Edgar Filing: COMPUTER PROGRAMS & SYSTEMS INC

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2008.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to .

Commission file number: 000-49796

COMPUTER PROGRAMS AND SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		74-3032373
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

6600 Wall Street, Mobile, Alabama		36695
(Address of Principal Executive Offices)		(Zip Code)

(251) 639-8100

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨		Accelerated filer x

Non-accelerated filer ¨		Smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of May 2, 2008, there were 10,827,425 shares of the issuer’s common stock outstanding.

COMPUTER PROGRAMS AND SYSTEMS, INC.

Form 10-Q

(For the period ended March 31, 2008)

INDEX


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Balance Sheets – March 31, 2008 (unaudited) and December 31, 2007	3

	Condensed Statements of Income (unaudited) – Three Months Ended March 31, 2008 and 2007	4

	Condensed Statement of Stockholders’ Equity (unaudited) – Three Months ended March 31, 2008	5

	Condensed Statements of Cash Flows (unaudited) – Three Months Ended March 31, 2008 and 2007	6

	Notes to Condensed Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	17

Item 4.	Controls and Procedures	18

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	18

Item 1A.	Risk Factors	18

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18

Item 3.	Defaults Upon Senior Securities	18

Item 4.	Submission of Matters to a Vote of Security Holders	18

Item 5.	Other Information	18

Item 6.	Exhibits	18

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED BALANCE SHEETS


	March 31, 2008			December 31, 2007
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	11,840,249		$	11,806,017
Investments		11,550,467			11,352,457
Accounts receivable, net of allowance for doubtful accounts of $1,192,763 and $948,712, respectively		14,387,621			14,333,934
Financing receivables, current portion		1,667,072			1,734,954
Inventories		1,513,947			1,450,164
Deferred tax assets		1,513,083			1,393,602
Prepaid expenses		381,577			505,565

Total current assets		42,854,016			42,576,693
Property and equipment
Land		936,026			936,026
Maintenance equipment		3,952,628			3,821,013
Computer equipment		5,803,539			5,663,741
Office furniture and equipment		1,616,508			1,576,728
Automobiles		132,926			132,926

		12,441,627			12,130,434
Less accumulated depreciation		(7,099,537	)		(6,621,407	)

Net property and equipment		5,342,090			5,509,027
Financing receivables, net of current portion		2,161,880			2,322,471

Total assets	$	50,357,986		$	50,408,191

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,586,410		$	1,716,882
Deferred revenue		3,162,999			3,580,709
Accrued vacation		2,179,276			2,112,256
Income taxes payable		2,435,687			541,987
Other accrued liabilities		2,119,895			3,506,845

Total current liabilities		11,484,267			11,458,679
Deferred tax liabilities		548,694			571,142
Stockholders’ equity:
Common stock, par value $0.001 per share; 30,000,000 shares authorized; 10,827,425 and 10,807,444 shares issued and outstanding		10,827			10,807
Additional paid-in capital		24,957,504			24,658,818
Accumulated other comprehensive income		83,523			44,825
Retained earnings		13,273,171			13,663,920

Total stockholders’ equity		38,325,025			38,378,370

Total liabilities and stockholders’ equity	$	50,357,986		$	50,408,191

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENTS OF INCOME (Unaudited)


	Three months ended March 31,
	2008		2007
Sales revenues:
System sales	$	10,655,360	$	8,316,607
Support and maintenance		13,085,769		12,540,342
Business management services		5,776,139		5,089,479

Total sales revenues		29,517,268		25,946,428
Costs of sales:
System sales		7,902,583		7,179,807
Support and maintenance		4,797,344		5,056,499
Business management services		3,585,418		3,057,297

Total costs of sales		16,285,345		15,293,603

Gross profit		13,231,923		10,652,825
Operating expenses:
Sales and marketing		2,259,758		2,076,064
General and administrative		5,474,351		4,892,053

Total operating expenses		7,734,109		6,968,117

Operating income		5,497,814		3,684,708
Other income:
Interest income		265,248		276,636

Total other income		265,248		276,636

Income before taxes		5,763,062		3,961,344
Income taxes		2,257,056		1,401,826

Net income	$	3,506,006	$	2,559,518

Net income per share - basic	$	0.33	$	0.24

Net income per share - diluted	$	0.33	$	0.24

Weighted average shares outstanding
Basic		10,745,976		10,664,009
Diluted		10,767,700		10,718,458
Dividends declared per share	$	0.36	$	0.36

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)


	Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings			Total Stockholders’ Equity
Balance at December 31, 2007	10,807,444	$	10,807	$	24,658,818	$	44,825	$	13,663,920		$	38,378,370
Net Income									3,506,006			3,506,006
Issuance of common stock	19,981		20		57,894							57,914
Unrealized gain on available for sale investments, net of tax of $25,266							38,698					38,698
Share-based compensation					224,162							224,162
Dividends									(3,896,755	)		(3,896,755	)
Income tax benefit from dividends on restricted stock					10,852							10,852
Income tax benefit from stock option exercise					5,778							5,778

Balance at March 31, 2008	10,827,425	$	10,827	$	24,957,504	$	83,523	$	13,273,171		$	38,325,025

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)


	Three months ended March 31,
	2008			2007
Operating Activities
Net income	$	3,506,006		$	2,559,518
Adjustments to net income:
Provision for bad debt		560,000			35,504
Deferred taxes		(139,988	)		243,930
Share-based compensation		224,162			345,567
Excess tax benefit from share-based compensation		(5,778	)		(2,950	)
Tax benefit from restricted stock dividends		(10,852	)		—
Depreciation		478,130			518,407
Changes in operating assets and liabilities:
Accounts receivable		(613,687	)		826,927
Financing receivables		228,473			254,101
Inventories		(63,783	)		233,536
Prepaid expenses		123,988			154,653
Accounts payable		(130,472	)		(506,776	)
Deferred revenue		(417,710	)		463,368
Other liabilities		(1,319,930	)		(1,278,527	)
Income taxes payable		1,910,330			(429,855	)

Net cash provided by operating activities		4,328,889			3,417,403
Investing Activities
Purchases of property and equipment		(311,193	)		(348,097	)
Purchases of investments		(161,253	)		(127,955	)

Net cash used in investing activities		(472,446	)		(476,052	)
Financing Activities
Proceeds from exercise of stock options		57,914			12,540
Income tax benefit from restricted stock dividends		10,852			—
Income tax benefit from stock option exercises		5,778			2,950
Dividends paid		(3,896,755	)		(3,872,297	)

Net cash used in financing activities		(3,822,211	)		(3,856,807	)

Increase (decrease) in cash and cash equivalents		34,232			(915,456	)
Cash and cash equivalents at beginning of period		11,806,017			8,760,122

Cash and cash equivalents at end of period	$	11,840,249		$	7,844,666

Cash paid for income taxes, net of refund	$	486,715		$	1,587,750

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

1.	BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments are considered of a normal recurring nature. Quarterly results of operations are not necessarily indicative of annual results.

Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2007 and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2007.

2.	REVENUE RECOGNITION

The Company recognizes revenue in accordance with accounting principles generally accepted in the United States of America, principally:

•

Statement of Position (“SOP”) No. 97—2, Software Revenue Recognition, issued by the American Institute of Certified Public Accountants (“AICPA”).

•

AICPA SOP No. 98—9, Modification of SOP 97—2, Software Revenue Recognition, With Respect to Certain Transactions.

•

Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, issued by the United States Securities and Exchange Commission, as amended by SAB No. 104.

•

The Emerging Issues Task Force (“EITF”) Issue 00—3, Application of AICPA Statement of Position 97—2 to Arrangements That Include the Right to Use Software Stored on Another Entities’ Hardware.

•

EITF Issue 03—5, Applicability of AICPA Statement of Position 97—2 to Non—Software Deliverables in an Arrangement Containing More—Than—Incidental Software.

The Company’s revenue is generated from three sources:

•

the sale of information systems, which includes software, conversion and installation services, hardware, peripherals, forms and supplies.

•

the provision of system support services, which includes software application support, hardware maintenance, continuing education, application service provider (“ASP”) products, and internet service provider (“ISP”) products.

•

the provision of business management services, which includes electronic billing, statement processing, payroll processing and accounts receivable management.

The Company enters into contractual obligations to sell hardware, perpetual software licenses, installation and training services, and maintenance services. Revenue from hardware sales is recognized upon shipment, when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. Revenue from the perpetual software licenses and installation and training services are recognized using the residual method. The residual method allocates an amount of the arrangement to the elements for which fair value can be determined and any remaining arrangement consideration (the “residual revenue”) is then allocated to the delivered elements. The fair value of maintenance services is determined based on vendor specific objective evidence (“VSOE”) of fair value and is deferred and recognized as revenue ratably over the maintenance term. VSOE of fair value of maintenance services is determined by reference to the price the Company’s customers are required to pay for the services when sold separately via renewals. The residual revenue is allocated to the perpetual license and installation and training services and is recognized over the term that the installation and training services are performed for the entire arrangement. The method of recognizing revenue for the perpetual license for the associated modules included in the arrangement and related installation and training services over the term the services are performed is on a module by module basis as the respective installation and training for each specific module is completed as this is representative of the pattern of provision of these services. The installation and training services are normally completed in three to four weeks.

Revenue derived from maintenance contracts primarily includes revenue from software application support, hardware maintenance, continuing education and related services. Maintenance contracts are typically sold for a separate fee with initial contract periods ranging from one to seven years, with renewal for additional periods thereafter. Maintenance revenue is recognized ratably over the term of the maintenance agreement.

The Company accounts for ASP contracts in accordance with the EITF 00—3, Application of AICPA Statement of Position 97—2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware. EITF 00—3 states that the software element of ASP services is covered by SOP 97—2 only “if the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the customer to either run the software on its own hardware or contract with another party related to the vendor to host the software.” Each ASP contract includes a system purchase and buyout clause, and this clause specifies the total amount of the system buyout.

In addition, a clause is included which states that should the system be bought out by the customer, the customer would be required to enter into a general support agreement (for post—contract support services) for the remainder of the original ASP term. Accordingly, the Company has concluded that ASP customers do not have the right to take possession of the system without significant penalty (i.e. the purchase price of the system), and thus ASP revenue of the Company does not fall within the scope of SOP 97—2. In accordance with SAB No. 104, revenue is recognized when the services are performed.

Revenue for ISP and outsourcing services are recognized in the period in which the services are performed.

3.	DETAILS ON BALANCE SHEET AMOUNTS

Other accrued liabilities are comprised of the following:


	March 31, 2008		December 31, 2007
Accrued salaries and benefits	$	1,165,642	$	2,560,116
Accrued commissions		367,033		392,033
Accrued self-insurance reserves		475,500		388,400
Other		111,720		166,296

	$	2,119,895	$	3,506,845

4.	INVESTMENTS

The Company accounts for investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, investments are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders’ equity. The Company’s management determines the appropriate classifications of investments in fixed maturity securities at the time of acquisition and re-evaluates the classifications at each balance sheet date. The Company’s investments in fixed maturity securities are classified as available-for-sale.

Investments are comprised of the following at March 31, 2008:


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Short term investments	$	408,211	$	—	$	—	$	408,211
Obligations of U.S. Treasury, U.S. government corporation and agencies		5,090,457		103,571		657		5,193,371
Mortgaged backed securities		272,603		—		626		271,977
Corporate bonds		5,648,864		53,817		25,773		5,676,908

	$	11,420,135	$	157,388	$	27,056	$	11,550,467

Shown below are the amortized cost and estimated fair value of securities with fixed maturities at March 31, 2008, by contract maturity date. Actual maturities may differ from contractual maturities because issuers of certain securities retain early call or prepayment rights.


	Amortized Cost		Fair Value
Due in 2008	$	2,294,940	$	2,310,132
Due in 2009		6,303,186		6,410,598
Due in 2010		1,936,918		1,944,380
Due in 2011		204,277		205,170
Due thereafter		272,603		271,976

	$	11,011,924	$	11,142,256

Investments are comprised of the following at December 31, 2007:


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Short term investments	$	377,360	$	—	$	—	$	377,360
Obligations of U.S. Treasury, U.S. government corporation and agencies		5,571,662		55,860		804		5,626,718
Mortgaged backed securities		298,097		—		436		297,661
Municipal obligations		800,000		—		—		800,000
Corporate bonds		4,219,731		36,840		5,853		4,250,718

	$	11,266,850	$	92,700	$	7,093	$	11,352,457

5.	EARNINGS PER SHARE

The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted EPS amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period presented. The Company uses the treasury stock method to calculate the impact of outstanding stock options and unvested restricted stock grants. Potentially dilutive shares are derived from outstanding stock options and unvested restricted stock grants that have an exercise price less than the weighted average market price of our common stock. Any options or restricted stock grants with an exercise price greater than the weighted average market price of our common stock are considered antidilutive and are excluded from the computation of diluted earnings per share. The difference between basic and diluted EPS is attributable to stock options. For the three month periods ended March 31, 2008 and 2007, these dilutive shares were 21,724 and 54,449 respectively. The number of unvested restricted stock grants considered antidilutive and thus excluded from the year to date dilutive earnings per share computation at March 31, 2008 were 76,086.

6.	INCOME TAXES

The Company accounts for income taxes using the liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred income taxes arise from the temporary differences in the recognition of income and expenses for tax purposes. Deferred tax assets and liabilities are comprised of the following:


	March 31, 2008		December 31, 2007
Deferred tax assets:
Accounts receivable	$	465,178	$	369,998
Accrued vacation		849,918		823,780
Stock-based compensation		442,557		519,571
Other accrued liabilities		223,253		227,031

Total deferred tax assets	$	1,980,906	$	1,940,380

Deferred tax liabilities:
Other comprehensive income	$	25,266	$	33,449
Depreciation		991,251		1,090,713

Total deferred tax liabilities	$	1,016,517	$	1,124,162

Significant components of the Company’s income tax provision for the three months ended March 31 are as follows:


	2008			2007
Current provision:
Federal	$	1,955,630		$	904,723
State		441,414			253,173
Deferred provision:
Federal		(125,630	)		218,911
State		(14,358	)		25,019

Total income tax provision	$	2,257,056		$	1,401,826

The difference between income taxes at the U. S. federal statutory income tax rate of 35% and those reported in the condensed statements of income for the three months ended March 31 are as follows:

	2008			2007
Income taxes at U. S. Federal statutory rate	$	2,017,072		$	1,386,470
State income tax, net of federal tax effect		263,634			182,970
Other		(23,650	)		(167,614	)

Total income tax provision	$	2,257,056		$	1,401,826

7.	STOCK BASED COMPENSATION

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share Based Payment (“SFAS No. 123R”). SFAS No. 123R establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. The Company previously applied Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations and provided pro forma disclosures of SFAS No. 123, Accounting for Stock Based Compensation. The Company elected to adopt the modified prospective application method as provided by SFAS No. 123R, and, accordingly, prior periods are not restated for the effects of SFAS No. 123R. The Company recorded compensation costs as the requisite service rendered for the unvested portion of previously issued awards that remain outstanding at the initial date of adoption and any awards issued, modified, repurchased, or cancelled after the effective date of SFAS No. 123R.

The following table shows total stock-based compensation expense for the three months ended March 31, 2008 and 2007, included in the Condensed Statement of Income:


	Three Months Ended
	March 31, 2008		March 31, 2007
Costs of sales	$	74,997	$	152,731
Operating expenses		149,165		192,836

Pre-tax stock-based compensation expense		224,162		345,567
Less: income tax effect		88,544		136,845

Net stock-based compensation expense	$	135,618	$	208,722

2002 Stock Option Plan

Under the 2002 Stock Option Plan, the Company has authorized the issuance of equity-based awards for up to 865,333 shares of common stock to provide additional incentive to employees and officers. Pursuant to the plan, the Company can grant either incentive or non-qualified stock options. Options to purchase common stock under the 2002 Stock Option Plan have been granted to Company employees with an exercise price equal to the fair market value of the underlying shares on the date of grant.

Stock options granted under the 2002 Stock Option Plan to executive officers of the Company become vested as to all of the shares covered by such grant on the fifth anniversary of the grant date and expire on the seventh anniversary of the grant date. Stock options granted under the 2002 Stock Option Plan to employees other than executive officers become vested as to 50% of the shares covered by the option grant on the third anniversary of the grant date and as to 100% of such shares on the fifth anniversary of the grant date. In addition, options become vested upon termination of employment resulting from death, disability or retirement. Such options expire on the seventh anniversary of the grant date.

Under the methodology of SFAS No. 123, the fair value of the Company’s stock options was estimated at the date of grant using the Black-Scholes option pricing model. The multiple option approach was used, with assumptions for expected option life of 5 years and 44% expected volatility for the market price of the Company’s stock in 2002. An estimated dividend yield of 3% was used. The risk-free rate of return was determined to be 2.79% in 2002. No options were granted during 2007 or the first quarter of 2008.

A summary of stock option activity under the plan during the three month periods ended March 31, 2008 and 2007 is as follows:


	March 31, 2008				March 31, 2007
	Shares		Exercise Price		Shares		Exercise Price
Outstanding at beginning of period	152,444		$	16.50	222,597		$	16.50
Granted	—			—	—			—
Exercised	(3,507	)		16.50	(760	)		16.50
Forfeited	—			—	(7,868	)		16.50

Outstanding at end of period	148,937		$	16.50	213,969		$	16.50

Exercisable at end of period	148,937		$	16.50	30,986		$	16.50

Shares available for future grants under the plan as end of period				495,134				493,232

Weighted-average grant date fair value			$	—			$	—

Weighted-average remaining contractual life				1.3				2.3

Aggregate intrinsic value outstanding options			$	655,323

Aggregate intrinsic value exercisable options			$	655,323

The aggregate intrinsic value in the above table represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading date of the first quarter of 2008 and the exercise price, multiplied by the number of options.) The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.

The aggregate intrinsic value of options exercised during the quarters ended March 31, 2008 and March 31, 2007 was $19,893 and $7,846 respectively.

As of March 31, 2008, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the existing stock option plan.

2005 Restricted Stock Plan

On January 27, 2006, the Compensation Committee of the Board of Directors approved the grant of 116,498 shares of restricted stock, effective January 30, 2006, to certain executive officers of the Company under the 2005 Restricted Stock Plan. The grant date fair value was $42.91 per share. The restricted stock vests in five equal annual installments commencing on the first anniversary of the date of grant. On May 17, 2006, the Compensation Committee of the Board of Directors approved the grant of 17,810 shares of restricted stock to Michael Jones, the newly named Chief Operating Officer of the Company. The grant date fair value was $42.11 per share. The restricted stock vests in five equal annual installments commencing January 30, 2007, and each January 30 thereafter. On January 23, 2008, the Compensation Committee of the Board of Directors approved the grant of 16,471 shares of restricted stock to Darrell G. West, the Company’s Vice President – Finance and Chief Financial Officer. The grant date fair value was $21.25 per share. The restricted stock vests in five equal installments commencing January 30, 2009, and each January 30 thereafter.


	Three Months Ended March 31, 2008				Three Months Ended March 31, 2007
	Shares		Weighted-Average Grant-Date Fair Value		Shares		Weighted-Average Grant-Date Fair Value
Nonvested stock outstanding at beginning of period	79,487		$	42.77	111,009		$	42.79
Granted	16,471			21.25	—			—
Vested	(19,872	)		42.77	(22,202	)		42.81

Nonvested stock outstanding at end of period	76,086		$	38.11	88,807		$	42.79

As of March 31, 2008, there was $2,591,804 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005 Restricted Stock Plan. This cost is expected to be recognized over a weighted-average period of 3.0 years.

8.	COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, requires the disclosure of certain revenue, expenses, gains and losses that are excluded from net income in accordance with accounting principles generally accepted in the United States of America. Total comprehensive income for the three months ended March 31, 2008 and 2007 was as follows:


	Three months ended March 31,
	2008		2007
Net income as reported	$	3,506,006	$	2,559,518
Other comprehensive income:
Unrealized gain on investments, net of taxes		38,698		18,554

Total comprehensive income	$	3,544,704	$	2,578,072

9.	FAIR VALUE

We adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), on January 1, 2008. SFAS 157 establishes a framework for measuring fair value and expands financial statement disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB issued a final Staff Position to allow a one-year deferral of adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company has elected this one-year deferral and thus will not apply the provisions of SFAS 157 to nonfinancial assets and nonfinancial liabilities that are recognized at fair value in the financial statements on a nonrecurring basis until its fiscal year beginning January 1, 2009. The Company is in the process of evaluating the impact of applying SFAS 157 to nonfinancial assets and nonfinancial liabilities measured on a nonrecurring basis. The FASB also amended SFAS 157 to exclude FASB Statement No. 13 and its related interpretive accounting pronouncements that address leasing transactions. SFAS 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The fair values of the Company’s available-for-sale investments are based on quoted prices in active markets for identical assets. We generally apply fair value techniques on a non-recurring basis associated with (1) valuing potential impairment loss related to financing receivables accounted for pursuant to SFAS No. 13, and (2) valuing potential impairment loss related to long-lived assets accounted for pursuant to SFAS No. 144.

The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis in the balance sheet as of March 31, 2008:


	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale investments	$	11,550,467	$	11,550,467	$	—	$	—

There was no cumulative effect of adoption related to SFAS 157, and the adoption did not have an impact on our financial position, results of operations, or cash flows.

We adopted the provisions of Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), on January 1, 2008. SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). Under this pronouncement, a business entity must report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting period. We did not elect the fair value option for any items on our Balance Sheet.

10.

RECENT ACCOUNTING PRONOUNCEMENTS

We adopted the provisions of the FASB Emerging Issues Task Force (“EITF”) Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF No. 07-3”), on January 1, 2008. EITF No. 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed. The adoption of EITF No. 07-3 did not have an impact on our financial position, results of operations, or cash flows.

We adopted the provisions of the FASB EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF No. 06-11”), on January 1, 2008. EITF No. 06-11 requires that the income tax benefits from dividends on equity-classified employee share-based payment awards be reflected as an increase in paid-in-capital. The effects of the adoption are disclosed in the Condensed Statement of Stockholders Equity and Condensed Statements of Cash Flows in the financial statements.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed financial statements and related notes appearing elsewhere herein.

This discussion and analysis contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified generally by the use of forward-looking terminology and words such as “expects,” “anticipates,” “estimates,” “believes,” “predicts,” “intends,” “plans,” “potential,” “may,” “continue,” “should,” “will” and words of comparable meaning. Without limiting the generality of the preceding statement, all statements in this report relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and future financial results are forward-looking statements. We caution investors that any such forward-looking statements are only predictions and are not guarantees of future performance. Certain risks, uncertainties and other factors may cause actual results to differ materially from those projected in the forward-looking statements. Such factors may include:

•

overall business and economic conditions affecting the healthcare industry;

•

saturation of our target market and hospital consolidations;

•

changes in customer purchasing priorities and demand for information technology systems;

•

competition with companies that have greater financial, technical and marketing resources than we have;

•

failure to develop new technology and products in response to market demands;

•

fluctuations in quarterly financial performance due to, among other factors, timing of customer installations;

•

failure of our products to function properly resulting in claims for medical losses;

•

government regulation of our products and customers, including changes in healthcare policy affecting Medicare reimbursement rates; and

•

interruptions in our power supply and/or telecommunications capabilities.

Additional information concerning these and other factors which could cause differences between forward-looking statements and future actual results is discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission.

Overview

We are a healthcare information technology company that designs, develops, markets, installs and supports computerized information technology systems to meet the unique demands of small and midsize hospitals. Our target market includes acute care community hospitals with 300 or fewer beds and small specialty hospitals. We are a single-source vendor providing comprehensive software and hardware products, complemented by data conversion, complete installation and extensive support. Our fully integrated, enterprise-wide system automates the management of clinical and financial data across the primary functional areas of a hospital. In addition, we provide services that enable our customers to outsource certain data-related business processes which we can perform more efficiently. We believe our products and services enhance hospital performance in the critical areas of clinical care, revenue cycle management, cost control and regulatory compliance. From our initial hospital installation in 1981, we have grown to serve more than 600 hospital customers across 46 states and the District of Columbia. In the three months ended March 31, 2008, we generated revenues of $29.5 million from the sale of our products and services.

Results of Operations

The following table sets forth certain items included in our results of operations for the three months ended March 31, 2008 and 2007, expressed as percentage of our total revenues for these periods (dollar amounts in thousands):


	Three Months Ended March 31,
	2008				2007
	Amount		% Sales		Amount		% Sales
INCOME DATA:
Sales revenues:
System sales	$	10,655	36.1	%	$	8,317	32.1	%
Support and maintenance		13,086	44.3	%		12,540	48.3	%
Business management services		5,776	19.6	%		5,089	19.6	%

Total sales revenues		29,517	100.0	%		25,946	100.0	%
Costs of sales:
System sales		7,903	26.8	%		7,180	27.7	%
Support and maintenance		4,797	16.3	%		5,056	19.5	%
Business management services		3,585	12.1	%		3,057	11.8	%

Total costs of sales		16,285	55.2	%		15,293	58.9	%

Gross profit		13,232	44.8	%		10,653	41.1	%
Operating expenses:
Sales and marketing		2,260	7.7	%		2,076	8.0	%
General and administrative		5,474	18.5	%		4,892	18.9	%

Total operating expenses		7,734	26.2	%		6,968	26.9	%

Operating income		5,498	18.6	%		3,685	14.2	%
Other income:
Interest income		265	0.9	%		277	1.1	%

Total other income		265	0.9	%		277	1.1	%

Income before taxes		5,763	19.5	%		3,962	15.3	%
Income taxes		2,257	7.6	%		1,402	5.4	%

Net income	$	3,506	11.9	%	$	2,560	9.9	%

Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007

Revenues. Total revenues increased by 13.8%, or $3.6 million, to $29.5 million for the three months ended March 31, 2008, from $25.9 million for the three months ended March 31, 2007.

System sales revenues increased by 28.1%, or $2.3 million, to $10.7 million for the three months ended March 31, 2008, from $8.3 million for the three months ended March 31, 2007. This increase was primarily due to larger system installations compared to the prior year. We completed software system installations at 6 new hospital clients in the first quarter of 2008 compared to 7 new hospital clients in the first quarter of 2007.

Support and maintenance revenues increased by 4.4%, or $0.5 million, to $13.1 million for the three months ended March 31, 2008, from $12.5 million for the three months ended March 31, 2007. This increase was attributable to an increase in recurring revenues as a result of a larger customer base and increased sales of add-on business to existing customers.

Business management services revenues increased by 13.5%, or $0.7 million, to $5.8 million for the three months ended March 31, 2008, from $5.1 million for the three months ended March 31, 2007. We experienced an increase in business management services revenues as a result of continued growth in existing customer demand for electronic billing and accounts receivable management services. We were providing full business office management services to 18 customers at March 31, 2008 compared to 17 customers at March 31, 2007.

Costs of Sales. Total costs of sales increased by 6.5%, or $1.0 million, to $16.3 million for the three months ended March 31, 2008, from $15.3 million for the three months ended March 31, 2007. As a percentage of total revenues, costs of sales decreased to 55.2% for the three months ended March 31, 2008 from 58.9% for the three months ended March 31, 2007. The gross margin on sales increased to 44.8% for the three months ended March 31, 2008 from 41.1% for the three months ended March 31, 2007.

Cost of system sales increased by 10.1%, or $0.7 million, to $7.9 million for the three months ended March 31, 2008, from $7.2 million for the three months ended March 31, 2007. Cost of equipment increased $0.2 million as a result of an increase in equipment sales which resulted from larger new system sales. The gross margin on system sales increased to 25.8% for the three months ended March 31, 2008, from 13.7% for the three months ended March 31, 2007. The gross margin on larger system installations is generally higher due to a high percentage of fixed expenses included in cost of sales which results in a higher gross margin percentage.

Cost of support and maintenance decreased by 5.1%, or $0.3 million, to $4.8 million for the three months ended March 31, 2008, from $5.1 million for the three months ended March 31, 2007. The gross margin on support and maintenance revenues increased to 63.3% for the three months ended March 31, 2008, compared to 59.6% for the three months ended March 31, 2007. The increase in gross margin was primarily due to the addition of new customers and increased sales of add-on business to our existing customer base combined with a decrease in support personnel.

Our costs associated with business management services increased by 17.3%, or $0.5 million, to $3.6 million for the three months ended March 31, 2008, from $3.1 million for the three months ended March 31, 2007. This increase was caused primarily by an increase of $0.5 million in payroll related expenses as a result of an increase in the number of employees needed to support our growing business management services operations and electronic billing operations.

Sales and Marketing Expenses. Sales and marketing expenses increased by 8.9%, or $0.2 million, to $2.3 million for the three months ended March 31, 2008, from $2.1 million for the three months ended March 31, 2007. The increase is attributable to increases in payroll related expenses of $0.2 million as a result of additional sales and marketing personnel added during 2007.

General and Administrative Expenses. General and administrative expenses increased 11.9%, or $0.6 million, to $5.5 million for the three months ended March 31, 2008, from $4.9 million for the three months ended March 31, 2007. This increase was attributable to a $0.6 million charge to bad debt expense during the quarter in anticipation of potential collection problems with certain customers in the future due to deteriorating economic conditions. Decreases in payroll and related expenses of $0.1 million were offset by a similar increase in customer user group meeting expenses during the quarter.

As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses decreased to 26.2% for the three months ended March 31, 2008 from 26.9% for three months ended March 31, 2007.

Net Income. Net income for the three months ended March 31, 2008 increased by 37.0%, or $0.9 million, to $3.5 million, or $0.33 per diluted share, as compared with net income of $2.6 million, or $0.24 per diluted share, for the three months ended March 31, 2007. Net income represents 11.9% of revenue for the three months ended March 31, 2008, as compared to 9.9% of revenue for the three months ended March 31, 2007.

Liquidity and Capital Resources

We had cash and cash equivalents of $11.8 million at March 31, 2008, compared to $7.8 million at March 31, 2007. Net cash provided by operating activities for the three months ended March 31, 2008 was $4.3 million, compared to $3.4 million for the three months ended March 31, 2007. The increase was primarily due to an increase in net income and resulting income taxes payable, offset by a decrease in other liabilities and deferred revenue and an increase in accounts receivable.

Net cash used in investing activities totaled $0.4 million for the three months ended March 31, 2008, compared to $0.5 million for the three months ended March 31, 2007. We used cash for the purchase of $0.3 million of property and equipment and investments of $0.1 million during the three months ended March 31, 2008.

Net cash used in financing activities totaled $3.8 million for the three months ended March 31, 2008, compared to $3.9 million for the three months ended March 31, 2007. We declared and paid dividends of $3.9 million during the first three months of 2008. We received proceeds from the exercise of stock options including the related tax benefit of $0.1 million.

We currently do not have a bank line of credit or other credit facility in place. Our future capital requirements will depend upon a number of factors, including the rate of growth of our sales, cash collections from our customers and our future investments in fixed assets. We believe that our available cash and cash equivalents and anticipated cash generated from operations will be sufficient to meet our operating requirements for at least the next 12 months.

Off Balance Sheet Arrangements

We are not currently a party to any material “off-balance sheet arrangement” as defined in Item 303 of Regulation S-K.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

Our exposure to market risk relates primarily to the potential change in the value of our investment portfolio as a result of fluctuations in interest rates. The primary purpose of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk of loss. As of March 31, 2008, our investment portfolio consisted of a variety of financial instruments, including, but not limited to, money market securities and high quality government, municipal and corporate obligations. It is our intent to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We do not hold financial instruments for trading or other speculative purposes. The securities in our investment portfolio are classified as available-for-sale and, consequently, are recorded on our balance sheet at fair market value with their related unrealized gain or loss reflected as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.

We believe that the market risk arising from our holdings of these financial instruments is minimal. Due to the conservative allocation of our investment portfolio, we do not believe that an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio. Additionally, since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio. We do not utilize derivative financial instruments to manage our interest rate risks.

The table that follows presents fair values of principal amounts and weighted average interest rates for our investment portfolio as of March 31, 2008.


	Aggregate Fair Value		Weighted Average Interest Rate
Cash and Cash Equivalents:
Cash	$	6,118,255	—
Money market funds		59,000	2.93	%
Certificates of deposit		5,662,994	2.23	%

Total cash and cash equivalents	$	11,840,249

Short-Term Investments:(1)
Accrued Income	$	150,452	—
Money market funds		257,759	3.15	%
Obligations of the U.S. Treasury, U.S government corporations and agencies		2,122,834	4.18	%
Corporate Bonds		2,136,501	4.45	%

Total short-term investments	$	4,667,546

Long-Term Investments:(2)
Obligations of the U.S. Treasury, U.S government corporations and agencies	$	3,070,537	4.85	%
Mortgage backed securities		271,977	5.00	%
Corporate debt securities		3,540,407	5.06	%

Total long-term investments	$	6,882,921

(1)	Reflects instruments with a contractual maturity of less than one year.

(2)	Reflects instruments with a contractual maturity of one year or more.

As of March 31, 2008, the Company had no borrowings and, therefore, is not subject to interest rate risks related to debt instruments.

Item 4.

Controls and Procedures.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company that is required to be included in our periodic SEC filings. There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings.

From time to time, we are involved in routine litigation that arises in the ordinary course of business. We are not currently involved in any litigation that we believe could reasonably be expected to have a material adverse effect on our business, financial condition, or results of operations.

Item 1A.

Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3.

Defaults Upon Senior Securities.

Not applicable.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

Item 5.

Other Information.

None.

Item 6.

Exhibits.


Exhibit Number		Description

3.1		Certificate of Incorporation (filed as Exhibit 3.4 to CPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and incorporated herein by reference)

3.2		Bylaws (filed as Exhibit 3.6 to CPSI’s Registration Statement on Form S-1 (Registration No. 333- 84726) and incorporated herein by reference)

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	COMPUTER PROGRAMS AND SYSTEMS, INC.

Date: May 6, 2008	By:	/s/ J. Boyd Douglas
		J. Boyd Douglas
		President and Chief Executive Officer

Date: May 6, 2008	By:	/s/ Darrell G. West
		Darrell G. West
		Vice President - Finance and Chief Financial Officer

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