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Article by DailyStocks_admin    (06-19-08 07:23 AM)

The Daily Magic Formula Stock for 06/19/2008 is Computer Programs and Systems Inc. According to the Magic Formula Investing Web Site, the ebit yield is 11% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

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 over 600 hospital customers across 46 states and the District of Columbia. In 2007, we generated revenues of $110.0 million from the sale of our products and services.

Industry Dynamics

The healthcare industry is the largest industry in the United States economy. According to the Centers for Medicare and Medicaid Services, or “CMS,” the U.S. is projected to have spent $2.2 trillion on healthcare in 2007, or approximately 16.2% of the U.S. gross domestic product. CMS estimates that by fiscal 2016 total U.S. healthcare spending will reach $4.14 trillion, or 19.6% of the estimated U.S. gross domestic product.

Hospital services represents one of the largest categories of total healthcare expenditures. According to CMS, in fiscal 2008, spending on hospital services will amount to approximately $747.2 billion, or 31% of total healthcare expenditures. According to the American Hospital Association, there are approximately 4,900 community hospitals in the United States that are in our target market of hospitals with 300 or fewer acute care beds. In addition, there is a market of small specialty hospitals that focus on discrete medical areas such as surgery, rehabilitation and psychiatry.

Notwithstanding the size and importance of the healthcare industry within the United States economy, the industry is constantly challenged by changing economic dynamics, increased regulation and pressure to improve the quality of healthcare. These challenges are particularly significant for the hospitals in our target market due to their more limited financial and human resources. However, we believe healthcare providers can successfully address these issues with the help of advanced medical information systems. Specific examples of the challenges facing healthcare providers include the following.

Changing Economic Dynamics. Community hospitals typically generate a significant portion of their revenues from beneficiaries of the Medicare program. Consequently, even small changes in this federal program have a disproportionately larger impact on community hospitals as compared to larger facilities where greater portions of their revenues are typically generated from beneficiaries of private insurance programs. Medicare funding and reimbursements fluctuate year to year and, with the anticipated growth in healthcare costs, will continue to be scrutinized as the federal government attempts to control the costs and growth of the program. The Medicaid program, which is a federal/state program managed by the individual states and dependent in part on funding from the states, also continues to struggle due to the increasing cost of healthcare and limited state revenues. In addition to issues in state funding, the Deficit Reduction Act of 2005, which included cuts of $6.4 billion and $4.7 billion from Medicare and Medicaid, respectively, over the five-year period from 2006 to 2010, is cutting deeper into Medicaid reimbursements, and the gains made in Medicare reimbursements are being adversely affected.

Continued Push for Improved Patient Care . With pressure mounting to reduce medical errors and improve patient safety, hospitals are actively seeking information technology solutions for clinical decision support. This migration toward clinical decision support solutions is further supported by CMS quality initiatives. For 2008, CMS reports that Medicare inpatient rates for operating expenses will increase by 3.3% for hospitals that report quality data. Hospitals that do not report quality data will only see a 1.3% increase. We believe hospitals utilizing fully integrated enterprise-wide medical information systems that allow professionals real-time access to information such as electronic charts, treatment protocols and pathways, pharmaceutical records and treatment schedules will continue to be favored by large employers and government payers.

Emergence of Electronic Medical Records/Electronic Health Records . In 2004, George W. Bush, President of United States, launched an initiative to make electronic health records available to most Americans within 10 years. Since that time, significant progress has been made in the establishment by the federal government of a National Health Information Network. The stated goal of the national electronic health record is to bring together patient information from across the disparate healthcare vendor systems used in all of the individual hospitals, clinics and physician offices where a patient may receive healthcare services. Achievement of this ambitious goal will revolutionize the healthcare industry. Data sharing of this magnitude will increase the efficiency of healthcare delivery, support better clinical decision making, and reduce clinical errors in all participating facilities. However, the first requirement for participation in national or regional initiatives is the implementation of an electronic medical record in the individual healthcare facilities. To share patient information electronically, the information must first be captured and stored electronically. We believe hospitals utilizing fully integrated enterprise-wide medical information systems, and consequently the vendors that supply such systems, will be best positioned to participate in and benefit from national and regional initiatives. During 2007, we received certification from the Certification Commission for Healthcare Information Technology (CCHIT (SM) ) for our inpatient electronic medical record (EMR) product. CCHIT is the certification authority endorsed by a number of professional healthcare organizations for electronic health records (EHRs).

While economic, regulatory and consumer pressures such as those described above have increased rapidly over the last several years, we believe healthcare organizations have historically underinvested in information technology and services compared to other industries. This underinvestment has caused healthcare providers to rely on non-integrated, complex and inefficient information systems. A hospital’s failure to adequately invest in modern medical information systems could result in fewer patient referrals, cost inefficiencies, lower than expected reimbursement, increased malpractice risk and possible regulatory infractions.

In the face of decreasing revenue and increasing pressure to improve patient care, healthcare providers are in need of management tools that (1) increase efficiency in the delivery of healthcare services, (2) reduce medical errors, (3) effectively track the cost of delivering services so those costs can be properly managed and (4) increase the speed and rate of reimbursement. We believe the industry will increase its adoption of information technology as a management tool. We further believe these dynamics will allow for future revenue growth.

Our Solution

We have tailored an information technology solution that effectively addresses the specific needs of small and midsize hospitals. Due to their smaller operating budgets, community hospitals have limited financial and human resources to operate manual or inefficient information systems. However, these hospitals are expected to achieve the same quality of care and regulatory compliance as larger hospitals, placing them in a particularly difficult operating environment.

We believe that the CPSI solution meets this challenge. We provide fully integrated, enterprise-wide, HIPAA compliant medical information systems and services that collect, process, retain and report data in the primary functional areas of a hospital, from patient care to clinical processing to administration and accounting. As a key element of our complete solution, we provide ongoing customer service through regular interaction with customers, customer user groups and extensive customer support. Further, we offer business management services that allow customers to avoid some of the fixed costs of a business office. We are capable of providing a single-source solution for small and midsize hospitals, making us a partner in their initiatives to improve operations and medical care.

Our customers continuously communicate with us through our support teams and through organized user groups, allowing us to continue to provide a state-of-the-art solution that meets their specific needs. By remaining sensitive and responsive to the ever-changing demands of our customers and regularly updating our products, we believe we provide an information technology solution that meets the needs of community hospitals. Our business has continued to grow because we have successfully addressed the needs of community hospitals for fully integrated enterprise-wide information systems that allow them to improve operating effectiveness, reduce costs and improve the quality of patient care.

Strategy

Our objective is to continue to grow as a leading provider of healthcare information technology systems and services to small and midsize hospitals by following the same strategy that we have successfully pursued for over twenty-five years, the key elements of which are described below.

Deliver a Single-Source Solution . When a customer purchases the CPSI system, we provide everything necessary for the customer to implement and use our system. We deliver the application software, computer hardware, peripherals, forms and supplies used in the comprehensive information network. Our installation teams work extensively with each customer to convert existing data to the new system, to install all of the necessary equipment and to train hospital personnel to use our system. After installation, our support teams answer and address customer questions and issues related to any aspect of the system. We also offer customers additional services such as business office management, electronic billing and ISP services. We believe our single-source approach to delivering a complete information system makes our system easier and more convenient for customers to understand and manage, which results in greater customer satisfaction and retention.

Provide Enterprise-Wide, Fully Integrated Software Applications . We have developed all of our software products internally as part of our fully integrated system architecture. Our experience has taught us that using a fully integrated system in the primary functional areas of a hospital ensures compatibility among applications and avoids pitfalls associated with interfacing disparate systems. Our system utilizes one central database where information is stored and used by all of our software applications. With our single database model, our systems provide secure, real-time access to all information across multiple applications for all those needing such access, including physicians, nurses, laboratory technicians, pharmacists, clinicians and other users. The enterprise-wide, fully integrated nature of our system also allows customers to monitor user access to information for purposes of compliance with new federal and state privacy regulations.

Maintain Commitment to Customer Oriented Operating Philosophy . A key factor in our success has been our focus on customer service and support. We make available to our customers experienced support teams that can assist with any question or problem. We currently have a greater than one to one support staff to customer ratio. Our support teams are extensively trained, and our employees are generally promoted from within so that they have a thorough knowledge of our system and a commitment to our culture. Because all of our customers use the same version of our system, our support teams can be more effective by maintaining a complete understanding of a single system. As part of our commitment to system support, we actively solicit customer feedback regarding ways in which we can improve the effectiveness and efficiency of our systems. To further this goal, we have organized our customers into a national user group to promote the exchange of information regarding our system and to identify product enhancements based on our customers’ operational experiences. We believe our user group concept is a key component of our success by positively impacting customer satisfaction and retention and by enhancing product development and system functionality. We will continue to focus on our national user group as a key component to our goal of maintaining and growing our customer base and market share.

Expand Presence in Target Market . We will continue to target small to midsize domestic hospitals of 300 or fewer acute care beds. We believe this market of over 4,900 community hospitals nationwide has been traditionally overlooked and underserved by other healthcare technology companies. In addition, a number of our customers are small specialty hospitals that focus on discrete medical areas such as surgery, rehabilitation and psychiatry. We intend to continue gaining customers from this market segment. Our system can help these smaller hospitals reduce costs and increase their operating efficiencies. We believe our personalized marketing approach and emphasis on customer relationships are attractive to the management of these hospitals. We also believe our system is well-suited to hospitals of this size because they typically demonstrate a greater commitment than larger hospitals to the concept of an enterprise-wide, fully integrated system. In addition, we will continue to sell additional services and software products to our existing customers who have not purchased our complete package of services and software applications.

Emphasize Recurring Revenue Opportunities . In addition to revenues from new system installations, we have developed and will continue to develop sources of recurring revenues. Our current principal source of recurring revenues is our support and maintenance fees paid by existing customers. As our customer base grows, our recurring revenues from support and maintenance fees should also grow. We believe growth in recurring revenues will also continue to come from our business management services, which we market to our existing customers as well as new customers. These services include electronic billing, patient statement processing, accounts receivable management, payroll processing, ISP services and web site hosting. We also provide our software products on an ASP basis. When we provide ASP services, we maintain a customer’s computer server in our facility and provide our system to the customer through remote access. Instead of the one-time system purchase price, these customers pay a monthly fee for the term of the ASP customer agreement, generating recurring revenues.

Our Products and Services

Software Systems

We offer a full array of software applications designed to streamline the flow of information to the primary functional areas of community hospitals in one fully integrated system. We intend to continue to enhance our existing software applications and develop new applications as required by evolving industry standards and the changing needs of our customers. Pursuant to our customer support agreements, we provide our customers with software enhancements and upgrades periodically on a when-and-if-available basis. See “Support and Maintenance Services.” These enhancements enable each customer, regardless of its original installation date, to have the benefit of the most advanced CPSI products available. Our software applications:


•

provide automated processes that improve clinical workflow and support clinical decision-making;


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allow healthcare providers to efficiently input and easily access the most current patient medical data in order to improve the quality of care and patient safety;


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integrate clinical, financial and patient information to promote efficient use of time and resources, while eliminating dependence on paper medical records;


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provide tools that permit healthcare organizations to analyze past performance, model new plans for the future and measure and monitor the effectiveness of those plans;


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provide for rapid and cost-effective implementation, whether through the installation of an in-house system or through our ASP services; and


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increase the flow of information by replacing centralized and limited control over information with broad-based, secure access by clinical and administrative personnel to data relevant to their functional areas.

Our software applications are grouped for support purposes according to the following functional categories:


•

Patient Management


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Financial Accounting


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Clinical


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Patient Care


•

Enterprise Applications

Due to the integrated nature of the CPSI system, our software applications are not marketed as distinct products, and our sales force attempts to sell all applications to each customer as a single product. New customers must purchase from us and install the core applications of patient management and financial accounting and all hardware necessary to run these applications. In addition to the core applications, customers may also acquire one or more of our clinical, patient care and enterprise applications. Approximately one-third of our customers have purchased a combination of applications that meet their enterprise-wide information technology needs.

The general functional categories, as well as the software applications in each of these categories, are described below.

Patient Management . Our patient management software enables a hospital to identify a patient at any point in the healthcare delivery system and to collect and maintain patient information throughout the entire process of patient care on an enterprise-wide basis. The single database structure of our software permits authorized hospital personnel to simultaneously access appropriate portions of a patient’s record from any point on the system. The patient management software performs the following functions:

Enterprise Applications . We provide software applications that support the products described above and are useful to all areas of the hospital. These applications include: ad hoc reporting, automatic batch and real-time system backups, an integrated fax system, archival data repository, document scanning and Microsoft Office integration and an Application Portal. The Application Portal allows clients to access our applications remotely via Microsoft Internet Explorer and the Internet without requiring the loading of any additional client software on the accessing PC. User information and data accessed is secured with HIPAA compliant 128 bit cipher strength Secure Socket Layer (SSL) encryption. Remote access using the Application Portal results in no discernable difference to the user in software functionality.

Support and Maintenance Services

After a customer installs a CPSI system, we provide software application support, hardware maintenance, continuing education and related services pursuant to a support agreement. The following describes services provided to customers using CPSI systems.

Total System Support . We believe the quality of continuing customer support is one of the most critical considerations in the selection of an information system provider. We provide hardware, technical and software support for all aspects of our system which gives us the flexibility to take the necessary course of action to resolve any issue. Unlike our competitors who use third-party services for hardware and software support, we provide a single, convenient and efficient resource for all of our customers’ system support needs. In order to minimize the impact of a system problem, we train our customer service personnel to be technically proficient, courteous and prompt. Because a properly functioning information system is crucial to a hospital’s operations, our support teams are available 24 hours a day to assist customers with any problem that may arise. Customers can also use the Internet to directly access our support system. This allows customers to communicate electronically with our support teams at any time. With approximately 709 employees who provide customer service and support, we currently have a greater than one-to-one support staff to customer ratio.

User Group . All of our customers have the opportunity to be members of our user group from which we solicit feedback regarding our products. We host a national user group meeting annually. We have also organized several active regional user groups which meet on a semi-annual basis. These groups meet to discuss and recommend product modifications and improvements which they then evaluate and prioritize. Upon confirming that the desired improvements are technically feasible, we agree to allocate a significant amount of programming time each year to undertake the requested modification or improvement. The majority of our product enhancements originate from suggestions from our customers through the user group structure.

Software Releases . We are committed to providing our customers with software and technology solutions that will continue to meet their information system needs. To accomplish this purpose, we continually work to enhance and improve our application programs. As part of this effort, for each customer covered under our general support agreement, we provide software updates as they become available at no additional cost. We design these enhancements to be seamlessly integrated into each customer’s existing CPSI system. The benefit of these enhancements is that each customer, regardless of its original installation date, uses the most advanced CPSI software available. Through this process, we can keep our customers up-to-date with the latest operational innovations in the healthcare industry as well as changing governmental regulatory requirements. Another benefit of this “one system” concept is that our customer service teams can be more effective in responding to customer needs because they maintain a complete understanding of and familiarity with the one system that all customers use.

Purchasing a new information technology system requires the expenditure of a substantial amount of capital and other resources, and many customers are concerned that these systems will become obsolete as technology changes. Our periodic product updates eliminate our customers’ concerns about system obsolescence. We believe providing this benefit is a strong incentive for potential customers to select our products over the products of our competitors.

Hardware Replacement . As part of our general support agreements, we are also committed to promptly replacing malfunctioning system hardware in order to minimize the effect of operational interruptions. By providing all hardware used in our system, we believe we are better able to meet and address all of the information technology needs of our customers.

Application Service Provider . In some circumstances, we offer ASP services to customers via remote access telecommunications. As an application service provider, we store and maintain computer servers dedicated to specific customers which contain all of such customers’ critical patient and administrative data. These customers access this information remotely through direct telecommunications connections with these servers.

Internet Service Provider . As part of our total information solution, we can provide Internet connection services to our customers. We also can provide web-site design and hosting services.

Forms and Supplies . We offer our customers the forms that they need for their patient and financial records, as well as their general office supplies. Furnishing these forms and supplies helps us to achieve our objective of being a one-source solution for a hospital’s complete healthcare information system requirements.

Business Management Services

Electronic Billing . We provide electronic billing for customers at prices competitive with other electronic billing vendors. Once a customer processes patient insurance claims in our system, we then perform the electronic billing function with no other participation by hospital staff. With this service, customers need not prepare billing files or maintain interfaces with third-party software, thereby saving the customer both time and money.

Statement Processing . Our customers may choose to have us prepare and distribute all patient billing statements. We use our knowledge of a customer’s collection system to produce statements without requiring any actions on the part of the hospital data processing personnel. Because we can connect directly with a customer’s system, the customer is not required to build and transfer files to us. All system enhancements are incorporated into the statement process without having to modify any third-party vendor interface. Like the electronic billing, this service saves the customer both time and money.

Accounts Receivable Management . We offer customers the option of using us to perform their patient billing functions and accounts receivable management. Using this service allows customers to reduce costs by employing fewer full time administrative employees.

Payroll Processing . We offer customers the option of using us to perform their payroll functions, including payroll processing, tax and deduction management, and quarterly and yearly reporting.

Contract Management . We offer customers the option of using us to perform audits of payments from third party insurers with which a customer executes managed care contracts to ensure payments are made in accordance to the agreed upon metrics.

Insurance Services . We offer customers the option of using us to provide insurance services to include Insurance Follow-up, Claim Eligibility Checking, Claim Status Checking, Pharmacy Online Adjudication, and Medical Necessity Database Updates. Using these services allows customers to improve their revenue cycle management by reducing the incidents of invalid claims and monitoring the progress of valid claims.

System Implementation and Training

Conversion Services . When a customer purchases our system, we convert its existing data to the CPSI system. Our knowledge of hospital data processing, in conjunction with extensive in-house technical expertise, allows us to accomplish this task in a cost effective manner. When we install a new system, the data conversion has already occurred so that the system is immediately operational. Our goal is for each customer to be immediately productive in order not to waste time and money on the costly and inefficient task of maintaining the same data on parallel systems. Our services also relieve the hospital staff of the time-consuming burden of data conversion.

Training . In order to integrate the new system and to ensure its success, we spend approximately three weeks providing individualized training on-site at each customer’s facility at the time of installation. We directly train all hospital users, including staff members and healthcare providers, during all hospital shifts in the use of hardware and software applications. In contrast, some of our competitors train only a hospital’s training staff at an off-site location. We employ nurses and medical technicians in addition to our technical training staff in order to help us communicate more effectively with our customers during the training process.

Technology

Operating Systems and Server Platform . We utilize Intel-based servers running industry standard “open systems,” including Unix, Linux and Microsoft Windows 2000 Server operating systems.

ClientWare ® Networking . Our ClientWare ® application integrates the UNIX and Linux systems with Microsoft operating systems. This integration brings together the strengths of both operating environments. The processing power of UNIX and Linux combined with the communication capabilities of Microsoft Windows creates an information system that allows the use of familiar “point and click” processing. This architecture also facilitates integration of other Microsoft software and provides expanded opportunities for the inclusion of new technologies without sacrificing system reliability or performance.

Wireless Technology . Traditional workstations were designed around access to electrical and network outlets. We now use wireless networking technology to connect computers to the CPSI system. This allows customers to use mobile computers and to place stationary computers in locations for optimum convenience and ease of use. We incorporate wireless laptop and hand held computers into our system. Convenient to carry and use, these mobile computers allow effective data collection and real-time access to patient information from practically anywhere in the hospital. Information efficiently collected will then be more quickly accessible by other caregivers throughout the hospital.


CEO BACKGROUND

Since August 2005, CPSI has paid fees to a registered broker-dealer for cash management services. Mr. Johnson serves as a director of a bank that is affiliated with the broker-dealer receiving the fees. The annual fees paid by CPSI have been less than 1% of the annual revenues of the broker-dealer.

Mr. Mulherin is a partner in a law firm that performs certain legal services for CPSI. With respect to the most recent three completed fiscal years, total payments by CPSI to the law firm have been less than 1% of the law firm’s annual revenues.

Mr. Mulherin’s brother-in-law, Matt Cole, is employed by CPSI as a sales manager. Mr. Cole is not an officer of CPSI.

Since August 2005, CPSI has paid fees to a registered broker-dealer for cash management services. Mr. Seifert serves as an executive officer of a bank that is affiliated with the broker-dealer receiving the fees. The annual fees paid by CPSI have been less than 1% of the annual revenues of the broker-dealer.

Mr. Seifert’s son’s construction business has entered into individual contracts with Boyd Douglas and Patrick Immel to construct houses for them. Mr. Seifert is not an owner, director or employee of this business. CPSI does not make any payments related to these arrangements.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We have achieved a compounded annual growth rate in revenues and net income of approximately 8.3% and 3.9%, respectively, over the past five years. We installed our financial and patient accounting system in 26 new hospitals in 2007, compared with 42 in 2006.

Our gross revenues decreased 5.1% from 2006, while our net income decreased 18.3%, principally as a result of a decrease in new system sales in 2007 due to increased competition. Cash flow from operations increased 32.3% from 2006 due to improved collection and cash management efforts during the year. We continue to believe that our strong cash performance reflects both the quality of our customer service and our product offerings.

Revenues

The Company recognizes its multiple element arrangements, including software and software-related services, using the residual method under SOP 97-2, Software Revenue Recognition , as amended by SOP 98-4, SOP 98-9 and clarified by Staff Accounting Bulletin (“SAB”) 101, Revenue Recognition in Financial Statements , as amended by SAB 104, Revenue Recognition . Revenue from general support agreements for post-contract support services (support and maintenance) is recognized by the Company ratably over the term of the agreement.

System Sales. Revenues from system sales are derived from the sale of information systems (including software, conversion and installation services, hardware, peripherals, forms and office supplies) to new customers and from the sale of new or additional products to existing customers. We do not record revenue upon the execution of a sales contract. Upon the execution of a contract to purchase a system from us, each customer pays a non-refundable 10% deposit that is recorded as deferred revenue. The customer pays 40% of the purchase price for the software and the related installation, training and conversion when we install the system and commence on-site training at the customer’s facility, which is likewise recorded as deferred revenue. When the system begins operating in a live environment, the remaining 50% of the system purchase price for each module that has been installed is payable. Revenue from the sale of the software perpetual license and the system installation and training is recognized on a module by module basis after the installation and training have been completed and the system is functioning as designed for each individual module. Revenue from the sale of hardware is recognized upon shipment of the hardware to the customer.

Support and Maintenance. We also derive revenues from the provision of system support services, including software application support, hardware maintenance, continuing education and related services. Support services are provided pursuant to a support agreement under which we provide comprehensive system support and related services in exchange for a monthly fee based on the services provided. The initial term of these contracts ranges from one to seven years, with a typical duration of five years. Upon expiration of the initial term, these contracts renew automatically on a year-to-year basis thereafter until terminated. Revenues from support services are recognized in the month when these services are performed.

We provide our products to some customers as an application service provider, or “ASP.” We provide ASP services on a remote access basis by storing and maintaining servers at our headquarters which contain customers’ patient and administrative data. These customers then access this data remotely in exchange for a monthly fee. In addition, as part of our total information solution, we serve as an Internet service provider, or “ISP,” for some of our customers for a monthly fee. We also provide web-site design and hosting services if needed. Revenues from our ASP and ISP services are recognized in the month when these services are performed.

Business Management Services. During 2007, we changed the name of our Outsourcing Services to Business Management Services to overcome a perceived negative view of the title “Outsourcing”. There have not been any changes to the actual services we offer customers, only a change in the name under which these services are provided. All references to Outsourcing Services in previous Company filings will be included under Business Management Services in future filings. Our business management services include electronic billing, statement processing, payroll processing and business office management (primarily accounts receivable management). Most of these business management services are sold pursuant to one year customer agreements, with automatic one year renewals until terminated. Revenues from business management services are recognized when these services are performed.

Costs of Sales

System Sales. The principal costs associated with the design, development, sale and installation of our systems are employee salaries, benefits, travel expenses and certain other overhead expenses. These costs are expensed as incurred. For the sale of equipment, we incur costs to acquire these products from the respective distributors or manufacturers. The costs related to the acquisition of equipment are capitalized into inventory and expensed upon the sale of the equipment utilizing the average cost method.

Support and Maintenance. The principal costs associated with our system support and maintenance services are employee salaries, benefits and certain other overhead expenses. These costs are expensed as incurred.

We have the same employee groups providing both system installations and support and maintenance services. Salary related expenses are allocated between cost of system sales and cost of support and maintenance services based upon an estimate of the percentage of time employees spend performing each function.

Business Management Services. The principal cost related to our statement processing services is postage. The principal costs related to our electronic billing services are employee related expenses, such as salaries and benefits, and long distance telecommunication fees. Supplies and forms represent an additional cost associated with our business management services. These costs are expensed as incurred.

Results of Operations

2007 Compared to 2006

Revenues. Total revenues decreased by 5.1%, or $6.0 million, to $110.0 million for 2007, from $116.0 million for 2006.

System sales revenues decreased by 26.4%, or $13.6 million, to $38.0 million in 2007, from $51.6 million in 2006. We completed software system installations at 26 new hospital clients in 2007, compared to installations at 42 new hospital clients in 2006. The decrease in installations at new hospital clients in 2007 was due primarily to increased competition. System sales to existing customers in 2007 was 68% of total revenues for 2007, as compared to 25% for 2006.

Support and maintenance revenues increased by 8.0%, or $3.8 million, to $50.5 million in 2007, from $46.7 million in 2006. The increase in revenues from support and maintenance was attributable to an increase in recurring revenues as a result of a larger customer base and additional system sales to existing customers. We had 630 customers at December 31, 2007, compared to 615 at December 31, 2006. ASP services revenues increased by 17.6%, or $0.3 million, due to a net increase of 5 ASP clients in 2007. ISP services revenues remained unchanged.

Business management service revenues increased by 22.1%, or $3.9 million, to $21.6 million in 2007, from $17.6 million in 2006. Business management service revenues increased as a result of continued growth in customer demand for electronic billing, business office and statement processing services. Statement processing revenues increased 8.8% and electronic billing revenues increased 14.3%. Revenue from business office services increased 31.4%. We were providing full business management services to 19 customers at December 31, 2007, compared to 18 customers at December 31, 2006.

Costs of Sales. Total costs of sales decreased by 1.6%, or $1.0 million, to $63.3 million in 2007, from $64.3 million in 2006. As a percentage of revenues, cost of sales increased to 57.5% for 2007, from 55.4% for 2006.

Cost of system sales decreased by 11.8%, or $4.0 million, to $30.1 million for 2007, from $34.1 million for 2006. The decrease in the cost of system sales is primarily due to decreased new system sales. The gross margin on system sales decreased to 20.8% in 2007 from 33.9% in 2006. This decrease is primarily due to relatively fixed employee headcount and payroll expenses with decreased system sales. As a percentage of system sales, payroll and related expenses increased to 41.6% in 2007 from 30% in 2006, travel expense increased to 14.6% from 13.4% and cost of software increased to 3.5% from 2.4%. Cost of equipment decreased to 17.1% in 2007 from 19.0% in 2006 due to softening costs of computers and related peripheral equipment during the year. In a more competitive market for community hospital information technology systems, we seek to contain costs through hiring freezes, wage controls and more efficient use of existing personnel across installation and support functions.

Cost of support and maintenance decreased slightly to $19.9 million in 2007 from $20.0 million in 2006. The decrease in the cost of support and maintenance was caused primarily by a slight decrease in payroll, telephony and supply costs of $0.1 million. The gross margin on support and maintenance revenues increased to 60.7% for 2007, from 57.2% for 2006. The increase in the gross margin was primarily due to the addition of new customers with a proportionately smaller increase in support personnel and more efficient use of system installation personnel in support functions.

Our costs associated with business management services increased 30.8%, or $3.1 million, to $13.3 million in 2007, from $10.2 million in 2006. The increase in the cost of business management services was primarily due to increased payroll related expense of $2.3 million due to additional employees hired to support our growing business office management services. Postage costs increased $0.6 million as a result of an increase in transaction volumes of our statement processing services as well as a postage rate increase in May of 2007. The gross margin on business management services decreased to 38.2% for 2007, from 42.3% for 2006.

Sales and Marketing Expenses. Sales and marketing expenses increased 6.0%, or $0.5 million, to $9.4 million in 2007, from $8.9 million in 2006. The increase in sales and marketing expenses was attributable to increased payroll related expenses of $0.2 million and travel related expenses of $0.3 million.

General and Administrative Expenses. General and administrative expenses increased by 0.8%, or $0.1 million, to $18.3 million for 2007, from $18.2 million for 2006. The increase in general and administrative expenses was due to increases in taxes and licenses of $0.2 million, bad debt expense of $0.2 million, employee group and commercial insurance of $0.1 million, retirement plan contributions of $0.1 million and occupancy costs of $0.1 million. These increases were offset by decreases in payroll related expense of $0.4 million and customer user group meeting expense of $0.3 million.

As a result of the foregoing factors, income before taxes decreased by 21.5%, or $5.5 million, to $20.3 million for 2007, from $25.8 million for 2006.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007

Revenues. Total revenues increased by 13.8%, or $3.6 million, to $29.5 million for the three months ended March 31, 2008, from $25.9 million for the three months ended March 31, 2007.

System sales revenues increased by 28.1%, or $2.3 million, to $10.7 million for the three months ended March 31, 2008, from $8.3 million for the three months ended March 31, 2007. This increase was primarily due to larger system installations compared to the prior year. We completed software system installations at 6 new hospital clients in the first quarter of 2008 compared to 7 new hospital clients in the first quarter of 2007.

Support and maintenance revenues increased by 4.4%, or $0.5 million, to $13.1 million for the three months ended March 31, 2008, from $12.5 million for the three months ended March 31, 2007. 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.

Business management services revenues increased by 13.5%, or $0.7 million, to $5.8 million for the three months ended March 31, 2008, from $5.1 million for the three months ended March 31, 2007. We experienced an increase in business management services revenues as a result of continued growth in existing customer demand for electronic billing and accounts receivable management services. We were providing full business office management services to 18 customers at March 31, 2008 compared to 17 customers at March 31, 2007.

Costs of Sales . Total costs of sales increased by 6.5%, or $1.0 million, to $16.3 million for the three months ended March 31, 2008, from $15.3 million for the three months ended March 31, 2007. As a percentage of total revenues, costs of sales decreased to 55.2% for the three months ended March 31, 2008 from 58.9% for the three months ended March 31, 2007. The gross margin on sales increased to 44.8% for the three months ended March 31, 2008 from 41.1% for the three months ended March 31, 2007.

Cost of system sales increased by 10.1%, or $0.7 million, to $7.9 million for the three months ended March 31, 2008, from $7.2 million for the three months ended March 31, 2007. Cost of equipment increased $0.2 million as a result of an increase in equipment sales which resulted from larger new system sales. The gross margin on system sales increased to 25.8% for the three months ended March 31, 2008, from 13.7% for the three months ended March 31, 2007. The gross margin on larger system installations is generally higher due to a high percentage of fixed expenses included in cost of sales which results in a higher gross margin percentage.

Cost of support and maintenance decreased by 5.1%, or $0.3 million, to $4.8 million for the three months ended March 31, 2008, from $5.1 million for the three months ended March 31, 2007. The gross margin on support and maintenance revenues increased to 63.3% for the three months ended March 31, 2008, compared to 59.6% for the three months ended March 31, 2007. 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 combined with a decrease in support personnel.

Our costs associated with business management services increased by 17.3%, or $0.5 million, to $3.6 million for the three months ended March 31, 2008, from $3.1 million for the three months ended March 31, 2007. This increase was caused primarily by an increase of $0.5 million in payroll related expenses as a result of an increase in the number of employees needed to support our growing business management services operations and electronic billing operations.

Sales and Marketing Expenses. Sales and marketing expenses increased by 8.9%, or $0.2 million, to $2.3 million for the three months ended March 31, 2008, from $2.1 million for the three months ended March 31, 2007. The increase is attributable to increases in payroll related expenses of $0.2 million as a result of additional sales and marketing personnel added during 2007.

General and Administrative Expenses. General and administrative expenses increased 11.9%, or $0.6 million, to $5.5 million for the three months ended March 31, 2008, from $4.9 million for the three months ended March 31, 2007. This increase was attributable to a $0.6 million charge to bad debt expense during the quarter in anticipation of potential collection problems with certain customers in the future due to deteriorating economic conditions. Decreases in payroll and related expenses of $0.1 million were offset by a similar increase in customer user group meeting expenses during the quarter.

As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses decreased to 26.2% for the three months ended March 31, 2008 from 26.9% for three months ended March 31, 2007.

Net Income . Net income for the three months ended March 31, 2008 increased by 37.0%, or $0.9 million, to $3.5 million, or $0.33 per diluted share, as compared with net income of $2.6 million, or $0.24 per diluted share, for the three months ended March 31, 2007. Net income represents 11.9% of revenue for the three months ended March 31, 2008, as compared to 9.9% of revenue for the three months ended March 31, 2007.

Liquidity and Capital Resources

We had cash and cash equivalents of $11.8 million at March 31, 2008, compared to $7.8 million at March 31, 2007. Net cash provided by operating activities for the three months ended March 31, 2008 was $4.3 million, compared to $3.4 million for the three months ended March 31, 2007. The increase was primarily due to an increase in net income and resulting income taxes payable, offset by a decrease in other liabilities and deferred revenue and an increase in accounts receivable.

Net cash used in investing activities totaled $0.4 million for the three months ended March 31, 2008, compared to $0.5 million for the three months ended March 31, 2007. We used cash for the purchase of $0.3 million of property and equipment and investments of $0.1 million during the three months ended March 31, 2008.

Net cash used in financing activities totaled $3.8 million for the three months ended March 31, 2008, compared to $3.9 million for the three months ended March 31, 2007. We declared and paid dividends of $3.9 million during the first three months of 2008. We received proceeds from the exercise of stock options including the related tax benefit of $0.1 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.

CONF CALL

Boyd Douglas

Thank you, Pama. Good morning, everyone and thank you for joining us. During this conference call, we may make statements regarding future operating plans, expectations and performance that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We caution you that any such forward-looking statements are only predictions and are not guarantees of future performance.

Actual results might differ materially from those projected in the forward-looking statements as a result of risks, uncertainties and other factors, including those described in our public releases and reports filed with the Securities and Exchange Commission, including but not limited to our recent annual report on Form 10-K. We also caution investors that the forward-looking information provided in this call represents our outlook only as of this date, and we undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call.

Joining me on this morning is Darrell West, our Chief Financial Officer. Darrell and I have a few minutes of prepared comments, and then we will be glad to take your questions.

In the first quarter, we installed our financial and patient accounting system in six hospitals, our core clinical departmental applications at seven facilities. Six hospitals implemented nursing Point of Care, and four customers went live with ImageLink PACS. Add-on sales to existing clients made up 20% of total revenue.

At this time, we expect to install our financial and patient accounting system at five facilities in the second quarter. We anticipate four new installations of our core clinical departmental modules, eight nursing Point of Care implementations, and three ImageLink installs.

In Business Management solutions during the first quarter we executed eight new accounts receivable management contracts, one of which were for full accounts receivable services, six for private pay collections one for contract management services. During the first quarter revenue from this segment of our business grew 13.5% year-over-year. We anticipated 10% year-over-year growth rate for the second quarter of 2008.

Demand for our Business Management solutions remain strong as hospitals continually looking for ways to improve processes and run their facilities in the most efficient manager possible. On the sales front there has been no significant change in the competitive landscape. Our move to the Linux operating system CCHIT approval and our full suite of business management services currently give us a distinct advantage over our competition.

Speaking of Linux, we now have completed 31 installations of Linux operating system at our client sites. We anticipate installing an additional 18 by the end of the second quarter. This comparison is gone very smoothly and as you can tell by the number it has been a huge success with our customer base and with potential clients. This is yet another example of our ability to some leading edge of technology, while proving our clients with a robust, but stable platform with which they can run their business most efficiently.

At this time I would like to turn it over to Darrell for a few comments on the financials.

Darrell West

Thanks, Boyd. Our DSOs were 45 days for the first quarter, down two days from the fourth quarter and within our range of 45 to 60 days. Cash provided from operations for the quarter was $4.3 million, compared with $3.4 million first quarter of last year. Free cash flow was $4 million for the quarter compared with $3.1 million for the prior year quarter. We defined free cash flow as net cash provided by operating activities, less capital expenditure. CapEx for the quarter was $311,000 compared with $348,000 for the prior year quarter.

Depreciation for the quarter was $478,000, compared with $517,000 last year. Cash collections were $29 million for the first quarter, compared with $27.8 million for 2007. We have recognized stock compensation expense of $224,000 in the first quarter of 2008 and anticipate a charge of $230,000 in the second quarter of 2008.

Our effective tax rate is expected to be around 39.5% for the year of 2008. Our headcount at quarter end was 887, a decrease of 34 over from year end.

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