S-1/A 1 ds1a.htm AMENDMENT #2 TO THE FORM S-1 Prepared by R.R. Donnelley Financial -- Amendment #2 to the Form S-1
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As Filed with the Securities and Exchange Commission on May 20, 2002
Registration No. 333-84726
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
COMPUTER  PROGRAMS  AND  SYSTEMS,  INC.
(Exact Name of Registrant as Specified in its Charter)
 
Delaware
  
7389
  
74-3032373
(State or Other Jurisdiction of Incorporation or Organization)
  
(Primary Standard Industrial Classification Code Number)
  
(I.R.S. Employer Identification Number)
6600 Wall Street
Mobile, Alabama 36695
(251) 639-8100
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
DAVID A. DYE
President and Chief Executive Officer
6600 Wall Street
Mobile, Alabama 36695
(251) 639-8100
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
Copies to:
GREGORY S. CURRAN, ESQ.
Maynard, Cooper & Gale, P.C.
1901 Sixth Avenue North, Suite 2400
Birmingham, Alabama 35203
(205) 254-1000 Telephone
(205) 254-1999 Facsimile
  
JOHN A. GOOD, ESQ.
Bass, Berry & Sims PLC
100 Peabody Place, Suite 900
Memphis, TN 38103
(901) 543-5900 Telephone
(888) 543-4644 Facsimile
Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. ¨
CALCULATION OF REGISTRATION FEE
 
                     
Title of Each Class of
Securities to be Registered
   
Amount to be Registered
   
Proposed Maximum Offering Price Per Share
   
Proposed Maximum Aggregate Offering Price(1)(2)
   
Amount of Registration Fee(3)
                     
Common Stock, par value $.001 per share
   
3,450,000
   
$18.00
   
$62,100,000
   
$5,714
                     
(1)
 
Includes the dollar value of shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2)
 
Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.
(3)
 
Previously paid on March 21, 2002.
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 

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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, Dated May 20, 2002
 
PROSPECTUS
 
3,000,000 Shares
 
 
LOGO
 
Computer Programs and Systems, Inc.
 
Common Stock
 
 
This is the initial public offering of shares of our common stock. We are selling 1,200,000 shares, and the selling stockholders identified in this prospectus are selling 1,800,000 shares. We will not receive any proceeds from the sale of shares by the selling stockholders. We anticipate that the initial public offering price will be between $16.00 and $18.00 per share.
 
No public market currently exists for our shares. Our shares have been approved for listing on the Nasdaq National Market under the symbol “CPSI.”
 
 
This investment involves risks. See “ Risk Factors” beginning on page 6.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
    
Per Share
   
Total
Public offering price
   
$
                
   
$
                
Underwriting discount
   
$
                
   
$
                
Proceeds to CPSI
   
$
                
   
$
                
Proceeds to selling stockholders
   
$
                
   
$
                
 
The underwriters may also purchase up to an additional 450,000 shares of our common stock from the selling stockholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus solely to cover over-allotments.
 
 
Morgan Keegan & Company, Inc.
Raymond James
 
 
                    , 2002

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LOGO
  
Clear direction
for healthcare information solutions
 
 
 
Over 400 hospital installations in 45 states
 
 
 
 
 
 
LOGO

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You should rely only on the information contained in this prospectus. Neither we nor any underwriter has authorized any other person to provide you with different or additional information. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. You should not assume that the information in this prospectus is complete and accurate as of any date other than the date of this prospectus, regardless of when this prospectus is delivered or when any sale of the common stock occurs.

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This summary highlights information found in more detail later in this prospectus. You should read the entire prospectus, including the risk factors and the financial statements and related notes, before deciding whether or not to invest in shares of our common stock.
 
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 clinical and financial data management in each of 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 quality, revenue cycle management, cost control and regulatory compliance. From our initial hospital installation in 1981, we have grown to serve more than 400 hospital customers across 45 states and the District of Columbia. In 2001, we generated revenues of $59.7 million from the sale of our products and services.
 
Industry Dynamics
 
Healthcare is the largest industry in the United States. Notwithstanding its size and importance, this industry has historically underinvested in medical information technology. Consequently, hospitals often operate with non-integrated, complex, inefficient systems. These systems can adversely impact patient care and financial management. As a result, hospitals have an enhanced need for management tools that allow them to operate more efficiently, capture more reimbursement dollars and provide improved care to patients. We believe these dynamics are more pronounced among hospitals having 300 or fewer acute care beds.
 
We believe healthcare providers, including hospitals having 300 or fewer acute care beds, are embracing information technology as a management tool. The current market for healthcare information technology and related services is estimated to be in excess of $19.0 billion annually and is expected to grow to more than $23.0 billion by 2003. We believe we offer a solution that positions us to take advantage of increased spending on healthcare information technology and sustain our revenue growth.
 
Our Solution
 
We have tailored an information technology solution that effectively addresses the unique 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. At the same time, they are expected to provide high quality healthcare on a cost effective basis.
 
Our solution has been developed entirely by our people to meet the challenges of our community hospital customers. The CPSI system collects, processes, retains and reports 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. We also offer outsourcing services that allow customers to avoid some of the fixed costs of a business office. 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.

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Strategy
 
Our objective is to continue to grow as a leading provider of healthcare information technology systems and services to small and midsize hospitals. We intend to follow the same strategy that we have successfully pursued for over twenty years, the key elements of which are as follows:
 
Deliver a Single-Source Solution.    When a customer purchases the CPSI system, we provide everything necessary for the customer to implement and use that system. We deliver the application software, computer hardware, peripherals, forms and supplies used in the comprehensive information network. We also offer customers additional services such as business office outsourcing, electronic billing outsourcing and ISP services.
 
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 across the primary functional areas of a hospital ensures compatibility among applications and avoids the pitfalls associated with interfacing disparate systems.
 
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 one to one support staff to customer ratio.
 
Expand Presence in Target Market.    We will continue to target small and midsize domestic hospitals with 300 or fewer acute care beds. We believe this market of approximately 4,100 community hospitals nationwide, plus the market of small specialty hospitals, has been traditionally overlooked and underserved by other healthcare technology companies. We will also continue to market additional software products to our existing customers who have not purchased our complete package of software applications.
 
Emphasize Recurring Revenue Opportunities.    In addition to revenues from new system installations, we are developing sources of recurring revenues. Currently, our principal source of recurring revenues is our support and maintenance fees paid by existing customers. We also generate recurring revenues from outsourcing, ASP and ISP services.
 
Company Information
 
We were incorporated in Alabama in 1979. We intend to reincorporate in Delaware prior to the completion of this offering through a merger with a recently formed Delaware subsidiary. Unless otherwise noted, all information in this prospectus assumes that the reincorporation has been completed.
 
Our principal offices are located at 6600 Wall Street, Mobile, Alabama 36695, and our telephone number is (251) 639-8100. We maintain a website at www.cpsinet.com. Note, however, that our website and the information contained therein is not a part of, nor otherwise incorporated into, this prospectus.

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The Offering
 
Common stock offered by CPSI
1,200,000 shares
 
Common stock offered by the selling stockholders
1,800,000 shares
 
Common stock outstanding after the offering(1)
10,488,000 shares
 
Offering price
$             per share
 
Proposed Nasdaq National Market trading symbol
CPSI
 
Use of proceeds
We will not receive any proceeds from the sale of shares by the selling stockholders. We will use the net proceeds we receive from our sale of shares to pay a distribution of previously-taxed S corporation earnings to our current stockholders, to repay existing debt and for general corporate purposes. See “Use of Proceeds.”
 
(1)
 
The number of shares of common stock to be outstanding after the offering is based on 9,288,000 shares outstanding as of May 17, 2002, and it excludes approximately 1,165,333 shares of our common stock that will be reserved for issuance under our 2002 Stock Option Plan. In May 2002, we effected a 430 for 1 stock split. Therefore, unless otherwise noted, all information in this prospectus reflects the completion of the 430 for 1 stock split.

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Summary Financial Data
 
The tables below set forth summary financial data for the years ended December 31, 1997, 1998, 1999, 2000 and 2001, the three months ended March 31, 2001 and 2002, and as of March 31, 2002. The data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our financial statements and related notes included elsewhere in this prospectus.
 
For all periods presented, we operated as an S corporation and were not subject to federal and certain state income taxes. Upon completion of this offering, we will become subject to federal and certain state income taxes applicable to C corporations.            
 
Pro forma net income reflects the provision for income taxes that would have been recorded had we been a C corporation during the periods presented. Pro forma net income per share is based on the weighted average number of shares of common stock outstanding during the years 1997 through 2000, or 9,288,000 shares, plus an additional 403,018 and 368,331 shares for the year ended December 31, 2001 and the three months ended March 31, 2002, respectively, which are the estimated portions of the shares being offered that would be necessary to fund the distribution of accumulated S corporation earnings in excess of net income through the date we become a C corporation. This number of shares has been computed assuming an initial public offering price of $17.00 per share. See Note 3 to our financial statements included elsewhere in this prospectus.
 
Our pro forma balance sheet reflects the accrual of the S corporation distribution, estimated to be approximately $13.5 million as of March 31, 2002. It also reflects the deferred income tax assets that would have been recorded at that date had we elected to be taxed as a C corporation.
 
Our pro forma as adjusted balance sheet reflects our sale of 1,200,000 shares of common stock in this offering at an assumed initial public offering price of $17.00 per share, after deducting the underwriting discount and our estimated offering expenses, reflects the repayment of the note payable and the payment of the S corporation distribution, and reflects the deferred compensation expense that would have been recorded had a May 2002 stock sale between one of our principal stockholders and our Chief Operating Officer occurred at that date. See “Management—Stock Compensation.”
 
   
Year ended December 31,
    
Three months ended March 31,
  
   
1997
  
1998
  
1999
    
2000
    
2001
    
2001
    
2002
  
   
(in thousands except for share and per share data)
 
INCOME STATEMENT DATA:
                                                    
Total sales revenues
  
$
24,121
  
$
32,150
  
$
50,530
 
  
$
49,222
 
  
$
59,666
 
  
$
13,529
 
  
$
16,921
 
Total costs of sales
  
 
13,810
  
 
19,170
  
 
29,895
 
  
 
31,487
 
  
 
36,242
 
  
 
8,171
 
  
 
9,902
 
   
 
 
 
 
 
 
Gross profit
  
 
10,311
  
 
12,980
  
 
20,635
 
  
 
17,735
 
  
 
23,424
 
  
 
5,358
 
  
 
7,019
 
Sales and marketing
  
 
1,612
  
 
2,872
  
 
4,650
 
  
 
4,477
 
  
 
5,105
 
  
 
1,383
 
  
 
1,346
 
General and administrative
  
 
4,337
  
 
4,960
  
 
7,244
 
  
 
8,603
 
  
 
9,843
 
  
 
        2,248
 
  
 
        2,874
 
   
 
 
 
 
 
 
Operating income
  
 
4,362
  
 
5,148
  
 
8,741
 
  
 
4,655
 
  
 
8,476
 
  
 
1,727
 
  
 
2,799
 
Other income
  
 
117
  
 
161
  
 
228
 
  
 
305
 
  
 
280
 
  
 
33
 
  
 
87
 
Interest expense
  
 
—  
  
 
—  
  
 
(32
)
  
 
(69
)
  
 
(76
)
  
 
(16
)
  
 
(14
)
   
 
 
 
 
 
 
Net income
  
$
4,479
  
$
5,309
  
$
8,937
 
  
$
4,891
 
  
$
8,680
 
  
$
1,744
 
  
$
2,872
 
   
 
 
 
 
 
 
Net income per share—basic and diluted
  
$
0.48
  
$
0.57
  
$
0.96
 
  
$
0.53
 
  
$
0.93
 
  
$
0.19
 
  
$
0.31
 
   
 
 
 
 
 
 
Weighted average shares outstanding—basic and diluted
  
 
9,288,000
  
 
9,288,000
  
 
9,288,000
 
  
 
9,288,000
 
  
 
9,288,000
 
  
 
9,288,000
 
  
 
9,288,000
 
   
 
 
 
 
 
 

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Year ended December 31,
   
Three months ended March 31,
    
1997
   
1998
   
1999
   
2000
   
2001
   
2001
   
2002
    
(in thousands except for share and per share data)
Pro forma information:
                                                 
Net income as reported
   
$
4,479
   
$
5,309
   
$
8,937
   
$
4,891
   
$
8,680
   
$
1,744
   
$
2,872
Pro forma income taxes
   
 
1,677
   
 
1,982
   
 
3,324
   
 
1,826
   
 
3,231
   
 
649
   
 
1,082
    
  
  
  
  
  
  
Pro forma net income
   
$
  2,802
   
$
3,327
   
$
5,613
   
$
3,065
   
$
5,449
   
$
1,095
   
$
1,790
    
  
  
  
  
  
  
Pro forma net income per share—basic and diluted (based on 9,288,000 weighted average shares)
   
$
0.30
   
$
0.36
   
$
0.60
   
$
0.33
   
$
0.59
   
$
0.12
   
$
0.19
    
  
  
  
  
  
  
Pro forma net income per share—basic and diluted (based on 9,691,018 and 9,656,331 weighted average shares at December 31, 2001 and March 31, 2002, respectively, and reflecting the S corporation distribution—see Note 3 to financial statements)
                              
$
0.56
          
$
0.19
                                
         
 
    
As of March 31, 2002
    
Actual
     
Pro forma
       
Pro forma as adjusted
    
(in thousands)
BALANCE SHEET DATA:
                           
Cash and cash equivalents
   
$
    1,750
     
$
1,750
 
     
$
5,764
Total assets
   
 
17,940
     
 
18,987
 
     
 
22,617
Total current liabilities
   
 
6,190
     
 
19,690
 
     
 
6,103
Note payable
   
 
641
     
 
641
 
     
 
—  
Total stockholders’ equity (deficit)
   
 
11,108
     
 
(1,344
)
     
 
16,514

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You should carefully consider the following risk factors before you decide to buy our common stock. You should also consider all of the other information in this prospectus. If any of the risks described below actually occurs, our business, financial condition, operating results and cash flows could be materially adversely affected. This could cause the trading price of our common stock to decline, and you may lose part or all of your investment.
 
Risks Related to Our Business and Industry
 
Market factors may cause a decline in spending for information technology and services by our current and prospective customers which may result in less demand for our products, lower prices and, consequently, lower revenues and a lower revenue growth rate.
 
The purchase of our information system involves a significant financial commitment by our customers. At the same time, the healthcare industry faces significant financial pressures which could adversely affect overall spending on healthcare information technology and services. For example, the Balanced Budget Act of 1997 has significantly reduced Medicare reimbursements to hospitals, leaving them less money to invest in infrastructure. Moreover, a general economic decline could cause hospitals to reduce or eliminate information technology related spending. To the extent spending for healthcare information technology and services declines or increases slower than we anticipate, demand for our products and services, as well as the prices we charge, could be adversely affected. Accordingly, we cannot assure you that we will be able to increase or maintain our revenues or our growth rate.
 
There is a limited number of hospitals in our target market. Continued consolidation in the healthcare industry could result in the loss of existing customers, a reduction in our potential customer base and downward pressure on our products’ prices.
 
There is a finite number of small and midsize hospitals with 300 or fewer acute care beds. Saturation of this market with our products or our competitors’ products could eventually limit our revenues and growth. Furthermore, many healthcare providers have consolidated to create larger healthcare delivery enterprises with greater market power. If this consolidation continues, we could lose existing customers and could experience a decrease in the number of potential purchasers of our products and services. The loss of existing and potential customers due to industry consolidation could cause our revenue growth rate to decline. In addition, larger, consolidated enterprises could have greater bargaining power, which may lead to downward pressure on the prices for our products and services.
 
We may experience fluctuations in quarterly financial performance that cause us to fail to meet revenues or earnings expectations. Failure to meet these expectations could adversely impact our stock price.
 
There is no assurance that consistent quarterly growth in our business will continue. Our quarterly revenues may fluctuate and may be difficult to forecast for a variety of reasons. For example, prospective customers often take significant time evaluating our system and related services before making a purchase decision. Moreover, a prospective customer who has placed an order for our system could decide to cancel that order or postpone installation of the ordered system. If a prospective customer delays or cancels a scheduled system installation during any quarter, we may not be able to schedule a substitute system installation during that quarter. The amount of revenues that would have been generated from that installation will be postponed or lost. The possibility of delays or cancellations of scheduled system installations could cause our quarterly revenues to fluctuate.
 
The following factors may also affect demand for our products and services and cause our quarterly revenues to fluctuate:
 
 
•
 
changes in customer budgets and purchasing priorities;

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•
 
market acceptance of new products, product enhancements and services from us and our competitors;
 
 
•
 
product and price competition; and
 
 
•
 
delay of revenue recognition to future quarters due to an increase in the sale of our remote access ASP services.
 
Variations in our quarterly revenues may adversely affect our operating results. In each fiscal quarter, our expense levels, operating costs and hiring plans are based on projections of future revenues and are relatively fixed. If our actual revenues fall below expectations, our earnings will also likely fail to meet expectations. If we fail to meet the revenue or earnings expectations of securities analysts and investors, the price of our common stock will likely decrease.
 
Competition with companies that have greater financial, technical and marketing resources than we have could result in loss of customers and/or a lowering of prices for our products, causing a decrease in our revenues and/or market share.
 
Our principal competitors are Medical Information Technology, Inc., or “Meditech,” and Healthcare Management Systems, Inc., or “HMS.” Meditech and HMS compete with us directly in our target market of small and midsize hospitals. These companies offer products and services that are comparable to our system and are designed to address the needs of community hospitals.
 
Our secondary competitors include McKesson Corporation, Quadramed Corp., Cerner Corporation and Siemens Corporation. These companies are significantly larger than we are, and they typically sell their products and services to larger hospitals outside of our target market. However, they sometimes compete directly with us. We also face competition from providers of practice management systems, general decision support and database systems and other segment-specific applications, as well as from healthcare technology consultants. Any of these companies as well as other technology or healthcare companies could decide at any time to specifically target hospitals within our target market.
 
A number of existing and potential competitors are more established than we are and have greater name recognition and financial, technical and marketing resources. Products of our competitors may have better performance, lower prices and broader market acceptance than our products. We expect increased competition that could cause us to lose customers, lower our prices to remain competitive and experience lower revenues, revenue growth and profit margins.            
 
Our failure to develop new products or enhance current products in response to market demands could adversely impact our competitive position and require substantial capital resources to correct.
 
The needs of hospitals in our target market are subject to rapid change due to government regulation, trends in clinical care practices and technological advancements. As a result of these changes, our products may quickly become obsolete or less competitive. New product introductions and enhancements by our competitors that more effectively or timely respond to changing industry needs may weaken our competitive position.            
 
We continually redesign and enhance our products to incorporate new technologies and adapt our products to ever-changing hardware and software platforms. Often we face difficult choices regarding which new technologies to adopt. If we fail to anticipate or respond adequately to technological advancements, or experience significant delays in product development or introduction, our competitive position could be negatively affected. Moreover, our failure to offer products acceptable to our target market could require us to make significant capital investments and incur higher operating costs to redesign our products, which could negatively affect our financial condition and operating results.

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Potential regulation of our products as medical devices by the U.S. Food and Drug Administration could increase our costs, delay the introduction of new products and slow our revenue growth.
 
The U.S. Food and Drug Administration, or the “FDA,” is likely to become more active in regulating the use of computer software for clinical purposes. The FDA has increasingly regulated computer products and computer-assisted products as medical devices under the federal Food, Drug and Cosmetic Act. If the FDA regulates any of our products as medical devices, we would likely be required to, among other things:
 
 
•
 
seek FDA clearance by demonstrating that our product is substantially equivalent to a device already legally marketed, or obtain FDA approval by establishing the safety and effectiveness of our product;
 
 
•
 
comply with rigorous regulations governing pre-clinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices; and
 
 
•
 
comply with the Food, Drug and Cosmetic Act’s general controls, including establishment registration, device listing, compliance with good manufacturing practices and reporting of specified device malfunctions and other adverse device events.
 
We anticipate that some of our products currently in development will be subject to FDA regulation. If any of our products fail to comply with FDA requirements, we could face FDA refusal to grant pre-market clearance or approval of products; withdrawal of existing clearances and approvals; fines, injunctions or civil penalties; recalls or product corrections; production suspensions; and criminal prosecution. FDA regulation of our products could increase our operating costs, delay or prevent the marketing of new or existing products and adversely affect our revenue growth.
 
Governmental regulations relating to patient confidentiality and other matters could increase our costs.
 
State and federal laws regulate the confidentiality of patient records and the circumstances under which those records may be released. These regulations may require the users of such information to implement security measures. Regulations governing electronic health data transmissions are also evolving rapidly, and they are often unclear and difficult to apply.
 
The Health Insurance Portability and Accountability Act of 1996, or “HIPAA,” requires, among other things, the Secretary of Health and Human Services, or “HHS,” to adopt national standards to ensure the integrity and confidentiality of health information. In December 2000, HHS published its final health data privacy regulations. Our customers must fully comply with these regulations by April 2003. These regulations restrict the use and disclosure of personally identifiable health information without the prior informed consent of the patient. In addition, HHS has also issued final regulations establishing national standards for some healthcare-related electronic transactions and uniform code sets to be used in those transactions. Our customers must comply with these regulations by October 2002, but may obtain a one-year extension for compliance by filing a plan with HHS that explains the steps the organization will take to comply by the extended deadline. Final rules have not yet been issued with respect to other aspects of HIPAA. For example, HHS has issued proposed rules with respect to information security that would require healthcare providers to implement organizational practices to protect the security of electronically maintained or transmitted health-related information, such as the use of electronic signatures and single sign-on access to information. Furthermore, HHS has not yet issued proposed rules on the topic of unique health identifiers. We cannot predict the potential impact of proposed rules and rules that have not yet been proposed. In addition to HIPAA, other federal and/or state privacy legislation may be enacted at any time.
 
In our support agreements with our customers, we agree to update our software applications to comply with applicable federal and state laws. While we believe we have developed products that will comply with current HIPAA and other regulatory requirements, new laws, regulations and interpretations could force us to further redesign our products. Any such product redesign could consume significant capital, research and development and other resources, which could significantly increase our operating costs.

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Our products assist clinical decision-making and related care by capturing, maintaining and reporting relevant patient data. If our products fail to provide accurate and timely information, our customers could assert claims against us that could result in substantial cost to us, harm our reputation in the industry and cause demand for our products to decline.
 
We provide products that assist clinical decision-making and related care by capturing, maintaining and reporting relevant patient data. Our products could fail or produce inaccurate results due to a variety of reasons, including mechanical error, product flaws, faulty installation and/or human error during the initial data conversion. If our products fail to provide accurate and timely information, customers and/or patients could sue us to hold us responsible for losses they incur from these errors. These lawsuits, regardless of merit or outcome, could result in substantial cost to us, divert management’s attention from operations and decrease market acceptance of our products. We attempt to limit by contract our liability for damages arising from negligence, errors or mistakes. Despite this precaution, such contract provisions may not be enforceable or may not otherwise protect us from liability for damages. We maintain general liability insurance coverage, including coverage for errors or omissions. However, this coverage may not be sufficient to cover one or more large claims against us or otherwise continue to be available on terms acceptable to us. In addition, the insurer could disclaim coverage as to any future claim.
 
Breaches of security in our system could result in customer claims against us and harm to our reputation causing us to incur expenses and/or lose customers.
 
We have included security features in our system that are intended to protect the privacy and integrity of patient data. Despite the existence of these security features, our system may experience break-ins and similar disruptive problems that could jeopardize the security of information stored in and transmitted through the computer networks of our customers. Because of the sensitivity of medical information, customers could sue us for breaches of security involving our system. Also, actual or perceived security breaches in our system could harm the market perception of our products which could cause us to lose existing and prospective customers.
 
New products that we introduce or enhancements to our existing products may contain undetected errors or problems which could affect customer satisfaction and cause a decrease in revenues.
 
Highly complex software products such as ours sometimes contain undetected errors or failures when first introduced or when updates and new versions are released. Tests of our products may not detect bugs or errors because it is difficult to simulate our customers’ wide variety of computing environments. Despite extensive testing, from time to time we have discovered defects or errors in our products. Defects or errors discovered in our products could cause delays in product introductions and shipments, result in increased costs and diversion of development resources, require design modifications, decrease market acceptance or customer satisfaction with our products, cause a loss of revenue, result in legal actions by our customers and cause increased insurance costs.
 
Our facilities are located in an area vulnerable to hurricanes and tropical storms, and the occurrence of a severe hurricane, similar storm or other natural disaster could cause damage to our facilities and equipment, which could require us to cease or limit our operations.
 
All of our facilities and virtually all of our employees are situated on one campus in Mobile, Alabama, which is located on the coast of the Gulf of Mexico. Our facilities are vulnerable to significant damage or destruction from hurricanes and tropical storms. We are also vulnerable to damage from other types of disasters, including tornadoes, fires, floods and similar events. If any disaster were to occur, our ability to conduct business at our facilities could be seriously impaired or completely destroyed. This would have adverse consequences for our customers who depend on us for system support or outsourcing services. Also, the servers of customers who use our remote access services could be damaged or destroyed in any such disaster. This would have potentially devastating consequences to those customers. Although we have an emergency recovery plan, there can be no

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assurance that this plan will effectively prevent the interruption of our business due to a natural disaster. Furthermore, the insurance we maintain may not be adequate to cover our losses resulting from any natural disaster or other business interruption.
 
Interruptions in our power supply and/or telecommunications capabilities could disrupt our operations, cause us to lose revenues and/or increase our expenses.
 
We currently have backup generators to be used as alternative sources of power in the event of a loss of power to our facilities. If these generators were to fail during any power outage, we would be temporarily unable to continue operations at our facilities. This would have adverse consequences for our customers who depend on us for system support and outsourcing services. Any such interruption in operations at our facilities could damage our reputation, harm our ability to retain existing customers and obtain new customers, and could result in lost revenue and increased insurance and other operating costs.
 
We also have customers for whom we store and maintain computer servers containing critical patient and administrative data. Those customers access this data remotely through telecommunications lines. If our power generators fail during any power outage or if our telecommunications lines are severed or impaired for any reason, those customers would be unable to access their mission critical data causing an interruption in their operations. In such event our remote access customers and/or their patients could seek to hold us responsible for any losses. We would also potentially lose those customers, and our reputation could be harmed.
 
If we are unable to attract and retain qualified customer service and support personnel our business and operating results will suffer.
 
Our customer service and support is a key component of our business. Most of our hospital customers have small information technology staffs, and they depend on us to service and support their systems. Future difficulty in attracting, training and retaining capable customer service and support personnel could cause a decrease in the overall quality of our customer service and support. That decrease would have a negative effect on customer satisfaction which could cause us to lose existing customers and could have an adverse effect on our new customer sales. The loss of customers due to inadequate customer service and support would negatively impact our ability to continue to grow our business.
 
We do not have employment or non-competition agreements with our key personnel, and their departure could harm our future success.
 
Our future success depends to a significant extent on the leadership and performance of our chief executive officer, chief operating officer and other executive officers. We do not have employment or non-competition agreements with any of our executive officers. Therefore, they may terminate their employment with us at any time and may compete against us. The loss of the services of any of our executive officers could have a material adverse effect on our business, financial condition and results of operations.
 
We have limited protection of our intellectual property and, if we fail to adequately protect our intellectual property, we may not be able to compete effectively.
 
We consider some aspects of our internal operations, products and documentation to be proprietary. To some extent we have relied on a combination of confidentiality provisions in our customer agreements, copyright, trademark and trade secret laws and other measures to protect our intellectual property. To date, however, we have not filed any patent applications to protect our proprietary software products. In addition, existing copyright laws afford only limited protection. Although we attempt to control access to our intellectual property, unauthorized persons may attempt to copy or otherwise use our intellectual property. Monitoring unauthorized use of our intellectual property is difficult, and the steps we have taken may not prevent unauthorized use. If our competitors gain access to our intellectual property, our competitive position in the industry could be damaged. An inability to compete effectively could cause us to lose existing and potential customers and experience lower revenues, revenue growth and profit margins.

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In the event our products infringe on the intellectual property rights of third-parties, our business may suffer if we are sued for infringement or if we cannot obtain licenses to these rights on commercially acceptable terms.
 
Others may sue us alleging infringement of their intellectual property rights. Many participants in the technology industry have an increasing number of patents and patent applications and have frequently demonstrated a readiness to take legal action based on allegations of patent and other intellectual property infringement. Further, as the number and functionality of our products increase, we believe we may become increasingly subject to the risk of infringement claims. If infringement claims are brought against us, these assertions could distract management. We may have to spend a significant amount of money and time to defend or settle those claims. If we were found to infringe on the intellectual property rights of others, we could be forced to pay significant license fees or damages for infringement. If we were unable to obtain licenses to these rights on commercially acceptable terms, we would be required to discontinue the sale of our products that contain the infringing technology. Our customers would also be required to discontinue the use of those products. We are unable to insure against this risk on an economically feasible basis. Even if we were to prevail in an infringement lawsuit, the accompanying publicity could adversely impact the demand for our system. Under some circumstances, we agree to indemnify our customers for some types of infringement claims that may arise from the use of our products.
 
Risks Related to this Offering
 
We will receive less than 40% of the net proceeds from this offering, and management may spend or invest these proceeds in ways with which you may not agree.
 
Over 60% of the net proceeds of this offering will be received by the existing stockholders who have elected to sell some of their shares of our common stock. We will not receive any net proceeds from the sale of those shares by the selling stockholders. We will receive less than 40% of the net proceeds from this offering. With our net proceeds, we will fund a distribution of previously taxed S corporation income to our current stockholders in connection with the termination of our S corporation election, which totaled $13.5 million as of March 31, 2002. We will also use approximately $0.7 million of our net proceeds to repay debt. Accordingly, approximately $4.0 million will be available for use in our operations. We have broad discretion to determine the allocation of our proceeds from this offering that will be used for general corporate purposes. You will not have an opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use these proceeds. The failure of management to use those funds effectively could have a material adverse effect on our financial condition and operating results. See “Use of Proceeds.”
 
As a new investor, you will experience immediate dilution of $15.53, or 91.4% in the book value of your common stock, and may experience additional dilution if options are granted and exercised.
 
The pro forma net tangible book value per share of common stock you purchase in this offering will be less than the initial public offering price that you pay. Accordingly, if you purchase common stock in this offering at an assumed initial public offering price of $17.00 per share, you will incur immediate and substantial dilution of $15.53 per share, which equals the difference between your purchase price per share and the net tangible book value per share following the completion of this offering. Simultaneously with the completion of this offering and in the future, we intend to issue to our employees options to purchase our common stock. To the extent these options are exercised, there will be further dilution to investors in this offering. See “Dilution.”
 
A large number of shares may be sold in the market following this offering which may depress our stock price.
 
Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that such sales are likely to occur, could depress the market price of our common stock. Based on shares outstanding as of May 17, 2002, upon completion of this offering we will have outstanding 10,488,000 shares of common stock. Of these shares, the 3,000,000 shares of common stock sold in this offering (or

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3,450,000 if the underwriters’ over-allotment option is exercised in full) will be freely tradable in the public market. After the lockup agreements signed by current stockholders expire 180 days from the date of this prospectus, an additional 2,548,568 shares will be eligible for immediate sale in the public market and an additional 4,939,432 shares will be available for sale subject to compliance with various requirements of Rule 144 under the Securities Act. See “Shares Eligible for Future Sale.”
 
An active public market for our common stock may not develop, which could impede your ability to sell your shares and could depress our stock price.
 
The price of our common stock to be sold in this offering will be determined through negotiations between us and the underwriters. The public offering price may not be indicative of prices that will prevail in the trading market. Before this offering, no public market existed for our common stock. An active public market for our common stock may not develop or be sustained after the offering, which could affect your ability to sell your shares and depress the market price of your shares. The market price of your shares may fall below the initial public offering price.
 
There has been significant volatility in the market price and trading volume of securities of healthcare and technology-related companies that are unrelated to the performance of those companies. These broad market fluctuations may negatively affect the market price of our common stock. As a consequence, you may not be able to sell the shares of common stock you purchase at or above the initial public offering price.
 
In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may become the target of similar litigation. Securities litigation may result in substantial costs and divert management’s attention and resources, which may harm our business, financial condition and results of operations, as well as the market price of our common stock.
 
Our executive officers, directors and other current stockholders will own approximately 71.4% of our outstanding common stock after this offering allowing them to control all matters involving stockholder approval.
 
Upon the completion of this offering, our executive officers, directors and other current stockholders will, in the aggregate, beneficially own approximately 71.4% of our outstanding common stock. As a result, these stockholders will be able to effectively control all matters requiring approval of our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also delay, deter or prevent a change in control and may make some transactions more difficult or impossible to complete without the support of these stockholders, even if the transactions are favorable to you. In addition, because of their ownership of our common stock, these stockholders will be in a position to significantly affect our corporate actions in a manner that could conflict with the interests of our public stockholders.
 
Certain provisions of our Certificate of Incorporation or our Bylaws could delay or prevent a change in control that may be favorable to our stockholders.
 
Our Certificate of Incorporation and Bylaws, which will be effective upon our reincorporation in Delaware, contain provisions that may deter or impede takeovers or changes of control or management. These provisions include:
 
 
•
 
our board of directors is classified into three classes of directors with staggered three-year terms;
 
 
•
 
the board of directors fixes the size of the board of directors, may create new directorships and may elect new directors to serve for the full term in which the new directorship was created;
 
 
•
 
all stockholder actions must be effected at a duly called meeting of stockholders and not by written consent;
 
 
•
 
there is no cumulative voting for directors;
 

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•
 
the board of directors may adopt, amend, alter or repeal the bylaws without any vote or further action by the stockholders;
 
 
•
 
advance notice procedures are required with respect to stockholder proposals and the nominations of candidates for election as directors; and
 
 
•
 
indemnification of executive officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures.
 
These provisions may have the effect of delaying or preventing a change of control that may be desired by or favorable to our public stockholders.
 
 
This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including, but not limited to, “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions and involve risks, uncertainties and other factors, including the risks outlined under “Risk Factors,” that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
 
Although we believe our expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are not under any duty to update any of the forward-looking statements after the date of this prospectus to conform these statements to actual results, unless required by law.
 
 
We estimate that our net proceeds from the sale of the 1,200,000 shares of common stock we are offering, assuming an initial public offering price of $17.00 per share, will be approximately $17.9 million, after deducting the estimated underwriting discount and estimated offering expenses of approximately $2.5 million payable by us (which include approximately $0.4 million of expenses which we have already paid). We will not receive any of the net proceeds from the sale of shares by the selling stockholders. See “Principal and Selling Stockholders.”
 
We have been an S corporation since 1986. Generally speaking, as an S corporation we have not paid income tax. Instead, our earnings have been passed through directly to our stockholders, who report the earnings on their individual tax returns. Our stockholders have been required to include in their taxable income their proportionate share of our earnings even if we did not distribute the earnings to them. Upon consummation of this offering, our S corporation election will terminate, and we will then become subject to federal and state income taxes. In connection with the termination of our S corporation election, we will use a portion of the net proceeds of this offering to fund a distribution to our current stockholders of previously taxed S corporation income through the date of termination. As of March 31, 2002, that amount was $13.5 million. Purchasers of shares of common stock in this offering will not be entitled to any portion of that distribution.
 
We will also use approximately $0.7 million of the net proceeds to repay the entire outstanding amount of debt on land we purchased in 1999 adjacent to our corporate headquarters. The loan currently is payable in monthly installments of $11,805, including interest at an annual rate of 7.72%. The loan would otherwise mature on July 29, 2009.

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We currently intend to use the balance of the net proceeds, approximately $4.0 million, for working capital and other general corporate purposes. However, we will retain broad discretion in the allocation of the net proceeds of this offering. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in interest bearing, investment-grade securities.
 
 
To the extent that we generate cash in excess of our operating needs, the board of directors from time to time will consider paying cash dividends to holders of our common stock. Any decision to pay dividends will depend upon many factors, including our financial condition and earnings, cash needed to fund future growth and legal requirements. Accordingly, there is no assurance that dividends will be declared or paid in the future.
 
 
The following table sets forth our capitalization as of March 31, 2002 on an actual basis and on a pro forma as adjusted basis to give effect to the following events:            
 
 
•
 
the sale of 1,200,000 shares of common stock by us in this offering, after deducting the underwriting discount and estimated offering expenses payable by us, and the application of the net proceeds as described in “Use of Proceeds.”
 
 
•
 
the May 2002 stock sale between one of our principal stockholders and our Chief Operating Officer, and the recording of deferred compensation expense, as a result of that transaction as described in footnote 1 to the table below.
 
You should read this table in conjunction with the audited financial statements and related footnotes, and the other financial information included in this prospectus.
 
    
As of March 31, 2002
  
    
(in thousands)
  
    
Actual
   
Pro forma, as adjusted
  
Cash and cash equivalents
   
$
1,750
   
$
5,764
 
    
  
Note payable
   
$
729
   
$
—  
 
Stockholders’ equity
                
Common stock, $0.001 par value; 30,000,000 shares authorized, 9,288,000 issued and outstanding actual; 10,488,000 shares issued and outstanding pro forma as adjusted
   
 
9
   
 
10
 
Additional paid-in capital
   
 
110
   
 
18,463
 
Deferred compensation (1)
   
 
—  
   
 
(496
)
Retained earnings (deficit)
   
 
10,989
   
 
(1,463
)
    
  
Total stockholders’ equity
   
 
11,108
   
 
16,514
 
    
  
Total capitalization
   
$
11,837
   
$
16,514
 
    
  
(1)
 
On May 17, 2002, one of our principal stockholders sold 86,000 shares of common stock to Boyd Douglas, our Chief Operating Officer for a price per share of $10.23. Mr. Douglas has delivered a promissory note for the entire purchase price. The promissory note bears interest at the applicable federal rate for federal income tax purposes, and the entire principal balance is due five years after the date of the stock sale. The stockholder and Mr. Douglas have agreed that if Mr. Douglas’ employment terminates during the five year period beginning with the date of sale, he will be required to sell back to the stockholder at $10.23 per share the following percentages of the purchased shares, foregoing any built-in profit in respect of such shares:
 
Prior to first anniversary
   
100
%
Prior to second anniversary
   
80
%
Prior to third anniversary
   
60
%
Prior to fourth anniversary
   
40
%
Prior to fifth anniversary
   
20
%
 
We estimated that the shares sold to Mr. Douglas had a fair market value of $16.00 per share as of the date of the sale. Accordingly, the Company will record deferred compensation of approximately $496,000 representing the discount of the sale price below the fair market value of the 86,000 shares. We will amortize the deferred compensation expense over 20 fiscal quarters, recognizing a pre-tax compensation expense of approximately $25,000 per quarter beginning with the quarter ending June 30, 2002.

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Our net tangible book value as of March 31, 2002, was approximately $10.7 million, or $1.15 per share. Net tangible book value per share represents the amount of our stockholders’ equity less intangible assets, divided by the number of shares of common stock outstanding as of March 31, 2002. Dilution per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the net tangible book value per share of common stock, on a pro forma basis, immediately after completion of this offering.
 
After giving effect to the sale of 1,200,000 shares of common stock offered by us at an assumed initial public offering price of $17.00 per share, after deducting the underwriting discount of approximately $1.4 million and estimated offering expenses of approximately $1.1 million payable by us ($0.4 million of which we have already paid), and the application of the net proceeds as described in “Use of Proceeds,” our net tangible book value as of March 31, 2002, on a pro forma basis, would have been approximately $15.5 million, or approximately $1.47 per share. This represents an immediate increase in pro forma net tangible book value of $.32 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $15.53 per share to investors purchasing our common stock in this offering, as illustrated in the following table:
 
Assumed initial public offering price per share
          
$
17.00
Net tangible book value per share before this offering
   
$
  1.15
       
Increase in pro forma net tangible book value per share attributable to new investors
   
 
.32
       
    
      
Pro forma net tangible book value per share after this offering
          
 
1.47
           
Dilution per share to new investors
          
$
15.53
           
 
The table below summarizes as of March 31, 2002, on a pro forma basis, the differences between our existing stockholders and the new investors purchasing our common stock in this offering with respect to the total number of shares purchased, the total consideration paid and the average price per share paid, based upon an assumed public offering price of $17.00 per share.
 
    
Shares Purchased
     
Total Consideration
     
Average Price
    
Number
   
Percent
     
Amount
   
Percent
     
per Share
Existing stockholders
   
7,488,000
   
71.4
%
   
$
119,099
   
0.2
%
   
$
0.02
New investors
   
3,000,000
   
28.6
 
   
 
51,000,000
   
99.8
 
   
 
17.00
    
  
  
  
      
Total
   
10,488,000
   
100.0
%
   
$
51,119,099
   
100.0
%
       
    
  
  
  
      
 
The foregoing table assumes no exercise by the underwriters of the over-allotment option. If the underwriters exercise their over-allotment option in full, the following will occur:
 
 
•
 
the number of shares of common stock held by existing stockholders will decrease to 7,038,000, or approximately 67.1% of the total number of shares of our common stock outstanding after this offering; and
 
 
•
 
the number of shares held by new investors will increase to 3,450,000 shares, or approximately 32.9% of the total number of shares of common stock outstanding after this offering.

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To assist you in your investment decision, we are providing the following selected financial data. We derived the selected income data for the years ended December 31, 1999, 2000 and 2001 and for the three months ended March 31, 2001 and 2002, and the selected balance sheet data as of December 31, 2000 and 2001 and March 31, 2002, from our financial statements included elsewhere in this prospectus. The selected income data for the years ended December 31, 1997 and 1998 and the selected balance sheet data as of December 31, 1997, 1998 and 1999, and March 31, 2001 are derived from financial statements not included in this prospectus. The data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our financial statements and related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of future results.
 
For all periods presented, we operated as an S corporation and were not subject to federal and certain state income taxes. Upon completion of this offering, we will become subject to federal and certain state income taxes applicable to C corporations.
 
Pro forma net income reflects the provision for income taxes that would have been recorded had we been a C corporation during the periods presented. Pro forma net income per share is based on the weighted average number of shares of common stock outstanding during the years 1997 through 2001 and the three-month periods ended March 31, 2001 and 2002, or 9,288,000 shares, plus an additional 403,018 and 368,331 shares for the year ended December 31, 2001 and the three months ended March 31, 2002, respectively, which are the estimated portions of the shares being offered that would be necessary to fund the distribution of accumulated S corporation earnings in excess of net income, through the date we become a C corporation. This number of shares has been calculated assuming an initial public offering price of $17.00 per share. See Note 3 to our financial statements included elsewhere in this registration statement.
 
   
Year ended December 31,
    
Three months ended March 31, 2002
  
   
1997
  
1998
  
1999
    
2000
    
2001
    
2001
    
2002
  
   
(in thousands except for share and per share data)
 
INCOME DATA:
                                                    
Sales revenues:
                                                    
System sales
  
$
12,268
  
$
18,201
  
$
32,538
 
  
$
25,737
 
  
$
30,350
 
  
$
6,767
 
  
$
8,800
 
Support and maintenance
  
 
11,853
  
 
13,949
  
 
17,088
 
  
 
21,123
 
  
 
25,823
 
  
 
6,008
 
  
 
7,090
 
Outsourcing
  
 
—  
  
 
—  
  
 
904
 
  
 
2,362
 
  
 
3,493
 
  
 
754
 
  
 
1,031
 
   
 
 
 
 
 
 
Total sales revenues
  
 
24,121
  
 
32,150
  
 
50,530
 
  
 
49,222
 
  
 
59,666
 
  
 
13,529
 
  
 
16,921
 
Costs of sales:
                                                    
System sales
  
 
8,926
  
 
13,142
  
 
21,210
 
  
 
20,198
 
  
 
22,499
 
  
 
5,052
 
  
 
6,047
 
Support and maintenance
  
 
4,884
  
 
6,028
  
 
8,044
 
  
 
9,781
 
  
 
11,634
 
  
 
2,694
 
  
 
3,231
 
Outsourcing
  
 
—  
  
 
—  
  
 
641
 
  
 
1,508
 
  
 
2,109
 
  
 
425
 
  
 
624
 
   
 
 
 
 
 
 
Total costs of sales
  
 
13,810
  
 
19,170
  
 
29,895
 
  
 
31,487
 
  
 
36,242
 
  
 
8,171
 
  
 
9,902
 
   
 
 
 
 
 
 
Gross profit
  
 
10,311
  
 
12,980
  
 
20,635
 
  
 
17,735
 
  
 
23,424
 
  
 
5,358
 
  
 
7,019
 
Operating expenses:
                                                    
Sales and marketing
  
 
1,612
  
 
2,872
  
 
4,650
 
  
 
4,477
 
  
 
5,105
 
  
 
1,383
 
  
 
1,346
 
General and administrative
  
 
4,337
  
 
4,960
  
 
7,244
 
  
 
8,603
 
  
 
9,843
 
  
 
2,248
 
  
 
2,874
 
   
 
 
 
 
 
 
Total operating expenses
  
 
5,949
  
 
7,832
  
 
11,894
 
  
 
13,080
 
  
 
14,948
 
  
 
3,631
 
  
 
4,220
 
   
 
 
 
 
 
 
Operating income
  
 
4,362
  
 
5,148
  
 
8,741
 
  
 
4,655
 
  
 
8,476
 
  
 
1,727
 
  
 
2,799
 
Other income (expense):
                                                    
Interest income
  
 
98
  
 
100
  
 
82
 
  
 
91
 
  
 
126
 
  
 
24
 
  
 
42
 
Miscellaneous income
  
 
19
  
 
61
  
 
146
 
  
 
214
 
  
 
154
 
  
 
9
 
  
 
45
 
Interest expense
  
 
—  
  
 
—  
  
 
(32
)
  
 
(69
)
  
 
(76
)
  
 
(16
)
  
 
(14
)
   
 
 
 
 
 
 
Total other income
  
 
117
  
 
161
  
 
196
 
  
 
236
 
  
 
204
 
  
 
17
 
  
 
73
 
   
 
 
 
 
 
 
Net income
  
$
4,479
  
$
5,309
  
$
8,937
 
  
$
4,891
 
  
$
8,680
 
  
$
1,744
 
  
$
2,872
 
   
 
 
 
 
 
 
Net income per share—basic and diluted
  
$
0.48
  
$
0.57
  
$
0.96
 
  
$
0.53
 
  
$
0.93
 
  
$
0.19
 
  
$
0.31
 
   
 
 
 
 
 
 
Weighted average shares outstanding—basic and diluted
  
 
9,288,000
  
 
9,288,000
  
 
9,288,000
 
  
 
9,288,000
 
  
 
9,288,000
 
  
 
9,288,000
 
  
 
9,288,000
 
   
 
 
 
 
 
 
Cash dividends declared per share
  
$
0.38
  
$
0.49
  
$
0.66
 
  
$
0.65
 
  
$
0.71
 
  
$
0.09  
 
  
$
0.19
 
   
 
 
 
 
 
 

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Year ended December 31,
  
Three months ended March 31, 2002
   
1997
  
1998
  
1999
  
2000
  
2001
  
2001
  
2002
   
(in thousands except for share and per share data)
Pro forma information:
                                          
Net income as reported
  
$
4,479
  
$
5,309
  
$
8,937
  
$
4,891
  
$
8,680
  
$
1,744
  
$
2,872
Pro forma income taxes
  
 
1,677
  
 
1,982
  
 
3,324
  
 
1,826
  
 
3,231
  
 
649
  
 
1,082
   
 
 
 
 
 
 
Pro forma net income
  
$
2,802
  
$
3,327
  
$
5,613
  
$
3,065
  
$
5,449
  
$
1,095
  
$
1,790
   
 
 
 
 
 
 
Pro forma net income per share—basic and diluted (based on 9,288,000 weighted average shares)
  
$
0.30
  
$
0.36
  
$
0.60
  
$
0.33
  
$
0.59
  
$
0.12
  
$
0.19
   
 
 
 
 
 
 
Pro forma net income per share basic and diluted (based on 9,691,018 and 9,656,331 weighted average shares at December 31, 2001 and March 31, 2002, respectively, and reflecting the S corporation distribution—see Note 3 to financial statements)
                          
 
$ 0.56
        
 
$0.19
                           
       
                                           
   
As of December 31,
  
As of March 31,
   
1997
  
1998
  
1999
  
2000
  
2001
  
2001
  
2002
   
(in thousands except for share and per share data)
BALANCE SHEET DATA:
                            
Cash and cash equivalents
  
$
1,467
  
$
715
  
$
980
  
$
1,033
  
$
2,019
  
$
1,111
  
$
1,750
Total assets
  
 
6,406
  
 
7,691
  
 
14,374
  
 
14,515
  
 
17,251
  
 
14,654
  
 
17,940
Total current liabilities
  
 
718
  
 
1,453
  
 
4,421
  
 
5,810
  
 
6,551
  
 
5,025
  
 
6,190
Note payable
  
 
—  
  
 
—  
  
 
889
  
 
749
  
 
664
  
 
729
  
 
641
Total stockholders’ equity
  
 
5,688
  
 
6,239
  
 
9,065
  
 
7,956
  
 
10,036
  
 
8,900
  
 
11,108

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion of our financial condition and results of operations in conjunction with “Selected Financial Data” and our financial statements and the related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under “Risk Factors” and elsewhere in this prospectus.
 
Overview
 
CPSI was founded in 1979 and specializes in delivering comprehensive healthcare information systems and related services to community hospitals. Our systems and services are designed to support the primary functional areas of a hospital and to enhance access to needed financial and clinical information. Our comprehensive system enables healthcare providers to improve clinical, financial and administrative outcomes. Our products and services provide solutions in key areas, including patient management, financial management, patient care and clinical, enterprise and office automation.
 
We sell a fully integrated, enterprise-wide financial and clinical hospital information system comprised of all necessary software, hardware, peripherals, forms and office supplies, together with comprehensive customer service and support. We also offer outsourcing services, including electronic billing submissions, patient statement processing and business office functions, as part of our overall information system solution.
 
We have achieved a compounded annual growth rate in revenues of approximately 22% over the past five years. We have achieved year-to-year revenue growth in each of the last five years except 2000, when hospitals decreased technology spending following increased spending in 1999 and earlier years to address the year 2000 issue. Our system currently is installed and operating in over 400 hospitals in 45 states and the District of Columbia. Our customers historically have consisted of community hospitals with 100 or fewer acute care beds. However, we also serve and are targeting for growth the market consisting of hospitals with 100 to 300 acute care beds.
 
Revenues
 
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 execution of a sales contract. Upon signing a contract to purchase a system from us, each customer pays a non-refundable 10% deposit that is recorded as deferred revenue. The customer then pays 40% of the purchase price for the software and the related installation, training and conversion when we install the system and commence training on-site at the customer’s facility, which is likewise recorded as deferred revenue. When the system begins operating in a live environment, we bill the remaining 50% of the system purchase price and recognize revenue for the total amount of the purchase price for software and related services. Revenues derived from installation of additional software applications are generally recognized upon installation. Revenues from the sale of hardware, forms and supplies are recognized upon the shipment of the product 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 from year-to-year 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 also serve as an Internet service provider,

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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 delivered.
 
Outsourcing Revenues.    We began offering outsourcing services in January 1999. Revenues from outsourcing services have increased rapidly since that time. We expect outsourcing revenues to continue to grow at a faster rate than our systems and services revenues. Our outsourcing services include electronic billing, statement processing and business office outsourcing (primarily accounts receivable management). All of these outsourcing services are sold pursuant to one year customer agreements, with automatic one year renewals until terminated. Revenues from outsourcing 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. For the sale of equipment we incur costs to acquire these products from the respective distributors or manufacturers, as the case may be. Costs are deferred and recognized as an expense at the time the related revenues are recognized on a completed contract basis. However, at December 31, 1999, 2000 and 2001, and March 31, 2002, no system sales related costs were deferred as all contracts were deemed to be substantially complete, or such amounts were not considered to be material.
 
Support and Maintenance.    The principal costs associated with our system support and maintenance services are employee salaries, benefits and certain other overhead expenses. Costs are expensed as incurred and are not deferred.
 
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.
 
Outsourcing.    The principal cost related to our statement outsourcing is postage. The principal cost related to our electronic billing outsourcing is long distance telecommunication fees. Employee salaries, benefits, supplies and forms are additional significant costs associated with our outsourcing services. Costs are expensed as incurred and are not deferred.
 
Results of Operations
 
The following table sets forth certain items included in our results of operations for each of the three years in the period ended December 31, 2001, and for the three months ended March 31, 2001 and 2002, expressed as a percentage of our total revenues for these periods:

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Year ended December 31
    
Three months ended March 31,
 
   
1999
    
2000
    
2001
    
2001
    
2002
  
   
Amount
    
% Sales
    
Amount
    
% Sales
    
Amount
    
% Sales
    
Amount
    
% Sales
    
Amount
    
%sales
  
   
(in thousands)
  
Sales revenues:
                                                                      
System sales
  
$
32,538
 
  
64.4
%
  
$
25,737
 
  
52.3
%
  
$
30,350
 
  
50.9
%
  
$
6,767
 
  
50.0
%
  
$
8,800
 
  
52.0
%
Support and maintenance
  
 
17,088
 
  
33.8
 
  
 
21,123
 
  
42.9
 
  
 
25,823
 
  
43.3
 
  
 
6,008
 
  
44.4
 
  
 
7,090
 
  
41.9
 
Outsourcing
  
 
904
 
  
1.8
 
  
 
2,362
 
  
4.8
 
  
 
3,493
 
  
5.8
 
  
 
754
 
  
5.6
 
  
 
1,031
 
  
6.1
 
   
 
 
 
 
 
 
 
 
 
Total sales revenues
  
 
50,530
 
  
100.0
 
  
 
49,222
 
  
100.0
 
  
 
59,666
 
  
100.0
 
  
 
13,529
 
  
100.0
 
  
 
16,921
 
  
100.0
 
Costs of sales:
                                                                      
System sales
  
 
21,210
 
  
42.0
 
  
 
20,198
 
  
41.0
 
  
 
22,499
 
  
37.7
 
  
 
5,052
 
  
37.4
 
  
 
6,047
 
  
35.7
 
Support and maintenance
  
 
8,044
 
  
15.9
 
  
 
9,781
 
  
19.9
 
  
 
11,634
 
  
19.5
 
  
 
2,694
 
  
19.9
 
  
 
3,231
 
  
19.1
 
Outsourcing
  
 
641
 
  
1.3
 
  
 
1,508
 
  
3.1
 
  
 
2,109
 
  
3.5
 
  
 
425
 
  
3.1
 
  
 
624
 
  
3.7
 
   
 
 
 
 
 
 
 
 
 
Total costs of sales
  
 
29,895
 
  
59.2
 
  
 
31,487
 
  
64.0
 
  
 
36,242
 
  
60.7
 
  
 
8,171
 
  
60.4
 
  
 
9,902
 
  
58.5
 
   
 
 
 
 
 
 
 
 
 
 
Gross profit
  
 
20,635
 
  
40.8
 
  
 
17,735
 
  
36.0
 
  
 
23,424
 
  
39.3
 
  
 
5,358
 
  
39.6
 
  
 
7,019
 
  
41.5
 
 
Operating expenses:
                                                                      
Sales and marketing
  
 
4,650
 
  
9.2
 
  
 
4,477
 
  
9.1
 
  
 
5,105
 
  
8.6
 
  
 
1,383
 
  
10.2
 
  
 
1,346
 
  
8.0
 
General and administrative
  
 
7,244
 
  
14.3
 
  
 
8,603
 
  
17.5
 
  
 
9,843
 
  
16.5
 
  
 
2,248
 
  
16.6
 
  
 
2,874
 
  
17.0
 
   
 
 
 
 
 
 
 
 
 
Total operating expenses
  
 
11,894
 
  
23.5
 
  
 
13,080
 
  
26.6
 
  
 
14,948
 
  
25.1
 
  
 
3,631
 
  
26.8
 
  
 
4,220
 
  
25.0
 
   
 
 
 
 
 
 
 
 
 
 
Operating income
  
 
8,741
 
  
17.3
 
  
 
4,655
 
  
9.4
 
  
 
8,476
 
  
14.2
 
  
 
1,727
 
  
12.8
 
  
 
2,799
 
  
16.5
 
 
Other income (expense):
                                  
Interest income
  
 
82
 
  
0.2
 
  
 
91
 
  
0.2
 
  
 
126
 
  
0.2
 
  
 
24
 
  
0.2
 
  
 
42
 
  
0.2
 
Miscellaneous income
  
 
146
 
  
0.3
 
  
 
214
 
  
0.4
 
  
 
154
 
  
0.2
 
  
 
9
 
  
0.1
 
  
 
45
 
  
0.3
 
Interest expense
  
 
(32
)
  
(0.1
)
  
 
(69
)
  
(0.1
)
  
 
(76
)
  
(0.1
)
  
 
(16
)
  
(0.1
)
  
 
(14
)
  
(0.1
)
   
 
 
 
 
 
 
 
 
 
Total other income
  
 
196
 
  
0.4
 
  
 
236
 
  
0.5
 
  
 
204
 
  
0.3
 
  
 
17
 
  
0.1
 
  
 
73
 
  
0.4
 
   
 
 
 
 
 
 
 
 
 
Net income
  
$
8,937
 
  
17.7
%
  
$
4,891
 
  
9.9
%
  
$
8,680
 
  
14.5
%
  
$
1,744
 
  
12.9
%
  
$
2,872
 
  
16.9
%
   
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2002
 
Revenues. Total revenues increased by 25.1% or $3.4 million from $13.5 million for the three months ended March 31, 2001 to $16.9 million for the three months ended March 31, 2002.
 
System sales revenues increased by 30.1% or $2.0 million from $6.8 million in the three months ended March 31, 2001 to $8.8 million in the three months ended March 31, 2002. The increase in system sales revenue was attributable to an increase in the number and size of new customer installations. No costs relating to system sales were deferred under our completed contract method of accounting at March 31, 2002 as all contracts were deemed to be substantially complete.
 
Support and maintenance revenues increased by 18.0% or $1.1 million from $6.0 million in the three months ended March 31, 2001 to $7.1 million in the three months ended March 31, 2002. The increase in support and maintenance revenues was attributable to an increase in recurring revenues as a result of a larger customer base and an increase in ASP services volume.
 
Outsourcing revenues increased by 36.6% or $0.3 million from $0.7 million in the three months ended March 31, 2001 to $1.0 million in the three months ended March 31, 2002. We experienced an increase in outsourcing revenues as a result of continued growth in customer demand for electronic billing and statement outsourcing services. We also initiated business office outsourcing services during the first quarter of fiscal 2002.
 
Costs of Sales. Total costs of sales increased by 21.2% or $1.7 million from $8.2 million in the three months ended March 31, 2001 to $9.9 million in the three months ended March 31, 2002. As a percentage of revenues,

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cost of sales changed from 60.4% for the three months ended March 31, 2001 to 58.5% for the three months ended March 31, 2002.
 
Cost of system sales increased by 19.7% or $1.0 million from $5.0 million for the three months ended March 31, 2001 to $6.0 million for the three months ended March 31, 2002. This increase was caused primarily by an increase in cost of equipment of $0.6 million as a direct result of our increased system sales. Additionally, salary expense increased $0.4 million as a result of increased headcount needed to support an increase in the number and size of system sales. The gross margin on system sales increased from 25.3% for the three months ended March 31, 2001 to 31.3% for the three months ended March 31, 2002. The increase in the gross margin was primarily due to an increase in the size of system installations in 2002, which produced a higher gross margin.
 
Cost of support and maintenance increased by 19.9% or $0.5 million from $2.7 million for the three months ended March 31, 2001 to $3.2 million for the three months ended March 31, 2002. This increase was caused primarily by an increase in salary expense of $0.3 million as a result of increased headcount needed to support our increasing customer base. Also, telecommunications expenses increased by $0.1 million due to increased utilization of our ISP services. The gross margin on support and maintenance revenues decreased from 55.2% for the three months ended March 31, 2001 to 54.4% for the three months ended March 31, 2002. The decrease in the gross margin was primarily due to the addition of customer support personnel necessary for the planned expansion of our customer base.
 
Our costs associated with outsourcing services increased significantly due to an increase in postage costs of $0.1 million resulting from an increase in the transaction volumes of our statement outsourcing services. Salary expense also increased $0.1 million due to the hiring of new employees to support the start up of business office outsourcing services in 2002.
 
Sales and Marketing Expenses. Sales and marketing expenses remained relatively unchanged for the three months ended March 31, 2001 as compared to the three months ended March 31, 2002.
 
General and Administrative Expenses. General and administrative expenses increased by 27.9% or $0.7 million from $2.2 million for the three months ended March 31, 2001 to $2.9 million for the three months ended March 31, 2002. The increase was due primarily to increases in employee related expenses as a result of an increase in employees from 508 at March 31, 2001 to 559 at March 31, 2002.
 
As a result of the foregoing factors, net income increased by 64.7% or $1.2 million from $1.7 million for the three months ended March 31, 2001 to $2.9 million for the three months ended March 31, 2002.
 
2000 Compared to 2001
 
Revenues.    Total revenues increased by 21.2% or $10.5 million from $49.2 million in 2000 to $59.7 million in 2001.
 
System sales revenues increased by 17.9% or $4.7 million from $25.7 million in 2000 to $30.4 million in 2001. The increase in system sales revenues was attributable to an increase in the number and size of new customer installations.            
 
Support and maintenance revenues increased by 22.2% or $4.7 million from $21.1 million in 2000 to $25.8 million in 2001. The increase in support and maintenance revenues was attributable to recurring revenues received from an increasing customer base and the commencement of ASP services.
 
Outsourcing revenues increased by 47.9% or $1.1 million from $2.4 million in 2000 to $3.5 million in 2001. We experienced an increase in outsourcing revenues as a result of continued growth in customer demand for billing and administrative support services. We expect outsourcing revenues to continue to grow at a faster rate than systems and services revenues.
 
Costs of Sales.    Total costs of sales increased by 15.1% or $4.7 million from $31.5 million in 2000 to $36.2 million in 2001. As a percentage of revenues, costs of sales changed from 64.0% in 2000 to 60.7% in 2001.

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Cost of system sales increased by 11.4% or $2.3 million from $20.2 million in 2000 to $22.5 million in 2001. This increase was caused primarily by increased salary expense of $1.0 million due to increased headcount needed to accommodate the increased number of system installations. We also experienced an increase in travel expense of $0.7 million as a result of the increase in the number of system installations in 2001 over 2000, and a related increase in customer training requirements. Our equipment expense increased by $0.8 million as a direct result of our increased system sales. The gross margin on system sales increased from 21.5% in 2000 to 25.9% in 2001. The increase in the gross margin was primarily due to the increase in software license revenues and custom programming revenues, both of which have a higher profit margin than hardware sales.
 
Cost of support and maintenance increased by 19.0% or $1.8 million from $9.8 million in 2000 to $11.6 million in 2001. This increase was caused primarily by increased salary expense of $1.0 million due to increased headcount needed to adequately support our increasing customer base. Telecommunications expenses increased by $0.3 million which resulted from the commencement of ASP and ISP services. The gross margin on support and maintenance revenues increased from 53.7% in 2000 to 54.9% in 2001. The increase in the gross margin was primarily due to the increasing customer base for which we provide support.
 
Our costs associated with outsourcing services increased significantly due to an increase in postage costs of $0.4 million resulting from an increase in the transaction volumes of our statement processing services. Salary costs also increased by $0.1 million due to the hiring of new employees in this area.
 
Sales and Marketing Expenses.    Sales and marketing expenses increased by 14.0% or $0.6 million from $4.5 million in 2000 to $5.1 million in 2001. As a percentage of total revenues, sales and marketing expenses changed from 9.1% in 2000 to 8.6% in 2001. The increase in expenses was due in part to increased travel expenses of $0.3 million and the increase in costs associated with the addition of sales and marketing personnel and increased sales commissions of $0.2 million. We expect sales and marketing expense to continue to increase on an absolute basis as our business continues to grow. We expect much of the increase to come from increases in the number of employees.
 
General and Administrative Expenses.    General and administrative expenses increased by 14.4% or $1.2 million from $8.6 million in 2000 to $9.8 million in 2001. As a percentage of total revenues, general and administrative expenses changed from 17.5% in 2000 to 16.5% in 2001. The increase in expenses was due to increased costs of $0.3 million associated with pay raises for existing employees and the hiring of additional employees to support the growth in our business and an increase of $0.5 million in our insurance related costs. The remainder of the increase is primarily attributable to increased depreciation and telecommunications expenses. We expect general and administrative expenses to increase as a result of our becoming a public company.
 
As a result of the foregoing factors, net income increased by 77.5% or $3.8 million from $4.9 million in 2000 to $8.7 million in 2001. Pro forma net income, which reflects a pro forma tax provision as if we had been a C corporation, increased by 77.8% or $2.3 million from $3.1 million in 2000 to $5.4 million in 2001.
 
1999 Compared to 2000
 
Revenues.    Total revenues decreased by 2.6% or $1.3 million from $50.5 million in 1999 to $49.2 million in 2000.
 
System sales revenues decreased by 20.9% or $6.8 million from $32.5 million in 1999 to $25.7 million in 2000. This decrease was due primarily to hospitals curtailing technology spending related to the Year 2000 issue following the completion of the 1999 calendar year, after which no Year 2000 issue existed. Contributing to the decrease were decisions by some hospitals to delay or cancel orders in the face of a substantial decrease in Medicare reimbursement following the passage of the Balanced Budget Act of 1997.
 
Support and maintenance revenues increased by 23.6% or $4.0 million from $17.1 million in 1999 to $21.1 million in 2000. The increase in support and maintenance revenues was attributable to recurring revenues received from an increasing customer base.

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Outsourcing revenues increased by 161.5% or $1.5 million from $0.9 million in 1999 to $2.4 million in 2000. The increase in outsourcing revenues was primarily attributable to the addition of electronic billing services.
 
Costs of Sales.    Total costs of sales increased by 5.3% or $1.6 million from $29.9 million in 1999 to $31.5 million in 2000. As a percentage of total revenues, costs of sales changed from 59.2% in 1999 to 64.0% in 2000.
 
Cost of system sales decreased by 4.3% or $1.0 million from $21.2 million in 1999 to $20.2 million in 2000. This decrease was due primarily to a decrease in equipment expense of $2.0 million due to a decrease in equipment sales from 1999. This decrease was offset by an increase in salary expense of $1.3 million as a result of the addition of employees and increased wages. We also experienced an increase in travel costs. The gross margin on system sales decreased from 34.8% in 1999 to 21.5% in 2000. The decrease in the gross margin was primarily due to a decrease in installation revenues and software license revenues. The Year 2000 issue in 1999 allowed us greater pricing flexibility due to a greater demand for our systems in 1999, resulting in higher profit margins.
 
Cost of support and maintenance increased by 21.6% or $1.8 million from $8.0 million in 1999 to $9.8 million in 2000. This increase was due primarily to an increase in salary expense of $1.3 million as a result of the addition of employees to keep up with additional customer support requirements arising from the significant increase in system sales in 1999. We also experienced an increase in other overhead expenses.The gross margin on support and maintenance revenue increased from 52.9% in 1999 to 53.7% in 2000. The increase in the gross margin was primarily due to the increasing customer base for which we provide support.
 
Our costs associated with outsourcing services increased significantly due to initial costs related to the addition of electronic billing to our outsourcing services. Postage expenses increased by $0.8 million resulting from an increase in the transaction volumes of our statement outsourcing.
 
Sales and Marketing Expenses.    Sales and marketing expenses decreased by 3.7% or $0.2 million from $4.7 million in 1999 to $4.5 million in 2000. As a percentage of total revenues, sales and marketing expenses changed from 9.2% in 1999 to 9.1% in 2000. The decrease in expenses was primarily attributable to a decrease in commission expenses of $0.7 million. This decrease in expense was partially offset by an increase in advertising expenditures of $0.3 million as we sought to improve our visibility and name recognition in the industry. We also experienced increased salary costs of $0.2 million due to the hiring of new employees.
 
General and Administrative.    General and administrative expenses increased by 18.8% or $1.4 million from $7.2 million in 1999 to $8.6 million in 2000. As a percentage of total revenues, general and administrative expenses changed from 14.3% in 1999 to 17.5% in 2000. The increase in expenses was due primarily to an increase in health insurance costs of $0.4 million, legal fees of $0.1 million incurred in connection with employment related litigation, and an increase in our contributions to our 401(k) plan of $0.3 million due to the hiring of additional employees.
 
As a result of the foregoing factors, net income decreased 45.3% or $4.0 million from $8.9 million in 1999 to $4.9 million in 2000. Pro forma net income, which reflects a pro forma tax provision as if we had been a C corporation, decreased by 45.4% or $2.5 million from $5.6 million in 1999 to $3.1 million in 2000.
 
Quarterly Results of Operations
 
The following table presents a summary of our results of operations for our four most recent quarters ended March 31, 2002. The information for each of these quarters is unaudited and has been prepared on a basis consistent with our audited financial statements appearing elsewhere in this prospectus. This information includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for fair presentation of this information when read in conjunction with our audited financial statements and related notes appearing elsewhere in this prospectus. Statement of income data included in this table has been adjusted to include pro forma corporate income tax provisions as if we had been a C corporation during all of the quarterly periods. Our operating results have varied on a quarterly basis and may fluctuate significantly in the future.

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Results of operations for any quarter are not necessarily indicative of results for any future quarter or for a full fiscal year.
 
    
2001
   
2002
    
June 30
   
September 30
   
December 31
   
March 31
Sales revenues
   
$
14,133,002
   
$
14,849,410
   
$
17,154,737
   
$
16,920,706
Gross profit
   
 
5,399,023
   
 
5,663,910
   
 
7,003,770
   
 
7,019,288
Operating income
   
 
1,909,478
   
 
2,093,542
   
 
2,746,365
   
 
2,798,595
Net income
   
 
1,930,610
   
 
2,186,106
   
 
2,819,506
   
 
2,871,831
Pro forma net income
   
 
1,211,874
   
 
1,372,253
   
 
1,769,850
   
 
1,789,677
 
Liquidity and Capital Resources
 
As of March 31, 2002, we had $1.8 million in cash and cash equivalents. After completion of the offering and application of the net proceeds, we expect to have approximately $5.8 million in cash, which we consider adequate to fund our business for the foreseeable future. Our principal source of liquidity has been cash provided by operating activities. Cash provided by operating activities has been used primarily to fund the growth in our business and to pay distributions to our stockholders. We paid monthly cash distributions to our stockholders in the aggregate amounts of $6.1 million, $6.0 million and $6.6 million in the years ended December 31, 1999, 2000 and 2001, respectively, and $0.8 million and $1.8 million for the three months ended March 31, 2001 and 2002, respectively. Upon the completion of this offering, we will convert from an S corporation to a C corporation for tax purposes. As a result, some of our cash provided by our operating activities will be required to pay taxes on our income.
 
Net cash provided by operating activities totaled $7.7 million, $7.6 million and $9.0 million for the years ended December 31, 1999, 2000 and 2001, respectively, and $1.3 million and $2.2 million for the three months ended March 31, 2001 and 2002, respectively. The increase in cash provided by operating activities from 2000 to 2001 was the result of the increase in net income and working capital. Likewise, the increase from the three months ended March 31, 2001 to the three months ended March 31, 2002 was attributable to an increase in net income.
 
Net cash used in investing activities totaled $2.3 million, $1.4 million and $1.3 million for the years ended December 31, 1999, 2000 and 2001, respectively, and $0.4 million and $0.3 million for the three months ended March 31, 2001 and 2002, respectively. We used cash for the purchase of property and equipment.
 
Net cash used in financing activities totaled $5.2 million, $6.1 million and $6.7 million for the years ended December 31, 1999, 2000 and 2001, respectively, and $0.8 million and $2.2 million for the three months ended March 31, 2001 and 2002, respectively. Cash was used in each of the periods primarily to pay cash distributions to our stockholders. In 1999, we purchased approximately 11.3 acres of undeveloped land, and we borrowed approximately $1.0 million to fund this purchase. We used cash to make payments on this debt and to pay distributions to our stockholders. For the three month periods ended March 31, 2001 and 2002, respectively, we used $0.8 million and $1.8 million, respectively, to pay cash distributions to our stockholders. During the three month period ended March 31, 2002, we also used $0.4 million to pay expenses related to this offering.
 
Our days sales outstanding for the years ended December 31, 2000 and 2001 were 52.5 and 41.7, respectively.
 
We currently do not have a bank line of credit or other credit facility in place. Because we will have no debt after the offering, we will not be subject to contractual restrictions or other influences on our operations, such as payment demands and restrictions on the use of operating funds, that are typically associated with debt. If we borrow money in the future, we will likely be subject to operating and financial covenants that could limit our ability to operate as profitably as we have in the past. Defaults under applicable loan agreements could result in

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the demand by lenders for immediate payment of substantial funds and substantial restrictions on expenditures, among other things.
 
Related Party Transactions
 
We lease the majority of our corporate headquarters campus from CP Investments, Inc., an Alabama corporation, the stockholders of which are also some of the stockholders of CPSI. In 2001, we paid total lease payments in the amount of $958,000 to CP Investments, Inc. On April 1, 2002, we entered into a new lease with CP Investments, Inc., which expires in April 2012. Under this new agreement, we will make annual lease payments in the amount of $1,080,000, subject to adjustment as set forth in the agreement. The annual rent payable under this lease has been determined by an independent, third party appraisal firm. The parties may agree, from time to time, to make adjustments in the annual rent payable under this lease based on subsequent third party appraisals.
 
We lease the remainder of our headquarters facilities, which is comprised of one building that houses our dedicated research and development staff, from DJK, LLC, a limited liability company owned by Dennis Wilkins. On April 1, 2002, we entered into a lease for this facility that expires in April 2012. Prior to that time we paid only the expenses associated with the building. Under the new lease, we will make annual lease payments in the amount of $39,000, subject to adjustment as set forth in the agreement. The annual rent payable under this lease has been determined by an independent, third party appraisal firm.
 
In July 1999 and May 2001, certain of our stockholders sold an aggregate of 904,750 shares (after considering the effect of the 430 for 1 stock split) to seven of our executive officers for cash in the aggregate amount of approximately $8.5 million. The executive officers financed 100% of the aggregate purchase price with individual loans from AmSouth Bank and pledged their shares of stock as collateral. Simultaneously with such financings, we entered into agreements with AmSouth Bank to purchase from AmSouth any such loan if (i) an officer’s employment with us is terminated for any reason, (ii) an officer defaults on his or her loan or pledge agreement or (iii) our financial condition deteriorates below certain defined parameters. As of March 31, 2002 the aggregate outstanding principal amount of these individual loans was $6,897,633. We have entered into agreements with AmSouth Bank to terminate the loan purchase agreements effective upon consummation of the offering.
 
Contractual Commitments
 
Our related party real estate leases are our principal contractual commitments requiring recurring payments in the future. We also have some equipment leases that will expire in July 2002. Our payments under these operating leases subsequent to March 31, 2002 will be as follows:
 
Year
   
Amount
2002
   
$   774,771
2003
   
  1,027,200
2004
   
  1,027,200
2005
   
  1,027,200
2006
   
  1,027,200
Thereafter
   
  3,792,600
    
Total
   
$8,676,171
    
 
Critical Accounting Policies
 
General.    Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with generally accepted accounting principles. We are required to make some estimates and judgments that affect the preparation of these financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, but actual results may differ from these estimates under different assumptions or conditions.

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Revenue Recognition.    We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements, as amended by SAB 101A and 101B and the American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition. SAB 101 and SOP 97-2 require that four basic criteria must be met before revenues can be recognized: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on our judgment regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in conditions cause us to determine these criteria are not met for certain future transactions, revenues recognized for any reporting period could be adversely affected.
 
Backlog
 
Backlog consists of revenues we reasonably expect to recognize over the next twelve months under existing contracts. The revenues to be recognized may relate to a combination of one-time fees for system sales, and recurring fees for support, outsourcing, ASP and ISP services. As of March 31, 2002, we had a twelve month backlog of approximately $14.5 million in connection with non-recurring system purchases and approximately $35.0 million in connection with recurring payments under support, outsourcing, ASP and ISP contracts.             
 
Qualitative and Quantitative Disclosures About Market and Interest Rate Risk
 
We reduce the sensitivity of our results of operations to market risks related to changes in interest rates by maintaining an investment portfolio comprised solely of highly rated, short-term investments. We do not hold or issue derivative, derivative commodity instruments or other financial instruments for trading purposes. We are not exposed to currency exchange fluctuations, as we do not sell our products internationally, and we currently have no exposure to equity price risks. After this offering, we will have no outstanding debt.
 
Recent Accounting Pronouncements
 
In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. The statements eliminate the pooling-of-interests method of accounting for business combinations and require that goodwill and intangible assets with indefinite useful lives not be amortized. Instead, these assets will be reviewed for impairment annually with any related losses recognized when incurred. SFAS No. 141 is generally effective for business combinations completed after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, with early application permitted in certain circumstances. Adoption of SFAS No. 141 and SFAS No. 142 did not have an effect on our financial position or results of operations.
 
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. We believe the adoption of SFAS No. 143 will not have a material effect on our financial position or results of operations.
 
In October 2001, the Financial Accounting Standards Board approved SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS No. 121 and APB Opinion No. 30, Reporting the Results of Operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The adoption of SFAS No. 144 did not have an effect on our financial position or results of operations.

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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 400 hospital customers across 45 states and the District of Columbia. In 2001, we generated revenues of $59.7 million from the sale of our products and services.
 
Industry Dynamics
 
The healthcare industry is the largest industry in the United States economy. The Centers for Medicare and Medicaid Services, or “CMS,” has calculated that fiscal 2000 total healthcare expenditures in the United States were approximately $1.3 trillion, or approximately 13.2% of the U.S. gross domestic product. CMS estimates that by fiscal 2011 total U.S. healthcare spending will reach $2.8 trillion, or 17.0% 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 2000 spending on hospital services amounted to $412.1 billion, or 31.7% of total healthcare expenditures. According to the American Hospital Association, there are approximately 4,900 community hospitals in the United States, with approximately 4,100 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.    The federal Balanced Budget Act of 1997, or “BBA,” significantly lowered Medicare reimbursements for hospital services. These reductions were projected to total over $250 billion over five years. While the Budget Refinement Act of 1999 and the Benefits Improvement Act of 2000 lessened the impact of the BBA, aggregate federal reimbursement for hospital services is still significantly below pre-1997 levels. Lower reimbursement from federal programs, administrative and clinical inefficiencies and increased patient loads due to an aging population have placed significant financial pressure on hospitals in general. This pressure is even greater on community hospitals, as they operate on tighter budgets with lower margins.
 
Health Insurance Portability and Accountability Act.    The federal Health Insurance Portability and Accountability Act of 1996, or “HIPAA,” requires the implementation of national guidelines for information management by healthcare organizations. Among other things, HIPAA mandates uniform electronic transactions and code sets, improved data security and increased patient privacy. As of February 2002, final regulations for

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privacy and electronic transaction/code set standards were adopted. Healthcare organizations have until October 2002, subject to a one year extension, to establish compliance with the electronic transaction rules and until April 2003 to establish compliance with the privacy rules. The influence of HIPAA is illustrated by the results of the 13th Annual HIMSS Leadership Survey sponsored by Superior Consultant Company. Survey respondents cited HIPAA compliance more than any other matter as a top business issue that will affect healthcare in the next two years. Approximately 60% of respondents identified upgrading information technology systems to meet HIPAA requirements as the number one information technology priority for their organizations. In addition, according to the Winter 2001-2002 Healthcare Industry HIPAA Compliance Survey conducted by HIMSS and Phoenix Health Systems, approximately 88% of respondent hospitals with 400 or fewer beds have developed an organizational approach for HIPAA compliance. Vendors that offer information solutions utilizing a common architecture and database structure are expected to be well positioned to provide healthcare participants with effective solutions to the HIPAA requirements.
 
Activism for Improved Clinical Care.    In November 1999, the Institute of Medicine published a report entitled “To Err is Human: Building a Safer Healthcare System.” The report indicated that avoidable medical error is one of the top ten leading causes of death in the United States. The report also estimates that medical error may add as much as $14.5 billion of preventable cost to the healthcare industry. As a result of this study, automated medical information systems have been increasingly identified as a key to improving patient care and reducing medical errors. For example, the Leapfrog Group, a consortium of more than 100 public and private organizations including General Motors, General Electric, AT&T and IBM, recommends that its members utilize hospitals with certain automated medical information systems that are designed to limit medical errors. Moreover, California has adopted legislation requiring hospitals to use automated medical information systems. 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 be favored by large employers and government payors.
 
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 has begun to embrace information technology as a management tool, evidenced by the fact that two-thirds of the respondents to the 13th Annual HIMSS Leadership Survey referenced above predicted an increase in their organizations’ information technology operating budgets during the next twelve months. We believe these dynamics will allow for our sustained 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.

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We believe that the CPSI solution meets this challenge. We provide fully integrated, enterprise-wide 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 outsourcing 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 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 outsourcing, electronic billing outsourcing 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 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

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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 approximately 4,100 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. While 92% of our current customers are hospitals of 100 acute care beds or less, we believe there is a substantial opportunity in the future to increase our market share among hospitals with 100 to 300 acute care beds. 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 are developing 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 come from our outsourcing services, which we market to our existing customers as well as new customers. These services include electronic billing, patient statement processing, business office outsourcing, 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
 
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 all of our customers with software enhancements and upgrades typically twice each year. 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;
 
 
•
 
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;
 
 
•
 
integrate clinical, financial and patient information to promote efficient use of time and resources, while eliminating dependence on paper medical records;
 
 
•
 
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;
 
 
•
 
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
 
 
•
 
Financial Accounting
 
 
•
 
Clinical
 
 
•
 
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, cu