NETSMART TECHNOLOGIES, INC.
146 NASSAU AVENUE
ISLIP, NEW YORK 11751
May 10, 2000
Securities and Exchange Commission
450 5th Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Dear Sirs:
Pursuant to regulations of the Securities and Exchange Commission, submitted
herewith for filing on behalf of Netsmart Technologies, Inc. (the "Company") is
the Company's Quarterly Report on Form 10- Q for the first quarter ended March
31, 2000.
This filing is being effected by direct transmission to the Commission's EDGAR
system.
Very truly yours,
Anthony F. Grisanti
Chief Financial Officer
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2000
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: (516) 968-2000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X_ No__
Number of shares of common stock outstanding as of May 3, 2000: 3,511,286
<PAGE>
Netsmart Technologies, Inc. and Subsidiaries
Index
Part I: - Financial Information:
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets - March 31, 2000 (Unaudited)
and December 31, 1999 1-2
Consolidated Statements of Income - (Unaudited)
Three Months Ended March 31, 2000 and March 31, 1999 3
Consolidated Statements of Cash Flows - (Unaudited)
Three Months Ended March 31, 2000 and March 31, 1999 4-5
Consolidated Statement of Stockholders' Equity - (Unaudited)
Three Months Ended March 31, 2000 6-7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
March 31, December 31,
2000 1999
(Unaudited) -----------
---------
Assets:
Current Assets:
Cash and Cash Equivalents $ 216,448 $ 204,989
Accounts Receivable - Net 6,696,194 5,789,734
Costs and Estimated Profits in Excess
of Interim Billings 4,434,876 4,253,072
Note Receivable 105,000 150,000
Other Current Assets 291,123 167,516
---------- ----------
Total Current Assets 11,743,641 10,565,311
---------- ----------
Property and Equipment - Net 528,185 534,864
---------- ----------
Other Assets:
Software Development Costs - Net 612,886 310,722
Customer Lists - Net 2,315,789 2,399,108
Other Assets 96,165 162,472
---------- ----------
Total Other Assets 3,024,840 2,872,302
---------- ----------
Total Assets $15,296,666 $13,972,477
========== ==========
See Notes to Consolidated Financial Statements.
-1-
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
March 31, December 31,
2000 1999
(Unaudited) -----------
---------
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable $ 235,132 $ 882,404
Capitalized Lease Obligations 26,250 25,385
Accounts Payable 2,496,558 2,562,087
Accrued Expenses 1,488,485 1,243,548
Interim Billings in Excess of Costs
and Estimated Profits 3,789,261 3,750,847
Deferred Revenue 78,306 88,546
---------- ----------
Total Current Liabilities 8,113,992 8,552,817
---------- ----------
Capitalized Lease Obligations 57,731 64,627
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Common Stock - $.01 Par Value;
Authorized 15,000,000 Shares;
Issued 3,282,218 Shares at
March 31, 2000, 2,988,738 Shares
at December 31, 1999 32,822 29,887
Additional Paid-in Capital -
Common Stock 19,987,754 18,657,579
Accumulated Deficit (12,835,633) (13,272,433)
---------- ----------
7,184,943 5,415,033
Less cost of 5,333 shares of
Common Stock held in Treasury 60,000 60,000
---------- ----------
Total Stockholders' Equity 7,124,943 5,355,033
---------- ----------
Total Liabilities and Stockholders'
Equity $15,296,666 $13,972,477
========== ==========
See Notes to Consolidated Financial Statements.
-2-
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME - (Unaudited)
- --------------------------------------------------------------------------------
Three months ended
March 31,
------------------
2000 1999
---- ----
Revenues:
Software and Related
Systems and Services:
General $ 4,323,930 $ 4,110,698
Maintenance Contract
Services 767,258 598,731
--------- ---------
Total Software and Related
Systems and Services 5,091,188 4,709,429
Data Center Services 510,175 525,354
--------- ---------
Total Revenues 5,601,363 5,234,783
--------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 2,754,226 2,740,485
Maintenance Contract
Services 520,343 397,883
--------- ---------
Total Software and Related
Systems and Services 3,274,569 3,138,368
Data Center Services 242,070 308,798
--------- ----------
Total Cost of Revenues 3,516,639 3,447,166
--------- ----------
Gross Profit 2,084,724 1,787,617
Selling, General and
Administrative Expenses 1,087,491 1,177,743
Cost of Warrants Issuance and Extension 181,000
Research and Development 321,956 202,196
--------- ----------
Income before Interest Expense 494,277 407,678
Interest Expense 57,477 80,577
--------- ----------
Net Income $ 436,800 $ 327,101
========= ==========
Earnings Per Share of Common Stock:
Basic:
Net Income $ .14 $ .11
========= ==========
Weighted Average Number of Shares of
Common Stock Outstanding 3,088,632 2,844,587
========= ==========
Diluted:
Net Income $ .12 $ .11
========= ==========
Weighted Average Number of Shares of
Common Stock Outstanding 3,705,964 3,024,454
========= ==========
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
- --------------------------------------------------------------------------------
Three months ended
March 31,
------------------
2000 1999
---- ----
Operating Activities:
Net Income $ 436,800 $ 327,101
-------- --------
Adjustments to Reconcile Net Income
to Net Cash [Used for] Provided by
Operating Activities:
Depreciation and Amortization 159,919 136,496
Financing Costs Related to Issuance
and Extension of Warrants 181,000 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (906,460) (583,714)
Costs and Estimated Profits in
Excess of Interim Billings (181,804) 693,712
Other Current Assets (78,607) (44,346)
Other Assets 66,307 2,399
Increase [Decrease] in
Accounts Payable (65,529) 148,027
Accrued Expenses 244,937 231,271
Interim Billings in Excess of
Costs and Estimated Profits 38,414 (153,430)
Deferred Revenue (10,240) (18,937)
-------- --------
Total Adjustments (552,063) 411,478
-------- --------
Net Cash - Operating Activities (115,263) 738,579
-------- --------
Investing Activities:
Acquisition of Property and Equipment (50,746) (78,051)
Software Development Costs (221,339) --
-------- --------
Net Cash - Investing Activities (272,085) (78,051)
-------- --------
See Notes to Financial Statements.
-4-
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
- --------------------------------------------------------------------------------
Three months ended
March 31,
------------------
2000 1999
---- ----
Financing Activities:
Proceeds (payments) on
Short term notes $ (647,272) $ (834,864)
Payment of Capitalized Lease Obligations (6,031) (16,085)
Repayment of Loans from Related Parties (32,000)
Proceeds from Capitalized Lease Obligation 40,000
Proceeds from Warrant Exercise 906,306 --
Proceeds from Stock Options Exercised 145,804 106,179
--------- ---------
Net Cash - Financing Activities 398,807 (736,770)
--------- ---------
Net [Decrease] in Cash 11,459 (76,242)
Cash - Beginning of Periods 204,989 198,689
--------- ---------
Cash - End of Periods $ 216,448 $ 122,447
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the periods for:
Interest $ 57,477 $ 87,300
Income Taxes $ 27,298 $ --
See Notes to Financial Statements.
-5-
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended March 31, 2000
Common Stock $.01 Par Value Authorized Shares Amount
15,000,000 Shares ------ ------
Beginning Balance 2,988,738 $ 29,887
Common Stock Issued - Exercise of Options 126,901 1,269
Common Stock Issued - Exercise of Warrants 151,051 1,511
Common Stock Issued - Acquisition 15,528 155
--------- -------
Ending Balance 3,282,218 $ 32,822
========= =======
See Notes to Financial Statements.
-6-
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - (Unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended March 31, 2000
Additional Paid-In Capital Common Stock Shares Amount
------ ------
Beginning Balance $ 18,657,579
Common Stock Issued - Exercise of Options 144,535
Common Stock Issued - Acquisition 99,845
Issuance and Extension of Warrants 181,000
Common Stock Issued - Exercise of Warrants 904,795
Ending Balance $ 19,987,754
==========
Accumulated Deficit
Beginning Balance $(13,272,433)
Net Income 436,800
----------
Ending Balance $(12,835,633)
==========
Treasury Stock
Beginning Balance 5,333 $ (60,000)
----- ----------
Ending Balance 5,333 $ (60,000)
----- ----------
Total Stockholders Equity $ 7,124,943
==========
See Notes to Financial Statements.
-7-
<PAGE>
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company as
of March 31, 2000 and the results of its operations for the three months ended
March 31, 2000 and 1999 and the changes in cash flows for the three months ended
March 31, 2000 and 1999. The results of operations for the three months ended
March 31, 2000 and 1999 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, 1999.
(3) Income per share - Income per share is computed by dividing the net income
for the period by the weighted average number of shares of common stock. The
Common stock equivalents are assumed converted to common stock when dilutive.
(4) During the quarter ended March 31, 2000, stock options to purchase 126,901
shares were exercised and we received gross proceeds of $145,804. As a result,
common stock and additional paid in capital increased by $1,269 and $144,535,
respectively.
During the quarter ended March 31, 2000, warrants to purchase 151,051 shares
were exercised and we received gross proceeds of $906,306. As a result, common
stock and additional paid in capital increased by $1,511 and $904,795,
receptively.
(5) In January 2000, we acquired the Connex suite of managed care and employee
assistance program (EAP) information system from Behavioral Health Partners,
Inc. ("BHPI"). The acquisition price consisted of approximately $39,266 in cash
and 15,528 shares of common stock valued at $100,000. The purchase price was
allocated to software development costs and will be amortized over an estimated
life of 5 years. During the quarter ended March 31, 2000 we incurred additional
software development costs associated with the EAP software in the amount of
$50,862.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended March 31, 2000 and 1999
A significant portion of our revenue is derived from fixed price software
development contracts and licenses. We recognize this revenue on the estimated
percentage of completion basis. Since the billing schedules under the contracts
differ from the recognition of revenue, at the end of any period, these contacts
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. Additionally, during
the first quarter of 2000, we undertook an increased effort in product
enhancements, which diverted revenue-generating resources to these efforts.
Our revenue for the three months ended March 31, 2000 (the "March 2000 period")
was $5,601,000, an increase of $367,000, or 7%, from the revenue for the three
months ended March 31, 1999 (the "March 1999 period"), which was $5,235,000. The
largest component of revenue was turnkey systems labor revenue, which increased
to $1,855,000 in the March 2000 period, from $1,563,000 in the March 1999
period, reflecting a 19% increase. This increase is substantially the result of
growth in the behavioral health information systems business and our ability to
provide the staff necessary to generate additional revenue from our outstanding
contracts. Revenue from third party hardware and software decreased to
$1,482,000 in the March 2000 period from $1,732,000 in the March 1999 period,
which represents a decrease of 14%. 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
$510,000 in the March 2000 period from $525,000 in the March 1999 period,
reflecting a decrease of 3%. License revenue increased to $648,000 in the March
2000 period from $570,000 in the March 1999 period, reflecting an increase of
14%. 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
$767,000 in the March 2000 period from $599,000 in the March 1999 period,
reflecting an increase of 28%. Revenue from the sales of our small turnkey
division increased to $338,000 in the March 2000 period from $246,000 in the
March 1999 period, reflecting an increase of 38%.
Revenue from contracts from government agencies represented 45% of revenue in
the March 2000 period and 58% of revenue in the March 1999 period. This decrease
is the result of us performing on a substantial contract with a private
institution.
Gross profit increased to $2,085,000 in the March 2000 period from $1,788,000 in
the March 1999 period, a 17% increase. Our overall gross margin was 37% in the
March 2000 period compared to 34% in the March 1999 period. 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 our
revenue from our behavioral health systems and services. The increase in gross
profit was also attributable to the increase in license revenue which provides
higher margins.
Selling, general and administrative expenses were $1,088,000 in the March 2000
period, a decrease of 8% from the $1,178,000 in the March 1999 period. This
decrease was substantially the result of a decrease in sales commissions.
In the March 2000 period we issued warrants for services rendered. We also
extended one series of our warrants for two months. An aggregate of $181,000 was
charged to operations for the warrant issuance and the warrant extension. We did
not have a similar charge in the March 1999 period. As a result of the extension
of the warrants, we raised additional capital of $1,153,000 of which $906,000
was received in the March 2000 period and the balance was received in April
2000.
-9-
<PAGE>
We incurred product development expenses of $322,000 in the March 2000 period,
an increase of 59% from the $202,000 in the March 1999 period. Research and
development expenses increased in the March 2000 period as a result of several
major productive initiatives. These initiatives include the repositioning of
all of our products to thin client environment that will facilitate alternative
system delivery methods, including Internet and application service provider
channels. Additionally, a significant upgrade to our core product was undertaken
which migrated the product to more current technologies and integrated customer
specific requirements.
Interest expense was $57,000 in the March 2000 period, a decrease of $24,000, or
29%, from the $81,000 in the March 1999 period. This decrease was the result of
lower borrowings during the March 2000 period, 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 the March 1999 period. In
October 1999, we entered into a new credit facility agreement. The interest rate
of the new facility is 2% above the prime rate.
As a result of the foregoing factors, in the March 2000 period we generated a
net income of $437,000, or $.14 per share (basic) and $.12 per share (diluted).
For the March 1999 period, we generated net income of $327,000, or $.11 per
share (basic and diluted).
Liquidity and Capital Resources
We had working capital of $3,630,000 at March 31, 2000 as compared to working
capital of $2,013,000 at December 31, 1999. Our cash position increased from
$205,000 at December 31, 1999 to $216,000 at March 31, 2000. The increase in
working capital for the March 2000 period was substantially due to capital
received from the exercise of warrants and options totaling $1,052,000 as well
as the net income after adding back depreciation and amortization.
Our principal source of funds, other than revenue, is an accounts receivable
financing agreement with an asset based lender which permits us to borrow up to
80% of eligible accounts receivable up to a maximum of $3.5 million. At March
31, 2000, the outstanding borrowings under this facility were $235,000 and the
maximum amount available to borrow under this formula was $2,471,000.
At March 31, 2000, accounts receivable and costs and estimated profits in excess
of interim billings were approximately $11.1 million, representing approximately
179 days of revenue based on annualizing the revenue for the March 2000 period,
although no assurance can be given that revenue will continue at the same level
as the March 2000 period. Accounts receivable at March 31, 2000 increased by
$906,000 from $5,790,000 at December 31, 1999 to $6,696,000 at March 31, 2000.
Based on our outstanding contracts and our continuing business, we believe that
our cash flow from operations, the availability under our financing agreement
and our cash on hand will be sufficient to enable us to continue to operate
without additional funding, although it is possible that we may need additional
funding if our business does not develop as we anticipate or if our expenses,
including our software development costs relating to our expansion of our
product line and our marketing costs for seeking to expand the market for our
products and services to include smaller clinics and facilities and sole group
practitioners exceed our expectation.
Furthermore, if we continue to grow at the existing rate into 2001 and beyond,
we may require additional funding. We are exploring various long term funding
possibilities, although we cannot give any assurances that we will be able to
obtain financing, and our failure to obtain financing could impair our ability
to grow.
-10-
<PAGE>
An important part of our growth strategy is to acquire other businesses that are
related to our current business. Such acquisitions may be made with cash or our
securities or a combination of cash and securities. To the extent that we
require cash, we may have to borrow the funds or issue equity. We have no
commitments from any financing source and we may not be able to raise any cash
necessary to complete an acquisition. If we fail to make any acquisitions our
future growth may be limited.
Year 2000 Compliance
The "Year 2000 Issue" refers generally to the problems that some software may
have in determining the correct century for the year. For example, software with
date-sensitive functions that is not Year 2000 compliant may not be able to
determine whether "00" means 1900 or 2000, which may result in computer and
other failures or the creation of erroneous results.
We believe that our present software products are Year 2000 compliant, and that
any changes which may be required to software which we have delivered in the
past would be made pursuant to new contracts with the clients to provide them
with a current version of our products.
We have defined Year 2000 compliant as the ability to:
* correctly handle date information needed for the December 31, 1999 to
January 1, 2000 date change;
* function according to the product documentation provided for this date
change, without changes in operation resulting from the advent
of a new century, assuming correct configuration;
* where appropriate, respond to two-digit date input in a way that
resolves the ambiguity as to century in a disclosed, defined and
predetermined manner;
* if the date elements in interfaces and data storage specify the
century, store and provide output of date information in ways
that are unambiguous as to century; and
* recognize year 2000 as a leap year.
To date, we have not experienced any material expense relating to Year 2000
compliance.
Forward Looking Statements
Statements in this Form 10-Q include forward-looking statements that address,
among other things, our expectations with respect to the development of our
business. In addition to these statements, other information including
words such as "seek" "anticipate," "believe," "plan," "estimate,"
"expect," "intend" and other similar expressions are forward looking
statements. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified in
this Form 10-Q, our Annual Report on Form 10-K for the year ended December 31,
1999 and in other documents filed by us with the Securities and Exchange
Commission.
-11-
<PAGE>
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 President, Chief Executive May 9, 2000
- ------------------------- Officer and Director (Principal
James L. Conway Executive Officer)
/s/ Anthony F. Grisanti Chief Financial Officer May 9, 2000
- -------------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - CALCULATION OF EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Three Months ended March 31,
---------------------------
2000 1999
---- ----
Average shares outstanding 3,088,632 2,844,587
Dilutive effect of stock options
and warrants computed by use
of treasury stock method 617,332 179,867
Computation of Earnings Per
Share=Net Income/Average
common and common share
equivalent shares $ 436,800 $ 327,101
outstanding 3,705,964 3,024,454
--------- ---------
Earnings Per Share $ .12 $ .11
========= =========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 216,448
<SECURITIES> 0
<RECEIVABLES> 6,696,194
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,743,641
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 528,185
<CURRENT-LIABILITIES> 8,113,992
<BONDS> 0
0
0
<COMMON> 20,020,636
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,124,943
<SALES> 0
<TOTAL-REVENUES> 5,601,363
<CGS> 3,516,639
<TOTAL-COSTS> 1,590,447
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,477
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 436,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 436,800
<EPS-BASIC> .14
<EPS-DILUTED> .12
</TABLE>
