 Plans 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 applicable 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.
During 2000, pursuant to an employment contract with a newly hired executive,
the Company issued a non-qualified stock option to purchase 75,000 shares of
stock at an exercise price of $6.50 per share.
A summary of the activity under the Company's stock option plans is as follows:
2000 1999 1998
--------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding - Beginning of
Year 783,041 $1.176 882,358 $1.172 148,780 $3.244
Granted During the Year 375,000 2.748 - - 823,167(a) 1.180
Canceled During the Year (20,002) 1.250 - - (80,667)(a) 9.600
Exercised During the Year (328,321) 1.167 (99,317) 1.143 (8,922) .723
------- ----- ------- ----- -------- -----
Outstanding - End of Year 809,718 $1.908 783,041 $1.176 882,358 $1.172
======= ===== ======= ===== ======= =====
Exercisable - End of Year 434,718 $1.183 783,041 $1.176 242,358 $1.338
======= ===== ======= ===== ======= =====
(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.
F - 23
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
--------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
The following table summarizes stock option information as of December 31, 2000:
Options Outstanding
------------------
Weighted
--------
Average Remaining Options
----------------- -------
Exercise Prices Number Outstanding Contractual Life Exercisable
--------------- ------------------ ----------------- -----------
$1.50 17,833 .25 Years 17,833
$1.50 141,135 2.42 Years 141,135
$1.00 275,750 2.83 Years 275,750
$6.50 75,000 4.25 Years -
$1.81 300,000 5.00 Years -
------- ---------- --------
Totals 809,718 3.64 Years 434,718
======= ========== ========
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 1999. In February 2000, these warrants were further
extended to April 30, 2000 and the company recognized additional financing costs
of $125,000 in 2000. At the end of April 2000, 192,105 of the $6 warrants were
exercised and 95,395 expired. During the course of the year the 448,544 $12
warrants were extended to April 30, 2001.
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.
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 which included an interest rate of 5.51% and a volatility rate of
.3. 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
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
--------------------------------------------------------------------------------
[14] Stock-Based Compensation - [Continued]
A summary of warrant activity is as follows:
2000 1999 1998
---------------------- --------------------- ----------------------
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning
of Year 790,044 $ 9.35 1,033,632 $10.49 1,033,632 $10.49
Granted During the Year 514,544 $11.13 790,044 9.36 - -
Canceled During the Year - - (188,333) 11.84 - -
Expired During the Year (543,939) $10.95 (845,299) 10.20 - -
Exercised During the Year (192,105) $ 6.00 - - - -
------- ----- --------- ----- --------- -----
Outstanding - End of Year 568,544 $10.57 790,044 $ 9.35 1,033,632 $10.49
======= ===== ========= ===== ========= =====
Exercisable - End of Year 568,544 $10.57 790,044 $ 9.35 1,033,632 $10.49
======= ===== ========= ===== ========= =====
The following table summarizes warrant information as of December 31, 2000:
Weighted
--------
Average Remaining
-----------------
Exercise Prices Shares Contractual Life
--------------- ------ ------------------
$12.00 448,544 .33 Years
$ 5.45 100,000 3.75 Years
$ 4.20 20,000 3.75 Years
------- ----------
Total 568,544 1.05 Years
======= ==========
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 for stock based employee compensation
awards for 2000, 1999 and 1998.
F - 25
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
--------------------------------------------------------------------------------
[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
$564,133 and $609,372 for the years ended December 31, 2000 and 1998,
respectively and the Company's net income (loss) and net income (loss) per share
would have been as follows:
Year ended
-----------
December 31,
------------
2000 1999 1998
---- ---- ----
Net Income as Reported $2,386,019 $1,824,769 $ 196,249
========== ========== =========
Pro Forma Net Income (loss) $2,291,997 $1,421,964 $ (10,320)
========== ========== =========
Net Income Attributable to Common Stock $2,386,019 $1,824,769 $ 123,649
========== ========== =========
Pro-Forma Net Income (loss) Attributable to
Common Stock $2,291,997 $1,421,964 $ (82,920)
========== ========== =========
Net Income Per Share as Reported $ .63 $ 0.52 $ .06
========== ========== =========
Pro Forma Net Income (loss) Per Share $ .61 $ 0.40 $ .00
========== ========== =========
There were no options or warrants issued to employees in 1999.
There were no options or compensation based warrants issued in 1999 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:
2000 1998
---- ----
Expected Life (Years) 5 5
Interest Rate 5.50% 4.87%
Annual Rate of Dividends 0% 0%
Volatility 57% 70%
The weighted average fair value of options and warrants at date of grant using
the fair value based method during 2000 and 1998 is estimated at $1.50 and $.74
respectively.
F - 26
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
--------------------------------------------------------------------------------
[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:
Year ended December 31,
-----------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Revenues:
--------
Software and Related Systems and Services $17,907,973 $19,343,472 $11,000,795
Data Center Services 2,262,676 1,908,158 2,164,472
---------- ---------- ----------
Total Revenues $20,170,649 $21,251,630 $13,165,267
-------------- ========== ========== ==========
Gross Profit:
------------
Software and Related Systems and Services $ 6,977,035 $ 6,574,753 $ 4,050,334
Data Center Services 1,238,153 800,587 1,033,394
---------- ---------- ----------
Total Gross Profit $ 8,215,188 $ 7,375,340 $ 5,083,728
------------------ ========== ========== ===========
Income From Continuing Operations before
----------------------------------------
Income Taxes:
------------
Software and Related Systems and Services $ 1,208,445 $ 1,266,614 $ 53,291
Data Center Services 770,747 378,155 359,976
---------- ---------- -----------
Total Income From Continuing
----------------------------
Operations before Income Taxes $ 1,979,192 $ 1,644,769 $ 413,267
------------------------------ ========== ========== ===========
Depreciation and Amortization:
-----------------------------
Software and Related Systems and Services $ 579,900 $ 356,191 $ 468,840
Data Center Services 137,876 244,716 92,722
---------- ---------- -----------
Total Depreciation and Amortization $ 717,776 $ 600,907 $ 561,562
----------------------------------- ========== ========== ===========
Capital Expenditures:
--------------------
Software and Related Systems and Services $ 850,893 $ 595,747 $ 188,570
Data Center Services 21,947 19,976 33,461
---------- ---------- -----------
Total Capital Expenditures $ 872,840 $ 615,723 $ 222,031
-------------------------- ========== ========== ===========
Identifiable Assets:
-------------------
Software and Related Systems and Services $12,659,935 $11,757,183 $ 7,740,018
Data Center Services 2,146,778 2,215,294 2,548,928
---------- ---------- -----------
Total Identifiable Assets $14,806,713 $13,972,477 $ 10,288,946
------------------------- ========== ========== ==========
F - 27
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17
--------------------------------------------------------------------------------
[16] Legal Proceedings
In October 2000, our subsidiary, Creative Socio-Medics, commenced an action
against the City of Richmond, in the Supreme Court of the State of New York,
County of Suffolk, which action was subsequently removed to the United States
District Court for the Eastern District of New York, for failure to pay more
than $1 million pursuant a contract we have with Richmond. Richmond advised the
court that it intended to move to dismiss the complaint for lack of personal
jurisdiction in New York and improper venue. The parties are currently engaged
in discovery on jurisdictional issues. In November 2000, Richmond filed a
complaint in the Circuit Court for the City of Richmond, Richmond, Virginia,
alleging, among other things, that the contract with Creative Socio-Medics was
procured through fraudulent misrepresentations concerning the nature of the work
to be performed and the price for the services and that Creative Socio-Medics
failed to perform its obligations under the agreement, seeking damages of
$373,000 and a finding that it owes no additional amounts to Creative
Socio-Medics. The parties entered into a stipulation staying the Richmond action
until a determination of Richmond's jurisdictional challenges to the New York
action. We believe that we have valid claims against Richmond and we intend to
vigorously pursue those claims. We also believe that the allegations contained
in Richmond's complaint are without merit and we intend to vigorously defend
against those claims.
In November 2000, Creative Socio-Medics commenced an action against Insight
Recovery Center Inc., in the Supreme Court of the State of New York County of
Suffolk, which action was subsequently removed to the United State District
Court of the Eastern District of New York. The complaint alleges breach of
contract in failing to pay $147,406 pursuant to an agreement with Insight
Recovery Center. Insight Recovery Center has not filed an answer to the
complaint and advised Creative Socio-Medics that it intended to challenge
jurisdiction in New York. Also in November 2000, Insight Recovery Center filed a
complaint against Creative Socio-Medics in the Circuit Court for the County of
Genessee, Michigan, which action was removed to the United States District Court
for the District of Michigan alleging, among other claims, fraudulently
inducement and breach of contract. Creative Socio-Medics has not filed an answer
to that complaint and advised Insight Recovery Center that it intended to
challenge jurisdiction in Michigan. However, prior to any motion being made, the
parties have agreed in principle to a settlement, which provides, among other
things, for a payment by Insight to Creative Socio-Medics and for Creative
Socio-Medics to perform services and provide product over an extended period of
time at stated rates. If the settlement in principle is not implemented for any
reason and the actions go forward, we believe that we have valid claims against
Insight Recovery Center and we intend to vigorously pursue those claims. We also
believe that the allegations contained in Insight Recovery Center's complaint
are without merit and we intend to vigorously defend against those claims.
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.
Date: March 29, 2001 /s/ James L. Conway
-----------------------------------------
James L. Conway, Chief Executive Officer
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 Chief Executive Officer March 29, 2001
------------------------ and Director (Principal
James L. Conway Executive Officer)
/s/ Anthony F. Grisanti Chief Financial Officer March 29, 2001
------------------------ (Principal Financial and
Anthony F. Grisanti Accounting Officer)
/s/ Edward D. Bright Director March 29, 2001
------------------------
Edward D. Bright
/s/ John F. Phillips Director March 29, 2001
------------------------
John F. Phillips
/s/ Gerald Koop Director March 29, 2001
------------------------
Gerald Koop
Director March 29, 2001
------------------------
Joseph Sicinski
Netsmart Technologies, Inc.
Index to Exhibits
December 31, 1999
a) Exhibits
3.1(1) Restated Certificate of Incorporation, as amended
3.2(1) By-Laws
10.1 Employment Agreement dated January 1, 2001, between the Registrant and
James L. Conway.
10.2 Employment Agreement dated January 1, 2001, between the Registrant and
John F. Phillips.
10.3 Employment Agreement dated January 1, 2001, between the Registrant and
Gerald O. Koop.
10.4 Employment Agreement dated January 1, 2001, 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(3) 1999 Long-Term Incentive Plan.
10.8(3) 1999 Employee Stock Purchase Plan
10.9(4) Agreement dated August 26, 1999, between the Registrant and Silicon
Valley Bank.
21.1 Subsidiaries of the Registrant.
25.1 Powers of attorney (See Signature Page)
----------
(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.
(3) Filed as an appendix the Registrant's proxy statement dated
November 9, 2000, relating to its 2000 Annual Meeting of Stockholders and
incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999 and incorporated herein by reference.