SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended September 30, 2003.
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission file number: 000-49796
COMPUTER PROGRAMS AND SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 74-3032373 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
| 6600 Wall Street, Mobile, Alabama | 36695 | |
| (Address of Principal Executive Offices) | (Zip Code) |
(251) 639-8100
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 30, 2003, there were 10,488,000 shares of the issuer’s common stock outstanding.
COMPUTER PROGRAMS AND SYSTEMS, INC.
Form 10-Q
(For the period ended September 30, 2003)
PART I- FINANCIAL INFORMATION
PART I
FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED BALANCE SHEETS (Unaudited)
| September 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 9,929,890 | $ | 6,352,452 | ||||
Accounts receivable, net of allowance for doubtful accounts of $788,000 and $768,000, respectively | 10,386,993 | 12,598,511 | ||||||
Financing receivables, current portion | 1,040,009 | 1,341,047 | ||||||
Inventories | 1,460,084 | 1,615,312 | ||||||
Deferred tax assets | 933,800 | 1,006,470 | ||||||
Prepaid expenses | 496,566 | 327,533 | ||||||
Prepaid income taxes | 183,886 | — | ||||||
Total current assets | 24,431,228 | 23,241,325 | ||||||
Property and equipment | ||||||||
Land | 936,026 | 936,026 | ||||||
Maintenance equipment | 2,987,367 | 2,679,766 | ||||||
Computer equipment | 4,193,320 | 3,486,030 | ||||||
Office furniture and equipment | 1,363,105 | 1,023,771 | ||||||
Automobiles | 89,934 | 89,934 | ||||||
| 9,569,752 | 8,215,527 | |||||||
Less accumulated depreciation | (4,099,041 | ) | (3,388,704 | ) | ||||
Net property and equipment | 5,470,711 | 4,826,823 | ||||||
Financing receivables | 847,286 | 840,603 | ||||||
Total assets | $ | 30,749,225 | $ | 28,908,751 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,121,624 | $ | 2,093,812 | ||||
Deferred revenue | 2,583,284 | 2,347,816 | ||||||
Sales and use taxes payable | 139,174 | 1,258,553 | ||||||
Accrued vacation | 1,618,484 | 1,317,247 | ||||||
Other accrued liabilities | 908,797 | 1,218,741 | ||||||
Income taxes payable | — | 193,546 | ||||||
Total current liabilities | 6,371,363 | 8,429,715 | ||||||
Stockholders’ equity: | ||||||||
Common stock, par value $0.001 per share; 30,000,000 shares authorized; 10,488,000 shares issued and outstanding | 10,488 | 10,488 | ||||||
Additional paid-in capital | 17,259,403 | 17,259,403 | ||||||
Deferred compensation | (187,143 | ) | (225,423 | ) | ||||
Retained earnings | 7,295,114 | 3,434,568 | ||||||
Total stockholders’ equity | 24,377,862 | 20,479,036 | ||||||
Total liabilities and stockholders’ equity | $ | 30,749,225 | $ | 28,908,751 | ||||
See accompanying notes.
1
COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED STATEMENTS OF INCOME (Unaudited)
| Three months ended | Nine months ended | ||||||||||||
| September 30 | September 30 | ||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||
Sales revenues: | |||||||||||||
System sales | $ | 9,081,677 | $ | 9,935,868 | $ | 28,821,791 | $ | 27,650,220 | |||||
Support and maintenance | 8,717,890 | 7,616,395 | 25,466,940 | 22,083,538 | |||||||||
Outsourcing | 1,791,446 | 1,344,329 | 5,285,304 | 3,594,985 | |||||||||
Total sales revenue | 19,591,013 | 18,896,592 | 59,574,035 | 53,328,743 | |||||||||
Costs of sales: | |||||||||||||
System sales | 7,170,946 | 6,544,503 | 20,804,605 | 18,904,917 | |||||||||
Support and maintenance | 4,010,353 | 3,578,257 | 11,938,605 | 10,084,417 | |||||||||
Outsourcing | 1,090,750 | 868,432 | 3,154,996 | 2,216,131 | |||||||||
Total costs of sales | 12,272,049 | 10,991,192 | 35,898,206 | 31,205,465 | |||||||||
Gross profit | 7,318,964 | 7,905,400 | 23,675,829 | 22,123,278 | |||||||||
Operating expenses: | |||||||||||||
Sales and marketing | 1,479,910 | 1,660,244 | 4,515,773 | 4,333,138 | |||||||||
General and administrative | 3,560,654 | 3,203,612 | 10,349,113 | 9,187,259 | |||||||||
Total operating expenses | 5,040,564 | 4,863,856 | 14,864,886 | 13,520,397 | |||||||||
Operating income | 2,278,400 | 3,041,544 | 8,810,943 | 8,602,881 | |||||||||
Other income (expense): | |||||||||||||
Interest income | 59,216 | 64,020 | 152,545 | 157,887 | |||||||||
Miscellaneous income | 3,085 | 117,238 | 60,586 | 225,726 | |||||||||
Interest expense | — | — | — | (23,677 | ) | ||||||||
Total other income | 62,301 | 181,258 | 213,131 | 359,936 | |||||||||
Income before taxes | 2,340,701 | 3,222,802 | 9,024,074 | 8,962,817 | |||||||||
Income taxes | 879,959 | 1,146,139 | 3,380,567 | 698,286 | |||||||||
Net income | $ | 1,460,742 | $ | 2,076,663 | $ | 5,643,507 | $ | 8,264,531 | |||||
Net income per share - basic | $ | 0.14 | $ | 0.20 | $ | 0.54 | $ | 0.84 | |||||
Net income per share - diluted | $ | 0.14 | $ | 0.20 | $ | 0.54 | $ | 0.83 | |||||
Weighted average shares outstanding | |||||||||||||
Basic | 10,488,000 | 10,488,000 | 10,488,000 | 9,868,220 | |||||||||
Diluted | 10,524,832 | 10,589,226 | 10,545,708 | 9,907,286 | |||||||||
Pro forma income data: | |||||||||||||
Historical income before provision for income taxes | 8,962,817 | ||||||||||||
Proforma income taxes | 3,303,862 | ||||||||||||
Proforma net income | $ | 5,658,955 | |||||||||||
Pro forma net income per share - basic | $ | 0.57 | |||||||||||
Pro forma net income per share - diluted | $ | 0.57 | |||||||||||
Cash dividends declared per share | $ | 0.085 | $ | — | $ | 0.17 | $ | — | |||||
See accompanying notes.
2
COMPUTER PROGRAMS AND SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine months ended September 30 | ||||||||
| 2003 | 2002 | |||||||
Operating Activities: | ||||||||
Net income | $ | 5,643,507 | $ | 8,264,531 | ||||
Adjustments to net income: | ||||||||
Depreciation | 999,000 | 792,340 | ||||||
Provision for bad debt | 19,969 | 186,500 | ||||||
Deferred taxes | 72,670 | (1,026,844 | ) | |||||
Deferred compensation | 38,279 | 17,014 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 2,191,549 | (4,059,542 | ) | |||||
Inventories | 155,228 | (128,972 | ) | |||||
Prepaid expenses | (169,033 | ) | (171,161 | ) | ||||
Financing receivables | 294,355 | 249,342 | ||||||
Accounts payable | (972,188 | ) | 33,877 | |||||
Deferred revenue | 235,468 | 264,041 | ||||||
Sales and use taxes payable | (1,119,379 | ) | (156,154 | ) | ||||
Accrued vacation | 301,237 | — | ||||||
Other liabilities | (89,591 | ) | 454,340 | |||||
Income taxes payable | (377,432 | ) | 721,390 | |||||
Net cash provided by operating activities | 7,223,639 | 5,440,702 | ||||||
Investing Activities: | ||||||||
Purchases of property and equipment | (1,642,888 | ) | (1,285,231 | ) | ||||
Net cash used in investing activities | (1,642,888 | ) | (1,285,231 | ) | ||||
Financing Activities: | ||||||||
Proceeds from issuance of common stock, net of expenses | — | 16,895,596 | ||||||
Repayments of note payables | — | (749,897 | ) | |||||
Distributions to stockholders | (220,353 | ) | (15,350,000 | ) | ||||
Dividends paid | (1,782,960 | ) | — | |||||
Net cash (used in) provided by financing activities | (2,003,313 | ) | 795,699 | |||||
Increase in cash and cash equivalents | 3,577,438 | 4,951,170 | ||||||
Cash and cash equivalents at beginning of period | 6,352,452 | 2,018,643 | ||||||
Cash and cash equivalents at end of period | $ | 9,929,890 | $ | 6,969,813 | ||||
See accompanying notes.
3
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 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, 2002 and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2002.
| 2. | NET INCOME PER SHARE |
Pro forma net income per share for the nine month period ended September 30, 2002 consists of the Company’s historical net income, adjusted for additional income taxes that would have been recorded had the Company operated as a C corporation for the entire period. The Company converted from an S corporation to a C corporation on May 21, 2002. 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 month and nine month periods ended September 30, 2003, these dilutive shares were 36,832 and 57,708, respectively. For the three month and nine month periods ended September 30, 2002, these dilutive shares were 101,226 and 39,066, respectively.
| 3. | INCOME TAXES |
The historical financial statements of the Company do not include a provision for income taxes through May 20, 2002 because the taxable income of the Company was included in the income tax returns of the stockholders under the S corporation election through that date. Upon completion of the initial public offering on May 21, 2002, the Company’s S corporation status was terminated and the Company became subject to federal and state income taxes. Upon revocation of the S corporation election, the Company recorded an income tax benefit of $934,000. Prior to its termination as an S corporation, the Company declared a distribution of earned, but undistributed, accumulated S corporation earnings through the date the Company became a C corporation. A partial distribution in the amount of $12,750,000 was disbursed on May 28, 2002. An additional distribution of $1,532,510 was made during the fourth quarter of 2002. Distributions of $220,353 were made during the nine months ended September 30, 2003. An estimated payable of $29,600, representing the remaining balance due, is recorded on the balance sheet of the Company as of September 30, 2003. The ultimate payout will be determined based on as-filed income tax returns for the year ended December 31, 2002.
4
COMPUTER PROGRAMS AND SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)
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 at September 30, 2003:
Deferred tax assets: | ||||
Accounts receivable | $ | 284,226 | ||
Sales, income and use tax receivables | 15,149 | |||
Accrued liabilities | 705,539 | |||
| 1,004,914 | ||||
Deferred tax liabilities: | ||||
Deferred compensation | (71,114 | ) | ||
Net deferred tax assets | $ | 933,800 | ||
Significant components of the Company’s income tax provision for the nine months ended September 30, 2003 are as follows:
Current provision: | |||
Federal | $ | 2,861,989 | |
State | 445,908 | ||
Deferred provision: | |||
Federal | 65,020 | ||
State | 7,650 | ||
Total income tax provision | $ | 3,380,567 | |
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, 2003 are as follows:
Income taxes at U. S. Federal statutory rate | $ | 3,068,185 | |
State income tax, net of federal tax effect | 299,348 | ||
Other | 13,034 | ||
| $ | 3,380,567 | ||
5
COMPUTER PROGRAMS AND SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)
| 4. | STOCK BASED COMPENSATION |
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, 2003 or 2002. 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, 2003 would have been impacted as indicated below. There were no employee stock options granted during the nine months ended September 30, 2003. The effects of applying SFAS No. 123 on a pro forma basis for the nine months ended September 30, 2003, 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.
| Nine months ended September 30, 2003 | ||||
Net income as reported | $ | 5,643,507 | ||
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards | (144,126 | ) | ||
Pro forma | $ | 5,499,381 | ||
Diluted income per share as reported | $ | 0.54 | ||
Pro forma diluted income per share | $ | 0.52 | ||
6
COMPUTER PROGRAMS AND SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)
| Nine months ended September 30, 2002 | ||||
Pro forma net income as reported | $ | 5,658,955 | ||
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards | (70,280 | ) | ||
Pro forma | $ | 5,588,675 | ||
Pro forma diluted income per share as reported | $ | 0.57 | ||
Pro forma diluted income per share | $ | 0.57 | ||
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.
7
COMPUTER PROGRAMS AND SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)
The weighted average grant date fair value of options granted to employees under the 2002 Stock Option Plan during 2002 was $5.30. During 2002, options were granted under the plan at exercise prices equal to the market value of the Company’s stock on the date of grant.
A summary of stock option activity under the plan is as follows:
| Shares | Exercise Price | |||||
Outstanding on January 1, 2003 | 444,998 | $ | 16.50 | |||
Granted | — | — | ||||
Exercised | — | — | ||||
Forfeited | (15,142 | ) | 16.50 | |||
Outstanding on September 30, 2003 | 429,856 | $ | 16.50 | |||
Exercisable on September 30, 2003 | — | $ | — | |||
Shares available on September 30, 2003 for options that may be granted | 735,477 | |||||
Weighted-average remaining contractual life | 6 years | |||||
8
| 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; 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, 2002, 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 470 hospital customers across 45 states and the District of Columbia. In
9
the nine months ended September 30, 2003, we generated revenues of $59.6 million from the sale of our products and services.
Results of Operations
Three Months Ended September 30, 2003 Compared with Three Months Ended September 30, 2002
Revenues. Total revenues increased by 3.7% or $0.7 million to $19.6 million for the three months ended September 30, 2003 from $18.9 million for the three months ended September 30, 2002.
System sales revenues decreased by 8.6% or $0.8 million to $9.1 million for the three months ended September 30, 2003 from $9.9 million for the three months ended September 30, 2002. This decrease was primarily due to a decrease in license fees and equipment sales which resulted from new installations that were smaller than average size. This decrease also reflects two ASP implementations, in which revenues are recognized over the life of the contract.
Support and maintenance revenues increased by 14.5% or $1.1 million to $8.7 million for the three months ended September 30, 2003 from $7.6 million for the three months ended September 30, 2002. 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 33.3% or $0.5 million to $1.8 million for the three months ended September 30, 2003 from $1.3 million for the three months ended September 30, 2002. We experienced an increase in outsourcing revenues as a result of continued growth in customer demand for electronic billing and statement outsourcing services.
Costs of Sales. Total costs of sales increased by 11.7% or $1.3 million to $12.3 million for the three months ended September 30, 2003 from $11.0 million for the three months ended September 30, 2002. As a percentage of total revenues, cost of sales increased to 62.7% for the three months ended September 30, 2003 from 58.1% for the three months ended September 30, 2002. This increase was attributable to smaller than average installation size which produced a lower profit margin.
Cost of system sales increased by 9.6% or $0.6 million to $7.2 million for the three months ended September 30, 2003 from $6.6 million for the three months ended September 30, 2002. Payroll related expenses increased $0.6 million as a result of increased employee headcount. The gross margin on system sales decreased to 21.0% for the three months ended September 30, 2003 from 34.1% for the three months ended September 30, 2002. This decrease was attributable to the smaller than average installation size which produced a lower profit margin.
Cost of support and maintenance increased by 12.1% or $0.4 million to $4.0 million for the three months ended September 30, 2003 from $3.6 million for the three months ended September 30, 2002. This increase was caused primarily by an increase in payroll related expenses of $0.4 million as a result of increased employee headcount needed to support our increasing customer base. The gross margin on support and maintenance revenues increased to 54.0% for the three months ended September 30, 2003 from 53.0% for the three months ended September 30, 2002.
Our costs associated with outsourcing services increased by 25.6% or $0.2 million to $1.1 million for the three months ended September 30, 2003 from $0.9 million for the three months ended September 30, 2002. Postage cost increased $0.1 million resulting from an increase in transaction volumes of our statement outsourcing services. Salary expense also increased $0.1 million due to the hiring of additional employees to support our business office outsourcing services.
10
Sales and Marketing Expenses. Sales and marketing expenses decreased by 10.9% or $0.2 million to $1.5 million for the three months ended September 30, 2003 from $1.7 million for the three months ended September 30, 2002. The decrease was attributable to decreased salary and commission expense of $0.2 million.
General and Administrative Expenses. General and administrative expenses increased 11.1% or $0.4 million to $3.6 million for the three months ended September 30, 2003 from $3.2 million for the three months ended September 30, 2002. The increase in expense was related to increased costs of $0.2 million associated with pay raises for existing employees and the hiring of additional employees to support the growth in our business. Additional expense increases were related to depreciation which increased $0.1 million and group health insurance which increased $0.1 million.
As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses remained unchanged for the three months ended September 30, 2003 and 2002.
Net Income. Net income for the three months ended September 30, 2003 was $1.5 million or $0.14 per diluted share, as compared with net income of $2.1 million or $0.20 per diluted share for the three months ended September 30, 2002. Net income represents 7.5% of revenue for the three months ended September 30, 2003. Net income represents 10.9% of revenue for the three months ended September 30, 2002.
Nine months Ended September 30, 2003 compared with Nine months Ended September 30, 2002
Revenues. Total revenues increased by 11.7% or $6.3 million to $59.6 million for the nine months ended September 30, 2003 from $53.3 million for the nine months ended September 30, 2002.
System sales revenues increased by 4.2% or $1.1 million to $28.8 million for the nine months ended September 30, 2003 from $27.7 million for the nine months ended September 30, 2002. This increase was primarily due to an increase in the license fees.
Support and maintenance revenues increased by 15.3% or $3.4 million to $25.5 million for the nine months ended September 30, 2003 from $22.1 million for the nine months ended September 30, 2002. 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 47.0% or $1.7 million to $5.3 million for the nine months ended September 30, 2003 from $3.6 million for the nine months ended September 30, 2002. We experienced an increase in outsourcing revenues as a result of continued 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 15.0% or $4.7 million to $35.9 million for the nine months ended September 30, 2003 from $31.2 million for the nine months ended September 30, 2002. As a percentage of total revenues, cost of sales changed to 60.2% for the nine months ended September 30, 2003 from 58.5% for the nine months ended September 30, 2002.
Cost of system sales increased by 10.0% or $1.9 million to $20.8 million for the nine months ended September 30, 2003 from $18.9 million for the nine months ended September 30, 2002. This increase was caused by an increase in cost of equipment and software of $0.2 million as a direct result of
11
our increase in system sales. Payroll related expenses increased $0.8 million as a result of increased employee headcount needed to support increasing sales volume. Travel expenses also increased by $0.7 million. The gross margin on system sales decreased to 27.8% for the nine months ended September 30, 2003 from 31.6% for the nine months ended September 30, 2002. The decrease in gross margin was due to an decrease in the average size of system installations in 2003.
Cost of support and maintenance increased by 18.4% or $1.8 million to $11.9 million for the nine months ended September 30, 2003 from $10.1 million for the nine months ended September 30, 2002. This increase was caused primarily by an increase in payroll related expenses of $1.5 million as a result of increased employee headcount needed to support our increasing customer base. Also, telecommunication expenses increased $0.2 million due to increased utilization of our ISP services. Departmental administrative expenses increased $0.2 million due to an increase in employee headcount. The gross margin on support and maintenance revenues decreased to 53.1% for the nine months ended September 30, 2003 from 54.3% for the nine months ended September 30, 2002.
Our costs associated with outsourcing services increased 42.4% or $1.0 million to $3.2 million for the nine months ended September 30, 2003 from $2.2 million for the nine months ended September 30, 2002. Postage cost increased $0.4 million resulting from an increase in transaction volumes of our statement outsourcing services. Salary expense increased $0.5 million due to the hiring of additional employees to support our business office outsourcing services.
Sales and Marketing Expenses. Sales and marketing expenses increased by 4.2% or $0.2 million to $4.5 million for the nine months ended September 30, 2003 from $4.3 million for the nine months ended September 30, 2002. The increase was attributable to increased commission expense of $0.2 million.
General and Administrative Expenses. General and administrative expenses increased 12.6% or $1.2 million to $10.4 million for the nine months ended September 30, 2003 from $9.2 million for the nine months ended September 30, 2002. The increase in expense was related to increased costs of $0.2 million associated with pay raises for existing employees and the hiring of additional employees to support the growth in our business. We also experienced increases in rent of $0.2 million and depreciation of $0.2 million from facilities expansion. Additional expense increases were related to telecommunications which increased $0.1 million and professional fees which increased $0.2 million.
As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses decreased to 25.0% from 25.4% for the nine months ended September 30, 2003 and 2002, respectively.
Net Income. Net income for the nine months ended September 30, 2003 was $5.6 million or $0.54 per diluted share, as compared with pro forma net income of $5.7 million or $0.57 per diluted share for the nine months ended September 30, 2002. Net income represents 9.5% of revenue for the nine months ended September 30, 2003. Pro forma net income represents 10.7% of revenue for the nine months ended September 30, 2002. Net income is discussed on a pro forma basis due to a provision for income taxes to reflect the estimated corporate income tax expense that the Company would have recognized had it not elected to be treated as an S corporation prior to the completion of its initial public offering in May 2002.
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Liquidity and Capital Resources
At September 30, 2003, we had cash and short-term investments of $9.9 million, compared with $7.0 million at September 30, 2002. Net cash provided by operating activities for the nine months ended September 30, 2003 was $7.2 million, compared to $5.4 million for the nine months ended September 30, 2002. The increase was primarily due to improved collections of accounts receivable.
Net cash used in investing activities totaled $1.6 million for the nine months ended September 30, 2003, compared to $1.3 million for the nine months ended September 30, 2002. We used cash primarily for the purchase of fixed assets.
Net cash used in financing activities totaled $2.0 million for the nine months ended September 30, 2003, compared to $0.8 million provided by financing activities for the nine months ended September 30, 2002. During the nine months ended September 30, 2003, we made cash distributions to pre-IPO stockholders in the amount of $0.2 million for previously taxed S corporation income and paid dividends to common stockholders of $1.8 million. During the nine months ended September 30, 2002, we received $16.9 million as net proceeds from our initial public offering of common stock (IPO). Prior to the IPO, we made cash distributions to our stockholders in the amount of $2.6 million. From the IPO proceeds, we made additional cash distributions to our pre-IPO stockholders in the amount of $12.8 million for previously taxed S corporation income. We also retired outstanding long-term debt in the amount of $0.7 million.
We currently do not have a bank line of credit or other credit facility in place. Our future capital requirements will depend upon a number of factors, including the rate of growth of our sales, cash collections from our customers and our future investments in fixed assets. We believe that our available cash and cash equivalents and anticipated cash generated from operations will be sufficient to meet our operating requirements for the next 12 months.
Contractual Commitments
Our real estate leases are our principal contractual commitments requiring recurring payments in the future. Our payments under these leases subsequent to September 30, 2003 will be as follows:
Year | Amount | ||
2003 | $ | 339,825 | |
2004 | 1,365,275 | ||
2005 | 1,365,275 | ||
2006 | 1,365,275 | ||
2007 | 1,365,275 | ||
Thereafter | 5,970,425 | ||
Total | $ | 11,771,350 | |
| 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.”
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As of September 30, 2003, 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 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. | Changes in Securities and Use of Proceeds. |
| (a) | None. |
| (b) | None. |
| (c) | None. |
| (d) | None. |
| Item 3. | Defaults Upon Senior Securities. |
Not applicable.
| Item 4. | Submission of Matters to a Vote of Security Holders. |
None.
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| Item 5. | Other Information. |
None.
| Item 6. | Exhibits and Reports on Form 8-K. |
| (a) | Exhibits. |
| 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| b) | Reports on Form 8-K. |
On July 24, 2003 we filed a current report on Form 8-K to report Company earnings for the quarter ended June 30, 2003. This report included an unaudited condensed statement of operations of the Company for the three month and six month periods ended June 30, 2003 and 2002 and an unaudited condensed balance sheet of the Company as of June 30, 2003 and 2002.
On September 24, 2003, we filed a current report on Form 8-K to report the commencement of a Rule 10b5-1 trading plan by John Morrissey, Chairman of the Board of Directors.
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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.
| COMPUTER PROGRAMS AND SYSTEMS, INC. | ||||||||
Date: October 30, 2003 | ||||||||
| By: | /s/ David A. Dye | |||||||
David A. Dye President and Chief Executive Officer | ||||||||
Date: October 30, 2003 | ||||||||
| By: | /s/ M. Stephen Walker | |||||||
M. Stephen Walker Vice President - Finance and Chief Financial Officer | ||||||||
Exhibit Index
| No. | Exhibit | |
| 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
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