NETSMART TECHNOLOGIES INC - 10-K Annual Report

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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 [Fee Required]
For the fiscal year ended December 31, 1996

Commission File Number 0-21177

NETSMART TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware 13-3680154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

146 Nassau Avenue, Islip, NY 11751
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (516) 968-2000

Securities registered pursuant to Section 12(b) of the Act: ____

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class Outstanding shares as of March 20, 1997
------------------- ---------------------------------------
Common Stock, par value
.01 per share 6,798,203

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

None

PART I

Item 1. Business

Introduction

Netsmart Technologies, Inc. ("Netsmart") develops, markets and supports computer
software designed to enable organizations to provide a range of services in a
network computing environment. A network computing environment is a computer
system that provides multiple users with access to a common database and
functions. A network system can be a local system, such as a local area network,
known as a LAN, which operates within an office or facility, or a distributed
system which provides simultaneous access to a common data base to many users at
multiple locations.

There are typically three parties in Netsmart's network system - the sponsor
(the party that maintains the data base, and may be a managed care organization,
a university or a financial institution), the users (the users are the
individuals who use the system, and may be the subscribers of a managed care
organization, the students at a university or the bank care or credit card
holders of a financial network) and the service providers (the service providers
are those who provide goods or services to the users, and may be physicians,
pharmacies, banks and merchants who provide goods, services or funds to bank
card or credit card holders).

Netsmart has developed proprietary network technology utilizing smart cards
which it markets in the health care, financial and education fields as the
CarteSmart System.

A smart card is a plastic card about the size of a standard credit card which
contains a single embedded microprocessor chip with both data storage and
computing capabilities. The smart card software provides access to the
information stored in the chip, the ability to update stored information and
includes security elements to restrict unauthorized access to or modification of
certain information stored on the card utilizing a smart card reader system. The
smart card reader system and the software provides the ability to include
information on both the smart card and the organization's computer system.
Netsmart also supplies network applications which use telecommunications rather
that than smart cards to obtain access to and manage data.

Substantially all of Netsmart's revenue through December 31, 1995 and 77%
through December 31, 1996 was generated by its health information systems and
related services which are marketed by it's subsidiary Creative Socio-Medics
Corp. ("CSM"). CSM was acquired by Carte Medical Holdings, Inc. ("Holdings")
from a nonaffiliated party in June 1994 and transferred by Holdings to Netsmart
in September 1995.

Netsmart is a Delaware Corporation formed in September 1992 under the name
Medical Services Corp. The name was changed to Carte Medical Corporation in
October 1993, CSMC in June 1995 and Netsmart Technologies, Inc. in February
1996. References to Netsmart include both the Company, its former and present
subsidiaries, including CSM from June 16, 1994. The Company's executive offices
are located at 146 Nassau Avenue, Islip, New York 11751, telephone (516) 968-
2000. In October 1993, Medical Services Corp. merged its subsidiary into itself
and changed its name to Carte Medical Corporation. In June 1995, Carte Medical
Corporation's name was changed to CSMC Corporation, and in February 1996 CSMC
Corporation's name was changed to Netsmart Technologies, Inc.

Health Information Systems and Services

Since the June 1994 acquisition of CSM, Netsmart has offered its customers a
range of products and services principally based upon the health information
systems which were developed and marketed by CSM prior to the acquisition. Users
typically purchase one of the health information systems, in the form of a
perpetual license to use the system, as well as contract services, maintenance
and third party hardware and software which Netsmart offers pursuant to
arrangements with the hardware and

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software vendors. The contract 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 CSM to adapt one of its health information
systems to meet the specific requirements of the customer.

Although the health information systems constituted the basis of CSM's business,
revenue from the license of such systems has not represented a major component
of its revenues. The typical price for a license for CSM's health information
systems ranges from $10,000 to $30,000. During the years ended December 31,
1996, 1995 and 1994, CSM installed health information systems licensing of such
systems represented approximately $329,000, $162,000 and $375,000, in the years
ended December 31, 1996, 1995 and 1994, respectively, accounting for
approximately 3.9%, 2.2% and 7.4% of revenue for such periods.

A customer's purchase order may also include third party hardware or software.
For the years ended December 31, 1996, 1995 and 1994, revenue from hardware and
third party software accounted for approximately $1.1 million, $2.1 million and
$552,000, representing 13%, 29.1% and 18.9%, respectively, of revenues in such
periods.

In addition to its health information systems and related services, CSM offers
specialty care facilities a data center, at which its personnel perform data
entry and data processing and produce operations reports. These services are
typically provided to smaller substance-abuse clinics. During the years ended
December 31, 1996, 1995 and 1994, CSM's service bureau operation generated
revenue of approximately $2.2 million, $1.7 million and $884,000, respectively,
representing approximately 25.8%, 23.6% and 30.2% of CSM's revenues for such
periods. The largest user of the service bureau is the State of New York Office
of Alcohol and Substance Abuse Services, which uses CSM's service bureau to
maintain its statewide database of methadone maintenance patients, however, such
customer accounted for less than 4% of CSM's revenues in the years ended
December 31, 1996, 1995 and 1994. Netsmart intends to augment the marketing
effort for the service bureaus, although no assurance can be given that such
operations will continue to be profitable.

Maintenance services have generated increasing revenue and are becoming a more
significant portion of CSM's business. Since purchasers of health information
system licenses typically purchase maintenance service. Maintenance revenue
increases as new customers obtain licenses for its health information services.
Under its maintenance contracts, which are executed on an annual basis, CSM
maintains its software and provides certain upgrades. Its obligations under the
maintenance contract may require CSM to make any modifications necessary to meet
new Federal reporting requirements. CSM does not maintain the hardware and third
party software sold to its customers.

The CarteSmart System

Netsmart's CarteSmart System software was designed to operate on
industry-standard computer networks and smart cards. A smart card is a plastic
card the size of a standard credit card which contains an embedded
microprocessor chip. The card has data storage and computing capabilities and
the smart card software includes security elements to restrict unauthorized
access to or modification of certain information contained on the card. A smart
card may also include a magnetic stripe to allow it to be used in networks that
do not include smart card functionality. The smart cards are designed to be
issued only by the sponsor organization, such as a managed care organization,
specialty care facility, administrator of an entitlement program or other
similar organization, a university or a bank or credit card organization.

The CarteSmart software consists of components which allow Netsmart to develop
network applications for sponsors with less effort than would be required if
those network applications were developed from scratch. The CarteSmart software
consists of an Application Program Interface ("API") and an API Generator which
shows fast customization of the API for specific network applications. The API
is a set of software modules that provide the common functions required to
support a computer network using smart cards. By using the API, Netsmart or a
sponsor may develop network systems more quickly than if all of the software
necessary to Implement the network

2

were custom written for a particular network application. The API Generator is a
tool developed by Netsmart that it designed to allow Netsmart or a network
sponsor to develop a custom API for a particular network and reduce the effort
required to build network systems.

The CarteSmart System is designed to operate on file servers and personal
computers which utilize the DOS, Windows 3.1, Windows 95, Windows MT or UNIX
operating systems, depending upon the application. The software used in the
smart card can be used or adapted for use in most commercially available smart
CarteSmart cards generally meet international standards and are considered
commodity products, although each manufacturer has its own software to interface
with a computer. Accordingly, Netsmart believes that a manufacturer would
provide any necessary assistance in order to market its cards.

Although Netsmart's CarteSmart System software has general applications, its
experience with its CarteSmart clients reflects a need to customize the software
to meet the specific need of the client. Although the customization need not be
significant, each user has its unique requirements that must be met. These
requirements may include the need to enable the CarteSmart System to interface
with the client's existing systems to the development of a range of software
products to meet needs which are not presently being served.

Netsmart's initial applications were designed to meet the needs of managed care
organizations and entitlement programs and Netsmart developed a smart card
interface to its health management systems. Each time a patient visits a
participating health care provider, the health care provider adds to the
patient's data base information concerning the visit, including the date,
procedures performed and diagnosis. At the time of the first visit to a
participating physician, the physician enters information relating to the
diagnosis and treatment given on that visit together with such information
relating to chronic conditions, such as allergies and medication, as the
physician deems important. Netsmart does not anticipate that the health care
provider will be expected to include information relating to earlier diagnosis
or treatment; however, the organization which provides the smart card may
require additional information to be input at the initial visit. This
information is input into the patient's smart card and may also be transmitted
to the managed care organization's central data base, where, unless
dissemination of such information has been restricted by the patient other
health care providers will have access to the information. The health care
provider can read information from, and write information onto the smart card
through a card interface device, which is standard computer peripheral equipment
readily available from composer outlets and can be easily connected to a
personal computer. The information transferred to the smart card is first input
by the health care provider on a computer and includes the date of service,
diagnosis, treatment including any prescribed medication, and any other
information which the health care provider determines.

At the time of the visit, the health care provider inputs the standard codes for
use diagnosis and procedures performed. Errors in inputting the diagnosis and
the procedure code delay payment or affect the amount of payment. The SmartCard
System can be integrated with the health care provider's existing practice
management system, without incurring any additional personnel. The CarteSmart
System software has integrated within it an easy to use diagnosis and procedure
code look-up capability, as well as error checking and other safeguards which
assist the health care provider in inputting the proper codes based upon normal
medical terminology.

The smart card stores only a limited amount of information, and is intended to
reflect current medical conditions and not a record of medical treatment from
birth. When the storage capacity of the card, which is equivalent to
approximately ten typed pages, is reached, items are deleted on a chronological
basis, with the earliest items being deleted first, although there is an
override procedure by which certain crucial medical information, such as
allergies and chronic conditions, can be retained, regardless of the date when
the patient was diagnosed or treated for the condition. The card also includes
information on each prescription which the patient is taking. A smart card is
different from a magnetic stripe card, such as is used at Virginia Commonwealth
University ("VCU"), in that it has an updatable data storage capacity, which a
magnetic stripe card does not.

3

To date, Netsmart has licensed its CarteSmart software in conjunction with a
pilot project for San Diego County, which involved the issuance of smart cards
to approximately 1,200 mental health patients participating in the California
Medical Managed Care Initiative. Netsmart is presently contracted to develop a
plan for an expansion of the program to include substance abuse and acute care
as well as mental health for the county's total health care population. Netsmart
is also marketing its CarteSmart System to other entitlement programs and
managed care organizations; however, except for the pilot project in San Diego
County, Netsmart has not entered into any agreements with any such
organizations, and no assurance can be given that Netsmart will enter into any
such agreements.

During 1995, Netsmart commenced marketing its CarteSmart based products to
markets other than the health care field. In July 1995, Netsmart entered into an
agreement pursuant to which it installed a magnetic stripe identification system
which uses CarteSmart technology to provide for the centralized issuance of a
single card to all persons allowed access to the facility and its services. The
card contains the individual's name, photo, signature and unique card
identification number, which defines the holder's entitlement to food service
and library services. Approximately 20,000 students are using the system.
Netsmart is negotiating with respect to an agreement to expand the program to
support additional services, however, no assurance can be given that the program
will be expanded. A magnetic card differs from a smart card since it does not
have an independent updatable data storage capability. Netsmart believes that a
major market for its smart card technology is the financial services industry,
including banks and credit card issuers. Commencing in May 1995, Netsmart
entered into a series of letter agreements with IBN for services and CarteSmart
software licenses for the implementation of a satellite based distributed
network of automatic teller machines and off-line point of sale terminals using
smart cards for the former Soviet Union. Netsmart entered into a definitive
agreement to develop the system and license the system to IBN. IBN is a New
York-based company which has rights to install such systems in the former Soviet
Union. Netsmart's agreement with IBN is not contingent upon the success of IBN's
installations in the former Soviet Union, although the extent of its revenues
from royalties will be based on the number of cards issued and may be adversely
affected by political developments in the former Soviet Union. The system being
delivered to IBN includes Oasis Technologies IST/Share Financial Transaction
System software and other third party software which Netsmart is integrating
with its CarteSmart software to complete the IBN system.

In developing the CarteSmart System for the financial services industry,
Netsmart is using networking technologies that use telecommunications networks
as well as smart cards. In addition, Netsmart, through a subsidiary, purchased
the SATC Software, which processes retail plastic card transactions and merchant
transactions. The purchase price is $650,000, of which $325,000 was paid by
Netsmart and the remaining $325,000 was paid by Oasis. The SATC Software is
designed to perform functions required by credit card issuers, including
applications processing and tracking credit evaluations, credit authorization
and the printing of statements. Netsmart has an agreement with Oasis pursuant to
which the subsidiary will become a joint venture corporation owned 50% by
Netsmart and 50% by Oasis and/or its principals.

Markets and Marketing

Although the market for smart card systems includes numerous applications where
a secure distributed data base processing system in important, CSM's initial
marketing efforts were directed to the health and human services market,
including managed care organizations and entitlement programs. In the United
States alone, CSM believes that there are presently more than 75 million persons
who participate in managed care programs, which are sponsored by almost 600
organizations or health insurers. Because of the relationship between the
organization and the participating medical care providers and patients, the
organization can institute a smart card system without the need for CSM to
conduct a separate marketing effort directed at the medical care providers.
Although independent health insurers which do not operate a managed care
organization may, in the future, be a market for a smart card system, because
the relationship between the insurer and the medical care provider is different
from that of the managed care organization and its participating medical care

4

providers, CSM is not treating independent insurance companies as a market for
the CarteSmart System, an no assurance can be given that it will ever become a
market for the system.

The market for CSM's health information systems and related services is
comprised of various providers of specialty care involving long-term treatment
of a repetitive nature rather than short-term critical care, such as medical and
surgical hospitals or clinics. CSM believes that there are approximately 15,000
providers of such treatment programs in the United States, including public and
private hospitals, private and community-based residential facilities and
Federal, state and local governmental agencies. Of these facilities,
approximately 200 are customers of CSM.

Netsmart's health information systems are marketed principally to specialty care
facilities, many of which are operated by government entities and include
entitlement programs. During the years ended December 31, 1996, 1995 and 1994,
approximately 31%, 54% and 47%, respectively, of revenues was generated from
contracts with government agencies. Contracts with government agencies generally
include provisions which permit the contracting agency to cancel the contract at
its convenience.

For the year ended December 31, 1996, one customer accounted for more than 10%
of Netsmart's revenue. IBN Limited generated revenue of approximately $1.9
million representing 22% of Netsmart's revenue.

For the year ended December 31, 1995, one customer accounted for more than 10%
of Netsmart's revenue. The State of Colorado generated revenue of approximately
$1.4 million, representing 18.5% of revenue for the year. CSM's largest customer
for 1994 was Cuyahoga County (Cleveland) Ohio, from which CSM recognized revenue
of $250,000, or 7.0% of revenue.

Netsmart believes that the CarteSmart software has applications beyond the
health and human services market and is seeking to market the software to
educational institutions and in the financial services industry. In April, 1995,
Netsmart entered into a joint marketing agreement with Oasis, pursuant to which
each company markets the software of the other company. Oasis, an independent
software developer, has developed and markets a transaction processing system,
known as IST/Share, designed for high volume users in the financial services
industry. Mr. Storm R. Morgan, a director of and consultant to Netsmart, is an
officer of, and has an equity interest in Oasis. Netsmart believes that its
agreement with Oasis will enhance its ability to market and introduce its
product to the financial services industry where Oasis has an existing client
base.

Netsmart may enter into negotiations with other companies which have business,
product lines or products which are compatible with Netsmart's business
objectives. However, no assurance can be given as to the ability of Netsmart to
enter into any agreement with such a company or that any agreement will result
in licenses of the CarteSmart System.

At December 31, 1996 and 1995, Netsmart had a backlog of orders, including
ongoing maintenance and data center contracts, in the aggregate amount of $3.7
million and $4.2 million respectively. Substantially all of the backlog at
December 31, 1996 is expected to be filled during 1997. Such orders and
contracts relate substantially to health information sales and services.

Netsmart's sales force is comprised of three full-time sales representatives, as
well as Mr. Leonard M. Luttinger, chief operating officer, John F. Phillips,
president of CSM, and Storm R. Morgan, a consultant to Netsmart. Mr. Storm R.
Morgan's services include activities relating to the marketing of the CarteSmart
System to industries outside of the medical field. His present efforts are
devoted principally to the financial services industry. In addition Mr.
Luttinger and other members of Netsmart's technical staff are available to
assist in market support, especially for proposals which contemplate the use of
smart card transaction processing networks.

Product Development

5

During 1996 the Company did not incur any research and development expenses,
since the personnel who had been engaged in such activities were reassigned to
work on the IBN contract and the development of Smart Card products. As a
result, their salaries and related expenses were included as costs of revenue
with respect to their work on the Smart Card product. As a result of such
product development the Company incurred $279,000 in capitalized software costs.
Netsmart intends to develop a product based on both the SATC Software and its
own technologies including the CarteSmart System, and to develop a network
support tool for the financial services industry. The proposed enhancements
include an increased language capability so that it can be multilingual, an
interface with the CarteSmart System and an interface with Oasis' IST/Share,
which is a transaction processing system for high volume users in the financial
services industry. During 1995 and 1994 Netsmart developed and enhanced the
CarteSmart System, and six of its employees were engaged in such activities. For
the year ended December 31, 1995 and the year ended December 31, 1994, research
and development expenses were $699,000 and $367,000, respectively, representing
a 90.4% increase. The increase reflects research and development for smart card
and related products and the graphical interface for Netsmart's health
information systems.

Competition

Netsmart is in the business of licensing software to entitlement programs and
managed care organizations, specialty care institutions and other major computer
users who have a need for access to a distributed data network and marketing
health information systems software to specialty care organizations. The
software industry in general is highly competitive, in addition, with
technological developments in the communications industry, it is possible that
communications as well as computer and software companies may offer similar or
compatible services. Although Netsmart believes that it can provide a health
care facility or managed care organization with software to enable it to perform
its services more effectively, other companies, including major computer and
communications companies have the staff and resources to develop competitive
systems, and users, such as insurance companies, have the ability to develop
software systems in house. Because of the large subscriber base participating in
the major managed care organizations, the inability of Netsmart to license any
such organizations could have a materially adverse effect upon its business.
Furthermore, various companies have offered smart card programs, by which a
person can have his medical records stored and software vendors and insurance
companies have developed software to enable a physician or other medical care
provider to have direct access to the insurer's computer and other software
designed to maintain patient health and/or medication records. The market is
very cost sensitive. In marketing systems such as the CarteSmart System,
Netsmart must be able to demonstrate the ability of the network sponsor to
provide enhanced services at lower effective cost. Major systems and consulting
vendors, such as Unisys, AT&T Corp. and Andersen Worldwide may offer packages
which include smart cards and other network services. No assurance can be given
that Netsmart will be able to compete successfully with such competitors.
Netsmart believes the health insurance industry is developing switching software
to be used in transmitting claims from health care providers to the insurers,
and insurers or managed care organizations may also develop or license or
purchase from others the software to process such claims, which would compete
with certain functions of the CarteSmart System. The health information systems
business is highly competitive, and is serviced by a number of major companies
and a larger number of smaller companies, many of which are better capitalized,
better known and have better marketing staffs than Netsmart, and no assurance
can be given that Netsmart will be able to compete effectively with such
companies. Major vendors of health information systems include Shared Medical
Systems Corp. And HBO Corp. Netsmart believes that price competition is a
significant factor in its ability to market its health information systems and
services.

Netsmart also faces intense competition as it seeks to enter the education and
financial services markets. Competition for the education market includes not
only major and minor software developers, but credit card issuers and
telecommunications companies. In marketing its CarteSmartbased products to
educational institutions, Netsmart can focus on the benefits to the university
of providing an all-purpose card to ease administration and reduce costs.

6

Major credit card issuers and communications companies, such as American
Express, AT&T and MCI, can offer similar services by permitting the university
to link their cards with the university's services. Such organizations can also
use these marketing efforts so a part of their overall corporate marketing
strategy to familiarize the students with their particular cards and services in
hopes of attracting the students with their particular cards and services in
hopes of attracting the students as a long-term user of their cards and
services. As part of a marketing plan, rather than a profit center, such card
issuers may be able to offer the universities services similar to Netsmart, but
at a lower cost to the university. In this context, it is possible that, unless
Netsmart can enter into a marketing arrangement with a major card issuer or
telecommunications company, Netsmart may not be able to compete successfully in
marketing its CarteSmart products to educational institutions.

The financial services industry is served by numerous software vendors. In
addition, major banks, credit card issuers and other financial services
companies have the resources to develop networking software in house. At
present, most financial institutions use magnetic stripe cards rather than smart
cards. Netsmart believes that its CarteSmart System together with the SATC
Software and its joint marketing agreement with Oasis, which presently serves
the financial services industry, will assist Netsmart in selling and licensing
its products and services in the financial services industry. However, to the
extent that smart cards become more important in the financial services
industry, more companies in the financial services industry, as well as the
major computer and software companies, all of whom are better known and
substantially better capitalized than Netsmart, and numerous smaller software
developers, are expected to play an increasingly active role in developing and
marketing smart card based products. No assurance can be given as to the ability
of Netsmart to compete in this industry.

Government Regulations

The Federal and State governments have adopted numerous regulations relating to
the health care industry, including regulations relating to the payments to
health care providers for various services. The adoption of new regulations can
have a significant effect upon the operations of health care providers and
insurance companies. Although Netsmart's business is aimed at meeting certain of
the problems resulting from government regulations and from efforts to reduce
the cost of health care, 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, cannot be
predicted. Any change in, the structure of health care in the United States can
have a material effect on companies providing services, including those
providing software. Although Netsmart believes that one likely direction which
may result from the current study of the health care industry would be an
increased trend to managed care programs, which is the market to which Netsmart
is seeking to license its CarteSmart System. No assurance can be given that
Netsmart's business will benefit from any changes in the industry structure.
Even if the industry does evolve toward more health care 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, Netsmart's business may be adversely affected.
Furthermore, to the extant that each state changes its own regulations in the
health care field, it may be necessary for Netsmart to modify its health
information systems to meet any new record-keeping or other requirements imposed
by changes in regulations, an no assurance can be given that Netsmart will be
able to generate revenues sufficient to cover the costs of developing the
modifications.

A substantial percentage of CSM's 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, contracts with government agencies
generally include provisions which permit the contracting agency to cancel the
contract at its convenience.

7

Intellectual Property Rights

The CarteSmart System is a proprietary system developed by Netsmart. Netsmart
has no patent rights for the CarteSmart System or health information system
software, but it relies upon nondisclosure and secrecy agreements with its
employees and third parties to whom Netsmart discloses information. No assurance
can be given that Netsmart will be able to protect its proprietary rights to its
system or that any third party will not claim rights in the system. Disclosure
of the codes used in the CarteSmart System or in any proprietary product,
whether or not in violation of a nondisclosure agreement, could have a
materially adverse affect upon Netsmart, even if Netsmart is successful in
obtaining injunctive relief. Furthermore, Netsmart may not be able to enforce
its rights in the CarteSmart System in certain foreign countries.

Source of Supply

Since Netsmart does not provide any of the hardware or the smart cards it is the
responsibility of the licensee to obtain the hardware smart cards and other
supplies. Netsmart's software operates on computer hardware and smart cards
manufactured by a number of suppliers.

Employees

As of December 31, 1996, Netsmart had 71 employees, including five executive,
five marketing and marketing support, 54 technical and seven clerical and
administrative employees. The chief executive officer and the president of
Netsmart devote only a portion of their time to the business of Netsmart.

Item 2. Property

The Company's executive offices and facilities are located in approximately
18,000 square feet of space at 146 Nassau Avenue, Islip, New York, pursuant to a
lease which terminates on February 28, 1999, at a minimum annual rental of
$248,000. This lease provides for fixed annual increases ranging from 4% to 5%.
The Company believes that such space is adequate for its immediate needs.

The Company also leases approximately 1,800 square feet of office space at 7590
Fay Avenue, La Jolla, California, pursuant to a lease which terminates on March
31, 1999, at a minimum annual rental of $31,000. This lease provides for fixed
annual increases of 4%.

The company occupies, on a month to month basis, approximately 1,500 square feet
of office space in Wethersfield, Conneticut, at a monthly rental of $2,000.

The Company believes that its space is adequate for its immediate needs and
that, if additional space is required, it would be readily available on
commercially reasonable rates.

Item 3. Legal Proceedings

None.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to security holders for a vote during the three months
ended December 31, 1996.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

The Company's shares of Common Stock is traded on the Nasdaq Market under the
symbol NTST. Set forth below is the reported high and low bid prices of the
shares of Common Stock for the transition period listed.

8

Quarter Ending High Bid Low Bid

September 30, 1996 $13.25 $12.50
December 31, 1996 3.38 3.00

As of December 31, 1996 there were approximately 347 holders of record of the
Company's common stock.

No cash dividends have been paid to the holders of the shares of Common Stock
during the years ended December 31, 1996 and 1995 and 1994.

9

Item 6. Selected Financial Data

Year Ended
----------
1996 1995 1994 1993
---- ---- ---- ----
(in 000's except per share data)
Selected Statements
of Operations Data:

Revenues $ 8,541 $ 7,382 $ 2,924 $ 57

Income (Loss) from
Operations (4,151) (1,433) (1,491) (339)

Net Income (Loss) 1&2(6,579) 3(2,850) (1,751) (433)

Net Income (Loss)
per Common Share $ (1.29) $ (.59) $ (.36) $ (.10)

Weighted average number
of shares outstanding 5,149 4,822 4,822 4,763

Selected Balance
Sheet Data:
Working Capital (deficiency) 477 (2,562) (4,037) (938)

Total Assets 8,251 6,390 7,193 585

Total Liabilities 3,836 5,887 6,342 938

Redeemable Preferred Stock -- 96 96 96

Accumulated Deficit (11,726) (5,147) (2,297) (546)

Stockholders' Equity
(deficiency) 4,415 407 755 (449)

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Years Ended December 31, 1996 and 1995.

The Company's revenue for 1996 was $8.5 million, an increase of $1.1 million, or
15% from the revenue for 1995 which was $7.4 million. Approximately $1,550,000
of the increase in revenue was generated pursuant
- - --------
1Includes $3,492 of non cash compensation charges arising out of the
issuance by the Company of warrants and options having exercises prices which
were less than the market value of the Common Stock at the date of approval by
the board of directors.
2 Includes $1,692 of non cash costs associated with the issuance of
500,000 common shares to certain noteholders and 25,000 shares of common stock
to the Company's asset based lender.
3Includes financing costs of $460 representing the write-off of deferred
financing costs relating to a proposed public offering scheduled for early 1995
but cancelled.

10

to the Company's agreement with IBN. IBN represented the Company's most
significant customer for 1996, accounting for approximately 22% of revenue.
Furthermore, through December 31, 1996 IBN has generated revenue of $2.4
million, or approximately 89.6% of the Company's total revenue from the
SmartCard systems during the two years ended December 31, 1996 and 1995 on a
combined basis. The revenue generated to date includes approximately $419,000 of
guaranteed royalties. As of December 31, 1996, the contract was more than 80%
complete. The Company is continuing to provide professional services to IBN,
although revenues from such services have declined substantially from the level
at the beginning of the year. The Company intends to expand its marketing effort
for its CarteSmarte System, however, at December 31, 1996, the Company did not
have any significant contracts for the CarteSmart system.

Revenue from the Company's health information systems continued to represent the
Company's principal source of revenue in 1996, accounting for $6.5 million or
76% of revenue. However, as a result of the increase of revenue from SmartCard
systems, principally from IBN, revenue from health information systems and
services declined as a percentage of total revenue. Except for revenue from the
IBN contract, the largest component of revenue in 1996 was data center (service
bureau) revenue which increased to $2,207,000 in 1996 from $1,742,000 in 1995,
reflecting an increase of 27%. The turnkey systems revenue decreased to
$1,663,000 in 1996 from $1,777,000 in 1995, reflecting a decrease of 6%.
Maintenance revenue increased to $1,226,000 in 1996 from $1,099,000 in 1995,
reflecting a 11% increase. Revenue from third party hardware and software
decreased to $1,114,000 in 1996 from $2,148,000 in 1995, a decrease of 48%.
Sales of third party hardware and software are made only in connection with the
sales of turnkey systems. License revenue increased to $329,000 in 1996 from
$162,000 in 1995. License revenue is generated as part of a sale of a turnkey
system pursuant to a contract or purchase order that includes development of a
turnkey system and maintenance. The Company believes that the increase in 1996
installations should enable the Company to increase the maintenance revenue in
future periods.

Revenue from contracts from government agencies represented 31% of revenue for
1996 . The Company believes that such contracts will continue to represent an
important part of its business, particularly its health information systems
business. In 1996, contracts from government agencies accounted for
approximately 40% of its revenue from health information systems.

Gross profit decreased to $1,332,000 in 1996 from $1,763,000 in 1995, a 24%
decrease. The decrease in the gross profit was substantially the result of costs
associated with the completion of the IBN contract. At December 31, 1996 the IBN
contract was more than 80% complete.

Selling, general and administrative expenses were $1.9 million in 1996, a
decrease of 24% from the $2.5 million in 1995. The decline was substantially the
result of a one time charge in 1995 of a write off deferred public offering
costs in the amount of $460,000 as well as a reduction in executive compensation
and a reduction in staff.

During 1996, the Company incurred non cash compensation charges of $3.5 million
arising out of 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. During 1996, the Company issued
500,000 common shares to certain noteholders and 25,000 common shares to the
Company's asset based lender. As a result of such issuance, the Company incurred
a financing cost charge to operations of approximately $1.7 million.

In 1996, the Company did not incur any research and development expenses, since
the personnel who had been engaged in such activities were reassigned to work on
the IBN contract and the development of SmartCard products. As s result, their
salaries and related expenses were included in costs of revenue with respect to
the work on the IBN contract and capitalized software development costs with
respect to their work on the SmartCard product. As a result of such product
development, the Company incurred $279,000 in capitalized software costs of
which $28,000 has been amortized in 1996 and charged to cost of sales. In 1995,
the Company incurred research and development expenses in the amount of
$699,000.

In 1996 the Company recognized its 50% share of its loss in its joint venture
corporation with respect to the purchase of SATC software. The amount of such
loss was $264,000.

11

Interest expense was $473,000 in 1996, a decrease of $81,000, or 15% from the
interest expense in 1995. The most significant component of the interest expense
on an ongoing basis is the interest payable to the Company's asset-based lender,
which it pays interest equal to the greater if 18% per annum or prime plus 8%
plus a fee of 1% of the face amount of the invoice.

As a result of the foregoing factors, the Company incurred a net loss of $6.6
million, or $1.29 per share in 1996 as compared with a net loss of $2.9 million,
or $.73 per share in 1995.

Years Ended December 31, 1995 and 1994

The results of the Company's operations for the year ended December 31, 1995 are
not comparable with the results of operations for 1994 since the acquisition of
CSM was effective July 1, 1994, and the results of operations for 1994 include
the CSM business only from such date.

The Company's revenue for 1995 was $7.4 million, representing an increase of
152% from the revenue of the Company for 1994 of $2.9 million. The increase
reflected the inclusion of CSM's operation for only the last six months of the
year. Revenue from health information systems and services accounted for $6.8
million, or 91.5% of total revenue for 1995 and more than 99% of pro forma
combined revenue of the Company and CSM for 1994. CarteSmart Systems revenue
accounted for the balance of the revenue for the periods. In 1994, the Company
generated CarteSmart Systems revenue of $90,000 from the pilot project in San
Diego County. In 1995, revenue from CarteSmart technology was $631,000.

The largest component of revenue for 1995 was $2.0 million from the sale of
third party hardware and software, as compared with $519,000 for 1994. Such
revenue represented 26.7% and 17.7% of revenue for 1995 and 1994, respectively.
A significant portion of revenue in 1995 represented the sale of hardware
($842,000) and software and related services ($524,000) pursuant to a purchase
order from the State of Colorado for its Department of Human Services. Revenue
from services related to turnkey systems and data center revenue accounted for
$1.8 million and $1.7 million, or 24.1% and 23.6% of revenue, respectively, for
1995, as compared with $664,000 and $884,000, or 22.7% and 30.2% of revenue,
respectively, for 1994. Maintenance revenue was $1.1 million and $500,000 in
1995 and 1994, respectively, representing 14.9% and 17% of revenue,
respectively. The Company believes that the increase in installations at
December 31, 1995 from the prior year should enable the Company to increase the
maintenance revenue in future periods. Revenue from CarteSmart Systems increased
to $631,000 in 1995, representing 8.6% of revenue, from $90,000 in 1994,
representing 3.1% of revenue. The CarteSmart System revenue reflected revenue
from IBN ($481,000), VCU ($118,000) and the San Diego pilot program ($31,000) in
1995 and the San Diego Prom ($90,000) in 1994. The overall increase in revenue
reflects the inclusion of CarteSmart Systems revenue combined with the revenue
from the Colorado agreement.

Both the increase in revenue and the change in revenue mix reflected increased
revenue resulting from an enhanced marketing effort following the June 1994
acquisition of CSM. During the second half of 1994, the Company received
significant purchase orders from the State of Colorado for its Department of
Human Services and the State of Oklahoma. The Colorado order covered the
purchase of the Company's health information system, including software,
consulting services and hardware, at a total purchase price of approximately
$1.2 million. Of the purchase price, approximately $700,000 represented the
purchase price of the software and consulting services, and the balance
represents the cost of the hardware. In July 1994, the Company received a
purchase order from a state agency of the State of Oklahoma for a health
information system which includes the graphical interface. The order called for
the installation of the system in ten hospitals for a purchase price of
approximately $430,000. The Company is continuing to market its health
information systems to entitlement programs. It believes that the inclusion of
the graphical and smart card functions, which were implemented during the second
half of 1994 and the first half of 1995, will assist it in marketing its
products to entitlement programs. It also believes that the successful pilot
project for the smart card interface in San Diego provides the Company with an
important tool in marketing this function to both new and existing clients. The
Company is commencing a marketing effort for its CarteSmart System directed at
the financial services industry and educational institutions. However, in the
industries to which the Company is marketing its products, there is typically a
long selling cycle, as a result of which the Company must continue to support
its marketing effort for a significant period before any revenue is realized.

12

Gross profit increased to $1.8 million in 1995 from $390,000 in 1994, an
increase of 352%, which reflected an increase in the gross margin to 23.9% in
1995 from 13.3% in 1994. The increase in gross profit resulted from both the
improved gross margin and the inclusion of twelve months of CSM operations in
1995 and six months of such operations in 1994. The improved margin reflects the
significant increase in CarteSmart revenue, on which the Company realized a
higher margin than on its health information systems and services. However, the
amortization of capitalized software costs of $419,000 during 1995 is reflected
as a cost of revenue, which offset the higher margin for the CarteSmart System.
During 1995, the Company changed its CarteSmart System from a DOS-based system
to a Windows-based system. The capitalized costs related to the DOS-based
system. As a result, at December 31, 1995, the Company wrote off the unamortized
software development costs, which increased cost of revenue. In addition, the
Company expensed the development of the Windows-based system, which was charged
to research and development. The gross profit for 1995 benefitted from the gross
margin for maintenance services. During 1995, the gross profit from maintenance
services increased to $356,000 from $52,000 in 1994, reflecting an increase in
the gross margin from such services to 32.4% for 1995 from 10.4% for 1994. The
increase in margin resulted from increased services performed on a time and
materials basis as well as a reduction in staff as the Company was able to
perform the same services with a smaller staff.

Selling, general and administrative expenses were $2.5 million and $1.5 million
for 1995 and 1994, respectively, representing a 65.0% increase. In 1994,
selling, general and administrative expenses included approximately $236,000 of
compensation expense arising out of the issuance of Consolidated common stock to
former officers of CSM and the grant by SISC to such persons of options to
purchase shares of the Company's Common Stock which were owned by SISC. However,
in 1995, selling, general and administrative expenses included a $200,000
increase in annualized expenses resulting from an increases in the marketing
staff, a $100,000 increase in the level of compensation for the Company's and
CSM's officers following the June 1994 acquisition of CSM, $150,000 in legal
expenses, a portion of which related to the acquisition of CSM, and $313,000 of
the amortization of customer lists resulting from the CSM acquisition.
Commencing July 1, 1994, general and administrative expenses reflects the
amortization of customer lists resulting from the CSM acquisition.

Research and development was $699,000 and $367,000 for 1995 and 1994,
respectively, representing a 90.4% increase. The increase reflects research and
development for smart card and related products and the graphical interface for
the Company's health information systems.

During 1995, the Company incurred financing costs of $863,000, representing the
write-off of deferred financing costs relating to a proposed initial public
offering which had been scheduled for early 1995, but which had been canceled.
No such expenses were incurred in 1994.

Interest expense was $554,000 and $260,000 for 1995 and 1994, reflecting a 113%
increase. The increased interest reflects (i) financing costs of $208,000
reflecting interest and fees at higher borrowing levels pursuant to the
Company's agreement with its asset-based lender and (ii) interest at 10% on an
increased average level of borrowings from SISC. The most significant component
of the interest on an ongoing basis is the interest payable to the Company's
asset-based lender, on which it pays interest equal to the greater of 18% per
annum or prime plus 8% plus a fee of 1% of the face amount of the invoice. The
debt restructure whereby at September 30, 1995, SISC exchanged more than $2
million in debt for shares of Series D Preferred Stock and the subsequent
exchange by SISC of a portion of such preferred stock for Common Stock will have
the effect of reducing the interest payable by the Company, which reduction will
be offset to some extent by dividends payable to SISC with respect to the Series
D Preferred Stock. However, the $72,700 annual dividends payable on the 1,210
shares of Series D Preferred Stock will be significantly less than the interest
paid on the debt.

As a result of the foregoing factors, the Company sustained losses of $2.9
million, or $.59 per share, for 1995, as compared with a loss of $1.8 million,
or $.36 per share. If certain additional compensation expenses were incurred
during the year, the pro forma loss would have been $3.5 million, or $.73 per
share.

In addition, at December 31, 1995 and 1994, the estimated profit included in
cost and estimated profit in excess of interim billings and interim billings in
excess of cost and estimated profit decreased substantially from approximately
$1.4 million to approximately $500,000. This decrease reflected a reduction in
the number of

13

contracts that have billing schedules which differ from revenue recognition. As
a result of a reduced number of such contracts at December 31, 1995, the
estimated profits from such contracts declined.

Liquidity and Capital Resources

On August 9, 1996 the Company closed on a public offering whereby it sold
646,875 units at a price of $8 per unit for a net proceeds of $3.8 million. Each
unit consisted of two shares of Common stock and one Series A Redeemable stock
purchase warrant. On August 21, 1996 Series B Common Stock Purchase Warrants to
purchase 800,000 shares of common stock at $2 per share were exercised and the
Company received $1.6 million in gross proceeds.

The Company's net loss for the year was $6.6 million of which $3.5 million
related to a one time non cash charge arising out of 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.
Also included in the 1996 loss was a one time non cash financing costs in the
amount of $1.6 million related to 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. Both of these one time non cash charges had no impact on the
Company's working capital.

Substantially, as a result of the above, the Company's working capital deficit
of $2.6 million at December 31, 1995 was improved to a working capital surplus
of $477,000 at December 31, 1996.

Since January 1, 1995 and prior to the public offering, the Company's principal
source of funds, other than revenue, has been an accounts receivable financing
agreement and interim loans from nonaffiliated accredited investors. In February
1995, the Company entered into an accounts receivable financing agreement with
an asset based lender, pursuant to which it may borrow up to 80% of eligible
accounts receivable. As of December 31, 1996 , the outstanding borrowings under
this facility was $590,000.

In January 1996, the Company borrowed $500,000 from unaffiliated investors, and
issued its 8% note due the earlier of January 31, 1997 or five days after
completion of a public offering. These loans were repaid in August 1996.

At December 31, 1996, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $3.2 million, representing
approximately 80 days of revenue for the year ended December 31, 1996. Accounts
receivable at December 31, 1996 increased by $171,000 from $2,113,000 at
December 31, 1995 to $2,284,000 at December 31, 1996. At December 31, 1996 one
customer, IBN accounted for 21% of the total accounts receivable balance. No
other customer accounted for more than 10% of the accounts receivable balance.

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

14

Item 10. Directors and Executive Officers of the Registrant

The directors and executive officers of the Company are as follows:

Name Age Position

Lewis S. Schiller 66 Chairman of the Board, Chief Executive
Officer & Director

James L. Conway 48 President and Director

Leonard M. Luttinger 47 Chief Operating Officer and Director

Anthony F. Grisanti 47 Chief Financial Officer, Treasurer
and Secretary

John F. Phillips 57 Director

E. Gerald Kay 55 Director

Storm R. Morgan 31 Director

Mr. Lewis S. Schiller has been chairman of the board and a director of the
Company since its organization in September 1992. Mr. Schiller is chairman of
the board and chief executive officer of Consolidated, SISC and Holdings and is
chief executive officer and/or chairman of Consolidated's operating
subsidiaries, whose operations include magnetic resonance imaging centers, three
dimensional imaging products, telecommunications and various manufacturing
operations. SISC is the sole stockholder of Holdings, the principal stockholder
of the Company, and SISC and Holdings are wholly-owned subsidiaries of
Consolidated. Mr. Schiller has held such positions for more than the past five
years. Since May 1995, Mr. Schiller has also been chairman of the board, chief
executive officer and a director of Trans Global Services, Inc. (formerly known
as Concept Technologies Group, Inc.), ("Trans Global"), a contract engineering
company, of which SISC holds a majority of the voting rights. Mr. Schiller
devotes only a portion of his time to the business of the Company. On December
11, 1989, Mr. Schiller was elected as chairman and chief executive and financial
officer of General Technologies Group, Ltd. ("GTG"), a Long Island based defense
manufacturing firm in which Consolidated was a stockholder and a major creditor.
On December 14, 1989, GTG filed for protection under Chapter 11 of the
Bankruptcy Act. Consolidated also commenced litigation against GTG, its former
chairman and chief executive officer, accountants and secured lender which was
settled out of court in 1993 and 1996. Mr. Schiller devotes a significant
portion of his time to the business of Consolidated and its other subsidiaries.
He anticipates that he will devote such amount of his time to the business of
the Company as is necessary; however, Mr. Schiller does not expect to devote
more than 10% of his time to the business of the Company.

Mr. James L. Conway has been president and a director of the Company since
January 1996. Since 1993, he has been president of S-Tech Corporation
("S-Tech"), a wholly-owned subsidiary of Consolidated which manufactures
specialty vending equipment for postal, telecommunication and other industries
and avionics products. His position as president of S-Tech Corporation is his
principal business activity. From 1990 to 1993, he was president of GTG, as
debtor in possession following its filing under Chapter 11 of the Bankruptcy
Act. Mr. Conway devotes 40% to 50% of his time to the business of the Company.

Mr. Leonard M. Luttinger has been president and a director of the Company since
its organization in September 1992 until January 1996, when he became chief
operating officer. From March 1991 to September 1992, Mr. Luttinger was vice
president of smart card systems for Onecard, a corporation engaged in the
development of smart-card technology. From June 1966 to February 1991, he was
employed at Unisys, a computer corporation, and its predecessor Burroughs
Corporation, in various capacities, including manager of semiconductor and
memory products and manager of scientific systems.

15

Mr. Anthony F. Grisanti has been treasurer of the Company since June 1994,
secretary since February 1995 and chief financial officer since January 1996. He
was chief financial officer of CSM and ACT for more than five years prior
thereto.

Mr. John Phillips has been a director of the Company and vice president of CSM
since June 1994, when CSM was acquired. He also served as vice chairman and vice
president -- marketing of the Company from June 1994 to January 1996. He was a
senior executive officer and director of CSM and ACT for more than five years
prior to June 1994. From January 1993 to June 1994, he was chairman of the Board
of CSM and ACT. From 1986 until December 1992, he was president of CSM and ACT.
Mr. Phillips is a director of ACT.

Mr. Storm R. Morgan has been a director of the Company since January 1996. Mr.
Morgan is also senior vice president of Oasis, a position he has held since
1991, and an officer and director of SMI, a position he has held since 1989.

The Company's Certificate of Incorporation includes certain provisions,
permitted under Delaware law, which provide that a director of the Company shall
not be personally liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director expect for liability (I) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for any transaction from which
the director derived an improper personal benefit, or (iv) for certain conduct
prohibited by law. The Certificate of Incorporation also contains broad
indemnification provisions. These provisions do not affect the liability of any
director under Federal or applicable state securities' laws.

The Board of Directors does not have any executive, nominating or audit
committees.

Item 11. Executive Compensation

Set forth below is information concerning the Company's chief executive officer
and the only officers who received or accrued compensation in excess of $100,000
during the years ended December 31, 1996, 1995 and 1994. Information with
respect to Messrs. Bright, Grisanti and Phillips reflects, for 1994, the
combined compensation received from the Company and Old CSM.

Annual Compensation Long Term Compensation (Awards)
Name and Principal PositioYear Salary Commissions/Bonus Restricted StocOptions/Warrants
Awards (Dollars)(Number)

Lewis S. Schiller, CEO 1996 1-- -- -- --
1995 1-- -- -- 52,500
1994 1-- -- -- --

James Conway, President 1996 $77,408 -- -- 268,750

Leonard M. Luttinger 1996 62,500 67,262 -- 156,250
Chief Operating Officer 1995 125,000 -- -- 176,768
1994 113,390 -- -- 415,000

John F. Phillips, 1996 100,000 33,906 -- 627,000
Vice Chairman 1995 123,900 -- -- 38,768
and Vice President 1994 108,416 -- 5-- 415,000
of Marketing

Anthony F. Grisanti 1996 80,000 23,500 -- 715,000
Chief Financial Officer 1995 80,000 -- -- 832,464
1994 71,500 -- 5

Storm R. Morgan 91996 -- -- -- 262,500

16

- - ------------------------

1Mr. Schiller received no compensation from the Company. Effective
December 31, 1994, Consolidated changed its fiscal year to the calendar year
from the twelve months ended July 31. During the year ended December 31, 1996
and 1995, the period from August 1, 1994 to December 31, 1994, for the fiscal
years ended July 31, 1994, the total compensation paid or accrued by
Consolidated to Mr. Schiller was $340,000, $250,000, $94,000 and $181,451
respectively. The Company has an agreement with Trinity pursuant to which it is
to pay Trinity consulting fees of $180,000 per year for the three years
commencing August 1996. The services to be rendered by Trinity include general
business and financial management services and may be rendered by officers of
Trinity, including Mr. Schiller, who is chief executive officer of both Trinity
and the Company.

2Represents warrants to purchase 100,000 shares of Common Stock at $2.00
per share and warrants to purchase 168,750 shares of Common Stock at $4 per
share.

3 Represents warrants to purchase 25,000 shares of Common Stock at $2 per
share and warrants to purchase 131,250 shares of Common Stock at $4 per share.

4In December 1994, the Company issued options to purchase 15,000 shares of
Common Stock at $5.33 per share to each of Messrs. Luttinger, Bright and
Phillips pursuant to the Company's 1993 Long-Term Incentive Plan. In January
1995, these options were canceled and new options were granted with an exercise
price of $.232 per share, which was determined by the Board of Directors to be
the fair market value per share on such date, to Messrs. Luttinger (8,058
shares), Bright (20,058 shares) and Phillips (20,058 shares).

5In June 1994 at the closing of the acquisition of CSM, SISC granted to
Messrs. Bright, Phillips and Grisanti options to purchase 66,000, 66,000 and
19,920 respectively of the Company's Common Stock owned by SISC. The options are
exercisable at an exercise price of $.232 per share during the five year period
commencing June 1994. In June 1994, at the closing of the acquisition,
Consolidated issued to such individuals an aggregate of 40,000 shares of
Consolidated common stock.

6Represents options to purchase 27,000 shares of Common Stock at $2 per
share.

7Represents options to purchase 15,000 shares of Common Stock at $2 per
share.

8Represents options to purchase 23,109 shares of Common Stock at $.232 per
share and 9,355 shares of Common Stock at $.345 per share.

9In January 1996, Mr. Storm Morgan was elected a director of the Company.
At the time of his election. He was a consultant of the Company. The Company
does not pay compensation to Mr. Morgan. During 1996 the Company operated under
a proposed agreement pursuant to which the Company paid to SMI, of which Mr.
Morgan is the sole stockholder, an officer and director, $619,700 for services
provides by Mr. Morgan from a time to time on an as needed basis and for four
persons to serve in management-level or other key positions of the Company on a
full time basis. These individuals provided marketing, support and technical
services to the Company. Mr. Morgan was not required to devote any minimum
amount of time to the business of the Company. In addition the Company during
1996 reimbursed SMI for expenses incurred by SMI staff a total of $285,524. A
substantial amount o these expenses were reimbursed to the Company by its
clients. The Company also paid SMI in 1996 a total of $11,750 in commissions and
$250,000 for services related to the Company's agreement with IBN.

In February 1997 the Company modified its agreement with SMI reducing the
monthly fees payable to $9,000.

10Represents warrants to purchase 150,000 shares of Common stock at $2 per
share and warrants to purchase 112,500 shares of Common stock at $4 per share.

17

In June 1994, at the closing of the acquisition of CSM, the Company entered into
five-year employment agreements with Messrs. Luttinger, Edward D. Bright, John
F. Phillips and Anthony F. Grisanti providing for annual base salaries of
$125,000, $125,000, 125,000 and $80,000, respectively. The agreements with
Messrs. Luttinger and Evans replaced prior agreements and increased their
compensation. The agreements provide for an annual cost of living adjustment, an
automobile allowance and a bonus of 4% of income before income taxes for Messrs.
Luttinger, Bright and Phillips and 2% of income before income taxes for Mr.
Grisanti. The maximum bonus is 300% of salary for Messrs. Luttinger, Bright and
Phillips and 200% of salary for Mr. Grisanti. The agreements provide that such
individuals will be elected as executive officers of the Company. Mr.
Luttinger's agreement also provides for payment of his relocation expenses. For
1996, Messrs. Luttinger, Phillips and Bright agreed to reduce base salaries of
$62,500, $100,000 and $100,000, with certain incentives if certain targets are
attained. The aggregate annual base salaries for 1996 under these agreements is
$442,500. In August 1996 the Company entered into a five year employment
agreement with Mr. Conway providing for an annual base salary of $125,000. The
agreement provides for an annual cost of living adjustment, an automobile
allowance and a bonus of 5% income before income taxes. The maximum bonus is
300% of salary. In addition, the Company has an agreement with Trinity pursuant
to which the Company will pay Trinity $180,000 per year during the three-year
period commencing on the first day of the month in which the Company receives
the proceeds from this Offering.

Pursuant to his employment agreement with Consolidated, Mr. Schiller
received, prior to September 1, 1996, an annual salary of $250,000 subject to a
cost of living increase, a bonus equal to 10% of Consolidated's net income
before income taxes or cash flow, whichever is greater, in excess of $350,000.
Effective September 1, 1996, Mr. Schiller's base salary was increased to
$500,000. Pursuant to his employment agreement with Consolidated, Mr. Schiller
has the right to acquire 10% of SISC's interest in its subsidiaries and
investments, including its investment in the Company, at 110% of SISC's cost.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth the, as of March 14, 1997, the number and
percentage of shares of outstanding common stock owned by each person owning at
least 5% of the Company's Common Stock, each director owning stock and all
directors and officers as a group:
Common Stock
Amount and Nature
Name and of Beneficial Percent of Ownership
1Address 2Ownership Outstanding

3Lewis S. Schiller 4,699,737 62.4%
160 Broadway
New York, NY 10038

4SIS Capital Corp. 4,433,070 60.2%
and
Carte Medical Holdings, Inc.
160 Broadway
New York, NY 10038

5Leonard M. Luttinger 261,016 3.7%

6John F. Phillips 131,766 1.9%

7Storm R. Morgan 307,000 4.3%

8James L. Conway 293,750 4.2%

All Directors and Officers 5,760,653 68.2%
As a group (four individuals
owning stock) 3, 5, 6, 7, 8, 9

18

- - ------------------------

1Unless otherwise indicated, the address of each person is c/o Netsmart
Technologies, Inc., 146 Nassau Avenue, Islip, New York 11751.

2Unless otherwise indicated, each person named has the sole voting and
sole investment power and has direct beneficial ownership of the shares.
Information as to ownership of Outstanding Warrants by each person named in the
table is set forth in the footnotes.

3Includes (a) 100,000 shares of Common Stock owned by Mr. Schiller, (b)
3,122,390 shares by Holdings, of which Mr. Schiller is the chief executive
officer and has the power to vote the shares,(c) 700,000 shares of Common Stock
issued to SISC as a result of exercising $2 warrants in August 1996. (d) 565,000
shares of Common Stock issuable to SISC upon the exercise of outstanding
warrants. (e) 166,667 shares of Common Stock issuable to Mr. Schiller upon the
exercise of outstanding warrants. Includes 151,920 shares of Common Stock owned
by Holdings, subject to options granted by SISC in connection with the
acquisition of CSM. Shares owned by Mr. Schiller do not include securities owned
by DLB, which is owned by Mr. Schiller's wife and with respect to which Mr.
Schiller disclaims beneficial interest. At March 14, 1997, DLB owned 237,577
shares of Common Stock and Outstanding Warrants to purchase 70,833 shares of
Common Stock at $2.00 per share and 53,126 shares of Common Stock at $4 per
share. If the shares owned by DLB were included with Mr. Schiller's shares, the
number shares of Common Stock beneficially owned by Mr. Schiller at March 14,
1997 would be 5,061,273 or 66.1% of the outstanding shares of Common Stock at
such date.

4Includes (a) 3,122,390 shares owned by Holdings, (b) 700,000 shares of
Common Stock issued to SISC as a result of exercising $2 warrants in August 1996
and (c) 565,000 shares of Common Stock issuable to SISC upon the exercise of
outstanding warrants. The shares owned by SISC include 151,920 shares of Common
Stock owned by Holdings, subject to options granted by SISC in connection with
the acquisition of CSM.

5Includes (a) 26,766 shares of Common Stock issuable upon the exercise of
outstanding options, (b) 25,000 shares of Common Stock issuable upon the
exercise of outstanding $2 warrants, (c) 131,250 shares of Common Stock issuable
upon the exercise of outstanding $4 warrants.

6Represents 66,000 shares issuable upon exercise of an option granted by
SISC and 65,766 shares of Common Stock issuable upon exercise of outstanding
options.

7Mr. Morgan holds Outstanding Warrants to purchase 150,000 shares of
Common Stock at $2.00 per share and 112,500 shares of Common Stock at $4 per
share.

8Mr. Conway holds Outstanding Warrants to purchase 100,000 shares of
Common Stock at $2 per share and 168,750 shares of Common Stock at $4 per share.

Item 13. Certain relationships and Related Transactions

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

19

1. Financial Statements
F-3 Report of Moore Stephens, P.C. Independent Certified
Accounts
F-4 - F-6 Consolidated Balance Sheets as of December 31, 1996
and 1995
F-7 - F8 Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994
F-9 Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994
F-9 - F-12 Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994
F-13 - F-33 Notes to Financial Statements

2. Financial Statement Schedules
None

3. Reports on Form 8-K
None

4. Exhibits

20

NETSMART TECHNOLOGIES, INC.

F - 1

NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------

INDEX
- - ------------------------------------------------------------------------------

Page to Page

Independent Auditor's Report................................F-3

Balance Sheets..............................................F-4.....F-6

Statements of Operations....................................F-7.....F-8

Statements of Stockholders' Equity..........................F-9

Statements of Cash Flows....................................F-10....F-12

Notes to Financial Statements ..............................F-13....F-33

. . . . . . . . . . .

F - 2

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Stockholders of
Netsmart Technologies, Inc.
New York, New York

We have audited the accompanying consolidated balance sheets of
Netsmart Technologies, Inc. [formerly CSMC Corporation] and its subsidiary as of
December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 subsidiary as of December 31, 1996 and 1995
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.

MOORE STEPHENS, P. C.
Certified Public Accountants.

Cranford, New Jersey
March 21, 1997, except as to note 5
for which the date is April 8, 1997

F - 3

NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEETS
- - ------------------------------------------------------------------------------

December 31,
1 9 9 6 1 9 9 5
Assets:
Current Assets:
Cash and Cash Equivalents $ 998,317 $ --
Accounts Receivable - Net 2,284,450 2,112,000
Costs and Estimated Profits in Excess
of Interim Billings 931,786 415,000
Other Current Assets 82,205 14,000
-------------- -----------

Total Current Assets 4,296,758 2,541,000
------------ -----------

Property and Equipment - Net 382,586 347,000
------------- -----------

Other Assets:
Software Development Costs 250,920 --
Investment in Joint Venture at Equity 120,546 --
Customer Lists 3,128,814 3,442,000

Other Assets 71,105 60,000
-------------- ------------

Total Other Assets 3,571,385 3,502,000
------------ ------------

Total Assets $ 8,250,729 $ 6,390,000
=========== =============

See Notes to Financial Statements.

F - 4

NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEETS
- - ------------------------------------------------------------------------------

December 31,
1 9 9 6 1 9 9 5

Liabilities and Stockholders' Equity:
Current Liabilities:
Cash Overdraft $ -- $ 95,000
Notes Payable - Bank -- 79,000
Notes Payable - Other 590,031 1,003,000
Capitalized Lease Obligations 41,449 169,000
Accounts Payable 983,156 1,186,000
Accrued Expenses 991,075 1,323,000
Interim Billings in Excess of Costs
and Estimated Profits 1,102,105 940,000
Due to Related Parties 23,542 167,000
Deferred Revenue 88,420 141,000

Total Current Liabilities - Forward 3,819,778 5,103,000
----------- ----------

Capitalized Lease Obligations - Forward 15,945 34,000
----------- -----------

Subordinated Debt - Related Party - Forward -- 750,000
------------ -----------

Commitments and Contingencies - Forward -- --
------------- ------------

Redeemable Preferred Stock:
Series B 6% Redeemable Preferred Stock; 80 Shares
Authorized, Issued and Outstanding at
December 31, 1995 [Liquidation Preference
and Redemption Price of $96,000] - Forwa -- 96,000

See Notes to Financial Statements.

F - 5

NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------

BALANCE SHEETS
- - ------------------------------------------------------------------------------

December 31,
1 9 9 6 1 9 9 5
[Consolidated] [Consolidated]
Total Current Liabilities - Forwarded $ 3,819,778 $ 5,103,000
------------- ------------

Capitalized Lease Obligations - Forwarded 15,945 34,000
---------------- ------------

Subordinated Debt - Related Party - Forwarded 750,000
----------------- ------------

Commitments and Contingencies - Forwarded --
------------------ ------------

Redeemable Preferred Stock - Forwarded 96,000
------------------ ------------

Stockholders' Equity:
Preferred Stock, $.01 Par Value; Authorized 3,000,000
Shares; Authorized, Issued and Outstanding:

Series A 4% Convertible Redeemable Preferred Stock -
$.01 Par Value 400 Shares Authorized, Issued and
Outstanding at December 31, 1995 [Liquidation
Preference of $40,000] -- --

Series D 6% Redeemable Preferred Stock -
$.01 Par Value 3,000 Shares Authorized,
1,210 and 2,210 Issued and Outstanding
[Liquidation Preference of $1,210,000 and
$2,210,000] at December 31, 1996 and
December 31, 1995, Respectively 12 --

Additional Paid-in Capital - Preferred
Stock [$40,000 - Series A; $1,209,509
- Series D at December 31, 1996, $2,210,000
- Series D at December 31, 1995] 1,209,509 2,250,000

Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued and Outstanding
6,798,203 Shares at December 31, 1996,
3,011,253 Shares at December 31, 1995 67,982 30,000

Additional Paid-in Capital - Common Stock 14,863,328 3,274,000

Accumulated Deficit (11,725,825) (5,147,000)
------------ -----------

Total Stockholders' Equity 4,415,006 407,000
------------ ------------

Total Liabilities and Stockholders' Equity $ 8,250,729 $6,390,000
=========== ==========
See Notes to Financial Statements.

F - 6

NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------

STATEMENTS OF OPERATIONS
- - ------------------------------------------------------------------------------

Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Consolidated] [Consolidated] [Combined]
Revenues:
Software and Related
Systems and Services:
General $ 5,108,095 $ 4,541,000 $ 1,539,000
Maintenance Contract
Services 1,225,709 1,099,000 501,000
--------- --------- -----------

Total Software and Related
Systems and Services 6,333,804 5,640,000 2,040,000

Data Center Services 2,207,155 1,742,000 884,000
--------- --------- ----------

Total Revenues 8,540,959 7,382,000 2,924,000
--------- --------- ---------

Cost of Revenues:
Software and Related
Systems and Services:
General 5,114,882 3,986,000 1,669,000
Maintenance Contract
Services 595,366 743,000 449,000
------- ---------- ----------

Total Software and Related
Systems and Services 5,710,248 4,729,000 2,118,000

Data Center Services 1,220,368 889,000 416,000
--------- ---------- ----------

Total Cost of Revenues 6,930,616 5,618,000 2,534,000
--------- --------- ---------

Gross Profit 1,610,343 1,764,000 390,000

Provision for Doubtful Accounts 260,000 8,000 --

Selling, General and
Administrative Expenses 1,661,854 2,478,000 1,495,000

Related Party Administrative
Expenses 69,000 18,000 19,000

Stock Based Compensation 3,492,300 -- --

Research and Development 278,000 699,000 367,000
-------- ---------- ---------

Loss from Operations (4,150,811) (1,433,000) (1,491,000)

Financing Costs 1,692,000 863,000 --

Interest Expense 472,548 355,000 71,000

Equity in Net Loss of Joint
Venture 264,085 -- --

See Notes to Financial Statements.

F - 7

NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------

STATEMENTS OF OPERATIONS
- - ------------------------------------------------------------------------------

Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Consolidated] [Consolidated] [Combined]

Related Party Interest
Expense -- 199,000 189,000
---------- --------- -----------

Net Loss $ (6,579,444) $ (2,850,000) $ (1,751,000)
============= ============= =============

Loss Per Share $ (1.28) $ (.59) $ (.36)
============= ============= =============

Number of Shares of
Common Stock 5,149,253 4,821,528 4,821,528
============= ============= =============

See Notes to Financial Statements.

F - 8

NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------

STATEMENTS OF STOCKHOLDERS' EQUITY
- - ------------------------------------------------------------------------------

Series A Series D Additional Common Stock Additional
Preferred StockPreferred StocPaid-in $.01 Par Value Paid-in
at .01 at .01 Capital Authorized Capital Total
Par Value Par Value Preferred 15,000,000 ShareCommon Accumulate Stockholders'
Shares Amount Shares Amount Stock Shares Amount Stock Deficit Equity

Balance - December 31, 1993 400 $ -- -- $ -- $ 40,000 1,050,003 $ 11,000 $ 46,000 $(546,000) $ (449,000)

Allocated Related Party
Administrative Expenses -- -- -- -- -- -- -- 19,000 -- 19,000

Combination with CSM -- -- -- -- -- -- -- 2,936,000 -- 2,936,000

Net Loss -- -- -- -- -- -- -- -- (1,751,000)(1,751,000)
-- -- -- -- -- -- -- -- ---------- ----------
Balance - December 31, 1994
[Combined] 400 -- -- -- 40,000 1,050,003 11,000 3,001,000 (2,297,000) 755,000

Allocated Related Party
Administrative Expenses -- -- -- -- -- -- -- 18,000 -- 18,000

Common Stock Issued to Affiliate -- -- -- -- -- 825,000 8,000 (8,000) -- --

Common Stock and Preferred Stock
241,000 -- 2,462,000

Common Stock Issued to Officer for
Services -- -- -- -- -- 11,250 -- 22,000 -- 22,000

Net Loss -- -- -- -- -- -- -- -- (2,850,000)(2,850,000)
-- -- -- -- -- -- -- --------- ----------

Balance - December 31, 1995
[Consolidated] 400 4 2,210 22 2,249,505 3,011,253 30,113 3,273,968 (5,146,381) 407,221

Common Stock Issued in Exchange for
Ser D and Ser A Preferred Stock (400) (4) (1,000) (10) (1,039,996) 1,168,200 11,681 1,028,319 -- --

Allocated Related Party
Administrative Expenses -- -- -- -- -- -- -- 9,000 -- 9,000

Compensation from the Issuance of
Common Stock Warrants -- -- -- -- -- -- -- 3,492,300 -- 3,492,300

Common Stock Issued - Initial
Public Offering 1,293,750 12,938 5,162,063 5,175,001

Common Stock Issued - Exercise of
Warrants 800,000 8,000 1,592,000 1,600,000

Common Stock Issued -
Financing Costs 525,000 5,250 1,674,750 1,680,000

Costs Associated with Issuance
of Stock (1,369,072) (1,369,072)

Net Loss -- -- -- -- -- -- -- (6,579,444)(6,579,444)
------------------------------------------------------------------------------------------------
Balance - December 31, 1996
[Consolidated] -- -- 1,210 12 $1,209,509 6,798,203 $67,982 $14,863,328(11,725,82)$4,415,006
See Notes to Financial Statements.

F - 9

NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------

STATEMENTS OF CASH FLOWS
- - ------------------------------------------------------------------------------

Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------
[Consolidated] [Consolidated] [Combined]

Operating Activities:
Net Loss $ (6,579,444) $ (2,850,000) $ (1,751,000)
--------------- ------------ --------------
Adjustments to Reconcile Net
Loss to Net Cash [Used
for] Provided by Operating Activities:
Depreciation and Amortization 486,566 872,00 470,000
Administrative Expenses 9,000 8,000 19,000
Additional Compensation Related to the
issuance of Equity Instruments 3,492,300 22,000 236,000
Financing Expenses related to the
issuance of Common Stock 1,680,000 -- --
Write Off of Deferred Public
Offering Costs -- 460,000 --
Equity in Net Loss of Joint Venture 264,085 21,000 15,000
Provision for Doubtful Accounts 260,000 8,000 --

Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (431,478) (388,000) (369,000)
Costs and Estimated Profits in
Excess of Interim Billings (516,707) 87,000 (233,000)
Other Current Assets (68,810) 10,000 45,000
Other Assets (10,502) -- (3,000)

Increase [Decrease] in:
Accounts Payable (202,620) 159,000 13,000
Accrued Expenses (332,174) 935,000 199,000
Interim Billings in Excess of
Costs and Estimated Profits 160,626 (217,000) 413,000
Accrued Payroll Taxes and
Related Expenses -- -- (276,000)
Due to Related Parties (143,458) 496,000 1,629,000
Deferred Revenue (52,580) 141,000 --
-------------------- ----------- -------------------

Total Adjustments 4,594,248 2,624,000 2,158,000
--------------------- ----------- -------------------

Net Cash - Operating Activities -
Forward (1,985,196) (226,000) 407,000
--------------------- ----------- --------------------

Investing Activities:
Acquisition of Property and
Equipment (181,033) (138,000) (122,000)
Software Development Costs (278,800) (177,000)
Investment in Joint Venture (384,631) (25,000)
Cash Acquired in Combination
with CSM 31,000

Net Cash - Investing Activities -
Forward) $ (844,464) $ (138,000) $ (293,000)
See Notes to Financial Statements.

F - 10

NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------

STATEMENTS OF CASH FLOWS
- - ------------------------------------------------------------------------------

Y e a r s e n d e d
D e c e m b e r 3 1,
1 9 9 6 1 9 9 5 1 9 9 4
------- ------- -------

[Consolidated] [Consolidated] [Combined]

Net Cash - Operating Activities -
Forwarded $ (1,985,196) $ (226,000) $ 407,000
--------------- -------------- --------------

Net Cash - Investing Activities -
Forwarded (844,464) (138,000) (293,000)
--------------- -------------- --------------

Financing Activities:
Proceeds from Short-Term Notes 500,000 831,000 200,000
Payment of Short-Term Notes 912,270) (190,000) --
Payment of Bank Note Payable 79,000) (175,000) (60,000)
Payment of Short-Term Notes
to related party 750,000) --
Payment of Capitalized Lease
Obligations 145,146) (29,000) (8,000)
Issuance of Common Stock 5,175,000 --
Proceeds from Warrant exercise 1,600,000 --
Cash Overdraft (95,536) 56,000 37,000
Redemption of Series B Preferred Stock (96,000) --
Costs associated with issuance of Stock (1,369,071)
Deferred Public Offering Costs (129,000) (283,000)
--------------- ------------ --------------

Net Cash - Financing Activities 3827,977 364,000 (114,000)
-------------- ------------ --------------

Net Increase [Decrease] in Cash 998,317 --

Cash - Beginning of Periods --
-------------- ----------- --------------

Cash - End of Periods $ 998,317 $ -- $ --
=============== ============ ===============

Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest $ 481,856 $ 349,000 $ 76,000

Supplemental Disclosures of Non-Cash Investing and Financing Activities:

During the year ended December 31, 1996, the Company had the following:

SISC exchanged 1,000 shares of Series D preferred stock for 1,125,000 shares of
common stock. As a result of this exchange the aggregate redemption price of the
Series D preferred stock was reduced to $1,210,000. The Series A preferred stock
was converted into 43,200 shares of common stock in a transaction valued at
$43,200.

Pursuant to an agreement with four accredited investors, the Company issued
250,000 units composed of two shares of common stock and one Series A Common
Stock purchase warrant. The Company incurred a one time non-cash charge of
$1,611,000.

Pursuant to a modification of an agreement with an asset based lender the
Company issued 25,000 common shares to such lender and incurred a one-time
non-cash finance charge of $81,000.

F - 11

NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------

STATEMENTS OF CASH FLOWS
- - ------------------------------------------------------------------------------

The Company granted stock options to purchase an aggregate of 242,000 shares of
common stock and recognized compensation expense of $154,800.

The Company granted 3,573,125 Series B Common Stock purchase warrants and
896,875 Series A Common Stock purchase warrants and recognized compensation
expense of $3,337,500.

During the year ended December 31, 1995, the Company had the following:

1) $388,000 of accrued interest owed to SISC was exchanged for 1,125,000
shares of common stock.

2) $2,210,000 of SISC debt was exchanged for 2,210 shares of Series D
Preferred Stock.

3) 825,000 shares of common stock were issued to Holdings as follows:

A) 750,000 shares were issued in connection with the transfer of the
Acquisition Corp. stock to CSMC.

B) 75,000 shares were issued in respect of certain indebtedness
guaranteed by Consolidated.

See Notes to Financial Statements.

F - 12

NETSMART TECHNOLOGIES, INC.
- - ------------------------------------------------------------------------------

NOTES TO FINANCIAL STATEMENTS, Sheet #1
- - ------------------------------------------------------------------------------

[1] Financial Statement Presentation, Organization and Nature of Operations

The financial statements as of December 31, 1996 and 1995 are presented on a
consolidated basis and include Netsmart Technologies, Inc. [formerly "CSMC
Corporation" and "Carte Medical Corporation"] ["Netsmart"], and its wholly-owned
subsidiary, Creative Socio-Medics Corp. ["CSM"] [collectively, the "Company"].
All intercompany transactions are eliminated in consolidation.

The financial statements as of December 31, 1994, which include Netsmart and CSM
commencing July 1, 1994, are presented on a combined basis because they are
under common control. All intercompany transactions are eliminated in
combination. The acquisition by Carte Medical Holdings, Inc. ["Holdings"], the
principal stockholder of Netsmart, of CSM occurred on June 16, 1994. The
operations of CSM from that date to June 30, 1994 were not substantial and are
not included in the combined financial statements as of December 31, 1994. The
financial statements prior to July 1, 1994 reflect the results of operations and
financial position of Netsmart.

Netsmart was incorporated on September 9, 1992 to engage in the development and
marketing of an integrated proprietary software system designed to run on
multiple systems in a distributed network environment. Netsmart's marketing
effort through December 31, 1996 was primarily directed at managed care
organizations and methadone clinics and other substance abuse facilities
throughout the United States. Netsmart's software operates on computer networks,
including networks based on personal computers, and so-called "smart cards." A
smart card is a plastic card the size of a standard credit card which combines
data storage capacity and access to information along with computing capacity
within a single embedded microprocessor chip contained in the card.

Netsmart is controlled by Consolidated Technology Group Ltd. ["Consolidated"],
a public company, through its wholly-owned subsidiary Holdings. Prior to
June 16, 1994, Netsmart's principal stockholder was SIS Capital Corp. ["SISC"],
a wholly-owned subsidiary of Consolidated. Netsmart's chairman of the board is
the chief executive officer of Consolidated.

In April 1994, Netsmart entered into an Agreement and Plan of Reorganization
[the "Purchase Agreement"] among Consolidated, Netsmart, CSM Acquisition Corp.
["Acquisition Corp."], a wholly-owned subsidiary of Consolidated, Creative
Socio-Medics ["Old CSM"], and Advanced Computer Techniques, Inc. ["ACT"], Old
CSM's parent.

Pursuant to the Purchase Agreement, in June 1994, Acquisition Corp. acquired the
assets and assumed liabilities of Old CSM in exchange for 800,000 shares of
Consolidated's common stock and $500,000 cash which was advanced by Netsmart
from a loan from SISC. The following summarizes the purchase price allocated to
acquired assets at fair value:

Cash $ 500,000
Stock of Consolidated 2,700,000
----------

Purchase Cost $ 3,200,000
------------- ===============

Allocated to:
Customer Lists $ 3,851,000
Accounts Receivable 1,363,000
Costs and Estimated Profits in Excess of
Billings 269,000
Property and Equipment 261,000
Other Assets 213,000
Liabilities Assumed (2,757,000)
----------

Total $ 3,200,000
----- ===============

F - 13

NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
- - ------------------------------------------------------------------------------

[1] Financial Statement Presentation, Organization and Nature of Operations
[Continued]

The value of Consolidated stock was calculated based on the 800,000 shares of
common stock given per the acquisition agreement at the fair value of $3.375 per
share. The fair value was determined based on the average trading price of
Consolidated common stock for a period before and after the acquisition date.
The $2,700,000 is recorded as additional paid-in capital since such amount will
not be reimbursed.

In June 1994, SISC formed a wholly-owned subsidiary, Holdings, and transferred
its stock in Netsmart and Acquisition Corp. to Holdings. On September 30, 1995,
the stock of Acquisition Corp., whose name had been changed to Creative
Socio-Medics Corp. in June 1994, was transferred to the Company. At the same
time, the Company issued 825,000 shares of its common stock to Holdings, of
which 750,000 shares were issued in connection with the transfer of the
Acquisition Corp. stock and 75,000 shares were issued in respect of certain
indebtedness guaranteed by Consolidated.

At the time of the execution of the Purchase Agreement, SISC granted three
officers of Old CSM, who became officers of the Company, options to purchase an
aggregate of 151,920 shares of common stock at $.232 per share. The value of the
options is based on a fair value of approximately $.89 per share of the
Company's common stock less the exercise price of $.232 per share. The fair
value was determined based on the financial condition of the Company at the time
the options were granted. The shares subject to option are outstanding shares
which were owned by SISC and transferred to Holdings subject to the options. The
Company has granted to these individuals certain piggy back registration rights
with respect to the shares of common stock issuable upon exercise of the
options. The value of these options is approximately $100,000 and is treated as
compensation by the Company. At the closing of the purchase of Old CSM,
Consolidated transferred to such three officers an aggregate of 40,000 shares of
Consolidated common stock, which were valued at approximately $136,000. The
value of such shares is treated as compensation by the Company. The value of
Consolidated stock was determined on a consistent basis with those shares given
in the acquisition. The amounts of $100,000 and $136,000 were credited to
additional paid-in capital.

The following pro forma unaudited results assumes the acquisition of CSM had
occurred at the beginning of 1994:
Year ended
December 31,1 9 9 4

Net Revenues $ 5,050,000
=============

Net Loss $ (2,136,000)
============

Loss Per Share $ (.44)
=============

Number of Shares of Common Stock 4,821,528
=============

[2] Summary of Significant Accounting Policies

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 $1,000,000 at December 31, 1996.

F - 14

NETSMART TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- - ------------------------------------------------------------------------------

[2] Summary of Significant Accounting Policies [Continued]

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 from its customers. 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. Such estimate of the financial
strength of such customers may be subject to change in the near term.

The Company's 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, 1996, 1995 and 1994,
approximately 31%, 54% and 49% of th