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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
Securities registered pursuant to Section 12(b) of the Act: ____
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Outstanding shares as of March 26, 2002
------------------- ---------------------------------------
Common Stock, par value 3,696,709
$.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X_ No__
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S - K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___ [ ]
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business
Introduction
Netsmart Technologies, Inc. develops, markets and supports Web-enabled,
Windows-based, thin-client, enterprise- wide, open platform software systems to
providers of services in the health and human services market, including mental
health clinics, substance abuse clinics, psychiatric hospitals, public health
agencies, managed care organizations and correctional facilities. We sell our
software products through our wholly owned subsidiary, Creative Socio-Medics
Corporation, either on a license or a subscription basis to health care
providers and we support our software under long-term maintenance agreements.
The maintenance contracts provide us with a recurring revenue stream.
We believe that we are one of the largest suppliers of practice management
systems to the behavioral health market, with over 500 contracts in place,
representing approximately 50,000 clinicians, including 24 state agencies and
installations in 43 states.
The cost of a new system to customers is typically in the range of $250,000 to
$1 million. Governmental agencies such as mental health, mental retardation,
child welfare, addiction, correction and public health facilities accounted for
approximately 40% of revenue in 2001, with the remainder from private hospitals,
smaller clinics, group and sole practitioners.
Business Strategy
Our systems 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. We direct our marketing effort for these products towards
providers of services in the health and human services market. Our branded suite
of products has integrated point-of-services technologies which also include
smart cards and personal digital assistants, which are commonly referred to as
PDAs.
The health and human services market is always subject to changes in state and
federal regulations as well as new demands required by the population. Some of
the factors which we believe are affecting the market include the following.
HIPAA.
- ------
As one of the most established suppliers of practice management solutions
to the behavioral health and substance abuse industry, we believe that we can
benefit as a result of the Health Insurance Portability and Accountability Act
which is generally known as HIPAA. HIPAA essentially mandates the Health and
Human Services department of the U.S. Government to enact standards regarding
the standardization, privacy and security of health care information that will
begin to take effect in the latter part of 2002.
We believe that this legislation will have the effect of requiring the
under-automated health and human services industry to make the leap to install
automated systems. We believe that our product suite, in conjunction with
products offered by our best-of-breed partners, offers comprehensive
enterprise-wide solutions for all human service providers.
California.
- -----------
Significant market opportunities continue to emerge with California
leading the way. Virtually all the 58 county systems, now running on legacy or
end-of-cycle information technology systems, are likely to shift to the
procurement mode within the coming 24 months. Furthermore, recently passed
Proposition 36 mandates that first-time drug offenders be directed into the
local healthcare systems rather than the criminal justice system. We recently
received our first smart-card pilot program in San Joaquin County and intend to
market the card as the solution in other markets as well. The added impact of
Proposition 36 on the 58 California county healthcare systems is therefore
expected to be substantial, and the state has appropriated some $60 million in
funding for upgrading these facilities.
Increased Demand.
- -----------------
As a result of the recent acts of terrorism, the demand for services in the
mental health and public health services has been elevated. Anxiety and fear
have gripped many people who are now seeking mental health services. This
increased demand puts more pressure on providers to improve the efficiency of
care through the use of practice management and clinical systems. The potential
threat of bio terrorism will also put similar pressure on public health agencies
to improve their delivery capabilities in much the same way.
We continue to win new contracts. A significant recent example is a master
licensing agreement with a recognized Catholic hospital that will, in effect,
make the hospital a re-seller of products, thereby providing us with an entry
into the many other Catholic hospitals throughout the United States.
Forward - Looking Statements
- ----------------------------
Statements in this Form 10-K annual 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. 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 this Form 10-K annual report, including the risks described
under "Risk Factors," 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-K.
Organization of the Company
- ---------------------------
We are a Delaware corporation formed in September 1992 under the name Medical
Services Corp. Our name was changed to Carte Medical Corporation in October
1993, CSMC Corporation in June 1995 and to Netsmart Technologies, Inc. in
February 1996. Our executive offices are located at 146 Nassau Avenue, Islip,
New York 11751, telephone (631) 968-2000. Reference to us and to Netsmart
include our subsidiary, Creative Socio-Medics, unless the context indicates
otherwise. Our website is located at www.csmcorp.com. Neither the Information
contained in our website nor the information contained in any Internet website
is a part of this Form 10-K annual report.
Risk Factors
- ------------
Because we are particularly dependent upon government contracts, our business
- -----------------------------------------------------------------------------
may be impaired by policies relating to entitlement programs.
- -------------------------------------------------------------
We market our health information systems principally to behavioral health
facilities, many of which are operated by government entities and include
entitlement programs. During 2001, we generated 40% of our revenue from
contracts with government agencies, as compared with 51% in 2000 and 55% in
1999. Government agencies generally have the right to cancel contracts at their
convenience. In addition, we may lose business if government agencies reduce
funding for entitlement programs.
Our business is based on providing systems relating to behavioral health
- ------------------------------------------------------------------------
organizations, and changes in government regulation of health care industry may
- -------------------------------------------------------------------------------
affect the market for our systems.
- ----------------------------------
The federal and state governments have adopted numerous regulations relating to
the health care industry, including regulations relating to the payments to
health care providers for various services, and our systems are designed to
provide information based on these requirements. The adoption of new regulations
can have a significant effect upon the operations of health care providers,
particularly those operated by state agencies. We cannot predict the effect on
our business of future regulations by governments and payment practices by
government agencies. Furthermore, changes in regulations in the health care
field may force us to modify our
health information systems to meet any new record-keeping or other requirements.
If that happens, we may not be able to generate revenues sufficient to cover the
costs of developing the modifications.
If we are not able to take advantage of technological advances, our business may
- --------------------------------------------------------------------------------
suffer.
- -------
Our customers require software which enables them to store, retrieve and process
very large quantities of data and to provide them with instantaneous
communications among the various data bases. Our business requires us to take
advantage of recent advances in software, computer and communications
technology. This technology has been developing at rapid rates in recent years,
and our future may be dependent upon our ability to use and develop or obtain
rights to products utilizing such technology. New technology may develop in a
manner which may make our software obsolete. Our inability to use new technology
would have a significant adverse effect upon our business.
Because of our size, we may have difficulty competing with larger companies that
- --------------------------------------------------------------------------------
offer similar services.
- -----------------------
Our customers in the human services market include entitlement programs, managed
care organizations and specialty care facilities which have a need for access to
information over a distributed data network. The software industry in general,
and the health information software business in particular, are highly
competitive. Other companies have the staff and resources to develop competitive
systems. We may not be able to compete successfully with such competitors. The
health information systems business is served by a number of major companies and
a larger number of smaller companies. We believe that price competition is a
significant factor in our ability to market our health information systems and
services.
Because we are dependent on our management, the loss of key executive officers
- ------------------------------------------------------------------------------
could harm our business.
- ------------------------
Our business is largely dependent upon our senior executive officers, Messrs.
James L. Conway, chief executive officer, Gerald O. Koop, president and Anthony
F. Grisanti, chief financial officer. Although we have employment agreements
with these officers, the employment agreement do not guarantee that the officers
will continue with us, and each of these officers has the right to terminate his
employment with us on 90 days notice. Our business may be adversely affected if
any of our key management personnel or other key employees left our employ.
Because we lack patent protection, we cannot assure you that others will not be
- -------------------------------------------------------------------------------
able to use our proprietary information in competition with us.
- ---------------------------------------------------------------
We have no patent or copyright protection for our proprietary software, and we
rely on non-disclosure agreements with our employees. Since our business is
dependent upon our proprietary products, the unauthorized use or disclosure of
this information could harm our business.
Our growth may be limited if we cannot make acquisitions.
- ---------------------------------------------------------
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. To the extent that we require cash, we
may have to borrow the funds or issue equity. Our stock price may adversely
affect our ability to make acquisitions for equity or to raise funds for
acquisition through the issues of equity securities. If we fail to make any
acquisitions, our future growth may be limited. As of the date of this Form 10-K
annual report, we do not have any agreement or understanding, either formal or
informal, as to any acquisition.
If we make any acquisitions, they may disrupt or have a negative impact on our
- ------------------------------------------------------------------------------
business.
- ---------
If we make acquisitions, we could have difficulty integrating the acquired
companies' personnel and operations with our own. In addition, the key personnel
of the acquired business may not be willing to work for us, and our officers may
exercise their rights to terminate their employment with us. We cannot predict
the affect expansion may have on our core business. Regardless of whether we are
successful in making an acquisition, the negotiations could disrupt our ongoing
business, distract our management and employees and increase our expenses.
We do not anticipate paying dividends on our common stock.
- ----------------------------------------------------------
We presently intend to retain future earnings, if any, in order to provide funds
for use in the operation and expansion of our business and, accordingly, we do
not anticipate paying cash dividends on our Common Stock in the foreseeable
future.
The rights of the holders of common stock may be impaired by the potential
- --------------------------------------------------------------------------
issuance of preferred stock.
- ----------------------------
Our certificate of incorporation gives our board of directors the right to
create new series of preferred stock. As a result, the board of directors may,
without stockholder approval, issue preferred stock with voting, dividend,
conversion, liquidation or other rights which could adversely affect the voting
power and equity interest of the holders of common stock. The preferred stock,
which could be issued with the right to more than one vote per share, could be
utilized as a method of discouraging, delaying or preventing a change of
control. The possible impact on takeover attempts could adversely affect the
price of our common stock. Although we have no present intention to issue any
additional shares of preferred stock or to create any series of preferred stock,
we may issue such shares in the future. If we issue preferred stock in a manner
which dilutes the voting rights of the holders of the common stock, our listing
on The Nasdaq SmallCap Market may be impaired.
Shares may be issued pursuant to options which may affect the market price of
- -----------------------------------------------------------------------------
our common stock.
- -----------------
We may issue stock upon the exercise of options to purchase up to an aggregate
967,885 shares of common stock pursuant to our long-term incentive plans, all of
which were outstanding at March 14, 2002. The exercise of these options and the
sale of the underlying shares of common stock may have an adverse effect upon
the price of our stock.
Health and Human Services Systems and Services
We develop, market and support computer software which enables behavioral/public
healthcare organizations to provide a full range of services in a network
computing environment.
Users typically purchase one of several healthcare information systems, in the
form of a perpetual license to use the system, as well as purchasing
professional services, support, and maintenance. In addition, we offer third
party hardware and software pursuant to value added resale arrangements with
third party vendors. The professional services include project management,
training, consulting and software development services, which are provided
either on a time and material basis or pursuant to a fixed-price contract. The
software development services may require the adaptation of health care
information technology systems to meet the specific requirements of the
customer.
Our typical license for a health information system ranges from $10,000 to
$100,000 for a single facility healthcare organization to $250,000 to $1,000,000
for multi-unit care organizations such as those run by state agencies. Revenue
from license fees were approximately $747,000, or 4.1% of revenue, for 2001,
$2,603,000, or 12.9% of revenue, for 2000 and $2,228,000, or 10.5% of revenue,
for 1999. A customer's purchase order may also include third party hardware or
software. Revenue from hardware and third party software accounted for
approximately $2,390,000, or 13.2% of revenue, for 2001, $4,158,000, or 20.6% of
revenue, for 2000 and $5,915,000, or 27.8% of revenue, for 1999. Revenue from
turnkey systems labor accounted for approximately $6,568,000, or 36.3% of
revenue, for 2001, $6,502,000, or 32.2% of revenue, for 2000 and $7,768,000, or
36.6% of revenue in 1999.
In addition to our behavioral/public healthcare information systems and related
services, we offer processing services to substance abuse facilities and
maintain a data center facility at which our personnel perform data entry, data
processing and produce operations reports for smaller substance abuse clinics.
Our data center revenue was approximately $2,042,000, or 11.3% of revenue, for
2001, $2,263,000, or 11.2% of revenue, for 2000 and $1,908,000, or 9% of
revenue, for 1999.
Maintenance services have generated increasing revenue and have become a more
significant portion of our business since most purchasers of health care
information system licenses also purchase maintenance service. Maintenance
revenue increases as existing customers purchase additional licenses and new
customers purchase
their initial software licenses. By agreement with our customers, we provide
telephone help services and maintain and upgrade their software. Maintenance
contracts may require us to make modifications to meet any new federal and state
reporting requirements which become effective during the term of the maintenance
contract. We do not maintain the hardware and third party software sold to our
customers, but we provide a telephone help line service for certain third party
software, which we license to our customers. Our maintenance revenue was
approximately $5,192,000, or 28.7% of revenue, for 2001, $3,521,000, or 17.5% of
revenue, for 2000 and $2,258,000, or 10.6% of revenue, for 1999.
We currently offer five product modules that provide a range of core application
requirements for behavioral healthcare providers. These products consist of a
suite of complete information technology applications developed by us, together
with software provided by others which enables us to offer enterprise-wide
solutions to the behavioral health industry. We offer the products in a variety
of delivery modes.
* Avatar - Practice Management: This system is a comprehensive solution
providing patient management functions, billing, tracking, scheduling,
and reporting for inpatient treatment facilities.
* Avatar - Clinician Workstation: This workstation provides a clinician
with documentation and medical record management including assessment,
care planning, progress notes and on-line medical records. The
clinician workstation is our electronic medical record system for
behavioral health, which integrates the clinical tools necessary for an
interdisciplinary approach to the delivery of human services.
* Avatar - M4: Pursuant to a joint marketing agreement with Mallinckrodt
Pharmaceutical Specialties, a division of Mallinckrodt Inc., we offer a
solution for dispensing, admissions and medical records, counselor and
reception/security specifically for methadone clinics. We can integrate
M4 with our other behavioral health products.
* Avatar - Managed Care: The managed care and employee assistance program
modules include such features as service request management, contact
tracking (patients, providers, others), import of eligibility
information by contract, provider search by location, specialty,
contract, hospital privileges, claims adjudication and payment.
* Smart Card: Tracking software application on a smart card platform to
enable coordination of patient services across multiple providers, even
if their systems are of incompatible design. This new level of patient
data portability will allow sales activity across all areas of human
services regardless of the client's existing technology.
Markets and Marketing
The market for behavioral/public health information systems and related services
consists of both private and publicly operated providers offering hospital or
community-based outpatient behavioral/public healthcare services. These
healthcare providers require a healthcare information system to administer their
programs. We believe that there are at least 15,000 behavioral/public healthcare
providers in the United States, including public and private hospitals, private
and community-based residential facilities and federal, state and local
governmental agencies.
Many long-term behavioral/public healthcare facilities are operated by
government entities and include those operated as part of entitlement programs.
During the years ended December 31, 2001, 2000 and 1999, approximately 40%, 51%
and 55%, respectively, of revenue was generated from contracts with government
agencies. Contracts with government agencies generally include provisions which
permit the contracting agency to cancel the contract for its convenience,
although we have not experienced a termination for convenience in the last five
years.
In addition to these major behavioral/public healthcare providers, there are a
larger number of sole practitioners, group practices and smaller clinics which
may also require behavioral/public healthcare facilities. We intend to market
our Internet-based systems to these potential customers.
We believe that the demand for information technology solutions is increasing as
a result of new federal initiatives for data standards as well as continuous
pressure from managed care providers to reduce healthcare delivery costs while
expanding the availability of services.
In order to remain competitive, the behavioral/public health delivery networks
need detailed clinical and management information systems that enable providers
within the networks to maintain a broad scope of accurate medical and financial
information, manage costs and deliver quality care efficiently. In addition, the
need to upgrade existing systems to meet the increased demand for data
processing needs of managed care and regulatory oversight has also resulted in
an increased demand for behavioral/public healthcare information technology.
These data processing needs include analysis of patient assessments, maintenance
of patient records, administration of patient treatment plans and the overall
coordination of patient case management.
We coordinate our marketing effort with the state agencies and other major users
of our systems. Our state agency clients formed a State Systems Association,
presently consisting of state organizations or agencies from 24 states. The
association's members work with us to assess and determine future requirements
in both patient managed care coordination and regulatory reporting.
No customer accounted for 10% or more of our revenue in 2001 and 2000. For the
year ended December 31, 1999, one customer accounted for revenue of
approximately $3.8 million or 18% of our revenue.
We had a backlog of orders, including ongoing maintenance and data center
contracts for our behavioral health information systems of $16.5 million at
December 31, 2001 and $14.4 million at December 31, 2000. A substantial amount
of the 2001 backlog is expected to be filled during 2002.
Product Development
- -------------------
We incurred product development costs relating to our behavioral health
information systems of approximately $1,335,000 in 2001, $1,360,000 in 2000 and
$800,000 in 1999, all of which was company-sponsored. In 2001, we incurred
capitalized software development costs of approximately $167,000 associated with
our acquisition of software products from Advanced Institutional Management
Software, Inc. In 2000, we incurred capitalized software development costs of
approximately $219,000 in connection with the development of our web portal
services and application service provider solutions for healthcare providers.
During 2000, we also incurred capitalized software development costs of $334,000
associated with our acquisition of the Connex suite of managed care and employee
assistance program information systems. Included in these costs is $100,000 of
valued assigned to the 15,528 shares of our common stock which we issued to
acquire the Connex suite.
Competition
- -----------
The healthcare software industry is highly competitive. Although we believe that
we can provide a health care facility or managed care organization with software
to enable it to perform its services more effectively, other software companies
provide comparable systems and also have the staff and resources to develop
competitive systems.
According to independent consulting reports, healthcare information technology
is an $18 billion industry served by numerous vendors. The dominant health care
information technology vendors have achieved annual sales of more than $1
billion by focusing on solutions for large medical/surgical health care
providers, such as large hospital systems and health maintenance organizations,
and, have not focused on the behavioral/public healthcare industry. We believe
that most of the presently available healthcare management software does not
meet the specific needs of the behavioral/public healthcare industry, and that
the functionality of our information systems are designed to meet the needs of
this market. However, the behavioral health information systems business is
serviced by a number of companies, some of which are better capitalized with
larger infrastructure than we, and we may not be able to continue to compete
effectively with such companies.
We have an established customer base of more than 500 clients nationwide,
including substantial private and government providers of healthcare services.
These 500 contracts represent approximately 50,000 clinicians, including 24
state agencies and installations in 43 states.
Government Regulations and Contracts
- ------------------------------------
The federal and state governments have adopted numerous regulations relating to
the health care industry, including regulations relating to the payments to
health care providers for various services. The adoption of new regulations can
have a significant effect upon the operations of health care providers and
insurance companies. Although our business is aimed at meeting certain of the
problems resulting from government regulations and from efforts to reduce the
cost of health care, we cannot predict the effect of future regulations by
governments and payment practices by government agencies or health insurers,
including reductions in the funding for or scope of entitlement programs. Any
change in the structure of health care in the United States can have a material
effect on companies, such as us, that provide services to the health care
industry, including those providing software. Although we believe that the
likely direction which may result from the current study of the health care
industry would be an increased trend to managed care programs, thereby
increasing the importance of automation, our business may not benefit from any
changes in the industry structure. Even if the industry does evolve toward more
healthcare being provided by managed care organizations, it is possible that
there will be substantial concentration in a few very large organizations, which
may seek to develop their own software or obtain software from other sources. To
the extent that the health care industry evolves with greater
government-sponsored programs and less privately run organizations, our business
may be adversely affected. Furthermore, to the extent that each state changes
its own regulations in the health care field, it may be necessary for us to
modify our behavioral health information systems to meet any new record-keeping
or other requirements imposed by changes in regulations, and we may not be able
to generate revenues sufficient to cover the costs of developing the
modifications.
A significant amount of our business has been with government agencies,
including specialized care facilities operated by, or under contract with,
government agencies. The decision on the part of a government agency to enter
into a contract is dependent upon a number of factors, including economic and
budgetary problems affecting the local area, and government procurement
regulations, which may include the need for approval by more than one agency
before a contract is signed. In addition, government agencies generally include
provisions in their contracts which permit the contracting agency to cancel the
contract at its convenience. We have not experienced a termination for
convenience in the last five years.
Intellectual Property Rights
- ----------------------------
We have no patent rights for our behavioral health information system software,
but we rely upon copyright protection for our software, as well as
non-disclosure and secrecy agreements with our employees and third parties to
whom we disclose information. We may not be able to protect our proprietary
rights to our system and third parties may claim rights in the system.
Disclosure of the codes used in any proprietary product, whether or not in
violation of a non-disclosure agreement, could have a materially adverse affect
upon us, even if we are successful in obtaining injunctive relief. We must
continue to invest in product development, employee training, and client
support.
Employees
- ---------
As of December 31, 2001, we had 136 employees, including 4 executive, 12 sales
and marketing, 111 technical and 9 clerical and administrative employees.
Executive Officers
- ------------------
Information concerning our executive officers is included in Item 11,
Directors and Executive Officers for the Registrant.
Item 2. Property
We lease office space at the following locations:
Location Purpose Space Annual Rental Expiration
- -------- ------- ----- ------------- ----------
146 Nassau Avenue Executive 18,000 $314,000, plus 4% 12/31/03
Islip, New York offices square feet annual increases
1335 Dublin Road Offices 3,500 $56,000 11/30/03
Columbus, Ohio square feet
7590 Fay Avenue Offices 1,800 $50,000 06/30/02
La Jolla, California square feet
We believe that our space is adequate for our immediate needs and that, if
additional space is required, it would be readily available on commercially
reasonable rates.
Item 3. Legal Proceedings
We are a defendant in an arbitration proceeding commenced in March 2001 by
PriceWaterhouse Coopers LLP, seeking damages of $635,000 for an alleged breach
of a staff augmentation services agreement. We believe that we have valid legal
defenses to this action.
In October 2000, our subsidiary, Creative Socio-Medics, commenced an action
against the City of Richmond, in the Supreme Court of the State of New York,
County of Suffolk, which action was subsequently removed to the United States
District Court for the Eastern District of New York, for failure to pay more
than $1 million pursuant a contract we have with Richmond. Richmond advised the
court that it intended to move to dismiss the complaint for lack of personal
jurisdiction in New York and improper venue. The parties are currently engaged
in discovery on jurisdictional issues. In November 2000, Richmond filed a
complaint in the Circuit Court for the City of Richmond, Richmond, Virginia,
alleging, among other things, that the contract with Creative Socio-Medics was
procured through fraudulent misrepresentations concerning the nature of the work
to be performed and the price for the services and that Creative Socio-Medics
failed to perform its obligations under the agreement, seeking damages of
$373,000 and a finding that it owes no additional amounts to Creative
Socio-Medics. The parties entered into a stipulation staying the Richmond action
until a determination of Richmond's jurisdictional challenges to the New York
action. We believe that we have valid claims against Richmond and we intend to
vigorously pursue those claims. We also believe that the allegations contained
in Richmond's complaint are without merit and we intend to vigorously defend
against those claims.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our common stock is traded on The Nasdaq SmallCap Market under the symbol NTST.
Set forth below is the reported high and low sales prices of our Common Stock
for each quarterly period during 2001 and 2000.
Quarter Ending High Bid
-------------- ---- ---
March 31, 2001 2.84 2.08
June 30, 2001 2.27 2.06
September 30, 2001 2.11 1.68
December 31, 2001 3.06 1.69
March 31, 2000 11.75 5.25
June 30, 2000 11.38 4.00
September 30, 2000 5.69 3.31
December 31, 2000 4.13 1.50
As of December 31, 2001, there were approximately 2,095 holders of our common
stock. The closing price of our common stock was $2.85 per share on March 25,
2002. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
We have not paid any cash dividends to the holders of our common stock since our
organization.
In May 2001, we issued 180,000 shares of common stock to Advanced Institutional
Management Software, Inc. as part of the purchase price for that company's
intellectual property rights, customer lists and certain other assets. Of these
shares, 162,000 were issued to the seller, and 18,000 are held in escrow.
In October 2001, we issued warrants to purchase 40,000 shares in connection with
an investor relations agreement whereby we will pay a monthly fee in addition to
the issuance of the warrants. The warrants have an exercise price of $2.50 for
the first 5,000 shares; $3.00 for the next 5,000 shares; $3.50 for 15,000 shares
and $4.00 for the final 15,000 shares, and will expire on October 28, 2002.
The issuance of the foregoing securities is exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended, or Regulation D of the
Securities and Exchange Commission thereunder.
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands except per share data)
Selected Statements
of Operations Data:
Revenue $ 18,119 $ 20,171 $ 21,252 $ 13,165 $ 7,635
Income (Loss) from Continuing
Operations before interest
and other financing costs 399 2,141(1) 1,895 759 (536)
Income (Loss) from Discontinued
Operations -- 70 180 (217) (2,615)
Net Income (Loss) 315 2,386(1) 1,825 196 (3,459)
Per Share Data - Diluted:
Continuing Operations .08 .61 .47 .12 (.37)
Discontinued Operations -- .02 .05 (.08) (1.10)
Net Income (loss) .08 .63 .52 .04 (1.47)
Weighted average number
of shares outstanding 3,872 3,771 3,516 2,865 2,387
Selected Balance
Sheet Data:
Working Capital (deficiency) 7,903 5,858 2,012 10 (537)
Total Assets 18,007 15,301 13,972 10,289 7,340
Total Liabilities 8,060 5,997 8,617 7,005 4,200
Accumulated Deficit (10,571) (10,886) (13,272) (15,097) (15,293)
Stockholders' Equity 9,948 9,303 5,355 3,284 3,140
- --------
(1)Includes benefit of net operating loss in the amount of $494,000.
All per share information has been retroactively adjusted for the
one-for-three reverse stock split which became effective September 1998.
Item 7. 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 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.
Years Ended December 31, 2001 and 2000
Our revenue for 2001 was $18,119,000, a decrease of $2,052,000, or 10%, from our
revenue for 2000, which was $20,171,000. The largest component of revenue was
turnkey systems labor revenue, which increased to $6,568,000 in 2001, from
$6,502,000 in 2000, reflecting a 1% increase. Although there was a general
decline in the sales of turnkey systems, due to an industry wide slowdown in
information technology purchasing activity, we were able to generate additional
labor revenue for customization and enhancements services for our existing
client base. Revenue from third party hardware and software decreased to
$2,390,000 in 2001, from $4,158,000 in 2000, which represents a decrease of 43%.
Sales of third party hardware and software are made in connection with the sales
of turnkey systems and were affected by the decline in the sales of 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 $2,042,000 in 2001, from $2,263,000 in 2000, reflecting a
decrease of 10%. This decrease is substantially the result of work performed for
one particular client during 2000 as well as a smaller client base during 2001.
License revenue decreased to $747,000 in 2001, from $2,603,000 in 2000,
reflecting a decrease of 71%. 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
$5,192,000 in 2001, from $3,521,000 in 2000, reflecting an increase of 48%. As
turnkey systems are completed, they are transitioned to the maintenance
division. Included in 2001 is $935,000 of maintenance revenue related to
contracts for AIMS software. We acquired the rights to the AIMS software,
including its installed customer base, in May 2001. Revenue from the sales of
our small turnkey division increased to $1,180,000 in 2001, from $1,124,000 in
2000, reflecting an increase of 5%.
Revenue from contracts from government agencies represented 40% of revenue in
2001 and 51% of revenue in 2000. This decrease reflects a reduction in new
government contracts.
Gross profit decreased to $6,118,000 in 2001 from $8,215,000 in 2000, reflecting
a decrease of 26%. Our gross margin percentage decreased to 34% in 2001 from 41%
in 2000. This decrease was substantially the result of a decrease in our license
and data center revenue mentioned above. In addition, the gross margin
associated with the AIMS maintenance revenue is currently lower than the gross
margin experienced with our other maintenance revenue.
Selling, general and administrative expenses were $4,384,000 in 2001, reflecting
a decrease of 7% from the $4,715,000 in 2000. This decrease was substantially in
the area of bonus provisions and costs related to issuance and extensions of
warrants and was partially offset by an increase in sales and marketing costs.
We incurred product development expenses of $1,335,000 in 2001, a decrease of 2%
from the $1,360,000 in 2000. During 2001, we continued to invest in improved
functionality and technology in our products, but at a lesser extent than in
2000.
Interest expense was $187,000 in 2001, an increase of $26,000, or 16%, from the
$161,000 in 2000. This increase was substantially the result of interest
associated with the $2,500,000 term loan arrangement, which we entered into in
June 2001.
Interest and other income consisted of interest income of $42,000 and other
income of $30,000.
We have a net operating loss tax carry forward of approximately $11 million. In
2001 we recorded an income tax benefit of $31,000. This benefit was based upon
an overaccrual of state and federal taxes in 2000. In 2000, we provided for
income taxes in the amount of $157,000. The 2000 provision was based upon
federal alternative minimum tax calculations as well as for certain state taxes.
In addition, we recognized a partial tax benefit in the amount of $494,000
principally related to our net operating loss carryfowards. We recognized an
additional $6,000 benefit of our operating loss carryfowards in 2001.
As a result of the foregoing factors, in 2001, we had a net income of $315,000,
or $.09 per share (basic) and $.08 per share (diluted). For 2000, we had net
income of $2,386,000, or $.71 per share (basic) and $.63 per share (diluted).
Years Ended December 31, 2000 and 1999
Our revenue for 2000 was $20,171,000, a decrease of $1,081,000, or 5%, from our
1999 revenue, which was $21,252,000. The largest component of revenue was
turnkey systems labor revenue, which decreased to $6,502,000 in 2000, from
$7,768,000 in 1999, reflecting a 16% decrease. This decrease reflects the
allocation of personnel to our product enhancement efforts instead of services
under the contracts. Revenue from third party hardware and software decreased to
$4,158,000 in 2000 from $5,915,000 in 1999, which represents a decrease of 30%.
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 behavioral health systems and services revenue. The data center (service
bureau) revenue increased to $2,263,000 in 2000 from $1,908,000 in the 1999,
reflecting an increase of 19%. This increase is substantially the result of work
being performed for one particular client which has not continued in 2001.
License revenue increased to $2,603,000 in 2000 from $2,228,000 in 1999,
reflecting an increase of 17%. 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. Maintenance revenue
increased to $3,521,000 in 2000 from $2,258,000 in 1999, reflecting an increase
of 56%. As turnkey systems are completed, they are transitioned to the
maintenance division. During 2000 we completed the turnkey systems for
approximately 32 new clients, for which we are performing maintenance services.
Revenue from the sales of our small turnkey division decreased to $1,124,000 in
2000 from $1,174,000 in 1999, reflecting a decrease of 4%.
Revenue from contracts from government agencies represented 51% of revenue in
2000 and 55% of revenue in 1999. This decrease reflects both the completion of
contracts with government agencies and recognition of revenue in 2000 from a
substantial contract with a private institution.
Gross profit increased to $8,215,000 in 2000 from $7,375,000 in 1999, reflecting
an 11% increase. Our overall gross margin was 41% in 2000 compared to 35% in
1999. The increase in gross margin was substantially attributable to the
decrease in our third party hardware and software revenue, which yields margins
significantly less than revenue from our behavioral health systems and services,
and the increase in maintenance revenue, which generates a higher gross margin
since the core costs and infrastructure investment have previously been
established.
Selling, general and administrative expenses were $4,715,000 in 2000, an
increase of 1% from the $4,680,000 in 1999.
We incurred product development expenses of $1,360,000 in 2000, an increase of
70% from the $800,000 in 1999. Research and development expenses increased in
2000 as a result of several major product initiatives. These initiatives include
the repositioning of all of our products to a client environment that will
facilitate alternative system delivery methods, including Internet and
application service provider channels. Additionally, we significantly upgraded
our core product to provide them with more current technologies and to integrate
them with customer specific requirements.
Interest expense was $161,000 in 2000, a decrease of $89,000, or 36%, from the
$250,000 in 1999. This decrease was the result of lower borrowings during 2000,
in addition to a reduced cost of borrowings. The most significant component of
the interest expense on an ongoing basis is the interest payable to our
asset-based lender. We paid interest on such loans at a rate equal to prime plus
5 % in 1999. In October 1999, we entered into a new credit facility agreement.
The interest rate of the new facility is 2% above the prime rate. During
2000, we paid all our outstanding borrowings from the lender, and, at December
31, 2000, there were no outstanding obligations to the lender.
We recognized a gain of $70,000 from our discontinued operations in 2000. This
gain resulted from the reduction in our reserve against a promissory note
received from the sale of the discontinued operations. We reduced the reserve as
a result of our sale of our interest in the purchaser for a note. In 1999, we
recognized a gain from our discontinued operations of $180,000.
We have a net operating loss tax carryforward of approximately $10.7 million.
However, in 2000, we provided for income taxes in the amount of $157,000. This
provision was based upon federal alternative minimum tax calculations as well as
for certain state taxes where we do not have any net operating loss carry
forwards. In addition, we recognized a partial tax benefit in the amount of
$494,000 principally related to our net operating loss carryforwards.
As a result of the foregoing factors, in 2000 we generated a net income from
continuing operations of $2,316,000, or $.69 per share (basic) and $.61 per
share (diluted), a gain from discontinued operations of $70,000, or $.02 per
share (basic and diluted), and a net income of $2,386,000, or $.71 per share
(basic) and $.63 per share (diluted). For 1999, we generated net income from
continuing operations of $1,645,000, or $.56 per share (basic) and $.47 per
share (diluted), a gain from discontinued operations of $180,000, or $.06 per
share (basic) and $.05 per share (diluted), and a net income of $1,825,000, or
$.62 per share (basic) and $.52 per share (diluted).
Liquidity and Capital Resources
In June 2001, we entered into a financing arrangement with Fleet Bank. This
improved credit facility medium term financing replaced our asset-based
borrowing facility. The new 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. The
term loan bears interest at a fixed rate of 7.95% per annum and the revolving
line of credit is priced at the prime rate. 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 December 31, 2001 under the borrowing base
formula was $1.5 million. The interest rate on the previous facility was prime +
2%. 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 will be utilized for general working capital needs. We did not use the
revolving line of credit during 2001. We have made principal payments on the
$2.5 million term loan and the amount outstanding at December 31, 2001 is
$2,250,000.
We had working capital of $7.9 million at December 31, 2001 as compared to
working capital of $5.9 million at December 31, 2000. The increase in working
capital for 2001 was substantially the result of our $2.5 million term loan as
well as cash flow from operations.
On May 10, 2001, we acquired the intellectual property, customer contracts and
certain other assets of Advanced Institutional Management Systems, Inc.
("AIMS"). The principal assets acquired were the AIMS' customer base and the
rights to AIMS' Correctional and Public Health Systems software. The purchase
price consisted of 180,000 shares of the Company's common stock, of which 18,000
shares are held in escrow and $500,000 cash. We funded the cash portion with our
term loan. In addition, we may issue up to 100,000 additional shares of common
stock, based upon revenue derived from new contracts for the AIMS systems.
At December 31, 2001, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $9.7 million, representing
approximately 192 days of revenue based on annualizing the revenue for the year
ended December 31, 2001, although no assurance can be given that revenue will
continue at the same level.
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. 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. If we fail to make any
acquisitions our future growth may be limited to only internal growth. As of the
date of this Form 10-K annual report, we did not have any agreements or
understandings with respect to any acquisitions, and we cannot give any
assurance that we will be able to complete any acquisitions.
Forward-Looking Statements
Statements in this Form 10-K annual 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. 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 this Form 10-K annual report, including the risks described
under "Risk Factors," 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-K.
Netsmart Technologies, Inc.
Quarterly Summary
Unaudited
In thousands, except per share data amounts
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
2001
Total revenue $ 4,575 $ 4,665 $ 4,575 $ 4,304
Gross profit 1,482 1,577 1,486 1,573
Net income 65 70 50 130
Per share amounts:
Net earnings - Basic: $ 0.02 $ 0.02 $ 0.01 $ 0.04
======== ======== ======== ========
Net earnings - Diluted: $ 0.02 $ 0.02 $ 0.01 $ 0.03
======== ======== ======== ========
2000 (a)
Total revenue $ 5,601 $ 4,909 $ 5,099 $ 4,562
Gross profit 2,085 2,142 1,884 2,104
Net income from continuing operations 437 453 451 975
Discontinued operations -- -- -- 70
Net income 437 453 451 1,045
Per share amounts:
Net earnings - Basic:
Continuing operations $ 0.14 $ 0.13 $ 0.13 $ 0.28
Discontinued operations $ -- $ -- $ -- $ 0.02
-------- --------- --------- ---------
$ 0.14 $ 0.13 $ 0.13 $ 0.30
======== ========= ========= =========
Net earnings - Diluted:
Continuing operations $ 0.12 $ 0.12 $ 0.12 $ 0.25
Discontinued operations $ -- $ -- $ -- $ 0.02
--------- --------- --------- ---------
$ 0.12 $ 0.12 $ 0.12 $ 0.27
========= ========= ========= =========
(a) Includes the benefit of a net operating loss in the amount of $494 in the
fourth quarter of 2000.
Earnings per share for each quarter are computed using the weighted-average
number of shares outstanding during that quarter, while earnings per share for
the full year are computed using the weighted-average number of shares
outstanding during the year. Thus, the sum of the earnings per share for the
four quarters' earnings per share may not equal the full-year earnings per
share.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data begin on page F-1 of this Form
10-K.
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10. Directors and Executive Officers of the Registrant.
Our directors and executive officers are as follows:
Name Age Position
- ---- --- --------
Edward D. Bright(1) 64 Chairman of the board and director
James L. Conway 53 Chief executive officer and director
Gerald O. Koop 62 President and director
Anthony F. Grisanti 52 Chief financial officer, treasurer and
secretary
John F. Phillips 63 Vice president and director
Joseph G. Sicinski(2) 69 Director
Francis J. Calcagno(2) 52 Director
John S.T. Gallagher(2) 71 Director
- ----------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Mr. Edward D. Bright has been our chairman of the board and a director
since April 1998. From April 1998 until 1999, Mr. Bright was chairman,
secretary, treasurer and a director of Consolidated Technology Group Ltd., a
public company now known as The Sagemark Companies, Ltd. In 2000, Mr. Bright was
reelected chairman of the board and a director of Sagemark. From January 1996
until April 1998, Mr. Bright was an executive officer of or advisor to Creative
Socio-Medics Corp., our wholly-owned subsidiary.
Mr. James L. Conway has been our chief executive office since April
1998, a director since January 1996 and president from January 1996 until
January 2001. From 1993 until April 1998, he was president of a Long Island
based manufacturer of specialty vending equipment for postal, telecommunication
and other industries.
Mr. Gerald O. Koop has been one of our directors since June 1998 and
president since January 2001. He has held management positions with Creative
Socio-Medics for more than the past five years, most recently as its chief
executive officer, a position he has held since 1996.
Mr. John F. Phillips has been one of our directors and president of
Creative Socio-Medics since June 1994, when Creative Socio-Medics was acquired,
and our vice president since June 1994.
Mr. Joseph G. Sicinski has been one of our directors since June 1998.
He is president and a director of the Trans Global Services, Inc., a technical
staffing company, a position he held with Trans Global and its predecessor since
September 1992. From April 1998 until December 2001, he was also chief executive
officer of Trans Global.
Mr. Francis J. Calcagno has been one of our directors since September
2001. He is a senior managing director of Dominick & Dominick LLC, a position
he has held since 1997. From 1993 until 1997, he was a managing director of
Deloitte and Touche, LLP.
Mr. John S.T. Gallagher has been one of our directors since March 2002.
He is deputy county executive for health and human services in Nassau County,
New York. He has been a senior executive officer of North Shore University
Hospital and North Shore - Long Island Jewish Health System since 1982, having
served as executive vice president of North Shore from 1982 until 1992,
president from 1992 until 1997 and chief executive officer of the combined
hospital system from 1997 until January 2002. In January 2002, he became
co-chairman of the North Shore - Long Island Jewish Heath System Foundation. Mr.
Gallagher is also a director of Perot Systems Corporation, a worldwide provider
of information technology services.
Directors are elected for a term of one year.
None of our officers and directors are related.
During 2001, one director, Mr. Calcagno, was late in filing his Form 3
Initial Statement of Beneficial Ownership.
Our board of directors has two committees - the audit committee and the
compensation committee.
The audit committee consists of three independent directors, Messrs.
Francis J. Calcagno, who is chairman of the committee, John S.T. Gallagher and
Joseph G. Sicinski. For 2001, the audit committee consisted of two independent
directors, Messrs. Francis J. Calcagno, who was chairman of the committee, and
Joseph G. Sicinski, and one director, Mr. Edward D. Bright, who is not an
employee or a family member of an employee but who is not an independent
directors under the Nasdaq guidelines. Mr. Bright serves as a consultant to us,
and his consulting contract is described under "Item 13. Certain Relationships
and Related Transactions." The board of directors has determined that, on an
interim basis, it is in our best interest for Mr. Bright to serve on the audit
committee.
The compensation committee, which is composed of Messrs. Calcagno,
Gallagher and Sicinski, serves as the stock option committee for our stock
option plans and the employee stock purchase plan, and it reviews and approves
any employment agreements with management and changes in compensation for our
executive officers.
Excluding actions by unanimous written consent, during 2001, the board
of directors held four meetings, the compensation committee held one meeting,
and the audit committee held four meetings. The audit committee met with our
independent accountants and chief financial officer prior to filing of this Form
10-K annual report to review the 2001 audited financial statements with the
independent auditors. During 2001, all of our directors attended at least 80% of
the meetings of the board and any committee of which they are members.
We pay a monthly fee of $750 to Messrs. Calcagno and Sicinski and
$2,000 to Mr. Gallagher and we pay the chairman of the board a monthly fee of
$1,500.
Our certificate of incorporation includes certain provisions, permitted
under Delaware law, which provide that a director shall not be personally liable
to us or our stockholders for monetary damages for breach of fiduciary duty as a
director except for liability (i) for any breach of the director's duty of
loyalty to us or our stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii) for
any transaction from which the director derived an improper personal benefit, or
(iv) for certain conduct prohibited by law. The Certificate of Incorporation
also contains broad indemnification provisions. These provisions do not affect
the liability of any director under federal or applicable state securities laws.
Item 11. Executive Compensation.
Set forth below is information with respect to compensation paid or
accrued by us for 2001, 2000 and 1999 to our chief executive officer and to each
of our other officers whose salary and bonus for 2001 exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Long-Term
------ ---------
Compensation Compensation
------------ ------------
(Awards)
--------
Options, SARs
Name and Principal Position Year Salary Bonus (Number)
- --------------------------- ---- ------ ----- ------------
James L. Conway, CEO 2001 $182,239 $ 61,261 --
2000 177,120 102,515 21,000
1999 172,000 107,000 --
Gerald O. Koop, president 2001 160,959 97,874 --
2000 156,480 139,269 21,000
1999 152,000 172,169 --
John F. Phillips, vice 2001 160,959 41,041 --
president 2000 156,480 83,973 18,750
1999 152,000 64,000 --
Anthony F. Grisanti, chief 2001 139,679 65,821 --
financial officer 2000 135,840 104,656 18,750
1999 132,000 100,000 --
The bonuses for Mr. Koop includes accrued commissions of $82,874 for
2001, $94,568 for 2000 and $100,169 for 1999. These commissions will be paid in
installments through 2002.
In January 2001, we entered into employment agreements with Messrs.
James L. Conway, John F. Phillips, Gerald O. Koop and Anthony F. Grisanti for a
term of three years for Messrs. Conway and Grisanti and two years for Messrs.
Koop and Phillips. We believe that these officers are vital to our business.
Each of the officers has the right to extend the term for an additional year.
Following termination of the employment term, or earlier at the discretion of
the officer, each of the officers has the right to continue as a part-time
consultant for a term of five years for annual compensation of $75,000. Pursuant
to these agreements, these officers received the following salaries in 2001: Mr.
Conway - $170,239, Mr. Koop - $148,959, Mr. Phillips - $148,959, and Mr.
Grisanti - $127,679. The agreements provide for annual increases. The agreements
provide that the executives are eligible to participate in a bonus pool to be
determined annually by the board, based on the executive's performance. The
agreements also provide each of these officers with an automobile allowance,
which is included under "Salary,"and insurance benefits. In the event of the
officer's dismissal or resignation or a material change in his duties or in the
event of a termination of employment by the executive or by us as a result of a
change of control, the officer may receive severance payments of between 30 and
36 months' compensation.
Option Exercises and Outstanding Options
The following table sets forth information concerning the exercise of
options during the year ended December 31, 2001 and the year-end value of
options held by our officers named in the Summary Compensation Table. No options
were granted during 2001 to any of our officers named in the Summary
Compensation Table. No stock appreciation rights have been granted.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
(All options were fully exercisable at year end)
Number of
Securities
Underlying Value of
Unexercised Unexercised In-the-
Shares Acquired Value Options at Fiscal Money Options at
Name Upon Exercise Realized Year End Fiscal Year End
---- ------------- --------- ------------------ ---------------
James L. Conway -- -- 69,250 $ 23,520
Gerald O. Koop 2,888 $3,350 101,000 162,920
John F. Phillips 9,000 7,290 98,750 160,400
Anthony F. Grisanti -- -- 23,802 28,224
The determination of "in the money" options at December 31, 2001, is
based on the closing price of the common stock on the Nasdaq SmallCap Market on
December 31, 2001, which was $2.93 per share.
The options held by Mr. Conway include warrants, exercisable at $12.00
per share, held by Mr. Conway (34,000 shares) and Mr. Conway's wife (14,250
shares). Mr. Conway disclaims beneficial interest in securities held by his
wife.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Set forth below is information as of December 31, 2001, as to each
person owning of record or known by us, based on information provided to us by
the persons named below and filings with the Securities and Exchange Commission,
to own beneficially at least 5% of our common stock, each director, each officer
listed in the Summary Compensation Table and all officers and directors as a
group.
Percent of
----------
Outstanding Common
------------------
Name and Address Shares Stock
- ---------------- ------ -----
John F. Phillips 215,972 5.7%
146 Nassau Avenue
Islip, New York 11751
R&R Opportunity Fund, L.P. 200,000 5.4%
1250 Broadway; 12th floor
New York, New York 10001
Edward D. Bright 188,172 5.0%
Gerald O. Koop 167,283 4.4%
James L. Conway 167,250 3.8%
Anthony F. Grisanti 120,171 3.2%
Joseph G. Sicinski 32,000 *
Francis J. Calcagno 0 0%
All directors and officers as 890,848 21.9%
a group (seven individuals)
- ----------
* Less than 1%.
Except as set forth in the following paragraphs, each person has the
sole voting and sole investment power and direct beneficial ownership of the
shares. Each person is deemed to beneficially own shares of common stock
issuable upon exercise of options or warrants which are exercisable on or within
60 days after the date as of which the information is provided.
The number of shares owned by our directors and officers shown in the
table includes shares of common stock which are issuable upon exercise of
options and warrants that are exercisable at December 31, 2001 or will become
exercisable within 60 days after that date. Set forth below is the number of
shares issuable upon exercise of those options and warrants for each of our
directors and the officers named in the Summary Compensation Table.
Name Number
- ---- ------
John F. Phillips 98,750
Edward D. Bright 86,250
Gerald O. Koop 101,000
James L. Conway 69,250
Anthony F. Grisanti 23,802
All officers and directors as a group 365,052
The options and warrants held by Mr. Conway include warrants,
exercisable at $12.00 per share, to purchase 34,000 held by Mr. Conway and
14,250 shares held by Mr. Conway's wife, as to which he disclaims beneficial
ownership.
Item 13. Certain Relationships and Related Transactions.
In August 2001, we entered into an exclusive investment banking
agreement Dominick & Dominick, Inc., of which Mr. Francis J. Calcagno, one of
our directors, is a senior managing director. Mr. Calcagno was not a director at
the time we entered into this agreement with Dominck & Dominick. Dominick &
Dominick holds warrants to purchase 100,000 shares of common stock at an
exercise price of $5.45 per share. These warrants were issued pursuant to a
nonexclusive investment banking agreement dated September 8, 1999.
We entered into a consulting agreement with Mr. Bright dated January 1,
2001, pursuant to which Mr. Bright is to devote 50% of his time to our business
for a period of two years, with Mr. Bright having the right to extend the term
for an additional year. Following the completion of the term, or earlier at the
discretion of Mr. Bright, Mr. Bright continues as a part-time consultant for an
additional five years. Mr. Bright receives compensation at the annual rate of
$75,000 during the consulting term, and we provide him with an automobile
allowance and insurance benefits. Mr. Bright is eligible, at the discretion of
the board, to participate in a bonus pool which may be established by the board.
___ In the event that Mr. Bright's consultant relationship is terminated as a
result of a change of control, we are to pay him as severance pay between 30 and
36 months compensation. We paid Mr. Bright total compensation of $88,180 for
2001, in addition to a bonus of $25,000.
Part IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.
1. Financial Statements
Report of Richard A. Eisner & Company, LLP
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Income for the Years Ended December 31, 2001,
2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
None
4. Exhibits
3.1(1) Restated Certificate of Incorporation, as amended
3.21 By-Laws
10.1 Employment Agreement dated January 1, 2001, between the
Registrant and James L. Conway.
10.2 Employment Agreement dated January 1, 2001, between the
Registrant and John F. Phillips.
10.3 Employment Agreement dated January 1, 2001, between the
Registrant and Gerald O. Koop.
10.4 Employment Agreement dated January 1, 2001, between the
Registrant and Anthony F. Grisanti.
10.5 Consulting Agreement dated January 1, 2001, between the
Registrant and Edward D. Bright
10.6(1) 1993 Long-Term Incentive Plan.
10.7(2) 1998 Long-Term Incentive Plan.
10.8(3) 1999 Long-Term Incentive Plan.
10.9(4) 2001 Long-Term Incentive Plan.
10.10(3) 1999 Employee Stock Purchase Plan
10.11 Agreement dated June 1, 2001, between the Registrant and Fleet
Bank.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent
25.1 Powers of attorney (See Signature Page)
- ----------
(1) Filed as an exhibit to the Registrant's registration statement on Form
S-1, File No. 333-2550, which was declared effective by the Commission on August
13, 1996, and incorporated herein by reference.
(2) Filed as an appendix to the Registrant's proxy statement dated
September 30, 1999, relating to its 1999 Annual Meeting of Stockholders and
incorporated herein by reference.
(3) Filed as an appendix to the Registrant's proxy statement dated
November 9, 2000, relating to its 2000 Annual Meeting of Stockholders and
incorporated herein by reference.
(4) Filed as an appendix to the Registrant's proxy statement dated
January 29, 2002, relating to its 2002 Annual Meeting of Stockholders and
incorporated herein by reference.
NETSMART TECHNOLOGIES, INC.
AND SUBSIDIARIES
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Page to Page
------------
Independent Auditors' Report....................................F-3
Consolidated Balance Sheets.....................................F-4........F-5
Consolidated Statements of Income...............................F-6........F-7
Consolidated Statements of Stockholders' Equity......... .......F-8
Consolidated Statements of Cash Flows...........................F-9........F-11
Notes to Consolidated Financial Statements .............. ......F-12.......F-28
. . . . . . . . . . .
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Netsmart Technologies, Inc.
We have audited the accompanying consolidated balance sheets of
Netsmart Technologies, Inc. and subsidiaries as of December 31, 2001 and 2000
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three year period ended December 31, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Netsmart Technologies, Inc. and its subsidiaries as of December 31, 2001 and
2000, and the consolidated results of their operations and their consolidated
cash flows for each of the years in the three year period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America.
Richard A. Eisner & Company, LLP
New York, New York
February 15, 2002
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
------------
2001 2000
---- ----
Assets:
Current Assets:
Cash and Cash Equivalents $ 3,837,226 $ 2,418,947
Accounts Receivable - Net 5,876,970 4,688,598
Costs and Estimated Profits in Excess
of Interim Billings 3,783,356 4,068,255
Deferred taxes 500,000 494,000
Other Current Assets 128,232 144,942
----------- -----------
Total Current Assets 14,125,784 11,814,742
----------- -----------
Property and Equipment - Net 366,356 512,281
----------- -----------
Other Assets:
Software Development Costs - Net 686,301 822,645
Customer Lists - Net 2,618,145 2,064,832
Other Assets 210,787 86,213
----------- -----------
Total Other Assets 3,515,233 2,973,690
----------- -----------
Total Assets $18,007,373 $15,300,713
=========== ===========
See Notes to Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
2001 2000
---- ----
Liabilities and Stockholders' Equity:
Current Liabilities:
Current Portion - Long Term Debt $ 500,000 $ --
Current Portion Capital Lease Obligations 28,905 35,756
Accounts Payable 688,682 807,298
Accrued Expenses 359,908 1,154,647
Interim Billings in Excess of Costs and Estimated
Profits 3,959,230 3,350,697
Deferred Revenue 685,569 608,444
----------- ----------
Total Current Liabilities 6,222,294 5,956,842
----------- ----------
Capital Lease Obligations - Less current portion
included above 12,519 40,458
Long Term Debt - Less current portion 1,750,004 --
Interest Rate Swap at Fair Value 74,875 --
----------- ----------
Total Non Current Liabilities 1,837,398 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 3,719,247 shares
at December 31, 2001, 3,524,692 shares at
December 31, 2000 37,192 35,246
Additional Paid in Capital 20,856,166 20,454,391
Accumulated Comprehensive loss - Interest Rate Swap (74,875) --
Accumulated Deficit (10,570,992) (10,886,414)
----------- ----------
10,247,491 9,603,223
Less cost of shares of Common Stock held
in treasury - 28,038 shares at December 31,
2001 and 2000 299,810 299,810
----------- ----------
Total Stockholders' Equity 9,947,681 9,303,413
----------- ----------
Total Liabilities and Stockholders' Equity $ 18,007,373 $ 15,300,713
=========== ==========
See Notes to Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Year ended December 31,
----------------------
2001 2000 1999
---- ---- ----
Revenues:
Software and Related
Systems and Services:
General $10,885,337 $14,387,256 $17,085,603
Maintenance Contract
Services 5,191,986 3,520,717 2,257,869
---------- ---------- ----------
Total Software and Related
Systems and Services 16,077,323 17,907,973 19,343,472
Data Center Services 2,042,098 2,262,676 1,908,158
---------- ---------- ----------
Total Revenues 18,119,421 20,170,649 21,251,630
---------- ---------- ----------
Cost of Revenues:
Software and Related
Systems and Services:
General 7,367,949 8,645,275 11,054,960
Maintenance Contract
Services 3,614,336 2,285,663 1,713,759
---------- ---------- ----------
Total Software and Related
Systems and Services 10,982,285 10,930,938 12,768,719
Data Center Services 1,018,950 1,024,523 1,107,571
---------- ---------- ----------
Total Cost of Revenues 12,001,235 11,955,461 13,876,290
---------- ---------- ----------
Gross Profit 6,118,186 8,215,188 7,375,340
---------- ---------- ----------
Selling, General and
Administrative Expenses 4,384,291 4,714,829 4,679,866
Research and Development 1,334,577 1,359,781 800,470
---------- ---------- ----------
Total 5,718,868 6,074,610 5,480,336
---------- ---------- ----------
Income from Continuing Operations
before Interest Expense 399,318 2,140,578 1,895,004
Interest and Other Income 71,742 -- --
Interest Expense 186,638 161,386 250,235
---------- ---------- ----------
Income from Continuing Operations
before Income Tax Expense (Benefit) 284,422 1,979,192 1,644,769
Income Tax Expense (Benefit) (31,000) (336,827) --
---------- ---------- ----------
Income from Continuing Operations 315,422 2,316,019 1,644,769
---------- ---------- ----------
See Notes to Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Discontinued Operations:
Gain on Sale of Discontinued Operations -- 70,000 180,000
----------- ----------- ------------
Income from Discontinued Operations -- 70,000 180,000
----------- ----------- ------------
Net Income $ 315,422 $ 2,386,019 $ 1,824,769
=========== =========== ============
Earnings Per Share of Common Stock:
Basic:
Income from Continuing Operations $ .09 $ .69 $ .56
Income from Discontinued Operations -- .02 .06
----------- ------------ ------------
Net Income $ .09 $ .71 $ .62
=========== ============ ============
Weighted Average Number of Shares of
Common Stock Outstanding 3,618,260 3,367,005 2,921,254
=========== ============ ============
Diluted:
Income from Continuing Operations $ .08 $ .61 $ .47
Income from Discontinued Operations -- .02 .05
----------- ------------ ------------
Net Income $ .08 $ .63 $ .52
=========== ============ ============
Weighted Average Number of Shares of
Common Stock Outstanding 3,871,876 3,770,992 3,516,317
=========== ============ ============
See Notes to Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Accumulated
-----------
Additional Additional Comprehensive
---------- ---------- -------------
Paid-in Paid-in Loss
------- ------- ----
Series D Capital Capital Interest Total
-------- ------- ------- -------- -----
Preferred Stock Preferred Common Stock Common Accumulated Rate Comprehensive Treasury Shares Stockholders'
--------------- --------- ------------ ------ ----------- ---- ------------- --------------- -------------
Shares Amount Stock Shares Amount Stock Deficit Swap Income Shares Amount Equity
------------- ----- ------ ------ ----- ------- ---- ------ ------ ------ ------
Balance-
December
31, 1998 1,210 $ 12 $ 1,209,509 2,786,921 $27,869 $17,203,904 $(15,097,202) $ - 5,333 $(60,000) $3,284,092
Common
Stock
Issued-
Exercise
of Options 99,317 993 112,554 113,547
Common
Stock
Issued-
Consultant 2,500 25 5,600 5,625
Common
Stock
Issued for (1,210) (12) (1,209,509) 100,000 1,000 1,208,521 --
Redemption
of Series D
Preferred
Stock
Issuance
and
Extension
of
Warrants 127,000 127,000
Net Income 1,824,769 $1,824,769 1,824,769
----- --- --------- --------- ------ ---------- ---------- -------- ========= ------ ------- ---------
-- -- -- 2,988,738 29,887 18,657,579 (13,272,433 -- 5,333 (60,000) 5,355,033
Balance-
December
31, 1999
Common
Stock
Issued-
Exercise of
Options 328,321 3,283 378,258 22,705 (239,810) 141,731
Common
Stock
Issued-
Exercise of
Warrants 192,105 1,921 1,137,709 1,139,630
Common
Stock
Issued-
Acquisition 15,528 155 99,845 100,000
Issuance
and
Extension
of
Warrants 181,000 181,000
Net Income 2,386,019 2,386,019 2,386,019
----- --- --------- --------- ------ ---------- ---------- -------- ========= ------ ------- ---------
Balance-
December
31,2000 -- -- -- 3,524,692 35,246 20,454,391 (10,886,414) -- 28,038 (299,810) 9,303,413
Common
Stock
Issued-
Exercise
of
Options 14,555 146 21,688 21,834
Common
Stock
Issued-
Acquisition 180,000 1,800 374,400 376,200
Issuance and
Extension of
Warrants 5,687 5,687
Change in
Fair Value
of Interest
Rate Swap (74,875) (74,875) (74,875)
Net Income 315,422 315,422 315,422
----- --- --------- --------- ------ ---------- ---------- -------- --------- ------ ------- ---------
$ 240,547
=========
Balance-
December
31, 2001 -- $ -- $ -- 3,719,247 $37,192 $20,856,166 $(10,570,992 $(74,875) 28,038 $(299,810) $9,947,681
===== === ========= ========= ====== ========== ========== ====== ====== ======= =========
See Notes to Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Year ended December 31,
2001 2000 1999
---- ---- ----
Operating Activities:
Income from Continuing Operations $ 315,422 $ 2,316,019 $ 1,644,769
------------ ----------- -----------
Adjustments to Reconcile Income
from Continuing Operations to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 1,010,821 717,776 600,907
Financing Costs Related to Issuance
and Extension of Warrants 5,687 181,000 127,000
Financing Expenses related to the issuance
of Common Stock -- 5,625
Provision for Doubtful Accounts 340,000 330,000 84,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,528,372) 771,136 (2,273,709)
Costs and Estimated Profits in
Excess of Interim Billings 284,899 184,817 (1,353,377)
Other Current Assets 16,710 22,574 (57,921)
Deferred Taxes (6,000) (494,000) --
Other Assets (124,574) 76,259 (61,408)
Increase [Decrease] in:
Accounts Payable (118,616) (1,754,789) 395,754
Accrued Expenses (794,739) (88,901) 64,655
Interim Billings in Excess of
Costs and Estimated Profits 413,547 (400,150) 1,946,848
Deferred Revenue 77,125 519,898 40,927
------------ ----------- -----------
Total Adjustments (423,512) 65,620 (480,699)
------------ ----------- -----------
Net Cash (Used In) Provided
by Operating Activities 108,090 2,381,639 1,164,070
------------ ----------- -----------
Investing Activities:
Acquisition of Property and
Equipment (120,765) (223,491) (366,751)
Net Cost of AIMS Acquisition (589,914) -- --
Software Development Costs -- (536,100) (208,972)
Cash Provided by Discontinued Operations -- 220,000 180,000
------------ ------------ ----------
Net Cash Used In Investing Activities (710,679) (539,591) (395,723)
------------ ------------ ----------
See Notes to Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Y e a r e n d e d
-------------------
D e c e m b e r 3 1,
----------------------
2001 2000 1999
---- ---- ----
Financing Activities:
Proceeds from Short-Term Notes -- -- 882,404
Payment of Short-Term Notes (882,404) (1,639,694)
Proceeds from Term Loan 2,500,000
Repayment of loans from related parties -- -- (84,000)
Payment of Capitalized Lease Obligations (34,790) (27,047) (34,304)
Net Proceeds from Warrant Exercise -- 1,139,630
Net Proceeds from Stock Option Exercise 21,834 141,731 113,547
Payments of Term Loan (249,996) -- --
---------- ---------- -----------
Net Cash Provided by (Used in)
Financing Activities 2,237,048 371,910 (762,047)
---------- ---------- -----------
Net Increase in Cash
and Cash Equivalents 1,418,279 2,213,958 6,300
Cash and Cash Equivalents -
Beginning of Year 2,418,947 204,989 198,689
---------- ---------- -----------
Cash and Cash Equivalents -
End of Year $3,837,226 $2,418,947 $ 204,989
========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the years for:
Interest $ 135,566 $ 172,556 $ 262,884
Income Taxes $ 87,859 $ 157,173 $ 41,478
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Year ended December 31, 2001:
The Company issued 180,000 shares of common stock related to the AIMS
acquisition. These shares were valued at $376,200 which was the market value at
the date of grant. The Company also recorded a liability of $194,986 for
contract obligations assumed.
The Fair value of the interest rate swap calculated at December 31, 2001 was
$74,875.
Year ended December 31, 2000:
The Company issued 15,528 shares of common stock to acquire the Connex suite of
managed care and employee assistance program information systems software. These
shares were valued at $100,000 which was the market value on date of issuance.
During 2000, stock options to purchase 328,321 shares were exercised, and
proceeds of $381,541 includes $239,810 representing the market value of 22,705
shares of the Company's common stock which was received for the exercise price
of certain of these options.
During 2000, the Company entered into a capitalized lease obligation to purchase
equipment in the amount of $13,249.
Year ended December 31, 1999:
In April 1999, the Company issued 100,000 shares of common stock to Consolidated
Technology Group Ltd. ("Consolidated"), now known as The Sagemark Companies, for
which Consolidated transferred to the Company, the 1,210 shares of the Company's
Series D 6% Redeemable Preferred Stock which it owned, including the right to
receive $145,200 of accumulated dividends, and warrants to purchase 188,333
shares of common stock. The shares of Series D Preferred Stock and the annual
dividends of $72,600 associated with the Series D Preferred Stock were
cancelled.
During 1999, the Company entered into a capitalized lease obligation to purchase
equipment in the amount of $40,000.
See Notes to Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #1
- --------------------------------------------------------------------------------
[1] The Company
Netsmart Technologies, Inc. and subsidiaries (the "Company") licenses and
installs its proprietary software products, operates an established service
bureau and enters into long term maintenance agreements with behavioral health
organizations and methadone clinics and other substance abuse facilities
throughout the United States.
During 2001, the Company acquired the intellectual property, customer contracts
and certain other assets of Advanced Institutional Management Systems ("AIMS").
The acquisition was accounted for under the purchase method of accounting. The
principal assets acquired were the AIMS' customer base and the rights to AIMS'
Correctional and Public Health Systems software. The purchase price consisted of
180,000 shares of the Company's common stock, valued at $376,200, of which
18,000 shares are held in escrow, and $500,000 cash. In addition, the Company
may issue up to 100,000 additional shares of common stock, based on revenue
derived from new contracts for the AIMS systems. The value of such shares, if
issued, will be charged to operations. The Company also assumed certain contract
obligations. The Company has allocated $194,986 of assumed contract obligations
to the purchase price. The cost of the acquisition was $1,161,100, of which
$167,000 was allocated to software development and $994,100 to customer lists.
The Company is amortizing the purchased software over a three-year life and the
customer lists over a seven-year life.
The following unaudited proforma condensed statements of operations assumes the
AIMS acquisition occurred on January 1, 2000. In the opinion of management, all
adjustments necessary to present fairly such unaudited proforma statements have
been made. AIMS fiscal year end is September 30. For the following proforma
condensed statements of operations, the AIMS year end of September 30 is
consolidated with the Netsmart fiscal year end of December 31.
2001 2000
---- ----
( In 000's)
Revenue $18,461 $22,045
Net Income $ 323 $ 2,613
Net Income Per Share - Basic $ 0.09 $ 0.74
- Diluted $ 0.08 $ 0.66
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
Netsmart Technologies, Inc. ("Netsmart"), and its wholly-owned subsidiary,
Creative Socio-Medics Corp. ("CSM") as well as PsyMedX, a joint venture in which
Netsmart owns an 80% interest. In addition, the results of operations from the
AIMS acquisition is included from May 2001. All intercompany transactions are
eliminated in consolidation. No minority interest related to the joint venture
has been recorded, since the joint venture partner was in breach of the joint
venture agreement and in 2001 ceased to exist.
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid instruments
purchased with a maturity of three months or less to be cash equivalents. Cash
equivalents totaled approximately $2,035,000 and $363,000 at December 31, 2001
and 2000 respectively.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
Concentration of Credit Risk - The Company extends credit to customers which
results in accounts receivable arising from its normal business activities. The
Company does not require collateral or other security to support financial
instruments subject to credit risk. The Company routinely assesses the financial
strength of its customers and based upon factors surrounding the credit risk of
the customers believes that its accounts receivable credit risk exposure is
limited.
The Company's behavioral health information systems are marketed to specialized
care facilities, many of which are operated by government entities and include
entitlement programs. During the years ended December 31, 2001, 2000 and 1999,
approximately 40%, 51% and 55% respectively, of the Company's revenue were
generated from contracts with government agencies.
During the year ended December 31, 2001 and 2000, no one customer accounted for
more than 10% of revenue. During the year ended December 31, 1999, one customer
accounted for approximately $3,835,000 or 18% of revenue.
The Company places its cash and cash equivalents with high credit quality
financial institutions. The amount on deposit in any one institution that
exceeds federally insured limits is subject to credit risk. At December 31, 2001
and 2000, cash and cash equivalent balances of $3.6 million and $2.2 million
respectively, were held at a financial institution in excess of federally
insured limits.
Revenue Recognition - The Company recognizes revenue principally from the
licensing of its 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. The Company also derives 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.
Property and Equipment and Depreciation - Property and equipment is stated at
cost less accumulated depreciation. Depreciation of property and equipment is
computed by the straight-line method at rates adequate to allocate the cost of
applicable assets over their expected useful lives. Amortization of leasehold
improvements is computed using the shorter of the lease term or the expected
useful life of these assets.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
Estimated useful lives are as follows:
Equipment 3-5 Years
Furniture and Fixtures 5 Years
Leasehold Improvements 5 Years
Capitalized Software Development Costs - Capitalization of computer software
development costs begins upon the establishment of technological feasibility.
Technological feasibility for the Company's computer software products is
generally based upon achievement of a detail program design free of high risk
development issues. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized computer software
development costs requires considerable judgement by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenue, estimated economic life and
changes in software and hardware technology.
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 Company periodically performs reviews of the recoverability of such
capitalized software costs. At the time a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be generated
from the applicable software net realizable value, any remaining capitalized
amounts are written off.
During 2000, the Company acquired the Connex suite of managed care and employee
assistance program information systems. The acquisition price consisted of
approximately $47,000 in cash and 15,528 shares of Netsmart's common stock
valued at $100,000. The purchase price was allocated to computer software in the
amount of $147,000. During 2000, the Company made additional enhancements to the
purchased software in the amount of $270,000. As of December 31, 2001, the
Company has invested approximately $417,000 on this effort of which $256,000
remains capitalized.
During 1999, the Company established PsyMedX, a joint venture with Pathware Inc.
The Company owns 80% of PsyMedX and Pathware, Inc. owns 20%. The agreement
focuses on a joint effort to develop and market web portal services and ASP
solutions for the behavioral/public healthcare providers, consumers and managers
throughout the United States. As of December 31, 2001, the Company has invested
approximately $428,000 in this venture of which $285,000 remains capitalized.
Information related to capitalized software costs applicable to continuing
operations is as follows:
Year ended December 31, 2001 2000 1999
----------------------- ---- ---- ----
Beginning of Year $ 822,645 $ 310,722 $ 142,450
Capitalized 167,000 636,100 208,972
Amortization (303,344) (124,177) (40,700)
--------- --------- ---------
Net $ 686,301 $ 822,645 $ 310,722
========= ========= =========
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
Customer Lists - Customer lists represent a listing of customers obtained
through the acquisitions of CSM and AIMS to which the Company can market its
products. Customer lists are being amortized on the straight-line method over an
estimated useful life of 12 years for the CSM list and 7 years for the AIMS
list.
Customer lists at December 31, 2001 and 2000 are as follows:
December 31,
2001 2000
---- ----
Customer Lists $4,106,223 $4,106,223
Acquisition of AIMS 994,100 --
Less: Accumulated Amortization 2,482,178 2,041,391
--------- ---------
Net $2,618,145 $2,064,832
========== ==========
Amortization expense amounted to $440,787, $334,276 and $334,284, respectively,
for the years ended December 31, 2001, 2000 and 1999.
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 established accounting standards for the
impairment of long-lived assets and certain identifiable intangibles, and
goodwill related to those assets to be held and used, and for long- lived assets
and certain identifiable intangibles to be disposed of. Management has
determined that expected future cash flows (undiscounted and without interest
charges) exceed the carrying value of the long lived assets at December 31, 2001
and believes that no impairment of these assets has occurred.
Stock Options and Similar Equity Instruments - The Company adopted the
disclosure requirements of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," for stock options and
similar equity instruments (collectively, "Options") issued to employees.
However, the Company has elected to apply the intrinsic value based method of
accounting for options issued to employees prescribed by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" rather
than the fair value based method of accounting prescribed by SFAS No. 123. SFAS
No. 123 also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. Those transactions
are accounted for based on the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably
measurable.
Earnings Per Share - Basic earnings per share of common stock is computed by
dividing income from continuing operations and net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share reflects the amount of earnings for the period available to
each share of common stock outstanding during the reporting period, giving
effect to all potentially dilutive shares of common stock from the potential
exercise of stock options and warrants.
The computation of diluted earnings per share does not assume conversion,
exercise or contingent issuance of securities that would have an antidilutive
effect on earnings per share (i.e. improving earnings per share). The dilutive
effect of outstanding options and warrants and their equivalents are reflected
in dilutive earnings per share by the application of the treasury stock method.
Options and warrants will have a dilutive effect only when the average market
price of the common stock during the period exceeds the exercise price of the
options or warrants. The Company had potentially dilutive options and warrants
outstanding of 723,385, 974,275 and 978,022 at December 31, 2001, 2000 and 1999,
respectively.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Numerator:
Income from continuing operations $ 315,422 $2,316,019 $1,644,769
Discontinued operations:
Gain on sale of discontinued operations -- 70,000 180,000
----------- ---------- ----------
Net income available to common stockholders $ 315,422 $2,386,019 $1,824,769
=========== ========== ==========
Denominator:
Weighted average shares 3,618,260 3,367,005 2,921,254
----------- ---------- ----------
Effect of dilutive securities:
Employee stock options 253,616 403,987 584,075
Stock warrants -- -- 10,988
----------- ---------- ----------
Dilutive potential common shares 253,616 403,987 595,063
----------- ---------- ----------
Denominator for diluted earnings per
share-adjusted weighted average shares
after assumed conversions 3,871,876 3,770,992 3,516,317
=========== ========== ==========
Research and Development - Research and development costs are charged to expense
as incurred.
Advertising - Advertising costs are expensed as incurred. Advertising expense
amounted to $290,146, $226,024 and $89,488 for the three years ended December
31, 2001, 2000 and 1999, respectively.
Reclassification - Certain prior years' amounts have been reclassified to
conform to the current year's presentation.
Financial Instruments - Effective June 2001 the Company adopted SFAS No. 133,
"Accounting for Derivative instruments and Hedging Activities" as amended. SFAS
No. 133 requires the recognition of all derivative instruments as either assets
or liabilities on the balance sheet measured at fair value. Generally, increases
or decreases in the fair value of derivative instrument will be recognized as
gains or losses in earnings in the period of change. If the derivative
instrument is designated and qualifies as a cash flow hedge, the change in fair
value of the derivative instrument will be recorded as a separate component of
shareholders' equity.
The Company entered into an interest rate swap to hedge exposure related to
changes in the LIBOR rate. Before entering into a derivative transaction for
hedging purposes, it is determined that a high degree of initial effectiveness
exists between the change in value of the hedged item and the change in the
value of the determinative instrument from movement in interest rates. High
effectiveness means that the change in the value of the derivative instrument
will effectively offset the change in the fair value of the hedge item. The
effectiveness of each hedged item is measured throughout the hedged period. Any
hedge ineffectiveness as defined by SFAS No. 133 is recognized in the income
statement.
New Accounting Pronouncements - In June 2001, the FASB issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Under these new standards, all acquisitions subsequent to June 30,
2001 must be accounted for under the purchase method of accounting, and
purchased goodwill is no longer amortized over its useful life. Rather,
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
goodwill will be subject to a periodic impairment test based upon its fair
value.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"), SFAS 143 establishes accounting standard for
recognition and measurements of a liability for the costs of asset retirement
obligations. Under SFAS 143, the costs of retiring an asset will be recorded as
a liability when the retirement obligation arises, and will be amortized to
expense over the life of the asset.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
discontinued operations.
Adoption of SFAS 141 will not have any effect on the Company's financial
position of results of operation. Netsmart is currently evaluating the impact of
SFAS 142, SFAS 143 and SFAS 144 to determine the effect, if any, they may have
on the consolidated financial position and results of operations. Netsmart is
required to adopt each of these standards in the first quarter of the year
ending December 31, 2002.
[3] Accounts Receivable
Accounts receivable is shown net of allowance for doubtful accounts of $357,994
and $370,222 at December 31, 2001 and 2000 respectively. The changes in the
allowance for doubtful accounts are summarized as follows:
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Beginning Balance $ 370,222 $ 305,226 $ 372,797
Provision for Doubtful Accounts 340,000 330,000 84,000
Charge-offs (352,228) (265,004) (151,571)
--------- --------- ---------
Ending Balance $ 357,994 $ 370,222 $ 305,226
========= ========= =========
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[4] Costs and Estimated Profits in Excess of Interim Billings and Interim
Billings in Excess of Costs and Estimated Profits
Costs, estimated profits, and billings on uncompleted contracts are summarized
as follows:
December 31,
------------
2001 2000
---- ----
Costs Incurred on Uncompleted Contracts $16,065,533 $15,063,888
Estimated Profits 8,803,818 9,368,984
----------- -----------
Total 24,869,351 24,432,872
Billings to Date 25,045,225 23,715,314
----------- -----------
Net $ (175,874) $ 717,558
=========== ===========
Included in the accompanying balance sheet
under the following captions:
Costs and estimated profits
in excess of interim billings $ 3,783,356 $ 4,068,255
Interim billings in excess of costs
and estimated profits (3,959,230) (3,350,697)
----------- -----------
Net $ (175,874) $ 717,558
=========== ===========
[5] Discontinued Operations
During 1998 the Company discontinued its CarteSmart division which included its
interest in a joint venture. On June 30, 1998, the Company sold this division,
with an option to purchase the Company's interest in the joint venture if the
other party to the venture did not elect to acquire the Company's interest, to
Granite Technologies, Inc. ("Granite"), a corporation formed by the former
management of the division. Granite issued to the Company its $500,000
promissory note and an equity interest in Granite equal to 20% at the time of
transaction. Granite also agreed to pay certain royalties to the Company. The
note was subject to cancellation if the other party to the joint venture elected
to purchase the Company's interest. As the Company has virtually no influence
over the financing and operating policies of Granite, the interest in Granite is
accounted for using the cost method. During 2000, the Company's 20% interest in
Granite was diluted to 13% as a result of additional equity issued by Granite to
third parties.
During 2001, Granite was purchased by The Finx Group, Inc. ("Finx") and the
Company received 496,124 restricted shares of Finx for its 13% interest in
Granite. The Finx shares are traded in the OTC Bulletin Board. During 2001, the
Company advanced Granite $39,490 for working capital purposes. In December 2001,
Finx repaid the advance with 79,661 shares of its common stock. At December 31,
2001, the Company valued its aggregate holding in Finx, consisting of 575,785
shares at $69,490. The Finx shares are included in other assets.
In October 1998, the other party to the joint venture exercised its right to
purchase the Company's interest in the joint venture for a $500,000 note. The
Company has been paid in full from installment payments on this note over a
period ranging from November 1998 through December 2000. The Company recognized
gain on the sale of discontinued operations as it continually revalued this note
throughout the payment period.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- --------------------------------------------------------------------------------
[6] Property and Equipment
Property and equipment consist of the following:
December 31,
2001 2000
---- ----
Equipment, Furniture and Fixtures $1,191,975 $1,082,773
Leasehold Improvements 294,152 282,589
---------- ----------
Totals - At Cost 1,486,127 1,365,362
Less: Accumulated Depreciation 1,119,771 853,081
---------- ----------
Net $ 366,356 $ 512,281
========== ==========
Depreciation expense amounted to $266,690, $259,323, and $225,923, respectively
for the years ended December 31, 2001, 2000 and 1999.
[7] Bank Financing
Bank Financing - In June 2001, the Company entered into a financing agreement
with a bank. This improved credit facility and medium term financing replaces
the Company's asset based borrowing facility. The new financing provides the
Company with a five-year term loan of $2.5 million and a two year $1.5 million
revolving line of credit. The term loan is paid in equal monthly installments
during the term of the loan plus interest. Proceeds from the term loan are
available for acquisitions and to upgrade certain software systems to meet
requirements in California. Funds drawn down from the revolving line of credit
are to be used for working capital purposes. The term loan bears interest at the
Company's option, to be equal to either (i) LIBOR plus 2.5% or (ii) the Prime
Rate. The revolving line of credit will bear interest, at the Company's option,
to be equal to either (i) LIBOR plus 2.0% or (ii) the Prime Rate, and incurr and
annual facility fee of 0.5%. On July 12, 2001, the Company entered into an
interest rate swap agreement on the term loan at 7.95% for five years. The
financing agreement contains certain covenants including limitations on the
Company's ability to incur liens, enter into change of control transactions,
maintain a minimum net worth at $9,000,000 and requires the maintenance of
certain financial ratios. The interest rate on the previous facility was prime
plus 2%. As of December 31, 2001, the Company owes $2,250,000 on the term loan,
of which $500,000 is classified as a current liability and $1,750,000 is
classified as a long term liability. The Company has not utilized any borrowing
availability on the $1.5 million revolving line of credit. The borrowing is
collateralized by a first priority security interest and lien on all the assets
of the Company.
[8] Income Taxes
The Company utilizes an asset and liability approach to determine the extent of
any deferred income taxes, as described in SFAS No. 109, "Accounting for Income
Taxes." This method gives consideration to the future tax consequences
associated with differences between financial statement and tax bases of assets
and liabilities.
At December 31, 2001, the Company has net operating loss carryforwards of
approximately $11,000,000 expiring by 2020. Pursuant to Section 382 of the
Internal Revenue Code regarding substantial changes in Company ownership,
utilization of approximately $6,500,000 of this net operating loss carryforward
is limited to approximately $1,360,000 per year, plus any prior years' amounts
not utilized. In addition, the tax benefit of approximately $1,800,000 of net
operating losses generated in 2000 on exercise of non-qualified compensatory
stock options and warrants will be credited to paid-in-capital as utilized.
The Company's provision for taxes for the year ended December 31, 2000 includes
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------
[8] Income Taxes - [Continued]
Federal alternative minimum taxes after utilizing its net operating loss as well
as certain state and local taxes.
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
- ------------ ------
2012 $ 71,000
2013 440,000
2014 1,010,000
2015 1,474,000
2016 2,413,000
2017 2,664,000
2018 716,000
2019 133,000
2020 1,810,000
2021 269,000
------------
$11,000,000
Provision for income taxes consists of the following:
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Current:
Federal $ (43,280) $ 43,280 $ --
State 18,280 113,893 --
---------- ----------- -----------
(25,000) 157,173 --
---------- ----------- -----------
Deferred:
Federal -- (442,000) --
State (6,000) (52,000) --
---------- ----------- -----------
(6,000) (494,000) --
---------- ----------- -----------
Total $ (31,000) (336,827) $ --
========== =========== ===========
The Company realized a tax benefit of approximately $909,000, during the year
ended December 31, 1999, from the utilization of a net operating loss
carryforward.
The difference between income taxes at the statutory Federal income tax rate and
income taxes reported in the income statement is as follows:
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Income taxes at the federal statutory rate 34% 34% 34%
State and local income taxes net of Federal taxes 5% 5% 6%
Nondeductible expenses 9% 5%
Utilization of net operating loss carryforward -- -- (53)%
Federal Minimum Tax -- 2% 3%
Stock Option Deduction -- (46)% --%
(Decrease) increase in valuation allowance (14)% (25)% 10%
Overaccrual from prior year (45)% -- --
Other -- 8%
------- ------ -----
(11)% (17)% 0%
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- --------------------------------------------------------------------------------
[8] Income Taxes - [Continued]
Significant components of the Company's deferred tax assets are comprised
of the following:
December 31,
------------
2001 2000
---- ----
Net operating loss carryforward $ 4,178,000 $ 3,965,000
Allowance for doubtful accounts 136,000 141,000
Accrued vacation and bonuses 122,000 363,000
Alternative minimum tax credit carryforward 43,000 43,000
Benefit of stock based compensation awards 502,000 502,000
----------- -----------
Total deferred tax assets 4,981,000 5,014,000
Valuation allowance (4,481,000) (4,520,000)
----------- -----------
Net deferred tax assets $ 500,000 $ 494,000
=========== ===========
The Company has provided a valuation allowance in the amount of $4,481,000 of
the deferred tax asset of approximately $4,981,000. The valuation allowance
decreased by $39,000 at December 31, 2001. The Company believes that based upon
its average income over its past three years, that it is more likely than not,
to use at least a portion of its net operating loss carryforward. The valuation
allowance decreased by $905,000 and $475,000 at December 31, 2000 and 1999
respectively.
The change in the valuation allowance for deferred tax assets are summarized as
follows:
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Beginning Balance $4,520,000 $5,425,000 $5,900,000
Change in Allowance (39,000) (905,000) (475,000)
---------- ---------- ----------
Ending Balance $4,481,000 $4,520,000 $5,425,000
========== ========== ==========
[9] Stockholders' Equity
The Company is authorized to issue 3,000,000 shares of preferred stock, par
value $.01 per share, and 15,000,000 shares of common stock, par value $.01 per
share. The Company's Board of Directors is authorized to issue preferred stock
from time to time without stockholder action, in one or more distinct series.
The Board of Directors is authorized to determine the rights and preferences of
the preferred stock when issued. The Board of Directors has authorized the
issuance of Series A, Series B and Series D preferred Stock. No shares of any
series of preferred stock were outstanding on December 31, 2001.
Pursuant to a March 25, 1999, agreement between the Company, Consolidated and a
group of purchasers, consisting principally of the Company's management and
directors, on April 8, 1999, Consolidated transferred to the Company the 1,210
shares of the Company's Series D 6% Redeemable Preferred Stock, including the
right to receive $145,200 of accumulated dividends for which the Company issued
100,000 shares of common stock to Consolidated. The shares of Series D Preferred
Stock have been cancelled as well as the annual dividends of $72,600 associated
with the Series D Preferred Stock.
Common Stock Issuances - During 2000, Series B Common Stock Purchase Warrants to
purchase an aggregate of 192,105 shares of Common Stock at $6 per share were
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- --------------------------------------------------------------------------------
[9] Stockholders' Equity - [Continued]
exercised. The Company received $1.1 million from the exercise of the warrants.
Treasury Stock - During 2000, stock options to purchase 328,321 shares were
exercised, and the Company received gross proceeds of $381,541. Pursuant to the
option grants, employees have the right to pay for the exercise price of the
option by delivering shares of common stock owned by them. During 2000, the
Company received 22,705 shares, having a value of $239,810, as the exercise
price of the options.
Stock Options - See Note 13 for information relating to the Company's 1993, 1998
and 1999 Long-Term Incentive Plans.
On December 21, 2000, the shareholders of the Company approved the 1999 Employee
Stock Purchase Plan. The plan reserves 150,000 shares of common stock. The Plan
provides eligible employees with the opportunity to purchase shares of common
stock at a discounted price through regular payroll deductions. No options have
been issued as of December 31, 2001 under this plan.
[10] Capital Lease Obligations
Future minimum payments under capital lease obligations as of December 31, 2001
are as follows:
Year ending
December 31,
2002 $ 33,249
2003 10,808
2004 1,801
---------
Total Minimum Payments 45,858
Less Amount Representing Interest at
3.9% to 13.8% Per annum 4,434
---------
Balance $ 41,424
=========
Capital lease obligations are collateralized by equipment which has a cost of
$134,000 at December 31, 2001 and 2000 and accumulated amortization of $71,000
and $44,000 at December 31, 2001 and 2000 respectively. Amortization of $26,778,
$25,054 and $19,329 in 2001, 2000 and 1999, respectively, has been included in
depreciation expense.
[11] Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, note
receivable, accounts payable and debt maturing within one year approximate the
fair value of these instruments because of their short maturities.
[12] Commitments and Contingencies
Leases
The Company leases space for its executive offices and facilities under
noncancellable operating leases expiring December 31, 2003.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- --------------------------------------------------------------------------------
[12] Commitments and Contingencies - [Continued]
Minimum annual rentals under noncancellable operating leases having terms of
more than one year are as follows:
Years ending
- ------------
December 31,
- ------------
2002 $ 410,000
2003 393,000
------------
Total $ 803,000
----- ===========
Rent expense amounted to $482,000, $464,000 and $388,000 respectively, for the
years ended December 31, 2001, 2000 and 1999.
Employment Agreement
In January 2001, the Company entered into employment agreements with its four
executive officers for terms of two or three years with the right of the
employee to extend the agreement for an additional year. The aggregate base
compensation for these officers for 2002 is $626,000, subject to annual
increases equal to the greater of 5% or the increase in the cost of living
increases. Each of the officers also has the right, at any time on 90 days
notice, to terminate his full time employment and continue as a part-time
consultant at an annual salary of $75,000 for five years following the
expiration or termination of his employment. The agreements also provide the
officers with an automobile allowance. In the event of a change of control, the
executive may receive severance payments of between 30 and 36 months'
compensation.
The Company also has a consulting agreement with a Director, which provides for
annual fees of $75,000 through December 31, 2003. In the event of a change of
control, the Director may receive severance payments of between 30 and 36 months
compensation.
[13] Stock-Based Compensation
Long Term Incentive Plans - The Company has two long-term incentive plans, the
1998 Long-Term Incentive Plan (the "1998 Plan"), as amended, and the 1999
Long-Term Incentive Plan (the "1999 Plan"). The 1999 plan was approved by the
shareholders in December 2000 and provides for the issuance of 300,000 shares of
common stock. The Company may issue 790,000 and 300,000 shares of Common Stock
pursuant to the 1998 Plan and the 1999 Plan respectively. The options, when
granted vest ratably over one year.
Officers and other key employees, consultants and directors (other than
non-employee directors) are eligible to receive options or other equity-based
incentives under the Plans. The 1998 Plan and the 1999 Plan (collectively, the
"Plans") are administered by the Compensation Committee of the board of
directors.
The 1998 and 1999 Plans provides that each non-employee director automatically
receives a nonqualified stock option to purchase 5,000 shares of Common Stock on
April 1 of each year. However, if there are not sufficient shares available
under the applicable Plan, the non-employee director will receive a lesser
number of shares.
During 2000, pursuant to an employment contract with a newly hired executive,
the Company issued a non-qualified stock option to purchase 75,000 shares of
stock at an exercise price of $6.50 per share.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- --------------------------------------------------------------------------------
[13] Stock-Based Compensation - [Continued]
A summary of the activity under the Company's stock option plans is as follows:
2001 2000 1999
------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
--------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning of
Year 809,718 $1.908 783,041 $1.176 882,358 $1.172
Granted During the Year 3,500 1.90 375,000 2.748 -- --
Canceled During the Year (5,278) 1.81 (20,002) 1.250 -- --
Exercised During the Year (14,555) 1.50 (328,321) 1.167 (99,317) 1.143
-------- ------ -------- ------ ------- ------
Outstanding - End of Year 793,385 $1.917 809,718 $1.908 783,041 $1.176
======== ====== ======== ====== ======= ======
Exercisable - End of Year 789,885 $1.917 434,718 $1.183 783,041 $1.176
======== ====== ======== ====== ======= ======
The following table summarizes stock option information as of December 31, 2001:
Options Outstanding
Weighted
Average Remaining Options
----------------- -------------
Exercise Prices Number Outstanding Contractual Life Exercisable
- --------------- ------------------ ------------------ -------------
$1.50 141,135 1.42 Years 141,135
$1.00 275,750 1.83 Years 275,750
$6.50 75,000 3.25 Years 75,000
$1.81 298,000 4.00 Years 298,000
$1.90 3,500 4.83 Years --
------- ---------- -------
Totals 793,385 3.64 Years 789,885
======= ========== =======
Warrants Issued as Compensation - In December 1999, the Company's $6 and $12
Series B Common Stock Purchase Warrants totaling 287,500 and 448,544,
respectively, were extended to February 29, 2000. These warrants had a previous
expiration date of December 31, 1999. The Company recognized a financing cost of
$81,000 with respect to this extension in 1999. In February 2000, these warrants
were further extended to April 30, 2000 and the Company recognized additional
financing costs of $125,000 in 2000. At the end of April 2000, 192,105 of the $6
warrants were exercised and 95,395 expired. During the course of the year the
448,544 $12 warrants were extended to January 31, 2002. In January 2002, the
448,544 $12 warrants were further extended to July 31, 2002. There was no
financing costs associated with the warrant extensions in 2001 and 2002 because
of the variance between the $12 exercisable price and the current market value
of the Company's stock at the date of exercise.
In October 2001, the Company issued warrants to purchase 40,000 shares in
connection with a public and investor relations agreement whereby the Company
will pay a monthly fee in addition to the issuance of the warrants. The warrants
have an exercise price of $2.50 for the first 5,000 shares; $3.00 for the next
5,000 shares; $3.50 for 15,000 shares and $4.00 for the final 15,000 shares.
These warrants were valued at an average price of $.14 per warrant based upon
the Black-Scholes calculation, which had an interest rate of 5.5% and a
volatility rate of .6. These warrants will expire on October 28, 2002.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- --------------------------------------------------------------------------------
[13] Stock-Based Compensation - [Continued]
During 1999, the Company issued warrants to purchase 45,000 shares in connection
with a financial advisory agreement whereby the Company will pay consulting fees
in addition to the issuance of the warrants. These warrants were valued at $.58
per warrant, which represented the cost of the services based upon the
contractual agreement. These warrants have an exercise price of $5.45, which
represented a 15% premium over the market value of the stock at the time of
issuance and will expire in October 2004.
During 1999, the Company issued 9,000 warrants for services rendered. These
warrants were valued at $2.20 per warrant based upon the Black-Scholes
calculation which included an interest rate of 5.51% and a volatility rate of
.3. These warrants have an exercise price of $4.20 per warrant, which was the
market value of the stock at the time of issuance and will expire in October
2004.
A summary of warrant activity is as follows:
2001 2000 1999
------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
--------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning
of Year 568,544 $10.57 790,044 $ 9.35 1,033,632 $10.49
Granted During the Year 488,544 $11.30 514,544 $11.13 790,044 9.36
Canceled During the Year -- -- -- -- (188,333) 11.84
Expired During the Year (448,544) $12.00 (543,939) $10.95 (845,299) 10.20
Exercised During the Year -- (192,105) $ 6.00 --
-------- -------- ---------
Outstanding - End of Year 608,544 $10.11 568,544 $10.57 790,044 $ 9.35
======== ====== ========== ====== ========== =======
Exercisable - End of Year 578,544 $10.44 568,544 $10.57 790,044 $ 9.35
======== ====== ========== ====== ========== ======
The following table summarizes warrant information as of December 31, 2001:
Weighted
--------
Average Remaining
-----------------
Exercise Prices Shares Contractual Life
- --------------- ------ ----------------
$ 5.45 100,000 2.75 Years
$ 4.20 20,000 2.75 Years
$ 2.50 5,000 .75 Years
$ 3.00 5,000 .75 Years
$ 3.50 15,000 .75 Years
$ 4.00 15,000 .75 Years
$ 12.00 448,544 .08 Years
------- -----------
Total 608,544 .65 Years
======= ===========
The Company applies Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, for
stock options issued to employees in accounting for its stock options plans.
There was no compensation cost recognized for stock based employee compensation
awards for 2001, 2000 and 1999.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
- --------------------------------------------------------------------------------
[13] Stock-Based Compensation - [Continued]
If the Company had accounted for the issuance of all options and
compensation-based warrants pursuant to the fair value based method of SFAS No.
123, the Company would have recorded additional compensation expense totaling
$473,749, $94,022 and $402,805 for the years ended December 31, 2001, 2000 and
1999 respectively and the Company's net income (loss) and net income (loss) per
share would have been as follows:
Year ended
-----------
December 31,
------------
2001 2000 1999
---- ---- ----
Net Income as Reported $ 315,422 $2,386,019 $1,824,769
======= ========= =========
Pro Forma (Loss) Net Income $ (158,327) $2,291,997 $1,421,964
======= ========= =========
Net Income Per Share as Reported $ .08 $ .63 $ .52
======= ========= =========
Pro Forma (Loss) Net Income Per Share $ (.04) $ .61 $ .40
======= ========= =========
There were no options or warrants issued to employees in 1999.
There were no options or compensation based warrants issued in 1999 which were
accounted for under APB No. 25. The fair value of options and warrants at date
of grant was estimated using the Black-Scholes fair value based method with the
following weighted average assumptions:
2001 2000
---- ----
Expected Life (Years) 5 5
Interest Rate 4.00% 5.50%
Annual Rate of Dividends 0% 0%
Volatility 60% 57%
The weighted average fair value of options and warrants at date of grant using
the fair value based method during 2001 and 2000 is estimated at $1.45 and $1.50
respectively.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
- --------------------------------------------------------------------------------
[14] Operating Segments
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 is as follows:
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Revenues:
Software and Related Systems and Services $16,077,323 $17,907,973 $19,343,472
Data Center Services 2,042,098 2,262,676 1,908,158
----------- ----------- -----------
Total Revenues $18,119,421 $20,170,649 $21,251,630
-------------- =========== =========== ===========
Gross Profit:
Software and Related Systems and Services $ 5,095,038 $ 6,977,035 $ 6,574,753
Data Center Services 1,023,148 1,238,153 800,587
----------- ------------ ------------
Total Gross Profit $ 6,118,186 $ 8,215,188 $ 7,375,340
------------------ =========== ============ ============
Income (loss) From Continuing Operations before
Income Taxes:
Software and Related Systems and Services $ (242,072) $ 1,208,445 $ 1,266,614
Data Center Services 526,494 770,747 378,155
----------- ------------ ------------
Total Income From Continuing
Operations before Income Taxes $ 284,422 $ 1,979,192 $ 1,644,769
------------------------------ =========== ============ ============
Depreciation and Amortization:
Software and Related Systems and Services $ 847,369 $ 579,900 $ 356,191
Data Center Services 163,452 137,876 244,716
----------- ------------ ------------
Total Depreciation and Amortization $ 1,010,821 $ 717,776 $ 600,907
----------------------------------- =========== ============ ============
Capital Expenditures:
Software and Related Systems and Services $ 116,951 $ 850,893 $ 595,747
Data Center Services 3,814 21,947 19,976
----------- ------------ ------------
Total Capital Expenditures $ 120,765 $ 872,840 $ 615,723
-------------------------- =========== ============ ============
Identifiable Assets:
Software and Related Systems and Services $16,104,973 $ 12,659,935 $ 11,757,183
Data Center Services 1,902,400 2,146,778 2,215,294
----------- ------------ ------------
Total Identifiable Assets $18,007,373 $ 14,806,713 $ 13,972,477
------------------------- =========== ============ ============
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17
- --------------------------------------------------------------------------------
[15] Legal Proceedings
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.
In October 2000, the Company's subsidiary, Creative Socio-Medics, commenced an
action against the City of Richmond, in the Supreme Court of the State of New
York, County of Suffolk, which action was subsequently removed to the United
States District Court for the Eastern District of New York, for failure to pay
more than $1 million pursuant a contract we have with Richmond. Richmond advised
the court that it intended to move to dismiss the complaint for lack of personal
jurisdiction in New York and improper venue. The parties are currently engaged
in discovery on jurisdictional issues. In November 2000, Richmond filed a
complaint in the Circuit Court for the City of Richmond, Richmond, Virginia,
alleging, among other things, that the contract with Creative Socio-Medics was
procured through fraudulent misrepresentations concerning the nature of the work
to be performed and the price for the services and that Creative Socio-Medics
failed to perform its obligations under the agreement, seeking damages of
$373,000 and a finding that it owes no additional amounts to Creative
Socio-Medics. The parties entered into a stipulation staying the Richmond action
until a determination of Richmond's jurisdictional challenges to the New York
action. We believe that we have valid claims against Richmond and we intend to
vigorously pursue those claims. We also believe that the allegations contained
in Richmond's complaint are without merit and we intend to vigorously defend
against those claims.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NETSMART TECHNOLOGIES, INC.
Dated: March 28, 2002
By /s/*
----------------------------------------
James L. Conway, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose
signature appears below hereby authorizes Edward D. Bright, James L. Conway and
Anthony F. Grisanti or any of them acting in the absence of the others, as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this report, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission.
Signature Title Date
--------- ----- -----
/s/* Chief Executive Officer March 28, 2002
- --------------------- and Director (Principal
James L. Conway Executive Officer)
/s/* Chief Financial Officer March 28, 2002
- --------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)
/s/* Director March 28, 2002
- ---------------------
Edward D. Bright
/s/* Director March 28, 2002
- ---------------------
John F. Phillips
/s/* President and Director March 28, 2002
- ---------------------
Gerald O. Koop
/s/* Director March 28, 2002
- ---------------------
Joseph G. Sicinski
/s/* Director March 28, 2002
- ---------------------
Francis J. Calcagno
/s/* Director March 28, 2002
- ---------------------
John S.T. Gallagher
Netsmart Technologies, Inc.
Index to Exhibits
December 31, 2000
a) Exhibits
3.1(1) Restated Certificate of Incorporation, as amended
3.2(1) By-Laws
10.1 Employment Agreement dated January 1, 2001, between the Registrant and
James L. Conway.
10.2 Employment Agreement dated January 1, 2001, between the Registrant and
John F. Phillips.
10.3 Employment Agreement dated January 1, 2001, between the Registrant and
Gerald O. Koop.
10.4 Employment Agreement dated January 1, 2001, between the Registrant and
Anthony F. Grisanti.
10.5 Consulting agreement dated January 1, 2001, between the Registrant and
Edward D. Bright.
10.6(1) 1993 Long-Term Incentive Plan.
10.7(2) 1998 Long-Term Incentive Plan.
10.8(3) 1999 Long-Term Incentive Plan.
10.9 2001 Long-Term Incentive Plan.
10.10(3) 1999 Employee Stock Purchase Plan
10.11 Agreement dated June 1, 2001, between the Registrant and Fleet Bank.
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent
25.1 Powers of attorney (See Signature Page)
- ----------
(1) Filed as an exhibit to the Registrant's registration statement on Form
S-1, File No. 333-2550, which was declared effective by the Commission on
August 13, 1996, and incorporated herein by reference.
(2) Filed as an appendix the Registrant's proxy statement dated September
30, 1999, relating to its 1999 Annual Meeting of Stockholders and incorporated
herein by reference.
(3) Filed as an appendix the Registrant's proxy statement dated November
9, 2000, relating to its 2000 Annual Meeting of Stockholders and incorporated
herein by reference.
Exhibit 23.1
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statements of
Netsmart Technologies, Inc. and Subsidiaries (the "Company") on Form S-3 (File
No. 333-91907) and Form S-8 (File No. 333- 96015) of our report dated February
15, 2002 on our audits of the consolidated financial statements of the Company
as of December 31, 2001 and December 31, 2000, and for each of the years in the
three year period ended December 31, 2001 which report is included in this
Annual Report on Form 10-K. In addition, we consent to the reference to us under
the heading "Experts" in the Registration Statements on the above Form S-3.
Richard A. Eisner & Company, LLP
New York, New York
March 27, 2002