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, 2001
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 May 1, 2001: 3,502,209
Netsmart Technologies, Inc. and Subsidiaries
Index
Part I: - Financial Information:
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets - March 31, 2001 (Unaudited)
and December 31, 2000 1-2
Consolidated Statements of Income - (Unaudited)
Three Months Ended March 31, 2001 and March 31, 2000 3
Consolidated Statements of Cash Flows - (Unaudited)
Three Months Ended March 31, 2001 and March 31, 2000 4-5
Consolidated Statement of Stockholders' Equity - (Unaudited)
Three Months Ended March 31, 2001 6-7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Part II: Other Information
Item 1. Legal Proceedings
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
March 31, December 31,
2001 2000
(Unaudited) ------------
-----------
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,686,693 $ 2,418,947
Accounts Receivable - Net 4,562,813 4,688,598
Costs and Estimated Profits in Excess
of Interim Billings 4,404,496 4,068,255
Deferred taxes 494,000 494,000
Other Current Assets 178,117 144,942
----------- -----------
Total Current Assets 11,326,119 11,814,742
----------- -----------
Property and Equipment - Net 534,570 512,281
----------- -----------
Other Assets:
Software Development Costs - Net 742,596 822,645
Customer Lists - Net 1,981,513 2,064,832
Other Assets 83,714 86,213
----------- -----------
Total Other Assets 2,807,823 2,973,690
----------- -----------
Total Assets $14,668,512 $15,300,713
=========== ===========
See Notes to Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
March 31, December 31,
2001 2000
(Unaudited) ------------
-----------
Liabilities and Stockholders' Equity:
Current Liabilities:
Capital Lease Obligations $ 36,530 $ 35,756
Accounts Payable 926,230 807,298
Accrued Expenses 982,252 1,154,647
Interim Billings in Excess of Costs and Estimated
Profits 2,984,070 3,350,697
Deferred Revenue 331,975 608,444
----------- -----------
Total Current Liabilities 5,261,057 5,956,842
----------- -----------
Capital Lease Obligations - Less current portion
included above 31,118 40,458
----------- -----------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock - $.01 Par Value, 3,000,000
Shares Authorized; None issued and outstanding
Common Stock - $.01 Par Value; Authorized 15,000,000
Shares; Issued 3,530,247 shares at March 31, 2001,
3,524,692 shares at December 31, 2000 35,302 35,246
Additional Paid in Capital 20,462,669 20,454,391
Accumulated Deficit (10,821,824) (10,886,414)
---------- ----------
9,676,147 9,603,223
Less cost of shares of Common Stock held in
treasury - 28,038 shares at March 31, 2001
and December 31, 2000 299,810 299,810
---------- ----------
Total Stockholders' Equity 9,376,337 9,303,413
---------- ----------
Total Liabilities and Stockholders' Equity $ 14,668,512 $ 15,300,713
========== ==========
See Notes to Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF INCOME - (Unaudited)
--------------------------------------------------------------------------------
Three months ended
March 31,
2001 2000
---- ----
Revenues:
Software and Related
Systems and Services:
General $ 3,065,355 $ 4,323,930
Maintenance Contract
Services 1,044,262 767,258
---------- ----------
Total Software and Related
Systems and Services 4,109,617 5,091,188
Data Center Services 465,224 510,175
---------- ----------
Total Revenues 4,574,841 5,601,363
---------- ----------
Cost of Revenues:
Software and Related
Systems and Services:
General 2,191,543 2,754,226
Maintenance Contract
Services 634,475 520,343
---------- ----------
Total Software and Related
Systems and Services 2,826,018 3,274,569
Data Center Services 266,531 242,070
---------- ----------
Total Cost of Revenues 3,092,549 3,516,639
---------- ----------
Gross Profit 1,482,292 2,084,724
Selling, General and
Administrative Expenses 1,104,725 1,087,491
Cost of Warrants Issued and Their Extensions -- 181,000
Research and Development 285,311 321,956
---------- ----------
Total 1,390,036 1,590,447
Income before Interest Expense and
Provision for Income Taxes 92,256 494,277
Interest Expense 22,466 57,477
---------- ----------
Income before provision for income taxes 69,790 436,800
Provision for income taxes 5,200 --
---------- ----------
Net Income $ 64,590 $ 436,800
========== ==========
Earnings Per Share of Common Stock:
Basic:
Net Income $ .02 $ .14
========== ==========
Weighted Average Number of Shares of
Common Stock Outstanding 3,499,126 3,088,632
========== ==========
Diluted:
Net Income $ .02 $ .12
========== ==========
Weighted Average Number of Shares of
Common Stock Outstanding 3,798,553 3,705,964
========== ==========
See Notes to Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
--------------------------------------------------------------------------------
Three months ended
March 31,
------------------
2001 2000
---- ----
Operating Activities:
Net Income $ 64,590 $ 436,800
-------- --------
Adjustments to Reconcile Net Income
to Net Cash (Used in) Operating Activities:
Depreciation and Amortization 228,182 159,919
Financing Costs Related to Issuance
and Extension of Warrants -- 181,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 125,785 (906,460)
Costs and Estimated Profits in
Excess of Interim Billings (336,241) (181,804)
Other Current Assets (33,175) (78,607)
Other Assets 2,499 66,307
Increase [Decrease] in
Accounts Payable 118,932 (65,529)
Accrued Expenses (172,395) 244,937
Interim Billings in Excess of
Costs and Estimated Profits (366,627) 38,414
Deferred Revenue (276,469) (10,240)
-------- --------
Total Adjustments (709,509) (552,063)
-------- --------
Net Cash (Used In) Operating Activities (644,919) (115,263)
-------- --------
Investing Activities:
Acquisition of Property and Equipment (87,103) (50,746)
Software Development Costs -- (221,339)
-------- --------
Net Cash (Used for) Investing Activities (87,103) (272,085)
-------- --------
See Notes to Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
--------------------------------------------------------------------------------
Three months ended
March 31,
------------------
2001 2000
---- ----
Financing Activities:
Payment of Short-Term Notes $ -- $ (647,272)
Payment of Capitalized Lease Obligations (8,566) (6,031)
Net Proceeds from Warrant Exercise 906,306
Net Proceeds from Stock Options Exercised 8,334 145,804
--------- ---------
Net Cash (Used in) Provided by
Financing Activities (232) 398,807
--------- ---------
Net (Decrease) Increase in Cash
and Cash Equivalents (732,254) 11,459
Cash and Cash Equivalents - Beginning of Period 2,418,947 204,989
--------- ---------
Cash and Cash Equivalents - End of Period $1,686,693 $ 216,448
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 22,466 $ 57,477
Income Taxes $ 39,128 $ 27,298
See Notes to Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Unaudited)
--------------------------------------------------------------------------------
For the Three Months Ended March 31, 2001
Common Stock $.01 Par Value Authorized Shares Amount
------ ------
15,000,000 Shares
Beginning Balance 3,524,692 $ 35,246
Common Stock Issued - Exercise of Options 5,555 56
--------- -------
Ending Balance 3,530,247 $ 35,302
========= =======
See Notes to Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Unaudited)
--------------------------------------------------------------------------------
For the Three Months Ended March 31, 2001
Additional Paid-In Capital Shares Amount
------ ------
Beginning Balance $ 20,454,391
Common Stock Issued - Exercise of Options 8,278
----------
Ending Balance $ 20,462,669
==========
Accumulated Deficit
Beginning Balance $(10,886,414)
Net Income 64,590
----------
Ending Balance $(10,821,824)
==========
Treasury Stock
Beginning Balance 28,038 $ (299,810)
------ ----------
Ending Balance 28,038 $ (299,810)
------ ----------
Total Stockholders' Equity $ 9,376,337
==========
See Notes to Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(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, 2001 and the results of its operations for the three months ended
March 31, 2001 and 2000 and the changes in cash flows for the three months ended
March 31, 2001 and 2000. The results of operations for the three months ended
March 31, 2001 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, 2000.
(3) Income per share - Income per share is computed by dividing the net income
for the period by the weighted average number of shares of common stock. The
common stock equivalents are assumed converted to common stock when dilutive.
(4) During the period ended March 31, 2001, stock options to purchase 5,555
shares were exercised and the Company received gross proceeds of $8,334. As a
result, common stock and additional paid in capital increased by $56 and $8,278.
(5) The Company is a defendant in an arbitration proceeding commenced in March
2001 seeking damages of $635,000 for an alleged breach of a staff augmentation
services agreement. The Company believes that it has valid legal defenses to
such action.
(6) In May 2001, the Company acquired intellectual property and certain other
assets of Advanced Institutional Management Software, Inc. for a combination of
cash and stock valued at approximately $900,000.
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 recognize this revenue on the estimated
percentage of completion basis. Since the billing schedules under the contracts
differ from the recognition of revenue, at the end of any period, these
contracts generally result in either costs and estimated profits in excess of
billing or billing in excess of cost and estimated profits. The largest
component of our revenue is based upon the time spent by our technical personnel
on a project. As a result, during the third and fourth quarters, when many of
our employees are on vacation and holidays, our revenue could be affected.
Three Months Ended March 31, 2001 and 2000
Our revenue for the three months ended March 31, 2001 (the "March 2001 period")
was $4,575,000, a decrease of $1,027,000, or 18%, from our revenue for the three
months ended March 31, 2000 (the "March 2000 period"), which was $5,601,000. The
largest component of revenue was turnkey systems labor revenue, which decreased
to $1,673,000 in the March 2001 period, from $1,855,000 in the March 2000
period, reflecting a 10% decrease. This decrease reflects an industry wide slow
down in information technology purchasing activity. Revenue from third party
hardware and software decreased to $772,000 in the March 2001 period, from
$1,482,000 in the March 2000 period, which represents a decrease of 48%. Sales
of third party hardware and software are made in connection with the sales of
turnkey systems and were affected by the decline in revenue from turnkey
systems. These sales are typically made at lower gross margins than our
behavioral health systems and services revenue. The data center (service bureau)
revenue decreased to $465,000 in the March 2001 period, from $510,000 in the
March 2000 period, reflecting a decrease of 9%. This decrease is substantially
the result of a smaller client base. License revenue decreased to $271,000 in
March 2001 period, from $648,000 in the March 2000 period, reflecting a decrease
of 58%. License revenue is generated as part of a sale of a behavioral health
information system pursuant to a contract or purchase order that includes
delivery of the system and maintenance and is affected by the decline in revenue
from turnkey systems. Maintenance revenue increased to $1,044,000 in March 2001
period, from $767,000 in the March 2000 period, reflecting an increase of 36%.
As turnkey systems are completed, they are transitioned to the maintenance
division. Revenue from the sales of our small turnkey division increased to
$350,000 in the March 2001 period, from $338,000 in the March 2000 period,
reflecting an increase of 4%.
Revenue from contracts from government agencies represented 43% of revenue in
the March 2001 period and 45% of revenue in the March 2000 period.
Gross profit decreased to $1,482,000 in the March 2001 period from $2,085,000 in
the March 2000 period, reflecting a decrease of 29%. The decrease in gross
margin was substantially attributable to the decrease in our license revenue
mentioned above. This decrease was partially offset by the gross margins related
to the increase in maintenance revenue. Our maintenance revenue gross margin
continues to improve since the core costs and infrastructure investment has
previously been established.
Selling, general and administrative expenses were $1,105,000 in the March 2001
period, reflecting an increase of 2 % from the $1,088,000 in the March 2000
period. This increase was substantially in the area of sales and marketing costs
and was partially offset by a decrease in administrative costs.
In the March 2000 period, we issued warrants for services rendered. We also
extended one series of our warrants for fourteen months. An aggregate of
$181,000 was charged to operations for the warrant issuance and the warrant
extension. As a result of the extension of the warrants in the March 2000
period, we raised additional equity of
$1,153,000 from the exercise of the warrants. There were no similar costs in the
March 2001 period.
We incurred product development expenses of $285,000 in the March 2001 period, a
decrease of 11% from the $322,000 in the March 2000 period. During the March
2001 period, we continued to invest in improved functionality and technology in
our products, but at a lesser extent than the March 2000 period.
Interest expense was $22,000 in the March 2001 period, a decrease of $35,000, or
61%, from the $57,000 in the March 2000 period. This decrease was the result of
lower borrowings during the March 2001 period.
We have a net operating loss tax carry forward of approximately $7 million.
However, in the March 2001 period, we provided for income taxes in the amount of
$5,200. This provision was based upon federal alternative minimum tax
calculations as well as certain state taxes where we do not have any net
operating loss carry forwards.
As a result of the foregoing factors, in the March 2001 period, we generated a
net income of $65,000, or $.02 per share (basic and diluted). For the March 2000
period, we generated net income of $437,000, or $.14 per share (basic) and $.12
per share (diluted).
Liquidity and Capital Resources
We had working capital of $6.1 million at March 31, 2001 as compared to working
capital of $5.9 million at December 31, 2000. The increase in working capital
for the March 2001 period was substantially due to net income after adding back
depreciation and amortization.
During the March 2001 period, our cash requirements were generated from
operations. We have an accounts receivable financing agreement with an asset
based lender which permits us to borrow up to 80% of eligible accounts
receivable up to a maximum of $3.5 million. We did not use this facility during
the March 2001 period, and there were no outstanding borrowings under this
facility. The maximum amount available under our borrowing base formula at March
31, 2001 was $1.6 million.
At March 31, 2001, accounts receivable and costs and estimated profits in excess
of interim billings were approximately $9 million, representing approximately
178 days of revenue based on annualizing the revenue for the March 2001 period,
although no assurance can be given that revenue will continue at the same level
as the March 2001 period.
Based on our outstanding contracts and our continuing business, we believe that
our cash flow from operations, the availability under our financing agreement
and our cash on hand will be sufficient to enable us to continue to operate
without additional funding, although it is possible that we may need additional
funding if our business does not develop as we anticipate or if our expenses,
including our software development costs relating to our expansion of our
product line and our marketing costs for seeking to expand the market for our
products and services to include smaller clinics and facilities and sole group
practitioners exceed our expectation.
An important part of our growth strategy is to acquire other businesses that are
related to our current business. Such acquisitions may be made with cash or our
securities or a combination of cash and securities. To the extent that we
require cash, we may have to borrow the funds or issue equity. We have no
commitments from any financing source and we may not be able to raise any cash
necessary to complete an acquisition. If we fail to make any acquisitions our
future growth may be limited.
In May 2001, we acquired intellectual property and certain other assets of
Advanced Institutional Management Software, Inc. for a combination of cash and
stock valued at approximately $900,000. We anticipate using our credit facility
to fund the cash portion of the purchase price. We anticipate that we will incur
development expenses for enhancements in the acquired software.
Forward Looking Statements
Statements in this Form 10-Q include forward-looking statements that
address, among other things, our expectations with respect to the development of
our business. In addition to these statements, other information including words
such as "seek," "anticipate," "believe," "plan," "estimate," "expect," "intend"
and other similar expressions are forward looking statements. Actual results
could differ materially from those currently anticipated due to a number of
factors, including those identified in our Annual Report on Form 10-K for 2000
under "Risk Factors," those discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this Form 10-Q and
our Form 10-K for 2000 and elsewhere, and in other documents which we file with
the Securities and Exchange Commission.
Part II
Item 1. Legal Proceedings
The Company is a defendant in an arbitration proceeding commenced in March 2001
by Price Waterhouse Coopers LLP, seeking damages of $635,000 for an alleged
breach of a staff augmentation services agreement. The Company believes that it
has valid legal defenses to such action.
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/ James L. Conway Chief Executive May 14, 2001
------------------------ Officer and Director (Principal
James L. Conway Executive Officer)
/s/ Anthony F. Grisanti Chief Financial Officer May 14, 2001
------------------------ (Principal Financial and
Anthony F. Grisanti Accounting Officer)