e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| |
|
|
| þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2006.
| |
|
|
| o |
|
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
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
74-3032373
(I.R.S. Employer Identification No.) |
| |
|
|
6600 Wall Street, Mobile, Alabama
(Address of Principal Executive Offices)
|
|
36695
(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. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange act). o Yes þ No
As
of November 2, 2006, there were 10,754,978 shares of the issuer’s common
stock outstanding.
COMPUTER PROGRAMS AND SYSTEMS, INC.
Form 10-Q
(For the period ended September 30, 2006)
INDEX
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(Unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
9,090,385 |
|
|
$ |
11,669,690 |
|
Investments |
|
|
10,573,345 |
|
|
|
10,231,446 |
|
Accounts receivable, net of allowance for doubtful accounts
of $904,000 and $704,000 respectively |
|
|
13,875,397 |
|
|
|
12,413,797 |
|
Financing receivables, current portion |
|
|
1,727,464 |
|
|
|
1,168,472 |
|
Inventories |
|
|
1,836,126 |
|
|
|
1,988,184 |
|
Deferred tax assets |
|
|
1,752,421 |
|
|
|
1,200,637 |
|
Prepaid income taxes |
|
|
52,479 |
|
|
|
268,321 |
|
Prepaid expenses |
|
|
256,220 |
|
|
|
265,128 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
39,163,837 |
|
|
|
39,205,675 |
|
Property and equipment
|
|
|
|
|
|
|
|
|
Land |
|
|
936,026 |
|
|
|
936,026 |
|
Maintenance equipment |
|
|
4,227,037 |
|
|
|
3,674,200 |
|
Computer equipment |
|
|
6,161,804 |
|
|
|
5,690,497 |
|
Office furniture and equipment |
|
|
1,863,717 |
|
|
|
1,626,940 |
|
Automobiles |
|
|
111,394 |
|
|
|
111,394 |
|
|
|
|
|
|
|
|
|
|
|
13,299,978 |
|
|
|
12,039,057 |
|
Less accumulated depreciation |
|
|
(7,115,287 |
) |
|
|
(5,866,020 |
) |
|
|
|
|
|
|
|
Net property and equipment |
|
|
6,184,691 |
|
|
|
6,173,037 |
|
Financing receivables |
|
|
1,845,432 |
|
|
|
1,605,226 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
47,193,960 |
|
|
$ |
46,983,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,384,245 |
|
|
$ |
2,051,195 |
|
Deferred revenue |
|
|
2,896,896 |
|
|
|
3,285,678 |
|
Accrued vacation |
|
|
2,135,626 |
|
|
|
1,875,365 |
|
Other accrued liabilities |
|
|
2,203,427 |
|
|
|
2,685,231 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
8,620,194 |
|
|
|
9,897,469 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
649,827 |
|
|
|
698,320 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share; 30,000,000 shares authorized;
10,754,978 and 10,624,901 shares issued and outstanding |
|
|
10,755 |
|
|
|
10,625 |
|
Additional paid-in capital |
|
|
22,038,546 |
|
|
|
20,576,268 |
|
Deferred compensation |
|
|
— |
|
|
|
(72,305 |
) |
Accumulated other comprehensive loss |
|
|
(59,938 |
) |
|
|
(67,979 |
) |
Retained earnings |
|
|
15,934,576 |
|
|
|
15,941,540 |
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
37,923,939 |
|
|
|
36,388,149 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
47,193,960 |
|
|
$ |
46,983,938 |
|
|
|
|
|
|
|
|
See accompanying notes.
3
COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED STATEMENTS OF INCOME (Unaudited)
| |
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|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Sales revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
10,917,361 |
|
|
$ |
12,479,787 |
|
|
$ |
38,648,480 |
|
|
$ |
37,778,628 |
|
Support and maintenance |
|
|
11,763,808 |
|
|
|
10,981,951 |
|
|
|
34,360,914 |
|
|
|
31,688,357 |
|
Outsourcing |
|
|
4,588,978 |
|
|
|
3,538,715 |
|
|
|
12,782,847 |
|
|
|
10,900,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales revenues |
|
|
27,270,147 |
|
|
|
27,000,453 |
|
|
|
85,792,241 |
|
|
|
80,367,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
8,400,956 |
|
|
|
8,510,674 |
|
|
|
25,677,480 |
|
|
|
24,932,499 |
|
Support and maintenance |
|
|
4,960,047 |
|
|
|
4,863,889 |
|
|
|
14,908,447 |
|
|
|
14,101,808 |
|
Outsourcing |
|
|
2,567,496 |
|
|
|
2,168,685 |
|
|
|
7,250,184 |
|
|
|
6,255,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of sales |
|
|
15,928,499 |
|
|
|
15,543,248 |
|
|
|
47,836,111 |
|
|
|
45,289,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
11,341,648 |
|
|
|
11,457,205 |
|
|
|
37,956,130 |
|
|
|
35,077,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
2,164,373 |
|
|
|
1,911,066 |
|
|
|
6,505,997 |
|
|
|
5,520,423 |
|
General and administrative |
|
|
4,220,919 |
|
|
|
3,838,777 |
|
|
|
13,613,004 |
|
|
|
13,070,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
6,385,292 |
|
|
|
5,749,843 |
|
|
|
20,119,001 |
|
|
|
18,591,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
4,956,356 |
|
|
|
5,707,362 |
|
|
|
17,837,129 |
|
|
|
16,486,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
308,864 |
|
|
|
176,779 |
|
|
|
829,623 |
|
|
|
431,214 |
|
Miscellaneous income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
308,864 |
|
|
|
176,779 |
|
|
|
829,623 |
|
|
|
436,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
5,265,220 |
|
|
|
5,884,141 |
|
|
|
18,666,752 |
|
|
|
16,923,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
1,841,040 |
|
|
|
2,318,937 |
|
|
|
7,064,523 |
|
|
|
6,714,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,424,180 |
|
|
$ |
3,565,204 |
|
|
$ |
11,602,229 |
|
|
$ |
10,208,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share — basic |
|
$ |
0.32 |
|
|
$ |
0.34 |
|
|
$ |
1.08 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share — diluted |
|
$ |
0.32 |
|
|
$ |
0.33 |
|
|
$ |
1.07 |
|
|
$ |
0.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
10,752,518 |
|
|
|
10,603,781 |
|
|
|
10,736,745 |
|
|
|
10,540,817 |
|
Diluted |
|
|
10,824,529 |
|
|
|
10,695,570 |
|
|
|
10,820,201 |
|
|
|
10,628,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.36 |
|
|
$ |
0.22 |
|
|
$ |
1.08 |
|
|
$ |
0.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
Other |
|
|
|
|
|
Total |
| |
|
Common |
|
Common |
|
Paid-in |
|
Deferred |
|
Comprehensive |
|
Retained |
|
Stockholders’ |
| |
|
Shares |
|
Stock |
|
Capital |
|
Compensation |
|
Loss |
|
Earnings |
|
Equity |
| |
|
|
Balance at December 31, 2005 |
|
|
10,624,901 |
|
|
$ |
10,625 |
|
|
$ |
20,576,268 |
|
|
$ |
(72,305 |
) |
|
$ |
(67,979 |
) |
|
$ |
15,941,540 |
|
|
$ |
36,388,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,602,229 |
|
|
|
11,602,229 |
|
Issuance of common stock |
|
|
153,376 |
|
|
|
154 |
|
|
|
314,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,641 |
|
Forfeiture of restricted stock |
|
|
(23,299 |
) |
|
|
(24 |
) |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
Unrealized loss on available for sales investments,
net of tax of $4,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,041 |
|
|
|
|
|
|
|
8,041 |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
1,020,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,020,316 |
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,609,193 |
) |
|
|
(11,609,193 |
) |
Income tax benefit from stock option exercise |
|
|
|
|
|
|
|
|
|
|
199,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199,756 |
|
Adoption of SFAS No. 123R |
|
|
|
|
|
|
|
|
|
|
(72,305 |
) |
|
|
72,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Balance at September 30, 2006 |
|
|
10,754,978 |
|
|
$ |
10,755 |
|
|
$ |
22,038,546 |
|
|
$ |
— |
|
|
$ |
(59,938 |
) |
|
$ |
15,934,576 |
|
|
$ |
37,923,939 |
|
| |
|
|
See accompanying notes.
5
COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Nine months ended September 30, |
|
| |
|
2006 |
|
|
2005 |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,602,229 |
|
|
$ |
10,208,518 |
|
Adjustments to net income: |
|
|
|
|
|
|
|
|
Provision for bad debt |
|
|
(148,250 |
) |
|
|
759,505 |
|
Deferred taxes |
|
|
(605,094 |
) |
|
|
(161,386 |
) |
Stock based compensation |
|
|
1,020,316 |
|
|
|
38,280 |
|
Excess tax benefit from stock based compensation |
|
|
(199,756 |
) |
|
|
882,921 |
|
Depreciation |
|
|
1,449,738 |
|
|
|
1,289,046 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,313,350 |
) |
|
|
(1,967,029 |
) |
Financing receivables |
|
|
(799,198 |
) |
|
|
(579,679 |
) |
Inventories |
|
|
152,058 |
|
|
|
(331,455 |
) |
Prepaid expenses |
|
|
8,908 |
|
|
|
(3,335 |
) |
Accounts payable |
|
|
(666,950 |
) |
|
|
735,222 |
|
Deferred revenue |
|
|
(388,782 |
) |
|
|
817,368 |
|
Other liabilities |
|
|
(221,543 |
) |
|
|
(171,970 |
) |
Income taxes payable |
|
|
415,598 |
|
|
|
312,819 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
10,305,924 |
|
|
|
11,828,825 |
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(329,041 |
) |
|
|
(1,766,989 |
) |
Purchases of investments |
|
|
(1,461,392 |
) |
|
|
(8,261,664 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,790,433 |
) |
|
|
(10,028,653 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options, net |
|
|
314,641 |
|
|
|
1,950,861 |
|
Excess tax benefit from stock based compensation |
|
|
199,756 |
|
|
|
— |
|
Dividends paid |
|
|
(11,609,193 |
) |
|
|
(6,948,134 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(11,094,796 |
) |
|
|
(4,997,273 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(2,579,305 |
) |
|
|
(3,197,101 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
11,669,690 |
|
|
|
13,785,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
9,090,385 |
|
|
$ |
10,588,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
7,254,019 |
|
|
$ |
5,691,906 |
|
See accompanying notes.
6
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,
2005 and the notes thereto contained in our Annual Report on Form 10-K for the year ended December
31, 2005. |
| |
| 2. |
|
REVENUE RECOGNITION |
| |
| |
|
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 outsourcing services, which includes electronic billing, statement
processing, and business office outsourcing. |
Depending upon the terms of the contract, revenue is recognized in accordance with SEC Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB
No. 104, Revenue Recognition, and the American Institute of Certified Public Accountants Statement
of Position (SOP) 97-2, Software Revenue Recognition, which states that revenue should be
recognized when persuasive evidence of an agreement exists, the product or service has been
delivered, fees and prices are fixed and determinable, collectibility is probable, and when all
other significant obligations have been fulfilled.
License revenue in connection with license agreements for proprietary software is recognized upon
delivery of the software, providing collection is considered probable, the fee is fixed or
determinable, there is evidence of an arrangement, and vendor specific objective evidence (VSOE)
exists with respect to any undelivered elements of the arrangement. For multiple-element
arrangements, the Company recognizes revenue under the residual method as permitted by the American
Institute of Certified Public Accountants Statement of Position (SOP) 98-9, Modification of SOP
97-2, Software Revenue Recognition, with Respect to Certain Transactions, whereby (1) the total
fair value of the undelivered elements, as indicated by VSOE, is deferred and subsequently
recognized in accordance with SOP 97-2 and (2) the difference between the total arrangement fee and
the amount deferred for the undelivered elements is recognized as revenue related to the delivered
elements.
Revenue derived from maintenance contracts primarily includes software application support,
hardware maintenance, continuing education and related services. Maintenance contracts are
typically sold for a separate fee with initial contractual periods ranging from one to three years
with renewal for additional periods thereafter. Maintenance revenue is recognized ratably over the
term of the maintenance agreement. In situations where all or a portion of the maintenance fee is
bundled with the license fee, VSOE for maintenance is determined based on prices when sold
separately.
Revenue for hardware is recognized under SAB No. 104. Under SAB No. 104, revenue is recognized
provided that persuasive evidence of an arrangement exists, delivery has occurred or services have
been rendered, the fee is fixed or determinable, and collectibility is reasonably assured. For
hardware, delivery is considered to have occurred upon shipment provided that risk of loss has been
transferred to the customer.
Revenue for ISP, ASP, and outsourcing services are recognized in the period in which the services
are performed.
7
| 3. |
|
DETAILS ON BALANCE SHEET AMOUNTS |
| |
| |
|
Other accrued liabilities are comprised of the following: |
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
Salaries and benefits |
|
$ |
1,327,619 |
|
|
$ |
1,920,861 |
|
Commissions |
|
|
309,744 |
|
|
|
306,704 |
|
Self-insurance reserves |
|
|
365,600 |
|
|
|
380,600 |
|
Other |
|
|
200,464 |
|
|
|
77,066 |
|
|
|
|
|
|
|
|
|
|
$ |
2,203,427 |
|
|
$ |
2,685,231 |
|
|
|
|
|
|
|
|
| 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
shareholder’s 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 September 30, 2006: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Short term investments |
|
$ |
236,186 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
236,186 |
|
Obligations of U.S. Treasury, U.S.
government corporation and agencies |
|
|
4,497,948 |
|
|
|
19,388 |
|
|
|
27,514 |
|
|
|
4,489,822 |
|
Mortgaged backed securities |
|
|
428,854 |
|
|
|
— |
|
|
|
8,904 |
|
|
|
419,950 |
|
Municipal obligations |
|
|
800,000 |
|
|
|
— |
|
|
|
— |
|
|
|
800,000 |
|
Corporate bonds |
|
|
4,686,103 |
|
|
|
10,293 |
|
|
|
69,009 |
|
|
|
4,627,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,649,091 |
|
|
$ |
29,681 |
|
|
$ |
105,427 |
|
|
$ |
10,573,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shown below are the amortized cost and estimated fair value of securities with fixed maturities
at September 30, 2006, by contract maturity date. Actual maturities may differ from contractual
maturities because issuers of certain securities retain early call or prepayment rights.
| |
|
|
|
|
|
|
|
|
| |
|
Amortized |
|
|
Fair |
|
| |
|
Cost |
|
|
Value |
|
Due in 2006 |
|
$ |
2,799,004 |
|
|
$ |
2,750,593 |
|
Due in 2007 |
|
|
3,290,670 |
|
|
|
3,280,277 |
|
Due in 2008 |
|
|
2,498,776 |
|
|
|
2,489,478 |
|
Due in 2009 and thereafter |
|
|
1,824,455 |
|
|
|
1,816,811 |
|
|
|
|
|
|
|
|
|
|
$ |
10,412,905 |
|
|
$ |
10,337,159 |
|
|
|
|
|
|
|
|
| 5. |
|
NET INCOME 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 difference between
basic and diluted EPS is solely attributable to stock options. The Company uses the treasury stock
method to calculate the impact of outstanding stock options. For the three and nine month periods
ended September 30, 2006, these dilutive shares were 72,011 and 83,456 respectively. For the three
and nine month periods ended September 30, 2005, these dilutive shares were 91,789 and 87,200
respectively. |
8
| 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: |
| |
|
|
|
|
|
|
|
|
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
352,468 |
|
|
$ |
274,520 |
|
Accrued vacation |
|
|
832,894 |
|
|
|
731,392 |
|
Stock compensation |
|
|
383,002 |
|
|
|
— |
|
Other accrued liabilities |
|
|
145,415 |
|
|
|
151,266 |
|
Unrealized loss on investments |
|
|
38,642 |
|
|
|
43,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
1,752,421 |
|
|
$ |
1,200,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Deferred compensation |
|
$ |
13,270 |
|
|
$ |
28,199 |
|
Depreciation |
|
|
636,557 |
|
|
|
670,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
649,827 |
|
|
|
698,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
1,102,594 |
|
|
$ |
502,317 |
|
|
|
|
|
|
|
|
| |
|
Significant components of the Company’s income tax provision for the nine months ended
September 30 are as follows: |
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Current provision: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
6,319,348 |
|
|
$ |
5,683,021 |
|
State |
|
|
1,350,269 |
|
|
|
1,193,100 |
|
Deferred provision: |
|
|
|
|
|
|
|
|
Federal |
|
|
(543,033 |
) |
|
|
(144,761 |
) |
State |
|
|
(62,061 |
) |
|
|
(16,625 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision |
|
$ |
7,064,523 |
|
|
$ |
6,714,735 |
|
|
|
|
|
|
|
|
| |
|
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 nine months ended September 30 are as
follows: |
| |
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
Income taxes at U. S. Federal statutory rate |
|
$ |
6,533,013 |
|
|
$ |
5,923,139 |
|
State income tax, net of federal tax effect |
|
|
841,750 |
|
|
|
755,463 |
|
Other |
|
|
(310,240 |
) |
|
|
36,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision |
|
$ |
7,064,523 |
|
|
$ |
6,714,735 |
|
|
|
|
|
|
|
|
| 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 123R. |
9
| |
|
The following table shows total stock-based compensation expense for the three and nine months
ended September 30, 2006, included in the Condensed Statement of Income: |
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, 2006 |
|
|
September 30, 2006 |
|
Costs of sales |
|
$ |
152,736 |
|
|
$ |
434,823 |
|
Operating expenses |
|
|
203,125 |
|
|
|
585,493 |
|
|
|
|
|
|
|
|
Pre-tax stock-based compensation expense |
|
|
355,861 |
|
|
|
1,020,316 |
|
Less: income tax effect |
|
|
124,445 |
|
|
|
386,190 |
|
|
|
|
|
|
|
|
Net stock-based compensation expense |
|
$ |
231,416 |
|
|
$ |
634,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted per share impact |
|
$ |
0.02 |
|
|
$ |
0.06 |
|
|
|
|
|
|
|
|
Prior to adopting SFAS 123R, the Company presented all tax benefits resulting from the exercise
of stock options as operating cash flows in the Statement of Cash Flows. SFAS 123R requires cash
flows resulting from excess tax benefits to be classified as a part of cash flows from financing
activities. Excess tax benefits are realized tax benefits from tax deductions for exercised options
in excess of the deferred tax asset attributable to stock compensation costs for such options. As a
result of adopting SFAS 123R, $199,756 of excess tax benefits for the nine months ended September
30, 2006 have been classified as a financing cash inflow.
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 have been granted in 2006
and no options were granted in 2005, 2004 or 2003.
As required under SFAS 123R, the reported net income and earnings per share for the three and
nine months ended September 30, 2005 have been presented to reflect the impact had the Company been
required to include the amortization of the Black-Scholes option value as an expense. The pro forma
amounts are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine Months Ended |
|
| |
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Net income as reported |
|
$ |
3,565,204 |
|
|
$ |
10,208,518 |
|
Add: Stock-based compensation expense, net of tax, included
in reported net income |
|
|
7,785 |
|
|
|
23,352 |
|
Deduct: Total stock-based employee compensation expense
determined under the fair value method for all awards,
net of tax |
|
|
(64,137 |
) |
|
|
(192,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
3,508,852 |
|
|
$ |
10,039,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share as reported |
|
$ |
0.34 |
|
|
$ |
0.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share as reported |
|
$ |
0.33 |
|
|
$ |
0.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic income per share |
|
$ |
0.33 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted income per share |
|
$ |
0.33 |
|
|
$ |
0.94 |
|
|
|
|
|
|
|
|
10
A summary of stock option activity under the plan during the nine month period ended September
30, 2006 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
| |
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Instrincic |
|
| |
|
Shares |
|
|
Price |
|
|
Contractual Term |
|
|
Value |
|
Outstanding at beginning of year |
|
|
251,519 |
|
|
$ |
16.50 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(19,068 |
) |
|
|
16.50 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(7,616 |
) |
|
|
16.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
224,835 |
|
|
$ |
16.50 |
|
|
|
2.75 |
|
|
$ |
3,658,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
36,919 |
|
|
$ |
16.50 |
|
|
|
2.75 |
|
|
$ |
600,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares available for future grants under
the plan at end of period |
|
|
|
|
|
|
484,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 third
quarter of 2006 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 September 30, 2006 and
September 30, 2005 was $87,672 and $195,487 respectively. The aggregate intrinsic value of options
exercised during the nine months ended September 30, 2006 and September 30, 2005 was $506,865 and
$2,255,151 respectively.
As of September 30, 2006, there was $230,410 of total unrecognized compensation cost related to
non-vested share-based compensation arrangements granted under the existing stock option plan. This
cost is expected to be recognized over a weighted-average period of 1.0 year.
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. 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 Company’s CEO, David A. Dye, resigned his position as CEO. Upon resignation,
23,299 shares of restricted stock which had been granted to him under the 2005 Restricted Stock
Plan were forfeited. The forfeiture of theses shares resulted in the reversal of previously
recognized stock compensation expense of $51,076.
On May 17, 2006, the Compensation Committee of the Board of Directors approved the grant of 17,810
shares of restricted stock, effective May 17, 2006, to the 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.
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-Average |
|
| |
|
|
|
|
|
Grant-Date |
|
| |
|
Shares |
|
|
Fair Value |
|
Nonvested stock outstanding at beginning of year |
|
|
— |
|
|
$ |
— |
|
Granted |
|
|
134,308 |
|
|
|
42.81 |
|
Vested |
|
|
— |
|
|
|
— |
|
Forfeited |
|
|
23,299 |
|
|
|
42.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested stock outstanding at end of period |
|
|
111,009 |
|
|
$ |
42.79 |
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $4,133,045 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 4.3 years.
11
Deferred Compensation
On May 17, 2002, Kenny Muscat, one of the Company’s directors and a principal stockholder sold
66,667 shares of common stock to J. Boyd Douglas, Jr., one of the Company’s directors and its
current Chief Executive Officer (CEO), for a price of $13.20 per share. The share price was
determined by an independent valuation of the fair
market value of the shares. A promissory note was delivered for the entire purchase price. The
promissory note bears interest at the applicable rate for federal income tax purposes, and the
entire principal balance is due five years after the date of the stock sale. As a part of the same
transaction, Mr. Muscat also transferred to Mr. Douglas 19,333 shares of common stock for $1.00.
These shares are subject to a mandatory transfer obligation under which Mr. Douglas will be
required to transfer the shares back to Mr. Muscat in the event Mr. Douglas’ employment with the
Company terminates for certain reasons prior to the fifth anniversary of the transaction date. The
mandatory transfer obligation lapses as to 20% of the shares on each anniversary of the transaction
date over the five year restriction period.
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted-Average |
|
| |
|
|
|
|
|
Grant-Date |
|
| |
|
Shares |
|
|
Fair Value |
|
Nonvested stock outstanding at beginning of
year |
|
|
5,478 |
|
|
$ |
13.20 |
|
Granted |
|
|
— |
|
|
|
— |
|
Vested |
|
|
2,901 |
|
|
|
13.20 |
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested stock outstanding at end of period |
|
|
2,577 |
|
|
$ |
13.20 |
|
|
|
|
|
|
|
|
As of September 30, 2006, there was $34,016 of total unrecognized compensation cost related to
the unlapsed portion of the mandatory transfer obligation. This cost is expected to be recognized
over a weighted-average period of 0.67 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 and nine months ended September 30, 2006 and 2005 are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
| |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income as reported |
|
$ |
3,424,180 |
|
|
$ |
3,565,204 |
|
|
$ |
11,602,229 |
|
|
$ |
10,208,518 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain
on investments, net of
taxes |
|
|
21,093 |
|
|
|
(28,930 |
) |
|
|
8,041 |
|
|
|
(55,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
3,445,273 |
|
|
$ |
3,536,274 |
|
|
$ |
11,610,270 |
|
|
$ |
10,153,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
| 9. |
|
RECENT ACCOUNTING PRONOUNCEMENTS |
| |
| |
|
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 requires a company to determine whether it
is more likely than not that a tax position will be sustained upon examination based upon the
technical merits of the position. If the more-likely-than-not threshold is met, a company must
measure the tax position to determine the amount to recognize in the financial statements. FIN 48
is effective for the Company beginning January 1, 2007. The Company is currently evaluating FIN 48
and the potential impact on its financial statements has not been determined. |
| |
| |
|
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
(“SAB 108”). SAB 108 was issued to provide consistency between how registrants quantify financial
statement misstatements. |
| |
| |
|
Historically, there have been two widely-used methods for quantifying the effects of financial
statement misstatements. These methods are referred to as the “roll-over” and “iron curtain”
method. The roll-over method quantifies the amount by which the current year income statement is
misstated. Exclusive reliance on an income statement approach can result in the accumulation of
errors on the balance sheet that may not have been material to any individual income statement, but
which may misstate one or more balance sheet accounts. The iron curtain method quantifies the
error as the cumulative amount by which the current year balance sheet is misstated. Exclusive
reliance on a balance sheet approach can result in disregarding the effects of errors in the
current year income statement that results from the correction of an error existing in previously
issued financial statements. We currently use the roll-over method for quantifying identified
financial statement misstatements. |
| |
| |
|
SAB 108 established an approach that requires quantification of financial statement misstatements
based on the effects of the misstatement on each of the company’s financial statements and the
related financial statement disclosures. This approach is commonly referred to as the “dual
approach” because it requires quantification of errors under both the roll-over and iron curtain
methods. |
| |
| |
|
SAB 108 allows registrants to initially apply the dual approach either by (1) retroactively
adjusting prior financial statements as if the dual approach had always been used or by (2)
recording the cumulative effect of initially applying the dual approach as adjustments to the
carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment
recorded to the opening balance of retained earnings. Use of this “cumulative effect” transition
method requires detailed disclosure of the nature and amount of each individual error being
corrected through the cumulative adjustment and how and when it arose. |
| |
| |
|
We will initially apply SAB 108 using the cumulative effect transition method in connection with
the preparation of our annual financial statements for the year ending December 31, 2006. The
Company is currently evaluating SAB 108 and the potential impact on its financial statements has
not been determined. |
13
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, 2005, 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 September 30, 2006, we
generated revenues of $27.3 million from the sale of our products and services.
Results of Operations
Three Months Ended September 30, 2006 Compared with Three Months Ended September 30, 2005
Revenues. Total revenues increased by 1.0%, or $0.3 million, to $27.3 million for the three
months ended September 30, 2006, from $27.0 million for the three months ended September 30, 2005.
System sales revenues decreased by 12.5%, or $1.6 million, to $10.9 million for the three
months ended September 30, 2006, from $12.5 million for the three months ended September 30, 2005.
This decrease was primarily due to a decrease in sales of systems to new customers.
Support and maintenance revenues increased by 7.1%, or $0.7 million, to $11.7 million for the
three months ended September 30, 2006, from $11.0 million for the three months ended September 30,
2005. This increase was attributable to an increase in recurring revenues as a result of a larger
customer base.
Outsourcing revenues increased by 29.7%, or $1.1 million, to $4.6 million for the three months
ended September 30, 2006, from $3.5 million for the three months ended September 30, 2005. We
experienced an increase in outsourcing revenues as a result of continued growth in existing
customer demand for electronic billing and business office outsourcing services. We were providing
business office outsourcing services to forty-five customers at September 30, 2006 and twenty
customers at September 30, 2005.
14
Costs of Sales. Total costs of sales increased by 2.5%, or $0.4 million, to $16.0 million for
the three months ended September 30, 2006, from $15.5 million for the three months ended September
30, 2005. As a percentage of total revenues, costs of sales increased to 58.4% for the three months
ended September 30, 2006 from 57.6% for the three months ended September 30, 2005.
Cost of system sales decreased by 1.3%, or $0.1 million, to $8.4 million for the three months
ended September 30, 2006, from $8.5 million for the three months ended September 30, 2005. The
gross margin on system sales decreased to 23.0% for the three months ended September 30, 2006, from
31.8% for the three months ended September 30, 2005. The decrease in sales of new systems resulted
in the decreased gross margin percentage since many of the expenses are fixed in nature.
Cost of support and maintenance increased by 2.0%, or $0.1 million, to $5.0 million for the
three months ended September 30, 2006, from $4.9 million for the three months ended September 30,
2005. This increase was caused primarily by an increase in payroll related expenses as a result of
salary increases and an increase in the number of employees. The gross margin on support and
maintenance revenues increased to 57.8% for the three months ended September 30, 2006, compared to
55.7% for the three months ended September 30, 2005. The increase in gross margin was primarily due
to the addition of new customers coupled with a proportionately smaller increase in support
personnel.
Our costs associated with outsourcing services increased by 18.4%, or $0.4 million, to $2.6
million for the three months ended September 30, 2006, from $2.2 million for the three months ended
September 30, 2005. This increase was caused primarily by an increase of $0.3 million in payroll
related expenses as a result of an increase in the number of employees needed to support our
growing business office outsourcing operations and electronic billing operations. Postage expense
related to our statement outsourcing business also increased $0.1 million due to an increase in
volume.
Sales and Marketing Expenses. Sales and marketing expenses increased by 13.3%, or $0.3
million, to $2.2 million for the three months ended September 30, 2006, from $1.9 million for the
three months ended September 30, 2005. The increase was attributable to an increase in salary
expense of $0.3 million as a result of an increase in the number of personnel in sales and
marketing.
General and Administrative Expenses. General and administrative expenses increased by 10.0%,
or $0.4 million, to $4.2 million for the three months ended September 30, 2006, from $3.8 million
for the three months ended September 30, 2005. Stock compensation expense which resulted from the
adoption of SFAS 123R was $0.2 million for the quarter ended September 30, 2006 as compared to $0.0
in the prior year period. Group health insurance expense increased $0.2 million due to an increase
in the number of covered employees.
As a percentage of total revenues, sales and marketing expenses and general and administrative
expenses increased to 23.5% for the three months ended September 30, 2006 from 21.3% for three
months ended September 30, 2005.
Net Income. Net income for the three months ended September 30, 2006 decreased by 4.0%, or
$0.1 million, to $3.4 million, or $0.32 per diluted share, as compared with net income of $3.6
million, or $0.33 per diluted share, for the three months ended September 30, 2005. Net income
represents 12.6% of revenue for the three months ended September 30, 2006, as compared to 13.2% of
revenue for the three months ended September 30, 2005.
Nine Months Ended September 30, 2006 Compared with Nine Months Ended September 30, 2005
Revenues. Total revenues increased by 6.7%, or $5.4 million, to $85.8 million for the nine
months ended September 30, 2006, from $80.4 million for the nine months ended September 30, 2005.
System sales revenues increased by 2.3%, or $0.9 million, to $38.6 million for the nine months
ended September 30, 2006, from $37.8 million for the nine months ended September 30, 2005. This
increase was primarily due to an increase in the number of new system installations as well as an
increase in the sale of add-on business to existing customers.
Support and maintenance revenues increased by 8.4%, or $2.7 million, to $34.4 million for the
nine months ended September 30, 2006, from $31.7 million for the nine months ended September 30,
2005. This increase was attributable to an increase in recurring revenues as a result of a larger
customer base.
Outsourcing revenues increased by 17.3%, or $1.9 million, to $12.8 million for the nine months
ended September 30, 2006, from $10.9 million for the nine months ended September 30, 2005. We
experienced an increase in outsourcing revenues as a result of continued growth in customer demand
for electronic billing, statement processing, and business office outsourcing services.
Costs of Sales. Total costs of sales increased by 5.6%, or $2.5 million, to $47.8 million for
the nine months ended September 30, 2006, from $45.3 million for the nine months ended September
30, 2005. As a percentage of total revenues, costs of sales decreased to 55.8% for the nine months
ended September 30, 2006, from 56.3% for the nine months ended September 30, 2005. The size of our
average new installation contract increased. We also experienced an increase in the number of new
system installations which produced a higher profit margin.
15
Cost of system sales increased by 3.0%, or $0.7 million, to $25.7 million for the nine months
ended September 30, 2006, from $24.9 million for the nine months ended September 30, 2005. Payroll
related expenses increased $0.6 million as a result of salary increases and an increase in the
number of employees. Stock compensation expense which resulted from the adoption of SFAS 123R was
$0.4 million for the nine months ended September 30, 2006, as compared to $0.0 in the prior year
period. Cost of equipment increased $0.2 million as a result of an increase in equipment sales.
These increases in expense were offset by a decrease in travel related expense of $0.5 million. The
gross margin on system sales decreased to 33.6% for the nine months ended September 30, 2006, from
34.0% for the nine months ended September 30, 2005.
Cost of support and maintenance increased by 5.7%, or $0.8 million, to $14.9 million for the
nine months ended September 30, 2006, from $14.1 million for the nine months ended September 30,
2005. This increase was caused primarily by an increase in payroll related expenses as a result of
salary increases and an increase in the number of employees. The gross margin on support and
maintenance revenues increased to 56.6% for the nine months ended September 30, 2006, compared to
55.5% for the nine months ended September 30, 2005.
Our costs associated with outsourcing services increased by 15.9%, or $1.0 million, to $7.3
million for the nine months ended September 30, 2006, from $6.3 million for the nine months ended
September 30, 2005. This increase was caused primarily by an increase of $0.7 million in payroll
related expenses as a result of an increase in the number of employees needed to support our
growing business office outsourcing operations and electronic billing operations. Postage expense
related to our statement outsourcing business also increased $0.3 million due to an increase in
volume.
Sales and Marketing Expenses. Sales and marketing expenses increased by 17.9%, or $1.0
million, to $6.5 million for the nine months ended September 30, 2006, from $5.5 million for the
nine months ended September 30, 2005. The increase was partly attributable to an increase in
salary expense of $0.6 million as a result of an increase in the number of personnel in sales and
marketing. Stock compensation expense which resulted from the adoption of SFAS 123R was $0.2
million for the nine months ended September 30, 2006, as compared to $0.0 in the prior year period.
Travel expense also increased $0.2 million.
General and Administrative Expenses. General and administrative expenses increased 4.1%, or
$0.5 million, to $13.6 million for the nine months ended September 30, 2006, from $13.1 million for
the nine months ended September 30, 2005. Stock compensation expense which resulted from the
adoption of SFAS 123R was $0.4 million for the nine months ended September 30, 2006 as compared to
$0.0 in the prior year period. Group health insurance expense increased $0.3 million and
depreciation increased $0.1 million. Payroll related expenses also increased $0.2 million. These
increases in expense were offset by a decrease in bad debt expense of $0.6 million.
As a percentage of total revenues, sales and marketing expenses and general and administrative
expenses increased to 23.5% for the nine months ended September 30, 2006, from 23.2% for nine
months ended September 30, 2005.
Net Income. Net income for the nine months ended September 30, 2006 increased by 13.7%, or
$1.4 million, to $11.6 million, or $1.07 per diluted share, as compared with net income of $10.2
million, or $0.96 per diluted share, for the nine months ended September 30, 2005. Net income
represents 13.5% of revenue for the nine months ended September 30, 2006, as compared to 12.6% of
revenue for the nine months ended September 30, 2005. This increase in net income is attributable
to an increase in the number of new system installations and also an increase in the average
installation size, as described above.
Liquidity and Capital Resources
At September 30, 2006, we had cash and cash equivalents of $9.1 million, compared with $10.6
million at September 30, 2005. Net cash provided by operating activities for the nine months ended
September 30, 2006 was $10.3 million, compared to $11.8 million for the nine months ended September
30, 2005. The decrease was primarily due to an increase in accounts receivable, financing
receivables and provision for bad debt. The temporary suspension of reimbursement to hospitals by
Medicare in September 2006 resulted in a decrease in collections from our customers.
Net cash used in investing activities totaled $1.8 million for the nine months ended September
30, 2006, compared to $10.0 million for the nine months ended September 30, 2005. We used cash
primarily for the purchase of property and equipment. In 2005, we used cash primarily for the
purchase of $8.3 million in investments which are classified as available for sale.
Net cash used in financing activities totaled $11.1 million for the nine months ended
September 30, 2006, compared to $5.0 million for the nine months ended September 30, 2005. We paid
dividends of $11.6 million to our shareholders in the nine months ended September 30, 2006 compared
to $6.9 million in the nine months ended September 30, 2005.
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 the next 12 months.
16
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.
We currently do not use derivative financial instruments. Cash and cash equivalents consist of
highly liquid financial instruments, primarily cash, money market funds and short term U.S.
Government obligations, purchased with an original maturity of three months or less. Interest
income on our income statement is included in “Other Income.”
As of September 30, 2006, the Company had no borrowings and is, therefore, 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, 2005, 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.
| |
(a) |
|
None. |
| |
| |
(b) |
|
None. |
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(c) |
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None. |
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
17
Item 6. Exhibits
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3.1 |
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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) |
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3.2 |
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Bylaws (filed as Exhibit 3.6 to CPSI’s Registration Statement
on Form S-1 (Registration No. 333-84726) and incorporated herein by reference) |
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31.1 |
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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 |
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31.2 |
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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 |
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| |
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 |
18
SIGNATURE
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.
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COMPUTER PROGRAMS AND SYSTEMS, INC. |
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Date: November 8, 2006
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By:
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/s/ J. Boyd Douglas |
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J. Boyd Douglas
President and Chief Executive Officer |
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Date: November 8, 2006
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By:
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/s/ M. Stephen Walker |
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M. Stephen Walker
Vice President — Finance and
Chief Financial Officer |
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19
Exhibit Index
| |
|
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| No. |
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Exhibit |
|
|
|
3.1
|
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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
|
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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
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|
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 |