TruBridge - 10-Q quarterly report FY

(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):

     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.

See accompanying notes.

See accompanying notes.

See accompanying notes.

See accompanying notes.

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.

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.

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.

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:

A summary of stock option activity under the plan during the nine month period ended September 30, 2006 is as follows:

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.

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.

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.

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.

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.

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:

     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:

     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.

     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.

     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.

     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.

     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.

     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.

     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.

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

     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.

     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.

     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.

     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.

     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.