Edgar Filing: COMPUTER PROGRAMS & SYSTEMS INC

Form 10-Q

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, 2007.

¨	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 a large accelerated filer, an accelerated filer, or a non-accelerated filer company (as defined in rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

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 17, 2007, there were 10,813,407 shares of the issuer’s common stock outstanding.

COMPUTER PROGRAMS AND SYSTEMS, INC.

Form 10-Q

(For the period ended September 30, 2007)

INDEX


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Balance Sheets – September 30, 2007 (unaudited) and December 31, 2006	3
	Condensed Statements of Income (unaudited) – Three and Nine Months Ended September 30, 2007 and 2006	4
	Condensed Statement of Stockholders’ Equity (unaudited) – Nine Months Ended September 30, 2007	5
	Condensed Statements of Cash Flows (unaudited) – Nine Months Ended September 30, 2007 and 2006	6
	Notes to Condensed Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16

Item 4.	Controls and Procedures	16

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	16

Item 1A.	Risk Factors	16

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16

Item 3.	Defaults Upon Senior Securities	16

Item 4.	Submission of Matters to a Vote of Security Holders	16

Item 5.	Other Information	16

Item 6.	Exhibits	16

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED BALANCE SHEETS


	September 30, 2007			December 31, 2006
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	10,018,050		$	8,760,122
Investments		11,174,628			10,717,952
Accounts receivable, net of allowance for doubtful accounts of $855,000 and $814,000, respectively		13,772,481			14,095,791
Financing receivables, current portion		2,130,799			2,177,430
Inventories		1,603,789			1,668,119
Deferred tax assets		1,360,966			1,406,279
Prepaid income taxes		278,036			107,426
Prepaid expenses		275,859			319,533

Total current assets		40,614,608			39,252,652
Property and equipment
Land		936,026			936,026
Maintenance equipment		4,843,638			4,446,419
Computer equipment		6,919,990			6,440,844
Office furniture and equipment		1,954,826			1,940,853
Automobiles		132,926			132,926

		14,787,406			13,897,068
Less accumulated depreciation		(9,130,796	)		(7,641,868	)

Net property and equipment		5,656,610			6,255,200
Financing receivables, net of current portion		2,394,205			2,396,764

Total assets	$	48,665,423		$	47,904,616

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,364,770		$	1,204,279
Deferred revenue		3,342,721			2,274,592
Accrued vacation		2,226,329			2,053,288
Other accrued liabilities		2,925,977			3,157,585

Total current liabilities		9,859,797			8,689,744
Deferred tax liabilities		449,555			508,382
Stockholders’ equity:
Common stock, par value $0.001 per share; 30,000,000 shares authorized; 10,813,407 and 10,756,381 shares issued and outstanding		10,813			10,756
Additional paid-in capital		24,563,364			22,427,967
Accumulated other comprehensive income (loss)		51,306			(7,333	)
Retained earnings		13,730,588			16,275,100

Total stockholders’ equity		38,356,071			38,706,490

Total liabilities and stockholders’ equity	$	48,665,423		$	47,904,616

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENTS OF INCOME (Unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2007		2006		2007		2006
Sales revenues:
System sales	$	9,773,770	$	10,917,361	$	28,356,239	$	38,648,480
Support and maintenance		12,686,801		11,763,808		37,594,924		34,360,914
Outsourcing		5,531,530		4,588,978		15,950,446		12,782,847

Total sales revenues		27,992,101		27,270,147		81,901,609		85,792,241
Costs of sales:
System sales		7,819,978		8,400,956		22,765,381		25,677,480
Support and maintenance		4,932,859		4,960,047		14,995,784		14,908,447
Outsourcing		3,399,854		2,567,496		9,752,461		7,250,184

Total costs of sales		16,152,691		15,928,499		47,513,626		47,836,111

Gross profit		11,839,410		11,341,648		34,387,983		37,956,130
Operating expenses:
Sales and marketing		2,614,278		2,164,373		6,996,610		6,505,997
General and administrative		4,492,797		4,220,919		14,149,844		13,613,004

Total operating expenses		7,107,075		6,385,292		21,146,454		20,119,001

Operating income		4,732,335		4,956,356		13,241,529		17,837,129
Other income:
Interest income		293,669		308,864		842,778		829,623

Total other income		293,669		308,864		842,778		829,623

Income before taxes		5,026,004		5,265,220		14,084,307		18,666,752
Income taxes		1,798,390		1,841,040		4,995,274		7,064,523

Net income	$	3,227,614	$	3,424,180	$	9,089,033	$	11,602,229

Net income per share - basic	$	0.30	$	0.32	$	0.85	$	1.09

Net income per share - diluted	$	0.30	$	0.32	$	0.85	$	1.08

Weighted average shares outstanding
Basic		10,718,643		10,641,509		10,688,709		10,635,823
Diluted		10,757,137		10,705,596		10,736,174		10,713,223
Dividends declared per share	$	0.36	$	0.36	$	1.08	$	1.08

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)


	Common Shares	Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
Balance at December 31, 2006	10,756,381	$	10,756	$	22,427,967	$	(7,333	)	$	16,275,100		$	38,706,490

Net Income										9,089,033			9,089,033
Issuance of common stock	57,026		57		940,872								940,929
Unrealized gain on available for sale investments, net of tax of $34,273							58,639						58,639
Share-based compensation					879,143								879,143
Dividends										(11,633,545	)		(11,633,545	)
Income tax benefit from stock option exercise					315,382								315,382

Balance at September 30, 2007	10,813,407	$	10,813	$	24,563,364	$	51,306		$	13,730,588		$	38,356,071

See accompanying notes.

COMPUTER PROGRAMS AND SYSTEMS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine months ended September 30,
	2007			2006
Operating Activities
Net income	$	9,089,033		$	11,602,229
Adjustments to net income:
Provision for bad debt		17,235			(148,250	)
Deferred taxes		(47,787	)		(605,094	)
Share-based compensation		879,143			1,020,316
Excess tax benefit from share-based compensation		(315,382	)		(199,756	)
Depreciation		1,488,928			1,449,738
Changes in operating assets and liabilities:
Accounts receivable		306,075			(1,313,350	)
Financing receivables		49,190			(799,198	)
Inventories		64,330			152,058
Prepaid expenses		43,674			8,908
Accounts payable		160,491			(666,950	)
Deferred revenue		1,068,129			(388,782	)
Other liabilities		(58,567	)		(221,543	)
Income taxes payable		144,772			415,598

Net cash provided by operating activities		12,889,264			10,305,924

Investing Activities
Purchases of property and equipment		(890,338	)		(1,461,392	)
Purchases of investments		(363,764	)		(329,041	)

Net cash used in investing activities		(1,254,102	)		(1,790,433	)

Financing Activities
Proceeds from exercise of stock options		940,929			314,641
Income tax benefit from stock option exercises		315,382			199,756
Dividends paid		(11,633,545	)		(11,609,193	)

Net cash used in financing activities		(10,377,234	)		(11,094,796	)

Increase (decrease) in cash and cash equivalents		1,257,928			(2,579,305	)
Cash and cash equivalents at beginning of period		8,760,122			11,669,690

Cash and cash equivalents at end of period	$	10,018,050		$	9,090,385

Cash paid for income taxes, net of refund	$	4,898,528		$	7,254,019

See accompanying notes.

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, 2006 and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2006.

2.	REVENUE RECOGNITION

The Company recognizes revenue in accordance with accounting principles generally accepted in the United States of America, principally:

•

Statement of Position (“SOP”) No. 97–2, Software Revenue Recognition, issued by the American Institute of Certified Public Accountants (“AICPA”).

•

AICPA SOP No. 98–9, Modification of SOP 97–2, Software Revenue Recognition, With Respect to Certain Transactions.

•

Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, issued by the United States Securities and Exchange Commission, as amended by SAB No. 104.

•

The Emerging Issues Task Force (“EITF”) Issue 00–3, Application of AICPA Statement of Position 97–2 to Arrangements That Include the Right to Use Software Stored on Another Entities’ Hardware.

•

EITF Issue 03–5, Applicability of AICPA Statement of Position 97–2 to Non–Software Deliverables in an Arrangement Containing More–Than–Incidental Software.

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, payroll processing and business office outsourcing.

The Company enters into contractual obligations to sell hardware, perpetual software licenses, installation and training services, and maintenance services. Revenue from hardware sales is recognized upon shipment, when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. Revenue from the perpetual software licenses and installation and training services are recognized using the residual method. The residual method allocates an amount of the arrangement to the elements for which fair value can be determined and any remaining arrangement consideration (the “residual revenue”) is then allocated to the delivered elements. The fair value of maintenance services is determined based on vendor specific objective evidence (“VSOE”) of fair value and is deferred and recognized as revenue ratably over the maintenance term. VSOE of fair value of maintenance services is determined by reference to the price the Company’s customers are required to pay for the services when sold separately via renewals. The residual revenue is allocated to the perpetual license and installation and training services and is recognized over the term that the installation and training services are performed for the entire arrangement. The method of recognizing revenue for the perpetual license for the associated modules included in the arrangement and related installation and training services over the term the services are performed is on a module by module basis as the respective installation and training for each specific module is completed as this is representative of the pattern of provision of these services. The installation and training services are normally completed in three to four weeks.

Revenue derived from maintenance contracts primarily includes revenue from software application support, hardware maintenance, continuing education and related services. Maintenance contracts are typically sold for a separate fee with initial contract periods ranging from one to seven years, with renewal for additional periods thereafter. Maintenance revenue is recognized ratably over the term of the maintenance agreement.

The Company accounts for ASP contracts in accordance with the EITF 00–3, Application of AICPA Statement of Position 97–2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware. EITF 00–3 states that the software element of ASP services is covered by SOP 97–2 only “if the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the customer to either run the software on its own hardware or contract with another party related to the vendor to host the software.” Each ASP contract includes a system purchase and buyout clause, and this clause specifies the total amount of the system buyout.

In addition, a clause is included which states that should the system be bought out by the customer, the customer would be required to enter into a general support agreement (for post-contract support services) for the remainder of the original ASP term. Accordingly, the Company has concluded that ASP customers do not have the right to take possession of the system without significant penalty (i.e. the purchase price of the system), and thus ASP revenue of the Company does not fall within the scope of SOP 97-2. In accordance with SAB No. 104, revenue is recognized when the services are performed.

Revenue for ISP 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, 2007		December 31, 2006
Accrued salaries and benefits	$	2,051,737	$	2,275,743
Accrued commissions		210,812		389,597
Accrued self-insurance reserves		384,400		440,100
Other		279,028		52,145

	$	2,925,977	$	3,157,585

4.	INVESTMENTS

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

Investments are comprised of the following at September 30, 2007:


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Short term investments	$	439,016	$	4,706	$	—	$	443,722
Obligations of U.S. Treasury, U.S. government corporation and agencies		5,416,572		51,744		4,645		5,463,671
Mortgaged backed securities		320,244		—		2,423		317,821
Municipal obligations		800,000		—		—		800,000
Corporate bonds		4,117,924		38,523		7,033		4,149,414

	$	11,093,756	$	94,973	$	14,101	$	11,174,628

Shown below are the amortized cost and estimated fair value of securities with fixed maturities at September 30, 2007, 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 2007	$	418,463	$	433,030
Due in 2008		3,700,017		3,730,782
Due in 2009		4,822,585		4,852,830
Due in 2010		593,431		596,443
Due thereafter		1,120,244		1,117,821

	$	10,654,740	$	10,730,906

Investments are comprised of the following at December 31, 2006:


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Short term investments	$	218,763	$	—	$	—	$	218,763
Obligations of U.S. Treasury, U.S. government corporation and agencies		5,019,979		21,591		25,092		5,016,478
Mortgaged backed securities		385,384		—		7,282		378,102
Municipal obligations		600,000		—		—		600,000
Corporate bonds		4,505,868		14,890		16,149		4,504,609

	$	10,729,994	$	36,481	$	48,523	$	10,717,952

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 Company uses the treasury stock method to calculate the impact of outstanding stock options and unvested restricted stock grants. Potentially dilutive shares are derived from outstanding stock options and unvested restricted stock grants that have an exercise price less than the weighted average market price of our common stock. Any options or restricted stock grants with an exercise price greater than the weighted average market price of our common stock are considered antidilutive and are excluded from the computation of diluted earnings per share. The difference between basic and diluted EPS is attributable to stock options. For the three month periods ended September 30, 2007 and 2006, these dilutive shares were 38,494 and 72,011 respectively. For the nine month periods ended September 30, 2007 and 2006, these dilutive shares were 47,465 and 83,456 respectively. The number of unvested restricted stock grants considered antidilutive and thus excluded from the year to date dilutive earnings per share computation at September 30, 2007 were 88,807.

6.	INCOME TAXES

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


	September 30, 2007		December 31, 2006
Deferred tax assets:
Accounts receivable	$	333,550	$	317,352
Accrued vacation		868,268		800,782
Stock-based compensation		577,868		516,811
Other comprehensive income		—		4,707
Other accrued liabilities		188,712		283,438

Total deferred tax assets	$	1,968,398	$	1,923,090

Deferred tax liabilities:
Deferred compensation	$	—	$	8,294
Other comprehensive income		29,564		—
Depreciation		1,027,423		1,016,900

Total deferred tax liabilities	$	1,056,987	$	1,025,194

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


	2007			2006
Current provision:
Federal	$	4,018,563		$	6,319,348
State		1,024,498			1,350,269
Deferred provision:
Federal		(42,885	)		(543,033	)
State		(4,902	)		(62,061	)

Total income tax provision	$	4,995,274		$	7,064,523

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:


	2007			2006
Income taxes at U. S. Federal statutory rate	$	4,929,507		$	6,533,013
State income tax, net of federal tax effect		654,411			841,750
Other		(588,644	)		(310,240	)

Total income tax provision	$	4,995,274		$	7,064,523

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. The application of income tax law is inherently complex. Laws and regulation in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the balance sheets and statements of income.

At the adoption date of January 1, 2007, we had no unrecognized tax benefits which would affect our effective tax rate if recognized. At September 30, 2007, we have no unrecognized tax benefits.

The Company classifies interest and penalties arising from the underpayment of income taxes in the statement of income under general and administrative expenses. As of September 30, 2007, we have no accrued interest or penalties related to uncertain tax positions. The tax year 2006 federal return remains open to examination and the tax years 2003-2006 remain open to examination by other taxing jurisdictions to which we are subject.

7.	STOCK BASED COMPENSATION

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share Based Payment (“SFAS No. 123R”). SFAS No. 123R establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. The Company previously applied

Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations and provided pro forma disclosures of SFAS No. 123, Accounting for Stock Based Compensation. The Company elected to adopt the modified prospective application method as provided by SFAS No. 123R, and, accordingly, prior periods are not restated for the effects of SFAS No. 123R. The Company recorded compensation costs as the requisite service rendered for the unvested portion of previously issued awards that remain outstanding at the initial date of adoption and any awards issued, modified, repurchased, or cancelled after the effective date of SFAS 123R.

The following table shows total stock-based compensation expense for the three and nine months ended September 30, 2007 and 2006, included in the Condensed Statement of Income:


	Three Months Ended				Nine Months Ended
	September 30, 2007		September 30, 2006		September 30, 2007		September 30, 2006
Costs of sales	$	74,997	$	152,736	$	344,526	$	434,823
Operating expenses		162,498		203,125		534,617		585,493
Pre-tax stock-based compensation expense		237,495		355,861		879,143		1,020,316
Less: income tax effect		94,047		124,445		348,141		386,190
Net stock-based compensation expense	$	143,448	$	231,416	$	531,002	$	634,126

2002 Stock Option Plan

Under the 2002 Stock Option Plan, the Company has authorized the issuance of equity-based awards for up to 865,333 shares of common stock to provide additional incentive to employees and officers. Pursuant to the plan, the Company can grant either incentive or non-qualified stock options. Options to purchase common stock under the 2002 Stock Option Plan have been granted to Company employees with an exercise price equal to the fair market value of the underlying shares on the date of grant.

Stock options granted under the 2002 Stock Option Plan to executive officers of the Company become vested as to all of the shares covered by such grant on the fifth anniversary of the grant date and expire on the seventh anniversary of the grant date. Stock options granted under the 2002 Stock Option Plan to employees other than executive officers become vested as to 50% of the shares covered by the option grant on the third anniversary of the grant date and as to 100% of such shares on the fifth anniversary of the grant date. In addition, options become vested upon termination of employment resulting from death, disability or retirement. Such options expire on the seventh anniversary of the grant date.

Under the methodology of SFAS No. 123, the fair value of the Company’s stock options was estimated at the date of grant using the Black-Scholes option pricing model. The multiple option approach was used, with assumptions for expected option life of 5 years and 44% expected volatility for the market price of the Company’s stock in 2002. An estimated dividend yield of 3% was used. The risk-free rate of return was determined to be 2.79% in 2002. No options have been granted in 2007.

A summary of stock option activity under the plan during the nine month periods ended September 30, 2007 and 2006 is as follows:


	September 30, 2007				September 30, 2006
	Shares		Exercise Price		Shares		Exercise Price
Outstanding at beginning of year	222,597		$	16.50	251,519		$	16.50
Granted	—			—	—			—
Exercised	(57,026	)		16.50	(19,068	)		16.50
Forfeited	(9,770	)		16.50	(7,616	)		16.50

Outstanding at end of period	155,801		$	16.50	224,835		$	16.50

Exercisable at end of period	155,801		$	16.50	36,919		$	16.50

Shares available for future grants under the plan as end of period				495,134				484,529

Weighted-average grant date fair value			$	—			$	—

Weighted-average remaining contractual life				1.8				2.8

Aggregate intrinsic value outstanding options			$	1,536,198

Aggregate intrinsic value exercisable options			$	1,536,198

The aggregate intrinsic value in the above table represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading date of the third quarter of 2007 and the exercise price, multiplied by the number of options.) The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.

The aggregate intrinsic value of options exercised during the quarters ended September 30, 2007 and September 30, 2006 was $170,951 and $87,672 respectively.

As of September 30, 2007, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the existing stock option plan.

2005 Restricted Stock Plan

On January 27, 2006, the Compensation Committee of the Board of Directors approved the grant of 116,498 shares of restricted stock, effective January 30, 2006, to certain executive officers of the Company under the 2005 Restricted Stock Plan. The grant date fair value was $42.91 per share. The restricted stock vests in five equal annual installments commencing on the first anniversary of the date of grant. On May 17, 2006, the Compensation Committee of the Board of Directors approved the grant of 17,810 shares of restricted stock to Michael Jones, the newly named Chief Operating Officer of the Company. The grant date fair value was $42.11 per share. The restricted stock vests in five equal annual installments commencing January 30, 2007, and each January 30 thereafter.


	Nine Months Ended September 30, 2007				Nine Months Ended September 30, 2006
	Shares		Weighted-Average Grant-Date Fair Value		Shares	Weighted-Average Grant-Date Fair Value
Nonvested stock outstanding at beginning of year	111,009		$	42.79	—	$	—
Granted	—			—	134,308		42.81
Vested	(22,202	)		42.81	—		—
Forfeited	—			—	23,299		42.91

Nonvested stock outstanding at end of period	88,807		$	42.79	111,009	$	42.79

As of September 30, 2007, there was $3,162,477 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005 Restricted Stock Plan. This cost is expected to be recognized over a weighted-average period of 3.3 years.

8.	COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, requires the disclosure of certain revenue, expenses, gains and losses that are excluded from net income in accordance with accounting principles generally accepted in the United States of America. Total comprehensive income for the three and nine months ended September 30, 2007 and 2006 are as follows:


	Three months ended September 30,				Nine months ended September 30,
	2007		2006		2007		2006
Net income as reported	$	3,227,614	$	3,424,180	$	9,089,033	$	11,602,229
Other comprehensive income:
Unrealized gain on investments, net of taxes		51,033		21,093		58,639		8,041

Total comprehensive income	$	3,278,647	$	3,445,273	$	9,147,672	$	11,610,270

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, 2006, as filed with the Securities and Exchange Commission.

Overview

We are a healthcare information technology company that designs, develops, markets, installs and supports computerized information technology systems to meet the unique demands of small and midsize hospitals. Our target market includes acute care community hospitals with 300 or fewer beds and small specialty hospitals. We are a single-source vendor providing comprehensive software and hardware products, complemented by data conversion, complete installation and extensive support. Our fully integrated, enterprise-wide system automates the management of clinical and financial data across the primary functional areas of a hospital. In addition, we provide services that enable our customers to outsource certain data-related business processes which we can perform more efficiently. We believe our products and services enhance hospital performance in the critical areas of clinical care, revenue cycle management, cost control and regulatory compliance. From our initial hospital installation in 1981, we have grown to serve more than 600 hospital customers across 46 states and the District of Columbia. In the three months ended September 30, 2007, we generated revenues of $28.0 million from the sale of our products and services.

Results of Operations

Three Months Ended September 30, 2007 Compared with Three Months Ended September 30, 2006

Revenues. Total revenues increased by 2.6%, or $0.7 million, to $28.0 million for the three months ended September 30, 2007, from $27.3 million for the three months ended September 30, 2006.

System sales revenues decreased by 10.5%, or $1.1 million, to $9.8 million for the three months ended September 30, 2007, from $10.9 million for the three months ended September 30, 2006. This decrease was primarily due to a decrease in the sale of information systems to new customers.

Support and maintenance revenues increased by 7.8%, or $0.9 million, to $12.7 million for the three months ended September 30, 2007, from $11.8 million for the three months ended September 30, 2006. This increase was attributable to an

increase in recurring revenues as a result of a larger customer base and increased sales of add-on business to existing customers.

Outsourcing revenues increased by 20.5%, or $0.9 million, to $5.5 million for the three months ended September 30, 2007, from $4.6 million for the three months ended September 30, 2006. We experienced an increase in outsourcing revenues as a result of continued growth in existing customer demand for electronic billing and business office outsourcing services. We were providing full business office outsourcing services to nineteen customers at September 30, 2007 compared to sixteen customers at September 30, 2006.

Costs of Sales. Total costs of sales increased by 1.4%, or $0.3 million, to $16.2 million for the three months ended September 30, 2007 from $15.9 million for the three months ended September 30, 2006. As a percentage of total revenues, costs of sales decreased to 57.7% for the three months ended September 30, 2007 from 58.4% for the three months ended September 30, 2006.

Cost of system sales decreased by 6.9%, or $0.6 million, to $7.8 million for the three months ended September 30, 2007, from $8.4 million for the three months ended September 30, 2006. Cost of equipment decreased $0.6 million as a result of a decrease in equipment sales which resulted from a decrease in new system sales. The gross margin on system sales decreased to 20.0% for the three months ended September 30, 2007, from 23.0% for the three months ended September 30, 2006. The decrease in the sale of systems to new customers coupled with a high percentage of fixed expenses included in cost of sales resulted in the decreased gross margin percentage.

Cost of support and maintenance decreased by 0.5%, or $0.1 million, to $4.9 million for the three months ended September 30, 2007 from $5.0 million for the three months ended September 30, 2006. The gross margin on support and maintenance revenues increased to 61.1% for the three months ended September 30, 2007, compared to 57.8% for the three months ended September 30, 2006. The increase in gross margin was primarily due to the addition of new customers and increased sales of add-on business to our existing customer base with a proportionately smaller increase in support personnel.

Our costs associated with outsourcing services increased by 32.4%, or $0.8 million, to $3.4 million for the three months ended September 30, 2007, from $2.6 million for the three months ended September 30, 2006. 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 expense also increased $0.2 million as a result of increased volume in our statement outsourcing business as well as an increase in postal rates in May 2007.

Sales and Marketing Expenses. Sales and marketing expenses increased by 20.8%, or $0.4 million, to $2.6 million for the three months ended September 30, 2007, from $2.2 million for the three months ended September 30, 2006. The increase is attributable to increases in payroll related expenses of $0.3 million as a result of additional sales and marketing personnel added throughout 2006 as well as an increase in travel related costs of $0.1 million.

General and Administrative Expenses. General and administrative expenses increased 6.4%, or $0.3 million, to $4.5 million for the three months ended September 30, 2007, from $4.2 million for the three months ended September 30, 2006. Employee group insurance increased $0.2 million as a result of unfavorable claims experience during the quarter. Expenses related to the annual customer user group meeting also increased $0.1 million during the quarter.

As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses increased to 25.4% for the three months ended September 30, 2007 from 23.5% for three months ended September 30, 2006.

Net Income. Net income for the three months ended September 30, 2007 decreased by 5.7%, or $0.2 million, to $3.2 million, or $0.30 per diluted share, as compared with net income of $3.4 million, or $0.32 per diluted share, for the three months ended September 30, 2006. Net income represents 11.5% of revenue for the three months ended September 30, 2007, as compared to 12.6% of revenue for the three months ended September 30, 2006.

Nine Months Ended September 30, 2007 Compared with Nine Months Ended September 30, 2006

Revenues. Total revenues decreased by 4.5%, or $3.9 million, to $81.9 million for the nine months ended September 30, 2007, from $85.8 million for the nine months ended September 30, 2006.

System sales revenues decreased by 26.6%, or $10.2 million, to $28.4 million for the nine months ended September 30, 2007, from $38.6 million for the nine months ended September 30, 2006. This decrease was primarily due to a decrease in the sale of information systems to new customers.

Support and maintenance revenues increased by 9.4%, or $3.2 million, to $37.6 million for the nine months ended September 30, 2007, from $34.4 million for the nine months ended September 30, 2006. This increase was attributable to an increase in recurring revenues as a result of a larger customer base.

Outsourcing revenues increased by 24.8%, or $3.1 million, to $15.9 million for the nine months ended September 30, 2007, from $12.8 million for the nine months ended September 30, 2006. We experienced an increase in outsourcing revenues as

a result of continued growth in customer demand for electronic billing, statement processing, and business office outsourcing services.

Costs of Sales. Total costs of sales decreased by 0.7%, or $0.3 million, to $47.5 million for the nine months ended September 30, 2007, from $47.8 million for the nine months ended September 30, 2006. As a percentage of total revenues, costs of sales increased to 58.0% for the nine months ended September 30, 2007 from 55.8% for the nine months ended September 30, 2006.

Cost of system sales decreased by 11.3%, or $2.9 million, to $22.8 million for the nine months ended September 30, 2007, from $25.7 million for the nine months ended September 30, 2006. Payroll related expenses increased $0.3 million as a result of salary increases and an increase in the number of employees. Cost of equipment decreased $2.5 million as a result of a decrease in equipment sales. Travel related expenses decreased $0.8 million due to a decrease in the number of new system installations. The gross margin on system sales decreased to 19.7% for the nine months ended September 30, 2007, from 33.6% for the nine months ended September 30, 2006. The decrease in the sale of systems to new customers coupled with a high percentage of fixed expenses included in cost of sales resulted in the decreased gross margin percentage.

Cost of support and maintenance increased by 0.6%, or $0.1 million, to $15.0 million for the nine months ended September 30, 2007, from $14.9 million for the nine months ended September 30, 2006. This increase was caused primarily by an increase in payroll related expenses as a result of salary increases and an increase in the number of employees. The gross margin on support and maintenance revenues increased to 60.1% for the nine months ended September 30, 2007, compared to 56.6% for the nine months ended September 30, 2006.

Our costs associated with outsourcing services increased by 34.5%, or $2.5 million, to $9.8 million for the nine months ended September 30, 2007, from $7.3 million for the nine months ended September 30, 2006. This increase was caused primarily by an increase of $1.7 million in payroll related expenses as a result of an increase in the number of employees needed to support our growing business office outsourcing operations and electronic billing operations. Postage expense related to our statement outsourcing business also increased $0.6 million due to an increase in volume and an increase in postal rates.

Sales and Marketing Expenses. Sales and marketing expenses increased by 7.5%, or $0.5 million, to $7.0 million for the nine months ended September 30, 2007, from $6.5 million for the nine months ended September 30, 2006. The increase was attributable to an increase in travel expenses of $0.3 million and payroll related expenses of $0.2 million.

General and Administrative Expenses. General and administrative expenses increased 3.9%, or $0.5 million, to $14.1 million for the nine months ended September 30, 2007, from $13.6 million for the nine months ended September 30, 2006. The increase was primarily caused by increased employee group insurance of $0.4 million as a result of unfavorable claims experience.

As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses increased to 25.8% for the nine months ended September 30, 2007, from 23.5% for the nine months ended September 30, 2006.

Net Income. Net income for the nine months ended September 30, 2007 decreased by 21.7%, or $2.5 million, to $9.1 million, or $0.85 per diluted share, as compared with net income of $11.6 million, or $1.08 per diluted share, for the nine months ended September 30, 2006. Net income represents 11.1% of revenue for the nine months ended September 30, 2007, as compared to 13.5% of revenue for the nine months ended September 30, 2006.

Liquidity and Capital Resources

At September 30, 2007, we had cash and cash equivalents of $10.0 million, compared with $9.1 million at September 30, 2006. Net cash provided by operating activities for the nine months ended September 30, 2007 was $12.9 million, compared to $10.3 million for the nine months ended September 30, 2006. The increase was primarily due to a increase in customer deposits and increased collection of accounts receivable, offset by a decrease in net income.

Net cash used in investing activities totaled $1.3 million for the nine months ended September 30, 2007, compared to $1.8 million for the nine months ended September 30, 2006. We used cash for the purchase of $0.9 million of property and equipment and investments of $0.4 million.

Net cash used in financing activities totaled $10.4 million for the nine months ended September 30, 2007, compared to $11.1 million for the nine months ended September 30, 2006. We declared and paid dividends of $11.6 million during the first nine months of 2007. We received proceeds from the exercise of stock options including the related tax benefit of $1.3 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 at least 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, 2007, the Company had no borrowings and is, therefore, not subject to interest rate risks related to debt instruments.

Item 4.

Controls and Procedures.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company that is required to be included in our periodic SEC filings. There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings.

From time to time, we are involved in routine litigation that arises in the ordinary course of business. We are not currently involved in any litigation that we believe could reasonably be expected to have a material adverse effect on our business, financial condition, or results of operations.

Item 1A.

Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

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.



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

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 19, 2007	By:	/s/ J. Boyd Douglas
		J. Boyd Douglas
		President and Chief Executive Officer

Date: October 19, 2007	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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