UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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.
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.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
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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.
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.
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.
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.
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.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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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
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
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
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
A significant portion of our revenue is derived from fixed price software
development contracts and licenses. We principally recognize this revenue on the
estimated percentage of completion basis. Since the billing schedules under the
contracts differ from the recognition of revenue, at the end of any period,
these contracts generally result in either costs and estimated profits in excess
of billing or billing in excess of cost and estimated profits. The largest
component of our revenue is 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.
Three Months Ended March 31, 2003 and 2002
Our 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. 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. 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. 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 primarily 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 was substantially 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 2002 period,
reflecting an increase of 14%. As turnkey systems are completed, they are
transitioned to the maintenance division, thereby increasing our installed base.
The data center (service bureau) revenue decreased to $459,000 in the March 2003
period, from $470,000 in the March 2002 period, reflecting a decrease of 2%.
Revenue from the sales of our small turnkey division remained constant at
$190,000 for both the March 2003 and 2002 periods.
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.
Gross profit increased to $2,426,000 in the March 2003 period from $1,685,000 in
the March 2002 period, reflecting an increase of 44%. Our gross margin
percentage increased to 40% in the March 2003 period from 35% 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.
Selling, general and administrative expenses were $1,591,000 in the March 2003
period, reflecting an increase of 32% from the $1,203,000 in the March 2002
period. This increase was substantially in the area of sales and marketing
costs, particularly salaries and commissions, as well as an increase in general
and administrative salaries, legal costs and provisions for bonuses.
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.
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 financing arrangement with Fleet Bank. 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 Bank with respect to the options available to us upon the
expiration of the revolving line of credit. The term loan bears interest at a
fixed rate of 7.95% per annum and amounts outstanding under the revolving line
of credit bear interest at the prime rate. Under our revolving line of credit,
we can borrow an aggregate amount equal to 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 foregoing 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.
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.
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 continue to
operate without additional funding 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.
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
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.
Critical Accounting Policies and Estimates
Revenue Recognition - We recognize revenue principally from the licensing of
software and from consulting and maintenance services rendered in connection
with such licensing activities. Information processing revenue is recognized in
the period in which the service is provided. Maintenance contract revenue is
recognized on a straight-line basis over the life of the respective contract. 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. No revenue is recognized prior to
obtaining a binding commitment from the customer.
Software development revenue from time-and-materials contracts are recognized as
services are performed. Revenue from fixed price software development contracts
and revenue under license agreements which require significant modification of
the software package to the customer's specifications, are recognized on the
estimated percentage-of-completion method. Using the units-of-work-performed
method to measure progress towards completion, revisions in cost estimates and
recognition of losses on these contracts are reflected in the accounting period
in which the facts become known. Revenue from software package license
agreements without significant vendor obligations is recognized upon delivery of
the software. Contract terms provide for billing schedules that differ from
revenue recognition and give rise to costs and estimated profits in excess of
billings, and billings in excess of costs and estimated profits.
Deferred revenue represents revenue billed and collected but not yet earned.
The cost of maintenance revenue, which consists solely of staff payroll and
applicable overhead, is expensed as incurred.
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 performs reviews of the recoverability of such capitalized
software costs. At the time a determination is made that capitalized amounts are
not recoverable based on the estimated cash flows to be generated from the
applicable software, any remaining capitalized amounts are written off.
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.
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
agreement, which effectively converted our variable rate debt into a fixed rate
debt of 7.95%. Therefore, if LIBOR rates increase 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 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.
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.
*James L. Conway Chief Executive Officer April 29, 2003
---------------------- (Principal Executive Officer)
James L. Conway
*Anthony F. Grisanti Chief Financial Officer April 29, 2003
---------------------- (Principal Financial and
Anthony F. Grisanti 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):
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: April 29, 2003 *James L. Conway
---------------------
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
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: April 29, 2003 *Anthony F. Grisanti
----------------------
Anthony F. Grisanti
Chief Financial Officer