UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2004.
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)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
(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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
As of October 29, 2004, there were 10,489,849 shares of the issuer’s common stock outstanding.
Form 10-Q
(For the quarterly period ended September 30, 2004)
INDEX
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Balance Sheets (unaudited) – September 30, 2004 and December 31, 2003
1
Condensed Statements of Income (unaudited) – Three and Nine months Ended September 30, 2004 and 2003
2
Condensed Statements of Cash Flows (unaudited) –Nine months Ended September 30, 2004 and 2003
3
Notes to Condensed Financial Statements (unaudited)
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
8
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
12
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
Unregistered Sales of Equity Securities and Use of Proceeds
13
Defaults upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
Item 6.
Exhibits
PART I
Item 1. Financial Statements.
CONDENSED BALANCE SHEETS (Unaudited)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $1,243,000 and $904,000, respectively
Financing receivables, current portion
Inventories
Deferred tax assets
Prepaid income taxes
Prepaid expenses
Total current assets
Property and equipment
Land
Maintenance equipment
Computer equipment
Office furniture and equipment
Automobiles
Less accumulated depreciation
Net property and equipment
Financing receivables
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Deferred revenue
Accrued vacation
Other accrued liabilities
Income taxes payable
Total current liabilities
Deferred tax liabilities
Stockholders’ equity:
Common stock, par value $0.001 per share; 30,000,000 shares authorized; 10,489,849 shares issued and outstanding
Additional paid-in capital
Deferred compensation
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
CONDENSED STATEMENTS OF INCOME (Unaudited)
Sales revenues:
System sales
Support and maintenance
Outsourcing
Total sales revenues
Costs of sales:
Total costs of sales
Gross profit
Operating expenses:
Sales and marketing
General and administrative
Total operating expenses
Operating income
Other income (expense):
Interest income
Miscellaneous income
Total other income
Income before taxes
Income taxes
Net income
Net income per share - basic
Net income per share - diluted
Weighted average shares outstanding
Basic
Diluted
Dividends declared per share
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Operating Activities
Adjustments to net income:
Provision for bad debt
Deferred taxes
Depreciation
Changes in operating assets and liabilities:
Accounts receivable
Other liabilities
Net cash provided by operating activities
Investing Activities
Purchases of property and equipment
Net cash used in investing activities
Financing Activities
Dividends paid
Distributions to stockholders
Net cash used in financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Cash paid for income taxes
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
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 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, 2003 and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2003.
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, 2004, these dilutive shares were 43,539 and 40,954, respectively. For the three and nine month periods ended September 30, 2003, these dilutive shares were 36,837 and 57,708, respectively.
The Company provides 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,
2004
Deferred tax assets:
Accrued liabilities
Net deferred tax assets
Deferred tax liabilities:
Net deferred tax liabilities
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)
Significant components of the Company’s income tax provision for the nine months ended September 30 are as follows:
Current provision:
Federal
State
Deferred provision:
Total income tax provision
The difference between income taxes at the U. S. federal statutory income tax rate of 34% and those reported in the condensed statements of income for the nine months ended September 30 are as follows:
Income taxes at U. S. Federal statutory rate
State income tax, net of federal tax effect
Other
During 2002, the Company adopted the 2002 Stock Option Plan, and in accordance with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for employee stock options. Under APB No. 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense was reflected in net income for the nine months ended September 30, 2004 or 2003. Had the Company accounted for its stock-based compensation plan based on the fair value of awards at grant date consistent with the methodology of SFAS No. 123, the Company’s reported net income and income per share for the nine months ended September 30, 2004 would have been impacted as indicated below. There were no employee stock options granted during the nine months ended September 30, 2004. The effects of applying SFAS No. 123 on a pro forma basis for the nine months ended September 30, 2004, are not likely to be representative of the effects on reported pro forma net income for future years as options vest over several years and it is anticipated that additional grants will be made in future years.
5
Net income as reported
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards
Pro forma net income
Diluted income per share as reported
Pro forma diluted income per share
Under the 2002 Stock Option Plan, the Company has authorized the issuance of equity-based awards for up to 1,165,333 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, and 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.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because subjectivity of assumptions can materially affect estimate of fair value, the Company believes the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of its employee stock options.
The weighted average grant date fair value of options granted to employees under the 2002 Stock Option Plan during 2002 was $5.30. There were no options granted under the plan during the nine months ended September 30, 2004.
6
A summary of stock option activity under the plan is as follows:
Outstanding on January 1, 2004
Granted
Exercised
Forfeited
Outstanding on September 30, 2004
Exercisable on September 30, 2004
Shares available for future grants under the plan as of September 30, 2004
Weighted-average grant date fair value
Weighted-average remaining contractual life
7
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:
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, 2003, 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 500 hospital customers across 45 states and the District of Columbia. In the three months ended September 30, 2004, we generated revenues of $21.1 million from the sale of our products and services.
Results of Operations
Three Months Ended September 30, 2004 Compared with Three Months Ended September 30, 2003
Revenues. Total revenues increased by 7.9% or $1.5 million to $21.1 million for the three months ended September 30, 2004 from $19.6 million for the three months ended September 30, 2003.
System sales revenues remained unchanged at $9.1 million for the three months ended September 30, 2004 and for the three months ended September 30, 2003.
Support and maintenance revenues increased by 8.5% or $0.7 million to $9.4 million for the three months ended September 30, 2004 from $8.7 million for the three months ended September 30, 2003. This increase was attributable to an increase in recurring revenues as a result of a larger customer base and also an increase in the volume of ASP and ISP services.
Outsourcing revenues increased by 46.4% or $0.8 million to $2.6 million for the three months ended September 30, 2004 from $1.8 million for the three months ended September 30, 2003. We experienced an increase in outsourcing revenues as a result of growth in customer demand for business office outsourcing, as well as electronic billing and statement outsourcing services.
Costs of Sales. Total costs of sales increased by 3.6% or $0.4 million to $12.7 million for the three months ended September 30, 2004 from $12.3 million for the three months ended September 30, 2003. As a percentage of total revenues, cost of sales decreased to 60.2% for the three months ended September 30, 2004 from 62.7% for the three months ended September 30, 2003.
Cost of system sales decreased by 1.7% or $0.1 million to $7.1 million for the three months ended September 30, 2004 from $7.2 million for the three months ended September 30, 2003. Travel related expenses decreased $0.6 million as a result of installation locations which did not require air travel. The cost of hardware, however, increased $0.5 million due to an increase in equipment sales. The gross margin on system sales increased to 22.2% for the three months ended September 30, 2004 from 21.0% for the three months ended September 30, 2003. This increase was attributable to the decrease in travel related expenses.
Cost of support and maintenance increased by 4.2% or $0.2 million to $4.2 million for the three months ended September 30, 2004 from $4.0 million for the three months ended September 30, 2003. This change was caused primarily by an increase in depreciation expense of $0.1 million. Depreciation of maintenance equipment in the amount of $0.1 million was included in general and administrative expenses in the prior year. The gross margin on support and maintenance revenues increased to 55.8% for the three months ended September 30, 2004 from 54.0% for the three months ended September 30, 2003. The increase in gross margin was due to the increase in our customer base.
Our costs associated with outsourcing services increased by 35.9% or $0.4 million to $1.5 million for the three months ended September 30, 2004 from $1.1 million for the three months ended September 30, 2003. This change is attributable to an increase in postage cost resulting from an increase in transaction volumes of our statement outsourcing services.
Sales and Marketing Expenses. Sales and marketing expenses decreased by 5.1% or $0.1 million to $1.4 million for the three months ended September 30, 2004 from $1.5 million for the three months ended September 30, 2003. The decrease was attributable to decreased salary and commission expense.
9
General and Administrative Expenses. General and administrative expenses increased 3.4% or $0.1 million to $3.7 million for the three months ended September 30, 2004 from $3.6 million for the three months ended September 30, 2003. The increase in expense was related to increased costs of $0.1 million associated with health insurance for existing employees. An additional expense increase of $0.2 million was related to an increase in provision for bad debt, while depreciation expense decreased $0.2 million.
As a percentage of total revenues, sales and marketing expenses and general and administrative expenses decreased to 24.0% for the three months ended September 30, 2004 from 25.7% for the three months ended September 30, 2003.
Net Income. Net income for the three months ended September 30, 2004 increased by 42.8% or $0.6 million to $2.1 million or $0.20 per diluted share, as compared with net income of $1.5 million or $0.14 per diluted share for the three months ended September 30, 2003. Net income represents 9.9% of revenues for the three months ended September 30, 2004, as compared to 7.4% of revenues for the three months ended September 30, 2003.
Nine months Ended September 30, 2004 Compared with Nine months Ended September 30, 2003
Revenues. Total revenues decreased by 2.0% or $1.2 million to $58.4 million for the nine months ended September 30, 2004 from $59.6 million for the nine months ended September 30, 2003.
System sales revenues decreased by 17.3% or $5.0 million to $23.8 million for the nine months ended September 30, 2004 from $28.8 million for the nine months ended September 30, 2003. This decrease was primarily due to fewer new system installations in the first half of the year. The average installation size also decreased.
Support and maintenance revenues increased by 10.0% or $2.5 million to $28.0 million for the nine months ended September 30, 2004 from $25.5 million for the nine months ended September 30, 2003. This increase was attributable to an increase in recurring revenues as a result of a larger customer base and also an increase in the volume of ASP and ISP services.
Outsourcing revenues increased by 22.9% or $1.2 million to $6.5 million for the nine months ended September 30, 2004 from $5.3 million for the nine months ended September 30, 2003. We experienced an increase in outsourcing revenues as a result of growth in customer demand for business office outsourcing, as well as electronic billing and statement outsourcing services.
Costs of Sales. Total costs of sales remained constant at $35.9 million for the nine months ended September 30, 2004 and 2003. As a percentage of total revenues, cost of sales increased to 61.5% for the nine months ended September 30, 2004 from 60.2% for the nine months ended September 30, 2003.
Cost of system sales decreased by 5.7% or $1.2 million to $19.6 million for the nine months ended September 30, 2004 from $20.8 million for the nine months ended September 30, 2003. This decrease was caused by a decrease in cost of travel of $1.2 million as a result of fewer new system installations and installations at locations which did not require air travel. Additionally, payroll related expenses increased $0.4 million as a result of annual salary increases for our employees. Equipment cost also decreased by $0.4 million as a result of a decrease in equipment sales. The gross margin on system sales decreased to 17.7% for the nine months ended September 30, 2004 from 27.8% for the nine months ended September 30, 2003. The decrease in gross margin for the nine-month period was attributable to a decrease in the number of new system installations and the average installation size in the first half of the year.
10
Cost of support and maintenance increased by 4.2% or $0.5 million to $12.4 million for the nine months ended September 30, 2004 from $11.9 million for the nine months ended September 30, 2003. This increase was caused primarily by an increase in depreciation expense of $0.4 million. Depreciation of maintenance equipment in the amount of $0.4 million was included in general and administrative expenses in the prior year. Additionally, payroll related expenses increased $0.1 million as a result of annual salary increases for our employees. The gross margin on support and maintenance revenues increased to 55.6% for the nine months ended September 30, 2004 from 53.1% for the nine months ended September 30, 2003. The increase in gross margin was due to the increase in our customer base.
Our costs associated with outsourcing services increased 21.5% or $0.7 million to $3.8 million for the nine months ended September 30, 2004 from $3.1 million for the nine months ended September 30, 2003. Postage cost increased $0.3 million resulting from an increase in transaction volumes of our statement outsourcing services. Other expenses increased $0.2 million due to the increased use of temporary labor to support our business office outsourcing services. Additionally, payroll related expenses increased $0.2 million as a result of hiring additional full-time employees to support our business office outsourcing.
Sales and Marketing Expenses. Sales and marketing expenses decreased by 8.5% or $0.4 million to $4.1 million for the nine months ended September 30, 2004 from $4.5 million for the nine months ended September 30, 2003. The decrease was primarily attributable to decreased salary and commission expense of $0.3 million. Advertising and business promotion expense also decreased $0.2 million. Travel expenses increased $0.1 million.
General and Administrative Expenses. General and administrative expenses increased 11.1% or $1.1 million to $11.5 million for the nine months ended September 30, 2004 from $10.4 million for the nine months ended September 30, 2003. The increase in expense was related to increased costs of $0.9 million associated with insurance and benefits for existing employees. Additionally, the provision for bad debts increased $0.5 million. Depreciation expense decreased $0.3 million as a result of depreciation of maintenance equipment being included in the cost of support and maintenance for the current year.
As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses increased to 26.8% from 25.0% for the nine months ended September 30, 2004 and 2003, respectively.
Net Income. Net income for the nine months ended September 30, 2004 decreased by 24.0% or $1.3 million to $4.3 million or $0.41 per diluted share, as compared with net income of $5.6 million or $0.54 per diluted share for the nine months ended September 30, 2003. Net income represents 7.4% of revenues for the nine months ended September 30, 2004, as compared to 9.5% of revenues for the nine months ended September 30, 2003.
Liquidity and Capital Resources
At September 30, 2004, we had cash and short-term investments of $12.6 million, compared with $9.9 million at September 30, 2003. Net cash provided by operating activities for the nine months ended September 30, 2004 was $8.0 million, compared to $7.2 million for the nine months ended September 30, 2003.
Net cash used in investing activities totaled $1.1 million for the nine months ended September 30, 2004, compared to $1.6 million for the nine months ended September 30, 2003. We used cash primarily for the purchase of fixed assets.
11
Net cash used in financing activities totaled $3.8 million for the nine months ended September 30, 2004, compared to $2.0 million for the nine months ended September 30, 2003. We used cash to pay dividends that we declared during the period.
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.
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, 2004, 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
Item 1. Legal Proceedings.
From time to time, we are involved in routine litigation that arises in the ordinary course of business. We currently are involved in a litigated dispute relating to the installation of a hospital information system that, if resolved unfavorably, could have a negative impact on our quarterly earnings at some point in the future. However, this dispute should not have a material adverse effect on our business or financial condition. We are not currently involved in any other litigation that we believe could reasonably be expected to have a material adverse effect on our business, financial condition, or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Item 6. Exhibits.
Exhibit
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.
Date: November 3, 2004
By:
/s/ David A. Dye
David A. Dye
President and Chief Executive Officer
/s/ M. Stephen Walker
M. Stephen Walker
Vice President - Finance and
Chief Financial Officer
14
Exhibit Index
15