Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
Quarter Ended March 31, 2006
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.
x
Yes oNo
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check
one):
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
o
Yes x
No
Number
of
shares of common stock outstanding as of April 21, 2006: 6,497,874
Netsmart
Technologies, Inc. and Subsidiaries
Index
Part
I: -
Financial Information:
Item
1. Financial Statements: |
Page
|
|
|
Condensed
Consolidated Balance Sheets - March 31, 2006 (Unaudited)
|
|
and
December 31, 2005
|
1-2
|
|
|
Condensed
Consolidated Statements of Income - (Unaudited)
|
|
Three
Months Ended March 31, 2006 and 2005
|
3
|
|
|
Condensed
Consolidated Statements of Cash Flows - (Unaudited)
|
|
Three
Months Ended March 31, 2006 and 2005
|
4-5
|
|
|
Condensed
Consolidated Statement of Stockholders' Equity -
(Unaudited)
|
|
Three
Months Ended March 31, 2006
|
6
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7-11
|
|
|
Item
2. Management's Discussion and Analysis of
|
|
Financial
Condition and Results of Operations
|
12-21
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
21
|
|
|
Item
4. Controls and Procedures
|
21
|
|
|
Part
II Other Information
|
|
|
|
Item
6. Exhibits and Reports on Form 8-K
|
23
|
Item
1. Financial Statements
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
Assets:
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
11,244,825
|
|
$
|
11,445,525
|
|
Accounts
Receivable - Net
|
|
|
11,196,691
|
|
|
11,524,811
|
|
Costs
and Estimated Profits in Excess
|
|
|
|
|
|
|
|
of
Interim Billings
|
|
|
2,394,265
|
|
|
1,811,986
|
|
Deferred
taxes
|
|
|
1,289,051
|
|
|
1,594,863
|
|
Other
Current Assets
|
|
|
1,713,645
|
|
|
1,466,577
|
|
|
Total
Current Assets
|
|
|
27,838,477
|
|
|
27,843,762
|
|
|
Property
and Equipment - Net
|
|
|
2,732,355
|
|
|
2,665,429
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
19,039,752
|
|
|
18,735,751
|
|
Capitalized
Software Costs - Net
|
|
|
6,166,418
|
|
|
6,534,551
|
|
Customer
Lists - Net
|
|
|
7,846,483
|
|
|
8,110,864
|
|
Contract
Backlog - Net
|
|
|
251,000
|
|
|
379,500
|
|
Other
Assets
|
|
|
184,009
|
|
|
351,997
|
|
|
Total
Other Assets
|
|
|
33,487,662
|
|
|
34,112,663
|
|
|
Total
Assets
|
|
$
|
64,058,494
|
|
$
|
64,621,854
|
|
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
Current
Portion - Long Term Debt
|
|
$
|
666,705
|
|
$
|
833,369
|
|
Current
Portion Capital Lease Obligations
|
|
|
44,126
|
|
|
61,315
|
|
Accounts
Payable
|
|
|
2,322,691
|
|
|
2,013,968
|
|
Accrued
Expenses
|
|
|
2,908,902
|
|
|
2,916,021
|
|
Interim
Billings in Excess of Costs and Estimated
|
|
|
|
|
|
|
|
Profits
|
|
|
7,144,958
|
|
|
7,938,422
|
|
Deferred
Revenue
|
|
|
9,860,767
|
|
|
10,037,813
|
|
|
Total
Current Liabilities
|
|
|
22,948,149
|
|
|
23,800,908
|
|
|
Long
Term Debt - Less current portion
|
|
|
1,791,667
|
|
|
1,916,667
|
|
Capital
Lease Obligations - Less current portion
|
|
|
2,431
|
|
|
9,521
|
|
Interest
Rate Swap at Fair Value
|
|
|
--
|
|
|
7,812
|
|
Deferred
Tax Liability
|
|
|
1,991,791
|
|
|
2,118,603
|
|
Deferred
Rent Payable
|
|
|
495,364
|
|
|
482,048
|
|
|
Total
Non Current Liabilities
|
|
|
4,281,253
|
|
|
4,534,651
|
|
|
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
6,729,937 and 6,497,724 shares at March 31, 2006 and
|
|
|
|
|
|
|
|
6,719,517
and 6,487,943
|
|
|
|
|
|
|
|
shares
at December 31, 2005
|
|
|
67,299
|
|
|
67,195
|
|
Additional
Paid in Capital
|
|
|
40,233,023
|
|
|
39,997,558
|
|
Accumulated
Comprehensive Income (Loss) - Interest
|
|
|
|
|
|
|
|
Rate
Swap
|
|
|
13,655
|
|
|
(7,812
|
) |
Deferred
Stock Compensation
|
|
|
(215,708
|
)
|
|
--
|
|
Accumulated
Deficit
|
|
|
(1,494,463
|
)
|
|
(2,004,132
|
) |
|
|
|
|
38,603,806
|
|
|
38,052,809
|
|
Less:
cost of shares of Common Stock held
|
|
|
|
|
|
|
|
in
treasury - 232,213 shares at March 31, 2006
|
|
|
|
|
|
|
|
and
231,574 at December 31, 2005
|
|
|
1,774,714
|
|
|
1,766,514
|
|
|
Total
Stockholders' Equity
|
|
|
36,829,092
|
|
|
36,286,295
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
64,058,494
|
|
$
|
64,621,854
|
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME - (Unaudited)
|
|
Three
months
ended
|
|
|
March
31,
|
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
Software
and Related
|
|
|
|
|
|
Systems
and Services:
|
|
|
|
|
|
Turnkey
Systems
|
|
$
|
6,310,583
|
|
$
|
4,240,756
|
|
Maintenance
Contract Services
|
|
|
6,314,070
|
|
|
2,154,119
|
|
Application
Service Provider Services
|
|
|
807,015
|
|
|
555,421
|
|
Data
Center Services
|
|
|
424,309
|
|
|
478,405
|
|
|
Total
Revenues
|
|
|
13,855,977
|
|
|
7,428,701
|
|
|
Cost
of Revenues:
|
|
|
|
|
|
|
|
Software
and Related
|
|
|
|
|
|
|
|
Systems
and Services:
|
|
|
|
|
|
|
|
Turnkey
Systems
|
|
|
4,175,507
|
|
|
2,260,327
|
|
Maintenance
Contract Services
|
|
|
2,123,105
|
|
|
1,060,759
|
|
Application
Service Provider Services
|
|
|
493,496
|
|
|
276,848
|
|
Data
Center Services
|
|
|
198,153
|
|
|
230,743
|
|
|
Total
Cost of Revenues
|
|
|
6,990,261
|
|
|
3,828,677
|
|
|
Gross
Profit
|
|
|
6,865,716
|
|
|
3,600,024
|
|
|
Selling,
General and
|
|
|
|
|
|
|
|
Administrative
Expenses
|
|
|
4,423,116
|
|
|
1,988,112
|
|
Research,
Development and Maintenance
|
|
|
1,555,687
|
|
|
1,070,382
|
|
|
Total
|
|
|
5,978,803
|
|
|
3,058,494
|
|
|
Operating
Income
|
|
|
886,913
|
|
|
541,530
|
|
Interest
and Other Income
|
|
|
91,397
|
|
|
57,289
|
|
Interest
and Other Expense
|
|
|
(56,641
|
)
|
|
(19,637
|
) |
|
Income
before Income Tax
|
|
|
921,669
|
|
|
579,182
|
|
Income
Tax
|
|
|
412,000
|
|
|
216,000
|
|
|
Net
Income
|
|
$
|
509,669
|
|
$
|
363,182
|
|
|
Earnings
Per Share ("EPS")of Common
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
.08
|
|
$
|
.07
|
|
|
Weighted
Average Number of Shares of
|
|
|
|
|
|
|
|
Common
Stock Outstanding
|
|
|
6,494,477
|
|
|
5,342,489
|
|
|
Diluted
EPS
|
|
$
|
.08
|
|
$
|
.07
|
|
|
Weighted
Average Number of Shares of
|
|
|
|
|
|
|
|
Common
Stock and Common Stock
|
|
|
|
|
|
|
|
Equivalents Outstanding
|
|
|
6,781,100
|
|
|
5,551,848
|
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
|
|
Three
Months
ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Operating
Activities:
|
|
|
|
|
|
Net
Income
|
|
$
|
509,669
|
|
$
|
363,182
|
|
|
Adjustments
to Reconcile Net Income
|
|
|
|
|
|
|
|
to
Net Cash Provided by Operating Activities:
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
1,063,372
|
|
|
406,851
|
|
Provision
for Doubtful Accounts
|
|
|
108,000
|
|
|
99,000
|
|
Deferred
Income Taxes
|
|
|
179,000
|
|
|
137,000
|
|
Vested
Option Expense
|
|
|
20,875
|
|
|
--
|
|
Changes
in Assets and Liabilities:
|
|
|
|
|
|
|
|
[Increase]
Decrease in:
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
220,120
|
|
|
2,307,484
|
|
Costs
and Estimated Profits in
|
|
|
|
|
|
|
|
Excess
of Interim Billings
|
|
|
(582,279
|
)
|
|
(36,446
|
)
|
Other
Current Assets
|
|
|
(247,068
|
)
|
|
(18,183
|
)
|
Other
Assets
|
|
|
166,851
|
|
|
(4,077
|
)
|
Increase
[Decrease] in:
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
308,723
|
|
|
95,811
|
|
Accrued
Expenses
|
|
|
(7,119
|
)
|
|
(322,679
|
)
|
Interim
Billings in Excess of
|
|
|
|
|
|
|
|
Costs
and Estimated Profits
|
|
|
(793,464
|
)
|
|
(1,390,756
|
)
|
Deferred
Revenue
|
|
|
(481,047
|
)
|
|
310,969
|
|
Deferred
Rent Payable
|
|
|
13,316
|
|
|
8,206
|
|
|
Total
Adjustments
|
|
|
(30,720
|
)
|
|
1,593,180
|
|
|
Net
Cash Provided by
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
478,949
|
|
|
1,956,362
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
Acquisition
of Property and Equipment
|
|
|
(354,492
|
)
|
|
(115,747
|
)
|
Capitalized
Software Development
|
|
|
--
|
|
|
--
|
|
Net
Cash Used In Investing Activities
|
|
|
(354,492
|
)
|
|
(115,747
|
)
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
|
|
Three
Months
ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
2005
|
|
Financing
Activities:
|
|
|
|
|
|
Payment
of Capitalized Lease Obligations
|
|
$
|
(24,279
|
)
|
$
|
(15,638
|
) |
Net
Proceeds from Stock Options Exercised
|
|
|
81,986
|
|
|
31,346
|
|
Costs
Related to Private Placement
|
|
|
(91,200
|
)
|
|
|
|
|
Payments
of Term Loans
|
|
|
(291,664
|
)
|
|
(166,665
|
) |
|
Net
Cash Used in Financing Activities
|
|
|
(325,157
|
)
|
|
(150,957
|
) |
|
Net
(Decrease) Increase in Cash
|
|
|
|
|
|
|
|
and
Cash Equivalents
|
|
|
(200,700
|
)
|
|
1,689,658
|
|
Cash
and Cash Equivalents -
|
|
|
|
|
|
|
|
Beginning
of Period
|
|
|
11,445,525
|
|
|
16,411,735
|
|
|
Cash
and Cash Equivalents -
|
|
|
|
|
|
|
|
End
of Period
|
|
$
|
11,244,825
|
|
$
|
18,101,393
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
58,346
|
|
$
|
42,470
|
|
Income
Taxes
|
|
$
|
149,087
|
|
$
|
88,990
|
|
Non
Cash Investing and Financing Activities:
The
fair
value of the interest rate swap decreased by $21,467 for the three months ended
March 31, 2006. The fair value of the interest rate swap decreased by $6,732
for
the three months ended March 31, 2005.
During
the three months ended March 31, 2006, the Company received 639 shares of its
common stock in consideration for the exercise of certain stock options. The
value of the shares received was $8,200, which was the market value of the
common stock on the date of exercise.
During
the three month period ended March 31, 2006, the Company evaluated the assets
acquired from CMHC and increased both deferred revenue and goodwill by
$304,001.
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY -
(UNAUDITED)
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
|
|
Interest
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Common
Stock
|
|
|
Common
|
|
|
Accumulated
|
|
|
Rate
|
|
|
Stock
|
|
|
Comprehensive |
|
|
Treasury
Shares
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Stock
|
|
|
Deficit
|
|
|
Swap
|
|
|
Compensation
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- January 1, 2006
|
|
|
6,719,517
|
|
$
|
67,195
|
|
$
|
39,997,558
|
|
$
|
(2,004,132
|
)
|
$
|
(7,812
|
)
|
$
|
--
|
|
$
|
--
|
|
|
231,574
|
|
$
|
(1,766,514
|
)
|
$
|
36,286,295
|
|
Common
Stock Issued - Exercise of Options
|
|
|
10,420
|
|
|
104
|
|
|
90,082
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
639
|
|
|
(8,200
|
)
|
|
81,986
|
|
Change
in Fair Value of Interest Rate Swap
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
21,467
|
|
|
--
|
|
|
21,467
|
|
|
--
|
|
|
--
|
|
|
21,467
|
|
Costs
Related to 2005 Private Placement
|
|
|
--
|
|
|
--
|
|
|
(91,200
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(91,200
|
) |
Fair
Value of Options Upon Adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
FAS 123(R)
|
|
|
--
|
|
|
--
|
|
|
236,583
|
|
|
--
|
|
|
--
|
|
|
(236,583
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Amortization
of Deferred Stock Compensation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
20,875
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
20,875
|
|
Net
Income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
509,669
|
|
|
--
|
|
|
--
|
|
|
509,669
|
|
|
--
|
|
|
--
|
|
|
509,669
|
|
Balance
- March 31, 2006
|
|
|
6,729,937
|
|
$
|
67,299
|
|
$
|
40,233,023
|
|
$
|
(1,494,463
|
)
|
$
|
13,655
|
|
$
|
(215,708
|
)
|
$
|
531,136
|
|
|
232,213
|
|
$
|
1,774,714
|
|
$
|
36,829,092
|
|
See
Notes
to Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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,
2005.
(2)
Earnings
Per Share
The
following table sets forth the components used in the computation of basic
and
diluted earnings per share:
|
|
Three
Months
Ended
|
|
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
Net
income
|
|
$
|
509,669
|
|
$
|
363,182
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
6,494,477
|
|
|
5,342,489
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
264,478
|
|
|
218,048
|
|
Warrants
|
|
|
22,145
|
|
|
--
|
|
|
Denominator
for diluted earnings
|
|
|
|
|
|
|
|
per
share-adjusted weighted
|
|
|
|
|
|
|
|
average
shares after assumed
|
|
|
|
|
|
|
|
conversions
|
|
|
6,781,100
|
|
|
5,560,537
|
|
Options
to purchase 31,500 shares of the Company’s common stock that were outstanding as
of March 31, 2006 were not included in the calculation of diluted earnings
per
share for the three months ended March 31, 2006 since such inclusion would
have
been antidilutive.
Options
to purchase 1,500 shares of the Company’s common stock that were outstanding as
of March 31, 2005 were not included in the calculation of diluted earnings
per
share for the three months ended March 31, 2005 since such inclusion would
have
been antidilutive.
(3)
Stock
Options and Similar Equity Instruments
At
March
31, 2006, the Company had three stock-based employee compensation plans.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123
(Revised 2004), “Share-Based Payment,” (“SFAS 123R”), using the
modified-prospective-transition method. As a result, the Company’s net loss
before taxes for the three months ended March 31, 2006 is $20,875 lower than
if
it had continued to account for share-based compensation under Accounting
Principles Board (“APB”) Opinion No. 25.
The
Company has $215,708 of stock based compensation expense remaining to be
expensed over the period April 2006 through October 2008.
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 APB 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 for the periods up to and including December 31,
2005. No stock-based employee compensation cost is reflected in net income
for
periods prior to December 31, 2005, 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 for periods prior
to
December 31, 2005.
|
|
|
Three
Months
Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2005
|
|
|
|
|
|
|
Net
Income as Reported
|
|
$
|
363,182
|
|
Deduct:
Total stock-based employee
|
|
|
|
|
compensation
expense determined
|
|
|
|
|
under
fair value-based method for
|
|
|
|
|
all
awards, net of related tax effect
|
|
|
311,832
|
|
|
Pro
Forma Net Income
|
|
|
51,350
|
|
|
Basic
Net Income Per Share as Reported
|
|
$
|
.07
|
|
|
Basic
Pro Forma Net Income Per Share
|
|
$
|
01
|
|
|
Diluted
Net Income Per Share as Reported
|
|
$
|
07
|
|
|
Diluted
Pro Forma Net Income Per Share
|
|
$
|
01
|
|
|
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:
|
|
|
Three
Months
Ended
|
|
|
|
|
March
31,
|
|
|
|
|
2005
|
|
Expected
Life (Years)
|
|
|
5
|
|
Interest
Rate
|
|
|
4.00
|
%
|
Annual
Rate of Dividends
|
|
|
0
|
%
|
Volatility
|
|
|
67
|
%
|
The
weighted average fair value of options at date of grant using the fair value
based method during 2005 is estimated at $5.01.
(4)
Acquisitions
In
2005,
the Company completed acquisitions of three companies with products and services
complementary to our existing offerings. We acquired Continued Learning (“CL”),
a Florida-based provider of online training services on April 28, 2005. On
June
20, 2005, we acquired Addiction Management Systems, Inc (“AMS”), which
solidified our position as one of the nation’s largest suppliers of automated
computerized methadone dispensing systems. In September 2005, we completed
the
acquisition of CMHC Systems (“CMHC”), a leading competitor in the behavioral
healthcare software market. During the three month period ended March 31, 2006,
the Company evaluated the assets acquired from CMHC and increased deferred
revenue by $304,001 and goodwill by the same amount.
The
following unaudited proforma condensed consolidated statements of operations
assumes the CL, AMS and CMHC acquisitions occurred on January 1, 2005. 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 acquisitions been completed
on
January 1, 2005 or results which may occur in the future.
|
|
Three
Months Ended
March
31,
2005
|
|
|
|
(in
thousands except share and per share amounts)
|
|
Revenue
|
|
$
|
14,801
|
|
Net
Income
|
|
|
582
|
|
Net
Income Per Share
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
Diluted
|
|
$
|
0.09
|
|
|
|
|
|
|
Weighted
Average Number of Shares of Common Stock Outstanding
|
|
|
6,288,224
|
|
Weighted
Average Number of Shares of Common Stock and Common Stock Equivalents
Outstanding
|
|
|
6,497,583
|
|
(5)
Income
Taxes
The
provision for income taxes for the three months ended March 31, 2006, consists
of a current tax provision of $233,000 and a deferred tax provision of
approximately $179,000. The provision for income taxes for the period ended
March 31, 2005, consists of a current tax provision of $79,000 and a deferred
tax provision of $137,000.
(6)
Stockholders’
Equity
During
the three months ended March 31, 2006, options to purchase 10,420 shares were
exercised and the Company received gross proceeds of $90,187. Pursuant to option
grants, employees have the right to pay for the exercise price of the options
by
delivering “mature” shares of common stock owned by them. Included in the 2006
exercise of options, the Company received 639 shares of its common stock in
consideration for the exercise of certain stock options. The value of the shares
received was $8,200, which was based upon the market value of the common stock
on the date of exercise in accordance with the cashless exercise provisions
of
the Company’s stock option plans.
(7)
Operating
Segments
The
Company currently classifies its operations in four business segments: (1)
Software and Related Systems and Services - NY, (2) Software and Related Systems
and Services - Ohio, (3) Data Center Services and (4) Application Service
Provider Services (“ASP”). NTST-Ohio is a new segment resulting from its
acquisition in September 2005. NTST-Ohio 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. Software and Related
Systems and Services for both the NY and Ohio segments refer to 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 out patient
environments, as well as clinical documentation and medical record generation
and management. Within these segments are large turnkey and small turnkey
components. The large turnkey components consist mostly of the Avatar suite
of
products. When the Company is engaged in a fixed price arrangement, these
installations will usually extend over a six-month to a multi-year time period.
The duration of the implementation is dependent on the size and complexity
of
the customer organization and the specifics of the implementation. The small
turnkey components are usually completed within a six-month period. Small
turnkey contracts performed in the New York segment are mostly related to the
Avatar methadone related products. The small turnkey contracts in the Ohio
segment are for system installations for behavioral healthcare information
management software for mental health, substance abuse and addiction services
agencies, developmental disability centers and behavioral health-related managed
care organizations.
Data
Center Services involve Company personnel performing data entry and data
processing services for customers. ASP services involve the Company offering
several of it software products on a virtual private network or internet
delivery approach, thereby allowing its customers to utilize the Company’s
products and pay on a monthly service basis.
Intersegment
sales and sales outside the United States are not material. Information
concerning the Company’s business segments is as follows:
|
|
Netsmart
-NY Sotware and Related Systems and Services
|
|
Data
Center
|
|
Application
Service Provider
|
|
Netsmart
- Ohio Sofware Related Systems and Services
|
|
Total
|
|
Three
Months Ended March 31,2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Large
Turnkey
|
|
$
|
4,367,661
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
4,367,661
|
|
Small
Turnkey
|
|
|
359,523
|
|
|
--
|
|
|
--
|
|
|
1,583,399
|
|
|
1,942,922
|
|
Maintenance
|
|
|
2,683,408
|
|
|
--
|
|
|
--
|
|
|
3,630,662
|
|
|
6,314,070
|
|
Other
|
|
|
-
|
|
|
424,309
|
|
|
807,015
|
|
|
|
|
|
1,231,324
|
|
Total
|
|
$
|
7,410,592
|
|
$
|
424,309
|
|
$
|
807,015
|
|
$
|
5,214,061
|
|
$
|
13,855,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
$
|
195,676
|
|
$
|
82,743
|
|
$
|
(44,832
|
)
|
$
|
688,082
|
|
$
|
921,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at March 31, 2006
|
|
$
|
26,961,593
|
|
$
|
1,760,281
|
|
$
|
3,601,220
|
|
$
|
33,199,756
|
|
$
|
65,522,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
Turnkey
|
|
$
|
3,974,461
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
3,974,461
|
|
Small
Turnkey
|
|
|
266,295
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
266,295
|
|
Maintenance
|
|
|
2,154,119
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
2,154,119
|
|
Other
|
|
|
|
|
|
478,405
|
|
|
555,421
|
|
|
--
|
|
|
1,033,826
|
|
Total
|
|
$
|
6,394,875
|
|
$
|
478,405
|
|
$
|
555,421
|
|
$
|
-
|
|
$
|
7,428,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
$
|
370,613
|
|
$
|
138,512
|
|
$
|
70,057
|
|
$
|
-
|
|
$
|
579,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at March 31, 2005
|
|
$
|
30,247,345
|
|
$
|
2,343,246
|
|
$
|
4,030,086
|
|
$
|
-
|
|
$
|
36,620,677
|
|
(7)
New
Accounting Pronouncements
In
March
2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
Assets" ("SFAS 156"), which amends SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", with respect
to the accounting for separately recognized servicing assets and servicing
liabilities. SFAS 156 permits the choice of the amortization method or the
fair
value measurement method, with changes in fair value recorded in income, for
the
subsequent measurement for each class of separately recognized servicing assets
and servicing liabilities. The statement is effective for years beginning after
September 15, 2006, with earlier adoption permitted. The Company does not expect
SFAS 156 to have a material impact on the Company's financial position or
results of operations.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
Our
operations are grouped into four segments:
|
§ |
Software and Related Systems and Services - New
York |
|
§ |
Software and Related Systems and Services -
Ohio |
|
§ |
Data
Center Services (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. We perform these
services in both the New York and Ohio segments. Within these segments, we
recognize revenue based on the nature of the products and services sold, for
example, a turnkey system, a consulting contract or a maintenance contract.
Turnkey revenue includes turnkey systems labor revenue, third party hardware
and
software, license revenue and sales from our small turnkey division. We further
classify our revenue into large turnkey and small turnkey components. The large
turnkey components consist mostly of our Avatar suite of products. When we
are
engaged in fixed price arrangements for large turnkey systems, the installations
will usually extend over a six-month to a multi-year time period. The duration
of the implementation depends on the size and complexity of the customer
organization and the specifics of the implementation. Installations of small
turnkey components are usually completed within a six-month period. Small
turnkey contracts performed in the New York segment are mostly related to our
Avatar methadone related products. The small turnkey contracts in the Ohio
segment are for system installations for 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 Ohio segment is a new segment established as a result
of
the acquisition of Netsmart - Ohio, formerly CMHC Systems, Inc. This acquisition
occurred in October 2005 and consequently operations from this acquisition
are
included in the results of operations for the three months ended March 31,
2006
but are not included in the comparable period for 2005. 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
Netsmart University, formerly 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.
In
addition to our acquisition of CMHC, we made two other acquisitions in fiscal
2005. 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. On June 20,
2005, we acquired the assets of Addiction Management Systems, Inc (“AMS”). The
results of operations from these acquisitions are also included in the results
of operations for the three months ended March 31, 2006 but not the comparable
period for 2005.
Our
results of operations are subject to various risks and uncertainties, including
those described in Item 1A, Risk Factors in both this Form 10-Q and in our
Form
10-K for the fiscal year ended December 31, 2005, and the market risks described
in Item 7A, Quantitative and Qualitative Disclosures about Market Risks in
our
Form 10-K for the fiscal year ended December 31, 2005.
Three
Months Ended March 31, 2006 and 2005
Results
of Operations
Our
total
revenue for the three months ended March 31, 2006 (“the “March 2006 period”) was
$13,856,000, an increase of $6,427,000, or 87%, from our revenue for the three
months ended March 31, 2005 (the “March 2005 period”) which was $7,429,000.
Revenue from the Netsmart - Ohio acquisition accounted for $5,214,000 or 70%
of
the increase in revenue from the March 2006 period to the March 2005 period.
Revenue
from contracts with state and local government agencies represented 39% of
revenue in the March 2006 period and 47% of revenue in the March 2005 period.
This decrease was the result of the inclusion of the Netsmart - Ohio revenue,
approximately 20% of which is generated from contracts with state and local
government agencies.
Fixed
price software development contracts, which include labor, licenses and third
party resale components, accounted for 18% and 37% of consolidated revenue
for
the March 2006 period and the March 2005 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 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 our ASP services, accounted for 54% of our consolidated revenue
for
the March 2006 period as compared to 43% of consolidated revenue for the March
2005 period. This increase was primarily the result of an increase in
maintenance revenue resulting from the inclusion of the operations of Netsmart
-
Ohio as well as an increase in both maintenance and ASP revenue, exclusive
of
the Netsmart - Ohio acquisition, which was partially offset by a decrease in
Data Center revenue.
Revenue
from large turnkey 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. 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
our
small turnkey fixed price contracts is accounted for under the completed
contract method.
Software
and Related Systems and Services - New York
Our
Software and Related Systems and Services - New York revenue for the March
2006
period was $7,411,000, an increase of $1,016,000, or 16%, from our revenue
for
the March 2005 period, which was $6,395,000. Software and Related Systems and
Services - New York 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 in the markets in
which we operated prior to our acquisition of our Ohio operations in September
2005.
Within
this segment are large turnkey and small turnkey components. The large turnkey
components consist mostly of our Avatar suite of products. When we are engaged
in fixed price arrangements for large turnkey systems, the installations will
usually extend over a six-month to a multi-year time period; these installations
are accounted for under the percentage of completion method. The duration of
the
implementation depends on the size and complexity of the customer organization
and the specifics of the implementation. Installations of small turnkey
components are usually completed within a six-month period; these installations
are accounted for under the completed contract method. Small turnkey contracts
performed in the New York segment are mostly related to our Avatar methadone
related products.
The
largest component of Software and Related Systems and Services - New York
revenue was maintenance revenue, which increased $529,000, or 25%, to $2,683,000
in the March 2006 period from $2,154,000 in the March 2005 period. Revenue
from
the AMS acquisition accounted for approximately 72% of this increase. As turnkey
systems are completed, they are transitioned to the maintenance division,
thereby increasing our installed base recurring revenue. Turnkey systems labor
revenue increased $181,000, or 8%, to $2,549,000 in the March 2006 period from
$2,367,000 in the March 2005 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 an increase in billable
time
spent on contracts. Increased revenue due to increases in the average daily
billing rate was nominal due to nominal change in our average daily billing
rate. Revenue from third party hardware and software increased 23% to $1,361,000
in the March 2006 period, from $1,105,000 in the March 2005 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 March 2006 period, the increase in revenue from third party
hardware and software was the result of an increase in database software sales
and pharmacy sales to various customers. License revenue decreased 9% to
$458,000 in the March 2006 period from $502,000 in the March 2005 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. The decrease in revenue is substantially the result
of a
decrease in customer user count upgrade sales, as well as a decrease in large
system license sales. Revenue from the sales of our small turnkey contracts
increased 35% to $360,000 in the March 2006 period from $266,000 in the March
2005 period. Small turnkey contract sales relate to turnkey contracts that
are
less than $50,000 and are usually completed within one to six months. The
increase in our small turnkey revenue for the March 2006 period is substantially
due to the inclusion of sales of AMS products.
Gross
profit increased 11% to $3,408,000 in the March 2006 period from $3,074,000
in
the March 2005 period. Our gross profit percentage decreased to 46% in the
March
2006 period from 48% in the March 2005 period. Our gross profit decreased as
a
result of the decrease in license revenue as well as an increase in our third
party hardware and software revenue, which are typically made at lower gross
margins than our other revenue components. This decrease was partially offset
by
improved efficiency from our maintenance division.
Software
and Related Systems and Services - Ohio
The
Software and Related Systems and Services-Ohio segment is a new segment
established as a result of the acquisition of Netsmart - Ohio, formerly CMHC
Systems, Inc. The Ohio operations commenced October 1, 2005. Netsmart - Ohio
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 small turnkey contracts in the Ohio segment are for system installations
for
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 small
turnkey contracts are usually completed within a six-month period.
Revenue
for the March 2006 period consisted of the following components; Maintenance
revenue of $3,630,000, third party hardware and software revenue of $332,000,
turnkey systems labor revenue of $705,000 and license revenue of
$547,000.
Gross
profit for the March 2006 period was $2,918,000 and our gross profit percentage
was 56%.
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 $424,000 in the March 2006 period from $478,000
in
the March 2005 period, representing a decrease of $54,000, or 11%. This decrease
was the result of one customer discontinuing the use of our
services.
Gross
profit decreased 9% to $226,000 in the March 2006 period from $248,000 in the
March 2005 period. Our gross margin percentage increased to 53% in the March
2006 period from 52% in the March 2005 period. This increase in gross margin
percentage was the result of a reduction in the following costs: communication
costs decreased $16,000, and support overhead costs decreased $21,000. These
decreases in costs, which increased our gross margin percentage, were partially
offset by the decrease in revenue.
Application
Service Provider Services (“ASP”)
ASP
Services involves the offering of our Avatar suite of products, our CareNet
products, our Netsmart University 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 $807,000 in the March 2006 period from $555,000 in the
March 2005 period, representing an increase of $252,000 or 45%. This increase
is
the result of the inclusion of our Netsmart University revenue, as well as
increases in our CareNet and InfoScriber customer base.
Gross
profit for the March 2006 period was $314,000 and for the March 2005 period
was
$279,000. The gross margin percentage was 39% for the March 2006 period and
50%
for the March 2005 period. Although revenue increased, the gross profit and
gross margin percentage did not increase proportionally due to the increased
costs associated with the Netsmart University operations, which amounted to
$172,000 in the March 2006 period. These costs represent the required baseline
costs to support the ContinuedLearning operation. We expect that as revenue
from
Netsmart University increases gross profit and margins for this segment will
increase accordingly.
Operating
Expenses
Selling,
general and administrative expenses were $4,423,000 in the March 2006 period,
reflecting an increase of $2,435,000, or 123%, from $1,988,000 in the March
2005
period. Approximately $1,412,000 or 58% of this increase was related to the
selling, general and administrative costs associated with Netsmart - Ohio.
These
costs consist of : (1) general and administrative costs totaling $813,000,
of
which the major cost components are as follows - accounting, human resources
and
administrative salaries and fringe $156,000, accounting fees $85,000, rent
and
real estate taxes related to the Ohio facility $182,000, reserve for bad debts
$25,000, consulting costs $32,000 and equipment costs and maintenance $54,000
and (2) sales and marketing costs totalling $796,000, of which the major cost
components are as follows - salaries $524,000, commissions $76,000 and travel
and lodging $67,000. The remaining increases beyond the Netsmart - Ohio costs
were in: sales and marketing salaries and fringe costs, which increased by
$193,000; commissions, which increased $120,000; sales and marketing travel
and
lodging costs which increased by $46,000; general administrative salaries and
fringe costs, which increased $176,000; amortization of customer lists and
contract backlog related to various acquisitions which increased by $249,000;
general insurance costs which increased by $46,000; recruitment costs which
increased by $24,000; legal costs which increased by $27,000; and provision
for
bonuses which increased by $40,000.
We
incurred research, development and maintenance expenses of $1,556,000 in the
March 2006 period, an increase of $485,000, or 45%, from $1,070,000 in the
March
2005 period. Approximately $602,000 of research, development and maintenance
expenses related to the Netsmart - Ohio operations. The remaining increase
in
research, development and maintenance expenses of approximately $116,000 was
the
result of redirecting resources towards revenue generating efforts.
Interest
expense was $57,000 in the March 2006 period, an increase of $37,000, or 188%,
from the $20,000 in March 2005 period. On October 7, 2005, we borrowed
$2,500,000 pursuant to a term loan advanced under a new revolving credit and
term loan agreement. The increase in interest expense was the result of the
increased borrowings under this term loan.
Interest
income was $91,000 in the March 2006 period, an increase of $34,000, or 60%,
from $57,000 in the March 2005 period. This increase is the result an increase
in interest rates. Interest income is generated from short-term investments
made
with a substantial portion of the proceeds received from our term loan, as
well
as cash generated from operations and, in the 2006 period, from financing
activities.
We
have a
net operating loss tax carry forward of approximately $3.6 million at March
31,
2006. In the March 2006 period, we recorded a current income tax expense of
$233,000, which related to various state and local taxes, as well as a provision
for the Federal alternative minimum tax. The income tax provision also consists
of a deferred tax provision of $179,000. In the March 2005 period, we recorded
a
current income tax expense of $79,000, which related to various state and local
taxes, as well as a provision for the Federal alternative minimum tax. The
income tax provision also consists of a deferred tax provision of
$137,000.
As
a
result of the foregoing factors, in the March 2006 period, we had net income
of
$510,000, or $.08 per share, basic and diluted. For the March 2005 period,
we
had net income of $363,000, or $.07 per share, basic and diluted.
Liquidity
and Capital Resources
We
had
working capital of approximately $4.9 million at March 31, 2006 as compared
to
working capital of approximately $4.1 million at December 31, 2005. This
increase of approximately $800,000 in working capital was the result of the
following: our net income, after adding back depreciation and amortization
and
other non-cash charges, which totaled $1,595,000; and net proceeds from the
exercise of stock options of $82,000. These increases were partially offset
by
$354,000 for the acquisition of equipment, $306,000 for a decrease in the
current portions of the deferred tax asset and liability, $304,000 for a
goodwill adjustment relating to deferred revenue and $91,000 of additional
costs
related to the private placement effort. The remaining increase in working
capital of $174,000 was due to changes in other current assets and
liabilities.
In
October 2005, we entered into a revolving credit and term loan agreement with
the Bank of America, which was amended as of December 31, 2005 (as so amended,
the “Credit Agreement”). 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 the Bank 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 amount outstanding under the
Term Loan Agreement at March 31, 2006 is $2,292,000. There is no amount
outstanding on the revolving credit agreement as of March 31, 2006.
The
terms
of the Credit Agreement require compliance with certain covenants, including
maintaining a minimum tangible net worth of $2,250,000 until March 31, 2006
with
provisions for increases in future periods, 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. As of March
31,
2006, the Company was in compliance with the financial covenants of the Credit
Agreement.
In
September 2001, we entered into the 2001 Term Loan Agreement with Bank of
America (formerly Fleet Bank). 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 the bank 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 March 31, 2006
is
$125,000.
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 March 31, 2006, we were in compliance with the financial covenants of
the
2001 Term Loan Agreement.
We
issued
a note payable to Shuttle Data Systems Corporation, d/b/a Adia Information
Management Corp. in connection with our acquisition of CareNet. 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 March
31,
2006 is $42,000.
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 material 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 pursue 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 March 31, 2006, our obligations and
commitments to make future payments under debt, capital leases, operating leases
and other long-term liabilities:
Contractual
Obligations
|
|
Payments
Due by Period
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less
than
1
year
|
|
1
- 3 years
|
|
4
- 5 years
|
|
Over
5 years
|
|
Long
Term Debt1
|
|
$
|
2,458,373
|
|
$
|
666,705
|
|
$
|
1,000,000
|
|
$
|
791,668
|
|
$
|
--
|
|
Capital
Lease Obligations2
|
|
|
46,557
|
|
|
44,126
|
|
|
2,431
|
|
|
--
|
|
|
--
|
|
Operating
Leases3
|
|
|
9,107,648
|
|
|
1,363,101
|
|
|
2,226,946
|
|
|
2,028,954
|
|
|
3,488,647
|
|
Other
Long-Term Liabilities3
|
|
|
1,508,241
|
|
|
746,344
|
|
|
745,959
|
|
|
15,938
|
|
|
--
|
|
Total
Contractual and Other Long-Term
Obligations
|
|
$
|
13,120,819
|
|
$
|
2,820,276
|
|
$
|
3,975,336
|
|
$
|
2,836,560
|
|
$
|
3,488,647
|
|
1
See Note
7 to Netsmart’s Consolidated Financial Statements for the years ended December
31, 2005, 2004 and 2003, which describes the Company’s financing
agreements.
2
See Note
10 to Netsmart’s Consolidated Financial Statements for the years ended December
31, 2005, 2004 and 2003, which describes the Company’s Capital Lease
Obligation.
3
See Note
12 to Netsmart’s Consolidated Financial Statements for the years ended December
31, 2005, 2004 and 2003 which describes the Company’s Operating Lease and other
Contractual Obligations.
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. Following is a discussion
of
the significant accounting policies and the significant estimates that we
believe are the most critical to aid in fully understanding and evaluating
our
reported financial results:
Revenue
Recognition
Capitalized
Software Development Costs
Impairment
of Customer Lists
Bad
Debts
Fair
Value of Acquired Deferred Post-Contract Customer Support
Valuation
Allowance for Deferred Income Tax Assets
Purchase
Price Allocation of Netsmart Ohio Acquisition
Revenue
Recognition
- The
Company recognizes large turnkey revenue from long-term (six months or longer),
fixed price contracts for financial statement purposes under the percentage
of
completion method when significant modification of the software package is
required to meet the customer specifications. The percentage of completion
method takes into account progress towards completion of a contract using time
spent by technical personnel on a particular project as the measuring standard.
Revisions in cost estimates and recognition of losses on these contracts are
reflected in the accounting period in which the facts become known. Contract
terms provide for billing schedules that differ from revenue recognition and
give rise to costs and estimated profits in excess of billings, and billings
in
excess of costs and estimated profits.
The
Company recognizes small turnkey revenue from short-term (less than six months),
fixed price contracts for financial statement purposes under the completed
contract method. Payments received in advance by customers are deferred until
earned and represented as deferred revenue in the accompanying balance
sheet.
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. 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.
Bad
Debts - We
maintain allowances for doubtful accounts for estimated bad debts. Our practice
is to specifically identify clients and invoices where we believe collection
may
be at risk and provide for these on a current basis. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances might be required. In addition,
since we evaluate each account and invoice on a case-by-case basis, the
provision could vary from period to period.
Fair
value of acquired deferred post-contract customer support
(“PCS”)
- We
value PCS in accordance with View B of EITF 04-11. In order to remain
competitive and maintain our existing customer base we upgrade and maintain
software for purposes of bug fixes, ongoing regulatory changes as well as
software corrections and enhancements. These services are not sold separately
and are therefore fair valued as a single unit. Although these services are
provided on a when-and-if-available basis, we have an obligation to our existing
customer base to develop upgrades and enhancements in order to maintain our
customer relationships as well as increase future revenue. The fair value of
this liability is estimated using the value of the services provided using
an
estimated fulfillment margin. We intend to fulfill 100% of our obligations
under
these PCS obligations assumed.
Valuation
Allowance for Deferred Income Tax Assets
-- We
measure deferred income taxes using enacted tax rates and laws that we expect
will be in effect when the underlying assets or liabilities settle. We record
a
valuation allowance against our deferred income tax assets balance when it
is
more likely than not that the benefits of the net tax asset balance will not
be
realized, and record a corresponding charge to income tax expense. Our ability
to reduce the valuation allowance for deferred income tax assets depends on
our
ability to generate taxable income in the future. Based on our projection of
the
Company’s future taxable income we have determined that a valuation allowance is
no longer required.
Purchase
Price Allocation of Netsmart Ohio Acquisition -
Purchase
price allocations are subject to change. Changes could include a reallocation
of
intangible assets which would likely have the effect of increasing or decreasing
future amortization expense, since the intangible assets are initially assigned
varied lives. Additionally, the lives assigned to the identifiable intangible
assets represent management’s best estimates of the time periods in which it
will continue to receive benefits from these assets. The useful lives may need
to be adjusted in the future based upon changes to the expected useful lives
of
such assets.
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 described under Item 1A.
“Risk
Factors” in this Form 10-Q and our Form 10-K for 2005 and those described
elsewhere in this report, which, among others, should be considered in
evaluating our financial outlook.
See also
“Forward-Looking Statements” below.
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 in this Form 10-Q and in our Form 10-K annual
report for the year ended December 31, 2005 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.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
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 March 31,2006 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 March 31, 2006, the effect
on
our net income would be a decrease of approximately $33,000 per
year.
Item
4. Controls and Procedures
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. Based upon the
evaluation that was conducted, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of the period covered by this report
the disclosure controls and procedures evaluated were effective to insure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported with
the
time periods specified by the SEC’s rules and forms.
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.
As
a
result of the CMHC acquisition, the company is currently evaluating its
operations and, commencing in fiscal 2006, integrating the New York and Ohio
operations. In doing so, we have chosen to use the most efficient processes
and
internal controls of the two operations in each location. This includes
combining sales, marketing and certain administrative functions for greater
efficiency of operation.
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.
PART
II
OTHER INFORMATION
Item
1A. Risk Factors
Our
business, financial condition, operating results and cash flows can be impacted
by a number of factors, including, but not limited to those set forth below,
any
one of which could cause our actual results to vary materially from recent
results or from our anticipated future results. For a discussion identifying
additional risk factors and important factors that could cause actual results
to
differ materially from those anticipated, see the discussions in “Risk Factors,
“ “Forward-Looking Statements,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Notes to Consolidated
Financial Statements” in our Form 10-K for 2005 and in this Form
10-Q.
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 the March 2006 period, we generated 39% of our
revenue from contracts that are directly or indirectly with government agencies,
as compared to 47% in the March 2005 period. 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.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item
6. Exhibits
Exhibit
No.
|
|
Description
|
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 report to be signed on its behalf by the undersigned thereunto
duly authorized.
NETSMART
TECHNOLOGIES, INC.
|
|
Chief
Executive Officer
|
|
May
__, 2006
|
|
|
(Principal
Executive Officer)
|
|
|
James L. Conway |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer
|
|
May
__, 2006
|
Anthony F. Grisanti |
|
(Principal
Financial and Accounting
Officer)
|
|
|
Index
of Exhibits
Exhibit
No.
|
|
Description
|
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.
|