UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2003
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: (631) 968-2000
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__
Number of shares of common stock outstanding as of April 29, 2003: 4,006,633
=========
Netsmart Technologies, Inc. and Subsidiary
Index
Part I: - Financial Information:
Item 1. Financial Statements: Page
----
Condensed Consolidated Balance Sheets - March 31, 2003 (Unaudited)
and December 31, 2002 1-2
Condensed Consolidated Statements of Income - (Unaudited)
Three Months Ended March 31, 2003 and March 31, 2002 3
Condensed Consolidated Statements of Cash Flows - (Unaudited)
Three Months Ended March 31, 2003 and March 31, 2002 4-5
Condensed Consolidated Statements of Stockholders' Equity - (Unaudited)
Three Months Ended March 31, 2003 6-7
Notes to Condensed Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-15
Item 3. Quantitive and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K 16
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
March 31, December 31,
-------- -----------
2003 2002
---- ----
Unaudited
---------
Assets:
Current Assets:
Cash and Cash Equivalents $ 8,430,541 $ 7,251,740
Accounts Receivable - Net 6,543,297 7,058,855
Costs and Estimated Profits in Excess
of Interim Billings 2,912,372 3,857,522
Deferred taxes 459,000 459,000
Other Current Assets 169,900 196,577
---------- ----------
Total Current Assets 18,515,110 18,823,694
---------- ----------
Property and Equipment - Net 450,381 364,306
---------- ----------
Other Assets:
Software Development Costs - Net 311,532 382,387
Customer Lists - Net 2,023,032 2,141,855
Deferred taxes less current portion 441,000 441,000
Other Assets 110,163 121,419
---------- ----------
Total Other Assets 2,885,727 3,086,661
---------- ----------
Total Assets $21,851,218 $22,274,661
========== ==========
See Notes to Condensed Consolidated Financial Statements.
1
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
March 31, December 31,
-------- -----------
2003 2002
---- ----
Unaudited
---------
Liabilities and Stockholders' Equity:
Current Liabilities:
Current Portion - Long Term Debt $ 500,000 $ 500,000
Current Portion Capital Lease Obligations 20,284 9,886
Accounts Payable 463,803 1,166,145
Accrued Expenses 930,156 922,417
Interim Billings in Excess of Costs and Estimated
Profits 6,428,427 5,914,970
Deferred Revenue 659,112 1,095,412
---------- -----------
Total Current Liabilities 9,001,782 9,608,830
---------- -----------
Capital Lease Obligations - Less current portion 24,882 1,864
Long Term Debt - Less current portion 1,125,014 1,250,012
Interest Rate Swap at Fair Value 98,617 107,713
---------- -----------
Total Non Current Liabilities 1,248,513 1,359,589
---------- -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock - $.01 Par Value, 3,000,000
Shares Authorized; None issued and outstanding -- --
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued 4,046,430 shares at
March 31, 2003 and December 31, 2002 40,464 40,464
Additional Paid in Capital 21,411,777 21,411,777
Unearned Compensation -- (14,400)
Accumulated Comprehensive loss - Interest Rate Swap (98,617) (107,713)
Accumulated Deficit (9,104,589) (9,375,774)
---------- ----------
12,249,035 11,954,354
Less cost of shares of Common Stock held
in treasury - 89,797 shares at March 31, 2003
and December 31, 2002 648,112 648,112
---------- ----------
Total Stockholders' Equity 11,600,923 11,306,242
---------- ----------
Total Liabilities and Stockholders' Equity $21,851,218 $22,274,661
========== ==========
See Notes to Condensed Consolidated Financial Statements.
2
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - (Unaudited)
--------------------------------------------------------------------------------
Three months ended
March 31
------------------
2003 2002
---- ----
Revenues:
Software and Related
Systems and Services:
General $3,946,961 $2,851,889
Maintenance Contract
Services 1,713,554 1,508,490
--------- ---------
Total Software and Related
Systems and Services 5,660,515 4,360,379
Data Center Services 458,538 469,693
--------- ---------
Total Revenues 6,119,053 4,830,072
--------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 2,560,642 2,008,581
Maintenance Contract
Services 866,126 875,075
--------- ---------
Total Software and Related
Systems and Services 3,426,768 2,883,656
Data Center Services 266,212 260,933
--------- ---------
Total Cost of Revenues 3,692,980 3,144,589
--------- ---------
Gross Profit 2,426,073 1,685,483
--------- ---------
Selling, General and
Administrative Expenses 1,590,583 1,203,195
Research and Development 510,437 328,929
--------- ---------
Total 2,101,020 1,532,124
--------- ---------
Income from Operations before Interest 325,053 153,359
Interest Income 12,303 9,179
Interest Expense (33,171) (51,374)
--------- ---------
Income before Income Tax Expense 304,185 111,164
Income Tax Expense 33,000 8,000
--------- ---------
Net Income $ 271,185 $ 103,164
========= =========
Earnings Per Share of Common Stock:
Basic:
Net Income $ .07 $ .03
========= =========
Weighted Average Number of Shares of
Common Stock Outstanding 3,956,633 3,695,334
========= =========
Diluted:
Net Income $ .06 $ .03
========= =========
Weighted Average Number of Shares of
Common Stock and Common Stock
Equivalents Outstanding 4,356,021 4,066,402
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
--------------------------------------------------------------------------------
Three months ended
March 31,
------------------
2003 2002
---- ----
Operating Activities:
Net Income $ 271,185 $ 103,164
--------- --------
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation and Amortization 247,900 292,379
Provision for Doubtful Accounts 25,567 90,000
Amortization of Warrants Issued for Services 14,400 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 489,991 298,211
Costs and Estimated Profits in
Excess of Interim Billings 945,150 50,612
Other Current Assets 26,677 (23,198)
Other Assets 11,256 28,736
Increase [Decrease] in
Accounts Payable (702,342) 258,657
Accrued Expenses 7,739 79,096
Interim Billings in Excess of
Costs and Estimated Profits 513,457 (897,250)
Deferred Revenue (436,300) 17,697
--------- --------
Total Adjustments 1,143,495 194,940
--------- --------
Net Cash Provided by
Operating Activities 1,414,680 298,104
--------- --------
Investing Activities:
Acquisition of Property and Equipment (108,524) (67,235)
--------- --------
Net Cash Used In Investing Activities (108,524) (67,235)
--------- --------
See Notes to Condensed Consolidated Financial Statements.
4
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
--------------------------------------------------------------------------------
Three months ended
March 31,
------------------
2003 2002
---- ----
Financing Activities:
Payment of Capitalized Lease Obligations $ (2,357) $ (9,538)
Net Proceeds from Stock Options Exercised -- 9,550
Payments of Term Loan (124,998) (124,998)
--------- ---------
Net Cash Used in Financing Activities (127,355) (124,986)
--------- ---------
Net Increase in Cash
and Cash Equivalents 1,178,801 105,883
Cash and Cash Equivalents -
Beginning of Period 7,251,740 3,837,226
--------- ---------
Cash and Cash Equivalents -
End of Period $8,430,541 $3,943,109
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 34,358 $ 44,082
Income Taxes $ 65,381 $ 4,607
Non Cash Investing and Financing Activities:
The fair value of the interest rate swap calculated at March 31, 2003 was
$98,617. The fair value of the interest rate swap calculated at March 31, 2002
was $49,818. The Company acquired equipment in the amount of $35,773 in
connection with a capital lease during the quarter ended March 31, 2003.
See Notes to Condensed Consolidated Financial Statements.
5
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
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CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Unaudited)
--------------------------------------------------------------------------------
For the Three Months Ended March 31, 2003
Common Stock $.01 Par Value Authorized Shares Amount
15,000,000 Shares ------ ------
Beginning Balance - December 31, 2002 4,046,430 $ 40,464
--------- -------
Ending Balance - March 31, 2003 4,046,430 $ 40,464
========= =======
See Notes to Condensed Consolidated Financial Statements.
6
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Unaudited)
--------------------------------------------------------------------------------
For the Three Months Ended March 31, 2003
Additional Paid-In Capital Common Stock: Shares Amount
------ ------
Beginning Balance - December 31, 2002 $ 21,411,777
----------
Ending Balance - March 31, 2003 $ 21,411,777
==========
Accumulated Deficit
Beginning Balance - December 31, 2002 $ (9,375,774)
Net Income 271,185
----------
Ending Balance - March 31, 2003 $ (9,104,589)
==========
Accumulated Comprehensive Loss - Interest Rate Swap:
Beginning Balance - December 31, 2002 $ (107,713)
Change in Fair Value of Interest Rate Swap 9,096
----------
Ending Balance - March 31, 2003 $ (98,617)
==========
Treasury Stock
Beginning Balance - December 31, 2002 89,797 $ (648,112)
------ ----------
Ending Balance - March 31, 2003 89,797 $ (648,112)
------ ----------
Total Stockholders' Equity $ 11,600,923
==========
Unearned Compensation
Beginning Balance - December 31, 2002 $ (14,400)
Amortization of Warrants Issued for Services 14,400
----------
Ending Balance - March 31, 2003 $ --
==========
See Notes to Condensed Consolidated Financial Statements.
7
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(1) In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company as
of March 31, 2003 and the results of its operations for the three months ended
March 31, 2003 and 2002 and the changes in cash flows for the three months ended
March 31, 2003 and 2002. The results of operations for the three months ended
March 31, 2003 are not necessarily indicative of the results to be expected for
the full year.
(2) The accounting policies followed by the Company are set forth in Notes 1 and
2 to the Company's consolidated financial statements as filed in its Form 10-K
for the year ended December 31, 2002.
(3) Income per share - The following table sets forth the components used in the
computation of basic and diluted earnings per share:
Three Months Ended March 31,
---------------------------
2003 2002
---- ----
Numerator:
Net income $ 271,185 $ 103,164
========= =========
Denominator:
Weighted average shares 3,956,633 3,695,334
--------- ---------
Effect of dilutive securities:
Employee stock option 371,448 370,338
Stock warrants 27,940 730
--------- ---------
Dilutive potential common shares 399,388 371,068
--------- ---------
Denominator for diluted earnings per
share-adjusted weighted average shares
after assumed conversions 4,356,021 4,066,402
========= =========
(4) Stock Options and Similar Equity Instruments - At March 31, 2003, the
Company had three stock-based employee compensation plans. As permitted under
SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure", which amended SFAS No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation", the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee compensation
arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", and related interpretations
including Financial Accounting Standards Board Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation", an
interpretation of APB No. 25. No stock-based employee compensation cost is
reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
8
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation:
Three Months Ended
March 31,
2003 2002
---- ----
Net Income as Reported $271,185 $103,164
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of related tax effect 136,401 20,117
------- -------
Pro Forma Net Income $134,784 $ 83,047
======= =======
Basic Net Income Per Share as Reported $ .07 $ .03
======= =======
Basic Pro Forma Net Income Per Share $ .03 $ .02
======= =======
Diluted Net Income Per Share as Reported $ .06 $ .03
======= =======
Diluted Pro Forma Net Income Per Share $ .03 $ .02
======= =======
The fair value of options at date of grant was estimated using the Black-Scholes
fair value based method with the following weighted average assumptions:
2003 2002
---- ----
Expected Life (Years) 5 5
Interest Rate 4.00% 4.00%
Annual Rate of Dividends 0% 0%
Volatility 68% 63%
The weighted average fair value of options at date of grant using the fair value
based method during 2003 is estimated at $1.42.
(5) Income Taxes - The provision for income taxes for the period ended March 31,
2003, reflects a deferred tax provision of approximately $137,000 offset by a
reduction in the deferred tax asset valuation allowance of the same amount.
(6) On January 27, 2003, following stockholder approval of the amendment to the
2001 Plan to increase the number of shares of common stock available for
issuance pursuant to the 2001 Plan, the Company granted to employees options to
purchase 217,500 shares under the 2001 Plan at a price per share of $4.93, which
was the fair market value at the date of grant. The options generally vest 50%
after six months and 100% after one year.
(7) The Company currently classifies its operations into two business segments:
(1) Software and Related Systems and Services and (2) Data Center Services.
Software and Related Systems and Services is the design, installation,
implementation and maintenance of computer information systems that provide
comprehensive healthcare information technology solutions including billing,
patient tracking and scheduling for inpatient and outpatient environments, as
well as clinical documentation and medical record generation and management.
Data Center
9
Services involve Company personnel performing data entry and data processing
services for customers. Intersegment sales and sales outside the United States
are not material. Information concerning the Company's business segments are as
follows:
Software and
------------
Related Systems Data Center
--------------- -----------
Three Months Ended March 31, and Services Services Consolidated
--------------------------- ------------ -------- ------------
2003
Revenue $ 5,660,515 $ 458,538 $ 6,119,053
Income before income taxes 229,164 75,021 304,185
Total identifiable assets at
March 31, 2003 20,175,008 1,676,210 21,851,218
2002
Revenue $ 4,360,379 $ 469,693 $ 4,830,072
Income before income taxes 43,927 67,237 111,164
Total identifiable assets at
March 31, 2002 15,771,078 1,672,673 17,443,751
(8) On February 27, 2003, the Board of Directors authorized management to
purchase up to $100,000 of its common stock at any time the market price is less
than $3.50 per share. Purchases of stock will be made from time to time,
depending on market conditions, in open market or in privately negotiated
transactions, at prices deemed appropriate by management. There is no set time
limit on the purchases. The Company expects to fund these stock repurchases from
its operating cash flow. As of March 31, 2003, the Company has not made any
stock repurchases.
(9) On April 7, 2003, warrants to purchase 50,000 shares were exercised and the
Company received gross proceeds of $134,500.
(10) New Accounting Pronouncements - In April 2002, the FASB issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". SFAS No. 145 requires that gains
and losses from extinguishment of debt be classified as extraordinary items only
if they meet the criteria in Accounting Principles Board Opinion No. 30
("Opinion No. 30"). Applying the provisions of Opinion No. 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual and infrequent that meets the criteria for classification as an
extraordinary item. The Company adopted SFAS No. 145 during the first quarter of
fiscal 2003. The adoption of this standard did not have a material effect on the
Company's consolidated financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value when the liability is incurred. SFAS No.
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. The adoption of this standard did not have a material effect
on the Company's consolidated financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, ("FIN 45") "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires a company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The initial recognition
requirements of FIN 45 are effective for guarantees issued or modified after
December 31, 2002. The Company's adoption of the recognition requirements of FIN
10
45 did not have a material effect on its consolidated financial position or
results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional financial support from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company does not expect the adoption of FIN
46 will have a material effect on its consolidated financial position or results
of operations.
(11) In January 2003, warrants to purchase 448,535 shares of common stock at
$12.00 per share were extended from January 31, 2003 to April 30, 2003. In April
2003, the Company agreed to extend these same warrants from April 30, 2003 to
July 31, 2003. The Company re-measured the fair value of the warrants at the
dates of extension. No financing costs were recorded associated with the warrant
extensions, as there was no material change in their fair value.
(12) Reclassifications - Certain accounts in the prior year financial statements
have been reclassified for comparative purposes to conform to the presentation
in the current year financial statements. These reclassifications have no effect
on previously reported income.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Our operations are grouped into two segments:
|*| Software and Related Systems and Services
|*| Data Center [service bureau services]
Results of Operations
Fixed price software development contracts and licenses accounted for 49% of
consolidated revenue for the three months ended March 31, 2003 and 2002,
respectively. We recognize revenue for fixed price contracts on the estimated
percentage of completion basis. Since the billing schedules under the contracts
differ from the recognition of revenue, at the end of any period, these
contracts generally result in either costs and estimated profits in excess of
billing or billing in excess of cost and estimated profits. Revenue from fixed
price software development contracts is determined using the percentage of
completion method which is based upon the time spent by our technical personnel
on a project. As a result, during the third and fourth quarters, when many of
our employees are on vacation and holidays, our revenue could be affected. Our
time spent on projects during the second half of the year generally ranges from
1% to 3% less than time spent on projects during the first half of the year.
Three Months Ended March 31, 2003 and 2002
Our total revenue for the three months ended March 31, 2003 (the "March 2003
period") was $6,119,000, an increase of $1,289,000, or 27%, from our revenue for
the three months ended March 31, 2002 (the March 2002 period"), which was
$4,830,000. Revenue from contracts from government agencies represented 62% of
revenue in the March 2003 period and 41% of revenue in the March 2002 period.
This reflects an increase in new government contracts, particularly relating to
contracts with two new county agencies.
Software and Related Systems and Services
Our Software and Related Systems and Services revenue for the March 2003 period
was $5,661,000, an increase of $1,300,000, or 29.8%, from our revenue for the
March 2002 period, which was $4,360,000. Software and related systems and
services revenue is comprised of turnkey systems labor revenue, revenue from
sales of third party hardware and software, license revenue, maintenance revenue
and revenue from small turnkey systems.
The largest component of revenue was turnkey systems labor revenue, which
increased to $2,184,000 in the March 2003 period, from $1,636,000 in the March
2002 period, reflecting a 34% increase. Turnkey systems labor revenue refers to
labor associated with turnkey installations and includes categories such as
training, installation, project management and development. This increase was
substantially the result of an increase in spending for information systems in
the human services marketplace and our ability to provide the staff necessary to
generate additional revenue. Labor rate price changes from March 2003 period to
the March 2002 period resulted in a 12% increase in the average daily billing
rate and accounted for approximately $168,000, or 31%, of the total turnkey
systems labor increase. Revenue from third party hardware and software increased
to $979,000 in the March 2003 period, from $492,000 in the March 2002 period,
which represents an increase of 99%. Sales of third party hardware and software
are made in connection with the sales of turnkey systems. These sales are
typically made at lower gross margins than our human services revenue. License
revenue increased to $594,000 in the March 2003 period, from $534,000 in the
March 2002 period, reflecting an increase of 11%. License revenue is generated
as part of a sale of a human services information system pursuant to a contract
or purchase order that includes delivery of the system and maintenance. This
increase in license revenue was the result of an increase in spending for
information systems in the human services marketplace. Maintenance revenue
increased to $1,714,000 in the March 2003 period, from $1,508,000 in the March
12
2002 period, reflecting an increase of 14%. As turnkey systems are completed,
they are transitioned to the maintenance division, thereby increasing our
installed base. Revenue from the sales of our small turnkey division remained
constant at $190,000 for both the March 2003 and 2002 periods. Small turnkey
division sales relate to turnkey contracts that are less than $50,000 and are
usually completed within one month.
Gross profit increased to $2,234,000 in the March 2003 period from $1,477,000 in
the March 2002 period, reflecting an increase of 51%. Our gross margin
percentage increased to 40% in the March 2003 period from 34% in the March 2002
period. Our gross margins have increased as a result of increased maintenance
and license revenue and to a lesser extent, an increase in our labor revenue.
Our infrastructure costs with respect to our maintenance division are
substantially in place and as new maintenance revenue occurs, our gross profit
margins are improved accordingly.
Data Center
Data center clients typically generate approximately the same amount of revenue
each year. We bill on a transaction basis or on a fixed fee arrangement.
Historically, each year, we increase the transaction or fixed fees by an amount
that approximates the New York urban consumer price index increase. The data
center revenue decreased to $459,000 in the March 2003 period, from $470,000 in
the March 2002 period, representing a decrease of $11,000, or 2%.
Gross profit decreased to $192,000 in the March 2003 period from $209,000 in
March 2002 period. Our gross margin percentage decreased to 42% in the March
2003 period from 44% in the March 2002 period. This decrease was the result of
the reduction in revenue with no corresponding decrease in costs.
Operating Expenses
Selling, general and administrative expenses were $1,591,000 in the March 2003
period, reflecting an increase of $388,000 or 32% from the $1,203,000 in the
March 2002 period. This increase was in the area of sales and marketing costs
which increased by $149,000, particularly salaries and commissions which
increased by $134,000, as well as an increase in general and administrative
salaries which increased by $107,000 and provisions for bonuses which increased
by $122,000.
We incurred product development expenses of $510,000 in the March 2003 period,
an increase of 55% from the $329,000 in March 2002 period. The increase in
product development expense is the result of continuing investment in product
enhancement and extensions. These extensions include the development of new
software modules including Minimum Data Set (MDS) reporting which is designed to
address Federal reporting requirements and a Computerized Physician Order Entry
(CPOE) module as well as continued investment in core products including a new
version of our addictions management software products. These amounts have been
appropriately accounted for in accordance with SFAS No. 86, "Accounting for the
Cost of Computer Software to be Sold, Leased, or Otherwise Marketed."
Interest expense was $33,000 in the March 2003 period, a decrease of $18,000, or
35%, from the $51,000 in the March 2002 period. This decrease the result of
reduced borrowing during the March 2003 period.
13
Interest income was $12,000 in the March 2003 period, an increase of $3,000, or
34%, from the $9,000 in the March 2002 period. Interest income is generated from
short-term investments made with a substantial portion of the proceeds received
from the term loan, as well as cash generated from operations.
We have a net operating loss tax carry forward of approximately $9 million. In
the March 2003 period, we recorded a current income tax expense of $33,000,
which related to various state and local taxes as well as a provision for the
Federal alternative minimum tax. In addition, we recognized a partial deferred
tax benefit in the amount of $137,000, which was offset by a reduction in the
deferred tax valuation allowance of the same amount. In the March 2002 period we
provided for taxes in the amount of $8,000. This provision was based upon
certain state taxes.
As a result of the foregoing factors, in the March 2003 period, we had a net
income of $271,000, or $.07 per share (basic) and $.06 per share (diluted). For
the March 2002 period, we had net income of $103,000, or $.03 per share basic
and diluted.
Liquidity and Capital Resources
We had working capital of approximately $9.5 million at March 31, 2003 as
compared to working capital of approximately $9.2 million at December 31, 2002.
The increase in working capital was substantially the result of our net income
after adding back depreciation and amortization and partially offset by the
acquisition of equipment.
In June 2001, we entered into a revolving credit and term loan agreement with
Fleet Bank ("Fleet"). This financing provides us with a five-year term loan of
$2.5 million, as well as a two year $1.5 million revolving line of credit. We
have begun preliminary discussions with Fleet with respect to the options
available to us upon the expiration of the revolving line of credit. The term
loan bears interest at LIBOR plus 2.5%. We have entered into an interest rate
swap agreement with Fleet whereby we converted our variable rate on the term
loan to a fixed rate of 7.95%. The revolving line of credit bears interest at
the Company's option to be equal to either (i) LIBOR plus 2.0% or (ii) the prime
rate and incur an annual facility fee of 0.5%. Under our revolving line of
credit, we can borrow up to 75% of eligible receivables up to a maximum of $1.5
million. The maximum available to us at March 31, 2003 under the borrowing base
formula was $1.5 million. The proceeds of the term loan are designated for
acquisitions as well as for product enhancements specific to California
requirements. The revolving line of credit is available for general working
capital needs. We did not use the revolving line of credit from inception
through March 31, 2003. We have made principal payments on the $2.5 million term
loan and the amount outstanding at March 31, 2003 is $1.63 million.
The terms of our revolving credit and term loan agreement require compliance
with certain covenants, including maintaining a minimum net equity of $9
million, minimum cash reserves of $500,000, maintenance of certain financial
ratios, limitations on capital expenditures and indebtedness and prohibition of
the payment of cash dividends. As of March 31, 2003, we were in compliance with
the financial covenants of this agreement.
On February 27, 2003, our Board of Directors authorized the purchase of up to
$100,000 of our common stock at any time the market price is less than $3.50 per
share. Purchases of stock will be made from time to time, depending on market
conditions, in open market or in privately negotiated transactions, at prices
deemed appropriate by management. There is no set time limit on the purchases.
We expect to fund these stock repurchases from our operating cash flow. As of
March 31, 2003, we have not made any stock repurchases.
We have entered into an interest rate swap agreement with Fleet Bank for the
amount outstanding under the term loan agreement at 7.95% in order to reduce the
interest rate risk associated with these borrowings.
A part of our growth strategy is to acquire other businesses that are related to
our current business. Such acquisitions may be made with cash or our securities
or a combination of cash and securities. If we fail to make any acquisitions our
future growth will be limited to only internal growth. As of the date of this
14
Form 10-Q quarterly report, we did not have any agreements formal or informal or
understandings with respect to any material acquisitions, and we cannot give any
assurance that we will be able to complete any material acquisitions.
Based on our outstanding contracts and our continuing business, we believe that
our cash flow from operations, the availability under our financing agreement,
if extended, and our cash on hand will be sufficient to enable us to fund our
operations for at least the next twelve months. It is possible that we may need
additional funding if we go forward with certain acquisitions or if our business
does not develop as we anticipate or if our expenses, including our software
development costs relating to our expansion of our product line and our
marketing costs for seeking to expand the market for our products and services
to include smaller clinics and facilities and sole group practitioners, exceed
our expectation.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. These accounting
principles require us to make certain estimates, judgments and assumptions. We
believe that the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time that these
estimates, judgments and assumptions are made. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the periods presented. To the extent there are material
differences between these estimates, judgments or assumptions and actual
results, our financial statements will be affected. The significant accounting
policies that we believe are the most critical to aid in fully understanding and
evaluating our reported financial results include the following:
Revenue Recognition
Impairment of Capitalized Software Development Costs
Impairment of Customer Lists
Revenue Recognition: Revenue associated with fixed price turnkey sales consists
of the following components: licensing of software, labor associated with the
installation and implementation of the software; and maintenance services
rendered in connection with such licensing activities. Revenue from fixed price
software development contracts and revenue under license agreements, which
require significant modification of the software package to the customer's
specifications, are recognized on the estimated percentage-of-completion method.
Using the units-of-work-performed method to measure progress towards completion,
revisions in cost estimates and recognition of losses on these contracts are
reflected in the accounting period in which the facts become known. The
complexity of the estimation process and issues related to the assumptions,
risks and uncertainties inherent with the application of the percentage of
completion method of accounting affect the amounts of revenue and related
expenses reported in our Consolidated Financial Statements. A number of internal
and external factors can affect our estimates, including labor rates,
utilization and efficiency variances and specification and testing requirement
changes. Maintenance contract revenue is recognized on a straight-line basis
over the life of the respective contract. We also derive revenue from the sale
of third party hardware and software which is recognized based upon the terms of
each contract. Consulting revenue is recognized when the services are rendered.
Data Center revenue is recognized in the period in which the service is
provided. The above sources of revenue are recognized when, persuasive evidence
of an arrangement exists, delivery has occurred, the fee is fixed and
determinable and collectibility is probable.
15
Contract terms provide for billing schedules that differ from revenue
recognition and give rise to costs and estimated profits in excess of billings,
and billings in excess of costs and estimated profits.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance revenue, which consists solely of staff payroll and
applicable overhead, is expensed as incurred.
Capitalized Software Development Costs - Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Technological feasibility for our computer software products is generally based
upon achievement of a detail program design free of high risk development
issues. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized computer software development costs
requires considerable judgment by management with respect to certain external
factors, including, but not limited to, technological feasibility, anticipated
future gross revenue, estimated economic life and changes in software and
hardware technology. Prior to reaching technological feasibility these costs are
expensed as incurred and included in research and development. Amortization of
capitalized computer software development costs commences when the related
products become available for general release to customers. Amortization is
provided on a product by product basis. The annual amortization is the greater
of the amount computed using (a) the ratio that current gross revenue for a
product bear to the total of current and anticipated future gross revenue for
that product or (b) the straight-line method over the remaining estimated
economic life of the product. The estimated life of these products range from 3
to 5 years.
We periodically perform reviews of the recoverability of such capitalized
software costs. At the time a determination is made that capitalized amounts are
not recoverable based on the estimated cash flows to be generated from the
applicable software, any remaining capitalized amounts are written off.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", we evaluate
our long-lived assets for financial impairment, and continue to evaluate them as
events or changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable. We evaluate the recoverability of
long-lived assets by measuring the carrying amount of the assets against the
estimated undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values.
Impairment of Customer Lists - Pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", we evaluate our long-lived assets for financial impairment,
and continue to evaluate them as events or changes in circumstances indicate
16
that the carrying amount of such assets may not be fully recoverable. We
evaluate the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of certain long-lived assets are not sufficient to
recover the carrying amount of such assets, the assets are adjusted to their
fair values.
The following table summarizes, as of March 31, 2003, our obligations and
commitments to make future payments under debt, capital leases and operating
leases:
Contractual Obligations Payments Due by
----------------------- ---------------
Period
------
Total Less than 1-3 years 4-5 years Over 5 years
----- --------- --------- --------- ------------
1 year
------
Long Term Debt 1,625,014 500,000 1,000,000 125,014 --
Capital Lease Obligations 45,166 20,284 24,882 -- --
Operating Leases 448,437 362,185 86,252 -- --
--------- ------- --------- -------
Total Contractual Cash
Obligations 2,118,617 882,469 1,111,134 125,014 --
========= ======= ========= ======= ======
-
Forward-Looking Statements
Statements in this Form 10-Q quarterly report may be "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, but are not limited to, statements
that express our intentions, beliefs, expectations, strategies, predictions or
any other statements relating to our future activities or other future events or
conditions and may be identified by words such as "expect", "anticipate",
"believe" and similar expressions. These statements are based on current
expectations, estimates and projections about our business based, in part, on
assumptions made by management. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual outcomes and results may, and probably will,
differ materially from what is expressed or forecasted in the forward-looking
statements due to numerous factors, including those described above and those
risks discussed from time to time in our Form 10-K for the year ended December
31, 2002 under "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in this Form 10-Q quarterly
report and in other documents which we file with the Securities and Exchange
Commission. In addition, such statements could be affected by risks and
uncertainties related to product demand, market and customer acceptance,
competition, government regulations and requirements, pricing and development
difficulties, as well as general industry and market conditions and growth
rates, and general economic conditions. Any forward-looking statements speak
only as of the date on which they are made, and we do not undertake any
obligation to update any forward-looking statement to reflect events or
circumstances after the date of this Form 10-Q.
Item 3. Quantitive and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates. Most of our
debt is at fixed rates of interest after completing an interest rate swap
17
agreement, which effectively converted our variable rate debt into a fixed rate
debt of 7.95%. Therefore, if the LIBOR rate plus 2.5% increases above 7.95%, it
may have a positive effect on our net income.
Most of our invested cash and cash equivalents, which are invested in money
market accounts and commercial paper, are at variable rates of interest. If
market interest rates decrease by 10 percent from levels at March 31, 2003, the
effect on our net income would be a decrease of approximately $2,300 per year.
Item 4. Controls and Procedures
Within the 90-day period prior to the initial filing of this Form 10-Q, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures as defined in Exchange Act Rule 13a-14. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
---------- -----------
99.1 Certification of Chief Executive Officer pursuant to
8 U.S.C.ss.1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. *
99.2 Certification of Chief Financial Officer pursuant to
8 U.S.C.ss.1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. *
* Previously Filed.
18
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETSMART TECHNOLOGIES, INC.
/s/* Chief Executive Officer June 18, 2003
------------------------ (Principal Executive Officer)
James L. Conway
/s/* Chief Financial Officer June 18, 2003
------------------------
Anthony F. Grisanti (Principal Financial and
Accounting Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James L. Conway certify that:
1. I have reviewed this quarterly report on Form 10-Q of Netsmart
Technologies, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
19
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 18, 2003 /s/
---------------------------
James L. Conway
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Anthony F. Grisanti certify that:
1. I have reviewed this quarterly report on Form 10-Q of Netsmart
Technologies, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of , and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
20
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: June 18, 2003 /s/*
---------------------------
Anthony F. Grisanti
Chief Financial Officer
Index of Exhibits
-----------------
Exhibit No. Description
---------- -----------
99.1 Certification of Chief Executive Officer pursuant to 8
U.S.C.ss.1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
99.2 Certification of Chief Executive Officer pursuant to 8
U.S.C.ss.1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
* Previously Filed