UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 8-K/A
Amendment No. 1
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 25, 2003
Netsmart Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)
Delaware 000-21177 13-3680154
(State or other jurisdiction (Commission (IRS Employer
of incorporation File No.) Identification No.)
146 Nassau Avenue, Islip, New York 11751
----------------------------------------
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (631) 968-2000.
Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits.
This filing amends the current report on Form 8-K of Netsmart Technologies, Inc.
("Netsmart") dated June 25, 2003 regarding Netsmart's acquisition of
substantially all of the assets of the CareNet segment ("CareNet") of Shuttle
Data Systems Corporation, d/b/a Adia Information Management Corp. ("Adia"),
pursuant to an asset purchase agreement dated June 25, 2003, among Netsmart,
Creative Socio-Medics Corp. ("CSM"), a wholly-owned subsidiary of Netsmart, Adia
and Steven Heintz, Jr., the president and majority shareholder of Adia.
(a) Financial Statements of business acquired.
See Annex A for the audited financial statements of the CareNet
segment of Shuttle d/b/a Adia for the year ended December 31, 2002 and
Annex B for the unaudited financial statements of the CareNet
segment of Shuttle d/b/a Adia for the three month periods ended March 31,
2003 and 2002.
(b) Pro Forma Financial Information.
The following unaudited pro forma condensed consolidated financial
statements give effect to the acquisition of the intellectual property,
customer contracts, and certain other assets of CareNet by Netsmart,
which occurred on June 25, 2003. The acquisition was accounted for under
the purchase method of accounting in accordance with Statement of
Financial Accounting Standards, ("SFAS") No. 141 "Business Combinations,
by which the acquiring company records at its cost the acquired assets
less liabilities assumed.
The unaudited pro forma condensed consolidated balance sheet has been
prepared to reflect the acquisition as if it occurred on March 31, 2003.
The unaudited pro forma condensed consolidated statements of operations
reflect the results of operations of Netsmart and CareNet for the year
ended December 31, 2002, and for the three months ended March 31, 2003 as
if the acquisition occurred on January 1, 2002.
The unaudited pro forma condensed consolidated financial statements are
presented for illustrative purposes only and are not necessarily
indicative of the consolidated financial position or results of
operations in future periods or the results that actually would have been
realized if the acquisition occurred during the specified periods. The
pro forma adjustments are based on available financial information and
certain estimates and assumptions set forth in the accompanying notes.
The unaudited pro forma condensed consolidated financial statements,
including the notes thereto, are qualified in their entirety by reference
to, and should be read in conjunction with, historical consolidated
financial statements and the related notes thereto of Netsmart included
in its Form 10-K and Form 10-K/A for the year ended December 31, 2002 and
its Form 10-Q and Form 10-Q/A for the three months ended March 31, 2003
which are on file with the SEC, and the audited financial statements of
CareNet included in this filing.
1
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
(In thousands)
Historical Historical Pro Forma Adjusted
Netsmart CareNet Adjustments Pro forma
---------- ---------- ----------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 8,431 $ 54 (A1) $(1,108) $ 7,377
Accounts Receivable, net 6,543 86 (A2) (86) 6,543
Costs and estimated profits in excess
of interim billings 2,912 -- -- 2,912
Deferred taxes 459 -- -- 459
Prepaid expenses and other
current assets 170 -- -- 170
------ ----- ------ ------
Total current assets 18,515 140 (1,194) 17,461
Property and equipment, net 450 23 -- 473
Software development costs, net 312 -- (A3) 883 1,195
Customer lists, net 2,023 -- (A4) 1,097 3,120
Deferred taxes less current portion 441 -- -- 441
Other assets 110 -- (A5) 140 250
------ ----- ------ ------
Total assets $21,851 $ 163 $ 926 $22,940
====== ===== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt and
capital lease obligations 520 87 (A6),(A2) 80 687
Accounts payable 464 5 (A2) (5) 464
Accrued expenses 931 10 (A2) (10) 931
Deferred taxes -- 12 (A2) (12) --
Interim billings in excess of costs and
estimated profits 6,428 -- -- --
Deferred revenue 659 118 (A2) (57) 7,148
------ ----- ----- -----
Total current liabilities 9,002 232 (4) 9,230
Long term debt and capital lease obligations 1,150 16 (A7),(A2) 317 1,483
Deferred taxes -- 38 (A2) (38) --
Interest rate swap at fair value 99 -- -- 99
------ ----- ----- ------
Total Liabilities 10,251 286 275 10,812
------ ----- ----- ------
Stockholders' equity (deficit)
Segment deficit -- (123) (A2) 123 --
Common stock 40 -- (A8) 1 41
Treasury stock, at cost (648) -- (648)
Paid in capital 21,412 -- (A9) 527 21,939
Accumulated comprehensive loss -
interest rate swap (99) -- -- (99)
Accumulated deficit (9,105) -- -- (9,105)
------ ----- ----- ------
Total stockholders' equity
(deficit) 11,600 (123) 651 12,128
------ ----- ----- ------
Total liabilities and
stockholders equity $21,851 $ 163 $ 926 $22,940
====== ===== ===== ======
See accompanying notes to unaudited pro forma
condensed consolidated financial statements
2
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2002 (In
thousands except share data)
Historical Historical Pro Forma Adjusted
Netsmart CareNet Adjustments Pro Forma
Revenue $ 22,126 $ 647 $ -- $ 22,773
Cost of sales 14,544 187 (B1) 139 14,870
--------- ---- ------- ---------
Gross profit 7,582 460 (139) 7,903
Operating expenses:
Selling, general and administrative 5,169 127 (B2) 249 5,545
Research and development 1,318 -- -- 1,318
--------- ---- ------- ---------
Total operating expenses 6,487 127 249 6,863
Income from operations 1,095 333 (388) 1,040
Other expenses
Interest expense, net 216 -- (B3) 22 238
--------- ---- ------- ---------
Income before taxes 879 333 (410) 802
Provision for income taxes (316) 154 (B4) (161) (323)
--------- ---- ------- ---------
Net income $ 1,195 $ 179 $ (249) $ 1,125
========= ==== ======= =========
Earnings per share of common stock:
Basic
Net income per share of common stock $ .32 $ 0.29
========= =========
Weighted average number of common
shares outstanding 3,748,537 (B5) 100,000 3,848,537
========= ======= =========
Diluted
Net Income per share of common stock $ .29 $ 0.26
========= =========
Weighted average number of shares of common
stock and common stock equivalents
outstanding 4,153,484 (B5) 100,000 4,253,484
========= ======= =========
See accompanying notes to unaudited pro forma
condensed consolidated financial statements
3
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(In thousands except share data)
Historical Historical Pro Forma Adjusted
Netsmart CareNet AdjustmentsPro forma
Revenue $ 6,119 $ 189 $ - 6,308
Cost of sales 3,693 52 (B1) 30 3,775
----- ------- ------ -----
Gross profit 2,426 137 (30) 2,533
Operating expenses:
Selling, general and administrative 1,591 52 (B2) 58 1,701
Research and development 510 -- -- 510
------ ------- ------- -----
Total operating expenses 2,101 52 58 2,211
Income from operations 325 85 (88) 322
Other expenses
Interest expense, net 21 -- (B3) 6 27
------ ------- ------- -------
Income before taxes 304 85 (94) 295
Provision for income taxes 33 38 (B4) (39) 32
------ ------- ------- -------
Net income $ 271 $ 47 $ (55) $ 263
====== ======= ======= =======
Earnings per share of common stock:
Basic
Net income per share of common stock $ .07 $ .06
======= ======
Weighted average number of common
shares outstanding 3,956,633 (B5) 100,000 4,056,633
========= ======= =========
Diluted
Net Income per share of common stock $ .06 $ .06
======= ======
Weighted average number of shares of
common stock and common stock
equivalents outstanding 4,356,021 (B5) 100,000 4,456,021
========= ======= =========
See accompanying notes to unaudited pro forma
condensed consolidated financial statements
4
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Pursuant to the asset purchase agreement dated June 25, 2003, Netsmart
Technologies, Inc. ("Netsmart") acquired the rights to the
intellectual property and customer contracts, and certain other assets
of the CareNet segment ("CareNet") of Shuttle Data Systems Corporation
("Shuttle"), d/b/a Adia Information Management Corp. ("Adia"). The
purchase price consisted of 100,000 shares of our common stock,
$838,740 in cash and a promissory note in the principal amount of
$500,000. The market value of the stock issued at the date of the
asset purchase agreement was $528,000. The purchase has been accounted
for under the purchase method of accounting in accordance with SFAS
No. 141 by which the acquiring company records at its cost the
acquired assets less liabilities assumed.
In addition, in connection with the acquisition, Netsmart entered into
a non-compete and non-solicitation agreement with two individuals for
which the individuals were paid an aggregate of $140,000.
As of the date of the agreement, CareNet had collected revenue from
clients in advance of performance of work contracted for. Netsmart has
assumed the liability of performing on these contracts and made a
purchase price adjustment of $61,260 which is the amount of revenue on
these contracts that CareNet collected prior to the acquisition. This
will be referred to throughout these notes as "pre-billed".
2. PRO FORMA ADJUSTMENTS
Netsmart did not purchase any of the assets on the CareNet balance
sheet other than the purchase of computer hardware utilized to service
existing clients, the value of which has been recorded as $23,700.
Netsmart did not assume any of the CareNet liabilities reflected on
the CareNet balance sheet other than contract performance related to
revenue collected from clients in advance of performance of work
contracted for in the amount of $61,260. As a result, all CareNet
assets, other than the purchased hardware, and liabilities, other than
the deferred revenue, have been eliminated and the only resulting
effect on the consolidated balance sheet of Netsmart is the allocation
of the purchase price, related acquisition costs, and the purchase
price adjustment for pre-billed revenue. These amounts were as
follows:
Cash paid $ 978,740
Promissory note 500,000
Market value of stock issued 528,000
Liabilities assumed 61,260
Legal fees and other costs 75,913
----------
Total acquisition $ 2,143,913
=============
The total cost of acquisition was allocated as follows:
Customer lists $ 1,097,138 (to be amortized over 9 years) Software
purchased 883,075 (to be amortized over 8 years) Non-compete and Non
solicitation 140,000 (to be amortized over 3 years) Hardware purchased
23,700 Total acquisition allocation$ 2,143,913
Pro forma adjustments were made to the statements of income for the
year ended December 31, 2002 and the three months ended March 31, 2003
to reflect the changes to the infrastructure of CareNet as a result of
the acquisition that are directly attributable, factually supportable
and will have continuing impact on the combined operations. In
addition, adjustments have been made to selling, general and
administrative expenses to reflect the amortization of the purchased
software and acquired intangible assets which were approximately
$70,000 for the three months ended March 31, 2003 and approximately
$278,000 for the year ended December 31, 2002.
The following are the notes explaining pro forma adjustments to the
unaudited condensed consolidated balance sheet as of March 31, 2003:
5
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(A1) The adjustment to cash represents the cash paid related to the
purchase price of CareNet ($838,000), the cost of the non-compete
and the non-solicitation agreement ($140,000) and the legal fees
and other costs paid ($76,000) related to the acquisition. The
CareNet cash ($54,000) was eliminated as Netsmart did not
purchase this asset from CareNet.
(A2) Netsmart did not purchase any of the assets on the CareNet
balance sheet other than the purchase of computer hardware
utilized to service existing clients, the value of which has been
recorded as $23,700. In addition, Netsmart did not assume any of
the CareNet liabilities on the CareNet balance sheet other than
deferred revenue of $61,260. As a result, all CareNet assets,
other than the purchased hardware, and liabilities, other than
deferred revenue, have been eliminated.
(A3) The amount of the acquisition cost allocated to software was
$883,000.
(A4) The amount of the acquisition cost allocated to customer lists
was $1,097,000.
(A5) The amount paid as consideration for the non compete and non
solicitation agreement was $140,000.
(A6) This amount reflects an increase in current portion of long term
debt related to the promissory note issued at the date of the
acquisition ($167,000), offset by the elimination of the CareNet
current portion of long term debt ($87,000) which Netsmart did
not assume.
(A7) This amount reflects an increase in non current portion of long
term debt related to the promissory note issued at the date of
the acquisition ($333,000) offset by the elimination of the
CareNet non current portion of long term debt ($16,000) which
Netsmart did not assume.
(A8) The par value of common stock issued is $1,000 (100,000 shares at
$0.01 per share).
(A9) The additional paid in capital related to the issuance of stock
is approximately $527,000.
The following are the notes explaining pro forma adjustments to the
unaudited condensed consolidated income statement for the year ended
December 31, 2002 and the three months ended March 31, 2003:
(B1) The adjustment increasing cost of sales is to increase the
CareNet cost of sales to the level representative of the salaries
of the personnel retained after the acquisition.
(B2) The adjustment increasing selling, general and administrative
expenses is due mainly to the amortization of the acquired
software, customer list and the non-compete and non-solicitation
agreement.
(B3) The adjustment to interest expense, net represents interest
expense related to the promissory note that was issued in
connection with, and a component of, the financing of the CareNet
acquisition.
(B4) The elimination of the CareNet tax provision is due to the
existing Netsmart net operating loss carry forward that will
offset, on a consolidated basis, any tax provision formerly
required by CareNet. We used the effective tax rate for Netsmart
and applied it to the consolidated pre tax income.
(B5) The pro forma adjustment to the number of common shares
outstanding is a direct result of the 100,000 shares issued as
part of the price of the acquisition of CareNet.
3. PRO FORMA EARNINGS PER SHARE
The pro forma condensed consolidated net income per common share of
stock, basic and diluted, is based upon the pro forma consolidated net
income and divided by the weighted average number of common shares of
Netsmart outstanding, adjusted for the 100,000 shares issued as part
of the purchase price of CareNet.
6
(c) Exhibits
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C.ss.1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C.ss.1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
7
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Netsmart Technologies, Inc.
/s/James L. Conway President, Chief Executive September 2, 2003
------------------ Officer and Director (Principal
James L. Conway Executive Officer)
/s/Anthony F. Grisanti Chief Financial Officer September 2, 2003
--------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)
8
ANNEX A
Board of Directors and Shareholder
Shuttle Data Systems Corporation, dba Adia
Information Management, CareNet Segment
Ann Arbor, Michigan
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheet of Shuttle Data Systems
Corporation dba Adia Information Management, Care Net Segment, as of December
31, 2002, and the related statements of operations, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based upon our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Shuttle Data Systems
Corporation, dba Adia Information Management, CareNet Segment as of December 31,
2002, and the results of its operations for the year ended December 31,2002 in
conformity with accounting principles generally accepted in the United States of
America.
Sloan and Associates, P.C.
/s/ Sloan and Associates, P.C.
------------------------------
Ann Arbor, Michigan
May 28, 2003
9
Shuttle Data Systems Corporation dba Adia Information Management
CareNet Segment
Balance Sheet
December 31, 2002
ASSETS:
------
Current Assets:
Deposits $ 29,730
Accounts Receivable trade 96,308
----------
Total Current Assets 126,038
Computer Equipment 35,125
Less: Accumulated Depreciation (8,977)
----------
Total Computer Equipment 26,148
----------
Total Assets $ 152,186
==========
LIABILITIES:
-----------
Current Liabilities
Line of Credit $ 59,568
Deferred Revenue 111,388
Accounts Payable 1,055
Equipment Leases - current portion 11,633
Deferred Taxes - current portion 1,875
Accrued Payroll 4,407
Accrued Withholding Liabilities 1,607
----------
Total Current Liabilities 191,533
----------
Long Term Liabilities
Equipment Leases 15,513
Deferred Taxes 39,211
----------
Total Long Term Liabilities 54,724
-----------
SEGMENT DEFICIT
---------------
Segment Deficit (94,071)
----------
Total Segment Deficit (94,071)
----------
Total Liabilities and Segment Deficit $ 152,186
==========
The accompanying notes are an integral part of these financial statements.
10
Shuttle Data Systems Corporation dba Adia Information Management
Statement of Operations and Retained Earnings CareNet Segment
For the Year Ended December 31, 2002
SALES $ 646,882
COST OF SALES
Cost of labor 167,657
Internet/data center 19,380
-------------
187,037
Gross Profit 459,845
GENERAL AND ADMINISTRATIVE EXPENSES
Accounting 7,541
Bank charges 857
Consulting 7,551
Contributions 2,275
Depreciation 8,977
Dues and subscriptions 1,316
Employee benefits 15,316
Insurance 427
License - software 2,765
Meals and entertainment 3,306
Mileage 758
Office expense 9,168
Parking 4,200
Postage 1,121
Printing and reproduction 1,201
Rent 36,021
Security system 2,093
Taxes - payroll 15,328
Taxes - property 265
Taxes - state 6,145
--------------
Total Operating Expenses 126,631
Net Income Before Income Tax 333,214
Less: Provision for Income Tax (154,290)
------------
Net Income 178,924
Segment Deficit, Beginning of the Year (70,063)
Contributions to Operations 2002 (202,932)
------------
Segment Deficit, End of the Period $ (94,071)
============
The accompanying notes are an integral art of these financial statements.
11
Shuttle Data Systems Corporation dba Adia Information Management
CareNet Segment
Statement of Cash Flows
For the Year Ended December 31, 2002
12/31/02
--------
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net income $ 178,924
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 8,977
Deferred Tax provision 17,473
Changes in Assets and Liabilities
(Increase) decrease in accounts receivable (44,688)
(Increase) decrease in deposits (16,490)
(Decrease) increase in accounts payable 703
(Decrease) increase in deferred revenue 41,938
(Decrease) increase in equipment lease 27,928
(Decrease) increase in accrued payroll 629
(Decrease) increase in accrued withholding 342
(Decrease) increase in taxes payable --
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 215,736
----------
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Computer purchases (35,907)
Contribution to operations (202,932)
---------
NET CASH USED BY INVESTING ACTIVITIES (238,839)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Net proceeds from line of credit 23,103
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 23,103
NET CHANGE IN CASH --
CASH AT BEGINNING OF YEAR --
---------
CASH AT END OF YEAR --
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
-------------------------------------------------
Interest expense 335
Income taxes 154,290
The accompanying notes are an intergral part of these financial statements.
12
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES
------------------------------
The following is a summary of certain accounting policies followed in
the preparation of these combined financial statements. The policies
conform to accounting principles generally accepted in the Unites States
of America and have been consistently applied in the preparation of the
financial statements.
Organization:
------------
The CareNet Segment has no separate legal status or existence. The
assets, liabilities, income and expenses shown on these financial
statements are only part of those of Shuttle Data Systems Corporation
d.b.a. Adia Information Management (Adia) attributable to the CareNet
Segment.
Corporate Purpose and Income Recognition:
----------------------------------------
Shuttle Data Systems Corporation is a Michigan corporation which began
business March 1, 1997. It develops and delivers full service hosted
management information services to health care, public sector and
business clients across the nation. The Company operates multiple
network centers in Michigan through which hundreds of users perform
transactions daily. The Company recognizes income and expense on the
accrual method of accounting, with sales recorded at the time services
are provided.
Use of estimates:
----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the Unites States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statement and the reported amount of
revenue and expense during the reporting period. Actual results could
differ from those estimates.
Receivables:
-----------
Sales and Income are recognized at the time the products or services are
provided, and accounts receivable are recorded at that time.
Equipment:
---------
Equipment is stated at cost. Depreciation is determined using
straight-line method over the estimated useful lives of the assets that
range from three to four years.
13
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF ACCOUNTING POLICIES (Cont.)
-------------------------------------
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 revenue, estimated
economic life and changes in software and hardware technology. Prior
to reaching technological feasibility these costs are expensed as
incurred and included in research and development. 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 the current gross revenue for a product bear to the total of
current and anticipated future gross revenue for that product or (b)
the straight-line method over the remaining estimated economic life of
the product. The estimated life of these products range from 3 to 5
years.
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 any remaining
capitalized amounts are written off.
New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No, 141, "Business Combinations," and SF AS No. 142. "Goodwill
and Other Intangible Assets". The provisions of these interpretations
that are applicable to the Company were implemented on a prospective
basis as of January 1, 2002, which had no material effect on the
Company's consolidated financial position or results of operations.
In April 2002 the FASB issued SFAS no. 145, "Rescission of FASB
Statements No.4, 44, and 64. Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 requires that gains and losses
from extinguishment of debt be classified as extraordinary items only
if they meet the criteria in Accounting Principles Board Opinion No.
30 ("Opinion No. 30"). Applying the provisions of Opinion No. 30 will
distinguish transactions that are part of an entity's recurring
operations from those that are unusual and infrequent that meets the
criteria for classification as an extraordinary item. The Company is
required to adopt SFAS No. 145 no later than the first quarter of
fiscal 2003, although early adoption is allowed. The adoption of this
standard is not expected to have a material effect on the Company's
consolidated financial position and results of operations.
14
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF ACCOUNTING POLICIES (Cont.)
-------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting Costs
Associated with Exit or Disposal Activities" SFAS No. 146 addresses
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit and Activity (Including Certain Costs Incurred in
a Restructuring)". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and
measured initially at fair value when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged.
The adoption of this standard is not expected to have a material
effect on the Company's consolidated financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45, ("FIN 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
requires a company. at the time it issues a guarantee, to recognize an
initial liability for the fair value of obligations assumed under the
guarantee and elaborates on existing disclosure requirements related
to guarantees and warranties. The initial recognition requirements of
FIN 45 are effective for guarantees issued or modified after December
31, 2002 and adoption of the disclosure requirements are effective for
the Company as of December 31, 2002. The Company does not expect that
the adoption of the recognition requirements of FIN 45 will have a
material effect on its consolidated financial position or results of
operations.
In January 2003, the FASB issued Interpretation no. 46 (FIN 46),
"Consolidation of Variable Interest Entitles, an Interpretation of ARB
No. 51." FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company does not
expect that the adoption of FIN 46 will have a material effect on its
consolidated financial position or results of operations.
2. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable includes $13,750 which are aged in excess ninety
days. Management has provided no reserve for uncollectable accounts due
to nominal bad debt experience.
15
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
3. LINE OF CREDIT
--------------
Borrowings under an $100,000 bank line of credit bearing interest at
8% collateralized by accounts receivable and company assets, and
guaranteed by the primarily shareholder. The line of credit expires in
December 2003. Liability attributable to the CareNet Segment is
allocated using accounts receivable as a basis.
4. DEFERRED REVENUE
----------------
It is the Company's policy to bill customers for hosting services 45
days prior to the first day of the service month. These advance billings
are recorded as deferred revenue. Customer's deposits received in
advance of the service month are posted to accounts receivable upon
receipt. Adia recognizes revenue when the service is provided. The
following is a summary of deferred revenue:
Deposits $ 29,730
Advanced billings 81.658
----------
Total Deferred Revenue $ 111,388
5. CAPITAL LEASE OBLIGATIONS
-------------------------
Future minimum payments under capital lease obligations as of December
31, 2002 are as follows:
Year ending December 31,
2003 11,968
2004 11,969
2005 3,991
---------
Total Minimum Payments 27,928
Less amount Representing Interest at
2.88 % per annum (782)
----------
Balance $ 27,146
Current Portion Long Term 11,633
Long Term $ 15,513
6. RETAINED EARNINGS
-----------------
The CareNet Segment has not maintained records or attempted to carve out
business activity for periods prior to the year 2002. Thus, retained
earnings is intended to reflect management's carve out commencing
January 1, 2002 of the CareNet Segment.
16
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
7. INTERCOMPANY TRANSACTIONS
-------------------------
The Company provides certain corporate and administrative services to
the CareNet Segment including executive management, human resources,
insurance, health benefits, professional services and office space.
The Company does not charge a management fee for these services;
however the Company has allocated a portion of the associated costs
according to labor hours, sales revenue and general administrative
expenses. Major allocations include the following: 100% of two
employees' salaries, 50% of the office manager's wages, rent expense
allocated according to space currently occupied, internet charges
based on 47% bandwidth usage and 50% of telephone expenses incurred.
Management believes that the intercompany charges and cost allocations
are reasonable.
8. INCOME TAX
----------
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
depreciation for financial and income tax reporting. The deferred tax
assets and liabilities represent the future tax return consequences of
those differences, which will either be taxable or deductible when the
assets and liabilities are recovered or settled.
Provisions have been established as if the segment had filed on a
separate return basis and the amount of current income tax expense is
due from Shuttle Data Corporation.
Federal Income Tax 113,204
Deferred Federal Income Tax 41,086
-------
$154,290
9. LITIGATION
----------
No actual litigation or legal action is currently pending or
anticipated.
10. RELATED PARTY TRANSACTIONS
--------------------------
During 2002 CareNet Segment provided contributions to operations
totaling $188,584. Adia uses these resources to finance new development
opportunities and fund other administrative costs.
17
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
11. SUBSEQUENT EVENTS
On May 6, 2003 the Company received a letter of intent to acquire the
CareNet Segment which includes assets, service agreements and
intellectual property for the health care network. In exchange the
Company will receive a $1,000,000 cash payment, promissory note with a
principal amount of $500,000 and 100,000 shares of Netsmart common
stock.
18
ANNEX B
Board of Directors and Shareholder
Shuttle Data Systems Corporation, dba Adia
Information Management, CareNet Segment
Ann Arbor, Michigan
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have reviewed the accompanying balance sheets of Shuttle Data Systems
Corporation dba Adia Infonnation Management, Care Net Segment, as of March 31,
2003 and 2002, and the related statements of operations and cash flows for the
three months then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these financial statements is
the representation of the management of Shuttle Data Systems Corporation dba
Adia Information Management, Care Net Segment.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with accounting principles generally accepted in the United States of
America.
Sloan and Associates, P.C.
/s/ Sloan and Associates, P.C.
------------------------------
Ann Arbor, Michigan
June 11, 2003
19
Shuttle Data Systems Corporation dba Adia Information Management
CareNet Segment
Balance Sheet
March 31, 2003 and 2002
ASSETS: 2003 2002
------
Current Assets:
Deposits $ 53,994 $ 10,010
Accounts Receivable trade 86,136 66,610
--------- --------
Total Current Assets 140,130 76,620
Computer Equipment 35,237 --
Less: Accumulated Depreciation (12,190) --
--------- --------
Total Computer Equipment 23,047 --
--------- --------
Total Assets $ 163,177 $ 76,620
========= ========
LIABILITIES:
-----------
Current Liabilities
Line of Credit $ 78,279 $ 39,868
Deferred Revenue 118,188 68,850
Accounts Payable 4,718 588
Equipment Leases - current portion 8,738 --
Deferred Taxes - current portion 11,657 6,713
Accrued Payroll 7,298 6,635
Accrued Withholding Liabilities 2,862 2,684
Accrued Federal Income Tax -- --
--------- --------
Total Current Liabilities 231,740 125,338
--------- --------
Long Term Liabilities
Equipment Leases 15,531 --
Deferred Taxes 38,646 23,613
--------- --------
Total Long Term Liabilities 54,177 23,613
--------- --------
SEGMENT DEFICIT
---------------
Segment Deficit (122,740) (72,331)
--------- --------
Total Segment Deficit (122,740) (72,331)
--------- --------
Total Liabilities and Segment Deficit $ 163,177 $ 76,620
========= ========
The accompanying notes are an integral part of these financial statements.
20
Shutte Data Systems Corporation dba Adia Information Management
Statement of Operations CareNet Segment
For the Three Months Ended March 31, 2003 and 2002
2003 2002
SALES $ 189,257 $ 140,975
COST OF SALES
Cost of labor 46,767 46,104
Internet/data center 5,871 5,787
------- --------
52,638 51,891
Gross Profit 136,619 89,084
GENERAL AND ADMINISTRATIVE EXPENSES
Accounting 1,096 717
Bank charges 217 107
Computer supplies -- 2,458
Consulting 11,668 --
Contributions 383 --
Depreciation 3,213 --
Dues and subscriptions 433 987
Employee benefits 3,841 3,849
Meals and entertainment 1,962 1,815
Meeting -- 337
Office expense 4,950 567
Parking 1,400 1,400
Postage 1,321 188
Printing and reproduction 3,525 202
Recruiting -- 138
Rent 10,463 5,589
Rent - equipment -- 2,992
Taxes - payroll 5,519 5,550
Taxes - state 1,732 1,665
Travel -- 828
------- --------
Total Operating Expenses 51,723 29,389
Net Income Before Income Tax 84,896 59,695
Less: Provision for Income Tax (38,104) (26,947)
------- --------
Net Income 46,792 32,748
Contributions to Operations 2003 (75,461) (35,016)
Segment Deficit, Beginning of the Period (94,071) (70,073)
------- -------
Segment Deficit, End of the Period $(122,740) $ (72,331)
======= =======
The accompanying notes are an integral art of these financial statements.
21
Shuttle Data Systems Corporation dba Adia Information Management
CareNet Segment
Statement of Cash Flows
Three months ended March 31, 2003 and 2002
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
------------------------------------
Net income $ 46,792 $ 32,748
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,213 --
Deferred income tax provision 9,217 6,713
Changes in Assets and Liabilities
(Increase) decrease in accounts receivable 10,172 (14,990)
(Increase) decrease in deposits (24,264) 3,230
(Decrease) increase in accounts payable 3,663 236
(Decrease) increase in deferred revenue 6,800 (600)
(Decrease) increase in equipment lease (2,989) --
(Decrease) increase in accrued payroll 2,891 2,857
(Decrease) increase in accrued withholding 1,255 1,419
(Decrease) increase in taxes payable -- --
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 56,750 $ 31,613
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
------------------------------------
Contribution to operations (75,461) (35,016)
------- --------
NET CASH USED BY INVESTING ACTIVITIES (75,461) (35,016)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
------------------------------------
Net proceeds from line of credit 18,711 3,403
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,711 3,403
NET CHANGE IN CASH -- --
CASH AT BEGINNING OF YEAR -- --
------ --------
CASH AT END OF YEAR $ -- $ --
====== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
-------------------------------------------------
Interest expense 112 --
Income taxes 38,104 26,947
The accompanying notes are an integral part of these financial statements.
22
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2003-AND MARCH 31, 2002
1. SUMMARY OF ACCOUNTING POLICIES
------------------------------
The following is a summary of certain accounting policies followed in
the preparation of these financial statements. The policies conform to
generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Organization:
------------
The CareNet Segment has no separate legal status or existence. The
assets, liabilities, income and expenses shown on these financial
statements are only part of those of Shuttle Data Systems Corporation
d.b.a. Adia Information Management (Adia) attributable to the CareNet
Segment.
Corporate Purpose and Income Recognition:
----------------------------------------
Shuttle Data Systems Corporation is a Michigan corporation which began
business March 1, 1997. It develops and delivers full service hosted
management information services to health care, public sector and
business clients across the nation. The Company operates multiple
network centers in Michigan through which hundreds of users perform
transactions daily. The Company recognizes income and expense on the
accrual method of accounting, with sales recorded at the time services
are provided.
Use of 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 disclosures of contingent assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statement
and the reported amount of revenue and expense during the reporting
period. Actual results could differ from those estimates.
Receivables:
-----------
Sales and Income are recognized at the time the products or services are
provided, and accounts receivable are recorded at that time.
Equipment:
---------
Equipment is stated at cost. Depreciation is determined using
straight-line method over the estimated useful lives of the assets that
range from three to four years.
See accountants' review report
23
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2003 AND MARCH 31, 2002
SUMMARY OF ACCOUNTING POLICIES (Cont.)
--------------------------------------
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 revenue, estimated
economic life and changes in software and hardware technology. Prior
to reaching technological feasibility these costs are expensed as
incurred and included in research and development. 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 the current gross revenue for a product bear to the total of
current and anticipated future gross revenue for that product or (b)
the straight-line method over the remaining estimated economic life of
the product. The estimated life of these products range from 3 to 5
years.
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 any remaining
capitalized amounts are written off.
New Accounting Pronouncements
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No, 141, "Business Combinations," and SF AS No. 142. "Goodwill
and Other Intangible Assets". The provisions of these interpretations
that are applicable to the Company were implemented on a prospective
basis as of January 1, 2002, which had no material effect on the
Company's consolidated financial position or results of operations.
In April 2002 the FASB issued SFAS no. 145, "Rescission of FASB
Statements No.4, 44, and 64. Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 requires that gains and losses
from extinguishment of debt be classified as extraordinary items only
if they meet the criteria in Accounting Principles Board Opinion No.
30 ("Opinion No. 30"). Applying the provisions of Opinion No. 30 will
distinguish transactions that are part of an entity's recurring
operations from those that are unusual and infrequent that meets the
criteria for classification as an extraordinary item. The Company is
required to adopt SFAS No. 145 no later than the first quarter of
fiscal 2003, although early adoption is allowed. The adoption of this
standard is not expected to have a material effect on the Company's
consolidated financial position and results of operations.
See accountants' review report
24
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2003 AND MARCH 31, 2002
SUMMARY OF ACCOUNTING POLICIES (Cont.)
--------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting Costs
Associated with Exit or Disposal Activities" SFAS No. 146 addresses
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit and Activity (Including Certain Costs Incurred in
a Restructuring)". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and
measured initially at fair value when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged.
The adoption of this standard is not expected to have a material
effect on the Company's consolidated financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45, ("FIN 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45
requires a company. at the time it issues a guarantee, to recognize an
initial liability for the fair value of obligations assumed under the
guarantee and elaborates on existing disclosure requirements related
to guarantees and warranties. The initial recognition requirements of
FIN 45 are effective for guarantees issued or modified after December
31, 2002 and adoption of the disclosure requirements are effective for
the Company as of December 31, 2002. The Company does not expect that
the adoption of the recognition requirements of FIN 45 will have a
material effect on its consolidated financial position or results of
operations.
In January 2003, the FASB issued Interpretation no. 46 (FIN 46),
"Consolidation of Variable Interest Entitles, an Interpretation of ARB
No. 51." FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company does not
expect that the adoption of FIN 46 will have a material effect on its
consolidated financial position or results of operations.
See accountants' review report
25
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2003 AND MARCH 31, 2002
SUMMARY OF ACCOUNTING POLICIES (Cont.)
--------------------------------------
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003. except as state below and for hedging
relationships designated after June 30. 2003. The guidance should be applied
prospectively. The provisions of the Statement that relate to Statement 133
Implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied .in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities or other
securities that do not yet exist, should be applied to existing contracts as
well as new contracts entered Into after June 30, 2003. The adoption of SFAS No.
149 is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for classification and measurement in
the statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31m 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The company has not
yet determined the impact of the adoption of SFAS No. 150 on its financial
position, results of operations or cash flows.
2. ACCOUNTS RECEIVABLE
-------------------
Accounts receivable at March 31, 2003 includes $10,900 which are aged in excess
ninety days. No accounts receivable were In excess of ninety days as of March
31, 2002. Management has provided no reserve for uncollectable accounts due to
nominal bad debt experience.
3. LINE OF CREDIT
--------------
Borrowings under an $100,000 bank line of credit bearing interest at 8%
collateralized by accounts receivable and company assets, and guaranteed by the
primarily shareholder. The line of credit expires in December 2003. Liability
attributable to the CareNet Segment is allocated using accounts receivable as a
basis.
See accountants' review report
26
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2003 AND MARCH 31, 2002
4. DEFERRED REVENUE
----------------
It is the Company's policy to bill customers for hosting services 45 days prior
to the first day of the service month. These advance billings are recorded as
deferred revenue. Customer's deposits received in advance of the service month
are posted to accounts receivable upon receipt. Adia recognizes revenue when the
service is provided. The following is a summary of deferred revenue:
3/31/03 3/31/02
------- -------
Deposits 53,994 10,010
Advanced billings 64,194 58,840
-------- --------
Total Deferred Revenue $118,188 $ 68,850
5. CAPITAL LEASE OBLIGATION
------------------------
Future minimum payments under capital lease obligations as of March 31, 2003 are
as follows:
Year ending
December 31,
2003 8,979
2004 11,969
2005 3,991
--------
Total Minimum Payments 24,939
Less amount Representing Interest at
2.88 % per annum (670)
--------
Balance $24,269
Current Portion 8,738
--------
Long Term $15,531
6. RETAINED EARNINGS
-----------------
The CareNet Segment has not maintained records or attempted to carve out
business activity for periods prior to the year 2002. Thus, retained earnings is
intended to reflect management's carve out commencing January 1, 2002 of the
CareNet Segment.
See accountants' review report
27
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2003 AND MARCH 31, 2002
7. INTERCOMPANY TRANSACTIONS
-------------------------
The Company provides certain corporate and administrative services to the
CareNet Segment including executive management, human resources, insurance,
health benefits, professional services and office space. The Company does not
charge a management fee for these services; however the Company has allocated a
portion of the associated costs according to labor hours, sales revenue and
general administrative expenses. Major allocations include the following: 100%
of two employees' salaries, 50% of the office manager's wages, rent expense
allocated according to space currently occupied, internet charges based on 47%
bandwidth usage and 50% of telephone expenses incurred. Management believes that
the intercompany charges and cost allocations are reasonable.
8. INCOME TAX
----------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of depreciation for financial
and income tax reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Provisions have been established for Corporation income taxes as if the segment
had filed on a separate return basis and amount of current income tax expense is
due from Shuttle Data Corporation.
2003 2002
Federal Income Tax $28,887 $20,234
Deferred Federal Income Tax 9,217 6,713
------- -------
$38,104 $26,947
9. LITIGATION
----------
No actual litigation or legal action is currently pending or anticipated.
10. RELATED PARTY TRANSACTIONS
--------------------------
During the first three months of 2003 and 2002 the CareNet Segment provided
contributions to the operations of Adia. Adia uses these resources to finance
new development opportunities and fund other administrative costs.
See accountants' review report
28
SHUTTLE DATA SYSTEMS d.b.a. ADIA INFORMATION MANAGEMENT
CARENET SEGMENT
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MARCH 31, 2003 ,AND MARCH 31, 2002
11. SUBSEQUENT EVENTS
-----------------
On May 6, 2003 the Company received a letter of Intent to acquire the CareNet
Segment which includes assets, service agreements and Intellectual property for
the health care network. In exchange the Company will receive a $1,000,000 cash
payment, promissory note with a principal amount of $500,000 and 100,000 shares
of Netsmart common stock.
See accountants' review report