UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission File Number 0-21177
NETSMART TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3680154
(State or other jurisdiction (I.R.S. Employer
of 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: ____
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Outstanding shares as of February 26, 2004
------------------- ------------------------------------------
Common Stock, par value 5,325,616
$.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_X_ No__
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes [ ] No [X]
As of June 30, 2003, the last day of our second quarter, the aggregate market
value of the voting and non-voting common equity held by non affiliates was
approximately $18,447,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
PART I
Item 1. Business
Introduction
We develop, market and support application software products designed for
providers of services in the health and human services market, including mental
health clinics, substance abuse clinics, psychiatric hospitals, public health
agencies and managed care organizations. Our software products perform various
functions such as patient management, billing, scheduling, and electronic
medical records solutions for all modalities of care. These products are
deployed utilizing current technologies. We sell our software products through
our wholly owned subsidiary, Creative Socio-Medics Corporation, either on a
license or a subscription basis to health care providers and we offer our
clients software support under maintenance agreements. The maintenance contracts
provide us with a recurring revenue stream. We currently have over 500 contracts
in place, representing approximately 50,000 clinicians, including 24 state
agencies and installations in 43 states.
The cost of a new system to customers is typically in the range of $10,000 to
$100,000 for a single facility healthcare organization to $250,000 to $1 million
for multi-unit care organizations such as those run by state agencies.
Governmental agencies such as mental health, mental retardation, child welfare,
addiction, correction and public health facilities accounted for approximately
57% of revenue in 2003, with the remainder from private hospitals, smaller
clinics, group and sole practitioners.
Our Data Center provides software which performs clinical and billing services
for outpatient facilities, including mental health, alcohol and substance abuse
facilities. Our services include statistical reporting, data entry electronic
billing and submission.
Business Strategy
Our systems 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 target our marketing effort to providers of services in the
health and human services market. Our branded suite of products has integrated
point-of-services technologies which also include personal digital assistants,
which are commonly referred to as PDAs.
The health and human services market is always subject to changes in state and
federal regulations as well as new demands required by the population. Some of
the factors which we believe are affecting the market demand include the
following.
HIPAA. As a supplier of practice management solutions to the behavioral health
and substance abuse industry, we believe that we can benefit as a result of the
Health Insurance Portability and Accountability Act, which is generally known as
HIPAA. HIPAA essentially mandates the Health and Human Services department of
the U.S. Government to enact standards regarding the standardization, privacy
and security of health care information.
We believe that this legislation will have the effect of requiring the
under-automated health and human services industry to make the leap to install
automated systems. We believe that our product suite, in conjunction with
products offered by other companies with which we have a marketing arrangement,
enables us to offer comprehensive enterprise-wide solutions for all human
service providers.
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General Unrest. As a result of acts of terrorism, the demand for services in the
mental health and public health services has increased. Anxiety and fear have
gripped many people who are now seeking mental health services. This increased
demand puts more pressure on providers to improve the efficiency of 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.
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 described above and those risks discussed from time to
time in this Form 10-K annual report, including the risks described under "Risk
Factors," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" 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.
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 include our subsidiary, Creative Socio-Medics, which we acquired in
June 1994, unless the context indicates otherwise. Our website is located at
www.csmcorp.com. Neither the Information contained in our website nor the
information contained in any Internet website is a part of this Form 10-K annual
report.
Risk Factors
Because we are particularly dependent upon government contracts, any decrease in
funding for entitlement programs could result in decreased revenue.
We market our health information systems principally to behavioral health
facilities, many of which are operated by state and local government entities
and include entitlement programs. During 2003, we generated 57% of our revenue
from contracts that are directly or indirectly with government agencies, as
compared with 52% in 2002 and 40% in 2001. Government agencies generally have
the right to cancel 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.
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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 new technology
would have a significant adverse effect upon our business.
Because of our size, 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. The software industry in general,
and the health information software business in particular, are 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 system.
Because we are dependent on our management, the loss of key executive officers
could disrupt our business and our financial performance could suffer.
Our business is largely dependent upon our senior executive officers, Messrs.
James L. Conway, our chief executive officer, Gerald O. Koop, our president, and
Anthony F. Grisanti, our chief financial officer. Although we have employment
agreements with these officers, the employment agreements do not guarantee that
the officers will continue with us, and each of these officers has the right to
terminate his employment with us on 90 days notice. Our agreements with Messrs.
Conway and Grisanti are scheduled to expire on December 31, 2005. In addition,
Mr. Koop's employment agreement is scheduled to expire on December 31, 2004,
following which he is expected to continue to work with us for a five-year
period pursuant to a consulting agreement between us dated January 1, 2001. Our
business may be adversely affected if any of our key management personnel or
other key employees left our employ.
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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 our
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 also cannot guarantee that in the future, third parties will not claim that
we infringed on 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 us.
The covenants in our loan agreement restrict our financial and operational
flexibility, including our ability to complete additional acquisitions, invest
in new business opportunities, or pay down certain indebtedness.
Our term loan agreement contains 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 the 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 agreement were accelerated, the lender could proceed
against those consolidated assets. Any event of default, therefore, could have a
material adverse effect on our business. Our loan agreement also requires 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 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.
Our growth may be limited if we cannot make acquisitions.
A part of our growth strategy is to acquire other businesses that are related to
our current business. Such acquisitions may be made with cash or our securities
or a combination of cash and securities. 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.
If we make any acquisitions, they may disrupt or have a negative impact on our
business.
If we make acquisitions, we could have difficulty integrating the acquired
company's personnel and operations with our own. In addition, the key personnel
of the acquired business may not be willing to work for us, and our officers may
exercise their rights to terminate their employment with us. We cannot predict
the affect 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.
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We do not anticipate, and our loan agreement prohibits, the payment of dividends
on our common stock.
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 on Netsmart. In addition, we are a party to a loan
agreement which prohibits us from paying cash dividends without the prior
consent of our lender.
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, Gerald Koop and
Anthony Grisanti provide that in the event there is a change in control of
Netsmart, the employee has the option to terminate his employment agreement.
Upon such termination, each of Messrs. Conway, Koop and Grisanti has the right
to receive a lump sum payment equal to his compensation for a forty-eight 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 certain 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 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 the common stock, our listing on The
Nasdaq SmallCap Market may be impaired.
Shares may be issued pursuant to options 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, of which options to purchase
365,755 shares were outstanding at December 31, 2003. 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 stock.
Software and Related Systems and Services
We develop, market and support computer software which enables health and human
services healthcare organizations to provide a full range of services in a
network computing environment.
Users typically purchase one of several healthcare information systems, 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 resale
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arrangements with them. Our products are designed to operate on hardware
platforms that either support the Microsoft Windows operating system platform
(Win_2000, NT, XP), or Unix operating system (IBM -AIX, Sun
Microsystems-Solaris, Hewlett Packard-HPUX). Due to the fact that our products
operate on a variety of platforms, we are not dependent on any single hardware
vendor or operating system. Since our products utilize the Cache database and
development software provided by Intersystems Corporation, we resell this
software. Due to the fact that our products are designed to operate solely with
Cache products, we are dependent on Cache products for our operations. The
professional services include project management, training, consulting and
software development services, which are provided either on a time and material
basis or pursuant to a fixed-price contract. The software development services
may require the adaptation of health care 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 $1,000,000
for multi-unit care organizations such as those run by state agencies. Revenue
from license fees were approximately $2,781,000, or 10.2% of revenue, for 2003,
$1,753,000, or 7.9% of revenue, for 2002 and $747,000, or 4.1% of revenue, for
2001. A customer's purchase order may also include third party hardware or
software. Revenue from hardware and third party software accounted for
approximately $4,444,000, or 16.4% of revenue, for 2003, $3,822,000, or 17.3% of
revenue, for 2002 and $2,390,000, or 13.2% of revenue, for 2001. Revenue from
turnkey systems labor accounted for approximately $10,139,000, or 37.3% of
revenue, for 2003, $7,418,000, or 33.5% of revenue, for 2002 and $6,568,000, or
36.3% of revenue in 2001.
Maintenance services have generated increasing revenue and have become a more
significant portion of our business since most purchasers of health care
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 services and maintain and upgrade their
software. Maintenance contracts may require us to make modifications to meet any
new federal and state reporting requirements which 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 $7,069,000, or 26% of revenue, for 2003,
$6,247,000, or 28.2% of revenue, for 2002 and $5,192,000, or 28.7% of revenue,
for 2001. Our small systems revenue was approximately $768,000, or 2.8% of
revenue, for 2003, $929,000, or 4.2% of revenue, for 2002 and $1,180,000, or
6.5% of revenue, for 2001.
We currently offer four product modules that provide a range of core application
requirements for behavioral healthcare providers. These products consist of a
suite of complete information technology applications developed by us, together
with software provided by others which enables us to offer enterprise-wide
solutions to the behavioral health industry. We offer the products in a variety
of delivery modes.
* Avatar - Practice Management: This system is a comprehensive
solution providing patient management functions, billing, tracking,
scheduling, and reporting for inpatient treatment facilities.
* Avatar - Clinician Workstation: This workstation provides a
clinician with documentation and medical record management including
assessment, care planning, progress notes, order entry and on-line
medical records. The clinician workstation is our electronic medical
record system for behavioral health, which integrates the clinical
tools necessary for an interdisciplinary approach to the delivery of
human services.
* Methadone Clinical System: Pursuant to a joint marketing agreement
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with Mallinckrodt Pharmaceutical Specialties, a division of
Mallinckrodt Inc., we offer a solution for dispensing, admissions
and medical records, counselor and reception/security specifically
for methadone clinics. We can integrate Methadone Clinical System
with our other behavioral health products.
* Avatar - Managed Care: The managed care and employee assistance
program modules include such features as service request management,
contact tracking (patients, providers, others), import of
eligibility information by contract, provider search by location,
specialty, contract, hospital privileges, claims adjudication and
payment.
Markets and Marketing
The market for behavioral/public health information systems and related services
consists of both private and publicly operated providers offering hospital or
community-based outpatient behavioral/public healthcare services. These
healthcare providers require a healthcare information system to administer their
programs. We believe that there are at least 15,000 behavioral/public healthcare
providers 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, 2003, 2002 and 2001, approximately 57%, 52%
and 40%, respectively, of 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.
In addition to these major behavioral/public healthcare providers, there are a
larger number of sole practitioners, group practices and smaller clinics which
may also require behavioral/public healthcare facilities. We market our
Internet-based systems to these potential customers.
We believe that the demand for information technology solutions is increasing as
a result of new federal initiatives for data standards 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, the health and human services health delivery
networks need detailed clinical and management information 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 increased demand for behavioral/public healthcare information technology.
These data processing needs include analysis of patient assessments, maintenance
of patient records, administration of patient treatment plans and the overall
coordination of patient case management.
We coordinate our marketing effort with the state agencies and other major users
of our systems. Our state agency clients formed a User Group Association,
presently consisting of state organizations or agencies from 26 states. The
association's members work with us to assess and determine future requirements
in both patient managed care coordination and regulatory reporting.
During the year ended December 31, 2003, one customer accounted for
approximately $2,861,000 or 10.5% of revenue. The account receivable from this
customer at December 31, 2003 was $589,000 or 7% of the total account
receivable. No one customer accounted for more than 10% of revenue for the years
ended December 31, 2002 and 2001.
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We had a backlog of orders, including ongoing maintenance and data center
contracts for our behavioral health information systems of $24 million at
December 31, 2003 and $25.3 million at December 31, 2002. We expect to fill
approximately $20.0 million of the 2003 backlog during 2004.
Our backlog consists of revenue of approximately $12 million from existing
turnkey contracts; maintenance of approximately $8 million that is comprised of
both amounts expected to be filled under unexpired maintenance contracts and
also amounts that are subject to automatic renewal; unexpired Data Center
contracts of approximately $2 million calculated using historical experience to
determine future useage and unexpired application service provider and facility
management contracts of approximately $2 million which is also calculated using
historical experience to determine future usage.
Data Center
Since our inception the Data Center has provided software which performs
clinical and billing services for outpatient facilities, including mental
health, alcohol and substance abuse facilities. Services include statistical
reporting, data entry, electronic billing and submission.
All of our products and services are offered not only in a turnkey mode of
operation but also in an Application Service Provider (ASP) mode in which the
client uses our software products with part or all of the software's operation
taking place on the computer facilities of our data centers. At present we have
a data center service facility in Great River, New York and an additional
facility in Columbus, Ohio.
Revenue from our Data Center was approximately $1,973,000 or 7.3% of revenue for
2003, $1,957,000 or 8.9% of revenue for 2002 and $2,042,000 or 11.3% of revenue
for 2001.
During 2003, one customer, a hospital in New York City, accounted for $274,000
or 13% of the total Data Center revenue. During 2002, two customers each
accounted for more than 10% of the total Data Center revenue. One customer was a
New York State agency, which accounted for $199,000, or 10.2% of total Data
Center revenue. The other client was a hospital in New York City, which
accounted for $225,000, or 11.5% of total Data Center revenue. During 2001, this
same major hospital accounted for $351,000, or 17.2% of 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, 2003 was $2,006,000. We anticipate that
all of this backlog will be earned in 2004. The Data Center backlog at December
31, 2002 was $2,076,000.
Product Development
We incurred product development costs relating to our health and human services
information systems of approximately $2,255,000 in 2003, $1,318,000 in 2002 and
$1,335,000 in 2001, all of which was company-sponsored and expensed as research,
development and maintenance. 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 2003, we charged $19,232 to operations. In 2003, we incurred
capitalized software development costs of approximately $883,000 associated with
our acquisition of software products from CareNet. In 2001, we incurred
capitalized software development costs of approximately $167,000 associated with
our acquisition of software products from Advanced Institutional Management
Software, Inc.
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Competition
The healthcare software industry is highly competitive. Although we believe that
we can provide a health care facility or managed care organization with software
to enable it to perform its services more effectively, other software companies
provide comparable systems and also have the staff and resources to develop
competitive systems.
Healthcare information technology is an $18 billion industry served by numerous
vendors. The dominant health care information technology vendors have achieved
annual sales of more than $1 billion by focusing on solutions for large
medical/surgical health care providers, such as large hospital systems and
health maintenance organizations, and, 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 are
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 infrastructure than we, and we may not be
able to continue to compete effectively with such companies.
Additionally, we face significant competition in the Data Center medical systems
ASP market. General ASP utilities offer clients use of computer facilities and
operations staff to process either generalized medical software or software
selected by the client from other software vendors. Large billing and clearing
house computer service companies provide a broad area of billing for a diverse
marketplace. Many organizations start with billing as their primary reason for
automation spending. Several types of professional service firms offer
departmental staff to operate a client's already in-house system when the client
believes that such an approach will provide the needed expertise at a cost
effective price. Our ASP service is focused on providing a complete and cost
effective service to a specific set of sectors in the large health and human
services marketplace. Behavioral health requires the ideal organization of
software, systems and staff to enable a client to maximize service at a
reasonable cost. Most important is that the service is based on the exclusive
use of the Company's proprietary suite of Avatar products which enables a
potential client to initiate the use of any part of a broad array of needed
clinical and financial systems for as long as these functions are needed knowing
that these services are developed, operated, and updated by a professional IT
staff which is on call as needed. In addition, our experience is that, once a
client has contracted for services, it generally remains a client and is
unaffected by competitive offerings. Some of our clients have been working with
us for up to thirty years. We believe our specialized experience and investment
in related software provides us with a competitive advantage.
We compete in the Health and Human Services Systems market with the following
behavioral healthcare vendors among others:
Anasazi Software, Inc.
Askesis Development Group, Inc.
Civerex Systems, Inc.
CMHC Systems
Geneva Software
InfoMC, Inc.
IMPEL Strategic Solutions
Multi-Health Systems, Inc.
Qualifacts System inc.
Raintree Systems Inc.
SecureHEALTH Inc.
Sequest Technologies Inc.
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The Echo Group
UNI/CARE Systems, Inc.
XAKTsoft, Inc.
As our business has expanded to the sale of larger integrated healthcare
delivery systems, we have begun to compete with companies such as Siemens, HBOC,
IDX, Meditech, Quadramed, and Misys. In the public health arena, we have
competed against QS Technologies, MANTECH, and QS Inc.
Competitive Position:
As a core part of our strategic business model, we bid on competitive
procurements numerous times during the calendar year and have a very high win
ratio, which is evidence of our leadership. This is especially evident in the
statewide mental health/mental retardation field for which we have 26 statewide
systems.
We have an established customer base of more than 500 clients nationwide,
including substantial private and government providers of healthcare services.
These 500 contracts represent approximately 50,000 clinicians, including 26
state agencies and installations in 43 states.
Government Regulations and Contracts
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. The adoption of new regulations can
have a significant effect upon the operations of health care providers and
insurance companies. Although our business is aimed at meeting certain of the
problems resulting from government regulations and from efforts to reduce the
cost of health care, 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 health care in the United States can have a material
effect on companies, such as us, that provide services to the health care
industry, including those providing software. Although we believe that the
likely direction which may result from the current study of the health care
industry would be an increased trend to 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. To
the extent that the health care industry evolves with greater
government-sponsored programs and less privately run organizations, our business
may be adversely affected. Furthermore, to the extent that each state changes
its own regulations in the health care field, it may be necessary for us to
modify our behavioral health information systems to meet any 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 economic and
budgetary problems affecting the local area, 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.
11
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 in the system.
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 client
support.
Employees
As of December 31, 2003, we had 161 employees, including 4 executive, 14 sales
and marketing, 132 technical and 11 clerical and administrative employees.
Executive Officers
Information concerning our executive officers is included in Item 11,
Directors and Executive Officers for the Registrant.
Item 2. Property
We lease office space at the following locations:
Location Purpose Space Annual Rental Expiration
-------- ------- ----- ------------- ----------
3500 Sunrise Highway Executive offices 32,600 square $505,000, plus 10/22/14
Great River, New York Software and Related feet 3% annual
Systems and Services increases
Data Center Services
1335 Dublin Road Offices 3,500 square $59,000 11/30/04
Columbus, Ohio Software and Related feet
Systems and Services
5120 Shoreham Place Offices 2,800 square $73,000 05/31/05
San Diego, California Software and Related feet
Systems and Services
220 E. Huron Software and Related 625 square $989 per month Month to
Ann Arbor, Michigan Systems and Services feet month
We believe that our space is adequate for our immediate needs and that, if
additional space is required, it would be readily available on commercially
reasonable rates.
12
Item 3. Legal Proceedings
In October 2000, the Company commenced an action against the City of Richmond,
in the United States District Court for the Eastern District of New York, for
failure to pay more than $1 million pursuant to a contract between the Company
and Richmond. On July 29, 2003, this action was settled and the Company received
an amount of $205,000. This settlement had no material adverse effect on the
results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Our common stock is traded on The Nasdaq SmallCap 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 2003 and 2002.
Quarter Ended High Low
------------- ---- ---
March 31, 2003 $ 6.00 3.53
June 30, 2003 5.53 4.00
September 30, 2003 10.90 5.15
December 31, 2003 19.85 8.45
March 31, 2002 $ 3.45 2.40
June 30, 2002 2.89 2.08
September 30, 2002 4.60 1.70
December 31, 2002 7.03 4.10
As of December 31, 2003, there were approximately 2,300 beneficial owners of our
common stock. The closing price of our common stock was $13.60 per share on
March 3, 2004. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
In July 2003, the Company's Board of Directors approved a one-time 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 surplus in
August 2003, based upon the shares outstanding on August 20, 2003, the record
date of the dividend, was $441,447. We do not anticipate that we will pay any
further 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.
13
Equity Compensation Plan Information
------------------------------------
The following table sets forth information relating to our compensation plans as
of December 31, 2003.
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a)
------------- ------------------- ------------------- ----------
(a) (b) (c)
Equity compensation
plans approved by
security holders 365,755 $4.111 5,750
Equity compensation
plans not approved by
security holders -- $ -- --
------- ------ -----
Total 365,755 $4.111 5,750
14
Item 6. Selected Financial Data
The selected consolidated financial data set forth below for the five years in
the period ended December 31, 2003 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,
-----------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(in thousands except per share data)
Selected Statements
of Operations Data:
Revenue $27,175 $22,126 $ 18,119 $ 20,171 $ 21,252
Income from Continuing
Operations before interest
and other financing costs 2,368 1,095 399 2,141 1,895
Income from Discontinued
Operations -- -- -- 70 180
Net Income 3,028(1) 1,195(2) 315 2,386(3) 1,825
Dividends Declared
Per Common Share .10 -- -- -- --
Per Share Data - Diluted:
Continuing Operations .64 .29 .08 .61 .47
Discontinued Operations -- -- -- .02 .05
Net Income .64 .29 .08 .63 .52
Weighted average number
of shares outstanding 4,752 4,153 3,872 3,771 3,516
Selected Balance
Sheet Data:
Working Capital 14,714 9,215 7,903 5,858 2,012
Total Assets 34,633 22,416 18,007 15,301 13,972
Long Term Debt
Including Current Portion 1,667 1,750 2,250 -- --
Capitalized Leases 147 12 41 76 90
90
Stock dividend 441 -- -- -- --
Total Liabilities 13,633 11,110 8,060 5,997 8,617
Accumulated Deficit (6,347) (9,376) (10,571) (10,886) (13,272)
Stockholders' Equity 21,000 11,306 9,948 9,303 5,355
-------------------------
15
(1) 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.
(2) 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..
(3) The Company's tax provision has been reduced as a result of available net
operating loss carry forwards. In addition, a $494,000 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 two segments:
|X| Software and Related Systems and Services
|X| Data Center (service bureau services)
Results of Operations
Fixed price software development contracts and licenses accounted for 44% of
consolidated revenue for each of the years ended December 31, 2003 and 2002. We
recognize revenue for fixed price contracts on the estimated percentage of
completion basis. Since the billing schedules under the contracts differ from
the recognition of revenue, at the end of any period, these contracts generally
result in either costs and estimated profits in excess of billing or billing in
excess of cost and estimated profits. Revenue from fixed price software
development contracts is determined using the percentage of completion method
which is based upon the time spent by our technical personnel on a project. As a
result, during the third and fourth quarters, when many of our employees are on
vacation and holidays, our revenue is affected. Our time spent on projects
during the second half of the year can generally range from 1% to 10% less than
time spent on projects during the first half of the year.
Years Ended December 31, 2003 and 2002
Our total revenue for 2003 was $27,175,000, an increase of $5,049,000, or 23%,
from our revenue for 2002, which was $22,126,000.
Revenue from contracts from government agencies represented 57% of revenue in
2003 and 52% of revenue in 2002. This reflects an increase in new government
contracts, primarily relating to contracts with two new county agencies.
Software and Related Systems and Services
Our Software and Related Systems and Services revenue for 2003 was $25,202,000,
an increase of $5,033,000, or 25%, from our revenue for 2002, which was
$20,169,000. Software and related systems and services revenue is comprised of
16
turnkey systems labor revenue, revenue from sales of third party hardware and
software, license revenue, maintenance revenue and revenue from small turnkey
systems.
The largest component of revenue was turnkey systems labor revenue, which
increased to $10,139,000 in 2003, from $7,418,000 in 2002, reflecting a 37%
increase. Turnkey systems labor revenue refers to labor associated with turnkey
installations and includes categories such as training, installation, project
management and development. This increase was substantially the result of an
increase in spending for information systems in the human services marketplace
and our ability to provide the staff necessary to generate additional revenue.
Labor rate price changes from 2003 to 2002 resulted in an 11% increase in the
average daily billing rate and accounted for approximately $567,000, or 21%, of
the total turnkey systems labor increase. The acquisition of the operations of
CareNet accounted for $380,000 or 14% of the total turnkey systems labor
increase. Revenue from third party hardware and software increased to $4,444,000
in 2003, from $3,822,000 in 2002, which represents an increase of 16%. Sales of
third party hardware and software are made in connection with the sales of
turnkey systems. These sales are typically made at lower gross margins than our
human services revenue. License revenue increased to $2,781,000 in 2003, from
$1,753,000 in 2002, reflecting an increase of 59%. 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. This
increase in license revenue was the result of an increase in spending for
information systems in the human services marketplace. Maintenance revenue
increased to $7,069,000 in 2003, from $6,247,000 in 2002, reflecting an increase
of 13%. As turnkey systems are completed, they are transitioned to the
maintenance division, thereby increasing our installed base. Revenue from the
sales of our small turnkey division decreased to $768,000 in 2003, from $929,000
in 2002, reflecting a decrease of 17%. This decrease is the result a redirection
of our sales efforts to larger turnkey sales. Small turnkey division sales
relate to turnkey contracts that are less than $50,000 and are usually completed
within one month.
Gross profit increased to $11,653,000 in 2003 from $7,006,000 in 2002,
reflecting an increase of 66%. Our gross margin percentage increased to 46% in
2003 from 35% in 2002. Our gross margin percentage has increased primarily as a
result of increased maintenance and license revenue and, to a lesser extent, an
increase in our labor revenue. Our infrastructure costs with respect to our
maintenance division are substantially in place and as new maintenance revenue
occurs, our gross profit margins are improved accordingly.
Data Center (Service Bureau Services)
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 $1,973,000 in 2003, from $1,957,000 in 2002,
representing an increase of $16,000, or 1%. This increase was due to an increase
in the client base.
Gross profit decreased to $939,000 in 2003 from $946,000 in 2002, reflecting a
decrease of less than 1%. Our gross margin percentage however, remained constant
at 48% for 2003 and 2002.
Operating Expenses
Selling, general and administrative expenses were $7,969,000 in 2003, reflecting
an increase of $2,431,000, or 44%, from the $5,538,000 in 2002. This increase
was in the area of sales and marketing salaries, which increased by $342,000;
sales commissions, which increased by $210,000; advertising and promotion, which
increased by $181,000; an increase in general and administrative salaries, which
increased by $316,000; provisions for bonuses, which increased by $404,000
provision for bad debts, which increased by $676,000 and the addition of the
17
amortization of the CareNet acquisition which was $139,000 in 2003 and was not
present in 2002.
We incurred product development and maintenance expenses of $2,255,000 in 2003,
an increase of 71% from the $1,319,000 in 2002. The increase in product
development and maintenance expense is the result of continuing investment in
product enhancement and extensions. These extensions include the development of
new software modules including Minimum Data Set (MDS) reporting, which is
designed to address 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 $200,000 in 2003, a decrease of $62,000, or 24%,
from the $262,000 in 2002. This decrease is the result of reduced borrowing
during 2003 with respect to our loan with Fleet Bank. The decrease in interest
expense was partially offset by in increase in borrowing related to the
promissory note issued to Shuttle Data Systems Corp. in connection with our
acquisition of CareNet and an increase in our capitalized lease arrangements.
Interest income was $74,000 in 2003, an increase of $28,000, or 61%, from 46,000
in 2002. 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 the exercise of options and warrants.
We have a net operating loss tax carry forward of approximately $6.5 million. 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, which was recorded as a tax benefit. In 2002, we recorded
current income tax expense of $84,000, which related to various state and local
taxes. In addition, we recognized a partial deferred tax benefit in the amount
of $400,000 principally due to a reduction in the valuation allowance of
$400,000 related to our net operating loss carry forward.
As a result of the foregoing factors, in 2003, we had net income of $3,029,000,
or $.69 per share (basic) and $.64 per share (diluted). For 2002, we had net
income of $1,195,000, or $.32 per share (basic) and $.29 per share (diluted).
Years Ended December 31, 2002 and 2001
Our total revenue for 2002 was $22,126,000, an increase of $4,007,000, or 22%,
from our revenue for 2001, which was $18,119,000.
Revenue from contracts from government agencies represented 52% of revenue in
2002 and 40% of revenue in 2001. This reflects an increase in new government
contracts.
Software and Related Systems and Services
Our Software and Related Systems and Services revenue for 2002 was $20,169,000,
an increase of $4,092,000, or 25%, from our revenue for 2001, which was
$16,077,000. Software and related systems and services revenue is comprised of
turnkey systems labor revenue, revenue from sales of third party hardware and
software, license revenue, maintenance revenue and revenue from small turnkey
systems. The largest component of revenue was turnkey systems labor revenue,
which increased to $7,418,000 in 2002, from $6,568,000 in 2001, reflecting a 13%
increase. Turnkey systems labor revenue refers to labor associated with turnkey
18
installations and includes categories such as training, installation, project
management and development. The increase in turnkey systems labor revenue was
substantially the result of an increase in spending for the information systems
in the human services marketplace and our ability to provide the staff necessary
to generate additional revenue. Labor rate price changes from 2002 to 2001
resulted in a 1% increase in the average daily billing rate and accounted for
approximately $76,000, or 9%, of the total turnkey systems labor increase.
Revenue from third party hardware and software increased to $3,822,000 in 2002,
from $2,390,000 in 2001, which represents an increase of 60%. Sales of third
party hardware and software are made in connection with the sales of turnkey
systems. These sales are typically made at lower gross margins than our human
services revenue. License revenue increased to $1,753,000 in 2002, from $747,000
in 2001, reflecting an increase of 135%. License revenue is generated as part of
a sale of a human services information system pursuant to a contract or purchase
order that includes delivery of the system and maintenance. The increase in
license revenue was the result of an increase in spending for information
systems in the human services marketplace. Maintenance revenue increased to
$6,247,000 in 2002, from $5,192,000 in 2001, reflecting an increase of 20%. As
turnkey systems are completed, they are transitioned to the maintenance
division, thereby increasing our installed base. Revenue from the sales of our
small turnkey division decreased to $929,000 in 2002, from $1,180,000 in 2001,
reflecting a decrease of 21%. Small turnkey division sales relate to turnkey
contracts that are less than $50,000 and are usually completed within one month.
We are experiencing a decline in small turnkey systems as a result of a
redirection of our sales efforts to larger turnkey sales.
Gross profit increased to $7,006,000 in 2002 from $5,095,000 in 2001, reflecting
an increase of 37%. Our gross margin percentage increased to 35% in 2002 from
32% in 2001. Although license and maintenance revenue, which are highly margined
revenue components, increased in 2002, our gross margin percentage did not
increase proportionately. This is because the mix of our revenue components for
2002 included a larger amount of third party hardware and software revenue than
2001. Our third party hardware and software revenue yields margins significantly
less than our margins from human services revenue.
Data Center (Service Bureau Services)
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 decreased to $1,957,000 in 2002 from $2,042,000 in 2001,
representing a decrease of $85,000, or 4%. In 2001, we provided additional
services to a client for fees in the amount of $120,000. These services were not
provided for in 2002.
Gross profit decreased to $946,000 in 2002 from $1,023,000 in 2001. Our gross
margin percentage decreased from 50% in 2001 to 48% in 2002. This decrease was
the result of the reduction in revenue with no corresponding decrease in costs.
Operating expenses
Selling, general and administrative expenses were $5,538,000 in 2002, reflecting
an increase of $1,154,000 or 26% from the $4,384,000 in 2001. This increase was
substantially in the area of provisions for bonuses, which increased by
$190,000, investor relations, which increased by $97,000, consulting fees, which
increased by $77,000, general insurance, which increased by $71,000, G&A
salaries which increased by $46,000, non recurring costs related to the national
users conference of $110,000 and settlement of a lawsuit for $69,000.
We incurred product development and maintenance expenses of $1,318,000 in 2002,
a decrease of 1% from the $1,335,000 in 2001. During 2002, we continued to
invest in improved functionality and technology in our products, but at a lesser
extent than in 2001.
19
Interest and other expenses was $262,000 in 2002, an increase of $75,000, or
40%, from the $187,000 in 2001. This increase was substantially the result of
interest associated with the $2,500,000 term loan, which we received in June
2001 and an other than temporary decline in the value of a security.
Interest and other income consisted of interest income of $46,000 in 2002 which
was generated from short term investments. Interest and other income consisted
of $42,000 which was generated from short term investments, and $30,000, which
relates to a gain realized on stock investment in 2001.
We have a net operating loss tax carry forward of approximately $9 million. In
2002, we recorded current income tax expense of $84,000, which related to
various state and local taxes. In addition, we recognized a partial deferred tax
benefit in the amount of $400,000 principally due to a reduction in the
valuation allowance of $400,000 related to our net operating loss carry forward.
In 2001 we recorded an income tax benefit of $31,000. This benefit was based
upon an over accrual of state and federal taxes in 2000 as well as the
recognition of an additional $6,000 benefit of our operating loss carry forward.
As a result of the foregoing factors, in 2002, we had a net income of
$1,195,000, or $.32 per share (basic) and $.29 per share (diluted). For 2001, we
had net income of $315,000, or $.09 per share (basic) and $.08 per share
(diluted).
Liquidity and Capital Resources
We had working capital of approximately $14.7 million at December 31, 2003 as
compared to working capital of approximately $9.2 million at December 31, 2002.
This increase of $5.5 million in working capital was the result of the
following: our net income, after adding back depreciation and amortization and
adjusting for the change in the current portion of the deferred tax asset,
increased working capital by $3.8 million. The increase in working capital also
included $6.5 million in net proceeds from the exercise of our stock options and
warrants. These increases were partially offset by the costs related to the
CareNet acquisition, which utilized approximately $979,000 of our cash. Our
working capital was further reduced by the CareNet acquisition because of the
current portion of the long-term debt assumed, which we recorded in the amount
of $166,000, and the assumption of certain other contract obligations totaling
$68,000. We also reduced our working capital by $441,000 as a result of the
payment of a dividend, an investment in capitalized software of $180,000 and by
an additional $2,354,000 for the acquisition of equipment and leasehold
improvements. In December 2003, we relocated our Islip, New York headquarters to
a larger facility in Great River, New York. Capital expenditures of
approximately $2 million related to this relocation and are included in the
acquisition of leasehold improvements and equipment mentioned above. The
remaining reduction in working capital of $612,000 was due to changes in other
current assets and liabilities. With respect to the $2 million investment in the
our new facility, we negotiated with our new landlord a rent free period of ten
months, which will result in approximately $442,000 of cash savings which will
partially offset the investment we have made.
In June 2001, we entered into a revolving credit and term loan agreement with
Fleet Bank ("Fleet"). This financing provides us with a five-year term loan of
$2.5 million, as well as a two year $1.5 million revolving line of credit. The
$1.5 million line of credit expired in June 2003. We did not utilize this line
of credit during its duration. We are currently exploring our options with
Fleet, relating to the possible increase in its term loan to be used for
acquisitions, as well as an additional term loan to assist in costs associated
with the relocation of our corporate headquarters. The current term loan bears
interest at LIBOR plus 2.5%. We have entered into an interest rate swap
agreement with Fleet 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. We have made
principal payments on the $2.5 million term loan and the amount outstanding at
December 31, 2003 is $1.3 million.
21
The terms of our 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.
We received Fleet's consent to the payment of the dividend declared in August
2003 and paid in September 2003. As of December 31, 2003, we were in compliance
with the financial covenants of this agreement.
On February 27, 2003, our Board of Directors authorized the purchase of up to
$100,000 of our common stock at any time the market price is less than $3.50 per
share. Purchases of stock will be made from time to time, depending on market
conditions, in open market or in privately negotiated transactions, at prices
deemed appropriate by management. There is no set time limit on the purchases.
We expect to fund any stock repurchases from our operating cash flow. As of
December 31, 2003, we have not made any stock repurchases.
On June 25, 2003, we acquired substantially all of the assets of the CareNet
segment of Shuttle Data Systems Corporation, d/b/a Adia Information Management
Corp., pursuant to an asset purchase agreement dated June 25, 2003, among the
Netsmart, 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 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 prime rate plus 1%. The cash portion of the purchase price was paid for out
of existing working capital. We 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. We are 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, we entered into a non-compete
and non-solicitation agreement with Steven Heintz, Jr. and Jennifer Lindbert for
which they were paid a fee of an aggregate $140,000, which fee was paid in cash
out of existing working capital and is included in "other assets" on the balance
sheet. The covenant not to compete is currently being amortized over a
three-year life.
We accounted for this acquisition pursuant to the purchase method of accounting.
For accounting purposes we recorded the assets and related liabilities of
CareNet effective as of June 30, 2003. We incorporated the operations of CareNet
into our operations commencing July 1, 2003.
In 2003, we incurred 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 2003,
we charged to $19,232 to operations.
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. 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 material acquisitions, and we cannot give any
assurance that we will be able to complete any material acquisitions.
Based on our outstanding contracts and our continuing business, we believe that
our cash flow from operations and our cash on hand will be sufficient to enable
us to fund our operations for at least the next twelve months. It is possible
that we may need additional funding if we go 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
22
product line and our marketing costs for seeking to expand the market for our
products and services to include smaller clinics and facilities and sole group
practitioners, exceed our expectation.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. These accounting
principles require us to make certain estimates, judgments and assumptions. We
believe that the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time that these
estimates, judgments and assumptions are made. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the periods presented. Among other things, estimates are
used in accounting for allowances for bad debts, deferred income taxes, expected
realizable values of assets (primarily capitalized software development costs
and customer lists) and revenue recognition. To the extent there are material
differences between these estimates, judgments or assumptions and actual
results, our financial statements will be affected. The significant accounting
policies that we believe are the most critical to aid in fully understanding and
evaluating our reported financial results include the following:
Revenue Recognition
Capitalized Software Development Costs
Impairment of Customer Lists
Revenue Recognition: Revenue associated with fixed price turnkey sales consists
of the following components: licensing of software, labor associated with the
installation and implementation of the software; and maintenance services
rendered in connection with such licensing activities. Revenue from fixed price
software development contracts and revenue under license agreements, which
require significant modification of the software package to the customer's
specifications, are recognized utilizing the estimated percentage-of-completion
method which uses the units-of-work-performed method to measure progress towards
completion. Revisions in cost estimates and recognition of losses on these
contracts are reflected in the accounting period in which the facts become
known. The complexity of the estimation process and issues related to the
assumptions, risks and uncertainties inherent with the application of the
percentage of completion method of accounting affect the amounts of revenue and
related expenses reported in our Consolidated Financial Statements. A number of
internal and external factors can affect our estimates, including labor rates,
utilization and efficiency variances and specification and testing requirement
changes. Maintenance contract revenue is recognized on a straight-line basis
over the life of the respective contract. We also derive revenue from the sale
of third party hardware and software which is recognized based upon the terms of
each contract. Consulting revenue is recognized when the services are rendered.
Data Center revenue is recognized in the period in which the service is
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 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
23
feasibility for our 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 maintance. 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 bear 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.
24
Contractual Obligations
The following table summarizes, as of December 31, 2003, our obligations and
commitments to make future payments under debt, capital leases and operating
leases:
Contractual Obligations Payments Due by
Period
Total Less than 1 - 3 4 - 5 years Over 5
1 year years years
Long Term Debt(1) 1,666,687 666,667 1,000,020 -- --
Capital Lease Obligations(2) 161,592 70,758 90,834 -- --
Operating Leases(3) 6,533,178 280,266 1,192,480 1,224,311 3,836,121
Total Contractual Cash Obligations 8,361,457 1,017,691 2,283,334 1,224,311 3,836,121
----------
(1) See Note 7 to Netsmart's Consolidated Financial Statements for the years
ended December 31, 2003, 2002 and 2001, which describes the Company's financing
agreement.
(2) See Note 10 to Netsmart's Consolidated Financial Statements for the
years ended December 31, 2003, 2002 and 2001, which describes the Company's
Capital Lease Obligation.
(3) See Note 12 to Netsmart's Consolidated Financial Statements for the years
ended December 31, 2003, 2002 and 2001, which describes the Company's Operating
Lease Obligations.
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 described above and those risks discussed from time to
time in this Form 10-K annual report, including the risks described under "Risk
Factors" and in other documents which we file with the Securities and Exchange
Commission. In addition, such statements could be affected by risks and
uncertainties related to product demand, market and customer acceptance,
competition, government regulations and requirements, pricing and development
difficulties, as well as general industry and market conditions and growth
rates, and general economic conditions. Any forward-looking statements speak
only as of the date on which they are made, and we do not undertake any
obligation to update any forward-looking statement to reflect events or
circumstances after the date of this Form 10-K.
25
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 an interest rate swap
agreement, which effectively converted our variable rate debt into a fixed rate
debt of 7.95%. Therefore, if the LIBOR rate plus 2.5% increases above 7.95%, it
may have a positive effect on our net 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, 2003,
the effect on our net income would be a decrease of approximately $8,900 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, 2003 and 2002. 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.
In thousands, except per share data amounts
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2003 (a)
Total revenue $6,119 $6,589 $7,108 $7,359
Gross profit 2,426 2,669 3,152 4,345
Net income 271 521 1,546 691
Per share amounts:
Net earnings - Basic: $ .07 $ .13 $ .34 $ .13
====== ====== ====== ======
Net earnings - Diluted: $ .06 $ .12 $ .33 $ .13
====== ====== ====== ======
(a) Includes a $100 and $800 reduction in the deferred tax asset valuation
allowance for the second and third quarters of 2003 respectively.
The Company recorded a $701,000 increase in its allowance for bad debts in the
fourth quarter of 2003. Also during the fourth quarter of 2003, the Company
capitalized $144,000 of software development costs incurred in quarters one
through three of 2003, totaling $62,000 $62,000 and $20,000 respectively.
26
2002 (b)
Total revenue $4,830 $5,447 $6,044 $5,805
Gross profit 1,685 1,843 1,880 2,174
Net income 103 142 202 748
Per share amounts:
Net earnings - Basic: $ .03 $ .04 $ .05 $ .19
====== ====== ====== ======
Net earnings - Diluted: $ .03 $ .04 $ .05 $ .18
====== ====== ====== ======
(b) Includes a $400 reduction in the deferred tax asset valuation allowance for
the fourth quarter of 2002.
Earnings per share for each quarter are computed using the weighted-average
number of shares outstanding during that quarter, while earnings per share for
the full year are computed using the weighted-average number of shares
outstanding during the year. Thus, the sum of the earnings per share for the
four quarters' earnings per share may not equal the full-year earnings per
share.
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
On May 7, 2002, the audit committee of the board of directors recommended, and
the board of directors approved, the dismissal of Eisner LLP (formerly Richard
A. Eisner & Company, LLP), as our independent public accountants and the
selection of Marcum & Kliegman LLP to serve as our independent public accountant
for the year ending December 31, 2002. The selection of Marcum & Kliegman LLP
was approved by our stockholders.
At no time since its engagement has Marcum & Kliegman LLP had any direct or
indirect financial interest in or any connection with the Registrant or any of
its subsidiaries other than as independent accountants.
The Company's financial statements for the year ended December 31, 2001 were
audited by Eisner LLP, whose report on such financial statements did not include
any qualification, disclaimer, modification or explanatory paragraph. There were
no disagreements with Eisner LLP during the year ended December 31, 2001 during
the period subsequent to December 31, 2001 on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
Item 9A. Controls and Procedures
Evaluation and Disclosure Controls and Procedures
Based on their evaluation as of December 31, 2003, our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures, as required by Exchange Act Rule 13a-15.
27
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were
effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported with the time periods specified by the SEC's rules and
forms.
Changes in Internal Controls
There were no significant changes in our internal controls over financial
reporting that occurred during the year ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Limitations on the Effectiveness of Controls
We believe that a control system, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the control system are
met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.
28
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 56 Chief executive officer and director
Gerald O. Koop 65 President and director
Anthony F. Grisanti 54 Chief financial officer, treasurer and
secretary
John F. Phillips 66 Vice president and director
Joseph G. Sicinski(1 & 2) 71 Director
Edward D. Bright 67 Chairman of the board and director
Francis J. Calcagno(1 & 2) 54 Director
John S.T. Gallagher(1 & 2) 73 Director
Yacov Shamash 54 Director
----------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Mr. James L. Conway has been our chief executive office since April 1998, a
director since January 1996 and 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 execellence for software and technology solutions. He
also serves and is a member of the CEO Roundtable for Long Island.
Mr. Gerald O. Koop has been one of our directors since June 1998 and president
since January 2001. He has held management positions with Creative Socio-Medics
for more than the past five years, most recently as its chief executive officer,
a position he has held since 1996.
Mr. John F. Phillips has been one of our directors and president of Creative
Socio-Medics since June 1994, when Creative Socio-Medics was acquired, and our
vice president since June 1994.
Mr. Anthony F. Grisanti has been our treasurer since June 1994, secretary since
February 1995 and chief financial officer since January 1996.
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, a position he held with Trans Global and its predecessor 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 was co-founder of BDS Strategic Solutions, Inc., a company
providing permanent and temporary staffing with solution services and programs
related to human resource issues. He is chairman of the BDS board of directors.
29
Mr. Edward D. Bright has been our chairman of the board and a director since
April 1998. From April 1998 until 1999, Mr. Bright was chairman, secretary,
treasurer and a director of Consolidated Technology Group Ltd., a public company
engaged in operating outpatient diagnostic imaging centers, now known as The
Sagemark Companies, Ltd. In 2000, Mr. Bright was reelected chairman of the board
and a director of Sagemark a position which he currently holds. From January
1996 until April 1998, Mr. Bright was an executive officer of or advisor to
Creative Socio-Medics Corp., our wholly-owned subsidiary.
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 is
deputy county executive for health and human services in Nassau County, New
York, a position he has held since 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.
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, of
American Medical Alert Corporation, a healthcare service provider, since 2001
and of Manchester Technologies, Inc., a hardware and software technology
provider, since December 2003.
Directors are elected for a term of one year.
None of our officers and directors are related.
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 anniversary 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.
Our board of directors has two committees - the audit committee and the
compensation committee.
The audit committee consists of three independent directors, Messrs. Francis J.
Calcagno, who is chairman of the committee, John S.T. Gallagher and Joseph G.
Sicinski. The responsibilities of the audit committee include overseeing our
30
financial reporting process, reporting the results of its activities to the
board, retaining and ensuring the independence of our auditors, approving
services to be provided by our auditors, reviewing our periodic filings with the
independent auditors prior to filing, and reviewing and responding to any
matters raised by the independent auditors in their management letter. The board
of directors has determined that at least one member of the audit committee, Mr.
Calcagno, is an audit committee financial expert. Mr. Calcagno is an independent
director as defined in the rule of the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934.
The compensation committee, which is composed of Messrs. Calcagno, Gallagher and
Sicinski, 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.
Excluding actions by unanimous written consent, during 2003, the board of
directors held eight meetings, the compensation committee held three meetings,
and the audit committee held four meetings. The audit committee met with our
independent accountants and chief financial officer prior to filing of this Form
10-K annual report to review the 2003 audited financial statements with the
independent auditors. During 2003, all of our directors attended at least 80% of
the meetings of the board and any committee of which they are members.
We pay a monthly fee of $1,250 to Mr. Calcagno, $750 to Mr. Sicinski and $2,000
to Mr. Gallagher and we pay the chairman of the board a monthly fee of $1,500.
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.
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 2003.
We have adopted a Code of Ethics applicable to our principal executive officers,
principal financial officer, principal accounting officer and controller, a copy
of which is filed as an exhibit to this Form 10-K and which is posted on our
website at www.csmcorp.com. A copy of Code 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.
31
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, 2003, 2002 and 2001 to our chief
executive officer and to each of our other officers whose salary and bonus for
2003 exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Long-Term
------ ---------
Compensation Compensation
------------ ------------
(Awards)
--------
Options, SARs
-------------
Name and Principal Position Year Salary Bonus (Number)
--------------------------- ---- ------ ----- --------
James L. Conway, CEO 2003 $207,814 $188,000 49,500
2002 193,151 120,000 20,000
2001 182,239 61,261 --
Gerald O. Koop, president 2003 189,880 206,539 49,500
2002 170,807 170,408 20,000
2001 160,959 97,874 --
John F. Phillips, vice 2003 187,772 84,000 35,000
president 2002 170,807 60,000 15,000
2001 160,959 41,041 --
Anthony F. Grisanti, chief 2003 162,343 144,000 27,500
financial officer 2002 148,463 106,000 16,000
2001 139,679 65,821 --
The bonuses for Mr. Koop includes accrued commissions of $135,539 for 2003,
$165,408 for 2002 and $82,874 for 2001. The 2003 commissions will be paid in
installments through 2004, the 2002 commissions were paid in installments
through 2003 and the 2001 commissions were paid in installments through 2002.
Employment Agreements
In January 2001, we entered into employment agreements with Messrs. James L.
Conway, John F. Phillips, Gerald O. Koop and Anthony F. Grisanti for a term
of three years for Messrs. Conway and Grisanti and two years for Messrs. Koop
and Phillips. During 2003 we extended the term of the employment agreements
by one year for Messrs. Conway, Koop & Grisanti. We believe that these
officers are vital to our business. Each of the officers has the right to
extend the term for an additional year beyond the 2003 amendment.
Following termination of the employment term, or earlier at the discretion of
the officer, each of the officers has the right to continue as a part-time
consultant for a term of five years for annual compensation of $75,000.
Pursuant to these employment agreements, these officers received the following
salaries in 2003: Mr. Conway - $187,689, Mr. Koop - $164,227, Mr. Phillips -
$164,277, and Mr. Grisanti - $140,766. 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 between 30 and 36 months' compensation. In January 2001, we entered
into a consulting agreement with Mr. Bright - see Item 13, Certain Relationships
and Related Transactions.
32
Compensation Committee Interlocks and Insider Participation
During fiscal 2003, our compensation committee consisted of Messrs. Calcagno,
Gallagher and Sincinski. None of them were our officers or employees during
fiscal 2003 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.
COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The compensation of our executive officers is determined by the Compensation
Committee of our board of directors, subject to applicable employment
agreements. Each member of the Compensation Committee is a director who is not
employed by us or any of our affiliates. The following report with respect to
certain compensation paid or awarded to our executive officers during fiscal
2003 is furnished by the directors who comprised the Compensation Committee
during fiscal 2003.
General Policies
Our compensation programs are intended to enable us to attract, motivate, reward
and retain the management talent required to achieve our corporate objectives,
and thereby increase shareholder value. It is our policy to provide incentives
to our senior management to achieve both short-term and long-term objectives and
to reward exceptional performance and contributions to the development of our
businesses. To attain these objectives, our executive compensation program
includes a competitive base salary, cash incentive bonuses and stock-based
compensation. See "Executive Compensation -- Employment Agreements".
Stock options are granted to employees, including our executive officers, under
our option plans. The Committee believes that stock options provide an incentive
that focuses the executive's attention on managing Netsmart from the perspective
of an owner with an equity stake in the business. Options are awarded with an
exercise price equal to the market value of common stock on the date of grant.
Among our executive officers, the number of shares subject to options granted to
each individual generally depends upon the level of that officer's
responsibility. The largest grants are awarded to the most senior officers who,
in the view of the Compensation Committee, have the greatest potential impact on
our profitability and growth. Previous grants of stock options are reviewed but
are not considered the most important factor in determining the size of any
executive's stock option award in a particular year.
Relationship of Compensation to Performance and Compensation of Chief Executive
Officer
The Compensation Committee annually establishes, subject to the approval of our
board of directors and any applicable employment agreements, the salaries to be
paid to our executive officers during the coming year. The base salary of each
of Messrs. Conway, Phillips, Koop and Grisanti is established by contract. In
setting salaries, the Compensation Committee takes into account several factors,
including the extent to which an individual may participate in the stock plans
maintained by us, and qualitative factors bearing on an individual's experience,
responsibilities, management and leadership abilities, and job performance.
For fiscal 2003, pursuant to the terms of his employment agreement with us, our
Chairman received a base salary and additional compensation (See "Executive
Compensation - Employment Agreements").
The Compensation Committee:
John S.T. Gallagher (Chairman)
Francis J. Calcagno
Joseph G. Sicinski
33
Option Exercises and Outstanding Options
The following table sets forth information concerning the grants of options made
during the year ended December 31, 2003.
Options/SAR Grants in Last Fiscal Year
Potential Realized Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Term (4)
Number of %of Total
Securities Options/SARS
Underlying Granted to Exercise or
options/SARS Employees in Base Price Expiration
Granted (1) 2003 (2) $/SH (3) Date 5%($) 10%($)
Koop 25,000 6.8% $ 4.93 1/27/08 $ 41,917 $ 95,095
Koop 24,500 6.6% $ 4.37 5/22/08 $ 36,412 $ 82,607
------ ----- -------- ---------
49,500 13.4% $ 78,329 $ 177,702
------ ----- -------- ---------
Phillips 17,500 4.7% $ 4.93 1/27/08 $ 29,342 $ 66,566
Phillips 17,500 4.7% $ 4.37 5/22/08 $ 26,009 $ 59,005
------ ----- -------- ---------
35,000 9.5% $ 55,351 $ 125,572
------ ----- -------- ---------
Edward D. Bright 5,000 1.4% $ 4.37 5/22/08 $ 7,431 $ 16,859
Anthony Grisanti 17,500 4.7% $ 4.93 1/27/08 $ 29,342 $ 66,566
Anthony Grisanti 10,000 2.7% $ 4.37 5/22/08 $ 14,862 $ 33,717
------ ----- -------- ---------
27,500 7.4% $ 44,204 $ 100,284
------ ----- -------- ---------
James Conway 25,000 6.8% $ 4.93 1/27/08 $ 41,917 $ 95,095
James Conway 24,500 6.6% $ 4.37 5/22/08 $ 36,412 $ 82,607
------ ----- -------- ---------
49,500 13.4% $ 78,329 $ 177,702
------ ----- -------- ---------
Joseph Sicinski 5,000 1.4% $ 4.37 5/22/08 $ 7,431 $ 16,859
Frank Calcagno 10,000 2.7% $ 4.37 5/22/08 $ 14,862 $ 33,717
Jack Gallagher 5,000 1.4% $ 4.37 5/22/08 $ 7,431 $ 16,859
(1) Includes options granted in 2003.
(2) Based on a total of 381,000 shares subject to options granted to employees
under Netsmart's options plans in 2003.
(3) 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
January 27, 2003 and May 22, 2003.
(4) 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.
34
The following table sets forth information concerning the exercise of options
during the year ended December 31, 2003 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
(All options were fully exercisable at year end or by 60 days after the dates
as of which the information is provided)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/At Fiscal Options/At Fiscal
Shares Acquired Value Year-End (#) Year-End ($)
------------ ------------
Upon Exercise Realized Exercisable/ Exercisable/
------------- -------- ------------
Name ($) Unexercisable Unexercisable
---- --- -------------
(a) (b) (c) (d) (e)
James L. Conway 44,750 $227,668 12,500/12,250 $130,250/134,505
Gerald O. Koop 112,500 $421,550 24,750/12,250 $264,755/134,505
John F. Phillips 92,500 $530,898 17,500/8,750 $187,250/96,075
Anthony F. Grisanti 0 $ 0 57,250/5,000 $696,725/54,900
The determination of "in the money" options at December 31, 2003, is based on
the closing price of the common stock on the Nasdaq SmallCap Market on December
31, 2003, which was $15.35 per share.
Information relating to securities issued under equity compensation plans is
disclosed in response to "Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters".
35
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Set forth below is information as of February 18, 2004, 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.
Percent of
----------
Name and Address Shares Outstanding Common
---------------- ------ ------------------
Stock
-----
John F. Phillips 145,250 2.7%
Edward D. Bright 129,877 2.4%
Gerald O. Koop 154,617 2.9%
James L. Conway 119,998 2.3%
Anthony F. Grisanti 132,315 2.5%
Joseph G. Sicinski 25,000 *
Francis J. Calcagno 10,000 *
John S.T. Gallagher 15,000 *
All directors and officers as a group (eight 732,057 13.3%
individuals)
Eagle Asset Management 457,245 8.6%
880 Carillon Parkway
St. Petersburg, FL
-------------
* 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 18, 2004 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 26,250
Edward D. Bright 5,000
Gerald O. Koop 37,000
James L. Conway 24,750
Anthony F. Grisanti 62,250
All officers and directors as a group 180,250
36
Item 13. Certain Relationships and Related Transactions.
In August 2001, we entered into a non exclusive investment banking agreement
with Dominick & Dominick, Inc., of which Mr. Francis J. Calcagno, one of our
directors, is a senior managing director. Mr. Calcagno was not a director at the
time we entered into this agreement with Dominick & Dominick. Dominick &
Dominick held warrants to purchase 100,000 shares of common stock at an exercise
price of $5.45 per share. These warrants were issued pursuant to a nonexclusive
investment banking agreement dated September 8, 1999 and were exercised during
2003. During 2002, this non exclusive investment banking agreement was
terminated.
We entered into a consulting agreement with Mr. Bright dated January 1, 2001,
pursuant to which Mr. Bright is to devote 50% of his time to our business for a
period of two years. Following the completion of the term, or earlier at the
discretion of Mr. Bright, Mr. Bright continues as a consultant for an additional
five years. Mr. Bright receives compensation at the annual rate of $75,000
during the consulting term, and we provide him with an automobile allowance and
insurance benefits. Mr. Bright is eligible, at the discretion of the board, to
participate in a bonus pool which may be established by the board. In the event
that Mr. Bright's consultant relationship is terminated as a result of a change
of control, we are to pay him as severance pay between 30 and 36 months
compensation. We paid Mr. Bright total compensation of $87,000 for 2003, in
addition to a bonus of $7,500.
Item 14. Principal Accounting Fees and Services
Audit Fees
We were billed by Marcum & Kliegman LLP the aggregate amount of approximately
$67,500 in respect of fiscal 2003 and $ 98,000 in respect to fiscal 2002 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
Marcum & Kliegman LLP did not provide any assurance and related services in
fiscal 2003 or fiscal 2002 that are reasonably related to the performance of the
audit or review of our financial statements that are not reported under the
preceding paragraph.
Tax Fees
We were billed by Marcum & Kliegman LLP the aggregate amount of approximately
$27,475 in respect of fiscal 2003 and $20,989 in respect of fiscal 2002 for fees
for services consisting primarily of tax compliance, tax advice or tax planning
services in respect of the preparation of our federal and state tax returns.
All Other Fees
Marcum & Kliegman LLP rendered other services consisting primarily of services
rendered in connection with acquisitions, reviews of registration statements and
issuances of related consents, audits of employee benefit plans and advice
regarding common stock purchase warrants. Aggregate fees billed for all other
services rendered by Marcum & Kliegman LLP were approximately $85,629 for fiscal
2003 and $-- in respect of fiscal 2002.
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.
37
Pre-Approval Policies
Our Audit Committee has determined to adopt a blanket pre-approval of non
prohibited audit related services by Marcum & Kliegman LLP for fees in an
amount not to exceed an aggregate of $10,000.
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.
38
1. Financial Statements
Report of Marcum & Kliegman LLP
Report of Eisner LLP
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the Years Ended December
31, 2003, 2002 and 2001 Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 2003,
2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and
2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
On October 21, 2003, we filed a Current Report on Form 8-K (Date
of Report: October 21,2003) to report, as an item 9 disclosure,
the issuance of a press release announcing our financial results
for the third quarter ended September 30, 2003.
On October 23, 2003, we filed a Current Report on Form 8-K (Date
of Report: October 23, 2003) to report as an item 5 disclosure,
the issuance of a press release announcing that we had reduced
the exercise price of our Series B Common Stock Purchase Warrants
from $12.00 per share to $10.00 per share.
4. Exhibits
3.1(1) Restated Certificate of Incorporation, as amended
3.2(1) By-Laws
10.1(2) Employment Agreement dated January 1, 2001, between
the Registrant and James L. Conway
10.2(2) Employment Agreement dated January 1, 2001, between
the Registrant and John F. Phillips
10.3(2) Employment Agreement dated January 1, 2001, between the
Registrant and Gerald O. Koop
10.4(2) Employment Agreement dated January 1, 2001, between
the Registrant and Anthony F. Grisanti
10.5(2) Consulting Agreement dated January 1, 2001, between the
Registrant and Edward D. Bright
10.6(1) 1993 Long-Term Incentive Plan
10.7(3) 1998 Long-Term Incentive Plan
10.8(4) 1999 Long-Term Incentive Plan
10.9(5) 2001 Long-Term Incentive Plan
10.10(4) 1999 Employee Stock Purchase Plan
10.11(2) Agreement dated June 1, 2001, between the Registrant and
Fleet Bank
10.12(6) AIMS Acquisition Agreement
10.13(7) 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.
10.14 Lease agreement dated as of December 22, 2003, between
Registrant and Spacely LLC.
21.1 Subsidiaries of the Registrant
23.1 Consent of Marcum & Kliegman LLP
23.2 Consent of Eisner 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
(1) 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.
(2) Filed as an exhibit to the Registrant's 10-K/A dated August 21, 2003.
(3) 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.
(4) 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.
(5) Filed as an appendix to the Registrant's proxy statement dated
November 14, 2002, relating to its 2002 Special Meeting of Stockholders held on
January 9, 2003 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's 8-K dated May 10, 2001.
(7) Filed as an exhibit to the Registrant's 8-K dated July 8, 2003.
39
NETSMART TECHNOLOGIES, INC.
AND SUBSIDIARY
F - 1
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
INDEX
-------------------------------------------------------------------------------
Page to Page
Independent Auditors' Report - Marcum & Kliegman LLP...... ........F-3
Independent Auditors' Report - Eisner LLP......................... F-4
Consolidated Balance Sheets........................................F-5.....F-6
Consolidated Statements of Income..................................F-7.....F-8
Consolidated Statements of Stockholders' Equity....................F-9
Consolidated Statements of Cash Flows..............................F-10....F-12
Notes to Consolidated Financial Statements ........................F-13....F-31
. . . . . . . . . . .
F - 2
INDEPENDENT AUDITORS' REPORT
To the Audit Committee of the Board of Directors
and Stockholders of
Netsmart Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Netsmart Technologies, Inc. and subsidiaries as of December 31, 2003 and 2002
and the related consolidated statements of income, stockholders' equity and cash
flows for the years then ended. 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 auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Netsmart Technologies, Inc. and its subsidiaries as of December 31, 2003 and
2002, and the consolidated results of its operations its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/*
-----------------------
Marcum & Kliegman LLP
Woodbury, New York
February 26, 2004
F - 3
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Netsmart Technologies, Inc.
We have audited the accompanying consolidated statement of income, stockholders'
equity and cash flows of Netsmart Technologies, Inc. and subsidiaries for the
year ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and consolidated
cash flows of Netsmart Technologies, Inc. and its subsidiaries as of
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/*
----------------------
Eisner LLP
New York, New York
February 15, 2002
F - 4
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
December 31,
-----------
2003 2002
---- ----
Assets:
Current Assets:
Cash and Cash Equivalents $15,920,993 $ 7,251,740
Accounts Receivable - Net 8,004,481 7,058,855
Costs and Estimated Profits in Excess
of Interim Billings 1,817,135 3,857,522
Deferred taxes 918,000 459,000
Other Current Assets 541,458 337,719
---------- -----------
Total Current Assets 27,202,067 18,964,836
---------- -----------
Property and Equipment - Net 2,591,758 364,306
---------- -----------
Other Assets:
Software Development Costs - Net 1,087,116 382,387
Customer Lists - Net 2,701,751 2,141,855
Deferred Taxes 882,000 441,000
Other Assets 168,697 121,419
---------- ----------
Total Other Assets 4,839,564 3,086,661
---------- ----------
Total Assets $34,633,389 $22,415,803
========== ==========
See Notes to Consolidated Financial Statements.
F - 5
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------
December 31,
2003 2002
---- ----
Liabilities and Stockholders' Equity:
Current Liabilities:
Current Portion - Long Term Debt $ 666,667 $ 500,000
Current Portion Capital Lease Obligations 61,416 9,886
Accounts Payable 1,329,765 1,166,145
Accrued Expenses 2,295,454 1,063,559
Interim Billings in Excess of Costs and Estimated
Profits 7,263,285 5,914,970
Deferred Revenue 871,628 1,095,412
----------- ----------
Total Current Liabilities 12,488,215 9,749,972
---------- ----------
Long Term Debt - Less current portion 1,000,020 1,250,012
Capital Lease Obligations - Less current portion 85,982 1,864
Interest Rate Swap at Fair Value 59,068 107,713
---------- ----------
Total Non Current Liabilities 1,145,070 1,359,589
----------- ----------
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
5,528,247 and 5,304,489 shares at December 31, 2003,
4,046,430 and 3,956,633 shares at December 31, 2002 55,282 40,464
Additional Paid-in Capital 29,010,212 21,411,777
Unearned Compensation -- (14,400)
Accumulated Comprehensive loss - Interest Rate Swap (59,068) (107,713)
Accumulated Deficit (6,346,873) (9,375,774)
---------- ----------
22,659,553 11,954,354
Less: cost of shares of Common Stock held
in treasury - 223,758 shares at December 31, 2003
and 89,797 shares at December 31, 2002 1,659,449 648,112
---------- ----------
Total Stockholders' Equity 21,000,104 11,306,242
---------- ----------
Total Liabilities and Stockholders' Equity $34,633,389 $22,415,803
========== ==========
See Notes to Consolidated Financial Statements.
F - 6
NETSMART TECHNOLOGIES, INC. AND SUBSIDIAY
-------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------------
Year ended December 31,
2003 2002 2001
---- ---- ----
Revenues:
Software and Related
Systems and Services:
General $18,132,558 $13,921,449 $10,885,337
Maintenance Contract
Services 7,069,000 6,247,336 5,191,986
---------- ---------- ----------
Total Software and Related
Systems and Services 25,201,558 20,168,785 16,077,323
Data Center Services 1,973,492 1,957,392 2,042,098
---------- ---------- ----------
Total Revenues 27,175,050 22,126,177 18,119,421
---------- ---------- ----------
Cost of Revenues:
Software and Related
Systems and Services:
General 10,142,818 9,814,637 7,367,949
Maintenance Contract
Services 3,406,183 3,348,217 3,614,336
---------- ---------- ----------
Total Software and Related
Systems and Services 13,549,001 13,162,854 10,982,285
Data Center Services 1,034,382 1,011,602 1,018,950
---------- ---------- ----------
Total Cost of Revenues 14,583,383 14,174,456 12,001,235
---------- ---------- ----------
Gross Profit 12,591,667 7,951,721 6,118,186
---------- ---------- ----------
Selling, General and
Administrative Expenses 7,968,892 5,538,184 4,384,291
Research, Development and Maintenance 2,254,676 1,318,124 1,334,577
---------- ---------- ----------
Total 10,223,568 6,856,308 5,718,868
---------- ---------- ----------
Operating Income 2,368,099 1,095,413 399,318
Interest and Other Income 73,800 46,115 71,742
Interest and Other Expense (199,573) (262,310) (186,638)
---------- ---------- ----------
Income before Income Tax (Benefit) 2,242,326 879,218 284,422
Income Tax (Benefit) (786,575) (316,000) (31,000)
---------- ---------- ----------
Net Income $ 3,028,901 $ 1,195,218 $ 315,422
========== ========== ==========
See Notes to Consolidated Financial Statements.
F - 7
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------------
Year ended December 31,
2003 2002 2001
---- ---- ----
Earnings Per Share ("EPS") of Common Stock
Basic EPS $ .69 $ .32 $ .09
========== ========== ==========
Weighted Average Number of Shares of
Common Stock Outstanding 4,418,364 3,748,537 3,618,260
========== ========== ==========
Diluted EPS $ .64 $ .29 $ .08
========== ========== ==========
Weighted Average Number of Shares of
Common Stock and Common Stock
Equivalents Outstanding 4,752,068 4,153,484 3,871,876
========== ========== ==========
See Notes to Consolidated Financial Statements.
F - 8
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
-----------
Comprehensive
-------------
Additional Loss Total
---------- ---- -----
Common Stock Paid-in Unearned Accumulated Interest Rate Comprehensive Treasury Shares Stockholders'
------------ ------- -------- ----------- ------------- ------------- --------------- ------------
Shares Amount Capital Compensation Deficit Swap Income Shares Amount Equity
------ ------ ------- ------------ ------- ---- ------ ------ ------ ------
Balance -
January 1, 2001 3,524,692 $35,246 $20,454,391 $ -- $(10,886,414) -- $ -- 28,038 $ (299,810) $ 9,303,413
Common Stock
Issued -
Exercise of
Options 14,555 146 21,688 -- -- -- -- -- -- 21,834
Common Stock
Issued -
Acquisition 180,000 1,800 374,400 -- -- -- -- -- -- 376,200
Issuance and
Extension of
Warrants -- -- 5,687 -- -- -- -- -- -- 5,687
Change in Fair
Value of Interest
Rate Swap -- -- -- -- -- (74,875) (74,875) -- -- (74,875)
Net Income -- -- -- -- 315,422 -- 315,422 -- -- 315,422
--------- ------ ---------- ------- ----------- ------- --------- ------ --------- ----------
$ 240,547
=========
Balance -
December 31, 2001 3,719,247 37,192 20,856,166 -- (10,570,992) (74,875) 28,038 (299,810) 9,947,681
Common Stock
Issued -
Exercise of
Options 327,183 3,272 501,938 -- -- -- $ -- 61,759 (348,302) 156,908
Issuance of
Warrants and
Options -- -- 53,673 (14,400) -- -- -- -- -- 39,273
Change in Fair
Value of Interest
Rate Swap -- -- -- -- -- (32,838) (32,838) -- -- (32,838)
Net Income -- -- -- -- 1,195,218 -- 1,195,218 -- -- 1,195,218
--------- ------ ---------- ------- ----------- ------- --------- ------ --------- ----------
$1,162,380
=========
Balance -
December 31, 2002 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 $29,010,282 $ -- $(6,346,873) $(59,068) 223,758 $(1,659,449)$21,000,104
========= ====== ========== ====== ========== ======= ======= ========== ==========
See Notes to Consolidated Financial Statements.
F - 9
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
Year ended December 31,
2003 2002 2001
---- ---- ----
Operating Activities:
Net Income $ 3,028,901 $ 1,195,218 $ 315,422
----------- ---------- -----------
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation and Amortization 1,233,592 1,036,721 1,010,821
Costs Related to Issuance
of warrants and options 20,736 39,273 5,687
Provision for Doubtful Accounts 1,046,094 370,000 340,000
Deferred Income Taxes (900,000) (400,000) (6,000)
Loss on Retirement of Property and Equipment 18,632 -- --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,991,720) (1,551,885) (1,528,372)
Costs and Estimated Profits in
Excess of Interim Billings 2,040,387 (74,166) 284,899
Other Current Assets (344,881) (68,345) 16,710
Other Assets 69,389 89,368 (124,574)
Increase [Decrease] in:
Accounts Payable 163,620 477,463 (118,616)
Accrued Expenses 645,226 562,509 (794,739)
Interim Billings in Excess of
Costs and Estimated Profits 1,287,055 1,955,740 413,547
Deferred Revenue (223,784) 409,843 77,125
----------- ---------- -----------
Total Adjustments 3,064,346 2,846,521 (423,512)
----------- ---------- -----------
Net Cash Provided by (Used In)
Operating Activities 6,093,247 4,041,739 (108,090)
----------- ---------- ------------
Investing Activities:
Acquisition of Property and
Equipment (1,633,226) (254,467) (120,765)
Capitalized Software Development (179,500) -- --
AIMS Acquisition -- -- (589,914)
CareNet Acquisition (1,047,845) -- --
----------- ---------- -----------
Net Cash Used In Investing Activities (2,860,571) (254,467) (710,679)
----------- ---------- -----------
See Notes to Consolidated Financial Statements.
F - 10
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
-------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------
Year ended December 31,
2003 2002 2001
---- ---- ----
Financing Activities:
Proceeds from Term Loan -- -- 2,500,000
Payment of Capitalized Lease Obligations (47,678) (29,674) (34,790)
Dividend Paid (441,447) --
--
Net Proceeds from Stock Options and
Warrants Exercised 6,509,027 156,908 21,834
Payments of Term Loan (583,325) (499,992) (249,996)
---------- ---------- ---------
Net Cash Provided by (Used in)
Financing Activities 5,436,577 (372,758) 2,237,048
---------- ---------- ---------
Net Increase in Cash
and Cash Equivalents 8,669,253 3,414,514 1,418,279
Cash and Cash Equivalents -
Beginning of Year 7,251,740 3,837,226 2,418,947
---------- ---------- ---------
Cash and Cash Equivalents -
End of Year $15,920,993 $7,251,740 $3,837,226
========== ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the years for:
Interest $ 159,940 $ 167,542 $ 135,566
Income Taxes $ 93,639 $ 41,517 $ 87,859
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
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
was $1,011,337, which was the market value of the common stock on the date 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
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.
F - 11
Year ended December 31, 2002:
During 2002, stock options to purchase 327,183 shares of common stock were
exercised and proceeds of $505,210 includes $348,302, representing the market
value of the Company's common stock which was received for the exercise price of
certain of these options.
The fair value of the interest rate swap calculated at December 31, 2002 was
$107,713.
Year ended December 31, 2001:
The Company issued 180,000 shares of common stock related to the AIMS
acquisition. These shares were valued at $376,200 which was the market value at
the date of grant. The Company also recorded a liability of $194,986 for
contract obligations assumed.
The fair value of the interest rate swap calculated at December 31, 2001 was
$74,875.
See Notes to Consolidated Financial Statements
F - 12
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #1
-------------------------------------------------------------------------------
[1] The Company
Netsmart Technologies, Inc. and subsidiaries (the "Company") licenses,
customizes and installs its proprietary software products, operates a service
bureau 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.
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements include
Netsmart Technologies, Inc. ("Netsmart"), and its wholly-owned subsidiary,
Creative Socio-Medics Corp. ("CSM"). In addition, the results of operations from
the CareNet acquisition (see note 5) is included from July 2003 and the results
of operations from the Advanced Institutional Management Software, Inc. ("AIMS")
acquisition is included from May 2001. All intercompany transactions are
eliminated in consolidation. Netsmart owned an 80% interest in a joint venture,
PsyMedX. No minority interest related to the joint venture has been recorded,
since the joint venture partner was in breach of the joint venture agreement and
in 2001 ceased to exist.
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 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 and
the capitalization, depreciation and amortization of certain long-term assets
(primarily software development costs and customer lists). 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 $1,042,000 and $2,064,000 at December 31, 2003
and 2002 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.
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, 2003, 2002 and 2001, approximately 57%, 52% and 40% respectively,
of the Company's revenue were generated from contracts directly or indirectly
with government agencies.
During the year ended December 31, 2003, one customer accounted for
approximately $2,861,000 or 10.5% of revenue. The account receivable from this
customer at December 31, 2003 was $589,000 or 7% of the total account
receivable. No one customer accounted for more than 10% of revenue for the years
ended December 31, 2002 and 2001.
F - 13
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
-------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
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, 2003
and 2002, cash and cash equivalent balances of $15.8 million and $7.1 million
respectively, were held at a financial institution in excess of federally
insured limits.
Revenue Recognition - The Company derives revenue principally from the licensing
of its software and maintenance services rendered in connection with such
licensing activities. Information processing revenue is recognized in the period
in which the service is provided. Maintenance contract revenue is recognized on
a straight-line basis over the life of the respective contract. The Company also
derives revenue from the sale of third party hardware and software which is
recognized based upon the terms of each contract. The above 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. In addition,
consulting revenue is recognized when the services are rendered
Software development revenue from time-and-materials contracts, which require
customization and modification, are recognized as services are performed.
Revenue from fixed price software development contracts and revenue under
license agreements which require significant modification of the software
package to the customer's specifications, are recognized on the estimated
percentage-of-completion method. Progress towards completion on a contract is
measured using the units of work performed method. 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.
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.
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 11 Years
Capitalized Software Development 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
F - 14
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
-------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
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 bear 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 5 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.
The amount allocated to purchased software related to the CareNet acquisition
(see note 5), totaled $883,075.
Information related to capitalized software development costs applicable to
operations is as follows:
Year ended December 31, 2003 2002 2001
----------------------- ---- ---- -----
Beginning of Year $ 382,387 $ 686,301 $ 822,645
Capitalized 1,062,575 -- 167,000
Amortization (357,846) (303,914) (303,344)
---------- --------- --------
Net $ 1,087,116 $ 382,387 $ 686,301
========== ========= ========
Customer Lists - Customer lists represent a listing of customers obtained
through the acquisitions of CSM, Johnson Computing System, ("Johnson"), AIMS and
CareNet, (see note 5), to which the Company can market its products. Customer
lists are being amortized on the straight-line method over an estimated useful
life of 12 years for the CSM and Johnson lists, 9 years for the CareNet list and
7 years for the AIMS list. The amount allocated to customer lists related to the
CareNet acquisition totaled $1,097,138.
Customer lists at December 31, 2003 and 2002 are as follows:
December 31,
2003 2002
---- ----
Customer Lists $6,197,461 $5,100,323
Less: Accumulated Amortization 3,495,710 2,958,468
--------- ---------
Net $2,701,751 $2,141,855
========= =========
Amortization expense amounted to $537,242, $476,290 and $440,787, respectively,
for the years ended December 31, 2003, 2002 and 2001.
Future amortization of customer lists will be approximately $598,000, $598,000,
$598,000, $285,000 and $179,000 for the years ending December 31, 2004, 2005,
2006, 2007 and 2008 respectively, and $444,000 thereafter.
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
F - 15
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
-------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
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. The
provisions of these interpretations that are applicable to the Company were
implemented on a prospective basis as of January 1, 2002, which had no material
effect on the Company's consolidated financial position or results of
operations.
Stock Options and Similar Equity Instruments - At December 31, 2003, the Company
had three stock-based employee compensation plans, 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 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,
2003 2002 2001
---- ---- ----
Net Income as Reported $3,028,901 $1,195,218 $ 315,422
Deduct: Total stock-based employee compensation
expense determined under the fair value-based method
for all awards, net of related tax effect 857,768 123,952 473,749
--------- --------- ----------
Pro Forma Net Income (Loss) $2,171,133 $1,071,266 $ (158,327)
========= ========= ==========
Basic Net Income Per Share as Reported $ .69 $ .32 $ .09
========= ========= ==========
Basic Pro Forma Net Income (Loss) Per Share $ .49 $ .29 $ (.04)
========= ========= ==========
Diluted Net Income Per Share as Reported $ .64 $ .29 $ .08
========= ========= ==========
Diluted Pro Forma Net Income (Loss) Per Share $ .46 $ .26 $ (.04)
========= ========= ==========
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:
2003 2002 2001
---- ---- ----
Expected Life (Years) 5 5 5
Interest Rate 4.00% 4.00% 4.00%
Annual Rate of Dividends 0% 0% 0%
Volatility 66% 63% 60%
F - 16
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
-------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
The weighted average fair value of options at date of grant using the fair value
based method during 2003, 2002 and 2001 is estimated at $2.38, $1.42 and $1.45,
respectively.
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 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 --, 713,544 and 723,385 during the years ended December 31, 2003,
2002 and 2001, respectively that were not included in the calculation of
diluted EPS because they were antidilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Numerator:
Net Income $3,028,901 $1,195,218 $ 315,422
========= ========= =========
Denominator:
Weighted average shares 4,418,364 3,748,537 3,618,260
--------- --------- ---------
Effect of dilutive securities:
Employee stock options 333,704 395,668 253,616
Stock warrants -- 9,279 --
--------- --------- ---------
Dilutive potential common shares 333,704 404,947 253,616
--------- --------- ---------
Denominator for diluted earnings per
share-adjusted weighted average shares
after assumed conversions 4,752,068 4,153,484 3,871,876
========= ========= =========
Advertising - Advertising costs are expensed as incurred. Advertising expense
amounted to $328,199, $139,110 and $290,146 for the years ended December 31,
2003, 2002 and 2001, respectively.
Reclassification - Certain prior years' amounts have been reclassified to
conform to the current year's presentation.
F - 17
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
-------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies - [Continued]
Financial Instruments - Effective June 2001 the Company adopted SFAS No. 133,
"Accounting for Derivative instruments and Hedging Activities" as amended. SFAS
No. 133 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 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 an interest rate swap 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.
New Accounting Pronuncements - In January 2003, and revised in December 2003,
the FASB issued Interpretation No. 46 ("FIN 46") "Consolidation of Variable
Interest Entities." Until this interpretation, a company generally included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. FIN 46 requires a variable interest entity,
as defined, to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns. Certain
provisions of FIN 46 were deferred until the period ending after March 15, 2004.
The adoption of FIN 46 for provisions effective during 2003 did not have a
material impact on the Company's financial position, cash flows or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." This statement clarifies the accounting guidance on (1) derivative
instruments (including certain derivative instruments embedded in other
contracts) and (2) hedging activities that fall within the scope of SFAS No.
133. SFAS No. 149 also amends certain other existing pronouncements, which will
result in more consistent reporting of contracts that are derivatives in their
entirety or that contain embedded derivatives that warrant separate accounting.
SFAS 149 is effective (1) for contracts entered into or modified after September
30, 2003, with certain exceptions, and (2) for hedging relationships designated
after September 30, 2003. The guidance is to be applied prospectively. The
adoption of SFAS No. 149 did not have a material impact on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
addresses certain financial instruments that, under previous guidance, could be
accounted for as equity, but now must be classified as liabilities in statements
of financial position. These financial instruments include: 1) mandatorily
redeemable financial instruments, 2) obligations to repurchase the issuer's
equity shares by transferring assets, and 3) obligations to issue a variable
number of shares. SFAS No. 150 is effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS No. 150 had no impact on the Company's consolidated financial
position or results of operations.
F - 18
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
-------------------------------------------------------------------------------
[3] Accounts Receivable
Accounts receivable is shown net of allowance for doubtful accounts of
$1,126,236 and $530,640 at December 31, 2003 and 2002 respectively. The changes
in the allowance for doubtful accounts are summarized as follows:
Year Ended December 31,
2003 2002 2001
---- ---- ----
Beginning Balance $ 530,640 $ 357,994 $ 370,222
Provision for Doubtful Accounts 1,046,094 370,000 340,000
Charge-offs (450,498) (197,354) (352,228)
--------- -------- --------
Ending Balance $ 1,126,236 $ 530,640 $ 357,994
========= ======== ========
[4] Costs, estimated profits, and billings on uncompleted contracts are
summarized as follows:
December 31,
2003 2002
---- ----
Costs Incurred on Uncompleted Contracts $ 11,540,502 $ 18,599,730
Estimated Profits 7,615,475 10,501,200
---------- ----------
Total 19,155,977 29,100,930
Billings to Date 24,602,127 31,158,378
---------- ----------
Net $ (5,446,150) $ (2,057,448)
========== ==========
Included in the accompanying consolidated balance sheet under the following
captions:
Costs and estimated profits in excess of
interim billings $ 1,817,135 $ 3,857,522
Interim billings in excess of costs and
estimated profits (7,263,285) (5,914,970)
---------- ----------
Net $ (5,446,150) $ (2,057,448)
========== ==========
F - 19
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
-------------------------------------------------------------------------------
[5] Acquisitions
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 common stock of the Company 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 year
ended December 31, 2003 was $23,333.
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.
The following unaudited proforma operating results assumes the CareNet
acquisition occurred on January 1, 2002. In the opinion of management, all
adjustments necessary to present fairly such unaudited proforma information has
been made. The results presented are not necessarily indicative of the results
of operations had the acquisition actually occurred on January 1, 2002.
Year ended December 31,
(in 000's except Per Share Data)
2003 2002
---- ----
Revenue $27,530 $22,773
Net Income $ 3,040 $ 1,218
Net Income Per Share - Basic $ .69 $ .32
Diluted $ .64 $ .29
F - 20
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
-------------------------------------------------------------------------------
[6] Property and Equipment
Property and equipment consist of the following:
December 31,
2003 2002
---- ----
Equipment, Furniture and Fixtures $2,337,632 $1,417,042
Leasehold Improvements 562,672 305,862
--------- ---------
Totals - At Cost 2,900,304 1,722,904
Less: Accumulated Depreciation
and Amortization 308,546 1,358,598
--------- ---------
Net $2,591,758 $ 364,306
========= =========
Depreciation and amortization expense amounted to $315,171, $256,517, and
$266,690, respectively for the years ended December 31, 2003, 2002 and 2001.
[7] Long Term Debt
Long-term debt at December 31, 2003 consists of the following:
Term loan payable, Fleet Bank - due in monthly installments
of $41,666. $1,250,020
Note payable, ADIA - due in monthly installments of
$13,889. 416,667
---------
Total Long-Term Debt 1,666,687
Less: Current Portion 666,667
---------
Long-Term Debt, Less Current Portion $1,000,020
==========
In June 2001, the Company entered into a financing agreement with a bank. The
financing provides the Company with a five-year term loan of $2.5 million. 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%. On July 12, 2001, 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.
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, 2003).
F - 21
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
-------------------------------------------------------------------------------
[7] Long Term Debt [Continued]
Maturities of long-term debt at December 31, 2003 for the next three (3) years
and in the aggregate are as follows:
For the Year Ending
December 31, Amount
------------------------------------------
2004 $ 666,667
2005 666,667
2006 333,353
----------
Total $ 1,666,687
[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, 2003 and 2002, the Company utilized
approximately $2.8 million and $1.6 million, respectively of net operating loss
carryforwards. At December 31, 2003 the Company has remaining net operating loss
carryforwards of approximately $6,448,000 expiring through 2022. Pursuant to
Section 382 of the Internal Revenue Code regarding substantial changes in
Company ownership, utilization of approximately $4,648,000 of this net operating
loss carryforward is limited to approximately $1,360,000 per year, plus any
prior years' amounts not utilized. In addition, the tax benefit of approximately
$1,800,000 of net operating losses generated in 2000 on exercise of
non-qualified compensatory stock options and warrants will be credited to
paid-in-capital as utilized.
The Company's provision for taxes for the year ended December 31, 2003 includes
certain state and local taxes.
The expiration dates of net operating loss carryforwards are as follows:
December 31, Amount
2016 1,374,000
2017 3,261,000
2020 1,810,000
2022 2,000
----------
$ 6,448,000
==========
Provision for income taxes consists of the following:
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Current:
Federal $ 24,000 $ -- $ (43,280)
State 89,425 84,000 18,280
--------- --------- ---------
113,425 84,000 (25,000)
--------- --------- ---------
Deferred:
Federal (900,000) (400,000) --
State -- -- (6,000)
--------- --------- ---------
(900,000) (400,000) (6,000)
--------- --------- ---------
Total $ (786,575) $ (316,000) $ (31,000)
========= ========= =========
F - 22
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
-------------------------------------------------------------------------------
[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,
-----------------------
2003 2002 2001
---- ---- ----
Income taxes at the federal statutory rate 34% 34% 34%
State and local income taxes net of
Federal taxes 3 5 5
Nondeductible expenses 2 6 9
Federal Minimum Tax 2 -- --
Decrease in valuation allowance (76) (82) (14)
Overaccrual from prior year -- -- (45)
Other -- 1 --
---- ---- ----
(35)% (36)% (11)%
Significant components of the Company's deferred tax assets are comprised of
the following:
December 31,
------------
2003 2002
---- ----
Net operating loss carryforward $ 2,640,000 $ 3,704,000
Allowance for doubtful accounts 457,000 211,000
Accrued vacation and bonuses 364,000 202,000
Alternative minimum tax credit carryforward 98,000 43,000
Benefit of stock based compensation awards 502,000 502,000
Other (516,000) 262,000
---------- ----------
Total deferred tax assets 3,545,000 4,924,000
Valuation allowance (1,745,000) (4,024,000)
---------- ----------
Net deferred tax assets $ 1,800,000 $ 900,000
========== ==========
The valuation allowance decreased by $2,279,000 at December 31, 2003. The
Company believes that it is more likely than not, to use at least a portion of
its net operating loss carryforward.
The change in the valuation allowance for deferred tax assets are summarized as
follows:
Year Ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Beginning Balance $ 4,024,000 $ 4,481,000 $ 4,520,000
Change in Allowance (2,279,000) (457,000) (39,000)
---------- ---------- ----------
Ending Balance $ 1,745,000 $ 4,024,000 $ 4,481,000
========== ========== ==========
F - 23
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
-------------------------------------------------------------------------------
[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, 2003.
Common Stock Issuances - On June 25, 2003 the Company issued 100,000 shares of
its common stock in connection the acquisition of CareNet. See note 5 for
information relating to this acquisition.
Treasury Stock - 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 $1,011,338,
which was based upon the market price of the common stock on the date of the
exercise in accordance with the cashless exercise provisions of the Company's
stock option plans.
Included in the above option exercise were 350,280 options owned by certain of
the Company's Officers and members of the Board of Directors. 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.
During 2002, stock options to purchase 327,183 shares were exercised and the
Company received gross proceeds of $505,210. Pursuant to the option grants,
employees have the right to pay for the exercise price of the options by
delivering shares of common stock owned by them. During 2002, the Company
received 61,759 shares having a value of $348,302, as the exercise price of the
options.
Stock Options and Warrants - See Note 13 for information relating to the
Company's 1998, 1999 and 2001 Long-Term Incentive Plans.
During 2003, warrants to purchase 713,620 shares were exercised and the Company
received net proceeds of $5,720,110.
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 it operating cash flow. As of December 31, 2003, the Company
had not made any stock repurchases.
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, 2003 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.
F - 24
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
-------------------------------------------------------------------------------
[10] Capital Lease Obligations
Future minimum payments under capital lease obligations as of December 31, 2003
are as follows:
Year ending
-----------
December 31,
------------
2004 70,758
2005 68,957
2006 21,877
--------
Total Minimum Payments 161,592
Less Amount Representing Interest ranging
From 7.9% to 12.6% Per annum 14,194
--------
Balance $147,398
========
Capital lease obligations are collateralized by equipment which has a cost of
$223,326 at December 31, 2003 and $40,000 at December 31, 2002 and accumulated
amortization of $66,554 and $28,000 at December 31, 2003 and 2002 respectively.
Amortization of $38,554 in 2003 and $8,000 in 2002 and $26,778 in 2001,
respectively, has been included in depreciation expense.
[11] Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and the note payable Adia approximate the fair value of these
instruments because of their short maturities or floating interest Notes.
The Bank debt, including current maturities, has a carrying value of
approximately $1,250,000 and an estimated fair value of $1,273,500. 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 three sales and service offices under non cancelable operating leases
expiring at various times through May 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%. The first ten months
of the lease provide for a rent holiday 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.
F - 25
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
-------------------------------------------------------------------------------
[12] Commitments and Contingencies [Continued]
Minimum annual rentals under noncancellable operating leases having terms of
more than one year are as follows:
Year ending
December 31,
2004 $ 280,000
2005 604,000
2006 588,000
2007 604,000
2008 620,000
Thereafter 3,836,000
----------
Total $ 6,532,000
Rent expense amounted to $519,000, $455,000 and $482,000 respectively, for the
years ended December 31, 2003, 2002 and 2001.
Employment Agreements
In January 2001, the Company entered into employment agreements with its four
executive officers for terms of two or three years with the right of the
employee to extend the agreement for an additional year. During 2003, the
Company amended the contracts of two of its executives to allow for one
additional year on the term of their original contracts. Another executive's
contract expired at December 31, 2003 and that executive is now on the first
year of his five year consultant agreement which pays an annual fee of $75,000.
The aggregate base compensation for its three executive officers for 2004 is
$517,000, subject to annual increases equal to the greater of 5% or the increase
in the cost of living index. Each of the officers also has the right, at any
time on 90 days notice, to terminate his full time employment and continue as a
consultant at an annual salary of $75,000 for five years following the
expiration or termination of his employment. The agreements also provide the
officers with an automobile allowance. In the event of a change of control, the
executive may receive severance payments of between 30 and 36 months'
compensation.
The Company also has a consulting agreement with a Director, which provides for
annual fees of $75,000 through December 31, 2007. The agreement also provides
the Director with an automobile allowance. In the event of a change of control,
the Director may receive severance payments of between 30 and 36 months
compensation.
Future minimum payments related to these agreements for the next five years are
as follows:
Year Ended
December 31, Amount
------------ ------
2004 $667,316
2005 569,877
2006 375,000
2007 375,000
2008 300,000
Thereafter 375,000
-------
Total $2,662,193
F - 26
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
-------------------------------------------------------------------------------
[12] Commitments and Contingencies - [Continued]
Interest Rate Swap
In June 2001 the Company entered into an interest rate swap with a bank, which
expires on June 1, 2006. The swap transaction was 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%. 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, 2003 and 2002 the fair value of the swap of $59,068 and $107,713,
respectively, is recorded as a non-current liability. The swap transaction has
been accounted for as a hedge, and accordingly, the change in the fair value of
the swap of $48,645, $32,838 and $74,875 during the years ended December 31,
2003, 2002, and 2001 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 of the Company to 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.
The letter of credit is required for the first 22 months of the lease and will
be reduced as follows:
$224,150 for months 23 through 34 of the lease.
$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 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. The Company may issue 790,000, 300,000 and 550,000
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. At
December 31, 2003 there were 0, 4,250 and 1,500 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 Plans provides that each non-employee director automatically receives a
nonqualified stock option to purchase 5,000 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.
During 2002, pursuant to an arrangement with a consultant, the Company issued a
non-qualified stock option to purchase 10,000 shares of stock at an exercise
price of $2.75, which was the fair market value of the stock at the date of
grant. The options were valued at $.57 per option based upon the Black-Scholes
calculation, which had an interest rate of 4% and a volatility rate of .48.
These options had a term of one year, and were exercised during 2002. The
Company recognized a charge to income under the Black-Scholes formula in the
amount of $5,673.
F - 27
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
-------------------------------------------------------------------------------
[13] Stock-Based Compensation - [Continued]
A summary of the activity under the Plans is as follows:
2003 2002 2001
------------------- ------------------ -----------------
2001
Weighted Weighted Weighted
-------- -------- --------
Average Average Average
------- ------- -------
Exercise Exercise Exercise
-------- -------- --------
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding - Beginning of
Year 664,702 $2.276 793,385 $1.917 809,718 $1.908
Granted During the Year 381,000 4.754 198,500 2.505 3,500 1.900
Canceled During the Year (11,750) 1.724 -- -- (5,278) 1.810
Exercised During the Year (668,197) 2.694 (327,183) 1.544 (14,555) 1.500
-------- ------- --------- ------- --------- -------
Outstanding - End of Year 365,755 $4.111 664,702 $2.276 793,385 $1.917
========= ====== ======== ====== ======== ======
Exercisable - End of Year 226,253 $3.721 575,451 $2.242 789,885 $1.917
========= ====== ======== ====== ======= ======
The following table summarizes stock option information as of December 31, 2003:
Options Outstanding
-------------------
Weighted
--------
Average Remaining Options
----------------- -------
Exercise Prices Number Outstanding Contractual Life Exercisable
--------------- ------------------ ---------------- -----------
$6.61 11,000 4.58 Years 5,500
$4.93 142,005 4.08 Years 71,003
$4.37 118,500 4.5 Years 59,250
$4.37 7,500 9.5 Years 3,750
$2.50 24,000 3.25 Years 24,000
$2.40 5,000 3.5 Years 5,000
$2.38 6,500 3.5 Years 6,500
$1.81 51,250 2 Years 51,250
------- ------- --------
Totals 365,755 3.98 Years 226,253
======= ========== =======
Warrants Issued as Compensation - In 2001, the Company's $12 Series B Common
Stock Purchase Warrants for 448,544 shares, were extended to January 31, 2002.
In January 2002, the 448,544 $12 warrants were further extended to July 31,
2002. In July 2002, the warrants were further extended to January 31, 2003.
There was no financing costs associated with the warrant extensions in 2001 and
2002 because of the variance between the $12 exercise price and the market value
of the Company's stock at the date of the warrant extension. In January 2003,
the warrants were further extended to April 30, 2003. In April 2003, the Company
agreed to extend the date of the expiration 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 expiration
date 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
F - 28
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17
-------------------------------------------------------------------------------
[13] Stock-Based Compensation - [Continued]
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. 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 will pay
consulting fees in addition to the issuance of warrants. These warrants, which
expire over various times ranging from one to two years, were valued at $.24 per
warrant, which represented the costs of the services based upon the contractual
agreement. Either party may terminate the agreement. The warrants have 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 $2.69 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 is 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 at $4.00 expired.
In October 2001, the Company issued warrants to purchase 40,000 shares in
connection with a public and investor relations agreement whereby the Company
will pay a monthly fee in addition to the issuance of the warrants. The warrants
have an exercise price of $2.50 for the first 5,000 shares; $3.00 for the next
5,000 shares; $3.50 for 15,000 shares and $4.00 for the final 15,000 shares.
These warrants were valued at an average price of $.14 per warrant based upon
the Black-Scholes calculation, which had an interest rate of 5.5% and a
volatility rate of .6. These warrants expired on October 28, 2002.
A summary of warrant activity is as follows:
2003 2002 2001
----------------------- -------------------------- ----------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding - Beginning
of Year 768,544 $9.17 608,544 $10.11 568,544 $10.57
Granted During the Year -- -- 648,544 $ 9.89 488,544 $11.30
Expired During the Year (54,924) $6.72 (488,544) $11.30 (448,544) $12.00
Exercised During the Year (713,620) $8.10 -- -- -- --
-------- ----- -------- ------ ------- -----
Outstanding - End of Year -- $ -- 768,544 $ 9.17 608,544 $10.11
======== ===== ======== ====== ======= ======
Exercisable - End of Year -- $ -- 708,544 $ 9.31 578,544 $10.44
======== ===== ======== ====== ======= ======
F - 29
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #18
-------------------------------------------------------------------------------
[14] Operating Segments
The Company currently classifies its operations into two business segments: (1)
Software and Related Systems and Services and (2) Data Center Services. Software
and Related Systems and Services is the design, installation, implementation and
maintenance of computer information systems that provide comprehensive
healthcare information technology solutions including billing, patient tracking
and scheduling for inpatient and outpatient environments, as well as clinical
documentation and medical record generation and management. Data Center Services
involve Company personnel performing data entry and data processing services for
customers. Intersegment sales and sales outside the United States are not
material. Information concerning the Company's business segments is as follows:
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenues:
Software and Related Systems and Services $25,201,558 $20,168,785 $16,077,323
Data Center Services 1,973,492 1,957,392 2,042,098
---------- ---------- ----------
Total Revenues $27,175,050 $22,126,177 $18,119,421
-------------- ========== ========== ==========
Gross Profit:
Software and Related Systems and Services $11,652,557 $ 7,005,931 $ 5,095,038
Data Center Services 939,110 945,790 1,023,148
---------- ---------- ----------
Total Gross Profit $12,591,667 $ 7,951,721 $ 6,118,186
------------------ ========== ========== ==========
Income (loss) before Income Taxes:
Software and Related Systems and Services $ 1,765,367 $ 486,371 $ (242,072)
Data Center Services 476,959 392,847 526,494
---------- ---------- -----------
Total Income before Income Taxes $ 2,242,326 $ 879,218 $ 284,422
-------------------------------- ========== ========== ==========
Depreciation and Amortization:
Software and Related Systems and Services $ 1,064,952 $ 866,115 $ 847,369
Data Center Services 168,640 170,606 163,452
---------- ---------- ----------
Total Depreciation and Amortization $ 1,233,592 $ 1,036,721 $ 1,010,821
----------------------------------- ========== ========== ==========
Capital Expenditures:
Software and Related Systems and Services $ 4,552,978 $ 248,201 $ 116,951
Data Center Services 151,390 6,266 3,814
---------- ---------- ----------
Total Capital Expenditures $ 4,704,368 $ 254,467 $ 120,765
-------------------------- ========== ========== ==========
Identifiable Assets:
Software and Related Systems and Services $31,948,510 $20,540,031 $16,104,973
Data Center Services 2,684,879 1,875,772 1,902,400
---------- ---------- ----------
Total Identifiable Assets $34,633,389 $22,415,803 $18,007,373
------------------------- ========== ========== ==========
F - 30
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #19
-------------------------------------------------------------------------------
[15] Legal Proceedings
In October 2000, the Company commenced an action against the City of Richmond,
in the United States District Court for the Eastern District of New York, for
failure to pay more than $1 million pursuant to a contract between the Company
and Richmond. On July 29, 2003, this action was settled and the Company received
an amount of $205,000. This settlement had no effect on the results of
operations of the Company.
[16] Subsequent Events
During the period January 1, 2004 through February 23, 2004 there were 21,127
options exercised. The Company received approximately $94,000 from these
exercises.
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 19, 2004 By: /s/ James L. Conway
---------------------------
James L. Conway, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amended 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 (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
(including post-effective 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 19, 2004
----------------------- and Director (Principal
James L. Conway Executive Officer)
/s/ Anthony F. Grisanti Chief Financial Officer March 19, 2004
----------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)
/s/ Edward D. Bright Director March 19, 2004
-----------------------
Edward D. Bright
/s/ John F. Phillips Director March 19, 2004
-----------------------
John F. Phillips
/s/ Gerald O. Koop President and Director March 19, 2004
-----------------------
Gerald O. Koop
/s/ Joseph G. Sicinski Director March 19, 2004
-----------------------
Joseph G. Sicinski
/s/ Francis J. Calcagno Director March 19, 2004
-----------------------
Francis J. Calcagno
/s/ John S.T. Gallagher Director March 19, 2004
-----------------------
John S.T. Gallagher
/s/ Dr. Yacov Shamash
------------------------ Director March 19, 2004
Dr. Yacov Shamash
EXHIBIT INDEX
1. Financial Statements
Report of Marcum & Kliegman LLP
Report of Eisner LLP
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the Years Ended December
31, 2003, 2002 and 2001 Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 2003,
2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
None
3. Reports on Form 8-K
On October 21, 2003, we filed a Current Report on Form 8-K (Date
of Report: October 21,2003) to report, as an item 9 disclosure,
the issuance of a press release announcing our financial results
for the third quarter ended September 30, 2003.
On October 23, 2003, we filed a Current Report on Form 8-K (Date
of Report: October 23, 2003) to report as an item 5 disclosure,
the issuance of a press release announcing that we had reduced
the exercise price of our Series B Common Stock Purchase Warrants
from $12.00 per share to $10.00 per share.
4. Exhibits
3.1(1) Restated Certificate of Incorporation, as amended
3.2(1) By-Laws
10.1(2) Employment Agreement dated January 1, 2001, between
the Registrant and James L. Conway
10.2(2) Employment Agreement dated January 1, 2001, between
the Registrant and John F. Phillips
10.3(2) Employment Agreement dated January 1, 2001, between
the Registrant and Gerald O. Koop
10.4(2) Employment Agreement dated January 1, 2001, between
the Registrant and Anthony F. Grisanti
10.5(2) Consulting Agreement dated January 1, 2001, between the
Registrant and Edward D. Bright
10.6(1) 1993 Long-Term Incentive Plan
10.7(3) 1998 Long-Term Incentive Plan
10.8(4) 1999 Long-Term Incentive Plan
10.9(5) 2001 Long-Term Incentive Plan
10.10(4) 1999 Employee Stock Purchase Plan
10.11(2) Agreement dated June 1, 2001, between the Registrant and
Fleet Bank 10.126 AIMS Acquisition Agreement
10.13(7) 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.
10.14 Lease agreement dated as of December 22, 2003, between
Registrant and Spacely LLC.
21.1 Subsidiaries of the Registrant
23.1 Consent of Marcum & Kliegman LLP
23.2 Consent of Eisner 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
(1) 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.
(2) Filed as an exhibit to the Registrant's 10-K/A dated August 21, 2003.
(3) 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.
(4) 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.
(5) Filed as an appendix to the Registrant's proxy statement dated
November 14, 2002, relating to its 2002 Special Meeting of Stockholders held on
January 9, 2003 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's 8-K dated May 10, 2001.
(7) Filed as an exhibit to the Registrant's 8-K dated July 8, 2003.