UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q/A
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
Quarter Ended September 30, 2005
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 incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
3500
Sunrise Highway, Great River, NY
|
11739
|
(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
o
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Exchange Act).
Yes
o No
x
Number
of shares of common stock outstanding as of November 9, 2005: |
|
6,476,843
|
Netsmart
Technologies, Inc. and Subsidiaries
Part
I: -
Financial Information:
|
Page
|
|
|
|
1-2
|
|
3
|
|
4-6
|
|
7
|
|
8-16
|
|
|
|
17-31
|
|
|
|
31
|
|
|
|
32
|
|
|
|
|
|
|
|
33
|
|
|
|
33
|
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
Assets:
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
7,855,340
|
|
$
|
16,411,735
|
|
Accounts
Receivable - Net
|
|
|
10,193,872
|
|
|
11,714,691
|
|
Costs
and Estimated Profits in Excess
|
|
|
|
|
|
|
|
of
Interim Billings
|
|
|
1,405,492
|
|
|
636,985
|
|
Deferred
taxes
|
|
|
1,262,912
|
|
|
1,111,000
|
|
Other
Current Assets
|
|
|
803,558
|
|
|
596,253
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
21,521,174
|
|
|
30,470,664
|
|
|
|
|
|
|
|
|
|
Property
and Equipment - Net
|
|
|
2,811,378
|
|
|
2,546,948
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
19,090,270
|
|
|
—
|
|
Software
Development Costs - Net
|
|
|
6,786,069
|
|
|
1,132,453
|
|
Contract
Backlog
|
|
|
490,000
|
|
|
—
|
|
Customer
Lists - Net
|
|
|
8,271,939
|
|
|
2,179,237
|
|
Deferred
taxes less current portion
|
|
|
1,157,281
|
|
|
1,284,000
|
|
Other
Assets
|
|
|
115,663
|
|
|
93,599
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
35,911,222
|
|
|
4,689,289
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
60,243,774
|
|
$
|
37,706,901
|
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED BALANCE
SHEETS
|
|
|
September
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Current
Portion - Long Term Debt
|
|
$
|
500,034
|
|
$
|
666,667
|
|
Promissory
Note
|
|
|
494,414
|
|
|
—
|
|
Current
Portion Capital Lease Obligations
|
|
|
45,248
|
|
|
64,450
|
|
Accounts
Payable
|
|
|
5,722,075
|
|
|
1,572,930
|
|
Accrued
Expenses
|
|
|
3,450,058
|
|
|
1,545,127
|
|
Interim
Billings in Excess of Costs and Estimated Profits
|
|
|
6,296,390
|
|
|
7,497,773
|
|
Deferred
Revenue
|
|
|
9,613,008
|
|
|
907,630
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
26,121,227
|
|
|
12,254,577
|
|
|
|
|
|
|
|
|
|
Long
Term Debt - Less current portion
|
|
|
—
|
|
|
333,361
|
|
Capital
Lease Obligations - Less current portion
|
|
|
38,058
|
|
|
21,532
|
|
Interest
Rate Swap at Fair Value
|
|
|
2,144
|
|
|
15,152
|
|
Deferred
Tax Liability
|
|
|
2,481,000
|
|
|
—
|
|
Deferred
Rent Payable
|
|
|
477,027
|
|
|
455,427
|
|
|
|
|
|
|
|
|
|
Total
Non Current Liabilities
|
|
|
2,998,229
|
|
|
825,472
|
|
|
|
|
|
|
|
|
|
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
and
|
|
|
|
|
|
|
|
outstanding
6,058,859 and 5,830,935 shares at September 30, 2005 and
|
|
|
|
|
|
|
|
5,567,124
and 5,339,200
|
|
|
|
|
|
|
|
shares
at December 31, 2004
|
|
|
60,588
|
|
|
55,671
|
|
|
|
|
|
|
|
|
|
Additional
Paid in Capital
|
|
|
35,181,386
|
|
|
29,893,223
|
|
Accumulated
Comprehensive Loss - Interest Rate Swap
|
|
|
(2,144
|
)
|
|
(15,152
|
)
|
Accumulated
Deficit
|
|
|
(2,402,530
|
)
|
|
(3,593,908
|
)
|
|
|
|
32,837,300
|
|
|
26,339,834
|
|
Less:
cost of shares of Common Stock held
|
|
|
|
|
|
|
|
in
treasury - 227,924 shares at September 30, 2005
|
|
|
|
|
|
|
|
and
December 31, 2004
|
|
|
1,712,982
|
|
|
1,712,982
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
31,124,318
|
|
|
24,626,852
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
60,243,774
|
|
$
|
37,706,901
|
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
|
|
|
Nine
months ended
|
|
Three
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Software
and Related Systems and Services:
|
|
|
|
|
|
|
|
|
|
General
|
|
$
|
13,462,087
|
|
$
|
12,638,623
|
|
$
|
4,798,426
|
|
$
|
4,334,656
|
|
Maintenance
Contract Services
|
|
|
7,076,606
|
|
|
6,101,765
|
|
|
2,631,573
|
|
|
2,132,857
|
|
Total
Software and Related Systems and Services
|
|
|
20,538,693
|
|
|
18,740,388
|
|
|
7,429,999
|
|
|
6,467,513
|
|
Application
Service Provider Services
|
|
|
1,785,665
|
|
|
1,167,297
|
|
|
652,619
|
|
|
425,412
|
|
Data
Center Services
|
|
|
1,380,234
|
|
|
1,525,048
|
|
|
433,976
|
|
|
527,894
|
|
Total
Revenues
|
|
|
23,704,592
|
|
|
21,432,733
|
|
|
8,516,594
|
|
|
7,420,819
|
|
Cost
of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
and Related Systems and Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
7,288,864
|
|
|
6,875,643
|
|
|
2,788,201
|
|
|
2,323,244
|
|
Maintenance
Contract Services
|
|
|
3,237,724
|
|
|
3,065,395
|
|
|
1,126,343
|
|
|
1,073,140
|
|
Total
Software and Related Systems and Services
|
|
|
10,526,588
|
|
|
9,941,038
|
|
|
3,914,544
|
|
|
3,396,384
|
|
Application
Service Provider Services
|
|
|
1,143,147
|
|
|
683,637
|
|
|
479,065
|
|
|
244,537
|
|
Data
Center Services
|
|
|
677,017
|
|
|
645,490
|
|
|
227,393
|
|
|
214,798
|
|
Total
Cost of Revenues
|
|
|
12,346,752
|
|
|
11,270,165
|
|
|
4,621,002
|
|
|
3,855,719
|
|
Gross
Profit
|
|
|
11,357,840
|
|
|
10,162,568
|
|
|
3,895,592
|
|
|
3,565,100
|
|
Selling,
General and Administrative Expenses
|
|
|
6,782,444
|
|
|
5,617,963
|
|
|
2,423,859
|
|
|
1,884,451
|
|
Research,
Development and Maintenance
|
|
|
2,855,906
|
|
|
2,519,961
|
|
|
886,603
|
|
|
855,272
|
|
Total
|
|
|
9,638,350
|
|
|
8,137,924
|
|
|
3,310,462
|
|
|
2,739,723
|
|
Operating
Income
|
|
|
1,719,490
|
|
|
2,024,644
|
|
|
585,130
|
|
|
825,377
|
|
Interest
and Other Income
|
|
|
246,257
|
|
|
93,526
|
|
|
100,563
|
|
|
28,574
|
|
Interest
and Other Expense
|
|
|
(52,369
|
)
|
|
(104,138
|
)
|
|
(14,936
|
)
|
|
(26,773
|
)
|
Income
before Income Tax Expense
|
|
|
1,913,378
|
|
|
2,014,032
|
|
|
670,757
|
|
|
827,178
|
|
Income
Tax Expense
|
|
|
722,000
|
|
|
563,000
|
|
|
292,000
|
|
|
194,000
|
|
Net
Income
|
|
$
|
1,191,378
|
|
$
|
1,451,032
|
|
$
|
378,757
|
|
$
|
633,178
|
|
Earnings
Per Share ("EPS")of Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
.22
|
|
$
|
.27
|
|
$
|
.07
|
|
$
|
.12
|
|
Weighted
Average Number of Shares of Common Stock
Outstanding
|
|
|
5,409,836
|
|
|
5,329,549
|
|
|
5,537,862
|
|
|
5,338,700
|
|
Diluted
EPS
|
|
$
|
.21
|
|
$
|
.26
|
|
$
|
.07
|
|
$
|
.11
|
|
Weighted
Average Number of Shares of Common Stock and Common Stock
Equivalents
Outstanding
|
|
|
5,655,631
|
|
|
5,544,614
|
|
|
5,798,017
|
|
|
5,547,848
|
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
|
|
|
Nine
Months ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
2004
|
|
Operating
Activities:
|
|
|
|
|
|
Net
Income
|
|
$
|
1,191,378
|
|
$
|
1,451,032
|
|
|
|
|
|
|
|
|
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating
Activities:
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
1,418,549
|
|
|
1,193,915
|
|
Provision
for Doubtful Accounts
|
|
|
342,000
|
|
|
64,000
|
|
Deferred
Income Taxes
|
|
|
487,000
|
|
|
462,000
|
|
|
|
|
|
|
|
|
|
Changes
in Assets and Liabilities:
|
|
|
|
|
|
|
|
[Increase]
Decrease in:
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
2,407,906
|
|
|
(1,306,946
|
)
|
Costs
and Estimated Profits in Excess of Interim Billings
|
|
|
(433,954
|
)
|
|
166,949
|
|
Other
Current Assets
|
|
|
46,750
|
|
|
240,213
|
|
Other
Assets
|
|
|
(7,730
|
)
|
|
43,851
|
|
|
|
|
|
|
|
|
|
Increase
[Decrease] in
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
433,759
|
|
|
606,692
|
|
Accrued
Expenses
|
|
|
830,550
|
|
|
(457,125
|
)
|
Interim
Billings in Excess of Costs and Estimated Profits
|
|
|
(1,201,383
|
)
|
|
(526,155
|
)
|
Deferred
Revenue
|
|
|
3,478
|
|
|
154,464
|
|
Deferred
Rent Payable
|
|
|
21,600
|
|
|
419,507
|
|
|
|
|
|
|
|
|
|
Total
Adjustments
|
|
|
4,348,525
|
|
|
1,061,365
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
|
|
5,539,903
|
|
|
2,512,397
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
Acquisition
of Property and Equipment
|
|
|
(346,020
|
)
|
|
(1,292,033
|
)
|
Capitalized
Software Development
|
|
|
(42,000
|
)
|
|
(185,000
|
)
|
Business
Acquisitions - Net
|
|
|
(13,347,017
|
)
|
|
(16,263
|
)
|
|
|
|
|
|
|
|
|
Net
Cash Used In Investing Activities
|
|
|
(13,735,037
|
)
|
|
(1,493,296
|
)
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS -
(Unaudited)
|
|
|
Nine
Months ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
2004
|
|
Financing
Activities:
|
|
|
|
|
|
Payment
of Capitalized Lease Obligations
|
|
$
|
(47,857
|
)
|
$
|
(46,084
|
)
|
Net
Proceeds from Stock Options Exercised
|
|
|
186,590
|
|
|
111,962
|
|
Payments
of Term Loans
|
|
|
(499,994
|
)
|
|
(499,994
|
)
|
|
|
|
|
|
|
|
|
Net
Cash Used in Financing Activities
|
|
|
(361,261
|
)
|
|
(434,116
|
)
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(8,556,395
|
)
|
|
584,985
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents -
|
|
|
|
|
|
|
|
Beginning
of Period
|
|
|
16,411,735
|
|
|
15,920,993
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents -
|
|
|
|
|
|
|
|
End
of Period
|
|
$
|
7,855,340
|
|
$
|
16,505,978
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
55,110
|
|
$
|
107,050
|
|
Income
Taxes
|
|
$
|
242,458
|
|
$
|
220,520
|
|
Non
Cash Investing and Financing Activities:
The
fair
value of the interest rate swap decreased by $13,008 for the nine months
ended
September 30, 2005. The fair value of the interest rate swap decreased by
$34,637 for the nine months ended September 30, 2004.
During
the nine months ended September 30, 2005, the Company acquired for $489,238
in
cash and stock, the software, customer lists and other assets of
ContinuedLearning LLC. The consideration consisted of $252,917 in cash plus
20,000 shares of common stock, valued at $191,400, based upon the average
weighted stock price of $9.57 for the period commencing three days before
and
ending three days after the acquisition was agreed to and announced. The
consideration also included the assumption of $44,921 for certain liabilities
for services to be performed in the future. The agreement also included
contingent consideration of $250,000 if certain revenue targets are met within
one year of the closing of the acquisition, which closed on April 28, 2005.
Based upon results thus far, the Company has provided for $125,000 of this
contingent consideration and has adjusted the related balance sheet accounts
accordingly. The $125,000 additional provision is included in accrued
expenses.
During
the nine months ended September 30, 2005, the Company acquired for $3,610,682,
the software, customer lists and other assets of Addiction Management Systems.
The consideration consisted of $2,661,849 in cash and the assumption of $948,833
for certain liabilities for services to be performed in the future.
During
the nine months ended September 30, 2005, the Company acquired 100% of the
equity interest in CMHC Systems, Inc. (“CMHC”). The purchase price totaled
approximately $19,565,956 as follows: 435,735 shares of Netsmart’s common stock
(valued at $4,915,091), $12,994,758 in cash plus additional cash consideration
currently estimated at $792,024 required by the “working capital adjustment”,
calculated and payable in accordance with the merger agreement, and acquisition
costs of $864,083. The value of the 435,735 shares of common stock was based
upon the average weighted stock price of $11.28 for the period commencing
three
days before and ending three days after the acquisition was agreed to an
announced.
During
the nine months ended September 30, 2004, the Company received 4,166 shares
of
its common stock in consideration for the exercise of certain stock options.
The
value of the shares received was $53,533, which was the market value of the
common stock on the dates of exercise.
During
the nine months ended September 30, 2004, the Company acquired for $250,000
TxM
software and customer lists. The consideration consisted of $16,263 in cash
and
the assumption of $233,707 for certain liabilities for services to be performed
in the future.
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Common
|
|
Accumulated
|
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Stock
|
|
Deficit
|
|
Swap
|
|
Income
|
|
Shares
|
|
Amount
|
|
Equity
|
|
Balance
- January 1, 2005
|
|
|
5,567,124
|
|
$
|
55,671
|
|
$
|
29,893,223
|
|
$
|
(3,593,908
|
) |
$
|
(15,152
|
)
|
$
|
—
|
|
|
227,924
|
|
$
|
(1,712,982
|
)
|
$
|
24,626,852
|
|
Common
Stock Issued - Exercise of Options
|
|
|
36,000
|
|
|
360
|
|
|
186,230
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
186,590
|
|
Change
in Fair Value of Interest Rate Swap
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,008
|
|
|
13,008
|
|
|
—
|
|
|
—
|
|
|
13,008
|
|
Common
Stock Issued - Business Acquisitions
|
|
|
455,735
|
|
|
4,557
|
|
|
5,101,933
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,106,490
|
|
Net
Income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,191,378
|
|
|
—
|
|
|
1,191,378
|
|
|
—
|
|
|
—
|
|
|
1,191,378
|
|
Balance
- September 30, 2005
|
|
|
6,058,859
|
|
$
|
60,588
|
|
$
|
35,181,386
|
|
$
|
(2,402,530
|
) |
$
|
(2,144
|
)
|
$
|
1,204,386
|
|
|
227,924
|
|
$
|
(1,712,982
|
)
|
$
|
31,124,318
|
|
See
Notes
to Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
|
|
(1)
Financial
Statements
The
accompanying condensed consolidated financial statements include the accounts
of
Netsmart Technologies, Inc. and its subsidiaries Netsmart New York, Inc.
formerly Creative Socio-Medics Corporation, and Netsmart Ohio, Inc., formerly
CMHC Systems, Inc., (collectively, unless the context otherwise indicates,
the
“Company”). All intercompany balances and transactions have been eliminated in
consolidation.
These
unaudited, condensed consolidated financial statements have been prepared
in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do
not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have
been
included. The results of operations for any interim period are not necessarily
indicative of the results of operations to be expected for any other fiscal
period or the full fiscal year. For further information, refer to the
consolidated financial statements and accompanying footnotes included in
the
Company’s annual report on Form 10-K for the year ended December 31,
2004.
(2)
Earnings
Per Share
The
following table sets forth the components used in the computation of basic
and
diluted earnings per share:
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,191,378
|
|
$
|
1,451,032
|
|
$
|
378,757
|
|
$
|
633,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
5,409,836
|
|
|
5,329,549
|
|
|
5,537,862
|
|
|
5,338,700
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
245,795
|
|
|
215,065
|
|
|
260,155
|
|
|
209,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share-adjusted weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
shares after assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversions
|
|
|
5,655,631
|
|
|
5,544,614
|
|
|
5,798,017
|
|
|
5,547,848
|
|
Options
to purchase 1,500 shares of the Company’s common stock that were outstanding as
of September 30, 2005 were not included in the calculation of diluted earnings
per share for the nine and three months ended September 30, 2005 since such
inclusion would have been antidilutive.
(3)
Stock
Options and Similar Equity Instruments
At
September 30, 2005, the Company had three stock-based employee compensation
plans. As permitted under Statement of Financial Accounting Standards No.
148,
“Accounting for Stock-Based Compensation--Transition and Disclosure”, which
amended SFAS No. 123 (SFAS 123), “Accounting for Stock-Based Compensation”, the
Company has elected to continue to follow the intrinsic value method in
accounting for its stock-based employee compensation arrangements, as defined
by
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees”, and related interpretations including Financial Accounting Standards
Board Interpretation No. 44, “Accounting for Certain Transactions Involving
Stock Compensation”, an interpretation of APB No. 25. No stock-based employee
compensation cost is reflected in net income, as all options granted under
those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on
net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee
compensation:
|
|
|
Nine
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income as Reported
|
|
$
|
1,191,378
|
|
$
|
1,451,032
|
|
$
|
378,757
|
|
$
|
633,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
expense determined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under
fair value-based method for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
all
awards, net of related tax effect
|
|
|
914,064
|
|
|
738,048
|
|
|
442,426
|
|
|
376,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma Net Income (loss)
|
|
$
|
277,314
|
|
$
|
712,984
|
|
$
|
(63,669
|
)
|
$
|
257,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Net Income Per Share as Reported
|
|
$
|
.22
|
|
$
|
.27
|
|
$
|
.07
|
|
$
|
.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Pro Forma Net Income (loss) Per Share
|
|
$
|
.05
|
|
$
|
.13
|
|
$
|
(.01
|
)
|
|
.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Net Income Per Share as Reported
|
|
$
|
.21
|
|
$
|
.26
|
|
$
|
.07
|
|
$
|
.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Pro Forma Net Income (loss) Per Share
|
|
$
|
.05
|
|
$
|
.13
|
|
$(
|
(.01
|
)
|
$
|
.05
|
|
The
fair
value of options at date of grant was estimated using the Black-Scholes fair
value based method with the following weighted average assumptions:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
2004
|
|
Expected
Life (Years)
|
|
5
|
|
5
|
|
Interest
Rate
|
|
|
5
|
%
|
|
4.00
|
%
|
Annual
Rate of Dividends
|
|
|
0
|
%
|
|
0
|
%
|
Volatility
|
|
|
51
|
%
|
|
68
|
%
|
The
weighted average fair value of options at date of grant using the fair value
based method during 2005 and 2004 is estimated at $4.20 and $3.95
respectively.
In
December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS No.
123R). SFAS No. 123R eliminates the alternative to use APB No. 25’s intrinsic
value method of accounting that was provided in SFAS No 123 as originally
issued. SFAS No. 123R requires entities to recognize the cost of employee
services in exchange for awards of equity instruments based on the grant-date
fair value of those awards (with limited exceptions). That cost will be
recognized over the period during which the employee is required to provide
the
service in exchange for the award. No compensation cost is recognized for
equity
instruments for which employees do not render the requisite service. SFAS
No.
123R requires entities to initially measure the cost of employee services
received in exchange for an award of liability instruments based on its current
fair value; the fair value of the award will be remeasured at each reporting
date through the settlement date. Changes in fair value during the requisite
service period will be recognized as compensation cost over that period.
The
grant date fair value of employee share options and similar instruments will
be
estimated using option-pricing models adjusted for the unique characteristics
of
those instruments. SFAS No. 123R is effective as of the beginning of the
Company’s interim reporting period that begins on January 1, 2006. The
transitional provisions of SFAS No. 123R will not have a material effect
on the
Company’s consolidated financial position or results of operations as
substantially all outstanding equity instruments vest on or prior to December
31, 2005. The Company will utilize the fair value method for any future
instruments issued or outstanding but not vested after the implementation
date.
In
March
2005, the SEC issued Staff Accounting Bulletin No. 107, “Share Based Payments”
(SAB 107). The interpretations in SAB 107 express views of the staff regarding
the interaction between SFAS 123R and certain SEC rules and regulations
and
provide the staff's views regarding the valuation of share-based payment
arrangements for public companies. In particular, SAB 107 provides guidance
related to share-based payment transactions with non-employees, the transition
from non-public to public entity status, valuation methods (including
assumptions such as expected volatility and expected term), the accounting
for
certain redeemable financial instruments issued under share-based
payment
arrangements, the classification of compensation expense, non-GAAP financial
measures, first-time adoption of SFAS 123R in an interim period, capitalization
of compensation cost related to share-based payment arrangements, the accounting
for income tax effects of share-based payment arrangements upon adoption
of SFAS
123R, the modification of employee share options prior to adoption of
SFAS 123R, and disclosures in Management's Discussion and Analysis
subsequent to adoption of SFAS 123R.
(4)
Income
Taxes
The
provision for income taxes for the nine months ended September 30, 2005,
consists of a current tax provision of $235,000 and a deferred tax provision
of
approximately $487,000. The provision for income taxes for the period ended
September 30, 2004, consists of a current tax provision of $101,000 and a
deferred tax provision of approximately $462,000. The deferred tax provision
for
the nine months ended September 30, 2004 was $801,000 based upon utilization
of
available net operating loss carry forwards offset by a reduction in the
deferred tax asset valuation allowance of $339,000. The provision for income
taxes for the three months ended September 30, 2005, consists of a current
tax
provision of $96,000 and a deferred tax provision of approximately $196,000.
The
provision for income taxes for the three months ended September 30, 2004
consists of a current provision of $27,000 and a deferred tax provision of
$167,000. The deferred tax provision was $433,000 based upon utilization
of
available net operating loss carry forwards plus an increase in the deferred
tax
asset valuation allowance of $29,000. Included in the deferred tax provision
was
a credit to Additional Paid in Capital in the amount of $462,000, which is
related to a component of the net operating loss carry forwards, created
as a
result of deductions arising from the exercise of options and
warrants.
Included
in the acquired balance sheet of CMHC Systems, Inc. was a deferred tax asset
comprised of the following significant components:
Deferred
tax assets:
|
|
|
|
Allowance
for doubtful receivables
|
|
$
|
43,205
|
|
Accrued
compensation
|
|
|
246,707
|
|
Property
and equipment and purchased software
|
|
|
131,018
|
|
Deferred
revenue
|
|
|
105,844
|
|
Other
|
|
|
31,118
|
|
Net
operating loss carryforwards
|
|
|
1,855,988
|
|
|
|
|
2,413,880
|
|
Less
valuation allowance
|
|
|
(848,475
|
)
|
|
|
|
1,565,405
|
|
Deferred
tax liabilities:
|
|
|
|
|
Capitalized
software development costs
|
|
|
118,212
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
1,447,193
|
|
Additionally,
as a result of the CMHC Systems, Inc. acquisition, the Company booked a deferred
tax liability in the amount of $3,416,000 relating to the non-deducible nature
of certain acquired intangible assets, which liability will be amortized
in
future periods.
(5)
Stockholders’
Equity
During
the nine months ended September 30, 2005, options to purchase 36,000 shares
were
exercised and the Company received gross proceeds of $186,590.
On
April
28, 2005, the Company acquired substantially all of the assets of Continued
Learning LLC (see Acquisitions, footnote 8). The total purchase price of
$489,238 consisted of various components of consideration including 20,000
shares of the Company’s common stock valued at $191,400.
On
July
14, 2004, at the annual meeting of stockholders, the stockholders approved
an
increase of 400,000 in the number of shares available under the Netsmart
2001
Long-Term Incentive Plan. These 400,000 additional options were granted to
officers and employees on July 14, 2005 with an exercise price of $9.85 per
share for each option, which was equal to the fair market value at the date
of
grant, in accordance with the terms of the 2001 Long-Term Incentive Plan.
The
options granted vest over different periods; however, they will all be fully
vested by December 31, 2005.
On
September 28, 2005, the Company consummated its acquisition by merger of
CMHC
Systems, Inc. (see Acquisitions, footnote 8). The total purchase price of
$19,565,956 consisted of various components of consideration including 435,735
shares of the Company’s common stock valued at $4,915,091.
(6)
Operating
Segments
The
Company currently classifies its operations into three business segments:
(1)
Software and Related Systems and Services, (2) Data Center Services and (3)
Application Service Provider (“ASP”) 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. ASP Services
involve Company offerings of each of its Avatar suite of products, CareNet
products, ContinuedLearning products and InfoScribeR products on a virtual
private network or internet delivery approach, thereby allowing its customers
to
rapidly deploy products and pay on a monthly service basis, thus eliminating
capital intensive system requirements. Intersegment sales and sales outside
the
United States are not material. Information concerning the Company’s business
segments are as follows:
|
|
Software
and
Related
Sytems
and
Service
|
|
Data
Center
Services
|
|
Application
Service
Provider
Services
|
|
Consolidated
|
|
Nine
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
20,538,693
|
|
$
|
1,380,234
|
|
$
|
1,785,665
|
|
$
|
23,704,592
|
|
Income
before income taxes
|
|
|
1,532,217
|
|
|
368,892
|
|
|
12,269
|
|
|
1,913,378
|
|
Total
identifiable assets at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2005
|
|
|
55,440,331
|
|
|
1,478,805
|
|
|
3,324,638
|
|
|
60,243,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
18,740,388
|
|
$
|
1,525,048
|
|
$
|
1,167,297
|
|
$
|
21,432,733
|
|
Income
before income taxes
|
|
|
1,427,856
|
|
|
547,163
|
|
|
39,013
|
|
|
2,014,032
|
|
Total
identifiable assets at
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2004
|
|
|
30,021,788
|
|
|
2,456,000
|
|
|
3,358,326
|
|
|
35,836,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,429,999
|
|
$
|
433,976
|
|
$
|
652,619
|
|
$
|
8,516,594
|
|
Income
before income taxes
|
|
|
604,978
|
|
|
101,905
|
|
|
(36,126
|
)
|
|
670,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,467,513
|
|
$
|
527,894
|
|
$
|
425,412
|
|
$
|
7,420,819
|
|
Income
before income taxes
|
|
|
589,962
|
|
|
205,436
|
|
|
31,780
|
|
|
827,178
|
|
(7)
Reclassifications
Certain
accounts in the prior year financial statements have been reclassified for
comparative purposes to conform to the presentation in the current year
financial statements. These reclassifications have no effect on previously
reported income.
(8)
Acquisitions
On
April
28, 2005, the Company acquired substantially all of the assets, including
computer software, customer lists and computer equipment, of ContinuedLearning
LLC, a company that offered a comprehensive family of web-based training
products and services, including its Learning Management System. The total
purchase price, including acquisition costs and a partial recognition of
a
potential additional payment, was $614,237 which consisted of cash of $252,917
including legal fees of $18,632, and broker fees of $10,000, 20,000 shares
of
the Company’s common stock valued at $191,400, assumed liabilities of $44,921
and an accrual for a potential additional payment of $125,000. The purchase
agreement also provides for a potential additional payment up to $250,000
if
certain revenue targets are met in year one. Based upon the attainment of
certain revenue targets as of September 30, 2005 the Company recognized $125,000
of this additional payment at September 30, 2005. The Company also entered
into
a two year employment agreement at an annual salary of $100,000 per year
with
the principal of ContinuedLearning LLC, whereby the principal can receive
an
additional $300,000 in cash, to be accounted for as compensation expense,
if
certain revenue targets are met within a two-year period. The cash portion
of
the purchase price was paid out of existing working capital.
The
cost
of the ContinuedLearning acquisition was allocated as follows: $567,955 to
purchased software, $4,282 to customer lists,$17,000 to computer hardware,
and
$25,000 to a covenant not to compete. The Company is amortizing the purchased
software over a six-year life, the customer lists and computer hardware over
a
three-year life, and the covenant not to compete over a two-year
life.
On
June
20, 2005, the Company acquired the assets of Addiction Management Systems,
Inc
(“AMS”). The total purchase price, including acquisition costs, was $3,610,682
which consisted of cash of $2,641,945 plus legal fees of $19,904 and assumed
liabilities for services to be provided of $948,833.
The
cost
of the AMS acquisition was allocated as follows: $2,050,700 to purchased
software, $1,396,902 to customer lists, $127,698 accounts receivable, $32,048
to
inventory, and $3,334 to a security deposit. The Company is amortizing the
purchased software and the customer lists over an eight-year life.
Pursuant
to a merger agreement dated September 20, 2005, the Company acquired 100%
of the
equity interest in CMHC Systems, Inc. (“CMHC”) a company that offers a full
suite of behavioral healthcare information management software for mental
health, substance abuse, and addiction services agencies, developmental
disability centers, and behavioral health-related managed care organizations.
The purchase price totaled approximately $19,565,956 as follows: 435,735
shares
of Netsmart’s common stock (valued at $4,915,091), $12,994,758 in cash plus
additional cash consideration currently estimated at $792,024 as required
by the
“working capital adjustment”, calculated and payable in accordance with the
merger agreement, and acquisition costs of $864,083. In addition, the Company
booked a deferred tax liability in the amount of $3,416,000 relating to certain
acquired intangible assets.
None
of
the goodwill or amortization of the contract backlog, capitalized software
or
customer list will be deductible on the Company’s tax return. The Company is
amortizing the contract backlog over one year, the capitalized software over
four years and the customer list over 20 years. The goodwill will be reviewed
each year to determine if any impairment adjustment will be required. The
unaudited condensed Consolidated Balance Sheet reflects the Company’s best
estimate of the purchase price allocations, however the final allocation
may
differ from these amounts.
The
Company also assumed the CMHC Systems, Inc. facility lease in Dublin, Ohio.
This
lease has a total square footage of 34,230, is non cancelable and expires
on
September 30, 2010. The annual rent is $377,172 and is subject to annual
real
estate tax assessments.
The
following table summarizes the estimated fair value of the assets acquired
and
liabilities assumed at the date of the acquisition of CMHC Systems, Inc.
At
September 30, 2005
($
in
thousands)
Current
assets
|
|
$
|
6,166
|
|
Property,
plant and equipment - net
|
|
|
464
|
|
Software
development costs
|
|
|
3,300
|
|
Customer
lists
|
|
|
5,200
|
|
Goodwill
|
|
|
19,091
|
|
Contract
backlog
|
|
|
490
|
|
Deferred
tax asset - long term
|
|
|
1,157
|
|
Other
assets
|
|
|
26
|
|
Total
assets acquired
|
|
|
35,894
|
|
|
|
|
|
|
Current
liabilities
|
|
|
12,874
|
|
Deferred
tax liability
|
|
|
3,416
|
|
Long-term
debt
|
|
|
38
|
|
Total
liabilities assumed
|
|
|
16,326
|
|
Net
assets acquired
|
|
$
|
19,566
|
|
Included
in the current liabilities of $12,874,000 is a promissory note which CMHC
entered into in April 2005 in the amount of $500,000. This note bears interest
at a rate of 14% per annum and is due on October 31, 2005. This promissory
note
was paid in full in October 2005.
The
following unaudited proforma condensed consolidated statements of operations
assumes the Continued Learning LLC, the AMS and the CMHC acquisitions occurred
on January 1, 2004. In the opinion of management, all adjustments necessary
to
present fairly such unaudited proforma statements have been made. These proforma
amounts may not be indicative of what would have occurred had the acquisition
been completed on January 1, 2004 or results which may occur in the
future.
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(in
thousands except share and per share amounts)
|
|
Revenue
|
|
$
|
43,392
|
|
$
|
39,959
|
|
$
|
15,076
|
|
$
|
13,138
|
|
Net
Income
|
|
|
1,360
|
|
|
71
|
|
|
553
|
|
|
(39
|
)
|
Net
Income Per Share;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.23
|
|
$
|
.01
|
|
$
|
.09
|
|
$
|
(.01
|
)
|
Diluted
|
|
$
|
.22
|
|
$
|
.01
|
|
$
|
.09
|
|
$
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Share of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Outstanding
|
|
|
5,854,460
|
|
|
5,785,284
|
|
|
5,973,597
|
|
|
5,794,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
if
Shares of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
and Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalents
Outstanding
|
|
|
6,100,255
|
|
|
6,000,349
|
|
|
6,233,752
|
|
|
6,003,583
|
|
The
results of the acquisitions of ContinuedLearning and AMS were included in
the
actual consolidated results of operations commencing with the respective
date of
the acquisitions. With respect to the CMHC acquisition which closed on September
28, 2005, the balance sheet of CMHC is reflected in the consolidated balance
sheet of (the Company as of September 30, 2005. The results of operations
of
CMHC will be consolidated with those of the Company commencing October 1,
2005.
The
Company accounted for the ContinuedLearning, AMS and CMHC acquisitions pursuant
to the purchase method of accounting as required under Statement of Financial
Accounting Standards No. 141 “Business Combination”.
(9)
New
Pronouncements
FASB
Interpretation No. 47, “Accounting for Conditional Asset Retirement
Obligations”
(FIN 47)
In March 2005, the FASB issued FIN 47, which is effective for the Company
on
December 31, 2005. FIN 47 clarifies that the phrase “conditional asset
retirement obligation,” as used in FASB Statement No. 143, “Accounting
for Asset Retirement Obligations”
(FAS
143), refers to a legal obligation to perform an asset retirement activity
for
which the timing and/or method of settlement are conditional on a future
event
that may or may not be within the control of the company. The obligation
to
perform the asset retirement activity is unconditional even though uncertainty
exists about the timing and/or method of settlement. Uncertainty about the
timing and/or method of settlement of a conditional asset retirement obligation
should be factored into the measurement of the liability when sufficient
information exists. FAS 143 acknowledges that in some cases, sufficient
information may not be available to reasonably estimate the fair value of
an
asset retirement obligation. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. The Company does not expect that adoption of FIN 47
will
have a significant effect on its consolidated financial position or results
of
operations.
In
May
2005, FASB issued SFAS No. 154, “Accounting
Changes and Error Corrections”(SFAS
154). SFAS 154 requires retrospective application to prior periods’ financial
statements of changes in accounting principle. It also requires that the
new
accounting principle be applied to the balances of assets and liabilities
as of
the beginning of the earliest period for which retrospective application
is
practicable and that a corresponding adjustment be made to the opening balance
of retained earnings for that period rather than being reported in an income
statement. The statement will be effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
The Company does not expect the adoption of SFAS 154 to have a material effect
on its consolidated financial position or results of operations.
In
June
2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
Period for Leasehold Improvements (EITF 05-6). EITF 05-6 provides guidance
on
determining the amortization period for leasehold improvements acquired in
a
business combination or acquired subsequent to lease inception. The guidance
in
EITF 05-6 will be applied prospectively and is effective for periods beginning
after June 29, 2005. EITF 05-6 is not expected to have a material impact
on the
Company’s consolidated financial position or results of operations.
In
September 2005, the FASB ratified the Emerging Issues Task Force’s (“EITF”)
Issue No. 05-7. “Accounting for Modifications to Conversion Options Embedded in
Debt Instruments and Related Issues”, which addresses whether a modification to
a conversion option that changes its fair value affects the recognition of
interest expense for the associated debt instrument after the modification,
and
whether a borrower should recognize a beneficial conversion feature, not
a debt
extinguishment, if a debt modification increases the intrinsic value of the
debt
(for example, the modification reduces the conversion price of the debt).
In
September 2005, the FASB also ratified the EITF’s Issue No. 05-8, “Income Tax
consequences of Issuing Convertible Debt with a Beneficial Conversion Feature”,
which discusses whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the intrinsic
value of the beneficial conversion feature on the commitment date, (which
is
treated recorded I shareholder’s equity for book purposes, but as a liability
for income tax purposes) and, if so, whether that basis difference is a
temporary difference under FASB Statement No. 109, Accounting for Income
Taxes.
Neither of these Issues have an effect on our consolidated financial position
or
results of operations since we do not currently have any convertible debt
instruments.
(10)
Subsequent
Events
On
October 7, 2005, the Company entered into a Revolving Credit and Term Loan
Agreement (the “Loan Agreement”) with Bank of America, N.A. (the “Bank”)
pursuant to which the Bank has agreed to make loans to the Company consisting
of
(i) a $2,500,000 Revolving Credit Loan and (ii) a $2,500, 000 Term Loan
(collectively, the “Loans”).
The
Loans are evidenced by promissory notes of the Company (the “Notes”) and are
secured by a security interest in the Company’s personal property, including a
pledge of the stock of the Company’s wholly-owned subsidiaries. The Loans are
guaranteed by the Company’s significant wholly-owned subsidiaries, Netsmart, New
York, Inc. and Netsmart Ohio, Inc.
On
October 7, 2005, the Company borrowed the full amount of the $2,500,000 Term
Loan. The Company has not borrowed any amounts under the Revolving Credit
Loan.
The term loan bears interest at LIBOR plus 2.25%. The Company has entered
into
an interest rate swap agreement with the bank for the amount outstanding
under
the term loan whereby it converted the variable rate on the term loan to
a fixed
rate of 7.1% in order to reduce the interest rate risk associated with these
borrowings. The revolving credit facility will bear interest at a rate per
annum
to be elected by the Company, equal to either (1) the LIBOR rate plus 2%
or (2)
the Bank’s prime rate.
On
October 14, 2005, the Company announced the completion of a private placement
of
units consisting of an aggregate 490,000 shares of its common stock and warrants
to purchase 147,003 shares of common stock, which include 24,500 warrants
issued
to the placement agent. The warrants have an exercise price of $11 per share.
The Company received net proceeds of approximately $4.2 million.
In
October 2005, options to purchase 155,908 shares were exercised and the Company
received gross proceeds of $600,007. Included in the 155,908 options exercised
were 103,250 options exercised related to officers and members of the Board
of
Directors of the Company, which accounted for gross proceeds of $382,333
of the
total $600,007 gross proceeds.
On
November 3, 2005, the Company granted 30,000 inducement options to employees
of
CMHC Systems, Inc. to encouraging the recipient to continue to remain in
the
employ of CMHC after the acquisition. The options were granted at a price
of
$14.77 which was equal to the fair market value at the date of grant. The
options will vest over a period of three years.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
Our
operations are grouped into three segments:
|
§
|
Software
and Related Systems and Services
|
|
§
|
Data Center (service bureau)
Services |
|
§
|
Application Service Provider Services
(ASP) |
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
involves our personnel performing data entry and data processing services
for
customers. Application Service Provider Services involves the offering of
our
Avatar suite of products, our CareNet products, our InfoScribeR products
and our
ContinuedLearning products on a virtual private network or through an internet
delivery approach, thereby allowing our customers to deploy products and
pay on
a monthly service basis, thus eliminating capital intensive system requirements
for such services.
On
April
28, 2005, we acquired substantially all of the assets, including computer
software, customer lists and computer equipment, of ContinuedLearning LLC,
a
company that offered a comprehensive family of web-based training products
and
services, including its Learning Management System. The total purchase price,
including acquisition costs, was $614,238 which consisted of cash of $252,917
including legal fees of $18,632 and brokers fees of $10,000, 20,000 shares
of
our common stock valued at $191,400, assumed liabilities of $44,921, and
an
accrual for a potential additional payment of $125,000. The purchase agreement
also provides for a potential additional payment of $250,000 if certain revenue
targets are met in year one. We recognized $125,000 of this additional payment
at September 30, 2005. We also entered into an employment agreement with
the
principal of ContinuedLearning LLC, whereby the principal can receive an
additional $300,000 in cash, to be accounted for as compensation expense,
if
certain revenue targets are met. The cash portion of the purchase price was
paid
out of existing working capital.
On
June
20, 2005, we acquired the assets of Addiction Management Systems, Inc (“AMS”).
The total purchase price, including acquisition costs, was $3,610,682, which
consisted of cash of $2,641,945 plus legal fees of $19,904 and assumed
liabilities for services to be provided of $948,833.
Pursuant
to a merger agreement dated September 20, 2005 ,we acquired 100% of the equity
interest in CMHC Systems, Inc. (“CMHC”) a company that offers a full suite of
behavioral healthcare information management software for mental health,
substance abuse, and addiction services agencies, developmental disability
centers, and behavioral health-related managed care organizations. The purchase
price totaled approximately $19,565,956 as follows: 435,735 shares of our
common
stock (valued at $4,915,091), $12,994,758 in cash plus additional cash
consideration currently estimated at $792,024 as required by the “working
capital adjustment”, calculated and payable in accordance with the merger
agreement, and acquisition costs of $864,083. In addition, we also acquired
CMHC
‘s negative net worth in the amount of $3,502,673. In addition, we booked
a
deferred tax liability in the amount of $3,416,000 relating to the
non-deductible nature of certain acquired intangible assets, which liability
will be amortized in future periods.
Nine
Months Ended September 30, 2005 and 2004
Results
of Operations
Our
total
revenue for the nine months ended September 30, 2005 (the “September 2005
period”) was $23,705,000, an increase of $2,272,000, or 11%, from our revenue
for the nine months ended September 30, 2004 (the “September 2004 period”),
which was $21,433,000.
Revenue
from contracts with state and local government agencies represented 49% of
revenue in both the September 2005 and September 2004 periods.
Fixed
price software development contracts, which include labor, licenses and third
party resale components, accounted for 31% and 35% of consolidated revenue
for
the September 2005 period and the September 2004 period, respectively. This
decrease is the result of a decrease in Software and Related Systems and
Services revenue generated from fixed price contracts and an increase in
such
revenue generated on an as incurred basis. Our recurring revenue components,
which include our maintenance
contract services, our Data Center and ASP services, accounted for 43% of
our
consolidated revenue for the September 2005 period compared to 41% of
consolidated revenue for the September 2004 period. This increase was the
result
of an increase in both maintenance and ASP revenue which was partially offset
by
a decrease in Data Center revenue. We recognize revenue for fixed price
contracts 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 costs and estimated
profits. Revenue from fixed price software development contracts is determined
using the percentage of completion method, which is based upon the time spent
by
our technical personnel on a project.
Software
and Related Systems and Services
Our
Software and Related Systems and Services revenue for the September 2005
period
was $20,539,000, an increase of $1,799,000, or 10%, from our revenue for
the
September 2004 period, which was $18,740,000. Software and Related Systems
and
Services revenue is comprised of turnkey systems labor revenue, revenue from
sales of third party hardware and software license revenue, maintenance revenue
and revenue from small turnkey systems.
The
largest component of Software and Related Systems and Services revenue was
turnkey systems labor revenue, which increased $116,000 or 2% to $7,250,000
in
the September 2005 period from $7,134,000 in the September 2004 period. Turnkey
systems labor revenue refers to labor associated with turnkey installations
and
includes categories such as training, installation, project management and
development. The increase in turnkey systems labor revenue was primarily
due to
a 4% increase in the average daily billing rate, which accounted for total
labor
revenue increase of $160,000 in the September 2005 period as compared to
the
September 2004 period. This increase was offset by a decrease of $44,000
related
to reduced services provided under labor related contracts. The decrease
in
services is primarily due to the fact that during the month of September,
a
substantial amount of our staff that is typically assigned to revenue generating
efforts spent time dedicated to the activities of our annual User Group meeting.
Revenue from third party hardware and software increased 20% to $3,882,000
in
the September 2005 period, from $3,244,000 in the September 2004 period.
Sales
of third party hardware and software, such as pharmacy and database software,
are made in connection with the sales of turnkey systems. These sales are
typically made at lower gross margins than our software and related systems
and
services revenue. During the September 2005 period, the increase in revenue
from
third party hardware and software was partially the result of an increase
in
database software sales and pharmacy sales to various customers. License
revenue
increased 7% to $1,691,000 in the September 2005 period, from $1,587,000
in the
September 2004 period. License revenue is generated as part of a sale of
a human
services information system pursuant to a contract or purchase order that
includes delivery of the system and maintenance. During the September 2005
period, the increase in license revenue was substantially the result of
increased user license sales to existing customers. Maintenance revenue
increased 16% to $7,077,000 in the September 2005 period from $6,102,000
in the
September 2004 period. Revenue from the AMS acquisition accounted for
approximately 6% of this increase. 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 5% to $639,000
in
the September 2005 period from $673,000 in the September 2004 period. We
sold
and performed on fewer small turnkey contracts in the September 2005 period
than
in the September 2004 period. Small turnkey division sales relate to turnkey
contracts that are less than $50,000 and are usually completed within one
month.
On September 20, 2005, we acquired AMS. AMS typically has the type of contracts
included in the small turnkey division revenue; however, sales of AMS products
and services were not material during the September 2005
period.
Gross
profit increased 14% to $10,012,000 in the September 2005 period from $8,799,000
in the September 2004 period. Our gross margin percentage increased to 49%
in
the September 2005 period from 47% in the September 2004 period. Our gross
margin increased as a result of improved efficiency from our maintenance
division as well as an increase in our license revenue. This increase was
partially offset by a decrease in our labor efficiency with respect to our
fixed
price contracts primarily due to the reallocation of staff to our User Group
activities in the month of September 2005.
Data
Center Services (Service Bureau)
Data
center clients typically generate approximately the same amount of revenue
each
year. We bill on a transaction basis or on a fixed fee arrangement.
Historically, each year we increase the transaction or fixed fee by an amount
that approximates the New York urban consumer price index increase. The data
center revenue decreased to $1,380,000 in the September 2005 period from
$1,525,000 in the September 2004 period, representing a decrease of $145,000,
or
10%. This decrease was the result of two customers discontinuing the use
of our
services.
Gross
profit decreased 20% to $703,000 in the September 2005 period from $880,000
in
the September 2004 period. Our gross margin percentage decreased to 51% in
the
September 2005 period from 58% in the September 2004 period. This decrease
was
the result of the decrease in revenue, as well as an increase in costs of
approximately $32,000. The increase in costs was substantially the result
of an
increase in communications costs of $30,000 and depreciation $13,000, which
was
partially offset by a decrease in support overhead of approximately
$11,000.
Application
Service Provider Services (“ASP”)
ASP
Services involves the offering of our Avatar suite of products, our CareNet
products, our ContinuedLearning products and our InfoScribeR products on
a
virtual private network or through an internet delivery approach, thereby
allowing our customers to rapidly deploy products and pay on a monthly service
basis, thus eliminating capital intensive system requirements for such
services.
ASP
revenue increased to $1,786,000 in the September 2005 period from $1,167,000
in
the September 2004 period, representing an increase of $619,000 or 53%. The
components of the ASP revenue are as follows:
|
|
September
2005
period
|
|
September
2004
period
|
|
Avatar
|
|
$
|
790,000
|
|
$
|
383,000
|
|
CareNet
|
|
|
663,000
|
|
|
617,000
|
|
ContinuedLearning
|
|
|
100,000
|
|
|
—
|
|
InfoScribeR
|
|
|
233,000
|
|
|
167,000
|
|
Total
|
|
$
|
1,786,000
|
|
$
|
1,167,000
|
|
Avatar
ASP revenue increased in the September 2005 period by 106% as compared to
the
September 2004 period. This increase was substantially the result of increased
usage from our existing customer base, as well as the addition of one new
customer in the September 2005 period.
CareNet
revenue increased in the September 2005 period by 7% as compared to the
September 2004 period. Approximately 44% of the revenue increase is associated
with the original CareNet customer base acquired in September 2003, with
the
balance of the increase resulting from sales to new customers.
InfoScribeR
revenue increased in the September 2005 period by 40% as compared to the
September 2004 period. This increase is the result of an increase in our
client
base.
On
April
28, 2005, we acquired substantially all of the assets, including computer
software, customer lists and computer equipment, of ContinuedLearning LLC,
a
company that offers a comprehensive family of web-based training products
and
services, including its Learning Management System. ContinuedLearning revenue
totaled $100,000 for the September 2005 period.
Gross
profit for the September 2005 period was $643,000 and for the September 2004
period was $484,000. The gross margin percentage was 36% in the September
2005
and 41% in the September 2004 period. Although revenue increased, the gross
profit and gross margin percentage did not increase proportionally due to
the
increased costs associated with the Continued Learning operations which amounted
to $309,000 in the September 2005 period. These costs represent the required
baseline costs to support the ContinuedLearning operation. We expect that
as new
revenue is added to this operation, gross profit and margins will increase
accordingly.
Operating
Expenses
Selling,
general and administrative expenses were $6,782,000 in the September 2005
period, reflecting an increase of $1,164,000, or 21%, from $5,618,000 in
the
September 2004 period. Approximately 24% or $278,000 of this increase was
related to an increase in bad debts as a result of one customer filing for
bankruptcy and approximately 9% or $110,000 was related to costs associated
with
our User Group meeting in September 2005. The remaining increases were: sales
and marketing salaries and fringe benefits, which increased by $296,000;
sales
and marketing consulting costs, which increased by $203,000; other consulting
which increased by $220,000, of which $78,000 related to Sarbanes Oxley
compliance efforts and $50,000 related to strategic planning efforts; general
administrative salaries and fringe benefits, which increased by $66,000 and
$208,000 which related to increased amortization related to the
ContinuedLearning and AMS acquisitions. The ongoing costs for consultants
for
Sarbanes-Oxley compliance are expected to decrease significantly in future
periods. The cost increases were partially offset by reductions in: trade
shows,
which decreased by $24,000; advertising and promotion, which decreased by
$46,000; commissions which decreased by $54,000; investment banker fees,
which
decreased by $66,000; depreciation, which decreased by $103,000; and provision
for bonuses, which decreased by $43,000.
We
incurred research, development and maintenance expenses of $2,856,000 in
the
September 2005 period, an increase of 13% from $2,520,000 in the September
2004
period. During the latter part of 2004, we invested in infrastructure that
is
designed to improve the way we support our customers and products. This
increased infrastructure costs relate to product version control, which includes
design, programming, testing, documentation and quality control of our products.
These efforts accounted for a substantial increase in our research, development
and maintenance expenses. The increase in research, development and maintenance
expense is also the result of continuing investment in product enhancement
and
extensions. These extensions include the development of new software modules
which address Federal reporting requirements, as well as continuing investment
in core products. These amounts have been appropriately accounted for in
accordance with SFAS No. 86, “Accounting for the Cost of Computer Software to be
Sold, Leased, or Otherwise Marketed.”
Interest
and other expense was $52,000 in the September 2005 period, a decrease of
$52,000, or 50%, from the $104,000 in the September 2004 period. This decrease
is the result of the completion of the amortization of the financing costs
associated with our then-current loan agreement, which was amortized over
a
three year period, as well as reduced borrowing under our then-current loan
agreement during the September 2005 period.
Interest
income was $246,000 in the September 2005 period, an increase of $152,000,
or
162%, from the $94,000 in the September 2004 period. This increase is the
result
of maintaining higher cash balances during the September 2005 period as well
as
an increase in interest rates. Interest income is generated from short-term
investments made with a substantial portion of the proceeds received from
our
then-current term loan, as well as cash generated from operations and the
proceeds of the exercise of options and warrants.
We
had a
net operating loss tax carry forward of approximately $2.1 million at September
30, 2005. Additionally, CMHC Systems, Inc. has remaining net operating loss
carryforwards of approximately $4 million, of which a reserve allowance of
$848,000 has been established. In the September 2005 period, we recorded
a
current income tax expense of $235,000, which related to various state and
local
taxes, as well as a provision for the Federal alternative minimum tax. The
income tax provision was increased by a deferred tax provision of $487,000.
In
the September 2004 period, we recorded a current income tax expense of $101,000,
which related to various state and local taxes, as well as a provision for
the
Federal alternative minimum tax. The income tax provision was increased by
a
deferred tax provision of $462,000. The deferred tax provision was $801,000
based upon utilization of available net operating loss carry forwards offset
by
a reduction in the deferred tax asset valuation allowance of $339,000.
As
a
result of the foregoing factors, in the September 2005 period we had net
income
of $1,191,000, or $.22 per share (basic) and $.21 per share (diluted). For
the
September 2004 period, we had net income of $1,451,000, or $.27 per share
(basic) and $.26 per share (diluted).
Three
Months Ended September 30, 2005 and 2004
Results
of Operations
Our
total
revenue for the three months ended September 30, 2005 (the “September 2005
quarter”) was $8,517,000, an increase of $1,096,000, or 15%, from our revenue
for the three months ended September 30, 2004 (the “September 2004 quarter”),
which was $7,421,000.
Revenue
from contracts with state and local government agencies represented 44% of
revenue in the September 2005 quarter and 47% of revenue in the September
2004
quarter. This decrease is the result of a substantial completion of two state
contracts and one county contract.
Fixed
price software development contracts, which include labor, licenses and third
party resale components, accounted for 31% and 35% of consolidated revenue
for
the September 2005 quarter and the September 2004 quarter, respectively.
This
decrease is the result of a decrease in Software and Related Systems and
Services revenue generated from fixed price contracts and an increase in
Software and Related Systems and Services revenue generated on an as incurred
basis. Our recurring revenue components, which include our maintenance
contract services, our Data Center and ASP services, accounted for 44% of
our
consolidated revenue for the September 2005 quarter compared to 42% of
consolidated revenue for the September 2004 quarter. This increase was the
result of an increase in both maintenance and ASP revenue which was partially
offset by a decrease in Data Center revenue. We recognize revenue for fixed
price contracts 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 quarter, these contracts generally result in either costs
and
estimated profits in excess of billing or billing in excess of costs and
estimated profits. Revenue from fixed price software development contracts
is
determined using the percentage of completion method, which is based upon
the
time spent by our technical personnel on a project.
Software
and Related Systems and Services
Our
Software and Related Systems and Services revenue for the September 2005
quarter
was $7,430,000, an increase of $962,000, or 15%, from our revenue for the
September 2004 quarter, which was $6,468,000. Software and Related Systems
and
Services revenue is comprised of turnkey systems labor revenue, revenue from
sales of third party hardware and software license revenue, maintenance revenue
and revenue from small turnkey systems.
Our
Software and Related Systems and Services turnkey systems labor revenue
decreased $185,000 or 8% to $2,241,000 in the September 2005 quarter from
$2,426,000 in the September 2004 quarter. Turnkey systems labor revenue refers
to labor associated with turnkey installations and includes categories such
as
training, installation, project management and development. A decrease in
turnkey systems labor revenue of $272,000 was primarily due to reduced services
provided under labor related contracts. Approximately $90,000 of the decrease
was the result of certain of our staff which are typically assigned to revenue
generating efforts, dedicating time to the activities of our annual User
Group
meeting in September. The remaining $182,000 decrease was the result of an
overall reduction in time spent on labor related contracts. This decrease
was
partially offset by a 6% increase in the average daily billing rate, which
accounted for a labor revenue increase of $87,000 in the September 2005 quarter
as compared to the September 2004 quarter. Revenue from third party hardware
and
software increased 32% to $1,588,000 in the September 2005 quarter, from
$1,200,000 in the September 2004 quarter. Sales of third party hardware and
software, such as pharmacy and database software, are made in connection
with
the sales of turnkey systems. These sales are typically made at lower gross
margins than our software and related systems and services revenue. During
the
September 2005 quarter the increase in third party hardware and software
was
partially the result of an increase in database software and pharmacy sales
to
various customers. License revenue increased 30% to $702,000 in the September
2005 quarter, from $542,000 in the September 2004 quarter. License revenue
is
generated as part of a sale of a human services information system pursuant
to a
contract or purchase order that includes delivery of the system and maintenance.
The increase in license revenue in the September 2005 quarter is the result
of
increased sales to our customer base related to customer user count increases.
Maintenance revenue increased 23% to $2,632,000 in the September 2005 quarter
from $2,133,000 in the September 2004 quarter. Revenue from the AMS acquisition
accounted for approximately 18% of this increase. 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
increased 60% to $266,000 in the September 2005 quarter from $166,000 in
the
September 2004 quarter. As a result of the AMS acquisition we sold and performed
on more small turnkey contracts in the September 2005 quarter than in the
September 2004 quarter. Small turnkey division sales relate to turnkey contracts
that are less than $50,000 and are usually completed within one month. On
September 20, 2005, we acquired AMS which typically has the type of contracts
included in the small turnkey division revenue; however, sales of AMS products
and services were not material during the September 2005 quarter.
Gross
profit increased 14% to $3,515,000 in the September 2005 quarter from $3,071,000
in the September 2004 quarter. Our gross margin percentage decreased to 47%
in
the September 2005 quarter from 48% in the September 2004 quarter. This decrease
was the result of a decrease in our labor efficiency with respect to our
fixed
price contracts substantially as a result of labor generating resources being
redirected to our User Group activities in the month of September 2005. The
decrease in our gross margin was partially offset by the improved efficiency
of
our maintenance division as well as an increase in our license
revenue.
Data
Center Services (Service Bureau)
Data
center clients typically generate approximately the same amount of revenue
each
year. We bill on a transaction basis or on a fixed fee arrangement.
Historically, each year we increase the transaction or fixed fee by an amount
that approximates the New York urban consumer price index increase. The data
center revenue decreased to $434,000 in the September 2005 quarter from $528,000
in the September 2004 quarter, representing a decrease of $94,000, or 18%.
This
decrease was the result of two customers discontinuing the use of our
services.
Gross
profit decreased 34% to $207,000 in the September 2005 quarter from $313,000
in
the September 2004 quarter. Our gross margin percentage decreased to 48%
in the
September 2005 quarter from 59% in the September 2004 quarter. This decrease
was
substantially the result of the decrease in revenue as well as an increase
in
costs of approximately $13,000. The increase in costs was substantially the
result of an increase in costs for communications $5,000, supplies $7,000
and
depreciation $4,000, which was partially offset by a decrease in support
overhead of approximately $3,000.
Application
Service Provider Services (“ASP”)
ASP
Services involves the offering of our Avatar suite of products, our CareNet
products, our ContinuedLearning products and our InfoScribeR products on
a
virtual private network or through an internet delivery approach, thereby
allowing our customers to rapidly deploy products and pay on a monthly service
basis, thus eliminating capital intensive system requirements for such
services.
ASP
revenue increased to $653,000 in the September 2005 quarter from $425,000
in the
September 2004 quarter, representing an increase of $228,000 or 54%. The
components of the ASP revenue are as follows:
|
|
September
2005
quarter
|
|
September
2004
quarter
|
|
Avatar
|
|
$
|
265,000
|
|
$
|
143,000
|
|
CareNet
|
|
|
221,000
|
|
|
226,000
|
|
ContinuedLearning
|
|
|
77,000
|
|
|
—
|
|
InfoScribeR
|
|
|
90,000
|
|
|
56,000
|
|
Total
|
|
$
|
653,000
|
|
$
|
425,000
|
|
Avatar
ASP revenue increased in the September 2005 quarter by 85% as compared to
the
September 2004 quarter. This increase was substantially the result of increased
usage from our existing customer base.
CareNet
revenue decreased by $10,000 in the September 2005 quarter or 2% as compared
to
the September 2004 quarter. This decrease was partially offset by an increase
of
$5,000 associated with the original CareNet customer base acquired in September
2003.
InfoScribeR
revenue increased in the September 2005 quarter by 61% as compared to the
September 2004 quarter. This increase is the result of an increase in our
client
base.
On
April
28, 2005, we acquired substantially all of the assets, including computer
software, customer lists and computer equipment, of ContinuedLearning LLC,
a
company that offers a comprehensive family of web-based training products
and
services including its Learning Management System. ContinuedLearning revenue
totaled $77,000 for the September 2005 quarter.
Gross
profit for the September 2005 quarter was $173,000 and for the September
2004
quarter was $181,000. The gross margin percentage was 27% in the September
2005
quarter and 43% in the September 2004 quarter. The decrease in gross margin
percentage is the result of increased costs associated with the
ContinuedLearning acquisition, which amounted to $191,000 in the September
2005
quarter. These costs represent the required baseline costs to support the
ContinuedLearning operation. We expect that as new revenue is added to this
operation, gross profit and margins will increase accordingly.
Operating
Expenses
Selling,
general and administrative expenses were $2,424,000 in the September 2005
quarter, reflecting an increase of $540,000, or 29%, from $1,884,000 in the
September 2004 quarter. Approximately 20%, or $110,000, of this increase
was
related to costs associated with our User Group meeting held in September
2005.
The remaining increases were: sales and marketing salaries and fringe benefits,
which increased by $105,000; other consulting costs, which increased by $49,000
of which $19,000 related to Sarbanes Oxley compliance efforts; legal fees,
which
increased by $26,000; accounting fees, which increased by $37,000; general
administrative salaries and fringe, which increased by $90,000 and $151,000
which related to increased amortization related to the ContinuedLearning
and AMS
acquisitions. The ongoing costs for consultants for Sarbanes-Oxley compliance
are expected to decrease significantly in future periods. The cost increases
were partially offset by reductions in: reserve for bad debts, which decreased
by $27,000 and depreciation, which decreased by $34,000.
We
incurred research, development and maintenance expenses of $887,000 in the
September 2005 quarter, an increase of 4% from $855,000 in the September
2004
quarter. During the latter part of 2004, we invested in infrastructure that
is
designed to improve the way we support our customers and products. These
infrastructure costs relate to product version control, which includes design,
programming, testing, documentation and quality control of our products.
These
research, development and maintenance expense are also the result of continuing
investment in product enhancement and extensions. These extensions include
the
development of new software modules which address Federal reporting
requirements, as well as continuing investment in core products. These amounts
have been appropriately accounted for in accordance with SFAS No. 86,
“Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed.”
Interest
and other expense was $15,000 in the September 2005 quarter, a decrease of
$12,000, or 44%, from the $27,000 in the September 2004 quarter. This decrease
is the result of the completion of the amortization of the financing costs
associated with our then-current loan agreement, which was amortized over
a
three year period, as well as reduced borrowing under our then-current loan
agreement during the September 2005 quarter.
Interest
income was $101,000 in the September 2005 quarter, an increase of $72,000,
or
248%, from the $29,000 in the September 2004 quarter. This increase is the
result of maintaining higher cash balances during the September 2005 quarter
as
well as an increase in interest rates. Interest income is generated from
short-term investments made with a substantial portion of the proceeds received
from our then-current term loan, as well as cash generated from operations
and
the proceeds of the exercise of options and warrants.
We
have a
net operating loss tax carry forward of approximately $2.1 million at September
30, 2005. Additionally, CMHC Systems, Inc. has remaining net operating loss
carryforwards of approximately $4 million, of which a reserve allowance of
$848,000 has been established. In the September 2005 quarter, we recorded
a
current income tax expense of $96,000, which related to various state and
local
taxes, as well as a provision for the Federal alternative minimum tax. The
income tax provision was increased by a deferred tax provision of $196,000.
In
the September 2004 quarter, we recorded a current income tax expense of $27,000,
which related to various state and local taxes, as well as a provision for
the
Federal alternative minimum tax. The income tax provision was increased by
a
deferred tax provision of $167,000. The deferred tax provision was $314,000
based upon utilization of available net operating loss carry forwards offset
by
a reduction in the deferred tax asset valuation allowance of $147,000.
As
a
result of the foregoing factors, in the September 2005 quarter we had net
income
of $379,000, or $.07 per share (basic and diluted). For the September 2004
quarter, we had net income of $633,000, or $.12 per share (basic) and $.11
per
share (diluted).
Liquidity
and Capital Resources
We
had a
working capital deficit of approximately $4.6 million at September 30, 2005
as
compared to working capital of approximately $18.2 million at December 31,
2004.
This decrease of approximately $22.8 million in working capital was the result
of the following: $15,890,000 for the acquisitions of CMHC, ContinuedLearning
and AMS, $6,708,000 of negative working capital acquired in the acquisition
of
CMHC, $1,656,000 of other costs related to the CMHC acquisition, $1,139,000
in
current liabilities assumed and accrued with respect to the acquisitions
of
ContinuedLearning and AMS, $346,000 for the acquisition of equipment, $42,000
related to the capitalization of software and a decrease in the current portion
of the deferred tax asset in the amount of $138,000. These decreases were
partially offset by our net income, after adding back depreciation and
amortization, which totaled $2,610,000, and $187,000 in net proceeds from
the
exercise of stock options. The remaining increase in working capital of $306,000
was due to changes in other current assets and liabilities.
In
October 2005, we entered into a revolving credit and term loan agreement
(the
“Credit Agreement”) with the Bank of America (“B of A”). This financing provides
us with a five-year term loan of $2.5 million. The term loan bears interest
at
LIBOR plus 2.25%. We have entered into an interest rate swap agreement with
B of
A for the amount outstanding under the term loan whereby we converted our
variable rate on the term loan to a fixed rate of 7.1% in order to reduce
the
interest rate risk associated with these borrowings. On October 7, 2005,
we
borrowed the full amount of the $2,500,000 term loan. The revolving credit
facility provides for borrowings of up to $2,500,000. Any amounts borrowed
under
this arrangement will bear interest at a rate per annum to be elected by
us,
equal to either (1) the LIBOR Rate plus 2.00% or (2) the Bank's prime rate.
We
have not borrowed any amounts under the revolving credit facility.
The
terms
of the Credit Agreement require compliance with certain covenants, including
maintaining a minimum tangible net worth of $4 million, minimum cash reserves
of
$5,000,000, maintenance of certain financial ratios, limitations on capital
expenditures and indebtedness and prohibition of the payment of cash dividends.
In
October 2005, we completed a private placement of units consisting of an
aggregate 490,000 shares of our common stock and warrants to purchase 122,504
shares of common stock. The warrants have an exercise price of $11 per share.
We
received net proceeds of approximately $4.2 million.
In
September 2001, we entered into the Term Loan Agreement with Fleet Bank,
which
was subsequently acquired by the Bank of America (“B of A”). This financing
provides us with a five-year term loan of $2.5 million. The current term
loan
bears interest at LIBOR plus 2.5%. We have entered into an interest rate
swap
agreement with B of A for the amount outstanding under the term loan whereby
we
converted our variable rate on the term loan to a fixed rate of 7.95% in
order
to reduce the interest rate risk associated with these borrowings. The amount
outstanding at September 30, 2005 is $375,000.
The
terms
of the 2001 Term Loan Agreement require compliance with certain covenants,
including maintaining a minimum net equity of $9 million, minimum cash reserves
of $500,000, maintenance of certain financial ratios, limitations on capital
expenditures and indebtedness and prohibition of the payment of cash dividends.
As of September 30, 2005, we were in compliance with the financial covenants
of
the Term Loan Agreement.
On
February 27, 2003, our Board of Directors authorized the purchase of up to
$100,000 of our common stock at any time that the market price is less than
$3.50 per share. Purchases of stock may be made from time to time, depending
on
market conditions, in open market or in privately negotiated transactions,
at
prices deemed appropriate by management. There is no set time limit on the
purchases. We expect to fund any stock repurchases from our operating cash
flow.
As of September 30, 2005, we have not made any stock
repurchases.
We
issued
a note payable to Shuttle Data Systems Corporation, d/b/a Adia Information
Management Corp. in connection with the acquisition of the CareNet segment.
This
three year promissory note is payable in 36 equal monthly installments of
principal plus interest at the prime rate plus 1%. We have made the required
principal and interest payments on the note and the principal amount outstanding
at September 30, 2005 is $125,000.
In
the
September 2005 period, we capitalized software development costs of $42,000
relating to our AVATAR Mobile product.
During
the nine months ended September 30, 2004, we capitalized $185,000 related
to our
RAD Plus 2004 product.
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, our securities,
or a
combination of cash and securities. If we fail to make any acquisitions our
future growth will be limited to only internal growth. We are continually
seeking acquisitions that will add complementary products to our offerings
and
that will provide value for the markets we serve. As of the date of this
Form
10-Q quarterly report, we did not have any formal or informal agreements
or
understandings with respect to any acquisitions.
Based
on
our outstanding contracts and our continuing business, we believe that our
cash
flow from operations and our cash on hand will be sufficient to enable us
to
fund our operations for at least the next twelve months. It is possible that
we
may need additional funding if we go forward with certain acquisitions or
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 expectations.
Off-Balance
Sheet Arrangements
We
are
not a party to any off-balance sheet arrangements.
Contractual
Obligations
The
following table summarizes, as of September 30, 2005, our obligations and
commitments to make future payments under debt, capital leases and operating
leases:
Contractual
Obligations
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
Less
than
1
year
|
|
1
- 3 years
|
|
4
- 5 years
|
|
Over
5 years
|
|
Long
Term Debt1,
4
|
|
$
|
500,034
|
|
$
|
500,034
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Capital
Lease Obligations2
|
|
|
83,306
|
|
|
45,248
|
|
|
38,058
|
|
|
—
|
|
|
—
|
|
Operating
Leases3
|
|
|
12,452,956
|
|
|
1,258,412
|
|
|
2,279,721
|
|
|
2,022,720
|
|
|
6,892,103
|
|
Total
Contractual Cash Obligations
|
|
$
|
13,036,297
|
|
$
|
1,803,694
|
|
$
|
2,317,779
|
|
$
|
2,022,720
|
|
$
|
6,892,104
|
|
1
See Note 7 to Netsmart’s Consolidated Financial Statements for the years ended
December 31, 2004, 2003 and 2002, which describes the Company’s financing
agreement.
2
See Note 10 to Netsmart’s Consolidated Financial Statements for the years ended
December 31, 2004, 2003 and 2002, which describes the Company’s Capital Lease
Obligation.
3
See Note 12 to Netsmart’s Consolidated Financial Statements for the years ended
December 31, 2004, 2003 and 2002 which describes the Company’s Operating Lease
Obligations.
4
Note that these amounts do not include the $2.5 million borrowed under the
Credit Agreement on October 14, 2005.
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. These accounting
principles require us to make certain estimates, judgments and assumptions.
We
believe that the estimates, judgments and assumptions upon which we rely
are
reasonable based upon information available to us at the time that these
estimates, judgments and assumptions are made. These estimates, judgments
and
assumptions can affect the reported amounts of assets and liabilities as
of the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the periods presented. Among other things, estimates
are
used in accounting for allowances for bad debts, deferred income taxes, expected
realizable values of assets (primarily capitalized software development costs
and customer lists) and revenue recognition. To the extent there are material
differences between these estimates, judgments or assumptions and actual
results, our financial statements will be affected. The significant accounting
policies that we believe are the most critical to aid in fully understanding
and
evaluating our reported financial results include the following:
Revenue
Recognition
Capitalized
Software Development Costs
Impairment
of Customer Lists
Revenue
Recognition
-
Revenue associated with fixed price turnkey sales consists of the following
components: licensing of software, labor associated with the installation
and
implementation of the software; and maintenance services rendered in connection
with such licensing activities. Revenue from fixed price software development
contracts and revenue under license agreements, which require significant
modification of the software package to the customer’s specifications, are
recognized utilizing the estimated percentage-of-completion method which
uses
the units-of-work-performed method to measure progress towards completion.
Revisions in cost estimates and recognition of losses on these contracts
are
reflected in the accounting period in which the facts become known. The
complexity of the estimation process and issues related to the assumptions,
risks and uncertainties inherent with the application of the percentage of
completion method of accounting affect the amounts of revenue and related
expenses reported in our Consolidated Financial Statements. A number of internal
and external factors can affect our estimates, including labor rates,
utilization and efficiency variances and specification and testing requirement
changes. Maintenance contract revenue is recognized on a straight-line basis
over the life of the respective contract. We also derive revenue from the
sale
of third party hardware and software which is recognized based upon the terms
of
each contract. Consulting revenue is recognized when the services are rendered.
Data Center revenue and Application Service Provider revenue are recognized
in
the period in which the services are provided. The above sources of revenue
are
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectibility is
probable.
Contract
terms often provide for billing schedules that differ from revenue recognition
and give rise to costs and estimated profits in excess of billings, and billings
in excess of costs and estimated profits.
Deferred
revenue represents revenue billed and collected but not yet
earned.
The
cost
of maintenance revenue, which consists solely of staff payroll and applicable
overhead, is expensed as incurred.
Capitalized
Software Development Costs
-
Capitalization of computer software development costs begins upon the
establishment of technological feasibility and ends upon its availability
for
general release to customers. Technological feasibility for our computer
software products is generally based upon achievement of a detail program
design
free of high risk development issues. We capitalize only those costs directly
attributable to the development of the software. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs require considerable judgment
by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenue, estimated
economic life and changes in software and hardware technology. Prior to reaching
technological feasibility these costs are expensed as incurred and included
in
research, development and maintenance. Activities undertaken after the products
are available for general release to customers to correct errors or keep
the
product updated are expensed as incurred and included in research, development
and maintenance. Amortization of capitalized computer software development
costs
commences when the related products become available for general release
to
customers. Amortization is provided on a product by product basis. The annual
amortization is the greater of the amount computed using (a) the ratio that
current gross revenue for a product bears to the total of current and
anticipated future gross revenue for that product or (b) the straight-line
method over the remaining estimated economic life of the product. The estimated
life of these products range from 3 to 8 years.
We
periodically perform reviews of the recoverability of such capitalized software
costs. At the time a determination is made that capitalized amounts are not
recoverable based on the estimated cash flows to be generated from the
applicable software, any remaining capitalized amounts are written
off.
Impairment
of Customer Lists
-
Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, we evaluate our long-lived assets for financial impairment,
and continue to evaluate them as events or changes in circumstances indicate
that the carrying amount of such assets may not be fully recoverable. We
evaluate the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of certain long-lived assets are not sufficient to
recover the carrying amount of such assets, the assets are adjusted to their
fair values.
ISSUES
AND UNCERTAINTIES
This
Quarterly Report on Form 10-Q contains statements that are forward-looking.
These statements are based on current expectations and assumptions that are
subject to risks and uncertainties. Actual results could differ materially
because of issues and uncertainties such as those listed below under “Risk
Factors” and elsewhere in this report, which, among others, should be considered
in evaluating our financial outlook.
Risk
Factors
Because
we are particularly dependent upon government contracts, any decrease in
funding
for entitlement programs could result in decreased
revenue.
We
market
our health information systems principally to behavioral health facilities,
many
of which are operated by state and local government entities and include
entitlement programs. During 2004, 2003 and 2002 we generated 49%, 57% and
52%,
respectively, of our revenue from contracts that are directly or indirectly
with
government agencies. Government agencies generally have the right to cancel
certain contracts at their convenience. Our ability to generate business
from
government agencies is affected by funding for entitlement programs, and
our
revenue would decline if state agencies reduce this funding.
Changes
in government regulation of the health care industry may adversely affect
our
revenue, operating expenses and profitability.
Our
business is based on providing systems for behavioral and public health
organizations in both the public and private sectors. The federal and state
governments have adopted numerous regulations relating to the health care
industry, including regulations relating to the payments to health care
providers for various services, and our systems are designed to provide
information based on these requirements. The adoption of new regulations
can
have a significant effect upon the operations of health care providers,
particularly those operated by state agencies. Furthermore, changes in
regulations in the health care field may force us to modify our health
information systems to meet any new record-keeping or other requirements
and may
impose added costs on our business. If that happens, we may not be able to
generate revenues sufficient to cover the costs of developing the modifications.
In addition, any failure of our systems to comply with new or amended
regulations could result in reductions in our revenue and profitability.
If
we are not able to take advantage of technological advances, we may not be
able
to remain competitive and our revenue may decline.
Our
customers require software which enables them to store, retrieve and process
very large quantities of data and to provide them with instantaneous
communications among the various data bases. Our business requires us to
take
advantage of recent advances in software, computer and communications
technology. This technology has been developing at rapid rates in recent
years,
and our future may be dependent upon our ability to use and develop or obtain
rights to products utilizing such technology. New technology may develop
in a
manner which may make our software obsolete. Our inability to use or develop
new
technology would have a significant adverse effect upon our
business.
We
may have difficulty competing with larger companies that offer similar services,
which may result in decreased revenue.
Our
customers in the human services market include entitlement programs, managed
care organizations and specialty care facilities which have a need for access
to
information over a distributed data network. Each of the software industry,
in
general, and the health information software business in particular, is highly
competitive. Other companies have the staff and resources to develop competitive
systems. We may not be able to compete successfully with such competitors.
The
health information systems business is served by a number of major companies
and
a larger number of smaller companies. We believe that price competition is
a
significant factor in our ability to market our health information systems
and
services, and our inability to offer competitive pricing may impair our ability
to market our systems and services.
If
we are unable to protect our intellectual property, our competitors may gain
access to our technology, which could harm our ability to successfully compete
in our market.
We
have
no patent protection for our proprietary software. We rely on copyright
protection for our software and non-disclosure and secrecy agreements with
employees and third parties to whom we disclose information. This protection
does not prevent our competitors from independently developing products similar
or superior to our products and technologies. To further develop our services
or
products, we may need to acquire licenses for intellectual property. These
licenses may not be available on commercially reasonable terms, if at all.
Our
failure to protect our proprietary technology or to obtain appropriate licenses
could have a material adverse effect on our business, operating results or
financial condition. Since our business is dependent upon our proprietary
products, the unauthorized use or disclosure of this information could harm
our
business.
We
cannot
guarantee that in the future, third parties will not claim that we infringed
their intellectual property. Asserting our rights or defending against third
party claims could involve substantial costs and diversion of resources,
which
could materially and adversely affect our financial condition.
Government
programs may suggest or mandate initiatives that could impact our ability
to
sell our products.
A
major
initiative being pushed by President Bush and the Department of Health and
Human
Services is the National Electronic Health Record. The federal government
is
promoting this platform and technology which is based on supplying “freeware” to
any agency who desires; however, support is not supplied. This initiative
competes with the private for profit Health Information Systems vendor community
and could adversely affect our ability to sell our products and our financial
results.
The
covenants in our loan agreements restrict our financial and operational
flexibility, including our ability to complete additional acquisitions, invest
in new business opportunities, pay down certain indebtedness or declare
dividends.
Our
term
loan agreement and our credit agreement contain covenants that restrict,
among
other things, our ability to borrow money, make particular types of investments,
including investments in our subsidiaries, make other restricted payments,
swap
or sell assets, merge or consolidate, or make acquisitions. An event of default
under our loan agreements could allow our lender to declare all amounts
outstanding to be immediately due and payable. We have pledged substantially
all
of our consolidated assets to secure the debt under our loan agreements.
If the
amounts outstanding under the loan agreements were accelerated, the lender
could
proceed against those consolidated assets. Any event of default, therefore,
could have a material adverse effect on our business. The loan agreements
also
require us to maintain specified financial ratios. Our ability to meet these
financial ratios can be affected by events beyond our control, and we cannot
assure you that we will continue to meet those ratios. We also may incur
future
debt obligations that might subject us to restrictive covenants that could
affect our financial and operational flexibility or subject us to other events
of default.
We
have
only paid one cash dividend after getting our lender’s consent and we do not
anticipate paying any further cash dividends on our common stock in the
foreseeable future. We presently intend to retain future earnings, if any,
in
order to provide funds for use in the operation and expansion of our business.
Consequently, investors cannot rely on the payment of dividends to increase
the
value of their investment in us. In addition, our loan agreements prohibit
us
from paying cash dividends without the prior consent of the lender.
Our
growth may be limited if we cannot make acquisitions.
A
part of
our business strategy is to acquire other businesses that are related to
our
current business. These acquisitions may be made with cash or 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, which could dilute our earnings
or the
book value per share of our common stock. Our stock price may adversely affect
our ability to make acquisitions for equity or to raise funds for acquisitions
through the issuance of equity securities. If we fail to make any acquisitions,
our future growth may be limited. As of the date hereof, we do not have any
agreement or understanding, either formal or informal, as to any
acquisition.
We
may be unable to effectively integrate CMHC Systems, Inc. or any other
acquisitions, which may disrupt or have a negative impact on our
business.
In
September 2005, we consummated a merger with CMHC Systems, Inc., pursuant
to
which CMHC has become our wholly-owned subsidiary. We may have difficulty
integrating CMHC’s personnel and operations with our own and we may have the
same difficulty with any other acquisitions we may make. In addition, the
key
personnel of any acquired business may not be willing to work for us, and
its
officers may exercise their rights to terminate their employment with us.
We
cannot predict the effect expansion may have on our core business. Regardless
of
whether we are successful in making an acquisition, the negotiations could
disrupt our ongoing business, distract our management and employees and increase
our expenses.
Because
we are dependent on our management, the loss of key executive officers could
disrupt our business and our financial performance could
suffer.
Our
business is largely dependent upon our senior executive officers, Messrs.
James
L. Conway, our chief executive officer, Gerald O. Koop, our president, and
Anthony F. Grisanti, our chief financial officer. Although we have employment
agreements with these officers, the employment agreements do not guarantee
that
the officers will continue as our employees, and each of these officers has
the
right to terminate his employment on 90 days notice. Our agreements with
Messrs.
Conway and Grisanti are scheduled to expire on December 31, 2006. In addition,
Mr. Koop’s employment agreement is scheduled to expire on December 31, 2005,
following which he is expected to continue to work with us for a six-year
period
pursuant to our Executive Retirement, Non-Competition & Consulting Plan
dated April 1, 2004. Our business may be adversely affected if any key
management personnel or other key employees left our employ.
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 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 annual report for the year ended December 31, 2004,
including the risks described under “Risk Factors” and in other documents which
we file with the Securities and Exchange Commission. In addition, such
statements could be affected by risks and uncertainties related to product
demand, market and customer acceptance, competition, government regulations
and
requirements, pricing and development difficulties, as well as general industry
and market conditions and growth rates, and general economic conditions.
Any
forward-looking statements speak only as of the date on which they are made,
and
we do not undertake any obligation to update any forward-looking statement
to
reflect events or circumstances after the date of this Form 10-Q.
We
are
exposed to market risks related to changes in interest rates. Our debt is
at
fixed rates of interest after completing an interest rate swap agreement,
which
effectively converted our variable rate debt at September 30, 2005 into a
fixed
rate debt of 7.95%. Therefore, if the LIBOR rate plus 2.5% increases above
7.95%, it may have a positive effect on our comprehensive income.
Most
of
our cash and cash equivalents, which are invested in money market accounts
and
commercial paper, are at variable rates of interest. If short-term market
interest rates decrease by 10% from the levels at September 30, 2005, the
effect
on our net income would be a decrease of approximately $4,000 per
year.
Evaluation
and Disclosure Controls and Procedures
Based
on
their evaluation as of the end of the period covered by this Form 10-Q,
our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the
design
and operation of our disclosure controls and procedures, as required by
Exchange
Act Rule 13a-15; however, due to the fact that the acquisition of CMHC
Systems
was consummated on September 28, 2005, the evaluation did not include an
evaluation of CMHC’s disclosure controls and procedures. Our disclosure controls
and procedures are designed to ensure that information required to be disclosed
by us in the reports that we file or submit to the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified by
the
Commission’s rules and forms, and that information is accumulated and
communicated to our management, including our Chief Executive Officer and
our
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. Based upon the evaluation that was conducted, the
Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures evaluated were effective as of the end of the period
covered by this report.
Changes
in Internal Controls
There
were no changes made in our internal controls over financial reporting that
occurred during our most recent fiscal quarter that have materially affected,
or
are reasonably likely to materially affect our internal controls over financial
reporting.
Limitations
on the Effectiveness of Controls
We
believe that a control system, no matter how well designed and operated,
cannot
provide absolute assurance that the objectives of the control system are
met,
and no evaluation of controls can provide absolute assurance that all controls
issues and instances of fraud, if any, within a company have been detected.
Our
disclosure controls and procedures are designed to provide a reasonable
assurance of achieving their objectives and our Chief Executive Officer and
Chief Financial Officer have concluded that the controls and procedures
evaluated are effective at the “reasonable assurance” level.
(a)
On
September 28, 2005, we issued 435,735 shares of common stock in connection
with
our acquisition by merger of all of the issued common stock of CMHC Systems,
Inc.
(c) The
435,735 shares, together with cash of $10,432,251 and the acquisition of
CMHC’s
negative net worth in the amount of $3,502,673, were issued in consideration
for
the shares and warrants of CMHC received by us pursuant to the
merger.
(d)
The sale
of the common stock was exempt from registration pursuant to Section 4(2)
of the
Securities Act. The issuance was to a total of eleven accredited investors,
all
of which received restricted securities.
|
Exhibit
No.
|
Description
|
|
10.1
|
Merger
Agreement dated September 20, 2005, between CMHC Systems, Inc.,
Hayes
Acquisition Corp., a newly-formed wholly-owned subsidiary of the
Registrant, and John Paton, solely in the capacity of Securities
Holders
Representative (incorporated by reference to Exhibit 10.1 to Form
8-K
dated September 19, 2005).
|
|
10.2
|
Revolving
Credit and Term Loan Agreement with Netsmart Technologies, Inc.
and the
Bank of America, N.A. (incorporated by reference to Exhibit 10.1
to Form
8-K dated October 7, 2005
|
|
10.3
|
Asset
Purchase Agreement dated June 17, 2005 between Addiction Management
Systems, Inc. and Creative Socio-Medics Corp. (incorporated by
reference
to Exhibit 10.1 to Form 8-K dated June 21, 2005).
|
|
10.4
|
2001
Long-Term Incentive Plan, as amended (incorporated by reference
to Exhibit
10.1 to Form 8-K dated June 16, 2005).
|
|
10.5
|
Amendment
No. 1 to Employment Agreement dated June 16, 2005, between the
Registrant
and James L. Conway (incorporated by reference to Exhibit 10.2
to Form 8-K
dated June 16, 2005).
|
|
10.6
|
Amendment
No. 1 to Employment Agreement dated June 16, 2005 between the Registrant
and Anthony F. Grisanti (incorporated by reference to Exhibit 10.3
to Form
8-K dated June 16, 2005).
|
|
10.7
|
Asset
Purchase Agreement dated April 27, 2005 between ContinuedLearning
LLC and
Creative Socio-Medics Corp. (incorporated by reference to Exhibit
10.2 to
Form 8-K dated April 27, 2005).
|
|
10.8
|
Employment
Agreement dated April 27, 2005 between Netsmart Technologies, Inc.
and A.
Sheree Graves (incorporated by reference to Exhibit 10.2 to Form
8-K dated
April 27, 2005).
|
|
10.9
|
Letter
Agreement between Griffin Securities, Inc. and Netsmart Technologies,
Inc.
dated as of August 9, 2005 (incorporated by reference to Exhibit
10.1 to
Registration Statement on Form S-3 (333-129265).
|
|
10.10
|
Letter
Agreement between Griffing Securities, Inc. and Netsmart Technologies,
Inc. dated as of October 11, 2005 (incorporated by reference to
Exhibit
10.2 to Registration Statement on Form S-3
(333-129265).
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant
to 8
U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this amended report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
|
|
NETSMART
TECHNOLOGIES, INC. |
|
|
|
Date: December
8, 2005 |
By: |
/s/ James
L. Conway |
|
James
L. Conway |
|
Chief
Executive Officer
(Principal Executive
Officer)
|
|
|
|
Date: December
8, 2005 |
By: |
/s/ Anthony
F. Grisanti |
|
Anthony
F. Grisanti |
|
Chief
Financial Officer
(Principal Financial and Accounting
Officer)
|
Index
of Exhibits
Exhibit
No.
|
Description
|
10.1
|
Merger
Agreement dated September 20, 2005, between CMHC Systems, Inc.,
Hayes
Acquisition Corp., a newly-formed wholly-owned subsidiary of the
Registrant, and John Paton, solely in the capacity of Securities
Holders
Representative (incorporated by reference to Exhibit 10.1 to Form
8-K
dated September 19, 2005).
|
10.2
|
Revolving
Credit and Term Loan Agreement with Netsmart Technologies, Inc.
and the
Bank of America, N.A. (incorporated by reference to Exhibit 10.1
to Form
8-K dated October 7, 2005
|
10.3
|
Asset
Purchase Agreement dated June 17, 2005 between Addiction Management
Systems, Inc. and Creative Socio-Medics Corp. (incorporated by
reference
to Exhibit 10.1 to Form 8-K dated June 21, 2005).
|
10.4
|
2001
Long-Term Incentive Plan, as amended (incorporated by reference
to Exhibit
10.1 to Form 8-K dated June 16, 2005).
|
10.5
|
Amendment
No. 1 to Employment Agreement dated June 16, 2005, between the
Registrant
and James L. Conway (incorporated by reference to Exhibit 10.2
to Form 8-K
dated June 16, 2005).
|
10.6
|
Amendment
No. 1 to Employment Agreement dated June 16, 2005 between the Registrant
and Anthony F. Grisanti (incorporated by reference to Exhibit 10.3
to Form
8-K dated June 16, 2005).
|
10.7
|
Asset
Purchase Agreement dated April 27, 2005 between ContinuedLearning
LLC and
Creative Socio-Medics Corp. (incorporated by reference to Exhibit
10.2 to
Form 8-K dated April 27, 2005).
|
10.8
|
Employment
Agreement dated April 27, 2005 between Netsmart Technologies, Inc.
and A.
Sheree Graves (incorporated by reference to Exhibit 10.2 to Form
8-K dated
April 27, 2005).
|
10.9
|
Letter
Agreement between Griffin Securities, Inc. and Netsmart Technologies,
Inc.
dated as of August 9, 2005 (incorporated by reference to Exhibit
10.1 to
Registration Statement on Form S-3 (333-129265).
|
10.10
|
Letter
Agreement between Griffing Securities, Inc. and Netsmart Technologies,
Inc. dated as of October 11, 2005 (incorporated by reference to
Exhibit
10.2 to Registration Statement on Form S-3
(333-129265).
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant
to 8
U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|