Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
fiscal year ended December 31, 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
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
Number)
|
3500
Sunrise Highway, Suite D-122, Great River, NY
|
11739
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (631) 968-2000
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
|
|
None
|
None
|
Securities
registered pursuant to section 12(g) of the Act:
Common
Stock, par value $.01 per share
(Title
of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. oYes xNo
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. oYes xNo
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 a check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S - K is not contained herein, and will not be contained, to the
best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
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 Act). oYes xNo
As
of
June 30, 2005, the last day of the Registrant’s second fiscal quarter, the
aggregate market value of the voting and non-voting common equity held by non
affiliates was approximately $42,386,000.
As
of
March 20, 2006, the registrant had outstanding 6,497,724 shares of common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
None
Part
I
Forward-Looking
Statements
Statements
in this Form 10-K annual 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 risks discussed from time to time in this 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-K.
Item
1. Business.
In
this
report, the terms "Netsmart," "we," "us" or "our" mean Netsmart Technologies,
Inc. and the subsidiaries in our consolidated financial
statements.
Introduction
We
develop market, and support application software for health and human services
organizations. In many cases, our software serves as the foundation for the
financial, clinical and management processes for our customers, which include
mental health clinics, substance abuse clinics, psychiatric hospitals, public
health agencies, and managed care entities.
Our
software facilitates key functions, such as patient management, billing,
scheduling, and electronic medical records, for all modalities of care. We
sell
our software products, either on a licensed or a subscription basis. We also
offer software support and upgrades under maintenance agreements with our
customers, an arrangement which provides us with a recurring revenue stream.
We
currently have in place contracts with more than 1,250 customer organizations
in
all 50 states, U.S. territories and several other countries. These contracts
represent more than 100,000 users and include more than 30 state agencies that
operate and/or manage multiple facilities.
The
ability for government agencies and non-profit organizations to integrate their
services is becoming more critical as they face requirements to provide a wider
range of services to more clients, but with less money. Our software, services,
and industry knowledge are designed to help our customers gain operational
efficiencies, while at the same time protecting the privacy of sensitive health
data. As a result, we are seeing increased demand for our software from
government agencies who are integrating services, and from major systems
integrators interested in reselling our software as part of their role in
supporting these agencies.
The
cost
of a new software system for our customers typically ranges from $10,000 to
$100,000 for a single-facility healthcare organization to $250,000 to several
million dollars for multi-unit care organizations, such as those run by state
agencies. Government agencies, such as mental health, mental retardation, child
welfare, addiction, correction and public health facilities, accounted for
approximately 44% of revenue in 2005, with the remainder coming from private
hospitals, smaller clinics, group and sole practitioners.
Netsmart
also furnishes data center services to providers that do not wish to maintain
the staff and infrastructure required to manage a direct-bill relationship
with
multiple payers for mental health, alcohol and substance abuse services. Data
Center services include statistical reporting, data entry, electronic billing
and submission. This business line provides a recurring revenue stream that
contributes to the recurring revenue base described above.
We
also
offer an Application Service Provider (“ASP”) option, which makes our Avatar
software suite, CareNet, InfoScriber and Netsmart University products available
either via a secure connection to the Internet or via a virtual private network
(“VPN”). The ASP model reduces the upfront capital investment required for
customers to procure our software and enables customers to deploy our products
more rapidly and to pay a monthly services-based fee rather than an upfront
license fee. The ASP model also eliminates the need for customers to continually
upgrade their hardware systems. In addition, it provides an opportunity for
us
to become more integrated with the customer’s day-to-day
operations.
Recent
Acquisitions
In
2005,
we completed acquisitions of three companies with products and services
complementary to our existing offerings. Each of these acquisitions expands
our
product offerings, and enhances our ability to offer our customers a wide range
of products and services that are designed to meet their needs.
We
acquired ContinuedLearning, a Florida-based provider of online training
services. We have integrated ContinuedLearning’s product offerings with our
existing customer training programs, and branded the combined offerings as
“Netsmart University”. Netsmart University includes a wide range of Web-based,
classroom and onsite training, as well as a learning management system that
is
designed to enable behavioral healthcare and other organizations to effectively
manage their own training and development initiatives. Netsmart University
offers access to hundreds of online courses in behavioral healthcare, safety,
and compliance.
We
acquired Addiction Management Systems, Inc., solidifying our position as one
of
the nation’s largest suppliers of automated computerized methadone dispensing
systems. We now serve more than 400 of the estimated 1,100 methadone clinics
in
the U.S., providing a range of offerings for customers ranging from small
“storefront” clinics to large clinics managed by large institutional health
providers.
In
September 2005, we completed the acquisition of CMHC Systems, a leading
competitor in the behavioral healthcare software market. As a result of the
acquisition, we acquired more than 400 additional customer organizations,
primarily in the community behavioral healthcare sector.
Our
Strategy
As
one of
the largest providers of technology solutions in the behavioral health market,
we believe we have the unique ability to provide our customers with the widest
range of solutions that can help them furnish high quality care to their clients
at a high level of efficiency. Our comprehensive information technology
solutions include functionality for billing, patient tracking and scheduling
(for inpatient and outpatient environments), as well as clinical documentation
and medical record generation and management. The key elements of our strategy
are to:
Capitalize
on market initiatives.
Our
strategy is to recognize the changes in the health and human services market
that are necessitated by legislation and other initiatives and to design our
software and services to meet the needs of our clients resulting from those
changes. Consequently, we have
|
·
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designed
our software to manage a wide variety of processes from check-in
to
treatment planning, which we believe is well-suited for agencies
seeking
to implement a technology infrastructure that supports integrated
services
|
|
·
|
combined
our products with products offered by other companies with which
we have a
marketing arrangement, enabling us to offer comprehensive enterprise-wide
HIPAA-compliant and HIPAA-related business services for most human
service
providers
|
|
·
|
positioned
and developed our software and services to support the goals and
implementation of an Electronic Health
Record
|
We
intend
to maintain and enhance our market position by continuing to invest significant
resources in research and development of software and services solutions
designed to address the factors affecting market demand. See “Markets”
below.
Expand
our product offerings and revenue base.
We
intend to use our recent acquisitions to expand both our product offerings
and
our sales to existing and newly-acquired customers. Our recent acquisitions
have
enabled us to create new packages of products, such as Netsmart University,
which we are marketing to existing and prospective customers. With many
Continuing Education Units available, we believe Netsmart University will be
well-received within our core market and that there are opportunities to sell
its more generic capabilities into closely-related market segments. Our
acquisitions have also provided us with the opportunity to sell our existing
products to the customers of the businesses we acquired, thereby increasing
our
recurring revenue.
Continue
to pursue strategic acquisitions.
We have
in the past grown in part through acquisitions of complimentary businesses.
We
intend to continue to identify and acquire companies or lines of business which
are complimentary to our existing businesses.
Organization
of the Company
We
are a
Delaware corporation formed in September 1992 under the name Medical Services
Corp. Our name was changed to Carte Medical Corporation in October 1993 to
CSMC
Corporation in June 1995 and to Netsmart Technologies, Inc. in February 1996.
Our
executive offices are located at 3500 Sunrise Highway, Suite D-122, Great River,
New York 11739, telephone (631) 968-2000. Reference to us and to Netsmart
includes both our legal subsidiaries Netsmart New York and Netsmart Ohio. Our
website is located at www.ntst.com.
Neither
the information contained in our website nor the information contained in any
Internet Web site is a part of this Form 10-K annual report.
Available
Information:
The
public may read and copy any materials filed by us with the SEC at the SEC’s
public reference room at 450 Fifth Street, NW, Washington D.C., 20549. The
public may obtain information about the operation of the SEC’s public reference
rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website
at
http://www.sec.gov
that
contains reports, proxy and information statements and other information about
issuers such as us that file electronically with the SEC.
In
addition, we make available free of charge on our website at www.ntst.com
our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) under the Exchange Act as soon as reasonably practical after
we
electronically file such material with, or furnish it to, the SEC.
Our
Board
of Directors has adopted a Code of Business Conduct applicable to the Company’s
officers and employees, and has also adopted a Code of Ethics for its senior
financial officers. These codes of ethics are posted on the Company’s website at
www.ntst.com in the Investor Relations section. Any amendment of the codes
of
ethics or waiver thereof applicable to any director or executive officer of
the
Company, including the Chief Executive Officer or any senior financial officer,
will be disclosed on the Company’s website within four business days of the date
of such amendment or waiver. In the case of a waiver, the nature of the waiver,
the name of the person to whom the waiver was granted and the date of the waiver
will also be disclosed.
The
Board
of Directors has also adopted, and we have posted in the Investor Relations
section of our website, written Charters for each of the Board’s standing
committees. We will provide without charge, upon a stockholder’s request to our
address set forth in the preceding section, a copy of the codes of ethics or
the
Charter of any standing committee of the Board.
Business
Segments
For
a
detailed description of the assets and profits of each of our business segments
see note 14 to our Consolidated Financial Statements.
Software
and Related Systems and Services - New York
We
develop market and support computer software and provide implementation and
business services that enable health and human services organizations to access,
manage and share information related to their financial, clinical and management
processes.
Customer
organizations typically purchase our software in the form of a perpetual license
to use the system, as well as purchasing professional services, support, and
maintenance. In addition, we resell third party hardware and software to our
customers pursuant to value-added reseller agreements with these partners.
Our
products are designed to operate on most hardware platforms and on most
operating systems, including UNIX, Microsoft Windows and Linux. Because our
products operate on a variety of platforms, we are not dependent on any single
hardware vendor or operating system. Since our Avatar suite of software products
utilizes the Cache database and development software provided by Intersystems
Corporation, we resell Cache software. Since Avatar is designed to operate
solely with Cache products, we are dependent on Cache products for our
operations.
Our
professional services offerings include project management, implementation,
training, consulting and software development services, which are provided
either on a time-and-material or fixed-price contract basis. Our software
development services may require the adaptation of healthcare information
technology systems to meet the specific requirements of the
customer.
Our
typical license for a health information system ranges from $10,000 to $100,000
for a single facility healthcare organization to $250,000 to $5,000,000 for
multi-unit care organizations such as those run by state agencies. Revenue
from
license fees was approximately $2,210,000, or 5.8% of consolidated revenue,
for
2005, $2,066,000, or 7.1% of consolidated revenue, for 2004 and $2,781,000,
or
10.2% of consolidated revenue, for 2003. A customer’s purchase order may also
include third party hardware or software. Revenue from hardware and third party
software accounted for approximately $5,544,000, or 14.6% of consolidated
revenue, for 2005, $4,336,000, or 15.0% of consolidated revenue, for 2004 and
$4,444,000, or 16.4% of consolidated revenue, for 2003. Revenue from turnkey
systems labor accounted for approximately $9,845,000, or 25.9% of consolidated
revenue, for 2005, $9,602,000, or 33.1% of consolidated revenue, for 2004 and
$9,548,000, or 35.1% of consolidated revenue in 2003.
Our
small
systems revenue was approximately $1,042,000, or 2.7% of consolidated revenue,
for 2005, $928,000, or 3.2% of consolidated revenue, for 2004 and $768,000,
or
2.8% of consolidated revenue, for 2003.
Maintenance
services have generated increasing revenue and have become a more significant
portion of our business, since most purchasers of healthcare information system
licenses also purchase maintenance service. Maintenance revenue increases as
existing customers purchase additional licenses and new customers purchase
their
initial software licenses. By agreement with our customers, we provide telephone
help desk support and maintain and upgrade their software. Maintenance contracts
may require us to make modifications to meet any new federal and state reporting
requirements that become effective during the term of the maintenance contract.
We do not maintain the hardware and third party software sold to our customers,
but we provide a telephone help line service for certain third party software
which we license to our customers. Our maintenance revenue was approximately
$9,784,000, or 25.8% of consolidated revenue, for 2005, $8,290,000, or 28.6%
of
consolidated revenue, for 2004 and $7,069,000, or 26% of consolidated revenue,
for 2003.
Software
and Related Systems and Services - Ohio
As
with
Netsmart New York, the Netsmart Ohio operation develops computer software and
provides implementation and business services that are designed to enable health
and human services organizations to access, manage and share information related
to their financial, clinical and management processes.
The
Ohio
segment consists mainly of the operations of the former CMHC Systems, Inc.,
now
named Netsmart Ohio. The results of operations from this acquisition are
included from October 1, 2005 through December 31, 2005. The focus of the Ohio
segment consists primarily of contracts for turnkey system installations of
behavioral healthcare information management software for mental health,
substance abuse, and addiction services agencies, and some developmental
disability centers and behavioral health-related managed care organizations.
These turnkey installations are usually completed within a six-month
period.
The
core
product of the Ohio segment is the CMHC/MIS, a comprehensive billing and
clinical software product designed for the UNIX operating system. As with the
Avatar software, customer organizations typically purchase the CMHC/MIS in
the
form of a perpetual license to use the system, as well as purchasing
professional services, support, and maintenance. In addition, Netsmart Ohio
resells third party hardware, typically in the form of servers used to run
the
application. Professional services for installation and implementation of the
software are provided either on a time-and-material or fixed-price contract
basis.
Our
typical license for a health information system ranges from $10,000 to $100,000
for a single facility healthcare organization to $250,000 to $500,000 for
multi-unit care organizations. Revenue from license fees was approximately
$230,000, or .6% of revenue, for 2005. A customer’s purchase order may also
include third party hardware or software. Revenue from hardware and third party
software accounted for approximately $654,000, or 1.7% of revenue, for 2005.
Revenue from turnkey systems labor accounted for approximately $802,000, or
2.1%
of revenue, for 2005.
Data
Center Services
Our
Data
Center provides software that performs clinical and billing services for mental
health, alcohol and substance abuse outpatient facilities. Services include
statistical reporting, data entry, electronic billing and
submission.
Revenue
from our Data Center was approximately $1,795,000, or 4.7% of our consolidated
revenue, for 2005, $2,058,000, or 7.1% of our consolidated revenue, for 2004
and
$1,973,000, or 7.3% of our consolidated revenue, for 2003.
In
2005,
three customers each accounted for 10% or more of total Data Center revenue.
One
customer was a New York State agency, which accounted for $211,000, or 12%
of
total Data Center revenue. The other two clients were hospitals in New York
City, which accounted for $209,000 and $192,000, or 11.6% and 10.7% of total
Data Center revenue. None of the above mentioned clients accounted for more
than
10% of our consolidated revenue.
In
2004,
two customers each accounted for 10% or more of the total Data Center revenue.
One customer was a New York State agency, which accounted for $207,000, or
10%
of total Data Center revenue. The other client was a hospital in New York City,
which accounted for $216,000, or 10.5% of total Data Center revenue. In 2003,
one customer, a hospital in New York City, accounted for $274,000, or 13% of
the
total Data Center revenue. None of the above mentioned clients accounted for
more than 10% of our consolidated revenue.
Our
Data
Center backlog at December 31, 2005 was $1,660,000. We anticipate that all
of
this backlog will be earned in 2006. The Data Center backlog at December 31,
2004 was $2,132,000.
Application
Service Provider
Our
ASP
services make our Avatar software suite, CareNet, Netsmart University and
InfoScriber products available either via a secure connection to the Internet
or
via a virtual private network (“VPN”). With the ASP option, Netsmart operates
and maintains the software on behalf of customers on computers in a secure
data
center facility in Columbus, Ohio. This enables customers to rapidly deploy
products and pay on a monthly service basis, thus eliminating capital intensive
system requirements. Our
CareNet product is a subscription-based Internet solution for Managed Care
Organizations that want to exchange data with their providers without having
to
maintain their own information technology infrastructure. CareNet furnishes
a
private, secure Web-based portal site where providers and their partner agencies
can log in via the Internet to access client information and complete paperwork
and necessary reporting on-line.
The
InfoScriber product is a secure, Web-based e-prescribing system that enables
practitioners in public or private practices to write and transmit electronic
prescriptions to pharmacies of choice. It is the only e-prescribing system
solely focused on the behavioral healthcare market with its unique medications,
treatment settings and reporting requirements.
Revenue
from ASP services was approximately for $2,538,000 for 2005 and $1,725,000
for
2004.
During
2005, one customer accounted for $661,000, or 26% of total ASP revenue and
during 2004, one customer accounted for $443,000, or 26% of total ASP revenue.
This customer did not account for more than 10% of our total consolidated
revenue in either 2005 or 2004.
Our
ASP
backlog at December 31, 2005 was $3,011,000. We anticipate that all of this
backlog will be earned in 2006. Our ASP backlog at December 31, 2004 was
$2,233,000.
Markets
Our
target market for information systems and related services consists of both
private and publicly-operated providers offering hospital or community-based
outpatient behavioral/public healthcare services, substance abuse, MR/DD and
social services. These healthcare providers require comprehensive information
systems to administer their programs. We believe that there are at least 15,000
healthcare providers that fall in our target markets in the United States,
including public and private hospitals, private and community-based residential
facilities, and federal, state and local governmental agencies.
Many
long-term behavioral/public healthcare facilities are operated by government
entities and include those operated as part of entitlement programs. During
the
years ended December 31, 2005, 2004 and 2003, approximately 44%, 49% and 57%,
respectively, of our consolidated revenue was generated from contracts with
state and local government agencies. Contracts with government agencies
generally include provisions which permit the contracting agency to cancel
the
contract for its convenience, although we have not experienced a termination
for
convenience in the last five years.
We
believe that the demand for information technology solutions will continue
to
increase as the result of additional federal data standards and requirements
for
information exchange, as well as continuous pressure from managed care providers
to reduce healthcare delivery costs while expanding the availability of
services.
In
order
to remain competitive, health and human services delivery networks need
comprehensive financial, clinical and management systems that enable providers
within the networks to maintain a broad scope of accurate medical and financial
information, manage costs and deliver quality care efficiently. In addition,
the
need to upgrade existing systems to meet the increased demand for data
processing needs of managed care and regulatory oversight has also resulted
in
an increasing demand for behavioral healthcare information technology. These
data management needs include analysis of patient assessments, maintenance
of
patient records, administration of patient treatment plans and the overall
coordination of in-office and remote case management.
In
addition to our focus on the behavioral healthcare market segment, we also
serve
a growing number of public healthcare organizations. Our products are designed
with functionality to assist this market segment with important considerations
like maximizing the ability for clinicians to provide care to individual
patients in high volume patient settings; near real-time analysis of data from
different systems for disease outbreak investigations and resolution; and
interoperability with other internal health department databases, including
environmental health. Since many of the consumers of services of our clients
are
some of the poorest Americans, they receive their primary care from public
health clinics. We believe this is driving the trend towards integration and
data sharing between these agencies.
We
are
also actively engaged in a number of key industry associations and organizations
to help assure that we pro-actively address trends and future needs of our
customers. In addition, there are active Netsmart user group organizations
at
the state, regional and national levels. These user groups provide us with
a
customer/user perspective on emerging requirements and ongoing feedback that
helps us determine future product direction and requirements.
Additionally,
the health and human services market in which we operate is always subject
to
changes in state and federal regulations, as well as new demands required by
consumers. Some factors which we believe are affecting market demand for
software such as ours include:
Electronic
Health Record (EHR).
There is
much discussion at the national level about the implementation of a standardized
electronic health record. Proponents state that such a record for patients
could
enable a virtual healthcare team and a coordinated system of care with
consistent, streamlined information exchange and transfer of clinical and
billing data. Exchanging health information through secure means — including
appropriate authorizations from patients/consumers — could link information from
health-related entities with consumers’ personal health information. This
connection would be intended to make important data available at the right
times
and places to support optimal treatment across a variety of healthcare levels.
We believe that, despite varying views on the best path for adoption of an
EHR,
it will eventually become reality.
Integrated
Services. This
concept, sometimes referred to as “no wrong door,” is an approach whereby
consumers seeking assistance from social services agencies receive complete
and
comprehensive services, regardless of their point of entry into the system.
As a
result, many social service agencies are seeking to implement a technology
infrastructure that supports integrated services.
HIPAA.
As a
supplier of practice management, we believe that the Health Insurance
Portability and Accountability Act, generally known as HIPAA, essentially
mandates that the U.S. Department of Health and Human Services enact standards
regarding the standardization, privacy and security of health care information.
This legislation requires more providers of services in the under-automated
health and human services industry to install automated systems, creating an
increased demand for automated software solutions. We believe that our products,
in conjunction with products offered by other companies with which we have
a
marketing arrangement, enables us to offer comprehensive enterprise-wide
HIPAA-compliant and HIPAA-related business services for most human service
providers.
General
Unrest.
With
the creation of the Department of Homeland Security (DHS) and an increased
focus
on anti-terrorism preparedness and response, the demand for services in the
mental health and public health arena has increased. Anxiety and fear have
motivated a growing number of people to seek mental health services. This
increased demand puts more pressure on providers to improve the efficiency
of
their care through the use of practice management and clinical systems. We
believe that the potential threat of bio-terrorism will also put similar
pressure on public health agencies to improve their delivery capabilities in
much the same way. We also believe that this focus on preparedness will lead
to
more cross-department integration requirements, which play well to our
strengths.
We
are
positioning our existing products and developing additional products in order
to
address these factors.
No
single
customer accounted for more than 10% of consolidated revenue for the years
ended
December 31, 2005 and 2004. During the year ended December 31, 2003, one
customer accounted for approximately $2,861,000 or 11.4% of software and related
systems and services revenue and 10.5% of consolidated revenue.
Sales
and Marketing
We
have a
sales force of 47 people who market our products. In addition, since the
acquisition of CMHC Systems, we have aligned our go-to-market strategy with
the
key vertical markets we serve: State Systems, Integrated Delivery Networks
(such
as hospitals with multiple facilities and behavioral healthcare offerings),
Community and Public Healthcare, and Methadone Providers. We also expanded
our
direct sales force and aligned them with the vertical markets above to enable
our sales force to develop in-depth knowledge of the unique needs of each
segment. In addition, we established an account management team which is
designed to maintain and grow relationships with our current customers, and
to
identify opportunities to sell additional software and services from our present
product offerings to that current customer base. We also added a dedicated
business development organization to cultivate large strategic opportunities
and
build relationships with the large systems integrators that service these
organizations. This approach is expected to enable us to leverage our resources
and to further extend our reach within the markets we serve.
Backlog
We
had a
backlog of orders, including ongoing maintenance and data center contracts
for
our behavioral health information systems, of $44.1 million at December 31,
2005
and $25.8 million at December 31, 2004. We expect to fill approximately $41.2
million of the 2005 backlog during 2006.
Our
backlog consists of revenue of approximately $11.6 million from existing turnkey
contracts; maintenance revenue of approximately $26.9 million that is comprised
both of amounts expected to be filled under unexpired maintenance contracts
and
amounts that are subject to automatic renewal; unexpired Data Center contracts
of approximately $1.7 million, calculated using historical experience to
determine future usage; unexpired ASP backlog of approximately $3.0 million;
and
facility management contracts of approximately $.9 million, which are also
calculated using historical experience to determine twelve months of future
usage.
Product
Development
We
incurred product development costs relating to our health and human services
information systems of approximately $4,547,000 in 2005, $3,498,000 in 2004
and
$2,770,000 in 2003, all of which was company-sponsored and expensed as research,
development and maintenance. In 2005, we acquired software with a fair value
of
approximately $3,300,000, $2,051,000 and $692,000 associated with our
acquisitions of CMHC Systems, Inc., AMS and Continued Learning, respectively.
In
2005, we also capitalized software development costs of $42,000 relating to
one
of our Avatar products. This Avatar product is being amortized over a three
year
period and in 2005 we charged $2,300 to operations. In 2004, we acquired
software with a fair value of approximately $150,000 associated with our
acquisition of TxM software which was related to our partnership arrangement
with the MSJ Communications Corporation, a wholly-owned subsidiary of the Betty
Ford Center. In 2003, we capitalized software development costs of $179,500
relating to our Avatar AM, Order Entry and RAD Plus 2004 products. The Avatar
AM
and Order Entry products are being amortized over a three year period and in
2004, we charged $43,100 to operations. In 2003, we acquired software with
a
fair value of approximately $883,000 associated with our acquisition of software
products from CareNet.
To
assure
that our customers are informed about our latest product plans and deliverables,
we have developed Product Roadmaps for our major products. The roadmaps provide
details about future product releases (both “version” and “maintenance”) along
with estimated dates and timeframes. This enables our customers to effectively
plan and budget for future use of our products and related
services.
Competition
and Competitive Position
The
multi-billion dollar healthcare software industry is highly competitive, and
is
served by numerous vendors. Although we believe that we can provide healthcare
facilities and managed care organizations with software to enable them to
perform their services more effectively than our competitors, other software
companies provide comparable systems and also have the staff and resources
to
develop competitive systems.
Some
dominant health care information technology vendors have achieved annual sales
of more than $1 billion by focusing on solutions for large medical/surgical
healthcare providers. As such, their target market has been large hospital
systems and health maintenance organizations, and they have not focused on
the
behavioral/public healthcare industry. We believe that most of the presently
available healthcare management software does not meet the specific needs of
the
behavioral/public healthcare industry, and that the functionality of our
information systems is better designed to meet the needs of this market.
However, the behavioral health information systems business is serviced by
a
number of companies, some of which are better capitalized with larger
infrastructures than Netsmart, and we may not be able to continue to compete
effectively with such companies. As our business expands and includes sales
to
larger, integrated healthcare delivery networks, we begin to compete with
companies such as Siemens, HBOC, IDX, Meditech, Quadramed, and
Misys.
Additionally,
we face significant competition in the clearinghouse, medical systems, and
ASP
market. General ASP utilities offer customers the use of computer facilities
and
operations staff to process either generalized medical software or software
selected by the customer from other software vendors. Many organizations start
with billing as their primary reason for automation-related spending. Large
billing and clearinghouse computer service companies provide a broad spectrum
of
billing services for a diverse marketplace. In addition, some professional
service firms provide staff to operate a customer’s in-house system when the
customer believes that such an approach will provide the needed expertise at
a
cost-effective price.
Our
ASP
offering is focused on a specific subset of the large health and human services
marketplace. Because behavioral healthcare requires the ideal organization
of
software, systems and staff to enable a customer to maximize service at a
reasonable cost, we believe our specialized experience and investment in related
software provides us with a competitive advantage. In addition, our ASP service
is based on use of our proprietary suite of Avatar products. This enables our
customers to use any or all components of a broad array of clinical and
financial systems for as long as these functions are needed. In addition, our
experience has shown that once a customer has contracted with us for software
and services, they generally remain our customer and seldom move away from
us to
a competitive offering. In fact, some of our customers have been working with
us
for 30 years.
We
compete with the following behavioral healthcare vendors, among
others:
Anasazi
Software, Inc.
Askesis
Development Group, Inc.
Civerex
Systems, Inc.
Geneva
Software
InfoMC,
Inc.
IMPEL
Strategic Solutions
Multi-Health
Systems, Inc.
Qualifacts
System inc.
Raintree
Systems Inc.
SecureHEALTH
Inc.
Sequest
Technologies Inc.
The
Echo
Group
UNI/CARE
Systems, Inc.
XAKTsoft,
Inc.
As
a core
part of our business model and growth strategy, we bid on numerous competitive
procurements during the calendar year, and have a high win ratio, especially
in
the statewide mental health/mental retardation field, where we provide 33
statewide systems.
We
have
an established base of more than 1,200 providers nationwide, including
substantial private and government providers of healthcare services. These
providers represent approximately 50,000 clinicians, and include 33 state
agencies and installations in all 50 states and several foreign
countries.
Government
Regulations and Contracts
The
federal government and state governments have adopted numerous regulations
affecting the healthcare industry, including those relating to payments to
healthcare providers for various services. The adoption of new regulations
can
have a significant effect upon the revenue stream and operations of healthcare
providers and insurance companies. Our solutions are designed to help our
customers meet a variety of regulations and payment requirements, mitigating
some of the problems resulting from government regulations. With
constantly-changing regulations and efforts to reduce the cost of healthcare,
we
cannot predict the effect of future regulations by governments and payment
practices by government agencies or health insurers, including reductions in
the
funding for or scope of entitlement programs. Any change in the structure of
healthcare in the United States can have a material effect on companies that
provide services to the healthcare industry, including those such as us that
provide software.
Although
we believe that the likely direction which may result from the current study
of
the healthcare industry would be an increased trend toward managed care
programs, thereby increasing the importance of automation, our business may
not
benefit from any changes in the industry structure. Even if the industry does
evolve toward more healthcare being provided by managed care organizations,
it
is possible that there will be substantial concentration in a few very large
organizations, which may seek to develop their own software or obtain software
from other sources. Our business may be adversely affected to the extent that
the healthcare industry evolves with greater government-sponsored programs
and
fewer privately-run organizations. Furthermore, to the extent that each state
changes its own regulations in the healthcare field, it may be necessary for
us
to modify our behavioral health information systems to meet new record-keeping
or other requirements imposed by changes in regulations, and we may not be
able
to generate revenues sufficient to cover the costs of developing the
modifications.
A
significant amount of our business has been with government agencies, including
specialized care facilities operated by, or under contract with, government
agencies. The decision on the part of a government agency to enter into a
contract is dependent upon a number of factors, including local economic and
budgetary problems, and government procurement regulations, which may include
the need for approval by more than one agency before a contract is signed.
In
addition, government agencies generally include provisions in their contracts
which permit the contracting agency to cancel the contract at its convenience.
We have not experienced a termination for convenience in the last five
years.
The
Sarbanes-Oxley Act of 2002 and rules promulgated thereunder by the SEC and
the
Nasdaq Stock Market have imposed substantial new or enhanced regulations and
disclosure requirements in the areas of corporate governance (including director
independence, director selection and audit, corporate governance and
compensation committee responsibilities), equity compensation plans, auditor
independence, pre-approval of auditor fees and services and disclosure and
internal control procedures. We are committed to industry best practices in
these areas and believe we are in compliance with the relevant rules and
regulations.
Intellectual
Property Rights
We
have
no patent rights for our behavioral health information system software, but
we
rely upon copyright protection for our software, as well as non-disclosure
and
secrecy agreements with our employees and third parties to whom we disclose
information. We may not be able to protect our proprietary rights to our system,
and third parties may claim rights to our system. The disclosure of the codes
used in any proprietary product, whether or not in violation of a non-disclosure
agreement, could have a material adverse affect upon us, even if we are
successful in obtaining injunctive relief. We must continue to invest in product
development, employee training, and customer support.
Employees
As
of
December 31, 2005, we had 322 employees, including 3 executives, 47 sales and
marketing, 194 technical and 78 clerical and administrative employees.
Executive
Officers
Information
concerning our executive officers is included in Item 10, Directors and
Executive Officers of the Registrant.
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 2005, 2004 and 2003, we generated 44%, 49% and
57%,
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, resulting in decreased revenue.
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, resulting in
decreased revenue.
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 agreements 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 agreement
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 agreement. 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 and Anthony F. Grisanti, our chief
financial officer. Although we have employment agreements with these officers,
the employment agreements do not guarantee that those officers will continue
as
our employees, and each of those 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. Our business may be adversely
affected if any key management personnel or other key employees left our
employ.
The
employment contracts with our executive officers and provisions of Delaware
law
may deter or prevent a takeover attempt and may reduce the price investors
might
be willing to pay for our common stock.
The
employment contracts between us and each of James Conway and Anthony Grisanti
provide that in the event there is a change in control of our company, the
employee has the option to terminate his employment agreement. Upon such
termination, each of Messrs. Conway and Grisanti has the right to receive a
lump
sum payment equal to his compensation for a 48 month period.
In
addition, Delaware law restricts business combinations with stockholders who
acquire 15% or more of a company’s common stock without the consent of the
company’s board of directors.
These
provisions could deter or prevent a takeover attempt and may also reduce the
price that investors might be willing to pay in the future for shares of our
common stock.
Any
issuance of preferred stock may adversely effect the voting power and equity
interest of our common stock.
Our
certificate of incorporation gives our board of directors the right to create
new series of preferred stock. As a result, the board of directors may, without
stockholder approval, issue preferred stock with voting, dividend, conversion,
liquidation or other rights which could adversely affect the voting power and
equity interest of the holders of our common stock. The preferred stock, which
could be issued with the right to more than one vote per share, could be
utilized as a method of discouraging, delaying or preventing a change of
control. The possible impact on takeover attempts could adversely affect the
price of our common stock. Although we have no present intention to issue any
shares of preferred stock or to create any series of preferred stock, we may
issue such shares in the future. If we issue preferred stock in a manner which
dilutes the voting rights of the holders of our common stock, our listing on
The
Nasdaq Capital Market may be impaired.
Shares
may be issued pursuant to options and warrants which may adversely affect the
market price of our common stock.
We
may
issue stock upon the exercise of options to purchase shares of our common stock
pursuant to our long term incentive plans, under which options to purchase
945,467 shares were outstanding at December 31, 2005. The exercise of these
options and the sale of the underlying shares of common stock may have an
adverse effect upon the price of our common stock.
We
may
also issue 147,003 shares of or common stock upon the exercise of warrants
to
purchase shares of our common stock pursuant to a Private Placement Offering
that we entered into in 2005. The exercise of these warrants and the sale of
the
underlying shares of common stock may have an adverse effect upon the price
of
our stock.
Item
1B. |
Unresolved
SEC Staff Comments.
|
None.
We
lease
office space at the following locations:
Location
|
|
Purpose
|
|
Space
|
|
Annual
Rental
|
|
Expiration
|
|
|
|
|
|
|
|
|
|
3500
Sunrise Highway
Great
River, New York
|
|
Executive
offices
Software
and Related Systems and Services - NY
Data
Center Services
|
|
32,600
square feet
|
|
$521,000,
plus 3% annual increases
|
|
10/22/14
|
|
|
|
|
|
|
|
|
|
570
Metro Place North
Dublin,
Ohio
|
|
Software
& Related Systems and Services - OH
|
|
32,000
square feet
|
|
$377,172
|
|
09/30/2010
|
|
|
|
|
|
|
|
|
|
555
Metro Place North
Dublin,
Ohio
|
|
Software
& Related Systems and Services - OH
|
|
11,775
square feet
|
|
$194,000
|
|
07/31/06
|
|
|
|
|
|
|
|
|
|
1335
Dublin Road
Columbus,
Ohio
|
|
Software
and Related Systems and Services - NY
ASP
Services
|
|
3,500
square feet
|
|
$59,000
|
|
11/30/06
|
|
|
|
|
|
|
|
|
|
5120
Shoreham Place
San
Diego, California
|
|
Software
and Related Systems and Services - NY
|
|
2,800
square feet
|
|
$73,000
|
|
08/31/08
|
|
|
|
|
|
|
|
|
|
69-730
Highway 11
Ranch
Mirage, California
|
|
Software
and Related Systems and Services - NY
|
|
1,400
square feet
|
|
$30,000
|
|
10/31/06
|
|
|
|
|
|
|
|
|
|
117
North 1st
Street
Ann
Arbor, Michigan
|
|
ASP
Services
|
|
2,200
square feet
|
|
$49,000
|
|
01/31/07
|
|
|
|
|
|
|
|
|
|
33-40
37th
Street
Long
Island City, NY
|
|
Software
& Related Systems and Services - NY
|
|
2,000
square feet
|
|
$22,000
|
|
10/15/08
|
|
|
|
|
|
|
|
|
|
146
Second Street North
St.
Petersburg, FL
|
|
ASP
Services
|
|
2,000
square feet
|
|
$28,000
|
|
03/31/08
|
We
believe that our space is adequate for our immediate needs and that, if
additional space is required, whether due to the scheduled expiration of a
lease
or otherwise, it would be readily available at commercially reasonable
rates.
Item
3. |
Legal
Proceedings.
|
None
Item
4. |
Submission
of Matters to a Vote of Security
Holders.
|
None
Part
II
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities.
|
(a)
Our
common stock is traded on The Nasdaq Capital Market under the symbol NTST.
Set
forth below is the reported high and low sales prices of our common stock
for each quarterly period during 2005 and 2004.
Quarter
Ended
|
|
High
|
|
Low
|
|
March
31, 2005
|
|
$
|
10.27
|
|
$
|
8.28
|
|
June
30, 2005
|
|
|
9.74
|
|
|
8.50
|
|
September
30, 2005
|
|
|
12.50
|
|
|
8.94
|
|
December
31,
2005
|
|
|
15.00
|
|
|
12.17
|
|
|
|
|
|
|
|
|
|
March
31, 2004
|
|
$
|
18.70
|
|
|
11.49
|
|
June
30, 2004
|
|
|
13.85
|
|
|
7.11
|
|
September
30, 2004
|
|
|
10.00
|
|
|
6.07
|
|
December
31,
2004
|
|
|
9.25
|
|
|
7.30
|
|
As
of
December 31, 2005, there were approximately 3,000 beneficial owners of our
common stock. The closing price of our common stock was $13.30 per share on
March 20, 2006. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions.
We
do not
anticipate that we will pay any dividends in the foreseeable future. We
currently intend to retain future earnings for use in operation and development
of our business and for potential acquisitions. In addition, the terms of our
term loan agreement requires our lender’s consent with respect to the payment of
cash dividends.
The
information required by Item 201(d) of Regulation S-K is located under “Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters”.
(b)
During the year ended December 31, 2005, no purchases were made under the
Company’s stock buyback plan.
Item
6. |
Selected
Financial Data.
|
The
selected consolidated financial data set forth below for the five years in
the
period ended December 31, 2005 has been derived from the company’s audited
Consolidated Financial Statements. This information should be read in
conjunction with the audited Consolidated Financial Statements and notes
thereto.
|
|
Year
Ended December 31,
|
|
|
|
2005(1)
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
|
|
|
|
(in
thousands except per share data)
|
|
|
|
Selected
Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
37,978
|
|
$
|
29,005
|
|
$
|
27,175
|
|
$
|
22,126
|
|
$
|
18,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
other financing costs
|
|
|
2,556
|
|
|
3,065
|
|
|
2,368
|
|
|
1,095
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
1,590
|
|
|
2,753
|
2 |
|
3,028
|
3 |
|
1,195
|
4 |
|
315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Common Share
|
|
|
--
|
|
|
--
|
|
|
.10
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data - Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
.27
|
|
$
|
.50
|
|
$
|
.64
|
|
$
|
.29
|
|
$
|
.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
shares outstanding
|
|
|
5,935
|
|
|
5,537
|
|
|
4,752
|
|
|
4,153
|
|
|
3,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
Capital
|
|
$
|
4,043
|
|
$
|
18,216
|
|
$
|
14,714
|
|
$
|
9,215
|
|
$
|
7,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
64,622
|
|
|
37,707
|
|
|
34,633
|
|
|
22,416
|
|
|
18,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Including
Current Portion
|
|
|
2,750
|
|
|
1,000
|
|
|
1,667
|
|
|
1,750
|
|
|
2,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
Leases Including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Portion
|
|
|
71
|
|
|
86
|
|
|
147
|
|
|
12
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
dividend
|
|
|
--
|
|
|
--
|
|
|
441
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
28,336
|
|
|
13,080
|
|
|
13,633
|
|
|
11,110
|
|
|
8,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Deficit
|
|
|
(2,004
|
)
|
|
(3,594
|
)
|
|
(6,347
|
)
|
|
(9,376
|
)
|
|
(10,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
$
|
36,286
|
|
$
|
24,627
|
|
$
|
21,000
|
|
$
|
11,306
|
|
$
|
9,948
|
|
1 In
2005,
the Company completed three acquisitions (see note 5 to the Consolidated
Financial Statements).
2 The
Company’s tax provision has been reduced as a result of a $1,014,000 reduction
in its deferred tax asset valuation allowance
3 The
Company’s tax provision has been reduced as a result of available net operating
loss carry forwards. In addition, a $900,000 tax benefit was recognized, as
a
result of a further reduction in its deferred tax asset valuation
allowance.
4 The
Company’s tax provision has been reduced as a result of available net operating
loss carry forwards. In addition, a $400,000 tax benefit was recognized, as
a
result of a further reduction in its deferred tax asset valuation
allowance.
Item
7.
|
|
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 -
NY
|
|
§
|
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 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. The Netsmart -
Ohio
operations are included commencing October 1, 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
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 and recognition of a probable additional payment,
was $739,238 which consisted of cash of $252,917, which was paid out of existing
working capital including legal fees of $18,632, 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 probable additional payment of $250,000. The
purchase agreement provides for the probable additional payment of up to
$250,000 if certain revenue targets are met in year one. Based upon the
attainment of certain revenue targets as of December 31, 2005 we recognized
the
full $250,000 of this additional payment at December 31, 2005. We 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. As of December 31,
2005, these revenue targets have not been met and consequently, no additional
compensation expense has been recognized.
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.
On
September 28, 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: $12,994,758 in cash, 435,735 shares
of
our common stock (valued at $4,915,091), acquisition costs of $864,083, plus
additional cash consideration currently estimated at $792,024 as required by
the
“working capital adjustment”. We have accrued $792,024 as the “working capital
adjustment” which was calculated in accordance with the merger agreement. This
calculation is subject to adjustment and is currently being disputed by the
company on the basis of the possibility of certain unrecorded liabilities at
the
acquisition date.
In
addition, we booked a deferred tax liability in the amount of $3,843,000
relating to the non-deductible nature of certain acquired intangible assets,
which liability will be amortized in future periods.
Our
results of operations are subject to various risks and uncertainties, including
those described in Item 1A, Risk Factors, above and the market risks described
in Item 7A, Quantitative and Qualitative Disclosures about Market Risks,
below.
Years
Ended December 31, 2005 and 2004
Results
of Operations
Our
total
revenue for 2005 was $37,978,000, an increase of $8,973,000, or 31%, from our
revenue for 2004 which was $29,005,000. Revenue from the Netsmart - Ohio
acquisition accounted for $5,219,000 of the increase in revenue from 2005 to
2004. This revenue was for the period October 1, 2005 through December 31,
2005.
Revenue
from contracts with state and local government agencies represented 44% of
revenue in 2005 and 49% of revenue in 2004. 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 24% and 34% of consolidated revenue
for
2005 and 2004, 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 46% of our
consolidated revenue for 2005 compared to 42% of consolidated revenue for 2004.
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. 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 2005 was
$28,425,000, an increase of $3,204,000, or 13%, from our revenue for 2004,
which
was $25,221,000. 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 is 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 revenue was
turnkey systems labor revenue, which increased $243,000 or 3% to $9,845,000
in
2005 from $9,602,000 in 2004. 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 $208,000
in
2005 as compared to 2004. Revenue from third party hardware and software
increased 28% to $5,544,000 in 2005, from $4,335,000 in 2004. 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 2005, 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 $2,210,000 in 2005,
from $2,066,000 in 2004. 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 2005, approximately
one-third of the increase in license revenue was the result of increased user
license sales to existing customers. Maintenance revenue increased 18% to
$9,784,000 in 2005 from $8,290,000 in 2004. Revenue from the AMS acquisition
accounted for approximately one-half 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 contracts
increased 12% to $1,042,000 in 2005 from $928,000 in 2004. Small turnkey
contract sales relate to turnkey contracts that are less than $50,000 and are
usually completed within one to six months. On June 20, 2005, we acquired AMS.
AMS typically has the type of contracts included in the small turnkey revenue;
sales of AMS products and services totaled $216,000 in 2005.
Gross
profit increased 17% to $13,836,000 in 2005 from $11,849,000 in 2004. Our gross
margin percentage increased to 49% in 2005 from 47% in 2004. Our gross margin
increased as a result of improved efficiency from our maintenance division
as
well as an increase in our license revenue.
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 are included commencing 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 October 1 through December 31, 2005 was $5,219,000 and consisted of the
following components; Maintenance revenue of $3,533,000, third party hardware
and software revenue of $654,000, turnkey systems labor revenue of $802,000
and
license revenue of $230,000.
Gross
profit for 2005 was $2,704,000 and our gross margin percentage was 52%.
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 $1,795,000 in 2005 from $2,058,000 in 2004,
representing a decrease of $263,000, or 13%. This decrease was the result of
two
customers discontinuing the use of our services.
Gross
profit decreased 25% to $908,000 in 2005 from $1,209,000 in 2004. Our gross
margin percentage decreased to 51% in 2005 from 59% in 2004. This decrease
was
the result of the decrease in revenue, as well as an increase in costs of
approximately $38,000. The increase in costs was substantially the result of
an
increase in communications costs of $29,000, depreciation of $20,000 and
salaries of $7,000, which was partially offset by a decrease in support overhead
of approximately $18,000.
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 $2,538,000 in 2005 from $1,725,000 in 2004, representing
an
increase of $813,000 or 47%. This increase is the result of additional users,
including one new customer of our Avatar suite of products, the inclusion of
our
Netsmart University revenue for the period April 28, 2005 through December
31,
2005, as well as increases in our CareNet and InfoScriber revenue.
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 $235,000 for 2005.
Gross
profit for 2005 was $927,000 and for 2004 was $799,000. The gross margin
percentage was 37% in 2005 and 46% in 2004. Although revenue increased, the
gross profit and gross margin percentage did not increase proportionally due
to
the increased costs associated with the ContinuedLearning operations which
amounted to $494,000 in 2005. 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 $11,272,000 in 2005, reflecting an
increase of $3,978,000, or 55%, from $7,294,000 in 2004. Approximately
$1,571,000 or 39% of this increase was related to the selling, general and
administrative costs associated with Netsmart - Ohio. Theses costs included
such
categories as salary and fringe benefits of $720,000, consulting costs of
$199,000 and rent of $170,000. Approximately $641,000 or 16% of this increase
was related to an increase in bad debts, which included an amount of $340,000
related to one customer who filed for bankruptcy. The remaining increases were
in: sales and marketing salaries and fringe benefits, which increased by
$503,000; sales and marketing consulting costs, which increased by $282,000;
other consulting which increased by $215,000, of which $86,000 related to
Sarbanes Oxley compliance efforts and $79,000 related to strategic planning
efforts; sales and marketing conference costs which increased by $151,000;
general administrative salaries and fringe benefits, which increased by $187,000
and $558,000 which related to increased amortization related to the
ContinuedLearning, Netsmart - Ohio and AMS acquisitions. The cost increases
were
partially offset by reductions in: depreciation, which decreased by $133,000;
and provision for bonuses, which decreased by $142,000.
We
incurred research, development and maintenance expenses of $4,547,000 in 2005,
an increase of 30% from $3,498,000 in 2004. Approximately $853,000 or 81% of
this increase was related to the Netsmart - Ohio operations after the
acquisition. 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 the remaining increase in our research, development
and maintenance expenses. We also continue to invest 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 $119,000 in 2005, a decrease of $10,000, or 8%, from
the
$129,000 in 2004. 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 2005. 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 decrease in interest expense was partially
offset by an increase in interest expense relating to the increased borrowings
under the term loan.
Interest
income was $311,000 in 2005, an increase of $185,000, or 147%, from $126,000
in
2004. This increase is the result of maintaining higher cash balances during
2005, 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 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 $5.3 million at December
31, 2005. In 2005, we recorded a current income tax expense of $324,000, 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 $835,000. In 2004, we recorded a current income tax expense
of
$187,000, which related to various state and local taxes, as well as a provision
for the Federal alternative minimum tax. The current provision was reduced
by
$952,000 as a result of the use of the available net operating loss carry
forward. During 2004, the deferred tax valuation allowance of $1,731,000 was
reversed, $717,000 of which was recorded as an addition to additional paid
in
capital and $1,014,000 as a deferred tax benefit. The deferred tax provision
was
$1,136,000 based on utilization of net operating loss carry forwards offset
by a
reduction in the deferred tax asset valuation allowance of
$1,014,000.
As
a
result of the foregoing factors, in 2005 we had net income of $1,590,000, or
$.28 per share (basic) and $.27 per share (diluted). For 2004, we had net income
of $2,753,000, or $.52 per share (basic) and $.50 per share
(diluted).
Years
Ended December 31, 2004 and 2003
Results
of Operations
Fixed
price software development contracts, third party hardware and software
components and licenses accounted for 34% and 44% of consolidated revenue for
the years ended December 31, 2004 and 2003, respectively. This decrease was
the
result of more labor revenue being generated on an as incurred basis, as well
as
a change in the overall mix of our revenue components. Our recurring revenue
components, which include our maintenance
contract services and our Data Center and ASP services, accounted for 42% of
our
consolidated revenue for the year ended December 31, 2004 compared to 35% of
consolidated revenue for the year ended December 31, 2003. 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. 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.
Our
total
revenue for 2004 was $29,005,000, an increase of $1,830,000, or 7%, from our
revenue for 2003, which was $27,175,000.
Revenue
from contracts with state and local government agencies represented 49% of
revenue in 2004 and 57% of revenue in 2003. This decrease is the result of
the
substantial completion towards the end of 2003 of one state contract and two
county contracts.
Software
and Related Systems and Services
Our
Software and Related Systems and Services revenue for 2004 was $25,221,000,
an
increase of $611,000, or 2%, from our revenue for 2003, which was $24,610,000.
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.
Within
this segments are large turnkey and small turnkey components. The large turnkey
components consist mostly of our Avatar suite of products. When we are 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
dependant 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 were mostly related
to our Avatar methadone related products.
The
largest component of revenue was turnkey systems labor revenue, which increased
to $9,602,000 in 2004 from $9,548,000 in 2003, reflecting a 1% increase. Turnkey
systems labor revenue refers to labor associated with turnkey installations
and
includes categories such as training, installation, project management and
development. Revenue from third party hardware and software decreased to
$4,335,000 in 2004, from $4,444,000 in 2003, which represents a decrease of
2%.
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 human services revenue.
During 2004, we did not sell and perform on as many contracts containing such
third party items. License revenue decreased to $2,066,000 in 2004, from
$2,781,000 in 2003, reflecting a decrease of 26%. 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. We
did
not sell and perform on as many contracts containing license revenue in 2004
as
we did in 2003. In addition, in order to encourage our existing customers to
upgrade from our old product to our new Avatar product, we discounted the
license fees to our existing clients. Maintenance revenue increased to
$8,290,000 in 2004 from $7,069,000 in 2003, reflecting an increase of 17%.
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 contracts increased to $928,000 in 2004 from $768,000 in 2003,
reflecting an increase of 21%. This increase is the result of the introduction
of our new Avatar Addictions Management product into the market place during
the
latter part of 2003. Small turnkey sales relate to turnkey contracts that are
less than $50,000 and are usually completed within one to six
months.
Gross
profit decreased to $11,849,000 in 2004 from $11,953,000 in 2003, reflecting
a
decrease of 1%. Our gross margin percentage was 47% in 2004 compared to 49%
in
2003. Our gross margin decreased as a result of the decrease in license revenue.
This decrease was partially offset by improved labor efficiency on our fixed
price contracts.
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 fees by an amount
that approximates the New York urban consumer price index increase. The data
center revenue increased to $2,058,000 in 2004 from $1,973,000 in 2003,
representing an increase of $85,000, or 4%. This increase was due to an increase
in the client base as well as increases in pricing.
Gross
profit increased to $1,209,000 in 2004 from $939,000 in 2003, reflecting an
increase of 29%. Our gross margin percentage increased to 59% in 2004 from
48%
in the 2003. This increase was the result of the increase in revenue as well
as
a reduction in costs of approximately $185,000. The major areas of cost
reductions were in the area of payroll and fringe benefits in the amount of
$21,000, support overhead in the amount of $65,000, facility costs in the amount
of $22,000, supplies in the amount of $22,000, depreciation in the amount of
$15,000, and other costs in the amount of $23,000.
Application
Service Provider Services (“ASP”)
ASP
Services involves the offering of our Avatar suite of products, our CareNet
products and our InfoScriber products on a virtual private network or internet
delivery approach, thereby allowing our customers to rapidly deploy products
and
pay on a monthly service basis, thus eliminating capital intensive system
requirements. This is the first year that we have accounted for ASP Services
as
a segment. Prior to our acquisition of CareNet on June 25, 2003, our ASP
operations were immaterial.
Revenue
for 2004 was $1,725,000 as compared to $591,000 in 2003.
Gross
profit for 2004 was $799,000 and our gross margin percentage was 46%. The gross
profit for 2003 was $214,000 and our gross margin percentage was 36%. Because
the ASP operations were in their infancy during the 2003, any comparisons
between the periods would not be meaningful.
Operating
Expenses
Selling,
general and administrative expenses were $7,294,000 in 2004, reflecting a
decrease of $675,000, or 8%, from $7,969,000 in 2003. The decreases were in:
bad
debt expense, which decreased by $1,250,000; provision for bonuses which
decreased by $172,000; and general and administrative salaries and related
fringe expense, which decreased by $101,000. These cost decreases were partially
offset by increases in: depreciation expense which increased by $351,000;
amortization of the CareNet acquisition costs, which increased by $139,000;
consulting costs which increased by $124,000; commissions, which increased
by
$87,000; sales salaries and related fringe benefits expense, which increased
by
$54,000; advertising and promotion, which increased by $47,000; accounting
costs, which increased by $40,000; and sales and marketing travel and living
costs, which increased by $41,000.
We
incurred research, development and maintenance expenses of $3,498,000 in 2004,
an increase of 26% from $2,770,000 in 2003. During 2004, we invested in
infrastructure to improve the way we support our customers and products. These
changes related to redirecting personnel that were previously employed
performing actual customer program “bug” fixing procedures, which would be
included in costs of goods sold, to our research, development and maintenance
area. These personnel now perform 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 addresses Federal reporting requirements, as well as continued 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 $129,000 in 2004, a decrease of $71,000, or 35%, from
$200,000 in 2003. This decrease is the result of the completion of the
amortization of the financing costs associated with our 2001 term loan
agreement, which was amortized over a three year period, as well as reduced
borrowing during 2004 under that term loan. This decrease was partially offset
by an increase in borrowing related to the promissory note issued to Shuttle
Data Systems Corp. in connection with our acquisition of CareNet.
Interest
income was $126,000 in 2004, an increase of $52,000, or 70%, from the $74,000
in
2003. Interest income is generated from short-term investments made with a
substantial portion of the proceeds received from the 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 $4.0 million at December
31, 2004. In the 2004 period, we recorded a current income tax expense of
$187,000, which related to various state and local taxes, as well as a provision
for the Federal alternative minimum tax. The current provision was reduced
by
$952,000 as a result of a use of the available net operating loss carry forward.
The income tax provision was increased by a net deferred tax provision of
$122,000. The deferred tax asset valuation allowance of $1,731,000 was reversed,
$717,000 of which was recorded as an addition to additional paid in capital
and
$1,014,000 was recorded as a deferred tax benefit, during 2004. The deferred
tax
provision was $1,136,000 based on utilization of net operating loss carry
forwards offset by the reduction in the deferred tax asset valuation allowance
of $1,014,000. In 2003, we recorded a current income tax expense of $113,000,
which related to various state and local taxes, as well as a provision for
the
Federal alternative minimum tax. The current income tax provision was reduced
by
$942,000 as a result of the use of available net operating losses. The deferred
tax asset and the valuation allowance were reduced by the same amount. We also
re-evaluated the deferred tax asset valuation allowance and further reduced
the
allowance by $900,000 to zero, which was recorded as a tax benefit.
As
a
result of the foregoing factors, in the 2004 period we had net income of
$2,753,000, or $.52 per share (basic) and $.50 per share (diluted). For 2003,
we
had net income of $3,029,000, or $.69 per share (basic) and $.64 per share
(diluted).
Liquidity
and Capital Resources
We
had
working capital of approximately $4.0 million at December 31, 2005 as compared
to working capital of approximately $18.2 million at December 31, 2004. This
decrease of approximately $14.2 million in working capital was the result of
the
following: $15,890,000 paid for the acquisitions of CMHC, ContinuedLearning
and
AMS, $6,032,000 of negative working capital acquired in the acquisition of
CMHC,
$1,656,000 of other costs, paid in connection with the CMHC acquisition,
$1,264,000 in current liabilities assumed and accrued with respect to the
acquisitions of ContinuedLearning and AMS, $458,000 paid for the acquisition
of
equipment, and $42,000 related to the capitalization of software . These
decreases were partially offset by our net income, after adding back
depreciation and amortization, which totaled $4,041,000, an increase in the
current portion of the deferred tax asset in the amount of $484,000, $854,000
in
net proceeds from the exercise of stock options, $4,110,000 in net proceeds
from
the completion of a private placement and $2,000,000 in net proceeds after
classifying the current portion of the term loan agreement entered into in
October 2005. The remaining decrease in working capital of $320,000 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
Credit Agreement at December 31, 2005 is $2,417,000.
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. The Company
was
not in compliance with one of the covenants at December 31, 2005. As a result,
the Company and the Bank entered into a First Amendment and Waiver to the term
loan, pursuant to which the Bank agreed to amend the terms of the Tangible
Net
Worth covenant contained in the Loan Agreement and waive any non-compliance
by
the Company. As a result, as of December 31, 2005, the Company was in compliance
with the financial covenants of the Credit Agreement.
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 $4.1 million.
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 December 31, 2005
is
$250,000.
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 December 31, 2005, 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 December
31, 2005 is $83,000.
In
the
2005, we capitalized software development costs of $42,000 relating to one
of
our AVATAR products.
In
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-K annual 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 December 31, 2005, 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
|
|
$
|
2,750,036
|
|
$
|
833,369
|
|
$
|
1,000,000
|
|
$
|
916,667
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Lease Obligations2
|
|
|
70,837
|
|
|
61,316
|
|
|
9,521
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases3
|
|
|
8,422,459
|
|
|
1,480,565
|
|
|
2,277,794
|
|
|
1,932,100
|
|
|
2,732,000
|
|
Other
Long-Term Liabilities3
|
|
|
1,693,738
|
|
|
741,625
|
|
|
930,863
|
|
|
21,250
|
|
|
--
|
|
Total
Contractual and Other Long-Term
Obligations
|
|
$
|
12,937,070
|
|
$
|
3,116,875
|
|
$
|
4,218,178
|
|
$
|
2,870,017
|
|
$
|
2,732,000
|
|
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
Liquidated
Damages of Registration Rights Agreement
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. As of December 31, 2005 the fair value of PCS
recorded as deferred revenue is $5.3 million. If we did not intend to perform
research and development for unspecified software upgrades, the estimated value
of the PCS would have been $4.0 million. 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.
Liquidated
Damages of Registration Rights Agreement -
We are
required to deliver registered shares in connection with our private placement
of shares and warrants in October 2005 or, in the alternative, pay liquidated
damages. In accordance with View A of EITF 05-04 the liquidating damages
penalties related to our obligation to register the shares and the shares
underlying warrants are combined with our right to deliver unregistered shares.
Thus these instruments have two settlement alternatives: (a) the delivery of
registered shares in exchange for the exercise price or (b) the delivery of
unregistered shares, plus the liquidated damages cash penalty required to be
paid under the registration rights provisions of the subscription agreement,
in
exchange for the exercise price.
The
Company has determined that the delivery of unregistered shares is considered
an
economic alternative, and the combined financial instrument should be classified
as equity. In this regard we have also determined that SFAS 5 is the appropriate
accounting for the registration rights agreements whereby any potential
penalties will be recorded in earnings when and if incurred.
Item
7A. |
Quantitative
and Qualitative Disclosures About Market
Risk
|
We
are
exposed to market risk related to changes in interest rates. Most of our debt
is
at fixed rates of interest after completing interest rate swap agreements,
which
effectively converted our variable rate debt into fixed rate debt at 7.95%
and
7.1% per annum. Therefore, if the LIBOR rate plus 2.5% increases above 7.95%
or
7.1% per annum, it may have a positive effect on our comprehensive
income.
Most
of
our invested cash and cash equivalents, which are invested in money market
accounts and commercial paper, are at variable rates of interest. If market
interest rates decrease by 10 percent from levels at December 31, 2005, the
effect on our net income would be a decrease of approximately $33,000 per
year.
Netsmart
Technologies, Inc.
Quarterly
Summary
Unaudited
The
following table sets forth certain unaudited quarterly results of operations
for
each of the quarters in the years ended December 31, 2005 and 2004. All
quarterly information was obtained from unaudited financial statements not
otherwise contained in this report. We believe that all necessary adjustments
have been made to present fairly the quarterly information when read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this report. The operating results for any quarter are
not
necessarily indicative of the results for any future period.
|
|
1st
Quarter
|
|
2nd
Quarter
|
|
3rd
Quarter
|
|
4th
Quarter
|
|
2005(a)
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
7,429
|
|
$
|
7,759
|
|
$
|
8,517
|
|
$
|
14,273
|
|
Gross
profit
|
|
|
3,600
|
|
|
3,862
|
|
|
3,896
|
|
|
7,018
|
|
Net
income
|
|
|
363
|
|
|
449
|
|
|
379
|
|
|
399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings - Basic:
|
|
$
|
.07
|
|
$
|
.08
|
|
$
|
.07
|
|
$
|
.06
|
|
Net
earnings - Diluted:
|
|
$
|
.07
|
|
$
|
.08
|
|
$
|
.07
|
|
$
|
.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
(b) (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
6,823
|
|
$
|
7,189
|
|
$
|
7,421
|
|
$
|
7,572
|
|
Gross
profit
|
|
|
3,163
|
|
|
3,435
|
|
|
3,565
|
|
|
3,694
|
|
Net
income
|
|
|
325
|
|
|
493
|
|
|
633
|
|
|
1,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings - Basic:
|
|
$
|
.06
|
|
$
|
.09
|
|
$
|
.12
|
|
$
|
.24
|
|
Net
earnings - Diluted:
|
|
$
|
.06
|
|
$
|
.09
|
|
$
|
.11
|
|
$
|
.24
|
|
In
thousands, except per share data amounts
(a)
During 2005, the Company made three acquisitions. See note 5 to the Consolidated
Financial Statements.
(b)
The
Company utilized an effective income tax rate of approximately 28% through
the
third quarter of 2004. In the fourth quarter of 2004, the Company determined
that the effective income tax rate should approximate 10%. Accordingly, the
change in estimate recorded in the fourth quarter was to reduce the income
tax
provision by approximately $360,000 related to the first three quarters of
2004.
(c)
During the fourth quarter the Company changed its method of calculating overhead
for its research, development and maintenance costs, from using a standard
overhead rate factor to a specific costs method. As a result, $1,248 of costs
have been reclassified from research, development and maintenance costs into
costs of goods sold. The effect of this reclassification on gross profit for
each quarter during 2004 has been reflected above.
Item
8. |
Financial
Statements and Supplementary
Data.
|
The
financial statements and supplementary data begin on page F-1 of this Form
10-K.
Item
9. |
Changes
and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
None
Item
9A. |
Controls
and Procedures.
|
Evaluation
and Disclosure Controls and Procedures
As
of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the
design and operation of our disclosure controls and procedures (as defined
in
Exchange Act Rule 13a-15(e) and 15d-15(e)). 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 as of the
end
of the period covered by this Annual Report on Form 10-K our disclosure controls
and procedures were effective.
Changes
in Internal Controls
There
were no changes made in our internal controls over financial reporting that
occurred during our most recently completed 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 the first quarter of 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 control
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 such controls and procedures are
effective at the “reasonable assurance” level.
Item
9B. |
Other
Information.
|
None
Part
III
Item
10. |
Directors
and Executive Officers of the
Registrant.
|
Our
directors and executive officers are as follows:
Name
|
Age
|
Position
|
|
|
|
James
L. Conway
|
58
|
Chief
executive officer and director
|
Anthony
F. Grisanti
|
56
|
Chief
financial officer, treasurer and secretary
|
Gerald
O. Koop
|
67
|
Director
|
John
F. Phillips
|
67
|
Director
|
Joseph
G. Sicinski1
& 2
|
73
|
Director
|
Francis
J. Calcagno1,
2 & 3
|
56
|
Director
|
John
S.T. Gallagher1,
2 & 3
|
74
|
Director
|
Yacov
Shamash3
|
56
|
Director
|
1
|
Member
of the compensation committee.
|
2 |
Member
of the audit committee.
|
3 |
Member
of the nominating and governance
committee.
|
Director
and Executive Officer Biographies
Mr.
James
L. Conway has been our Chief Executive Officer since April 1998, a director
since January 1996 and was President from January 1996 until January 2001.
From
1993 until April 1998, he was president of a Long Island-based manufacturer
of
specialty vending equipment for postal, telecommunication and other industries.
He was previously vice president, treasurer and director of ITT Credit
Corporation. Mr. Conway was recently elected to the board of LISTnet, which
is
an organization with the objective of promoting Long Island as one of the
national centers of excellence for software and technology solutions. He also
serves and is a member of the CEO Roundtable for Long Island.
Mr.
Anthony F. Grisanti has been our Treasurer since June 1994, Secretary since
February 1995 and Chief Financial Officer since January 1996.
Mr.
Gerald O. Koop has been one of our directors since June 1998 and was President
of Netsmart from January 2001 until his resignation on December 31, 2005. Mr.
Koop continues to serve as an employee of Netsmart but is no longer an executive
officer.
Mr.
John
F. Phillips has been one of our directors since June 1994. Mr. Phillips served
as a Vice President of Netsmart and as President of Creative Socio-Medics from
June 1994 until his retirement in April 2004. Mr. Phillips continues to serve
as
a consultant to Netsmart pursuant to the terms of the Netsmart Executive
Retirement, Non Competition and Consulting Plan.
Mr.
Joseph G. Sicinski has been one of our directors since June 1998. He was
president and a director of the Trans Global Services, Inc., a technical
staffing company, from September 1992 until April 1998. From April 1998 until
September 2002 he was also chief executive officer of Trans Global. In September
2003 he retired from Trans Global and co-founded Novus Management Services,
Inc., a company providing services related to the insurance industry where
he is
also a board member. In February 2004 he co-founded BDS Strategic Solutions,
Inc., a company providing permanent and temporary staffing solution services
and
programs related to human resource issues. He is chairman of the board of
directors of BDS.
Mr.
Francis J. Calcagno has been one of our directors since September 2001. He
is a
senior managing director of Dominick & Dominick LLC, a company engaged in
investment banking, a position he has held since 1997. From 1993 until 1997,
he
was a managing director of Deloitte and Touche, LLP.
Mr.
John
S.T. Gallagher has been one of our directors since March 2002. He has been
chief
executive officer of SUNY Stony Brook since November 2005. Prior to that time,
he served as deputy county executive for health and human services in Nassau
County, New York from February 2002. He has been a senior executive officer
of
North Shore University Hospital and North Shore - Long Island Jewish Health
System since 1982, having served as executive vice president of North Shore
from
1982 until 1992, president from 1992 until 1997 and chief executive officer
of
the combined hospital system from 1997 until January 2002. In January 2002,
he
became co-chairman of the North Shore - Long Island Jewish Heath System
Foundation. Mr. Gallagher is also a director of Perot Systems Corporation,
a
worldwide provider of information technology services, since 2000 and of
American Medical Alert Corporation, a healthcare service provider, since
2005.
Dr.
Yacov
Shamash is Vice President for Economic Development and the Dean of the College
of Engineering and Applied Sciences at Stony Brook University. Prior to joining
SUNY Stony Brook in 1992, Dr. Shamash served as the Director of the School
of
Electrical Engineering and Computer Science at Washington State University.
He
has also held faculty positions at Florida Atlantic University, the University
of Pennsylvania and Tel Aviv University. He received his undergraduate and
graduate degrees from Imperial College of Science and Technology in London,
England. Dr. Shamash has been a member of the Board of Directors of KeyTronic
Corporation, a contract manufacturer, since 1989 and of American Medical Alert
Corporation, a healthcare service provider, since 2001.
Directors
are elected for a term of one year.
None
of
our officers and directors are related.
Our
certificate of incorporation includes certain provisions, permitted under
Delaware law, which provide that a director shall not be personally liable
to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director except for liability (i) for any breach of the director’s duty of
loyalty to us or our stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
for
any transaction from which the director derived an improper personal benefit,
or
(iv) for certain conduct prohibited by law. The Certificate of Incorporation
also contains broad indemnification provisions. These provisions do not affect
the liability of any director under federal or applicable state securities
laws.
Board
Committees
Our
board
of directors has three committees - the audit committee, the compensation
committee and the nominating and governance committee. All of the members of
each committee are “independent” as defined under Nasdaq rules.
The
responsibilities of the audit committee include overseeing our financial
reporting process, reporting the results of its activities to the board,
retaining and ensuring the independence of our independent registered public
accountants, approving services to be provided by our independent registered
public accountants, reviewing our periodic filings with the independent
registered public accountants prior to filing, and reviewing and responding
to
any matters raised by the Independent Registered Public Accountants in their
management letter and SAS 61 Communications. The audit committee consists of
Mr.
John S.T. Gallagher, who is chairman of the committee and Messrs. Francis
Calcagno and Joseph G. Sicinski. The board of directors has determined that
each
of Messrs. Gallagher and Calcagno, qualifies as an “Audit Committee financial
expert,” as defined by Securities and Exchange Commission rules, based in his
education, experience and background. A copy of the Audit Committee charter
can
be found on our website at www.ntst.com.
The
compensation committee serves as the stock option committee for our stock option
plans and the employee stock purchase plan, and it reviews and approves any
employment agreements with management and changes in compensation for our
executive officers. The members of the compensation committee are Mr. Gallagher,
who is chairman of the committee and Messrs. Calcagno and Sicinski. A copy
of
the Compensation Committee charter can be found on our website at www.ntst.com.
The
nominating and governance committee is primarily responsible for reviewing
our
corporate governance principles and independence standards: overseeing the
annual evaluation of our board and its committees; discharging the board’s
responsibilities related to compensation of directors; identifying and
evaluating individuals for board and committee membership and chairs; making
recommendations to the board concerning the selection of director nominees
and
making recommendations as to the size and composition of the board and its
committees. It will consider director nominee recommendations by stockholders
provided that the names of such nominees, accompanied by relevant biographical
information are properly submitted to our Secretary in accordance with the
stockholder nomination procedures adopted by the Board of Directors, as
described below. The members of the Nominating and Governance Committee are
Dr.
Shamash, who is the chairman of the committee and Messrs. Gallagher and
Calcagno. A copy of the Nominating and Governance Committee charter can be
found
on our website at www.ntst.com.
Excluding
actions by unanimous written consent, during 2005, the board of directors held
thirteen meetings, the compensation committee held three meetings, the
nominating and governance committee held one meeting and the audit committee
held five meetings. The independent directors also held one
meeting.
The
audit
committee met with our independent registered public accountants and chief
financial officer prior to filing of this Form 10-K annual report to review
the
2005 audited financial statements with the independent registered public
accountants. During 2005, all of our directors attended at least 75% of the
aggregate of meetings of the board and the meetings of any committee of which
they are members.
Directors’
Fees
We
pay an
annual fee of $20,000 to each of Messrs. Calcagno, Sicinski, Shamash and
Gallagher and we pay an additional $12,500 per annum to Mr. Gallagher in respect
of his services as chairman of our Audit Committee and Compensation
Committee.
Stockholder
Nomination Procedures
Any
stockholder who wants to nominate a candidate for election to the Board must
deliver timely notice to our Secretary at our principal executive offices.
In
order to be timely, the notice must be delivered
|
·
|
in
the case of an annual meeting, not less than 120 days prior to the
anniver-sary date of the immediately preceding annual meeting of
stockholders, although if we did not hold an annual meeting or the
annual
meeting is called for a date that is not within 30 days of the anniversary
date of the prior year’s annual meeting, the notice must be received a
reasonable time before we begin to print and mail our proxy materials;
and
|
|
·
|
in
the case of a special meeting of stockholders called for the purpose
of
electing directors, the notice must be received a reasonable time
before
we begin to print and mail our proxy
materials.
|
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our executive officers,
directors and persons who own more than ten percent of a registered class of
our
equity securities ("Reporting Persons") to file reports of ownership and changes
in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission
and
the Nasdaq Stock Exchange. These Reporting Persons are required by SEC
regulation to furnish us with copies of all Forms 3, 4 and 5 they file with
the
SEC and Nasdaq. Based solely upon our review of the copies of the forms we
have
received, and upon representations received from such Reporting Persons, we
believe that all Reporting Persons complied on a timely basis with all filing
requirements applicable to them with respect to transactions during fiscal
2005
except that each of Messrs. Gallagher, Sicinski, Calcagno and Shamash failed
to
timely file the requisite Form 4 reporting the grant of certain options pursuant
to the automatic grant provisions of our 2001 Long Term Incentive
Plan.
Code
of Ethics
We
have
adopted a Code of Ethics applicable to our principal executive officers,
principal financial officer, principal accounting officer and controller and
a
Code of Business Conduct applicable to all of our employees, each which is
posted on our website at www.ntst.com.
Our
Board of Directors has adopted a Code of Business Conduct applicable to the
Company’s officers and employees, and has also adopted a Code of Ethics for its
senior financial officers. These codes of ethics are posted on the Company’s
website at www.ntst.com in the Investor Relations section. Any amendment of
the
codes of ethics or waiver thereof applicable to any director or executive
officer of the Company, including the Chief Executive Officer or any senior
financial officer, will be disclosed on the Company’s website within four
business days of the date of such amendment or waiver. In the case of a waiver,
the nature of the waiver, the name of the person to whom the waiver was granted
and the date of the waiver will also be disclosed. A copy of the codes of ethics
may also be obtained without charge by writing to Mr. Anthony F. Grisanti,
Chief
Financial Officer, Netsmart Technologies, Inc, 3500 Sunrise Highway, Great
River, NY 11739.
Item
11. |
Executive
Compensation.
|
Set
forth
below is information with respect to compensation paid or accrued by us for
the
three years ended December 31, 2005, 2004 and 2003 to our chief executive
officer and to each of our other officers whose salary and bonus for 2005
exceeded $100,000.
Summary
Compensation
Table
|
|
Annual
Compensation
|
|
Long-Term
Compensation (Awards)
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Options,
SARs
(Number)
|
|
James
L. Conway, CEO
|
|
|
2005
2004
2003
|
|
$
|
313,390
218,698
207,814
|
|
$
|
75,000
175,000
188,000
|
|
|
100,000
42,500
49,500
|
|
Gerald
O. Koop, president(a) (b)
|
|
|
2005
2004
2003
|
|
|
201,938
194,665
189,880
|
|
|
91,932
174,078
206,539
|
|
|
25,000
40,000
49,500
|
|
Anthony
F. Grisanti, chief financial officer
|
|
|
2005
2004
2003
|
|
|
204,432
167,535
162,343
|
|
|
60,000
125,000
144,000
|
|
|
45,000
27,500
27,500
|
|
(a)
Mr.
Koop resigned as president on December 31, 2005.
(b)
The
bonuses for Mr. Koop include accrued commissions of $73,932 for 2005, $111,578
for 2004 and $135,539 for 2003. The 2005 commissions will be paid in
installments through 2006, the 2004 and 2003 commissions were paid in
installments through 2005 and 2004.
Employment
Agreements
In
April
2004, we entered into revised employment agreements with Messrs. James L. Conway
and Anthony F. Grisanti. The terms and conditions of the revised contracts
are
identical in all material respects to the previous contracts except that (i)
the
term of each individual’s contract was extended by one year, so that Messrs.
Conway and Grisanti’s contract will expire on December 31, 2006 and (ii) the
revised contracts do not provide for a five-year consulting period following
each individual’s respective term of employment during which such individual
would have been entitled to compensation of $75,000 per year. Messrs. Conway
and
Grisanti’s contracts also provide for an option to extend their contracts for
one additional year so that upon the exercise of such option, their contracts
would expire on December 31, 2007. We believe that these officers are vital
to
our business. Mr. Koop was party to a revised employment agreement that was
identical to the agreements with Messrs. Conway and Grisanti except as to the
expiration date, which was December 31, 2005.
The
agreements provide for annual increases associated with cost of living indexes
or 5%, whichever is greater. The agreements provide that the executives are
eligible to participate in a bonus pool to be determined annually by the board,
based on the executive’s performance. The agreements also provide each of these
officers with an automobile allowance, which is included under “Salary”, and
insurance benefits. In the event of the officer’s dismissal or resignation or a
material change in his duties or in the event of a termination of employment
by
the executive or by us as a result of a change of control, the officer may
receive severance payments of 36 months’ compensation.
Effective
April 1, 2004, we adopted an Executive Retirement, Non-Competition and
Consulting Plan which was subsequently amended August 5, 2004 effective April
1,
2004, pursuant to which, following their retirement, selected officers will
be
entitled to receive a minimum payment of approximately $85,000 per year for
a
period of six years, provided, that such officers (i) provide a minimum amount
of consulting days each month and (ii) agree to certain covenants not to
compete. The annual payments are subject to 10% increases up to a maximum of
$136,893 per year. Pursuant to the Executive Retirement, Non-Competition and
Consulting Plan, the selected officers are also entitled to receive health
benefits for life, provided that there are no breaches of the covenants not
to
compete. Each of Messrs. Conway and Grisanti are entitled to receive benefits
under the plan.
Mr.
Koop’s employment contract expired on December 31, 2005 and he resigned as
president on that date. Mr. Koop continues to serve as an employee but is no
longer an executive officer.
Compensation
Committee Interlocks and Insider Participation
During
fiscal 2005, our compensation committee consisted of Messrs. Calcagno, Gallagher
and Sicinski. None of them were our officers or employees during fiscal 2005
or
were previously an officer of ours nor did any of them have any relationship
with us that is required to be disclosed under this heading.
Option
Exercises and Outstanding Options
The
following table sets forth information concerning the grants of options made
during the year ended December 31, 2005.
|
|
Options
Grants in Last Fiscal Year
|
|
|
|
Potential
Realized Value at Assumed Annual Rates of Stock Price Appreciation
for
Option Term (3)
|
|
|
|
Number
of Securities Underlying Options Granted
|
|
%
of Total Options Granted to Employees in 2005 (1)
|
|
Exercise
or Base Price $/Sh (2)
|
|
Expiration
Date
|
|
5%
($)
|
|
10%
($)
|
|
|
|
Gerald
Koop
|
|
|
25,000
|
|
|
5.7
|
%
|
|
$
|
9.85
|
|
|
7/13/10
|
|
$
|
83,749
|
|
$
|
189,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
25,000
|
|
|
5.7
|
%
|
|
|
|
|
|
|
|
$
|
83,749
|
|
$
|
189,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yacov
Shamash
|
|
|
3,927
|
|
|
.9
|
%
|
|
$
|
9.85
|
|
|
7/13/10
|
|
$
|
13,155
|
|
$
|
29,845
|
|
Yacov
Shamash
|
|
|
2,073
|
|
|
.5
|
%
|
|
$
|
9.57
|
|
|
4/1/10
|
|
$
|
6,747
|
|
$
|
15,307
|
|
|
|
|
6,000
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
$
|
19,902
|
|
$
|
45,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony
Grisanti
|
|
|
45,000
|
|
|
10.3
|
%
|
|
$
|
9.85
|
|
|
7/13/10
|
|
$
|
150,747
|
|
$
|
341,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
45,000
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
$
|
150,747
|
|
$
|
341,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Conway
|
|
|
100,000
|
|
|
22.8
|
%
|
|
$
|
9.85
|
|
|
7/13/10
|
|
$
|
334,994
|
|
$
|
759,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
100,000
|
|
|
22.8
|
%
|
|
|
|
|
|
|
|
$
|
334,994
|
|
$
|
759,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Sicinski
|
|
|
3,927
|
|
|
.9
|
%
|
|
$
|
9.85
|
|
|
7/13/10
|
|
$
|
13,155
|
|
$
|
29,845
|
|
Joseph
Sicinski
|
|
|
2,073
|
|
|
.5
|
%
|
|
$
|
9.57
|
|
|
4/1/10
|
|
$
|
6,747
|
|
$
|
15,307
|
|
|
|
|
6,000
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
$
|
19,902
|
|
$
|
45,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frank
Calcagno
|
|
|
3,927
|
|
|
.9
|
%
|
|
$
|
9.85
|
|
|
7/13/10
|
|
$
|
13,155
|
|
$
|
29,845
|
|
Frank
Calcagno
|
|
|
2,073
|
|
|
.5
|
%
|
|
$
|
9.57
|
|
|
4/1/10
|
|
$
|
6,747
|
|
$
|
15,307
|
|
|
|
|
6,000
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
$
|
19,902
|
|
$
|
45,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jack
Gallagher
|
|
|
5,427
|
|
|
1.2
|
%
|
|
$
|
9.85
|
|
|
7/13/10
|
|
$
|
18,180
|
|
$
|
41,245
|
|
Jack
Gallagher
|
|
|
2,073
|
|
|
0.5
|
%
|
|
$
|
9.57
|
|
|
4/1/10
|
|
$
|
16,747
|
|
$
|
15,307
|
|
|
|
|
7,500
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
$
|
24,927
|
|
$
|
56,551
|
|
(1)
Based
on a total of 438,292 shares subject to options granted to employees under
Netsmart's options plans in 2005.
(2)
Under
all stock option plans, the option purchase price is equal to the fair market
value at the date of grant. Options were
granted to executives on April 1, 2005 and July 14, 2005.
(3)
In
accordance with the U.S. Securities and Exchange Commission rules, these
columns
show gains that could
accrue for the respective options, assuming that the market price of Netsmart
common stock appreciates from
the
date of grant over a period of 6 years at an annualized rate of 5% and 10%,
respectively. If the stock price
does not increase above the exercise price at the time of exercise, realized
value to the named executive from
these options would be zero.
The
following table sets forth information concerning the exercise of options during
the year ended December 31, 2005 and the year-end value of options held by
our
officers named in the Summary Compensation Table. No stock appreciation rights
have been granted.
Aggregate
Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Value
(Includes
options that were fully exercisable at year end or by 60 days after the
date
as
of
which the information is provided)
|
|
|
|
|
|
Number
of Securities Underlying Unexercised Options
At Fiscal Year-End
(#) |
|
Value
of Unexercised In-the-Money Options At
Fiscal
Year-End ($) |
|
Name
|
|
Shares
Acquired
Upon
Exercise
|
|
Value
Realized
($)
|
|
Exercisable/
Unexercisable
|
|
Exercisable/
Unexercisable
|
|
James
L. Conway
|
|
|
24,750
|
|
$
|
242,075
|
|
|
142,500/--
|
|
$
|
451,000/--
|
|
Gerald
O. Koop
|
|
|
24,750
|
|
$
|
242,075
|
|
|
65,000/--
|
|
$
|
233,800/--
|
|
Anthony
F. Grisanti
|
|
|
34,750
|
|
$
|
422,988
|
|
|
100,000/--
|
|
$
|
454,300/--
|
|
The
determination of “in the money” options at December 31, 2005, is based on the
closing price of the common stock on the Nasdaq SmallCap Market on December
31,
2005, which was $12.61 per share.
Information
relating to securities issued under equity compensation plans is disclosed
in
response to “Item 12. Security Ownership of Certain Benefical Owners and
Management and Related Stockholder Matters.”
Item
12. |
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
Set
forth
below is information as of February 23, 2006, as to each person known by us,
based on information provided to us by the persons named below and filings
with
the Securities and Exchange Commission, to own beneficially at least 5% of
our
common stock, each director, each officer listed in the Summary Compensation
Table and all officers and directors as a group.
Name
and Address
|
|
Shares
|
|
Percent
of Outstanding Common Stock
|
|
James
L. Conway
|
|
|
248,848
|
|
|
3.7
|
%
|
John
F. Phillips
|
|
|
109,825
|
|
|
1.7
|
%
|
Gerald
O. Koop
|
|
|
204,883
|
|
|
3.1
|
%
|
Anthony
F. Grisanti
|
|
|
204,815
|
|
|
3.1
|
%
|
Joseph
G. Sicinski
|
|
|
37,000
|
|
|
*
|
|
Francis
J. Calcagno
|
|
|
22,000
|
|
|
*
|
|
John
S.T. Gallagher
|
|
|
30,000
|
|
|
*
|
|
Yacov
Shamash
|
|
|
12,000
|
|
|
*
|
|
All
directors and officers as a group (eight individuals)
|
|
|
869,371
|
|
|
12.6
|
%
|
Eagle
Asset Management
880
Carillon Parkway
St.
Petersburg, FL
|
|
|
656,734
|
|
|
10.1
|
%
|
Dawson
Herman
354
Pequot Avenue
Southport,
CT
|
|
|
743,150
|
|
|
11.4
|
%
|
Daniel
Zeff
50
California St.
San
Francisco, CA.
|
|
|
330,870
|
|
|
5.1
|
%
|
FMR
Corp.
82
Devonshire St.
Boston,
MA
|
|
|
449,985
|
|
|
6.9
|
%
|
Mosaix
Ventures L.P.
1822
North Mohawk
Chicago,
IL
|
|
|
612,055
|
|
|
9.3
|
%
|
John
A. Paton
P.O.
Box 729
Dublin,
OH
|
|
|
347,192
|
|
|
5.3
|
%
|
* Less
than
1%.
Except
as
set forth in the following paragraphs, each person has the sole voting and
sole
investment power and direct beneficial ownership of the shares. Each person
is
deemed to beneficially own shares of common stock issuable upon exercise of
options or warrants which are exercisable on or within 60 days after the date
as
of which the information is provided.
Except
as
otherwise noted above, the address of each person listed is c/o Netsmart
Technologies, Inc., 3500 Sunrise Highway, Great River, NY 11739.
The
number of shares owned by our directors and officers shown in the table above
includes shares of common stock which are issuable upon exercise of options
that
are exercisable at February 2, 2006 or will become exercisable within 60 days
after that date. Set forth below is the number of shares issuable upon exercise
of those options for each of such directors and the officers.
Name
|
|
Number
|
|
John
F. Phillips
|
|
|
15,000
|
|
Yacov
Shamash
|
|
|
12,000
|
|
Gerald
O. Koop
|
|
|
65,000
|
|
James
L. Conway
|
|
|
142,500
|
|
Anthony
F. Grisanti
|
|
|
100,000
|
|
Joseph
G. Sicinski
|
|
|
12,000
|
|
Francis
J. Calcagno
|
|
|
22,000
|
|
John
S.T. Gallagher
|
|
|
20,000
|
|
All
officers and directors as a group
|
|
|
388,500
|
|
Equity
Compensation Plan Information
The
following table sets forth information relating to our compensation plans as
of
December 31, 2005.
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
915,467
|
|
$
|
8.561
|
|
|
10,503
|
|
Equity
compensation plans not approved by security holders
|
|
|
30,0001
|
|
$
|
14.77
|
|
|
--
|
|
Total
|
|
|
945,467
|
|
$
|
8.758
|
|
|
10,503
|
|
1
Options
to acquire 30,000 shares were granted to certain former employees of
Netsmart-Ohio to induce them to remain in our employ. The options have a
ten-year term, an exercise price of $14.77 per share and become exercisable
over
a period of three years.
Item
13. |
Certain
Relationships and Related
Transactions.
|
Effective
April 1, 2004, we adopted an Executive Retirement, Non-Competition and
Consulting Plan which was subsequently amended August 5, 2004 effective April
1,
2004, pursuant to which, following their retirement, selected officers will
be
entitled to receive a minimum payment of approximately $85,000 per year for
a
period of six years, provided, that such officers (i) provide a minimum amount
of consulting days each month and (ii) agree to certain covenants not to
compete. The annual payments are subject to 10% increases up to a maximum of
$136,893 per year. Pursuant to the Executive Retirement, Non-Competition and
Consulting Plan, the selected officers are also entitled to receive health
benefits for life, provided that there are no breaches of the covenants not
to
compete. Each of Messrs. Conway, and Grisanti are entitled to receive benefits
under the plan.
Mr.
Koop’s employment contract expired on December 31, 2005 and he retired as
President as of that date. He is still employed by Netsmart but not as an
executive officer. Upon his retirement as an employee, pursuant to the terms
of
our Executive Retirement, Non-Competition and Consulting Plan, Mr. Koop will
receive $85,000 per year for each of the six years following his retirement;
provided, that he complies with the non-competition covenants of the
plan.
Netsmart
was a party to an employment agreement with John Phillips, a former Vice
President who currently serves as a director of Netsmart. Mr. Phillip’s
employment contract expired on December 31, 2003 and he retired effective April
1, 2004. Pursuant to the terms of Netsmart’s Executive Retirement,
Non-Competition and Consulting Plan, Mr. Phillips will receive $85,000 per
year
for each of the next six years; provided that he complies with the
non-competition covenants of the plan.
As
a
result of the CMHC acquisition, we are leasing a building in which the
operations of CMHC are housed. This building is owned by a limited partnership
in which John Paton, former primary shareholder of CMHC, is sole owner. Paton
currently holds 5.3% of the outstanding shares of Netsmart. He currently has
a
fifteen month consulting agreement with Netsmart and does not hold an officer
position nor is he a director of the company. Netsmart does not guarantee any
payments on the mortgage that exists related to this property.
Item
14. |
Principal
Accounting Fees and
Services.
|
Audit
Fees
We
were
billed by Marcum & Kliegman LLP the aggregate amount of approximately
$337,000 in respect of fiscal 2005 and $151,000 in respect of fiscal 2004 for
fees for professional services rendered for the audit of our annual financial
statements and review of our financial statements included in our Forms
10-Q.
Audit-Related
Fees
We
were
billed by Marcum & Kliegman LLP in fiscal 2005 and 2004 in the amounts of
$99,200 and $13,241, respectively for assurance and related services such as
fees for our 401K audit and acquisition services, that were reasonably related
to the performance of the audit or review of our financial statements that
are
not reported under the preceding paragraph. Including,
services rendered in connection with acquisitions, reviews of registration
statements and issuances of related consents, audits of employees benefit plans
and advice regarding common stock purchase warrants and Sox 404 related
efforts.
Tax
Fees
We
were
billed by Marcum & Kliegman LLP the aggregate amount of $72,050 in respect
of fiscal 2005 and $25,600 in respect of fiscal 2004 for fees for services
consisting primarily of tax compliance, tax advice or tax planning in respect
of
the preparation of our federal and state tax returns.
All
Other Fees
Marcum
& Kliegman did not render any other services during fiscal 2005 and fiscal
2004 that are not described in the preceding paragraphs.
Auditor
Independence
Our
Audit
Committee has determined that the provision of services by Marcum & Kliegman
LLP other than for audit related services is compatible with maintaining the
independence of Marcum & Kliegman as our independent accountants.
Pre-Approval
Policies
Our
Audit
Committee has pre-approved the provision by Marcum & Kliegman LLP of audit
services and of non-prohibited audit related services for fees in an amount
not
to exceed an aggregate of $10,000 as well as $25,000 for acquisition due
diligence services. Our Audit Committee has not otherwise adopted any blanket
pre-approval policies.
Our
Audit
Committee approved all of the services provided by Marcum & Kliegman LLP and
described in the preceding paragraphs.
Part
IV
Item
15. |
Exhibits,
Financial Statements Schedules and Reports on Form
8-K.
|
Report
of
Marcum & Kliegman LLP
Consolidated
Balance Sheets as of December 31, 2004 and 2003
Consolidated
Statements of Income for the Years Ended December 31, 2004, 2003 and
2002
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2004,
2003
and
2002
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and
2002
Notes
to
Consolidated Financial Statements
2. |
Financial
Statement Schedules
|
None
|
3.1
|
Restated
Certificate of Incorporation, as amended (Filed as an exhibit to
the
Registrant’s registration statement on Form S-1, File No. 333-2550, which
was declared effective by the Commission on August 13, 1996, and
incorporated herein by reference.)
|
|
3.2
|
By-Laws
(Filed as an exhibit to the Registrant’s registration statement on Form
S-1, File No. 333-2550, which was declared effective by the Commission
on
August 13, 1996, and incorporated herein by
reference.)
|
|
10.1 |
Employment
Agreement dated April 1, 2004, between the Registrant and James L.
Conway
(Filed as an exhibit to the Registrant’s 10-Q dated May 5,
2004.)
|
|
10.2 |
Consulting
Agreement dated April 1, 2004, between the Registrant and John F.
Phillips
(Filed as an exhibit to the Registrant’s 10-Q dated May 5,
2004.)
|
|
10.3 |
Employment
Agreement dated April 1, 2004, between the Registrant and Gerald
O. Koop
(Filed as an exhibit to the Registrant’s 10-Q dated May 5,
2004.)
|
|
10.4 |
Employment
Agreement dated April 1, 2004, between the Registrant and Anthony
F.
Grisanti (Filed as an exhibit to the Registrant’s 10-Q dated May 5,
2004.)
|
|
10.6
|
1993
Long-Term Incentive Plan (Filed as an exhibit to the Registrant’s
registration statement on Form S-1, File No. 333-2550, which was
declared
effective by the Commission on August 13, 1996, and incorporated
herein by
reference.)
|
|
10.7
|
1998
Long-Term Incentive Plan (Filed as an appendix to the Registrant’s proxy
statement dated September 30, 1999, relating to its 1999 Annual Meeting
of
Stockholders and incorporated herein by
reference.)
|
|
10.8
|
1999
Long-Term Incentive Plan (Filed as an appendix to the Registrant’s proxy
statement dated November 9, 2000, relating to its 2000 Annual Meeting
of
Stockholders and incorporated herein by
reference.)
|
|
10.9 |
2001
Long-Term Incentive Plan - Amended (Filed as an exhibit to the
Registrant’s 8-K dated June 16,
2005.)
|
|
10.10
|
1999
Employee Stock Purchase Plan (Filed as an appendix to the Registrant’s
proxy statement dated November 9, 2000, relating to its 2000 Annual
Meeting of Stockholders and incorporated herein by
reference.)
|
|
10.11
|
Agreement
dated June 1, 2001, between the Registrant and Fleet Bank (Filed
as an
exhibit to the Registrant’s 10-K/A dated August 21,
2003.)
|
|
10.12 |
AIMS
Acquisition Agreement (Filed as an exhibit to the Registrant’s 8-K dated
May 10, 2001.)
|
|
10.13
|
Agreement
dated June 25, 2003, among Registrant, Creative Socio-Medics Corp.,
Shuttle Data Systems Corp., d/b/a/ ADIA Information Management Corp.
and
Steven Heintz, Jr. (Filed as an exhibit to the Registrant’s 8-K dated July
8, 2003.)
|
|
10.14
|
Lease
agreement dated as of December 22, 2003, between Registrant and Spacely
LLC. (Filed as an exhibit to the Registrant’s 10-K dated March 23,
2004.)
|
|
10.15
|
Amended
Executive Retirement, Non Competition and Consulting Plan. (Filed
as an
exhibit to the Registrant’s 10-Q dated August 9,
2004.)
|
|
10.16
|
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. (Filed as an exhibit to the Registrant’s Form 8-K dated
September 19, 2005.)
|
|
10.17
|
Revolving
Credit and Term Loan Agreement with Netsmart Technologies, Inc. and
the
Bank of America, N.A. (Filed as an exhibit to the Registrant’s Form 8-K
dated October 7, 2005.)
|
|
10.18
|
Asset
Purchase Agreement dated June 17, 2005 between Addiction Management
Systems, Inc. and Creative Socio-Medics Corp. (Filed as an exhibit
to the
Registrant’s Form 8-K dated June 21,
2005.)
|
|
10.20
|
Amendment
No. 1 to Employment Agreement dated June 16, 2005, between the Registrant
and James L. Conway. (Filed as an exhibit to the Registrant’s Form 8-K
dated June 16, 2005.)
|
|
10.21
|
Amendment
No. 1 to Employment Agreement dated June 16, 2005 between the Registrant
and Anthony F. Grisanti. (Filed as an exhibit to the Registrant’s Form 8-K
dated June 16, 2005.)
|
|
10.22
|
Asset
Purchase Agreement dated April 27, 2005 between ContinuedLearning
LLC and
Creative Socio-Medics Corp. (Filed as an exhibit to the Registrant’s Form
8-K dated April 27, 2005.)
|
|
10.23
|
Employment
Agreement dated April 27, 2005 between Netsmart Technologies, Inc.
and A.
Sheree Graves. (Filed as an exhibit to the Registrant’s Form 8-K dated
April 27, 2005.)
|
|
10.24
|
Letter
Agreement between Griffin Securities, Inc. and Netsmart Technologies,
Inc.
dated as of August 9, 2005. (Filed as an exhibit to the Registrant’s Form
S-3, File No. 333-129265.)
|
|
10.25
|
Letter
Agreement between Griffin Securities, Inc. and Netsmart Technologies,
Inc.
dated as of October 11, 2005. (Filed as an exhibit to the Registrant’s
Form S-3, File No. 333-129265.)
|
|
21.1 |
Subsidiaries
of the Registrant
|
|
23.1 |
Consent
of Marcum & Kliegman LLP
|
|
24 |
Powers
of Attorney (See Signature Page)
|
|
31.1 |
Certification
of Chief Executive Officer
|
|
31.2 |
Certification
of Chief Financial Officer
|
|
32 |
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|
NETSMART
TECHNOLOGIES, INC.
AND
SUBSIDIARIES
NETSMART
TECHNOLOGIES, INC. AND
SUBSIDIARIES
INDEX
|
Page
to Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-3
|
|
|
Consolidated
Balance Sheets
|
F-4
........ F-5
|
|
|
Consolidated
Statements of Income
|
F-6
........ F-7
|
|
|
Consolidated
Statements of Stockholders' Equity
|
F-8
|
|
|
Consolidated
Statements of Cash Flows
|
F-9
........ F-11
|
|
|
Notes
to Consolidated Financial Statements
|
F-12
.......F-41
|
.
. . . . . . . . . .
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Audit Committee of the
Board
of
Directors and Stockholders
of
Netsmart Technologies, Inc.
We
have
audited the accompanying consolidated balance sheets of Netsmart Technologies,
Inc. and Subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of income, stockholders’ equity and cash flows for each
of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Netsmart
Technologies, Inc. and Subsidiaries at December 31, 2005 and 2004, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2005, in conformity with generally
accepted accounting principles (United States).
/s/
Marcum & Kliegman llp
Marcum
& Kliegman LLP
Melville,
New York
February
10, 2006
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Assets:
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
11,445,525
|
|
$
|
16,411,735
|
|
Accounts
Receivable - Net
|
|
|
11,524,811
|
|
|
11,714,691
|
|
Costs
and Estimated Profits in Excess
|
|
|
|
|
|
|
|
of
Interim Billings
|
|
|
1,811,986
|
|
|
636,985
|
|
Deferred
taxes
|
|
|
1,594,863
|
|
|
1,111,000
|
|
Other
Current Assets
|
|
|
1,466,577
|
|
|
596,253
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
27,843,762
|
|
|
30,470,664
|
|
|
|
|
|
|
|
|
|
Property
and Equipment - Net
|
|
|
2,665,429
|
|
|
2,546,948
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
18,735,751
|
|
|
--
|
|
Capitalized
Software Costs - Net
|
|
|
6,534,551
|
|
|
1,132,453
|
|
Customer
Lists - Net
|
|
|
8,110,864
|
|
|
2,179,237
|
|
Deferred
Taxes
|
|
|
--
|
|
|
1,284,000
|
|
Contract
Backlog - Net
|
|
|
379,500
|
|
|
--
|
|
Other
Assets
|
|
|
351,997
|
|
|
93,599
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
34,112,663
|
|
|
4,689,289
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
64,621,854
|
|
$
|
37,706,901
|
|
See
Notes
to Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Liabilities
and Stockholders’ Equity:
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Current
Portion - Long Term Debt
|
|
$
|
833,369
|
|
$
|
666,667
|
|
Current
Portion Capital Lease Obligations
|
|
|
61,315
|
|
|
64,450
|
|
Accounts
Payable
|
|
|
2,013,968
|
|
|
1,572,930
|
|
Accrued
Expenses
|
|
|
2,916,021
|
|
|
1,545,127
|
|
Interim
Billings in Excess of Costs and Estimated
|
|
|
|
|
|
|
|
Profits
|
|
|
7,938,422
|
|
|
7,497,773
|
|
Deferred
Revenue
|
|
|
10,037,813
|
|
|
907,630
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
23,800,908
|
|
|
12,254,577
|
|
|
|
|
|
|
|
|
|
Long
Term Debt - Less current portion
|
|
|
1,916,667
|
|
|
333,361
|
|
Capital
Lease Obligations - Less current portion
|
|
|
9,521
|
|
|
21,532
|
|
Interest
Rate Swaps at Fair Value
|
|
|
7,812
|
|
|
15,152
|
|
Deferred
Tax Liability
|
|
|
2,118,603
|
|
|
--
|
|
Deferred
Rent Payable
|
|
|
482,048
|
|
|
455,427
|
|
|
|
|
|
|
|
|
|
Total
Non Current Liabilities
|
|
|
4,534,651
|
|
|
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
|
|
|
|
|
|
|
|
6,719,517
and 6,487,943 shares at December 31, 2005,
|
|
|
|
|
|
|
|
5,567,124
and 5,339,200 shares at December 31, 2004
|
|
|
67,195
|
|
|
55,671
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in Capital
|
|
|
39,997,558
|
|
|
29,893,223
|
|
Accumulated
Comprehensive loss - Interest Rate Swaps
|
|
|
(7,812
|
)
|
|
(15,152
|
)
|
Accumulated
Deficit
|
|
|
(2,004,132
|
)
|
|
(3,593,908
|
)
|
|
|
|
38,052,809
|
|
|
26,339,834
|
|
|
|
|
|
|
|
|
|
Less:
cost of shares of Common Stock held
|
|
|
|
|
|
|
|
in
treasury - 231,574 shares at December 31, 2005
|
|
|
|
|
|
|
|
and
227,924 shares at December 31, 2004
|
|
|
1,766,514
|
|
|
1,712,982
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
36,286,295
|
|
|
24,626,852
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
64,621,854
|
|
$
|
37,706,901
|
|
See
Notes
to Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Software
and Related
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services:
|
|
|
|
|
|
|
|
|
|
|
Turnkey
Systems
|
|
$
|
20,326,805
|
|
$
|
16,931,606
|
|
$
|
17,541,356
|
|
Maintenance
Contract Services
|
|
|
13,317,744
|
|
|
8,289,525
|
|
|
7,069,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Application
Service Provider Services
|
|
|
2,538,457
|
|
|
1,725,473
|
|
|
591,202
|
|
|
|
|
|
|
|
|
|
|
|
|
Data
Center Services
|
|
|
1,795,448
|
|
|
2,058,240
|
|
|
1,973,492
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
37,978,454
|
|
|
29,004,844
|
|
|
27,175,050
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues:
|
|
|
|
|
|
|
|
|
|
|
Software
and Related
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services:
|
|
|
|
|
|
|
|
|
|
|
Turnkey
Systems
|
|
|
11,682,754
|
|
|
9,203,071
|
|
|
9,250,378
|
|
Maintenance
Contract Services
|
|
|
5,421,575
|
|
|
4,168,975
|
|
|
3,406,183
|
|
|
|
|
|
|
|
|
|
|
|
|
Application
Service Provider Services
|
|
|
1,611,026
|
|
|
926,333
|
|
|
377,305
|
|
|
|
|
|
|
|
|
|
|
|
|
Data
Center Services
|
|
|
887,169
|
|
|
849,353
|
|
|
1,034,382
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Cost of Revenues
|
|
|
19,602,524
|
|
|
15,147,732
|
|
|
14,068,248
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
18,375,930
|
|
|
13,857,112
|
|
|
13,106,802
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and
|
|
|
|
|
|
|
|
|
|
|
Administrative
Expenses
|
|
|
11,272,446
|
|
|
7,293,865
|
|
|
7,968,892
|
|
Research,
Development and Maintenance
|
|
|
4,547,114
|
|
|
3,498,448
|
|
|
2,769,811
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,819,560
|
|
|
10,792,313
|
|
|
10,738,703
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
2,556,370
|
|
|
3,064,799
|
|
|
2,368,099
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Other Income
|
|
|
311,496
|
|
|
126,379
|
|
|
73,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Other Expense
|
|
|
(119,090
|
)
|
|
(129,213
|
)
|
|
(199,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Tax (Benefit)
|
|
|
2,748,776
|
|
|
3,061,965
|
|
|
2,242,326
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax (Benefit)
|
|
|
1,159,000
|
|
|
309,000
|
|
|
(786,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
1,589,776
|
|
$
|
2,752,965
|
|
$
|
3,028,901
|
|
See
Notes
to Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Earnings
Per Share (“EPS”) of Common Stock
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
.28
|
|
$
|
.52
|
|
$
|
.69
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares of
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Outstanding
|
|
|
5,684,191
|
|
|
5,331,700
|
|
|
4,418,364
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
.27
|
|
$
|
.50
|
|
$
|
.64
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares of
|
|
|
|
|
|
|
|
|
|
|
Common
Stock and Common Stock
|
|
|
|
|
|
|
|
|
|
|
Equivalents
Outstanding
|
|
|
5,935,405
|
|
|
5,536,731
|
|
|
4,752,068
|
|
See
Notes
to Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
Paid-in
|
|
Unearned
|
|
Accumulated
|
|
Interest
Rate
|
|
Comprehensive
|
|
Treasury
|
|
Stockholders’
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Deficit
|
|
Swap
|
|
Income
|
|
Shares
|
|
Amount
|
|
Equity
|
|
Balance
- January 1, 2003
|
|
|
4,046,430
|
|
$
|
40,464
|
|
$
|
21,411,777
|
|
$
|
(14,400
|
)
|
$
|
(9,375,774
|
)
|
$
|
(107,713
|
)
|
|
|
|
$
|
89,797
|
|
$
|
(648,112
|
)
|
$
|
11,306,242
|
|
Common
Stock Issued - Exercise of Options
|
|
|
668,197
|
|
|
6,682
|
|
|
1,793,574
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
133,961
|
|
|
(1,011,337
|
)
|
|
788,919
|
|
Common
Stock Issued - Exercise of Warrants
|
|
|
713,620
|
|
|
7,136
|
|
|
5,712,972
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
5,720,108
|
|
Common
Stock Issued - Acquisition
|
|
|
100,000
|
|
|
1,000
|
|
|
527,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
528,000
|
|
Cost
Related to Warrant Extension
|
|
|
--
|
|
|
--
|
|
|
6,336
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
6,336
|
|
Change
in Fair Value of Interest Rate Swap
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
48,645
|
|
|
48,645
|
|
|
--
|
|
|
--
|
|
|
48,645
|
|
Amortization
of Warrants Issued for Services
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
14,400
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
14,400
|
|
Dividends
|
|
|
--
|
|
|
--
|
|
|
(441,447
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(441,447
|
)
|
Net
Income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,028,901
|
|
|
--
|
|
|
3,028,901
|
|
|
--
|
|
|
--
|
|
|
3,028,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,077,546
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2003
|
|
|
5,528,247
|
|
|
55,282
|
|
|
29,010,212
|
|
|
--
|
|
|
(6,346,873
|
)
|
|
(59,068
|
)
|
|
|
|
|
223,758
|
|
|
(1,659,449
|
)
|
|
21,000,104
|
|
Common
Stock Issued - Exercise of Options
|
|
|
38,877
|
|
|
389
|
|
|
166,011
|
|
|
--
|
|
|
--
|
|
|
--
|
|
$
|
--
|
|
|
4,166
|
|
|
(53,533
|
)
|
|
112,867
|
|
Change
in Deferred Tax Asset Valuation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
--
|
|
|
--
|
|
|
717,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
717,000
|
|
Change
in Fair Value of Interest Rate Swap
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
43,916
|
|
|
43,916
|
|
|
--
|
|
|
--
|
|
|
43,916
|
|
Net
Income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
2,752,965
|
|
|
--
|
|
|
2,752,965
|
|
|
--
|
|
|
--
|
|
|
2,752,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,796,881
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2004
|
|
|
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
|
|
|
206,658
|
|
|
2,067
|
|
|
852,173
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,650
|
|
|
(53,532
|
)
|
|
800,708
|
|
Common
Stock Issued - Private Placement
|
|
|
490,000
|
|
|
4,900
|
|
|
4,488,204
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
4,493,104
|
|
Cost
Related to Private Placement
|
|
|
--
|
|
|
--
|
|
|
(377,976
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(377,976
|
)
|
Common
Stock Issued - Acquisitions
|
|
|
455,735
|
|
|
4,557
|
|
|
5,101,934
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
5,106,491
|
|
Change
in Fair Value of Interest Rate Swaps
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
7,340
|
|
|
7,340
|
|
|
--
|
|
|
--
|
|
|
7,340
|
|
Tax
Benefit from Exercise of Options
|
|
|
--
|
|
|
--
|
|
|
40,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
40,000
|
|
Net
Income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,589,776
|
|
|
--
|
|
|
1,589,776
|
|
|
--
|
|
|
--
|
|
|
1,589,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,589,776
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2005
|
|
|
6,719,517
|
|
$
|
67,195
|
|
$
|
39,997,558
|
|
$
|
--
|
|
$
|
2,004,132
|
|
$
|
(7,812
|
)
|
|
|
|
|
231,574
|
|
$
|
(1,766,514
|
)
|
$
|
36,286,295
|
|
See
Notes
to Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
1,589,776
|
|
$
|
2,752,965
|
|
$
|
3,028,901
|
|
Adjustments
to Reconcile Net Income
|
|
|
|
|
|
|
|
|
|
|
to
Net Cash Provided by Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
2,451,456
|
|
|
1,624,393
|
|
|
1,233,592
|
|
Costs
Related to Issuance
|
|
|
|
|
|
|
|
|
|
|
of
warrants and options
|
|
|
--
|
|
|
--
|
|
|
20,736
|
|
Provision
for Doubtful Accounts
|
|
|
465,004
|
|
|
(204,000
|
)
|
|
1,046,094
|
|
Tax
Benefit from Exercise of Options
|
|
|
40,000
|
|
|
--
|
|
|
--
|
|
Deferred
Income Taxes
|
|
|
805,431
|
|
|
122,000
|
|
|
(900,000
|
)
|
Loss
on Retirement of Property and Equipment
|
|
|
--
|
|
|
--
|
|
|
18,632
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
[Increase]
Decrease in:
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
953,963
|
|
|
(3,506,210
|
)
|
|
(1,991,720
|
)
|
Costs
and Estimated Profits in
|
|
|
|
|
|
|
|
|
|
|
Excess
of Interim Billings
|
|
|
(840,448
|
)
|
|
1,180,150
|
|
|
2,040,387
|
|
Other
Current Assets
|
|
|
(686,023
|
)
|
|
(54,795
|
)
|
|
(344,881
|
)
|
Other
Assets
|
|
|
(258,856
|
)
|
|
28,431
|
|
|
69,389
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
[Decrease] in:
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
(3,274,348
|
)
|
|
243,165
|
|
|
163,620
|
|
Accrued
Expenses
|
|
|
(681,174
|
)
|
|
(43,046
|
)
|
|
645,226
|
|
Deferred
Rent Payable
|
|
|
26,621
|
|
|
455,427
|
|
|
--
|
|
Interim
Billings in Excess of
|
|
|
|
|
|
|
|
|
|
|
Costs
and Estimated Profits
|
|
|
440,649
|
|
|
234,488
|
|
|
1,287,055
|
|
Deferred
Revenue
|
|
|
945,721
|
|
|
(197,705
|
)
|
|
(223,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Adjustments
|
|
|
387,996
|
|
|
(117,702
|
)
|
|
3,064,346
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by Operating Activities
|
|
|
1,977,772
|
|
|
2,635,263
|
|
|
6,093,247
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Property and
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
(458,092
|
)
|
|
(1,328,050
|
)
|
|
(1,633,226
|
)
|
Capitalized
Software Development
|
|
|
(42,000
|
)
|
|
(185,000
|
)
|
|
(179,500
|
)
|
Business
Acquisitions - Net of $4,218,614
|
|
|
|
|
|
|
|
|
|
|
of
Acquired Cash in 2005
|
|
|
(12,554,994
|
)
|
|
(16,263
|
)
|
|
(1,047,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Used In Investing Activities
|
|
$
|
(13,055,086
|
)
|
$
|
(1,529,313
|
)
|
$
|
(2,860,571
|
)
|
See
Notes
to Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
Payment
of Capitalized Lease Obligations
|
|
$
|
(60,327
|
)
|
$
|
(61,416
|
)
|
$
|
(47,678
|
)
|
Proceeds
from Term Loan
|
|
|
2,500,000
|
|
|
--
|
|
|
--
|
|
Repayment
of Promissory Note
|
|
|
|
|
|
|
|
|
|
|
Assumed
in Acquisition
|
|
|
(494,413
|
)
|
|
|
|
|
|
|
Dividend
Paid
|
|
|
--
|
|
|
--
|
|
|
(441,447
|
)
|
Net
Proceeds from Stock Options and
|
|
|
|
|
|
|
|
|
|
|
Warrants
Exercised
|
|
|
800,708
|
|
|
112,867
|
|
|
6,509,027
|
|
Net
Proceeds from Private Placement
|
|
|
4,115,128
|
|
|
--
|
|
|
--
|
|
Payments
of Term Loans
|
|
|
(749,992
|
)
|
|
(666,659
|
)
|
|
(583,325
|
)
|
Net
Cash Provided by (Used in)
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
6,111,104
|
|
|
(615,208
|
)
|
|
5,436,577
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash
|
|
|
|
|
|
|
|
|
|
|
and
Cash Equivalents
|
|
|
(4,966,210
|
)
|
|
490,742
|
|
|
8,669,253
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents -
|
|
|
|
|
|
|
|
|
|
|
Beginning
of Year
|
|
|
16,411,735
|
|
|
15,920,993
|
|
|
7,251,740
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents -
|
|
|
|
|
|
|
|
|
|
|
End
of Year
|
|
$
|
11,445,525
|
|
$
|
16,411,735
|
|
$
|
15,920,993
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the years for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
107,810
|
|
$
|
132,635
|
|
$
|
159,940
|
|
Income
Taxes
|
|
$
|
338,254
|
|
$
|
237,879
|
|
$
|
93,639
|
|
Supplemental
Disclosures of Non-Cash Investing and Financing
Activities:
Year
Ended December 31, 2005:
The
fair
value of the interest rate swaps decreased by $7,340 for the year ended December
31, 2005.
During
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
the
full $250,000 of this contingent consideration and has adjusted the related
balance sheet accounts accordingly. The $250,000 additional provision is
included in accrued expenses.
During
2005, the Company acquired for $3,610,682, the software, customer lists and
other assets of Addiction Management Systems. The consideration consisted of
$2,641,945 in cash plus legal fees of $19,904 and the assumption of $948,833
for
certain liabilities for services to be performed in the future.
During
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 and announced.
During
2005, the Company received 3,650 shares of its common stock as 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 date of
exercise.
Year
Ended December 31, 2004:
During
2004, the Company received 4,166 shares of its common stock as 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 date of
exercise.
During
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.
The
fair
value of the interest rate swap decreased by $43,916 for the year ended December
31, 2004. At December 31, 2004, it is valued at $15,152.
Year
ended December 31, 2003:
During
2003, the Company acquired equipment in the amount of $183,326 in connection
with a capital lease.
During
2003, the Company received 133,961 shares of its common stock as consideration
for the exercise of certain stock options. The value of the shares received
was
$1,011,337, which was the market value of the common stock on the dates of
exercise.
During
2003, the Company accrued $721,003 of fixed assets related to its new
facility.
During
2003, the Company issued 100,000 shares of its common stock in connection with
the acquisition of CareNet. See Note 5. These shares were valued at $528,000,
which was based upon the average stock price three days before and ending three
days after the acquisition was agreed to and announced. The Company also issued
a $500,000 three-year promissory note and assumed contract obligations and
vacation liabilities totaling $68,068.
The
fair
value of the interest rate swap decreased by $48,645 for the year ended December
31, 2003. At December 31, 2003, it is valued at $59,068.
See
Notes
to Consolidated Financial Statements
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[1]
The Company
Netsmart
Technologies, Inc. and subsidiaries (the “Company”) licenses, customizes and
installs its proprietary software products, operates a service bureau (“Data
Center Services”) and provides Application Service Provider (“ASP”) Services and
enters into long term maintenance agreements with behavioral health and public
health organizations, methadone clinics and other substance abuse facilities
throughout the United States. The Company currently classifies it 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”). 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;
these installations are performed in the New York segment. The duration of
the
implementation is dependant 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. Revenue for these segments is recognized based on the nature
of
the product sold. See note 2.
The
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.
[2]
Summary of Significant Accounting Policies
Principles
of Consolidation -
The
Consolidated Financial Statements include Netsmart Technologies, Inc.
(“Netsmart”), and its wholly-owned subsidiaries, Netsmart New York, Inc.,
(“NTST-NY”) formerly Creative Socio-Medics Corp. (“CSM”) and Netsmart Ohio,
Inc., (“NTST-Ohio”), formerly CMHC Systems, Inc. In addition, the results of
operations from the CareNet acquisition is included from July 2003, the results
of operations from the ContinuedLearning LLC (“CL”) acquisition is included from
April 28, 2005, the results of operations from the Addictions Management
Systems, Inc. (“AMS”) acquisition is included from June 20, 2005 and the results
of operations of the NTST- Ohio acquisition is included from October 1, 2005
(see note 5). All intercompany transactions are eliminated in
consolidation.
Estimates
-
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenue and expenses during
the
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[2]
Summary of Significant Accounting Policies -
[Continued]
reporting
period. Critical estimates include management’s judgements associated with: the
application of the percentage of completion method to the recognition of
revenue, determination of an allowance for doubtful accounts receivable,
deferred income tax valuation allowance, the application of purchase accounting
to the Company’s acquisitions and the capitalization, impairment analysis,
depreciation and amortization of certain long-term assets. Actual results could
differ from those estimates.
Cash
and Cash Equivalents
- The
Company considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents. Cash equivalents totaled
approximately $8,218,000 and $1,053,000 at December 31, 2005 and 2004,
respectively.
Concentration
of Credit Risk - The
Company extends credit to customers which results in accounts receivable and
costs and estimated profits in excess of interim billings arising from its
normal business activities. The Company does not require collateral or other
security to support financial instruments subject to credit risk. The Company
routinely assesses the financial strength of its customers and based upon
factors surrounding the credit risk of the customers, believes that its accounts
receivable credit risk exposure is limited. If the financial condition of the
Company’s customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances might be required. In addition,
since the Company evaluates each account and invoice on a case-by-case basis,
the provision could vary from period to period.
The
Company’s behavioral health information systems are marketed to specialized care
facilities, many of which are operated by various state and local government
entities and include entitlement programs. During the years ended December
31,
2005, 2004 and 2003, approximately 44%, 49% and 57% respectively, of the
Company’s revenue were generated from contracts directly or indirectly with
government agencies.
No
one
customer accounted for more than 10% of revenue for the years ended December
31,
2005 and 2004. During the year ended December 31, 2003, one customer accounted
for approximately $2,861,000 or 10.5% of revenue.
The
Company places its cash and cash equivalents with high credit quality financial
institutions. The amount on deposit in any one institution that exceeds
federally insured limits is subject to credit risk. At December 31, 2005 and
2004, cash and cash equivalent balances of $11.3 million and $16.3 million
respectively, were held at a financial institution in excess of federally
insured limits.
Revenue
Recognition -
The
Company presents its revenue in four different categories: Software and Related
Systems and Services- Turnkey, Software and Related Systems and Services-
Maintenance, ASP Services and Data Center Services, as follows:
Software
and Related Systems and Services- Turnkey
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
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[2]
Summary of Significant Accounting Policies -
[Continued]
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.
The
Company also enters into multiple element arrangements contracts which do not
require significant customization and modification, in which it bundles a
software license, one year’s maintenance and sometimes training. In accordance
with Statement of Position 97-2 “Software Revenue Recognition”, as amended,
revenue is allocated using the residual method. The Company sells both annual
maintenance contracts and training separately, with long established pricing
to
its customers. Annual maintenance contracts are generally sold at a fee based
upon a percentage of the underlying software license. The Company also sells
training separately with established per diem rates for its trainers.
Accordingly, the Company uses vendor specific objective evidence to ascertain
the fair values of all undelivered elements in a multiple element arrangement.
The residual amount is allocated to the software license. Each of these
components is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed and determinable and collectibility
is
probable.
The
Company also derives revenue from the sale of third party hardware and software
which is recognized based upon the terms of each contract. These sources of
revenue, which do not require significant customization or modification, are
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectibility is
probable.
Software
and Related Systems and Services- Maintenance
Maintenance
contract revenue consists of services provided to customers for telephone help
services, as well as maintaining and upgrading the software, including ongoing
enhancements. The Company’s maintenance contracts may require it to make
modifications to meet any new federal or state reporting requirements which
become effective during the term of the maintenance contract. Maintenance
contract revenue sold under separate contractual arrangements is recognized
on a
straight-line basis over the life of the respective contract.
The
cost
of maintenance revenue, which consists solely of staff payroll and applicable
overhead, is expensed as incurred.
ASP
Services
ASP
Services consist of the Company’s offering of its Avatar suite of products,
including CareNet, Continued Learning and InfoScriber products, on a virtual
private network or internet delivery approach. This service allows the Company’s
customers to rapidly deploy its products and pay on a monthly service basis
instead of making a capital intensive investment in the purchase of the system
at their own facility. ASP Services contract revenue, sold under separate
contractual arrangements, is recognized on a straight-line basis over the life
of the respective contract.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[2]
Summary of Significant Accounting Policies -
[Continued]
Data
Center Services
Information
processing revenue, which represents Data Center Services, is recognized in
the
period in which the service is provided. The Data Center provides software
which
performs clinical and billing services for outpatient facilities, including
mental health, alcohol and substance abuse facilities. Data Center services
include statistical reporting, data entry, electronic billing and submission.
The Company bills its clients on a transaction basis or on a fixed monthly
fee
arrangement. Revenue is recognized as the services are performed.
Property
and Equipment and Depreciation and Amortization - Property
and equipment is stated at cost less accumulated depreciation and amortization.
Depreciation of property and equipment is computed using the straight-line
method at rates adequate to allocate the cost of applicable assets over their
expected useful lives. Amortization of leasehold improvements is computed using
the shorter of the lease term or the expected useful life of these
assets.
Estimated
useful lives are as follows:
Equipment
|
3-7
Years
|
Furniture
and Fixtures
|
5-10
Years
|
Leasehold
Improvements
|
Life
of the Lease
|
Capitalized
Software Costs -
Capitalization of computer software development costs begins upon the
establishment of technological feasibility. Technological feasibility for the
Company’s computer software products is generally based upon achievement of a
detail program design free of high risk development issues. The Company
capitalizes 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
requires 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 and is included in the applicable cost
of
revenue. 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.
The
Company periodically performs 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.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[2]
Summary of Significant Accounting Policies -
[Continued]
The
amounts allocated to purchased software development costs related to the
NTST-Ohio, CL and AMS acquisitions in 2005 (see note 5), totaled $3,300,000,
$692,020 and $2,050,700, respectively.
Capitalized
software development costs applicable to operations are as follows:
Year
ended December 31,
|
|
2005
|
|
2004
|
|
2003
|
|
Beginning
of Year
|
|
$
|
1,132,453
|
|
$
|
1,087,116
|
|
$
|
382,387
|
|
Capitalized
|
|
|
6,084,720
|
|
|
334,872
|
|
|
1,062,575
|
|
Amortization
|
|
|
(682,622
|
)
|
|
(289,535
|
)
|
|
(357,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
6,534,551
|
|
$
|
1,132,453
|
|
$
|
1,087,116
|
|
Customer
Lists
-
Customer lists represent a listing of customers obtained through the
acquisitions of CSM, Johnson Computing System, (“Johnson”), Advanced
Institutional Management Systems (“AIMS”), CareNet, NTST-Ohio, CL, AMS (see note
5), and other to which the Company can market its products. Customer lists
are
being amortized on a straight line method over an estimated useful life of
20
years for the NTST -Ohio list, 12 years for the NTST - NY and Johnson lists,
9
years for the CareNet list, 8 years for the AMS list, 7 years for the AIMS
list,
3 years for the CL lists and 6 years for the other list. The amount allocated
to
customer lists related to the NTST-Ohio, AMS and CL acquisitions are $5,300,000,
$1,396,902 and $5,218, respectively.
Customer
lists at December 31, 2005 and 2004 are as follows:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Customer
Lists
|
|
$
|
12,983,419
|
|
$
|
6,281,299
|
|
Less:
Accumulated Amortization
|
|
|
(4,872,555
|
)
|
|
(4,102,062
|
)
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
8,110,864
|
|
$
|
2,179,237
|
|
Amortization
expense amounted to $770,493, $606,352 and $537,242, respectively, for the
years
ended December 31, 2005, 2004 and 2003 and is included in selling, general
and
administrative expenses.
Future
amortization of customer lists are approximately $1,052,000, $741,000, $633,000,
$593,000 and $567,000 for the years ending December 31, 2006, 2007, 2008, 2009
and 2010 respectively, and $4,523,000 thereafter.
Contract
Backlog -
Contract backlog represents profit to be earned on customer contracts and
purchase orders that have not been fully completed as of the acquisition date
of
NTST- Ohio, but are expected to be completed at some future point. As a result,
there are still revenue and profits to be earned on these orders.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[2]
Summary of Significant Accounting Policies -
[Continued]
Contract
backlog costs are being amortized over a one-year period commencing October
1,
2005 through September 30, 2006. Contract backlog costs at December 31, 2005
are
as follows:
Contract
backlog
|
|
$
|
502,000
|
|
Less:
Accumulated Amortization
|
|
|
(122,500
|
)
|
|
|
|
|
|
Net
|
|
$
|
379,500
|
|
Amortization
expense amounted to $122,500 for the year ended December 31, 2005. Future
amortization of contract backlog costs is $379,500 in 2006.
Pursuant
to Statement of Financial Accounting Standards (“SFAS”) No. 144, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", the Company evaluates its long-lived assets for financial impairment,
and
continues to evaluate them as events or changes in circumstances indicate that
the carrying amount of such assets may not be fully recoverable.
The
Company evaluates 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 value of such assets, the assets are adjusted to their
fair values.
Goodwill
Goodwill
in the amount of $18,735,751 resulted from the acquisition of NTST-Ohio (See
note 5). Goodwill is not amortized but is tested for impairment at least on
an
annual basis or more frequently if events or changes in circumstances indicate
that the asset might be impaired. We determined that there was no impairment
of
goodwill at December 31, 2005
Stock
Options and Similar Equity Instruments
- At
December 31, 2005, the Company had three stock-based employee compensation
plans
as well as outstanding inducement options granted to certain former employees
of
NTST-Ohio, which are described more fully in note 13. As permitted under SFAS
No. 148, “Accounting for Stock-Based Compensation--Transition and Disclosure”,
which amended SFAS No. 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 (“APB”) No. 25, “Accounting for Stock Issued
to Employees”, and related interpretations including Financial Accounting
Standards Board (“FASB”) 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
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[2]
Summary of Significant Accounting Policies -
[Continued]
per
share
if the Company had applied the fair value recognition provisions of SFAS No.
123
to stock-based employee compensation:
|
|
Year
ended
|
|
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Net
Income as Reported
|
|
$
|
1,589,776
|
|
$
|
2,752,965
|
|
$
|
3,028,901
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based employee compensation
|
|
|
|
|
|
|
|
|
|
|
expense
determined under the fair value-based
|
|
|
|
|
|
|
|
|
|
|
method
for all awards, net of related tax effect
|
|
|
1,724,201
|
|
|
1,368,139
|
|
|
857,768
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma Net (Loss) Income
|
|
$
|
(134,425
|
)
|
$
|
1,384,826
|
|
$
|
2,171,133
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Net Income Per Share as Reported
|
|
$
|
.28
|
|
$
|
.52
|
|
$
|
.69
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Pro Forma Net (Loss) Income Per Share
|
|
$
|
(.02
|
)
|
$
|
.26
|
|
$
|
.49
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Net Income Per Share as Reported
|
|
$
|
.27
|
|
$
|
.50
|
|
$
|
.64
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Pro Forma Net (Loss) Income Per Share
|
|
$
|
(.02
|
)
|
$
|
.25
|
|
$
|
.46
|
|
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:
|
|
2005
|
|
2004
|
|
2003
|
|
Expected
Life (Years)
|
|
|
5
|
|
|
5
|
|
|
5
|
|
Interest
Rate
|
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
Annual
Rate of Dividends
|
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Volatility
|
|
|
65
|
%
|
|
68
|
%
|
|
66
|
%
|
The
weighted average fair value of options at date of grant using the fair value
based method during 2005, 2004 and 2003 is estimated at $5.39, $3.95, and $2.38,
respectively.
In
December 2004, FASB issued SFAS No. 123 (Revised), “Share-Based Payments
(Revised 2004)”. See New Accounting Pronouncements.
Earnings
Per Share -
Basic
earnings per share of common stock is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share reflects the amount of earnings for the period
available to each share of common stock outstanding during the reporting period,
giving effect to all potentially dilutive shares of common stock from the
potential exercise of stock options and warrants.
The
computation of diluted earnings per share does not assume conversion, exercise
or contingent
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[2]
Summary of Significant Accounting Policies -
[Continued]
issuance
of securities that would have an antidilutive effect on earnings per share
(i.e.
improving earnings per share). The dilutive effect of outstanding options and
warrants and their equivalents are reflected in diluted earnings per share
by
the application of the treasury stock method. Options and warrants will have
a
dilutive effect only when the average market price of the common stock during
the period exceeds the exercise price of the options or warrants. The Company
had potentially dilutive options and warrants outstanding of 30,000, 300,780
and
0 during the years ended December 31, 2005, 2004 and 2003, respectively, that
were not included in the calculation of diluted earnings per share because
they
were anti dilutive.
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
1,589,776
|
|
$
|
2,752,965
|
|
$
|
3,028,901
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
5,684,191
|
|
|
5,331,700
|
|
|
4,418,364
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
244,416
|
|
|
205,031
|
|
|
333,704
|
|
Stock
warrants
|
|
|
6,798
|
|
|
--
_
|
|
|
--
|
|
Dilutive
potential common shares
|
|
|
251,214
|
|
|
205,031
|
|
|
333,704
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per
|
|
|
|
|
|
|
|
|
|
|
share-adjusted
weighted average shares
|
|
|
|
|
|
|
|
|
|
|
after
assumed conversions
|
|
|
5,935,405
|
|
|
5,536,731
|
|
|
4,752,068
|
|
Advertising
- Advertising
costs are expensed as incurred. Advertising expense amounted to $395,476,
$392,575 and $328,199 for the years ended December 31, 2005, 2004 and 2003,
respectively.
Financial
Instruments -
SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities” as amended,
requires the recognition of all derivative instruments as either assets or
liabilities on the balance sheet measured at fair value. Generally, increases
or
decreases in the fair value of a derivative instrument will be recognized as
gains or losses in earnings in the period of change. If the derivative
instrument is designated and qualifies as a cash flow hedge, the change in
fair
value of the derivative instrument will be recorded as a separate component
of
stockholders’ equity.
The
Company entered into interest rate swaps to hedge exposure related to changes
in
the LIBOR rate. Before entering into a derivative transaction for hedging
purposes, it is determined that a high degree of initial effectiveness exists
between the change in value of the hedged item and the change in the value
of
the determinative instrument from movement in interest rates. High effectiveness
means that the change in the value of the derivative instrument will effectively
offset the change in the fair value of the hedged item. The effectiveness of
each hedged item is measured throughout the hedged period. Any hedge
ineffectiveness as defined by SFAS No. 133 is recognized in the income
statement.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[2]
Summary of Significant Accounting Policies -
[Continued]
New
Accounting Pronuncements
-
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. Based upon
the employee options outstanding as of December 31, 2005, 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 vested on or prior to December 31, 2005; there
is
approximately $237,000 of future costs, utilizing the fair value method, that
will be expensed over a three year period from 2006 through 2010. Additionally,
the Company will utilize the fair value method for any future instruments issued
after the implementation date.
In
March
2005, the Securities and Exchange Commission 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, 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.
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
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[2]
Summary of Significant Accounting Policies -
[Continued]
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 Emerging Issues Task Force (“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 did not have
any impact on the Company’s consolidated financial position or results of
operations.
[3]
Accounts Receivable
Accounts
receivable is shown net of allowance for doubtful accounts of $350,291 and
$423,720 at December 31, 2005 and 2004, respectively. The changes in the
allowance for doubtful accounts are summarized as follows:
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
Beginning
Balance
|
|
$
|
423,720
|
|
$
|
1,126,236
|
|
Provision
(credit) for Doubtful Accounts
|
|
|
465,004
|
|
|
(204,000
|
)
|
Charge-offs
|
|
|
(538,433
|
)
|
|
(498,516
|
)
|
|
|
|
|
|
|
|
|
Ending
Balance
|
|
$
|
350,291
|
|
$
|
423,720
|
|
[4]
Costs, estimated profits, and billings on uncompleted contracts are summarized
as follows:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Costs
Incurred on Uncompleted Contracts
|
|
$
|
5,389,787
|
|
$
|
10,663,115
|
|
Estimated
Profits
|
|
|
3,028,931
|
|
|
5,657,902
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,418,718
|
|
|
16,321,017
|
|
Billings
to Date
|
|
|
14,545,154
|
|
|
23,181,805
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
(6,126,436
|
)
|
$
|
(6,860,788
|
)
|
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[4]
Costs, estimated profits, and billings on uncompleted contracts are summarized
-
[Continued]
Included
in the accompanying consolidated balance sheet under the following
captions:
Costs
and estimated profits in excess of interim billings
|
|
$
|
1,811,986
|
|
$
|
636,985
|
|
Interim
billings in excess of costs and estimated profits
|
|
|
(7,938,422
|
)
|
|
(7,497,773
|
)
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
(6,126,436
|
)
|
$
|
(6,860,788
|
)
|
[5]
Acquisitions
CL
On
April
28, 2005, the Company acquired substantially all of the assets, including
computer software, customer lists and computer equipment, of CL, 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 recognition of a probable additional payment, was
$739,238 which consisted of cash of $252,917, which was paid out of existing
working capital 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 probable additional payment of
$250,000. The purchase agreement provides for the potential additional payment
of up to $250,000 if certain revenue targets are met in year one. Based upon
the
attainment of certain revenue targets as of December 31, 2005, the Company
recognized the full $250,000 of this additional payment at December 31, 2005.
The Company also entered into a two year employment agreement at an annual
salary of $100,000 per year with the principal of CL, 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. As of
December 31, 2005, these revenue targets have not been met and consequently,
no
additional compensation expense has been recognized.
The
cost
of the CL acquisition was allocated as follows: $692,020 to purchased software,
$5,218 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. Amortization expense
for
the covenant not to compete was $8,333 for the year ended December 31,
2005.
AMS
On
June
20, 2005, the Company acquired the assets of AMS. The total purchase price,
including acquisition costs, was $3,610,682 which consisted of cash of
$2,641,945, 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 to 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.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[5]
Acquisitions - [Continued]
NTST-Ohio
On
September 28, 2005, the Company acquired 100% of the equity interest of
NTST-Ohio (formerly CMHC Systems, Inc.) 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 primary
reason for this acquisition was to acquire a significant customer base (over
400
clients) which provided a large recurring revenue stream, and included a
workforce with significant domain knowledge.
The
Company believes that due to the factors above and the potential long range
benefits of the combined company that the purchase price paid fairly represents
the value of NTST-Ohio. The purchase price totaled approximately $19,565,956
as
follows: 435,735 shares of the Company’s common stock (valued at $4,915,091),
$12,994,758 in cash plus additional cash consideration recorded in accrued
expenses as of December 31, 2005, 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.
The
Company also renegotiated and assumed the NTST-Ohio facility lease in Dublin,
Ohio. This facility is leased from a Partnership whose general partner is the
former majority stockholder of CMHC and currently a 5.3% stockholder of the
Company. 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.
John
Paton, the former majority stockholder of CMHC Systems, entered into an
employment agreement with the Company pursuant to which Mr. Paton is to receive,
in addition to the amounts he received as a former security holder of CMHC,
a
base salary at the rate of $150,000 per annum for the fifteen month term of
the
agreement.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[5]
Acquisitions - [Continued]
The
following table summarizes the estimated fair value of the assets acquired
and
liabilities assumed at the date of the acquisition of NTST-Ohio.
At
September 30, 2005
($
in
thousands)
Cash
|
|
$
|
4,218
|
|
Other
current assets
|
|
|
2,879
|
|
Property
and equipment - net
|
|
|
464
|
|
Capitalized
software cost
|
|
|
3,300
|
|
Customer
lists
|
|
|
5,300
|
|
Goodwill
|
|
|
18,736
|
|
Contract
backlog
|
|
|
502
|
|
Deferred
tax asset - long term
|
|
|
1,381
|
|
Other
assets
|
|
|
26
|
|
Total
assets acquired
|
|
|
36,807
|
|
|
|
|
|
|
Deferred
revenue
|
|
|
8,134
|
|
Other
current liabilities
|
|
|
5,898
|
|
Deferred
tax liability - long term
|
|
|
3,171
|
|
Long-term
debt
|
|
|
38
|
|
Total
liabilities assumed
|
|
|
17,241
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
19,566
|
|
Included
in other current liabilities of $5,898,000 is a promissory note which NTST-Ohio
issued in April 2005 in the amount of $500,000. This note accrued interest
at a
rate of 14% per annum and was due on October 31, 2005. This promissory note
was
paid in full in October 2005.
None
of
the goodwill or amortization of the contract backlog, capitalized software
or
customer list will be deductible on the Company’s tax return. For financial
statement purposes 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 is not amortized and will be reviewed each year to determine if
any
impairment adjustment will be required.
The
following unaudited proforma condensed consolidated statements of operations
assumes the CL, the AMS and the NTST-Ohio acquisitions occurred on January
1,
2004. Shares related to the private
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[5]
Acquisitions - [Continued]
placement
(see note 9) are included in the weighted average per share calculations. 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, 2004 or results which may occur in the future.
|
|
Years
Ended
|
|
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
Unaudited
|
|
Unaudited
|
|
|
|
(in
thousands except share and per share amounts)
|
|
Revenue
|
|
$
|
57,667
|
|
$
|
55,299
|
|
Net
Income
|
|
|
1,657
|
|
|
942
|
|
Net
Income Per Share;
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.26
|
|
$
|
.15
|
|
Diluted
|
|
$
|
.25
|
|
$
|
.15
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number
|
|
|
|
|
|
|
|
of
Shares of Common
|
|
|
|
|
|
|
|
Stock
Outstanding
|
|
|
6,387,381
|
|
|
6,277,435
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number
|
|
|
|
|
|
|
|
of
Shares of Common
|
|
|
|
|
|
|
|
Stock
and Common Stock
|
|
|
|
|
|
|
|
Equivalents
Outstanding
|
|
|
6,638,595
|
|
|
6,482,466
|
|
The
results of the acquisitions of CL and AMS were included in the actual
consolidated results of operations commencing with the respective date of the
acquisitions. With respect to the NTST-Ohio acquisition which closed on
September 28, 2005, the results of operations of NTST-Ohio were included in
the
actual results of operations of the Company commencing October 1,
2005.
The
Company accounted for the CL, AMS and NTST-Ohio acquisitions pursuant to the
purchase method of accounting as required under SFAS No. 141 “Business
Combination”.
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.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[5]
Acquisitions - [Continued]
CareNet
On
June
25, 2003, the Company acquired substantially all of the assets of the CareNet
segment ("CareNet") of Shuttle Data Systems Corporation, d/b/a Adia Information
Management Corp. ("Adia"), pursuant to an asset purchase agreement dated June
25, 2003, among the Company, Adia and Steven Heintz, Jr., the president and
majority shareholder of Adia. The principal assets acquired were the
intellectual property and customer contracts of CareNet. The total purchase
price, including acquisition costs, was $2,003,913 which consisted of 100,000
shares of the Company’s common stock valued at $528,000, $838,740 in cash and a
three-year promissory note in the principal amount of $500,000 payable in 36
equal monthly installments of principal plus interest at the average prime
rate
plus 1% as defined in the note agreement. Adia has received certain piggyback
registration rights with respect to these 100,000 shares. The cash portion
of
the purchase price was paid out of existing working capital. The Company also
assumed certain contractual obligations and liabilities totaling $68,068 and
incurred $69,105 in legal and accounting costs which are included in the
purchase price.
The
cost
of the acquisition was allocated to purchased software in the amount of
$883,075, customer lists in the amount of $1,097,138, and computer hardware
in
the amount of $23,700. The Company is amortizing the purchased software over
an
eight-year life and the customer lists over a nine-year life.
In
addition, in connection with the acquisition, the Company entered into a three
year non-compete and non-solicitation agreement with Steven Heintz, Jr. and
Jennifer Lindbert for which they were paid an aggregate fee of $140,000, which
fee was paid in cash out of existing working capital and is included in “other
assets” on the consolidated balance sheet. The covenant not to compete is being
amortized over the three-year life. Amortization expense for the years ended
December 31, 2005, 2004 and 2003 was $46,667, $46,667 and $23,333
respectively.
The
Company accounted for this acquisition pursuant to the purchase method of
accounting. For accounting purposes the Company recorded the assets and related
liabilities of CareNet effective as of June 30, 2003. The Company incorporated
the operations of CareNet into its operations commencing July 1,
2003.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[6]
Property and Equipment
Property
and equipment consist of the following:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Equipment,
Furniture and Fixtures
|
|
$
|
3,843,666
|
|
$
|
2,980,440
|
|
Leasehold
Improvements
|
|
|
632,989
|
|
|
556,893
|
|
|
|
|
|
|
|
|
|
Totals
- At Cost
|
|
|
4,476,655
|
|
|
3,537,333
|
|
Less:
Accumulated Depreciation
|
|
|
|
|
|
|
|
and
Amortization
|
|
|
1,811,226
|
|
|
990,385
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
2,665,429
|
|
$
|
2,546,948
|
|
Depreciation
and amortization expense amounted to $820,841, $681,839, and $315,171,
respectively for the years ended December 31, 2005, 2004 and 2003.
[7]
Long Term Debt
Long-term
debt at December 31, 2005 consists of the following:
Term
loan payable, bank - due in monthly installments
|
|
|
|
|
of
$41,667 (a)
|
|
$
|
2,416,667
|
|
|
|
|
|
|
Term
loan payable, bank - due in monthly installments
|
|
|
|
|
of
$41,666. (b)
|
|
|
250,036
|
|
|
|
|
|
|
Note
payable, Adia - due in monthly installments of
|
|
|
|
|
$13,889.
(c)
|
|
|
83,333
|
|
|
|
|
|
|
Total
Long-Term Debt
|
|
|
2,750,036
|
|
|
|
|
|
|
Less:
Current Portion
|
|
|
833,369
|
|
|
|
|
|
|
Long-Term
Debt, Less Current Portion
|
|
$
|
1,916,667
|
|
(a)
On
October 7, 2005, the Company entered into a revolving credit and term loan
agreement with Bank of America 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”).
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[7]
Long Term Debt - [Continued]
The
Loans
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, NTST-NY and
NTST-Ohio, whose assets represent substantially all of the assets of the
Company.
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 (Note 12). 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. The financing agreement contains certain
covenants including limitations on the Company’s ability to incur liens,
maintain a minimum tangible net worth of $2,250,000 and requires the maintenance
of certain financial ratios. The Company was not in compliance with a certain
covenant at December 31, 2005. As a result, the Company and the Bank entered
into a First Amendment and Waiver (“the Amendment”) to the term loan, pursuant
to which the Bank agreed to amend the terms of the Tangible Net Worth covenant
contained in the Loan Agreement and waive any non-compliance by the Company.
As
a result of the Amendment, as of December 31, 2005, the Company was in
compliance with the financial covenants of this agreement.
(b)
The
Company has a five-year term loan with Bank of America with an original
principal balance of $2.5 million which matures in June 2006. The term loan
is
paid in equal monthly installments during the term of the loan plus interest.
The term loan bears interest at LIBOR plus 2.5%. In addition, the Company
entered into an interest rate swap agreement on the term loan at 7.95% for
five
years (note 12). The financing agreement contains certain covenants including
limitations on the Company’s ability to incur liens, enter into change of
control transactions, maintain a minimum net worth at $9,000,000 and requires
the maintenance of certain financial ratios. The borrowing is collateralized
by
a first priority security interest and lien on all the assets of the Company.
As
of December 31, 2005, the Company was in compliance with the financial covenants
of this agreement.
(c)
In
connection with the acquisition of CareNet (see note 5), the Company issued
a
three year promissory note to Adia in the principal amount of $500,000 payable
in 36 equal monthly installments of principal plus interest at the prime rate
plus 1% on the date of issuance adjusted on each note anniversary date (5.25%
at
December 31, 2005).
Maturities
of long-term debt at December 31, 2005 are as follows:
For
the Year Ending
|
|
|
|
December
31,
|
|
Amount
|
|
2006
|
|
$
|
833,369
|
|
2007
|
|
|
500,000
|
|
2008
|
|
|
500,000
|
|
2009
|
|
|
500,000
|
|
2010
|
|
|
416,667
|
|
|
|
|
|
|
Total
|
|
$
|
2,750,036
|
|
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[8]
Income Taxes
The
Company utilizes an asset and liability approach to determine the extent of
any
deferred income taxes, as described in SFAS No. 109, “Accounting for Income
Taxes.” This method gives consideration to the future tax consequences
associated with differences between financial statement and tax bases of assets
and liabilities.
During
the years ended December 31, 2005 and 2004, the Company utilized approximately
$2.9 million and $2.8 million, respectively of net operating loss carryforwards.
At December 31, 2005, the Company has remaining net operating loss carryforwards
of approximately $5,261,000 expiring through 2025. Pursuant to Section 382
of
the Internal Revenue Code regarding substantial changes in Company ownership,
utilization of this net operating loss carryforward is limited. Approximately
$2,279,000 can be used in 2006 and $830,000 can be used in each of 2007, 2008
and 2009 and the remaining $492,000 can be used in 2010; unused amounts can
be
carried forward. In addition, the $717,000 tax benefit related to approximately
$1,800,000 of net operating losses generated in 2000 on exercise of
non-qualified compensatory stock options and warrants was credited to
paid-in-capital in 2004.
The
Company’s provision for taxes for the year ended December 31, 2005 includes
certain state and local taxes.
The
expiration dates of net operating loss carryforwards are as
follows:
December
31,
|
|
Total
|
|
|
|
Amount
|
|
2020
|
|
$
|
1,851,000
|
|
2021
|
|
|
1,626,000
|
|
2022
|
|
|
9,000
|
|
2023
|
|
|
709,000
|
|
2024
|
|
|
9,000
|
|
2025
|
|
|
1,057,000
|
|
|
|
$
|
5,261,000
|
|
Provision
for income taxes consists of the following:
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
63,000
|
|
$
|
56,000
|
|
$
|
24,000
|
|
State
|
|
|
261,000
|
|
|
131,000
|
|
|
89,425
|
|
|
|
|
324,000
|
|
|
187,000
|
|
|
113,425
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
642,000
|
|
|
104,000
|
|
|
(900,000
|
)
|
State
|
|
|
193,000
|
|
|
18,000
|
|
|
--
|
|
|
|
|
835,000
|
|
|
122,000
|
|
|
(900,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,159,000
|
|
$
|
309,000
|
|
$
|
(786,575
|
)
|
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[8]
Income Taxes - [Continued]
The
difference between income taxes at the statutory Federal income tax rate and
income taxes reported in the income statement is as follows:
|
|
Year
ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Income
taxes at the federal statutory rate
|
|
|
34
|
%
|
|
34
|
%
|
|
34
|
%
|
State
and local income taxes net of Federal taxes
|
|
|
6
|
|
|
3
|
|
|
3
|
|
Nondeductible
expenses
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Federal
Alternative Minimum Tax
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Decrease
in valuation allowance
|
|
|
--
|
|
|
(31
|
)
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
%
|
|
10
|
%
|
|
(35
|
)%
|
Significant
components of the Company’s deferred taxes are comprised of the
following:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Deferred
Tax Asset:
|
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
2,024,000
|
|
$
|
1,605,000
|
|
Allowance
for doubtful accounts
|
|
|
175,000
|
|
|
169,000
|
|
Accrued
vacation and bonuses
|
|
|
384,000
|
|
|
317,000
|
|
Alternative
minimum tax credit carryforward
|
|
|
241,000
|
|
|
147,000
|
|
Other
|
|
|
241,000
|
|
|
157,000
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
3,065,000
|
|
|
2,395,000
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
Net
book value - intangible assets
|
|
|
(3,589,000
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
Net
deferred tax (liability) assets
|
|
$
|
(524,000
|
)
|
$
|
2,395,000
|
|
The
deferred taxes are presented in the Consolidated Balance Sheet as
follows:
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Current
asset
|
|
$
|
1,595,000
|
|
$
|
1,111,000
|
|
Long
term asset
|
|
|
--
|
|
|
1,284,000
|
|
Long
term liability
|
|
|
(2,119,000
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
Net
deferred tax (liability) assets
|
|
$
|
(524,000
|
)
|
$
|
2,395,000
|
|
During
2004, the Company reduced the valuation allowance to zero based upon its belief
that it is more likely than not that the entire net operating loss carry forward
will be utilized.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[8]
Income Taxes - [Continued]
The
change in the valuation allowance for deferred tax assets are summarized as
follows:
|
|
Year
Ended December 31,
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Beginning
Balance
|
|
$
|
--
|
|
$
|
1,731,000
|
|
$
|
4,010,000
|
|
Change
in Allowance
|
|
|
--
|
|
|
(1,731,000
|
)
|
|
(2,279,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance
|
|
$
|
--
|
|
|
--
|
|
$
|
1,731,000
|
|
[9]
Stockholders’ Equity
The
Company’s Board of Directors is authorized to issue preferred stock from time to
time without stockholder action, in one or more distinct series. The Board
of
Directors is authorized to determine the rights and preferences of the preferred
stock when issued. The Board of Directors has authorized the issuance of Series
A, Series B and Series D preferred stock. No shares of any series of preferred
stock were outstanding on December 31, 2005.
Common
Stock Issuances -
On April
28, 2005, the Company issued 20,000 shares of its common stock in connection
with the acquisition of CL. On September 28, 2005, the Company issued 435,735
shares of its common stock in connection with the acquisition of NTST-Ohio.
On
June 25, 2003 the Company issued 100,000 shares of its common stock in
connection with the acquisition of CareNet. See note 5 for information relating
to these acquisitions.
The
Company sold to investors, pursuant to a private placement agreement, an
aggregate 490,000 shares of common stock and warrants to purchase 122,504 shares
of common stock. The Company received $4,493,104 in gross proceeds and paid
commissions of $275,000 and $102,976 in other professional costs related to
the
private placement. The Company also issued a warrant to purchase 24,500 shares
to the placement agent. The private placement agreement required the Company
to
file a registration statement within 30 days of the closing of the private
placement, and to use its reasonable best efforts to have such registration
statement declared effective within 90 days of the closing. Generally, the
private placement agreement further provides for a penalty to be paid to the
investors should the Company fail to meet its registration obligations. Such
penalty is payable to the investors in cash at the rate of 2.5% of the gross
proceeds per month, up to a maximum penalty of 20% of the gross proceeds. The
Company has accounted for the proceeds of the private placement as equity in
accordance with View A of EITF 05-04, “The Effect of a Liquidated Damages Clause
on a Freestanding Financial Instrument Subject to Issue No. 00-19”. Any
potential penalties incurred pursuant to the registration rights agreement
will
be recorded in earnings when and if incurred as per SFAS 5, “Accounting for
Contingencies.” As of December 31, 2005, the Company has not incurred any
penalties relating to this private placement.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[9]
Stockholders’ Equity - [Continued]
Treasury
Stock
- During
2005, options to purchase 206,658 shares were exercised and the Company received
gross proceeds of $854,240. 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 2005 exercise of options were 12,250
options owned by a Company officer. These options were exercised by the delivery
of 3,650 shares of the Company’s common stock, which were valued at $53,532,
which was based upon the market price of the common stock on the dates of
exercise in accordance with the cashless exercise provisions of the Company’s
stock option plans.
During
2004, options to purchase 38,877 shares were exercised and the Company received
gross proceeds of $166,400. Pursuant to the 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 2004 exercise of options were
12,250 options owned by a Company officer. These options were exercised by
the
delivery of 4,166 shares of the Company’s common stock, which were valued at
$53,533, which was based upon the market price of the common stock on the dates
of exercise in accordance with the cashless exercise provisions of the Company’s
stock option plans.
During
2003, stock options to purchase 668,197 shares were exercised and the Company
received gross proceeds of $1,800,256. Included in the gross proceeds received
from the exercise of the options was the delivery of 133,961 shares of the
Company’s common stock, which were valued at $1,011,337, which was based upon
the market price of the common stock on the dates of the exercise in accordance
with the cashless exercise provisions fo the Company’s stock option
plans.
Included
in the 2003 option exercises were 350,280 options owned by certain of the
Company’s officers and members of the Board of Directors. Pursuant to the 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. These options were
exercised by delivery of 97,718 shares of the Company’s common stock valued at
$682,965, which was based upon the market price of the common stock on the
date
of exercise in accordance with the cashless exercise provisions of the Company’s
stock option plans.
On
February 27, 2003, the Board of Directors authorized management to purchase
up
to $100,000 of the Company’s common stock at any time the market price of the
common stock is less than $3.50 per share. Purchases of stock will be made
from
time to time, depending on market conditions, in the open market or in privately
negotiated transactions, at prices deemed appropriate by management. There
is no
set time limit on the purchases. The Company expects to fund any stock
repurchases from its operating cash flow. As of December 31, 2005, the Company
had not made any stock repurchases.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[9]
Stockholders’ Equity - [Continued]
Stock
Options and Warrants -
See note
13 for information relating to the Company’s 1998, 1999 and 2001 Long-Term
Incentive Plans.
During
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 $4.1 million.
During
2005, the Company granted 30,000 inducement options to employees of NTST-Ohio
to
encourage the recipients to continue to remain in the employ of NTST-Ohio 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 vest over a period
of
three years.
During
2003, warrants to purchase 713,620 shares were exercised and the Company
received net proceeds of $5,720,108.
On
December 21, 2000, the stockholders of the Company approved the 1999 Employee
Stock Purchase Plan. The plan reserves 150,000 shares of common stock. The
plan
provides eligible employees with the opportunity to purchase shares of common
stock at a discounted price through regular payroll deductions. No shares have
been issued as of December 31, 2005 under this plan.
Dividends
- In July 2003, the Company’s Board of Directors approved a cash dividend of
$.10 per share of common stock which was paid in September 2003 to all
stockholders of record on August 20, 2003. The amount charged to additional
paid-in capital in August 2003, based upon the shares outstanding on August
20,
2003, the record date of the dividend, was $441,447.
[10]
Capital Lease Obligations
Future
minimum payments under capital lease obligations as of December 31, 2005 are
as
follows:
Year
ending
|
|
|
|
December
31,
|
|
|
|
2006
|
|
$
|
65,316
|
|
2007
|
|
|
9,695
|
|
|
|
|
|
|
Total
Minimum Payments
|
|
|
75,011
|
|
Less
Amount Representing Interest at 8.7% Per annum
|
|
|
4,175
|
|
|
|
|
|
|
Balance
|
|
$
|
70,836
|
|
Capital
lease obligations are collateralized by equipment which has a cost of $214,426
at December 31, 2005 and $183,326 at December 31, 2004 and accumulated
amortization of $162,119 and $91,663 at December 31, 2005 and 2004,
respectively. Amortization of $70,456 in 2005 and $61,109 in 2004 and 38,534
in
2003, respectively, has been included in depreciation expense.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[11]
Fair Value of Financial Instruments
The
carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and the note payable to Adia approximate the fair value of these
instruments because of their short maturities or floating interest
rates.
The
bank
debt (see note 7), including current maturities, has a carrying value of
$2,666,703 and an estimated fair value of $2,661,000. Estimated fair value
is
based on the expected current rates offered to the Company for instruments
of
the same or similar maturities, after considering the effect of the interest
rate swap.
[12]
Commitments and Contingencies
Leases
The
Company leases space for its executive offices and facilities under a
cancellable operating lease expiring October 2014. In addition, the Company
leases seven sales and service offices under non cancelable operating leases
expiring at various times through January 2008. The Company leases space for
NTST-Ohio under a non-cancellable operating lease expiring September 2010.
The
lease provides for a fixed monthly rent of approximately $31,000. This facility
is leased from a Partnership whose general partner is a 5.3% stockholder of
the
Company. The amount paid in connection with this facility was $110,823 for
the
period from commencement of the lease to December 31, 2005.
In
December 2003, the Company relocated its Islip, New York headquarters facility
to a larger facility in Great River, New York. The lease is for a ten year
and
ten month period. The lease provides for a fixed monthly rent of $45,700 and
includes an annual escalation increase of 3%. There are no lease payments
required during the first ten months of the lease and the Company has the option
of canceling the lease after six years. However, upon cancellation, certain
unamortized costs must be reimbursed to the landlord. Future maturities of
this
lease were considered for the entire ten year and ten month period.
Minimum
annual rentals under noncancellable operating leases having terms of more than
one year are as follows:
Year
ending
|
|
|
|
|
December
31,
|
|
|
|
|
2006
|
|
$
|
1,481,000
|
|
2007
|
|
|
1,177,000
|
|
2008
|
|
|
1,101,000
|
|
2009
|
|
|
1,008,000
|
|
2010
|
|
|
925,000
|
|
Thereafter
|
|
|
2,732,000
|
|
|
|
|
|
|
Total
|
|
$
|
8,424,000
|
|
Rent
expense amounted to $1,009,700, $833,000 and $519,000 respectively, for the
years ended December 31, 2005, 2004 and 2003.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[12]
Commitments and Contingencies - [Continued]
Employment
Agreements
In
April
2004, the Company entered into revised employment agreements with Messrs. James
L. Conway and Anthony F. Grisanti. The terms and conditions of the revised
contracts are identical in all material respects to the previous contracts
except that (i) the term of each individual’s contract was extended by one year,
so that Messrs. Conway and Grisanti’s contract will expire on December 31, 2006
and (ii) the revised contracts do not provide for a five-year consulting period
following each individual’s respective term of employment during which such
individual would have been entitled to compensation of $75,000 per year. Messrs.
Conway and Grisanti’s contracts also provide for an option to extend their
contracts for one additional year so that upon the exercise of such option,
their contracts would expire on December 31, 2007. Mr. Koop, the former
President, was party to a revised employment agreement that was identical to
the
agreements with Messrs. Conway and Grisanti except as to the expiration date,
which was December 31, 2005. The minimum aggregate base compensation for its
three officers is $650,000 for 2005. The minimum aggregate base compensation
for
Messrs. Conway and Grisanti is $573,000 for each of 2006 and 2007, subject
to
annual increases equal to the greater of 5% or the increase in the cost of
living index. The agreements also provide the officers with an automobile
allowance. In the event of a change of control, the executive may receive
severance payments equal to 48 months compensation.
The
Company also has a consulting agreement with a former Director, which provides
for annual fees of $75,000 through December 31, 2007. The agreement also
provides the former Director with an automobile allowance. In the event of
a
change of control, the former Director may receive severance payments of 36
months compensation.
Effective
April 1, 2004, the Company adopted an Executive Retirement, Non-Competition
and
Consulting Plan which was subsequently amended August 5, 2004 retroactively
effective to April 1, 2004, pursuant to which, following their retirement,
selected officers will be entitled to receive a minimum payment of approximately
$85,000 per year for a period of six years, provided, that such officers (i)
provide a minimum amount of consulting days each month and (ii) agree to certain
covenants not to compete. The annual payments are subject to 10% increases
up to
a maximum of $136,893 per year. Pursuant to the Executive Retirement,
Non-Competition and Consulting Plan, the selected officers are also entitled
to
receive health benefits for life, provided that there are no breaches of the
covenants not to compete. Each of Messrs. Conway, Koop and Grisanti are entitled
to receive benefits under the plan.
The
Company was a party to an employment agreement with John Phillips, a former
Vice
President who currently serves as a director of the Company. Mr. Phillip’s
employment contract expired on December 31, 2003 and he retired effective April
1, 2004. Pursuant to the terms of the Company’s Executive Retirement,
Non-Competition and Consulting Plan, Mr. Phillips will receive $85,000 per
year
for each of the next six years; provided that he complies with the
non-competition covenants of the plan.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[12]
Commitments and Contingencies - [Continued]
Future
minimum payments related to consulting and Executive Retirement, Non-Competition
and Consulting agreements for the next five years are as follows:
Year
Ending
|
|
|
|
December
31,
|
|
Amount
|
|
2006
|
|
|
169,000
|
|
2007
|
|
|
160,000
|
|
2008
|
|
|
85,000
|
|
2009
|
|
|
85,000
|
|
2010
|
|
|
21,000
|
|
|
|
|
|
|
Total
|
|
$
|
520,000
|
|
Interest
Rate Swap
In
June
2001, the Company entered into an interest rate swap with a bank, which expires
on June 1, 2006. In October, 2005, the Company entered into another interest
rate swap with a bank, which expires on October 6, 2010. The swap transactions
were entered into to protect the Company from upward movement in interest rates
relating to outstanding bank debt (see note 7) and calls for a fixed rate of
7.95% for the 2001 transaction and 7.1% for the 2005 transaction. When the
one-month LIBOR rate is below the fixed rate then the Company is obligated
to
pay the bank for the difference in rates. When the one-month LIBOR rate is
above
the fixed rate then the bank is obligated to pay the Company for the difference
in rates. At December 31, 2005 and 2004 the fair value of the swaps of $7,812
and $15,152, respectively, is recorded as a non-current liability. The swap
transactions have been accounted for as a hedge, and accordingly, the change
in
the fair value of the swaps of $7,340, $43,916 and $48,645 during the years
ended December 31, 2005, 2004, and 2003, respectively, has been recorded as
part
of comprehensive income.
Letter
of Credit
The
Company relocated its Islip, New York headquarters to a larger facility in
Great
River, New York. Included in the terms and conditions of the Great River lease
is the requirement that the Company provide to the landlord a letter of credit
in the amount of $292,980, which represents approximately six months rent.
This
letter of credit was provided to the landlord on October 31, 2003, and will
be
reduced as follows:
$195,320
for months 35 through 46 of the lease.
$146,490
for months 47 through 58 of the lease.
$97,660
for months 59 to the expiration of the lease.
[13]
Stock-Based Compensation
Long
Term Incentive Plans -
The
Company has three long-term incentive plans, the 1998 Long-Term Incentive Plan
(the “1998 Plan”), as amended, the 1999 Long-Term Incentive Plan (the “1999
Plan”) and the 2001 Long-Term Incentive Plan (the “2001 Plan”), as amended. The
2001 Plan was approved by the
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[13]
Stock-Based Compensation - [Continued]
stockholders
on March 7, 2002 and originally provided for the issuance of 180,000 shares
of
common stock. In January 2003, the 2001 Plan was amended and approved by the
stockholders to provide for an increase in the number of shares subject to
the
plan from 180,000 to 550,000. In May 2004, the 2001 Plan was further amended
and
approved by the stockholders to provide an increase in the number of shares
subject to the plan from 550,000 to 950,000. In July, 2005, the plan was amended
and approved by the stockholders to provide an increase in the number of shares
subject to the plan from 950,000 to 1,350,000. The maximum shares issuable
by
the Company are 790,000, 300,000 and 1,350,000 shares of Common Stock pursuant
to the 1998 Plan, the 1999 Plan and the 2001 Plan, respectively. The options,
when granted vest ratably over one year except
for the 400,000 options granted in July
2005, which vested prior to December 31, 2005. These 400,000 options were
granted at an exercise of $9.85 which was equal to the fair market value at
the
date of grant. At December 31, 2005 there were 0, 10,500 and 3 shares available
for further issuance under the 1998 Plan, the 1999 Plan and 2001 Plan,
respectively.
The
1998
Plan, the 1999 Plan and the 2001 Plan (collectively, the “Plans”) are
administered by the Compensation Committee of the board of directors. Officers
and other key employees, consultants and directors (other than non-employee
directors) are eligible to receive options or other equity-based incentives
under the Plans.
The
2001
Plan provides that each non-employee director automatically receives a
nonqualified stock option to purchase 6,000 shares of common stock and the
chairman of the audit committee and the compensation committee will receive
a
nonqualified stock option to purchase 7,500 shares of common stock on April
1 of
each year. However, if there are not sufficient shares available under the
applicable Plan, the non-employee director will receive a lesser number of
shares. In April 2005, the Company granted 8,292 options, under its 2001 Plan,
to its non-employee directors. These options were granted at a price of $9.57
which was equal to the fair market value of the options at the date of grant.
These options were fully vested by December 31, 2005. The balance of the
automatic nonqualified options to its non-employee directors, which amounted
to
17,208, were issued and included in the 400,000 options issued in July
2005.
A
summary
of the activity under the Plans and the NTST-Ohio inducement options (see note
9) are as follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Outstanding
- Beginning of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
724,333
|
|
$
|
6.476
|
|
|
365,755
|
|
$
|
4.111
|
|
|
664,702
|
|
$
|
2.276
|
|
Granted
During the Year
|
|
|
438,292
|
|
|
10.181
|
|
|
397,455
|
|
|
8.438
|
|
|
381,000
|
|
|
4.754
|
|
Canceled
During the Year
|
|
|
(10,500
|
)
|
|
1.81
|
|
|
--
|
|
|
--
|
|
|
(11,750
|
)
|
|
1.724
|
|
Exercised
During the Year
|
|
|
(206,658
|
)
|
|
4.134
|
|
|
(38,877
|
)
|
|
4.280
|
|
|
(668,197
|
)
|
|
2.694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
- End of Year
|
|
|
945,467
|
|
$
|
8.758
|
|
|
724,333
|
|
$
|
6.476
|
|
|
365,755
|
|
$
|
4.111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
- End of Year
|
|
|
915,467
|
|
$
|
8.561
|
|
|
525,606
|
|
$
|
5.734
|
|
|
226,253
|
|
$
|
3.721
|
|
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[13]
Stock-Based Compensation - [Continued]
The
following table summarizes stock option information as of December 31,
2005:
|
|
|
|
Options
Outstanding
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
Remaining
|
|
Options
|
|
Exercise
Prices |
|
Number
Outstanding
|
|
Contractual
Life
|
|
Exercisable
|
|
$13.29
|
|
|
1,500
|
|
|
3.25
Years
|
|
|
1,500
|
|
$14.77
|
|
|
30,000
|
|
|
4.83
Years
|
|
|
--
|
|
$
9.85
|
|
|
400,000
|
|
|
4.50
Years
|
|
|
400,000
|
|
$
9.57
|
|
|
8,292
|
|
|
4.25
Years
|
|
|
8,292
|
|
$
8.49
|
|
|
299,280
|
|
|
3.42
Years
|
|
|
299,280
|
|
$
8.20
|
|
|
81,875
|
|
|
3.50
Years
|
|
|
81,875
|
|
$
6.61
|
|
|
8,000
|
|
|
2.58
Years
|
|
|
8,000
|
|
$
4.93
|
|
|
69,378
|
|
|
2.08
Years
|
|
|
69,378
|
|
$
4.37
|
|
|
7,500
|
|
|
7.50
Years
|
|
|
7,500
|
|
$
4.37
|
|
|
31,642
|
|
|
2.50
Years
|
|
|
31,642
|
|
$
2.50
|
|
|
3,000
|
|
|
1.25
Years
|
|
|
3,000
|
|
$
2.38
|
|
|
5,000
|
|
|
1.50
Years
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
945,467
|
|
|
3.81
Years
|
|
|
915,467
|
|
Warrants
Issued as Compensation -
In 2001,
the term of the Company’s $12 Series B Common Stock Purchase Warrants for
448,544 shares, was extended to January 31, 2002. In January 2002, the term
of
the 448,544 $12 warrants was further extended to July 31, 2002. In July 2002,
the term of the warrants was further extended to January 31, 2003. In January
2003, the term of the warrants was further extended to April 30, 2003. In April
2003, the Company agreed to extend the term of these warrants to July 31, 2003.
The Company re-measured the fair value of the warrants at the dates of
extension. No financing costs were recorded associated with the warrant
extension made in January 2003, as there was no material change in their fair
value. The Company charged $1,125 to operations related to the warrant extension
made in April 2003. In July 2003, the Company agreed to extend the term of
these
same warrants from July 31, 2003 to October 31, 2003. The Company re-measured
the fair value of the warrants at the date of extension and charged $5,211
of
financing costs to operations in July 2003. On October 23, 2003, the Company
reduced the exercise price of the warrants from $12.00 per share to $10.00
per
share and through October 31, 2003, 423,620 warrants were exercised and the
Company received gross proceeds of $4,236,200 less $59,592 of costs. The
remaining 24,924 warrants expired unexercised.
During
2003, 120,000 warrants that were issued in 1999 were exercised and the Company
received gross proceeds of $629,000.
During
2002, the Company issued warrants to purchase 200,000 shares in connection
with
a financial advisory agreement whereby the Company would pay consulting fees
in
addition to the issuance of warrants. These warrants, which expired over various
times ranging from one to two years, were valued at $.24 per warrant, which
represented the costs of the services based upon the contractual agreement.
The
warrants
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[13]
Stock-Based Compensation - [Continued]
had
the
following exercise price, vesting dates and expiration date for the number
of
shares set forth below:
Shares
|
|
Exercise
Price
|
|
Vesting
Date
|
|
Expiration
Date
|
|
|
|
|
|
|
|
50,000
|
|
|
|
April
10, 2002
|
|
March
31, 2003
|
30,000
|
|
$4.00
|
|
June
1, 2002
|
|
May
31, 2003
|
30,000
|
|
$5.00
|
|
September
1, 2002
|
|
February
28, 2004
|
30,000
|
|
$6.00
|
|
November
1, 2002
|
|
April
30, 2004
|
30,000
|
|
$7.00
|
|
January
1, 2003
|
|
December
31, 2004
|
30,000
|
|
$8.00
|
|
February
28, 2003
|
|
January
31, 2005
|
The
$48,000 value of the warrants was being charged to operations over the vesting
period. As a result, $33,600 was charged to operations in 2002 and $14,400
was
charged to operations in 2003. During 2003, 170,000 of these warrants were
exercised and the Company received gross proceeds of $914,500 and 30,000
warrants with an exercise price of $4.00 expired.
During
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 and
will expire in October 2010. The Company received net proceeds of approximately
$4.1 million.
A
summary
of warrant activity is as follows:
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Outstanding
- Beginning
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
Year
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
768,544
|
|
$
|
9.17
|
|
Granted
During the Year
|
|
|
147,003
|
|
$
|
11.00
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Expired
During the Year
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(54,924
|
)
|
$
|
6.72
|
|
Exercised
During the Year
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(713,620
|
)
|
$
|
8.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
- End of Year
|
|
|
147,003
|
|
$
|
11.00
|
|
|
--
|
|
|
--
|
|
|
--
_
|
|
$
|
--_
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
- End of Year
|
|
|
147,003
|
|
$
|
11.00
|
|
|
--
|
|
|
--
|
|
|
--_
|
|
$
|
--_
|
|
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[14]
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”). 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 dependant 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.
The
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.
ASP
services was established as a result of the CareNet acquisition in June 2003.
Prior to the acquisition of CareNet, the Company’s ASP operations were
immaterial and were included in Software and Related Systems and Services.
NTST-Ohio is a new segment resulting from their 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. Intersegment sales and sales outside the United States are not
material. Information concerning the Company’s business segments is as
follows:
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sotware
and Related Systems and Services-NY
|
|
Data
Center
|
|
Application
Service Provider
|
|
Software
and Related Systems and Services-Ohio
|
|
Total
|
|
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
Turnkey
|
|
|
17,599,035
|
|
|
|
|
|
|
|
|
|
|
|
17,599,035
|
|
Small
Turnkey
|
|
|
1,041,866
|
|
|
|
|
|
|
|
|
1,685,904
|
|
|
2,727,770
|
|
Maintenance
|
|
|
9,784,488
|
|
|
|
|
|
|
|
|
3,533,256
|
|
|
13,317,744
|
|
Other
|
|
|
-
|
|
|
1,795,448
|
|
|
2,538,457
|
|
|
|
|
|
4,333,905
|
|
Total
|
|
|
28,425,389
|
|
|
1,795,448
|
|
|
2,538,457
|
|
|
5,219,160
|
|
|
37,978,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turnkey
|
|
|
8,434,026
|
|
|
|
|
|
|
|
|
210,025
|
|
|
8,644,051
|
|
Maintenance
|
|
|
5,402,433
|
|
|
|
|
|
|
|
|
2,493,736
|
|
|
7,896,169
|
|
Other
|
|
|
|
|
|
908,279
|
|
|
927,431
|
|
|
|
|
|
1,835,710
|
|
Total
|
|
|
13,836,459
|
|
|
908,279
|
|
|
927,431
|
|
|
2,703,761
|
|
|
18,375,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
|
2,151,923
|
|
|
328,414
|
|
|
(116,027
|
)
|
|
328,414
|
|
|
2,748,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
1,489,017
|
|
|
110,479
|
|
|
401,835
|
|
|
450,125
|
|
|
2,451,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
3,755,207
|
|
|
6,445
|
|
|
863,605
|
|
|
9,121,675
|
|
|
13,746,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
Assets
|
|
|
26,219,605
|
|
|
1,909,546
|
|
|
3,221,333
|
|
|
33,271,370
|
|
|
64,621,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
18,735,751
|
|
|
18,735,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
Turnkey
|
|
|
16,003,646
|
|
|
|
|
|
|
|
|
-
|
|
|
16,003,646
|
|
Small
Turnkey
|
|
|
927,960
|
|
|
|
|
|
|
|
|
|
|
|
927,960
|
|
Maintenance
|
|
|
8,289,525
|
|
|
|
|
|
|
|
|
|
|
|
8,289,525
|
|
Other
|
|
|
|
|
|
2,058,240
|
|
|
1,725,473
|
|
|
|
|
|
3,783,713
|
|
Total
|
|
|
25,221,131
|
|
|
2,058,240
|
|
|
1,725,473
|
|
|
-
|
|
|
29,004,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
Turnkey
|
|
|
7,728,535
|
|
|
|
|
|
|
|
|
|
|
|
7,728,535
|
|
Maintenance
|
|
|
4,120,550
|
|
|
|
|
|
|
|
|
|
|
|
4,120,550
|
|
Other
|
|
|
|
|
|
1,208,887
|
|
|
799,140
|
|
|
|
|
|
2,008,027
|
|
Total
|
|
|
11,849,085
|
|
|
1,208,887
|
|
|
799,140
|
|
|
-
|
|
|
13,857,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
|
2,095,722
|
|
|
784,353
|
|
|
181,890
|
|
|
-
|
|
|
3,061,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
1,247,962
|
|
|
113,676
|
|
|
262,755
|
|
|
-
|
|
|
1,624,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
950,094
|
|
|
12,144
|
|
|
93,501
|
|
|
-
|
|
|
1,055,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
Assets
|
|
|
31,291,838
|
|
|
2,775,036
|
|
|
3,640,027
|
|
|
-
|
|
|
37,706,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
Turnkey
|
|
|
16,773,201
|
|
|
|
|
|
|
|
|
-
|
|
|
16,773,201
|
|
Small
Turnkey
|
|
|
768,155
|
|
|
|
|
|
|
|
|
|
|
|
768,155
|
|
Maintenance
|
|
|
7,069,000
|
|
|
|
|
|
|
|
|
|
|
|
7,069,000
|
|
Other
|
|
|
|
|
|
1,973,492
|
|
|
591,202
|
|
|
-
|
|
|
2,564,694
|
|
Total
|
|
|
24,610,356
|
|
|
1,973,492
|
|
|
591,202
|
|
|
-
|
|
|
27,175,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
Turnkey
|
|
|
8,290,978
|
|
|
|
|
|
|
|
|
|
|
|
8,290,978
|
|
Maintenance
|
|
|
3,662,817
|
|
|
|
|
|
|
|
|
|
|
|
3,662,817
|
|
Other
|
|
|
|
|
|
939,110
|
|
|
213,897
|
|
|
|
|
|
1,153,007
|
|
Total
|
|
|
11,953,795
|
|
|
939,110
|
|
|
213,897
|
|
|
-
|
|
|
13,106,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
|
1,700,571
|
|
|
476,959
|
|
|
64,796
|
|
|
-
|
|
|
2,242,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
1,012,367
|
|
|
103,285
|
|
|
117,940
|
|
|
-
|
|
|
1,233,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Expenditures
|
|
|
2,546,295
|
|
|
151,390
|
|
|
2,006,683
|
|
|
-
|
|
|
4,704,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
Assets
|
|
|
29,530,139
|
|
|
2,607,681
|
|
|
2,495,569
|
|
|
-
|
|
|
34,633,389
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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. |
|
|
|
Dated:
March 31, 2006 |
By: |
/s/
James L. Conway |
|
James
L. Conway, Chief Executive Officer |
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated. Each person whose signature appears
below
hereby authorizes James L. Conway and Anthony F. Grisanti (or any of them acting
in the absence of the others), as his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities to sign any and all amendments
to this report, and to file same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
/s/
James
L. Conway |
|
Chief
Executive Officer
|
|
March 31,
2006
|
James
L. Conway
|
|
and
Director (Principal
|
|
|
|
|
Executive
Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Anthony
F. Grisanti |
|
Chief
Financial Officer
|
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March
31, 2006
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Anthony
F. Grisanti
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(Principal
Financial and
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Accounting
Officer)
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|
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Director
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March
31, 2006
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John
F. Phillips
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President
and Director
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March
31, 2006
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Gerald
O. Koop
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/s/
Joseph
G. Sicinski |
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Director
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March
31, 2006
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Joseph
G. Sicinski
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/s/
Francis
J. Calcagno |
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Director
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March
31, 2006
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Francis
J. Calcagno
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/s/
John
S.T. Gallagher |
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Director
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March
31, 2006
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John
S.T. Gallagher
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/s/
Yacov
Shamash
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Director
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March
31, 2006
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Dr.
Yacov Shamash
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EXHIBIT
INDEX
Exhibits
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3.1
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Restated
Certificate of Incorporation, as amended (Filed as an exhibit to
the
Registrant’s registration statement on Form S-1, File No. 333-2550, which
was declared effective by the Commission on August 13, 1996, and
incorporated herein by reference.)
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|
3.2
|
By-Laws
(Filed as an exhibit to the Registrant’s registration statement on Form
S-1, File No. 333-2550, which was declared effective by the Commission
on
August 13, 1996, and incorporated herein by
reference.)
|
|
10.1 |
Employment
Agreement dated April 1, 2004, between the Registrant and James L.
Conway
(Filed as an exhibit to the Registrant’s 10-Q dated May 5,
2004.)
|
|
10.2 |
Consulting
Agreement dated April 1, 2004, between the Registrant and John F.
Phillips
(Filed as an exhibit to the Registrant’s 10-Q dated May 5,
2004.)
|
|
10.3 |
Employment
Agreement dated April 1, 2004, between the Registrant and Gerald
O. Koop
(Filed as an exhibit to the Registrant’s 10-Q dated May 5,
2004.)
|
|
10.4 |
Employment
Agreement dated April 1, 2004, between the Registrant and Anthony
F.
Grisanti (Filed as an exhibit to the Registrant’s 10-Q dated May 5,
2004.)
|
|
10.6
|
1993
Long-Term Incentive Plan (Filed as an exhibit to the Registrant’s
registration statement on Form S-1, File No. 333-2550, which was
declared
effective by the Commission on August 13, 1996, and incorporated
herein by
reference.)
|
|
10.7
|
1998
Long-Term Incentive Plan (Filed as an appendix to the Registrant’s proxy
statement dated September 30, 1999, relating to its 1999 Annual Meeting
of
Stockholders and incorporated herein by
reference.)
|
|
10.8
|
1999
Long-Term Incentive Plan (Filed as an appendix to the Registrant’s proxy
statement dated November 9, 2000, relating to its 2000 Annual Meeting
of
Stockholders and incorporated herein by
reference.)
|
|
10.9 |
2001
Long-Term Incentive Plan - Amended (Filed as an exhibit to the
Registrant’s 8-K dated June 16,
2005.)
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|
10.10
|
1999
Employee Stock Purchase Plan (Filed as an appendix to the Registrant’s
proxy statement dated November 9, 2000, relating to its 2000 Annual
Meeting of Stockholders and incorporated herein by
reference.)
|
|
10.11
|
Agreement
dated June 1, 2001, between the Registrant and Fleet Bank (Filed
as an
exhibit to the Registrant’s 10-K/A dated August 21,
2003.)
|
|
10.12 |
AIMS
Acquisition Agreement (Filed as an exhibit to the Registrant’s 8-K dated
May 10, 2001.)
|
|
10.13
|
Agreement
dated June 25, 2003, among Registrant, Creative Socio-Medics Corp.,
Shuttle Data Systems Corp., d/b/a/ ADIA Information Management Corp.
and
Steven Heintz, Jr. (Filed as an exhibit to the Registrant’s 8-K dated July
8, 2003.)
|
|
10.14
|
Lease
agreement dated as of December 22, 2003, between Registrant and Spacely
LLC. (Filed as an exhibit to the Registrant’s 10-K dated March 23,
2004.)
|
|
10.15
|
Amended
Executive Retirement, Non Competition and Consulting Plan. (Filed
as an
exhibit to the Registrant’s 10-Q dated August 9,
2004.)
|
|
10.16
|
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. (Filed as an exhibit to the Registrant’s Form 8-K dated
September 19, 2005.)
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|
10.17
|
Revolving
Credit and Term Loan Agreement with Netsmart Technologies, Inc. and
the
Bank of America, N.A. (Filed as an exhibit to the Registrant’s Form 8-K
dated October 7, 2005.)
|
|
10.18
|
Asset
Purchase Agreement dated June 17, 2005 between Addiction Management
Systems, Inc. and Creative Socio-Medics Corp. (Filed as an exhibit
to the
Registrant’s Form 8-K dated June 21,
2005.)
|
|
10.20
|
Amendment
No. 1 to Employment Agreement dated June 16, 2005, between the Registrant
and James L. Conway. (Filed as an exhibit to the Registrant’s Form 8-K
dated June 16, 2005.)
|
|
10.21
|
Amendment
No. 1 to Employment Agreement dated June 16, 2005 between the Registrant
and Anthony F. Grisanti. (Filed as an exhibit to the Registrant’s Form 8-K
dated June 16, 2005.)
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|
10.22
|
Asset
Purchase Agreement dated April 27, 2005 between ContinuedLearning
LLC and
Creative Socio-Medics Corp. (Filed as an exhibit to the Registrant’s Form
8-K dated April 27, 2005.)
|
|
10.23
|
Employment
Agreement dated April 27, 2005 between Netsmart Technologies, Inc.
and A.
Sheree Graves. (Filed as an exhibit to the Registrant’s Form 8-K dated
April 27, 2005.)
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|
10.24
|
Letter
Agreement between Griffin Securities, Inc. and Netsmart Technologies,
Inc.
dated as of August 9, 2005. (Filed as an exhibit to the Registrant’s Form
S-3, File No. 333-129265.)
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|
10.25
|
Letter
Agreement between Griffin Securities, Inc. and Netsmart Technologies,
Inc.
dated as of October 11, 2005. (Filed as an exhibit to the Registrant’s
Form S-3, File No. 333-129265.)
|
|
21.1 |
Subsidiaries
of the Registrant
|
|
23.1 |
Consent
of Marcum & Kliegman LLP
|
|
24 |
Powers
of Attorney (See Signature Page)
|
|
31.1 |
Certification
of Chief Executive Officer
|
|
31.2 |
Certification
of Chief Financial Officer
|
|
32 |
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002
|