TruBridge (TBRG) 10-Q 2005 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2005.

¨ 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

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

As of October 28, 2005, there were 10,608,083 shares of the issuer’s common stock outstanding.

COMPUTER PROGRAMS AND SYSTEMS, INC.

Form 10-Q

(For the period ended September 30, 2005)

INDEX
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Balance Sheets – September 30, 2005 (unaudited) and December 31, 2004	1
	Condensed Statements of Income (unaudited) – Three and Nine Months Ended September 30, 2005 and 2004	2
	Condensed Statement of Stockholders’ Equity (unaudited) – Nine Months Ended September 30, 2005	3
	Condensed Statements of Cash Flows (unaudited) – Nine Months Ended September 30, 2005 and 2004	4
	Notes to Condensed Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	12
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4.	Controls and Procedures	16
PART II.OTHER INFORMATION
Item 1.	Legal Proceedings	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3.	Defaults upon Senior Securities	17
Item 4.	Submission of Matters to a Vote of Security Holders	17
Item 5.	Other Information	17
Item 6.	Exhibits	17

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED BALANCE SHEETS

	September 30, 2005			December 31, 2004
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	10,588,276		$	13,785,377
Investments		8,174,199			—
Accounts receivable, net of allowance for doubtful accounts of $1,560,000 and $1,636,000, respectively		12,971,989			11,764,465
Financing receivables, current portion		1,503,878			974,160
Inventories		1,806,621			1,475,166
Deferred tax assets		1,559,364			1,397,016
Prepaid income taxes		—			171,574
Prepaid expenses		441,051			437,716
Total current assets		37,045,378			30,005,474
Property and equipment
Land		936,026			936,026
Maintenance equipment		3,445,045			3,298,140
Computer equipment		5,327,165			4,854,331
Office furniture and equipment		1,492,554			1,481,314
Automobiles		89,934			89,934
		11,290,724			10,659,745
Less accumulated depreciation		(5,357,766	)		(5,204,730	)
Net property and equipment		5,932,958			5,455,015
Financing receivables		667,618			617,657
Total assets	$	43,645,954		$	36,078,146
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,704,676		$	969,454
Deferred revenue		3,419,603			2,602,235
Accrued vacation		1,953,115			1,630,382
Other accrued liabilities		1,828,730			2,323,433
Income taxes payable		141,245			—
Total current liabilities		9,047,369			7,525,504
Deferred tax liabilities		685,604			718,753
Stockholders’ equity:
Common stock, par value $0.001 per share; 30,000,000 shares authorized; 10,608,083 and 10,489,849 shares issued and outstanding		10,608			10,490
Additional paid-in capital		20,125,743			17,292,079
Deferred compensation		(85,065	)		(123,345	)
Accumulated other comprehensive loss		(53,354	)		—
Retained earnings		13,915,049			10,654,665
Total stockholders’ equity		33,912,981			27,833,889
Total liabilities and stockholders’ equity	$	43,645,954		$	36,078,146

See accompanying notes.

1

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENTS OF INCOME (Unaudited)

	Three months ended September 30,				Nine months ended September 30,
	2005		2004		2005		2004
Sales revenues:
System sales	$	12,479,787	$	9,054,816	$	37,778,628	$	23,844,800
Support and maintenance		10,981,951		9,454,473		31,688,357		28,018,235
Outsourcing		3,538,715		2,622,702		10,900,497		6,495,159
Total sales revenues		27,000,453		21,131,991		80,367,482		58,358,194
Costs of sales:
System sales		8,510,674		7,047,553		24,932,499		19,626,923
Support and maintenance		4,863,889		4,180,557		14,101,808		12,438,017
Outsourcing		2,168,685		1,482,056		6,255,241		3,833,573
Total costs of sales		15,543,248		12,710,166		45,289,548		35,898,513
Gross profit		11,457,205		8,421,825		35,077,934		22,459,681
Operating expenses:
Sales and marketing		1,911,066		1,404,568		5,520,423		4,134,039
General and administrative		3,838,777		3,680,454		13,070,778		11,497,050
Total operating expenses		5,749,843		5,085,022		18,591,201		15,631,089
Operating income		5,707,362		3,336,803		16,486,733		6,828,592
Other income (expense):
Interest income		176,779		62,428		431,214		180,665
Miscellaneous income		—		49,527		5,306		128,403
Total other income		176,779		111,955		436,520		309,068
Income before taxes		5,884,141		3,448,758		16,923,253		7,137,660
Income taxes		2,318,937		1,362,982		6,714,735		2,847,334
Net income	$	3,565,204	$	2,085,776	$	10,208,518	$	4,290,326
Net income per share - basic	$	0.34	$	0.20	$	0.97	$	0.41
Net income per share - diluted	$	0.33	$	0.20	$	0.96	$	0.41
Weighted average shares outstanding
Basic		10,603,781		10,489,849		10,540,817		10,489,849
Diluted		10,695,570		10,533,388		10,628,017		10,530,803
Dividends declared per share	$	0.22	$	0.12	$	0.66	$	0.36

See accompanying notes.

2

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)

	Common Shares	Common Stock		Additional Paid-in Capital		Deferred Compensation			Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders' Equity
Balance at December 31, 2004	10,489,849	$	10,490	$	17,292,079	$	(123,345	)	$	—		$	10,654,665		$	27,833,889
Net Income													10,208,518			10,208,518
Dividends													(6,948,134	)		(6,948,134	)
Unrealized loss on investments held for sale, net of tax of $34,110										(53,354	)					(53,354	)
Amortization of deferred compensation							38,280									38,280
Issuance of common stock	118,234		118		1,950,743											1,950,861
Income tax benefit from stock option exercises					882,921											882,921
Balance at September 30, 2005	10,608,083	$	10,608	$	20,125,743	$	(85,065	)	$	(53,354	)	$	13,915,049		$	33,912,981

See accompanying notes.

3

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

	��	Nine months ended September 30
		2005			2004
Operating Activities
Net income		$	10,208,518		$	4,290,326
Adjustments to net income:
Provision for bad debt			759,505			562,694
Deferred taxes			(161,386	)		121,801
Deferred compensation			38,280			38,280
Income tax benefit from stock option exercise			882,921			—
Depreciation			1,289,046			1,179,277
Changes in operating assets and liabilities:
Accounts receivable			(1,967,029	)		173,836
Financing receivables			(579,679	)		86,012
Inventories			(331,455	)		(262,878	)
Prepaid expenses			(3,335	)		(184,049	)
Accounts payable			735,222			(296,237	)
Deferred revenue			817,368			150,459
Other liabilities			(171,970	)		1,387,054
Income taxes payable			312,819			738,090
Net cash provided by operating activities			11,828,825			7,984,665
Investing Activities
Purchases of property and equipment			(1,766,989	)		(1,062,596	)
Purchases of investments			(8,261,664	)		—
Net cash used in investing activities			(10,028,653	)		(1,062,596	)
Financing Activities
Proceeds from exercise of stock options, net			1,950,861			—
Dividends paid			(6,948,134	)		(3,776,346	)
Net cash used in financing activities			(4,997,273	)		(3,776,346	)
(Decrease)/increase in cash and cash equivalents			(3,197,101	)		3,145,723
Cash and cash equivalents at beginning of period			13,785,377			9,472,743
Cash and cash equivalents at end of period		$	10,588,276		$	12,618,466
Cash paid for income taxes		$	5,691,906		$	1,987,443

See accompanying notes.

4

COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION

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

Certain financial information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These unaudited condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2004 and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2004.

2. REVENUE RECOGNITION

The Company’s revenue is generated from three sources:

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

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

• the provision of outsourcing services, which includes electronic billing, statement processing, and business office outsourcing.

Depending upon the terms of the contract, revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 101 (“SAB 101”),Revenue Recognition in Financial Statements, as amended by SAB 104,Revenue Recognition, the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2,Software Revenue Recognition, and SOP 81-1,Accounting for Performance of Construction-Type and Certain Production-Type Contracts, 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.

For contracts involving multiple deliverables, where the deliverables are governed by more than one authoritative accounting standard, the Company generally applies the FASB Emerging Issues Task Force (“EITF”) Issue No. 00-21,Revenue Arrangements with Multiple Deliverables (“EITF 00-21”), and evaluates each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) whether the delivered item has value to the customer on a standalone basis, and (b) where there is vendor specific objective evidence (“VSOE”) of the fair value of the undelivered item(s). If VSOE of fair value exists for all units of accounting in the contract, which is based on prices charged when the element is sold separately, revenue is allocated to each unit of accounting or element based on relative fair values. Revenue related to post-contract support, including technical support and unspecified when-and-if available software upgrades (“PCS”), is recognized ratably over the PCS term.

5

COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

In situations where there is VSOE of fair value for all undelivered elements, but not for the delivered elements, the residual method is used to allocate the contract consideration. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements. Each unit of accounting is then accounted for under the applicable revenue recognition guidance.

Revenue for hardware is recognized under SAB 104. Under SAB 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.

3. DETAILS ON BALANCE SHEET AMOUNTS

Other accrued liabilities are comprised of the following:

	September 30, 2005		December 31, 2004
Salaries and benefits	$	938,490	$	1,613,420
Commissions		393,500		436,307
Self-insurance reserves		375,000		244,500
Other		121,740		29,206
	$	1,828,730	$	2,323,433

4. INVESTMENTS

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

6

COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

Investments are comprised of the following:

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Short term investments	$	148,587	$	—	$	—	$	148,587
Obligations of U.S. Treasury, U.S. government corporations and agencies		3,497,539		4,604		20,485		3,481,658
Mortgaged backed securities		501,213				2,049		499,164
Corporate bonds		4,117,370		85		72,665		4,044,790
	$	8,264,709	$	4,689	$	95,199	$	8,174,199

Shown below are the amortized cost and estimated fair value of securities with fixed maturities at September 30, 2005, by contract maturity date. Actual maturities may differ from contractual maturities because issuers of certain securities retain early call or prepayment rights.

	Amortized Cost		Fair Value
Due in 2005	$	1,102,875	$	1,107,275
Due in 2006		4,711,269		4,643,457
Due in 2007		702,724		693,314
Due in 2008		1,599,254		1,581,566
	$	8,116,122	$	8,025,612

5. NET INCOME PER SHARE

The Company presents both basic and diluted earnings per share (EPS) amounts. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period presented. Diluted EPS amounts are based upon the weighted average number of common and common equivalent shares outstanding during the period presented. The difference between basic and diluted EPS is solely attributable to stock options. The Company uses the treasury stock method to calculate the impact of outstanding stock options. For the three and nine month periods ended September 30, 2005, these dilutive shares were 91,789 and 87,200, respectively. For the three and nine month periods ended September 30, 2004, these dilutive shares were 43,539 and 40,954, respectively.

7

COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

6. INCOME TAXES

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

	2005		2004
Deferred tax assets:
Accounts receivable	$	608,450	$	638,044
Accrued liabilities		916,804		758,972
Unrealized loss on investments		34,110		—
Total deferred tax assets	$	1,559,364	$	1,397,016
Deferred tax liabilities:
Deferred compensation	$	33,175	$	48,104
Depreciation		652,429		670,649
Total deferred tax liabilities	$	685,604	$	718,753

Significant components of the Company’s income tax provision for the nine months ended September 30 are as follows:

	2005			2004
Current provision:
Federal	$	5,683,021		$	2,451,072
State		1,193,100			518,063
Deferred provision:
Federal		(144,761	)		(111,428	)
State		(16,625	)		(10,373	)
Total income tax provision	$	6,714,735		$	2,847,334

The difference between income taxes at the U. S. federal statutory income tax rate of 35% and those reported in the condensed statements of income for the nine months ended September 30 are as follows:

	2005		2004
Income taxes at U. S. Federal statutory rate	$	5,923,139	$	2,426,804
State income tax, net of federal tax effect		755,463		305,136
Other		36,133		115,394
Total income tax provision	$	6,714,735	$	2,847,334

8

COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

7. STOCK BASED COMPENSATION

The Company measures compensation expense related to stock based compensation using the intrinsic value method. Accordingly, no stock-based employee compensation expense is reflected in net income if the exercise price of the Company’s employee stock options equals or exceeds the market price of the underlying stock on the date of grant. 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 Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-based Compensation, the Company’s reported net income and income per share for the three and nine months ended September 30, 2005 and 2004 would have been impacted as indicated below:

	Three months ended September 30,
	2005			2004
Net income as reported	$	3,565,204		$	2,085,776
Add: Stock-based compensation expense, net of tax, included in reported net income		7,785			7,785
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax		(64,137	)		(64,137	)
Pro forma net income	$	3,508,852		$	2,029,424
Basic income per share as reported	$	0.34		$	0.20
Diluted income per share as reported	$	0.33		$	0.20
Pro forma basic income per share	$	0.33		$	0.19
Pro forma diluted income per share	$	0.33		$	0.19

	Nine months ended September 30,
	2005			2004
Net income as reported	$	10,208,518		$	4,290,326
Add: Stock-based compensation expense, net of tax, included in reported net income		23,352			23,352
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of tax		(192,408	)		(245,961	)
Pro forma net income	$	10,039,462		$	4,067,717
Basic income per share as reported	$	0.97		$	0.41
Diluted income per share as reported	$	0.96		$	0.41
Pro forma basic income per share	$	0.95		$	0.39
Pro forma diluted income per share	$	0.94		$	0.39

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, and such options expire on the seventh anniversary of the grant date.

Under the methodology of SFAS 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.

9

COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

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 estimates 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, 2005.

A summary of stock option activity under the plan during the three month periods ended September 30, 2005 and 2004 is as follows:

	September 30, 2005				September 30, 2004
			Exercise				Exercise
	Shares		Price		Shares		Price
Outstanding at beginning of period	280,432		$	16.50	415,148		$	16.50
Granted	—			—	—			—
Exercised	(9,092	)		16.50	—			—
Forfeited	(1,603	)		16.50	(4,587	)		16.50
Outstanding at end of period	269,737		$	16.50	410,561		$	16.50
Exercisable at end of period	68,484		$	16.50	312		$	16.50
Shares available for future grants under the plan at end of period				475,513				752,923
Weighted-average grant date fair value			$	5.30			$	5.30
Weighted-average remaining contractual life				3.75				4.75

A summary of stock option activity under the plan during the nine month periods ended September 30, 2005 and 2004 is as follows:

	September 30, 2005				September 30, 2004
			Exercise				Exercise
	Shares		Price		Shares		Price
Outstanding at beginning of period	399,948		$	16.50	424,759		$	16.50
Granted	—			—	—			—
Exercised	(118,234	)		16.50	—			—
Forfeited	(11,977	)		16.50	(14,198	)		16.50
Outstanding at end of period	269,737		$	16.50	410,561		$	16.50
Exercisable at end of period	68,484		$	16.50	312		$	16.50
Shares available for future grants under the plan at end of period				475,513				752,923
Weighted-average grant date fair value			$	5.30			$	5.30
Weighted-average remaining contractual life				3.75				4.75

10

COMPUTER PROGRAMS AND SYSTEMS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

8. COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130,Reporting Comprehensive Income, requires the disclosure of certain revenue, expenses, gains and losses that are excluded from net income in accordance with accounting principles generally accepted in the United States of America. Total comprehensive income for the three and nine months ended September 30, 2005 and 2004 is as follows:

	Three months ended September 30,					Nine months ended September 30,
	2005			2004		2005			2004
Net income as reported	$	3,565,204		$	2,085,776	$	10,208,518		$	4,290,326
Other comprehensive income:
Unrealized loss on investments, net of taxes		(28,930	)		—		(55,354	)		—
Total comprehensive income	$	3,536,274		$	2,085,776	$	10,153,164		$	4,290,326

9. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R,Share-Based Payment, which requires companies to measure and recognize compensation expense for stock-based payments at fair value. SFAS No. 123R was initially effective as of the first interim or annual reporting period that begins after June 15, 2005. In April 2005, the SEC issued a rule amending the compliance date which allows companies to implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. As a result, we will implement SFAS No. 123R in the reporting period starting January 1, 2006. We are currently evaluating the impact of SFAS No. 123R on our financial position and results of operations. See Note 7 for information related to the pro forma effects on our reported net income and net income per share of applying the fair value recognition provisions of the previous SFAS No. 123 to stock-based employee compensation.

11

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

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

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

• overall business and economic conditions affecting the healthcare industry;

• saturation of our target market and hospital consolidations;

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

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

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

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

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

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

• interruptions in our power supply and/or telecommunications capabilities.

Additional information concerning these and other factors which could cause differences between forward-looking statements and future actual results is discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2004, 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 550 hospital customers across 45 states and the District of Columbia. In the three months ended September 30, 2005, we generated revenues of $27.0 million from the sale of our products and services.

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Results of Operations

Three Months Ended September 30, 2005 Compared with Three Months Ended September 30, 2004

Revenues. Total revenues increased by 27.8%, or $5.9 million, to $27.0 million for the three months ended September 30, 2005, from $21.1 million for the three months ended September 30, 2004.

System sales revenues increased by 37.8%, or $3.4 million, to $12.5 million for the three months ended September 30, 2005, from $9.1 million for the three months ended September 30, 2004. This increase was primarily due to an increase in the number of new system installations. The average installation size also increased.

Support and maintenance revenues increased by 16.2%, or $1.6 million, to $11.0 million for the three months ended September 30, 2005, from $9.4 million for the three months ended September 30, 2004. 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 services.

Outsourcing revenues increased by 34.9%, or $0.9 million, to $3.5 million for the three months ended September 30, 2005, from $2.6 million for the three months ended September 30, 2004. We experienced an increase in outsourcing revenues as a result of continued growth in customer demand for electronic billing and business office outsourcing services. We were providing business office outsourcing services to 18 customers at September 30, 2005, compared to 6 customers at September 30, 2004.

Costs of Sales. Total costs of sales increased by 22.3%, or $2.8 million, to $15.5 million for the three months ended September 30, 2005, from $12.7 million for the three months ended September 30, 2004. As a percentage of total revenues, costs of sales decreased to 57.6% for the three months ended September 30, 2005 from 60.1% for the three months ended September 30, 2004. 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 20.8%, or $1.5 million, to $8.5 million for the three months ended September 30, 2005, from $7.0 million for the three months ended September 30, 2004. Cost of equipment increased $0.2 million as a result of an increase in equipment sales. Travel related expenses increased $0.7 million as a result of the increase in the number of system installations. Payroll related expenses increased $0.6 million as a result of annual salary increases and an increase in the number of employees. The gross margin on system sales increased to 31.8% for the three months ended September 30, 2005, from 22.2% for the three months ended September 30, 2004.

Cost of support and maintenance increased by 16.3%, or $0.6 million, to $4.8 million for the three months ended September 30, 2005, from $4.2 million for the three months ended September 30, 2004. This increase was caused primarily by an increase of $0.5 million in payroll related expenses as a result of annual salary increases and an increase in the number of employees. General departmental expenses increased $0.1 million as a result of our increasing customer base. The gross margin on support and maintenance revenues decreased slightly to 55.7% for the three months ended September 30, 2005, compared to 55.8% for the three months ended September 30, 2004.

Our costs associated with outsourcing services increased by 46.3%, or $0.7 million, to $2.2 million for the three months ended September 30, 2005, from $1.5 million for the three months ended September 30, 2004. This increase was caused primarily by an increase of $0.6 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 cost increased $0.1 million resulting from an increase in transaction volumes of our statement outsourcing services.

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Sales and Marketing Expenses. Sales and marketing expenses increased by 36.1%, or $0.5 million, to $1.9 million for the three months ended September 30, 2005, from $1.4 million for the three months ended September 30, 2004. The increase was attributable to increased commission expense which resulted from an increase in system sales revenue.

General and Administrative Expenses. General and administrative expenses increased 4.3%, or $0.1 million, to $3.8 million for the three months ended September 30, 2005, from $3.7 million for the three months ended September 30, 2004. The increase in expense was primarily related to increased cost of salary and benefits of $0.1 million.

As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses decreased to 21.3% for the three months ended September 30, 2005, from 24.1% for three months ended September 30, 2004.

Net Income. Net income for the three months ended September 30, 2005 increased by 70.9%, or $1.5 million, to $3.6 million, or $0.33 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, 2004. Net income represents 13.2% of revenue for the three months ended September 30, 2005, as compared to 9.9% of revenue for the three months ended September 30, 2004. 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.

Nine Months Ended September 30, 2005 Compared with Nine Months Ended September 30, 2004

Revenues. Total revenues increased by 37.7%, or $22.0 million, to $80.4 million for the nine months ended September 30, 2005, from $58.4 million for the nine months ended September 30, 2004.

System sales revenues increased by 58.4%, or $13.9 million, to $37.8 million for the nine months ended September 30, 2005, from $23.9 million for the nine months ended September 30, 2004. This increase was primarily due to an increase in the number of new system installations. The average installation size also increased. This increase also reflects three ASP implementations during the first nine months of 2004, in which revenues are recognized over the life of the contract.

Support and maintenance revenues increased by 13.1%, or $3.7 million, to $31.7 million for the nine months ended September 30, 2005, from $28.0 million for the nine months ended September 30, 2004. 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 services.

Outsourcing revenues increased by 67.8%, or $4.4 million, to $10.9 million for the nine months ended September 30, 2005, from $6.5 million for the nine months ended September 30, 2004. We experienced an increase in outsourcing revenues as a result of continued growth in customer demand for electronic billing and business office outsourcing services.

Costs of Sales. Total costs of sales increased by 26.2%, or $9.4 million, to $45.3 million for the nine months ended September 30, 2005, from $35.9 million for the nine months ended September 30, 2004. As a percentage of total revenues, costs of sales decreased to 56.3% for the nine months ended September 30, 2005, from 61.5% for the nine months ended September 30, 2004. 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.

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Cost of system sales increased by 27.0%, or $5.3 million, to $24.9 million for the nine months ended September 30, 2005, from $19.6 million for the nine months ended September 30, 2004. Cost of equipment increased $2.1 million as a result of an increase in equipment sales. Travel related expenses increased $1.8 million as a result of the increase in the number of system installations. Payroll related expenses increased $1.4 million as a result of annual salary increases and an increase in the number of employees. The gross margin on system sales increased to 34.0% for the nine months ended September 30, 2005, from 17.7% for the nine months ended September 30, 2004.

Cost of support and maintenance increased by 13.4%, or $1.7 million, to $14.1 million for the nine months ended September 30, 2005, from $12.4 million for the nine months ended September 30, 2004. This increase was caused primarily by an increase of $1.2 million in payroll related expenses as a result of annual salary increases and an increase in the number of employees. General departmental expenses increased $0.5 million as a result of our increasing customer base. The gross margin on support and maintenance revenues decreased slightly to 55.5% for the nine months ended September 30, 2005, compared to 55.6% for the nine months ended September 30, 2004.

Our costs associated with outsourcing services increased by 63.2%, or $2.4 million, to $6.3 million for the nine months ended September 30, 2005, from $3.9 million for the nine months ended September 30, 2004. This increase was caused primarily by an increase of $2.0 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 cost increased $0.4 million resulting from an increase in transaction volumes of our statement outsourcing services.

Sales and Marketing Expenses. Sales and marketing expenses increased by 33.5%, or $1.4 million, to $5.5 million for the nine months ended September 30, 2005, from $4.1 million for the nine months ended September 30, 2004. The increase was attributable to increased commission expense which resulted from an increase in system sales revenue.

General and Administrative Expenses. General and administrative expenses increased 13.7%, or $1.6 million, to $13.1 million for the nine months ended September 30, 2005, from $11.5 million for the nine months ended September 30, 2004. A portion of the increase in expense was related to increased legal and accounting fees of $0.4 million which resulted from increased audit related fees. Additional expense increases were related to bad debts which increased $0.2 million, payroll related expenses which increased $0.3 million, telecommunications costs which increased $0.1 million, shipping cost increase of $0.1 million and increases in other general and administrative expenses of $0.5 million.

As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses decreased to 23.2% for the nine months ended September 30, 2005, from 26.8% for nine months ended September 30, 2004.

Net Income. Net income for the nine months ended September 30, 2005 increased by 137.9%, or $5.9 million, to $10.2 million, or $0.96 per diluted share, as compared with net income of $4.3 million, or $0.41 per diluted share, for the nine months ended September 30, 2004. Net income represents 12.6% of revenue for the nine months ended September 30, 2005, as compared to 7.3% of revenue for the nine months ended September 30, 2004. 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.

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Liquidity and Capital Resources

At September 30, 2005, we had cash and cash equivalents of $10.6 million, compared with $12.6 million at September 30, 2004. Net cash provided by operating activities for the nine months ended September 30, 2005 was $11.8 million, compared to $8.0 million for the nine months ended September 30, 2004. The increase was primarily due to increases in net income, accounts payable and deferred revenue, offset by increases in accounts receivable, financing receivables, inventories and prepaid income taxes.

Net cash used in investing activities totaled $10.0 million for the nine months ended September 30, 2005, compared to $1.1 million for the nine months ended September 30, 2004. We used cash primarily for the purchase of $8.3 million in investments which are included on the balance sheet as investments available for sale. We also invested $1.7 million in property and equipment.

Net cash used in financing activities totaled $5.0 million for the nine months ended September 30, 2005, compared to $3.8 million for the nine months ended September 30, 2004. We paid dividends to our shareholders in the amount of $6.9 million. We received proceeds of $1.9 million from the exercise of employee stock options.

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, 2005, 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.

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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 results of operations at some point in the future. However, management believes that this dispute will 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.

(a) None.

(b) None.

(c) None.

Item 3. Defaults Upon Senior Securities.

Not applicable.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits

No.	Exhibit
3.1	Certificate of Incorporation (filed as Exhibit 3.4 to CPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and incorporated herein by reference)
3.2	Bylaws (filed as Exhibit 3.6 to CPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and incorporated herein by reference)
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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: November 1, 2005
	By:	/s/ David A. Dye
		David A. Dye
		President and Chief Executive Officer
Date: November 1, 2005	By:	/s/ M. Stephen Walker
		M. Stephen Walker
		Vice President - Finance and
		Chief Financial Officer

Exhibit Index

No.	Exhibit
3.1	Certificate of Incorporation (filed as Exhibit 3.4 to CPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and incorporated herein by reference)
3.2	Bylaws (filed as Exhibit 3.6 to CPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and incorporated herein by reference)
31.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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