UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002
Commission File Number 0-21177
NETSMART TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3680154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
146 Nassau Avenue, Islip, NY 11751
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 968-2000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X_ No__
Number of shares of common stock outstanding as of July 31, 2002: 3,696,709
=========
Netsmart Technologies, Inc. and Subsidiaries
Index
Part I: - Financial Information:
Item 1. Financial Statements: Page
----
Condensed Consolidated Balance Sheets - June 30, 2002 (Unaudited)
and December 31, 2001 1-2
Condensed Consolidated Statements of Income - (Unaudited)
Six Months Ended June 30, 2002 and June 30, 2001 and Three
Months Ended June 30, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows - (Unaudited)
Six Months Ended June 30, 2002 and June 30, 2001 4-5
Condensed Consolidated Statement of Stockholders' Equity - (Unaudited)
Six Months Ended June 30, 2002 6-7
Notes to Condensed Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
-------- ------------
2002 2001
---- ----
Unaudited
---------
Assets:
Current Assets:
Cash and Cash Equivalents $ 3,677,329 $ 3,837,226
Accounts Receivable - Net 5,996,985 5,876,970
Costs and Estimated Profits in Excess
of Interim Billings 4,167,661 3,783,356
Deferred taxes 500,000 500,000
Other Current Assets 91,108 128,232
----------- -----------
Total Current Assets 14,433,083 14,125,784
----------- -----------
Property and Equipment - Net 370,409 366,356
----------- -----------
Other Assets:
Software Development Costs - Net 524,098 686,301
Customer Lists - Net 2,380,500 2,618,145
Other Assets 202,783 210,787
----------- -----------
Total Other Assets 3,107,381 3,515,233
----------- -----------
Total Assets $ 17,910,873 $ 18,007,373
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
-------- ------------
2002 2001
---- ----
Unaudited
---------
Liabilities and Stockholders' Equity:
Current Liabilities:
Current Portion - Long Term Debt $ 500,000 $ 500,000
Current Portion Capital Lease Obligations 15,102 28,905
Accounts Payable 580,683 688,682
Accrued Expenses 459,946 359,908
Interim Billings in Excess of Costs and Estimated
Profits 4,125,997 3,959,230
Deferred Revenue 419,497 685,569
----------- ------------
Total Current Liabilities 6,101,225 6,222,294
----------- ------------
Capital Lease Obligations - Less current portion 6,962 12,519
Long Term Debt - Less current portion 1,500,008 1,750,004
Interest Rate Swap at Fair Value 80,691 74,875
----------- ------------
Total Non Current Liabilities 1,587,661 1,837,398
----------- ------------
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 3,724,747 shares at
June 30, 2002, 3,719,247 shares at
December 31, 2001 37,247 37,192
Additional Paid in Capital 20,890,534 20,856,166
Accumulated Comprehensive loss - Interest Rate Swap (80,691) (74,875)
Accumulated Deficit (10,325,293) (10,570,992)
----------- ------------
10,521,797 10,247,491
Less: Cost of shares of Common Stock held
in treasury - 28,038 shares at June 30, 2002
and December 31, 2001 299,810 299,810
----------- ------------
Total Stockholders' Equity 10,221,987 9,947,681
----------- ------------
Total Liabilities and Stockholders' Equity $ 17,910,873 $ 18,007,373
=========== ============
See Notes to Condensed Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Six months ended Three months ended
June 30, June 30,
---------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Software and Related
Systems and Services:
General $ 6,299,687 $ 5,833,078 $ 3,447,798 $ 2,767,723
Maintenance Contract
Services 3,022,288 2,472,791 1,513,798 1,428,529
---------- ---------- ---------- ----------
Total Software and Related
Systems and Services 9,321,975 8,305,869 4,961,596 4,196,252
Data Center Services 955,395 933,620 485,702 468,396
---------- ---------- ---------- ----------
Total Revenues 10,277,370 9,239,489 5,447,298 4,664,648
---------- ---------- ---------- ----------
Cost of Revenues:
Software and Related
Systems and Services:
General 4,450,324 4,062,096 2,441,743 1,870,553
Maintenance Contract
Services 1,771,212 1,611,175 896,137 976,700
---------- ---------- ---------- ----------
Total Software and Related
Systems and Services 6,221,536 5,673,271 3,337,880 2,847,253
Data Center Services 526,945 506,614 266,012 240,083
---------- ---------- ---------- ----------
Total Cost of Revenues 6,748,481 6,179,885 3,603,892 3,087,336
---------- ---------- ---------- ----------
Gross Profit 3,528,889 3,059,604 1,843,406 1,577,312
---------- ---------- ---------- ----------
Selling, General and
Administrative Expenses 2,484,522 2,218,934 1,281,327 1,114,209
Research and Development 684,460 641,311 355,531 356,000
---------- ---------- ---------- ----------
Total 3,168,982 2,860,245 1,636,858 1,470,209
---------- ---------- ---------- ----------
Income from Operations before Interest 359,907 199,359 206,548 107,103
Interest Income 20,453 6,670 11,274 6,670
Interest Expense 108,661 60,859 57,287 38,393
---------- ---------- ---------- ----------
Income before Income Tax Expense 271,699 145,170 160,535 75,380
Income Taxes Expense 26,000 11,000 18,000 5,800
---------- ---------- ---------- ----------
Net Income $ 245,699 $ 134,170 $ 142,535 $ 69,580
========== ========== ========== ==========
Earnings Per Share of Common Stock:
Basic:
Net Income $ .07 $ .04 $ .04 $ .02
========== ========== ========== ==========
Weighted Average Number of Shares of
Common Stock Outstanding 3,695,923 3,555,733 3,696,709 3,598,959
========== ========== ========== ==========
Diluted:
Net Income $ .06 $ .04 $ .04 $ .02
========== ========== ========== ==========
Weighted Average Number of Shares of
Common Stock and Common Stock
Equivalents Outstanding 4,047,746 3,832,539 4,055,479 3,873,939
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Six months ended
June 30,
--------
2002 2001
---- ----
Operating Activities:
Net Income $ 245,699 $ 134,170
--------- ----------
Adjustments to Reconcile Net Income
to Net Cash Provided by (Used in)
Operating Activities:
Depreciation and Amortization 517,606 513,996
Issuance of Warrants and Options for Services 24,873 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (120,015) (1,080,455)
Costs and Estimated Profits in
Excess of Interim Billings (384,305) (371,665)
Other Current Assets 37,124 39,700
Other Assets 8,004 (90,961)
Increase [Decrease] in
Accounts Payable (107,999) 53,576
Accrued Expenses 100,038 (378,931)
Interim Billings in Excess of
Costs and Estimated Profits 166,767 232,428
Deferred Revenue (266,072) (167,292)
--------- ----------
Total Adjustments (23,979) (1,249,604)
--------- ----------
Net Cash Provided by
(Used In) Operating Activities 221,720 (1,115,434)
--------- ----------
Investing Activities:
Net Cost of AIMS Acquisition -- (779,700)
Acquisition of Property and Equipment (121,811) (82,799)
--------- ----------
Net Cash Used In Investing Activities (121,811) (862,499)
--------- ----------
See Notes to Condensed Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Six months ended
June 30,
--------
2002 2001
---- ----
Financing Activities:
Proceeds from Long Term Loan $ -- $2,500,000
Payment of Capitalized Lease Obligations (19,360) (16,531)
Net Proceeds from Stock Options Exercised 9,550 21,834
Payments of Term Loan (249,996) --
--------- ---------
Net Cash (Used in) Provided by Financing
Activities (259,806) 2,505,303
--------- ---------
Net (Decrease) Increase in Cash
and Cash Equivalents (159,897) 527,370
Cash and Cash Equivalents -
Beginning of Period 3,837,226 2,418,947
--------- ---------
Cash and Cash Equivalents -
End of Period $3,677,329 $2,946,317
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 110,703 $ 42,153
Income Taxes $ 14,727 $ 114,366
Non Cash Financing Activities:
The fair value of the interest rate swap calculated at June 30, 2002 was
$80,691.
Non Cash Investing Activities:
Value of Common Stock issued in AIMS Acquisition -- $ 376,200
See Notes to Condensed Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Unaudited)
For the Six Months Ended June 30, 2002
Common Stock $.01 Par Value Authorized Shares Amount
------ ------
15,000,000 Shares
Beginning Balance - December 31, 2001 3,719,247 $ 37,192
Common Stock Issued - Exercise of Options 5,500 55
--------- -------
Ending Balance - June 30, 2002 3,724,747 $ 37,247
========= =======
See Notes to Condensed Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Unaudited)
For the Six Months Ended June 30, 2002
Additional Paid-In Capital Common Stock: Shares Amount
------ ------
Beginning Balance - December 31, 2001 $ 20,856,166
Common Stock Issued - Exercise of Options 9,495
Issuance of Warrants and Options 24,873
-----------
Ending Balance - June 30, 2002 $ 20,890,534
===========
Accumulated Deficit
Beginning Balance - December 31, 2001 $(10,570,992)
Net Income 245,699
-----------
Ending Balance - June 30, 2002 $(10,325,293)
===========
Accumulated Comprehensive Loss - Interest Rate Swap:
Beginning Balance - December 31, 2001 $ (74,875)
Change in Fair Value of Interest Rate Swap (5,816)
-----------
Ending Balance - June 30, 2002 $ (80,691)
Treasury Stock
Beginning Balance - December 31, 2001 28,038 $ (299,810)
------ -----------
Ending Balance - June 30, 2002 28,038 $ (299,810)
------ -----------
Total Stockholders' Equity $ 10,221,987
See Notes to Condensed Consolidated Financial Statements.
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company as
of June 30, 2002 and the results of its operations for the six and three months
ended June 30, 2002 and 2001 and the changes in cash flows for the six months
ended June 30, 2002 and 2001. The results of operations for the periods ended
June 30, 2002 are not necessarily indicative of the results to be expected for
the full year.
(2) The accounting policies followed by the Company are set forth in Notes 1 and
2 to the Company's consolidated financial statements as filed in its Form 10-K
for the year ended December 31, 2001.
(3) Income per share - The following table sets forth the components used in the
computation of basic and diluted earnings per share:
Six Months Ended June 30, Three Months Ended June 30
------------------------ --------------------------
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income $ 245,699 $ 134,170 $ 142,535 $ 69,580
Denominator:
Weighted average shares 3,695,923 3,555,733 3,696,709 3,598,959
--------- --------- --------- ---------
Effect of dilutive securities:
Employee stock option 351,359 276,806 358,307 274,980
Stock warrants 464 -- 463 --
--------- --------- --------- ---------
Dilutive potential common shares 351,823 276,806 358,770 274,980
--------- --------- --------- ---------
Denominator for diluted earnings per
share-adjusted weighted average shares
after assumed conversions 4,047,746 3,832,539 4,055,479 3,873,939
========= ========= ========= =========
(4) Income Taxes - The provision for income taxes for the period ended June 30,
2002, reflects a deferred tax provision of approximately $77,000 offset by a
reduction in the deferred tax asset valuation allowance of the same amount.
(5) During the quarter ended March 31, 2002, stock options to purchase 5,500
shares were exercised and the Company received gross proceeds of $9,550. As a
result, common stock and additional paid in capital increased by $55 and $9,495
respectively.
(6) The Company was a defendant in a previously-reported arbitration proceeding
commenced in March 2001 seeking damages of $635,000 for an alleged breach of a
staff augmentation services agreement. This action was settled, and the
settlement had no material adverse effect on the results of operations of the
Company.
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 to a contract between the Company and 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. The Company believes it has valid claims
against Richmond and intends 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.
(7) In March 2002 the stockholders approved the Company's 2001 Long Term
Incentive plan, covering 180,000 shares of common stock. In March 2002, the
Company issued options to its employees to purchase 179,000 shares of common
stock at a price of $2.50 which was the fair market value at the date of grant.
In June 2002, the Company issued 13,000 options to employees and a director with
exercise prices ranging from $2.38 to $2.40. These options were issued from
previous Long Term Incentive plans.
(8) The Company currently classifies its operations into two business segments:
(1) Software and Related Systems and Services and (2) Data Center Services.
Software and Related Systems and Services is the design, installation,
implementation and maintenance of computer information systems that provide
comprehensive healthcare information technology solutions including billing,
patient tracking and scheduling for inpatient and outpatient environments, as
well as clinical documentation and medical record generation and management.
Data Center Services involve Company personnel performing data entry and data
processing services for customers. Intersegment sales and sales outside the
United States are not material. Information concerning the Company's business
segments are as follows:
Software and
------------
Related Systems Data Center
--------------- -----------
Six Months Ended June 30, and Services Services Consolidated
- ------------------------- ------------ -------- ------------
2002
Revenue $ 9,321,975 $ 955,395 $10,277,370
Income before income taxes 124,101 147,598 271,699
Total identifiable assets at June 30, 2002 16,292,536 1,618,337 17,910,873
2001
Revenue $ 8,305,869 $ 933,620 $ 9,239,489
Income (loss) before income taxes (39,011) 184,181 145,170
Total identifiable assets at June 30, 2001 16,318,319 1,737,848 18,056,167
Software and
------------
Related Systems Data Center
--------------- -----------
Three Months Ended June 30, and Services Services Consolidated
- --------------------------- ------------ -------- ------------
2002
Revenue $ 4,961,596 $ 485,702 $ 5,447,298
Income before income taxes 80,174 80,361 160,535
2001
Revenue $ 4,196,252 $ 468,396 $ 4,664,648
Income (loss) before income taxes (36,516) 111,896 75,380
(9) During the quarter ended June 30, 2002, the Company issued warrants to
purchase 200,000 shares in connection with a financial advisory agreement
whereby the Company will pay consulting fees in addition to the issuance of
warrants. These warrants, which expire over various times ranging from one to
two years, were valued at $.24 per warrant, which represented the costs of the
services based upon the contractual agreement. The agreement may be terminated
by either party. The warrants have the following exercise price and vesting
dates for the number of shares set forth below.
Shares Exercise Price Vesting Date
------ -------------- ------------
50,000 $2.70 April 10, 2002
30,000 $4.00 June 1, 2002
30,000 $5.00 September 1, 2002
30,000 $6.00 November 1, 2002
30,000 $7.00 January 1, 2003
30,000 $8.00 February 28, 2003
During the quarter ended June 30, 2002, the Company charged to operations
$19,200 as costs related to the April 10 and June 1, 2002 warrants. The Company
is scheduled to charge to future operations the amounts of $7,200 each for the
September 2002 through February 2003 warrants.
During the quarter ended June 30, 2002, the Company issued 10,000 options for
services rendered. These options were valued at $.57 per option based upon the
Black-Scholes calculation and a charge was made to operations in the amount of
$5,673. These options have an exercise price of $2.75 per option, which was the
market value of the stock at the time of issuance and will expire on April 22,
2003.
In July 2002, the Company extended the expiration date of warrants to purchase
448,535 shares of common stock at $12.00 per share, from July 31, 2002 to
January 31, 2003.
(10) New Accounting Pronouncements - Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill
and Other Intangible Assets" became effective for the Company during the period
ended June 30, 2002. The provisions of these interpretations that are applicable
to the Company were implemented on a prospective basis as of January 1, 2002,
which had no material effect on the Company's financial statements.
SFAS No. 143, "Accounting for Asset Retirement Obligations" became effective for
the Company during the period ended June 30, 2002. The provisions of these
interpretations that are applicable to the Company were implemented on a
prospective basis as of January 1, 2002, which had no material effect on the
Company's financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
became effective for the Company during the period ended June 30, 2002. The
provisions of the interpretations that are applicable to the Company were
implemented on a prospective basis as of January 1, 2002, which had no material
effect on the Company's financial statements.
On April 30, 2002 the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13, and Technical Corrections". SFAS No. 145 eliminates the requirement that
gains and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect and
eliminates an inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. Generally, SFAS No. 145 is effective for
transactions occurring after May 15, 2002. The adoption of this standard is
expected to have no impact to the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The most 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. This largest
component of total revenue, which is generated primarily from time spent by our
technical personnel, may be adversely affected during the third and fourth
quarters of our fiscal year when vacation and holidays occur.
Six months Ended June 30, 2002 and 2001
Our revenue for the six months ended June 30, 2002 (the "June 2002 period") was
$10,277,000, an increase of $1,038,000, or 11%, from our revenue for the six
months ended June 30, 2001, (the "June 2001 period") which was $9,239,000. The
largest component of revenue was turnkey systems labor revenue, which increased
by $164,000 to $3,549,000 in the June 2002 period, from $3,385,000 in June 2001
period, reflecting a 5% increase. Revenue from third party hardware and software
increased to $1,378,000 in the June 2002 period, from $1,353,000 in the June
2001 period, which represents an increase of 2%. 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 $955,000 in the June 2002 period, from $934,000 in the June 2001 period,
reflecting an increase of 2%. License revenue increased to $912,000 in the June
2002 period, from $483,000 in the June 2001 period, reflecting an increase of
89%. 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. This increase was partially due to the
sale of our licensed programs to an existing customer, which enables the
customer to roll out our software within its entire organization. While this is
an example of our ability to resell into our existing client base, there are no
assurances that we will be able to duplicate these sales with other customers.
Maintenance revenue increased to $3,022,000 in the June 2002 period, from
$2,473,000 in the June 2001 period, reflecting an increase of 22%. As turnkey
systems are completed, they are transitioned to the maintenance division.
Revenue from the sales of our small turnkey division decreased to $461,000 in
the June 2002 period, from $612,000 in the June 2001 period, reflecting a
decrease of 25%.
Revenue from contracts from government agencies represented 43% of revenue in
the June 2002 period and 42% of revenue in the June 2001 period. This reflects a
slight increase in new government contracts.
Gross profit increased to $3,529,000 in June 2002 period from $3,060,000 in the
June 2001 period, reflecting an increase of 15%. Our gross margin percentage
increased to 34% in the June 2002 period from 33% in the June 2001 period. This
increase was substantially the result of an increase in our license and
maintenance revenue mentioned above.
Selling, general and administrative expenses were $2,485,000 in the June 2002
period, reflecting an increase of 12% from the $2,219,000 in the June 2001
period. This increase was substantially in the area of general insurance,
settlement of certain litigation, increase in the provision for bad debts and
investor public relations costs.
We incurred product development expenses of $684,000 in the June 2002 period, an
increase of 7% from the $641,000 in the June 2001 period. During the June 2002
period, we continued to invest in improved functionality and technology in our
products.
Interest expense was $109,000 in the June 2002 period, an increase of $48,000,
or 79%, from the $61,000 in the June 2001 period. This increase was
substantially the result of interest associated with the $2,500,000 term loan,
which we made in June 2001.
Interest income of $20,000, for the June 2002 period is generated from
short-term investments made with a substantial portion of the proceeds received
from the term loan.
We have a federal net operating loss tax carry forward of approximately $11
million. In the June 2002 period, a deferred tax provision in the amount of
$77,000 was offset by a reduction in the deferred tax valuation allowance of the
same amount. Therefore, in the June 2002 period we provided for taxes in the
amount of $26,000. This provision was based upon certain state taxes. We made a
similar provision in the June 2001 period in the amount of $11,000.
As a result of the foregoing factors, in the June 2002 period, we had a net
income of $246,000, or $.07 per share basic and $.06 per share diluted. For the
June 2001 period, we had net income of $134,000, or $.04 per share basic and
diluted.
Three Months Ended June 30, 2002 and 2001
Our revenue for the three months ended June 30, 2002 (the "June 2002 quarter")
was $5,447,000, an increase of $782,000, or 17%, from our revenue for the three
months ended June 30, 2001, (the "June 2001 quarter") which was $4,665,000. The
largest component of revenue was turnkey systems labor revenue, which increased
by $201,000 to $1,913,000 in the June 2002 quarter, from $1,712,000 in June 2001
quarter, reflecting a 12% increase. Revenue from third party hardware and
software increased to $886,000 in the June 2002 quarter, from $581,000 in the
June 2001 quarter, which represents an increase of 52%. 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 $486,000 in the June 2002 quarter, from $468,000 in the June 2001 quarter,
reflecting an increase of 4%. License revenue increased to $378,000 in the June
2002 quarter, from $212,000 in the June 2001 quarter, reflecting an increase of
78%. 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
$1,514,000 in the June 2002 quarter, from $1,429,000 in the June 2001 quarter,
reflecting an increase of 6%. As turnkey systems are completed, they are
transitioned to the maintenance division. Revenue from the sales of our small
turnkey division increased to $271,000 in the June 2002 quarter, from $262,000
in the June 2001 quarter, reflecting an increase of 3%.
Revenue from contracts from government agencies represented 44% of revenue in
the June 2002 quarter and 40% of revenue in the June 2001 quarter. This increase
reflects a slight amplification in new government contracts.
Gross profit increased to $1,843,000 in June 2002 quarter from $1,577,000 in the
June 2001 quarter, reflecting an increase of 17%. Our gross margin percentage
remained constant at 34%.
Selling, general and administrative expenses were $1,281,000 in the June 2002
quarter, reflecting an increase of 15% from the $1,114,000 in the June 2001
quarter. This increase was substantially in the area of general insurance,
settlement of certain litigation and an increase in the provision for bad debts.
We incurred product development expenses of $356,000 in the June 2002 quarter,
which represented no change from the $356,000 in the June 2001 quarter. During
the June 2002 quarter, we continued to invest in improved functionality and
technology in our products.
Interest expense was $57,000 in the June 2002 quarter, an increase of $19,000,
or 50%, from the $38,000 in the June 2001 quarter. This increase was
substantially the result of interest associated with the $2,500,000 term loan,
which we made in June 2001.
Interest income of $11,000, for the June 2002 quarter is generated from
short-term investments made with a substantial portion of the proceeds received
from the term loan arrangement.
We have a federal net operating loss tax carry forward of approximately $11
million. In the June 2002 quarter, a deferred tax provision in the amount of
$43,000 was offset by a reduction in the deferred tax valuation allowance of the
same amount. Therefore, in the June 2002 quarter we provided for taxes in the
amount of $18,000. This provision was based upon certain state taxes. We made a
similar provision in the June 2001 quarter in the amount of $5,800.
As a result of the foregoing factors, in the June 2002 quarter, we had a net
income of $143,000, or $.04 per share basic and diluted. For the June 2001
quarter, we had net income of $70,000, or $.02 per share basic and diluted.
Liquidity and Capital Resources
We had working capital of $8.3 million at June 30, 2002 as compared to working
capital of $7.9 million at December 31, 2001. The increase in working capital
for June 2002 period was substantially the result of our net income after adding
back depreciation and amortization and partially offset by the acquisition of
equipment and principal payments of the term loan.
In June 2001, we entered into a financing arrangement with Fleet Bank. This
financing provides us with a five-year term loan of $2.5 million, as well as a
two year $1.5 million revolving line of credit. 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 June 30, 2002 under the borrowing base formula was $1.5 million. The
proceeds of the term loan are intended to be used for acquisitions as well as
for product modifications specific to California requirements. The revolving
line of credit will be utilized for general working capital needs. We have not
used the revolving line of credit from inception through June 30, 2002. We have
made principal payments on the $2.5 million term loan and the amount outstanding
at June 30, 2002 is $2,000,000.
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.
A part of our growth strategy is to acquire other businesses that are related to
our current business. Such acquisitions may be made with cash or our securities
or a combination of cash and securities. If we fail to make any acquisitions our
future growth may be limited to only internal growth. As of the date of this
Form 10-Q quarterly 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-Q quarterly report may be "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, but are not limited to, statements
that express our intentions, beliefs, expectations, strategies, predictions or
any other statements relating to our future activities or other future events or
conditions. 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-Q quarterly report, and in other documents which we
file with the Securities and Exchange Commission. In addition, such statements
could be affected by risks and uncertainties related to product demand, market
and customer acceptance, competition, government regulations and requirements,
pricing and development difficulties, as well as general industry and market
conditions and growth rates, and general economic conditions. Any
forward-looking statements speak only as of the date on which they are made, and
we do not undertake any obligation to update any forward-looking statement to
reflect events or circumstances after the date of this Form 10-Q.
Part II
Item 1. Legal Proceedings
The previously reported arbitration proceeding commenced in March 2001 by
PriceWaterhouse Coopers LLP, seeking damages of $635,000 for an alleged breach
of staff augmentation services agreement has been settled for a modest payment
by us. The settlement did not have a material effect on our financial position
or the results of our operations.
Item 4. Submission of Matters to a Vote of Security Holders.
On March 7, 2002, we held our 2002 annual meeting of stockholders.
The following individuals were elected as directors:
Name Number of Votes
---- ---------------
Edward D. Bright 3,065,809
James L. Conway 3,183,824
John F. Phillips 2,974,940
Gerald O. Koop 3,040,505
Francis J. Calcagno 3,135,424
Joseph G. Sicinski 3,077,374
The following proposals were approved as follows:
Votes For Votes Against Abstain
Approval of the amendment
to the 2001 Long Term
Incentive Plan 3,071,481 68,446 4,468
Approval of the selection of
Richard A. Eisner & Co., LLP
as independent auditors for 2001 3,135,588 2,863 5,944
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
During the quarter ended June 30, 2002, we filed a Form 8-K, with a report date
of May 14, 2002, relating to Item 4 - Changes in Registrant's Certifying
Accountants.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETSMART TECHNOLOGIES, INC.
/s/James L. Conway Chief Executive Officer August 1, 2002
- --------------------- (Principal Executive Officer)
James L. Conway
/s/Anthony F. Grisanti Chief Financial Officer August 1, 2002
- ---------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)