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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 September 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 October 15, 2002: 3,755,665
=========





Netsmart Technologies, Inc. and Subsidiaries

Index

Part I: - Financial Information:

Item 1. Financial Statements: Page
----


Condensed Consolidated Balance Sheets - September 30, 2002 (Unaudited)
and December 31, 2001 1-2

Condensed Consolidated Statements of Income - (Unaudited)
Nine Months Ended September 30, 2002 and September 30, 2001 and Three
Months Ended September 30, 2002 and 2001 3

Condensed Consolidated Statements of Cash Flows - (Unaudited)
Nine Months Ended September 30, 2002 and September 30, 2001 4-5

Condensed Consolidated Statement of Stockholders' Equity - (Unaudited)
Nine Months Ended September 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

September 30, December 31,
------------ -----------
2002 2001
---- ----
Unaudited
---------
Assets:
Current Assets:
Cash and Cash Equivalents $ 5,102,647 $ 3,837,226
Accounts Receivable - Net 5,989,472 5,876,970
Costs and Estimated Profits in Excess
of Interim Billings 4,015,924 3,783,356
Deferred taxes 500,000 500,000
Other Current Assets 25,209 128,232
---------- ----------

Total Current Assets 15,633,252 14,125,784
---------- ----------

Property and Equipment - Net 346,813 366,356
---------- ----------

Other Assets:
Software Development Costs - Net 453,242 686,301
Customer Lists - Net 2,260,677 2,618,145
Other Assets 190,419 210,787
---------- ----------

Total Other Assets 2,904,338 3,515,233
---------- ----------

Total Assets $18,884,403 $18,007,373
========== ==========

See Notes to Condensed Consolidated Financial Statements.




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 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 9,581 28,905
Accounts Payable 742,421 688,682
Accrued Expenses 819,538 359,908
Interim Billings in Excess of Costs and Estimated
Profits 4,041,534 3,959,230
Deferred Revenue 880,431 685,569
----------- -----------

Total Current Liabilities 6,993,505 6,222,294
----------- -----------

Capital Lease Obligations - Less current portion 4,453 12,519
Long Term Debt - Less current portion 1,375,010 1,750,004
Interest Rate Swap at Fair Value 113,130 74,875
----------- -----------

Total Non Current Liabilities 1,492,593 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
September 30, 2002, 3,719,247 shares at
December 31, 2001 37,247 37,192

Additional Paid in Capital 20,897,734 20,856,166
Accumulated Comprehensive loss - Interest Rate Swap (113,130) (74,875)
Accumulated Deficit (10,123,736) (10,570,992)
----------- -----------
10,698,115 10,247,491

Less: Cost of shares of Common Stock held
in treasury - 28,038 shares at September 30, 2002
and December 31, 2001 299,810 299,810
----------- -----------

Total Stockholders' Equity 10,398,305 9,947,681
----------- -----------

Total Liabilities and Stockholders' Equity $ 18,884,403 $ 18,007,373
=========== ===========


See Notes to Condensed Consolidated Financial Statements.




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Nine months ended Three months ended
September 30, September 30,
----------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----


Revenues:
Software and Related
Systems and Services:
General $10,361,414 $ 8,493,803 $4,061,727 $2,660,725
Maintenance Contract
Services 4,521,469 3,772,538 1,499,181 1,299,747
---------- ---------- --------- ---------
Total Software and Related
Systems and Services 14,882,883 12,266,341 5,560,908 3,960,472

Data Center Services 1,438,254 1,548,640 482,859 615,020
---------- ---------- --------- ---------


Total Revenues 16,321,137 13,814,981 6,043,767 4,575,492
---------- ---------- --------- ---------

Cost of Revenues:
Software and Related
Systems and Services:
General 7,457,227 5,899,287 3,006,903 1,837,191
Maintenance Contract
Services 2,660,630 2,608,638 889,418 997,463
---------- ---------- --------- ---------
Total Software and Related
Systems and Services 10,117,857 8,507,925 3,896,321 2,834,654

Data Center Services 794,327 761,339 267,382 254,725
---------- ---------- --------- ---------

Total Cost of Revenues 10,912,184 9,269,264 4,163,703 3,089,379
---------- ---------- --------- ---------

Gross Profit 5,408,953 4,545,717 1,880,064 1,486,113
---------- ---------- --------- ---------

Selling, General and
Administrative Expenses 3,799,164 3,255,337 1,314,642 1,036,403
Research and Development 992,557 985,782 308,097 344,471
---------- ---------- --------- ---------

Total 4,791,721 4,241,119 1,622,739 1,380,874
---------- ---------- --------- ---------


Income from Operations before Interest 617,232 304,598 257,325 105,239


Interest Income 32,847 24,632 12,394 17,962


Interest Expense 158,823 129,794 50,162 68,935
---------- ---------- --------- ---------

Income before Income Tax Expense 491,256 199,436 219,557 54,266


Income Taxes Expense 44,000 15,000 18,000 4,000
---------- ---------- --------- ---------

Net Income $ 447,256 $ 184,436 $ 201,557 $ 50,266
========== ========== ========= =========

Earnings Per Share of Common Stock:
Basic:
Net Income $ .12 $ .05 $ .05 $ .01
========== ========== ========= =========


Weighted Average Number of Shares of
Common Stock Outstanding 3,696,159 3,596,376 3,696,709 3,691,209
========== ========== ========= =========

Diluted:
Net Income $ .11 $ .05 $ .05 $ .01
========== ========== ========= =========

Weighted Average Number of Shares of
Common Stock and Common Stock
Equivalents Outstanding 4,062,130 3,844,476 4,070,466 3,937,426
========== ========== ========= =========


See Notes to Consolidated Financial Statements.




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)


Nine months ended
September 30,
-------------
2002 2001
---- ----
Operating Activities:
Net Income $ 447,256 $ 184,436
---------- ----------

Adjustments to Reconcile Net Income
to Net Cash Provided by (Used In)
Operating Activities:
Depreciation and Amortization 772,280 802,999
Issuance of Warrants and Options for Services 32,073 --

Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (112,502) (686,690)
Costs and Estimated Profits in
Excess of Interim Billings (232,568) (527,335)
Other Current Assets 103,023 64,240
Other Assets 20,368 (67,520)

Increase [Decrease] in
Accounts Payable 53,739 266,176
Accrued Expenses 459,630 (540,488)
Interim Billings in Excess of
Costs and Estimated Profits 82,304 (31,746)
Deferred Revenue 194,862 (103,286)
---------- ----------


Total Adjustments 1,373,209 (823,650)
---------- ----------

Net Cash Provided by
(Used In) Operating Activities 1,820,465 (639,214)
---------- ----------

Investing Activities:
Net Cost of AIMS Acquisition -- (779,700)
Acquisition of Property and Equipment (162,210) (99,639)
---------- ----------

Net Cash Used In Investing Activities (162,210) (879,339)
---------- ----------

See Notes to Condensed Consolidated Financial Statements.




NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)


Nine months ended
September 30,
-------------
2002 2001
---- ----

Financing Activities:
Proceeds from Long Term Loan $ -- $2,500,000
Payment of Capitalized Lease Obligations (27,390) (25,528)
Net Proceeds from Stock Options Exercised 9,550 21,834
Payments of Term Loan (374,994) (124,998)
--------- ---------

Net Cash (Used in) Provided by Financing
Activities (392,834) 2,371,308
--------- ---------

Net Increase in Cash
and Cash Equivalents 1,265,421 852,755

Cash and Cash Equivalents -
Beginning of Period 3,837,226 2,418,947
--------- ---------

Cash and Cash Equivalents -
End of Period $5,102,647 $3,271,702
========= =========

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 161,638 $ 90,997
Income Taxes $ 23,992 $ 117,810

Non Cash Financing Activities:
The fair value of the interest rate swap
calculated at September 30, 2002 was $113,130.

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 Nine Months Ended September 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 - September 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 Nine Months Ended September 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 32,073
----------

Ending Balance - September 30, 2002 $ 20,897,734
==========

Accumulated Deficit

Beginning Balance - December 31, 2001 $(10,570,992)

Net Income
447,256
----------

Ending Balance - September 30, 2002 $(10,123,736)
==========

Accumulated Comprehensive Loss - Interest Rate Swap:
Beginning Balance - December 31, 2001 $ (74,875)

Change in Fair Value of Interest Rate Swap (38,255)
----------


Ending Balance - September 30, 2002 $ (113,130)
===========

Treasury Stock

Beginning Balance - December 31, 2001 28,038 $ (299,810)
------ -----------

Ending Balance - September 30, 2002 28,038 $ (299,810)
------ -----------

Total Stockholders' Equity $ 10,398,305


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 September 30, 2002 and the results of its operations for the nine and three
months ended September 30, 2002 and 2001 and the changes in cash flows for the
nine months ended September 30, 2002 and 2001. The results of operations for the
periods ended September 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:

Nine Months Ended September 30, Three Months Ended September 30,
------------------------------ -------------------------------
2002 2001 2002 2001
---- ---- ---- ----

Numerator:
Net income $ 447,256 $ 184,436 $ 201,557 $ 50,266

Denominator:
Weighted average shares 3,696,159 3,596,376 3,696,709 3,691,209
--------- --------- --------- ---------
Effect of dilutive securities:
Employee stock options 364,176 248,100 371,140 246,217
Stock warrants 1,795 -- 2,617 --
--------- --------- --------- ---------
Dilutive potential common shares 365,971 248,100 373,757 246,217
--------- --------- --------- ---------

Denominator for diluted earnings per
share-adjusted weighted average shares
after assumed conversions 4,062,130 3,844,476 4,070,466 3,937,426
========= ========== ========== =========

(4) Income Taxes - The provision for income taxes for the period ended September
30, 2002, reflects a deferred tax provision of approximately $138,000 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 in 2002, 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. 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. On August 21, 2002, the United States
District Court for the Eastern District of New York denied Richmond's motion to
dismiss the Company's complaint for lack of personal jurisdiction in New York on
the basis of improper venue. 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
--------------- -----------
Nine Months Ended September 30, and Services Services Consolidated
- ------------------------------- ------------ -------- ------------

2002
Revenue $14,882,883 $1,438,254 $16,321,137
Income before income taxes 254,815 236,441 491,256
Total identifiable assets at September 30, 2002 17,233,292 1,651,111 18,884,403
2001
Revenue $12,266,341 $1,548,640 $13,814,981
Income (loss) before income taxes (201,416) 400,852 199,436
Total identifiable assets at September 30, 2001 16,024,759 1,798,554 17,823,313

Software and
------------
Related Systems Data Center
--------------- -----------
Three Months Ended September 30, and Services Services Consolidated
- -------------------------------- ------------ -------- ------------
2002
Revenue $ 5,560,908 $ 482,859 $ 6,043,767
Income before income taxes 130,714 88,843 219,557
2001
Revenue $ 3,960,472 $ 615,020 $ 4,575,492
Income (loss) before income taxes (162,405) 216,671 54,266




(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 nine months ended September 30, 2002, the Company charged to
operations $26,400 as costs related to the April 10, June 1, 2002 and September
1, 2002 warrants. The Company is scheduled to charge to future operations the
amounts of $7,200 each for the November 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) In October 2002, stock options to purchase 88,333 shares were exercised and
we received gross proceeds of $160,157. Pursuant to the option grants, employees
had the right to pay for the exercise price of the option by delivering shares
of common stock owned by them. During October, the Company received 29,377
shares, having a value of $146,582 and cash totaling $13,575, as the exercise
price of the options.

(11) 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.

Effective July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Cost
Associated with Exit or Disposal Activities." The main provisions of this
statement address the recognition of liabilities associated with an exit or
disposal activity. Implementation of this statement is not expected to have a
material impact on our consolidated financial statements.




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.

Nine months ended September 30, 2002 and 2001

Our revenue for the nine months ended September 30, 2002 (the "September 2002
period") was $16,321,000, an increase of $2,506,000, or 18%, from our revenue
for the nine months ended September 30, 2001, (the "September 2001 period")
which was $13,815,000. The largest component of revenue was turnkey systems
labor revenue, which increased by $314,000 to $5,357,000 in the September 2002
period, from $5,043,000 in September 2001 period, reflecting a 6% increase. This
increase was substantially the result of an increase in spending for information
systems in the behavioral health marketplace and our ability to provide the
staff necessary to generate additional revenue. Revenue from third party
hardware and software increased to $2,964,000 in the September 2002 period, from
$1,868,000 in the September 2001 period, which represents an increase of 59%.
This increase was attributable to an increase in spending for information
systems in the behavioral health marketplace as well as a substantial sale of
hardware to an existing customer. 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 decreased to $1,438,000 in the
September 2002 period, from $1,549,000 in the September 2001 period, reflecting
a decrease of 7%. This decrease was the result of work performed for one
particular client during the September 2001 period. License revenue increased to
$1,388,000 in the September 2002 period, from $623,000 in the September 2001
period, reflecting an increase of 123%. 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 substantially the result of an increase in spending for information
systems in the behavioral health marketplace as well as a sale of our licensed
programs to an existing customer. Maintenance revenue increased to $4,521,000 in
the September 2002 period, from $3,772,000 in the September 2001 period,
reflecting an increase of 20%. As turnkey systems are completed, they are
transitioned to the maintenance division, thereby increasing our installed base.
Revenue from the sales of our small turnkey division decreased to $653,000 in
the September 2002 period, from $960,000 in the September 2001 period,
reflecting a decrease of 32%. We are experiencing a decline in small systems
sales as a result of a redirection of our sales efforts to the larger turnkey
sales.

Revenue from contracts from government agencies represented 53% of revenue in
the September 2002 period and 39% of revenue in the September 2001 period. This
reflects an increase in new government contracts.

Gross profit increased to $5,409,000 in September 2002 period from $4,546,000 in
the September 2001 period, reflecting an increase of 19%. Our gross margin
percentage remained constant at 33% in the September 2002 period and the
September 2001 period. Although license and maintenance revenue, which are
highly margined revenue components, increased in the September 2002 period, our
gross margin percentage did not increase. This is because the mix of our revenue
components for the September 2002 period included a larger amount of third party
hardware and software revenue than the September 2001 period. Our third party



hardware and software revenue yields margins significantly less than our margin
from behavioral health systems and services revenue.

Selling, general and administrative expenses were $3,799,000 in the September
2002 period, reflecting an increase of 17% from the $3,255,000 in the September
2001 period. This increase was substantially in the area of general insurance,
investor relations and increase in the provision for bad debts and provision for
bonuses.

We incurred product development expenses of $993,000 in the September 2002
period, an increase of 1% from the $986,000 in the September 2001 period. During
the September 2002 period, we continued to invest in improved functionality and
technology in our products.

Interest expense was $159,000 in the September 2002 period, an increase of
$29,000, or 22%, from the $130,000 in the September 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 $32,000, for the September 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 $10
million. In the September 2002 period, a deferred tax provision in the amount of
$138,000 was offset by a reduction in the deferred tax valuation allowance of
the same amount. Therefore, in the September 2002 period we provided for taxes
in the amount of $44,000. This provision was based upon certain state taxes and
federal minimum alternative taxes. We made a similar provision in the September
2001 period in the amount of $15,000.

As a result of the foregoing factors, in the September 2002 period, we had a net
income of $447,000, or $.12 per share basic and $.11 per share diluted. For the
September 2001 period, we had net income of $184,000, or $.05 per share basic
and diluted.

Three Months Ended September 30, 2002 and 2001

Our revenue for the three months ended September 30, 2002 (the "September 2002
quarter") was $6,044,000, an increase of $1,468,000, or 32%, from our revenue
for the three months ended September 30, 2001, (the "September 2001 quarter")
which was $4,575,000. The largest component of revenue was turnkey systems labor
revenue, which increased by $150,000 to $1,808,000 in the September 2002
quarter, from $1,658,000 in September 2001 quarter, reflecting a 9% increase.
This increase was substantially the result of an increase in spending for
information systems in the behavioral health marketplace and our ability to
provide the staff necessary to generate additional revenue. Revenue from third
party hardware and software increased to $1,586,000 in the September 2002
quarter, from $515,000 in the September 2001 quarter, which represents an
increase of 208%. This increase was attributable to an increase in spending for
information systems in the behavioral health marketplace as well as a
substantial sale of hardware to an existing customer. 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 decreased
to $483,000 in the September 2002 quarter, from $615,000 in the September 2001
quarter, reflecting a decrease of 21%. This decrease was the result of work
performed for one particular client during the September 2001 quarter. License
revenue increased to $476,000 in the September 2002 quarter, from $140,000 in
the September 2001 quarter, reflecting an increase of 241%. 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 substantially the result of an increase in
spending for information systems in the behavioral health marketplace.
Maintenance revenue increased to $1,499,000 in the September 2002 quarter, from



$1,300,000 in the September 2001 quarter, reflecting an increase of 15%. As
turnkey systems are completed, they are transitioned to the maintenance division
thereby increasing our installed base. Revenue from the sales of our small
turnkey division decreased to $192,000 in the September 2002 quarter, from
$348,000 in the September 2001 quarter, reflecting a decrease of 45%. We are
experiencing a decline in small systems sales as a result of a redirection of
our sales efforts to the larger turnkey sales.

Revenue from contracts from government agencies represented 53% of revenue in
the September 2002 quarter and 35% of revenue in the September 2001 quarter.
This reflects an increase in new government contracts.

Gross profit increased to $1,880,000 in September 2002 quarter from $1,486,000
in the September 2001 quarter, reflecting an increase of 27%. Our gross margin
percentage decreased to 31% in the September 2002 quarter from 32% in the
September 2001 quarter. Although license and maintenance revenue, which are
highly margined revenue components, increased in the September 2002 quarter, our
gross margin percentage decreased. This is because the mix of our revenue
components for the September 2002 quarter included a larger amount of third
party hardware and software revenue than the September 2001 quarter. Our third
party hardware and software revenue yields margins significantly less than our
margin from behavioral health systems and services revenue.

Selling, general and administrative expenses were $1,315,000 in the September
2002 quarter, reflecting an increase of 27% from the $1,036,000 in the September
2001 quarter. This increase was substantially in the area of general insurance,
investor relations and increase in the provision for bad debts and provision for
bonuses.

We incurred product development expenses of $308,000 in the September 2002
quarter, a decrease of 11% from the $344,000 in the September 2001 quarter.
Although the percentage decrease was 11%, the absolute dollar decrease was
$36,000. During the September 2002 quarter, we continued to invest in improved
functionality and technology in our products.

Interest expense was $50,000 in the September 2002 quarter, a decrease of
$19,000, or 28%, from the $69,000 in the September 2001 quarter. This decrease
was substantially the result of lower borrowings associated with the $2,500,000
term loan, which we made in June 2001.

Interest income was $12,000 in the September 2002 quarter, a decrease of $6,000,
or 33%, from the $18,000 in the September 2001 quarter. Interest income is
generated from short-term investments made with a substantial portion of the
proceeds received from the term loan arrangement and the decrease reflects the
reduced interest rates for the September 2002 quarter.

We have a federal net operating loss tax carry forward of approximately $10
million. In the September 2002 quarter, a deferred tax provision in the amount
of $61,000 was offset by a reduction in the deferred tax valuation allowance of
the same amount. Therefore, in the September 2002 quarter we provided for taxes
in the amount of $18,000. This provision was based upon certain state taxes and
federal minimum alternative taxes. We made a similar provision in the September
2001 quarter in the amount of $4,000.

As a result of the foregoing factors, in the September 2002 quarter, we had a
net income of $202,000, or $.05 per share basic and diluted. For the September
2001 quarter, we had net income of $50,000, or $.01 per share basic and diluted.

Liquidity and Capital Resources

We had working capital of $8.6 million at September 30, 2002 as compared to
working capital of $7.9 million at December 31, 2001. The increase in working



capital for September 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 September 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 September 30, 2002. We
have made principal payments on the $2.5 million term loan and the amount
outstanding at September 30, 2002 is $1,875,000.

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 material acquisitions, and we cannot give any assurance that
we will be able to complete any material 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 our Form 10-K for the year ended December 31, 2001 under "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in this Form 10-Q quarterly report, and in other
documents which we file with the Securities and Exchange Commission. In
addition, such statements could be affected by risks and uncertainties related
to product demand, market and customer acceptance, competition, government
regulations and requirements, pricing and development difficulties, as well as
general industry and market conditions and growth rates, and general economic
conditions. Any forward-looking statements speak only as of the date on which
they are made, and we do not undertake any obligation to update any
forward-looking statement to reflect events or circumstances after the date of
this Form 10-Q.



Part II
- -------

Item 1. Legal Proceedings

In the Company's form 10-K for the year ended December 31, 2001, the Company
reported it 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
and a complaint filed by Richmond in the Circuit Court for the City of Richmond,
Richmond, Virginia. On August 21, 2002, the United States District Court for the
Eastern District of New York denied Richmond's motion to dismiss the Company's
complaint for lack of personal jurisdiction in New York on the basis of improper
venue.

Item 4. None.



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 October 23, 2002
- ---------------------- (Principal Executive Officer)
James L. Conway



/s/Anthony F. Grisanti Chief Financial Officer October 23, 2002
- ---------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)





CERTIFICATION OF CHIEF EXECUTIVE AND FINANCIAL OFFICERS


James L. Conway does hereby certify that he is the duly elected and incumbent
chief executive officer and Anthony F. Grisanti does hereby certify that he is
the duly elected and incumbent chief financial officer of Netsmart Technologies,
Inc. (the "issuer") and each of them does hereby certify, with respect to the
issuer's Form 10-Q for the quarter ended September 30, 2002 (the "report") as
follows:

1. He or she has reviewed the report;

2. Based on his or her knowledge, the report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by the report;

3. Based on his or her knowledge, the financial statements, and
other financial information included in the report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the issuer as of, and for, the periods presented in
the report;

4. He or she and the other certifying officers are responsible for
establishing and maintaining disclosure controls and procedures, as
defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, as
amended, for the issuer and have:

i. Designed such disclosure controls and procedures to
ensure that material information relating to the issuer,
including its consolidated subsidiaries, is made known to them
by others within those entities, particularly during the
period in which the periodic reports are being prepared;

ii. Evaluated the effectiveness of the issuer's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of the report (the "Evaluation Date"); and

iii. Presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures based
on the required evaluation as of the Evaluation Date

5. He or she and the other certifying officers have disclosed to
the issuer's auditors and to the audit committee of the board of
directors (or persons fulfilling the equivalent function):

i. All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's
ability to record, process, summarize and report financial
data and have identified for the issuer's auditors any
material weaknesses in internal controls; and

ii. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the issuer's
internal controls; and

6. He or she and the other certifying officers have indicated in the
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of their most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.


/s/James L. Conway /s/Anthony F. Grisanti
--------------------------- ------------------------
James L. Conway Anthony F. Grisanti
Chief Executive Officer Chief Financial Officer