Computer Programs and Systems
Annual Report 2014

Plain-text annual report

2 0 1 4 A N Nu A L R E P o R T Company Profile CPSI is a leading provider of electronic health records systems for more than 650 community, rural and critical access hospitals and their 12,000 healthcare providers. Founded in 1979, the Company is dedicated to meeting the ever-changing needs of healthcare IT, while optimizing the quality of care for communities in 46 states and the District of Columbia. CPSI provides a complete information and patient care system from business office to bedside combined with comprehensive implementation, training and ongoing support from our staff of approximately 1,400 healthcare and business professionals. CPSI’s wholly owned subsidiary, TruBridge, LLC, focuses exclusively on providing business office, consulting and managed IT services to rural and community healthcare organizations, regardless of their primary IT vendor. For more information, visit www.cpsi.com or www.trubridge.com. Annual Meeting The annual meeting of stockholders will be held on May 14, 2015, at 9:00 a.m., Central Time, at the Mobile Convention Center, one South Water Street, Mobile, Alabama. Financial Highlights (In thousands, except per share data) Total sales revenues Total cost of sales Gross profit Total operating expenses Operating income Total other income Income before income taxes Provision for income taxes Net income Net income per share – basic Net income per share – diluted Weighted average shares outstanding: Basic Diluted 2 4 7 , 4 0 2 $ 3 6 8 , 0 0 2 $ 9 0 3 , 3 8 1 $ 6 7 4 , 3 7 1 $ 7 4 2 , 3 5 1 $ ) s d n a s u o h t n i $ ( s e u n e v e R 0 2 9 , 2 3 $ 3 4 7 , 2 3 $ 3 7 9 , 9 2 $ 3 3 8 , 5 2 $ 8 3 7 , 8 1 $ ) s d n a s u o h t n i $ ( e m o c n I t e N Years Ended December 31, 2013 $ 200,863 107,126 93,737 43,493 50,244 466 50,710 17,967 $ 32,743 $ $ 2.95 2.95 10,998 10,998 2014 $ 204,742 110,766 93,976 44,389 49,587 152 49,739 16,819 $ 32,920 $ $ 2.94 2.94 11,026 11,026 5 9 . 2 $ 4 9 . 2 $ 1 7 . 2 $ 4 3 . 2 $ 1 7 . 1 $ e r a h S r e P s g n i n r a E d e t u l i D 10 11 12 13 14 10 11 12 13 14 10 11 12 13 14 To Our Shareholders: We are pleased to share that 2014 marked another year of growth and progress for CPSI. With solid execution, we affirmed our leadership position as a provider of electronic health record (EHR) systems and a variety of business management, information technology and consulting services to rural and community hospitals. Last year marked the fifth anniversary of the passage of the American Recovery and Reinvestment Act (ARRA), a defining moment in healthcare information technology (IT) as the ARRA offers direct financial incentives for hospitals to adopt EHRs. The ARRA provides access to over $30 billion if hospitals can demonstrate they are “meaningful users” of an EHR based on three stages of increasingly stringent objectives. Smaller hospitals have historically underinvested in healthcare IT compared with larger hospitals due to budget constraints and lack of resources. With the ARRA providing substantial financial incentives to these smaller hospitals, a significant window of opportunity opened for CPSI. Since 2009, our primary strategic focus has been to direct all our resources towards the singular goal of ensuring our hospital clients are positioned to take full advantage of the incentives made available under the ARRA. We are proud to say our execution has been outstanding, and CPSI has been a leader since day one with regard to the number of rural and community hospitals that have successfully attested to meaningful use of an EHR and received incentive funds. To date, our clients have received well over a half billion dollars for meeting the meaningful use standards. In 2014, a number of our clients were required to advance to the next stage of the program, Stage 2. As noted, the objectives are increasingly more difficult to achieve, and many hospitals and vendors struggled with Stage 2. However, we continued to excel. CPSI was one of the first vendors to have our inpatient EHR system certified, followed shortly by the certification of our eligible provider (physician) product. As with Stage 1, the true measure of our success is evidenced by the number of clients who met the higher standards and completed successful attestation of Stage 2. More than 220 of our clients, or 80 percent of eligible hospitals, achieved Stage 2 attestation by the end of 2014. Both in number of clients and in percentage of eligible hospitals attesting, these numbers were among the highest in the industry across all vendors and far more than those of our competitors. We also recognize that this accomplishment required significant work from both our clients and our employees, and we would be remiss if we did not recognize them for their efforts. For 2015, the meaningful use program added a requirement that noticeably affected hospitals and EHR vendors alike. up until 2015, hospitals were only required to meet the meaningful use standards for a 90-day reporting period. With the 2015 reporting period changed to a full 365 days, and the start of the reporting period based on the federal fiscal year beginning october 1, 2015, many hospitals were caught unprepared. We believe a number of hospitals therefore made the decision to completely forgo attestation until 2016 to allow more time to prepare for the year-long attestation period. This resulted in an unexpected delay of new software purchases and adversely affected our system sales for the fourth quarter. It is worth noting that the government recently announced its intent to revert back to a 90-day attestation period for 2015, as well as to change the attestation period to a calendar year as opposed to the federal fiscal year. Should these changes become effective, we believe they will be favorable for CPSI. It will be easier for hospitals to change vendors during the year without doing so in the midst of a reporting period, as well as allow more time to make that transition. Given our track record, we feel confident about our opportunities in a replacement market. In addition, any current clients who delayed attestation in 2014 and 2015 due to the longer reporting period, should now be in a position to move forward. While it is difficult to quantify the full effect of these changes, we view this as a positive development for both potential add-on and new client sales. Finally, with regard to the EHR incentive program, we acknowledge that much progress has been made during this transformative period. There is no doubt this program has been extremely beneficial to our clients and the communities they serve, and we have been an integral part of their successful EHR adoption. Even more than our system itself, we believe the strong working relationships we have established with our hospitals have been central to our mutual success. our clients know they can rely on us in meeting the challenges of meaningful use. And, with the combination of a complete, integrated EHR solution and our outstanding customer service, we have continually earned that level of confidence. Simply put, we are giving our clients the best chances for success. Regardless of the market conditions that affected sales in our fourth quarter, we are pleased with our solid execution in 2014 around the factors we can control. Namely, our win rate in competitive new client deals and our current client retention rate were both at five-year highs during 2014. As a result, we extended our record of top-line growth in 2014 with total revenues for the year ended December 31, 2014, of $204.7 million, compared with $200.9 million for 2013. Net income for the year was $32.9 million, or $2.94 per diluted share. We also paid our shareholders an annual dividend of $2.28 per share. Commencing in the first quarter of 2015, our Board of Directors approved a $0.07 increase in the regular quarterly cash dividend to $0.64 per share, or $2.56 on an annual basis. We believe this action demonstrates confidence in CPSI’s future and our commitment to building shareholder value. Maintaining a strong financial position and generating solid cash flow have also continued to be top priorities for CPSI. Cash provided by operations for 2014 was $38.9 million, compared with $29.0 million for the prior-year period. We have a strong balance sheet with no debt, and we have the financial flexibility to make the strategic investments to pursue our growth strategy and support our technology leadership. Despite a challenging end to 2014, we feel very positive about our prospects for 2015. This outlook is based on several factors. In our core EHR business, we believe we are well positioned to capture replacement business in 2015 and beyond from customers who are not satisfied with their current EHR vendor, especially as Stage 3 requirements evolve. We also believe the upcoming changes in the meaningful use program in 2015 will create an environment where more hospitals can change vendors in 2015 without compromising their chances to attest. We carry a strong competitive advantage with the products and support we provide, and a highly successful attestation rate to confirm our value proposition. We are also looking to expand markets in 2015 for our EHR solution. In 2014, we successfully implemented our first hospital outside of the united States on the island nation of St. Maarten. This has led us to evaluate the opportunities that exist in other English-speaking countries. To this end, we are currently exploring opportunities in the Canadian healthcare market. our initial findings reveal that our product would easily meet the needs of rural and community facilities throughout Canada. Indications also show that the Canadian healthcare system is approximately five years behind the united States with regard to EHR adoption. Based on this information, we believe the potential for CPSI in the Canadian market is substantial, and we are aggressively moving forward. New opportunities also exist within our current client base for 2015. our Emergency Department Information System was released late in 2014. Given that the emergency department is the primary source of inpatient admissions for virtually all of our acute care hospitals, the integration provided by the CPSI solution is especially important. A number of our clients recognize this fact and have foregone third party solutions in anticipation of our product release. The beta and initial implementations of the Emergency Department Information System have exceeded expectations, and we are confident we will be at installation capacity for this application for all of 2015. We also believe a substantial opportunity exists within our client base for our Medical Practice EHR system. As part of a project to meet the Stage 1 and Stage 2 meaningful use objectives, this application has undergone a complete rewrite over the past two years. It is fully certified to meet all of the requirements for meaningful use, and a number of physicians have successfully attested to both Stage 1 and Stage 2 using the CPSI Medical Practice EHR system. The response from our current user base of practices owned or managed by our hospitals has been so positive that we have extended our market to the standalone physician practice market, initially targeting physician practices in the communities where our hospitals are located. We believe our ability to offer integration with the hospital EHR, thereby ensuring a single patient record and a consistent user experience between the physician practice and local hospital, will give us a significant competitive advantage. There are two additional products on the horizon for 2015 that we believe will be widely adopted by our current client base and be well received by prospective clients. Directed at our physician users is an iPad-based rounding application. This application provides targeted functionality currently available to our PC-based clients in a mobile environment. With several thousand physicians and other providers already using our applications daily, we believe this mobile application provides a natural path to supplement and expand their use of the CPSI system. We are also in the final stages of development of a subscription-based clinical content application intended for nursing documentation. We have developed this content internally based on best practices resulting from hundreds of successful point of care documentation implementations involving hundreds of thousands of patient encounters. According to feedback from our current users, best practice-based content derived specifically from rural and community hospitals will provide significant benefits in the quality of care delivered, as well as relieve hospital clinicians of the burden of developing and maintaining the content on their own. Finally on our product horizon is population health management. our approach is twofold. We are already well positioned with applications that address the continuum of care in our customers’ communities. our solutions address not only inpatient stays, but patient encounters outside of the hospital including physician practices, outpatient clinics, home health and long-term care. our ability to tie clinical patient data together no matter where the care is delivered puts our clients in a unique position to coordinate care across all environments, which is a key element of population health management. on a broader scale, in November, we announced a collaboration with IBM to develop and deliver predictive analytics targeted specifically to the rural and community hospital space. our ability to leverage “Big Data” aggregated and curated from across our extensive footprint of rural and community hospitals puts us in a unique position. The initial focus of this project involving ten of our client hospitals examines factors affecting readmission risk. once we have completed this proof of concept pilot project, we believe the possibilities are far reaching. There is no doubt the opportunities are significant for CPSI to incorporate predictive analytics as part of our EHR solution, and through TruBridge, to provide accompanying services and expertise to help our clients manage population health and successfully transition to outcome and value based reimbursement. We also foresee demand extending beyond hospitals to third party payors and clinical research organizations based on the unique nature of our payor data set. The massive transitions currently taking place in the united States healthcare system are creating tremendous opportunities for service providers across the healthcare spectrum. Because of this, the importance of our TruBridge subsidiary cannot be overstated. Healthcare reimbursement models are changing dramatically with the insured population increasing due to the Affordable Care Act, and a shift by payors away from the current fee for service model towards outcome/value based payments. With this transition comes more complexity and an increasing financial burden being shifted to the patient. TruBridge business services fill the expertise and knowledge gap experienced by many rural and community hospitals through a full suite of revenue cycle management services and, as a result, the demand for those services continues to increase dramatically. on the consulting services side of TruBridge, a number of hospitals have shifted their focus from acquisition to optimization where their EHR is concerned. Also, the long delayed transition to the ICD-10 coding system is now slated for 2015. Many smaller hospitals simply do not have ready access to the expertise required to address these changes. Consequently, the demand for TruBridge managed IT and consulting services continues to grow at a rapid rate driven particularly by the demand for medical record coding, clinical documentation improvement and data security engagements. These factors have contributed to another outstanding year for TruBridge with revenues growing 13.2 percent over the past year. We have seen favorable growth trends in virtually all the TruBridge service offerings in 2014. TruBridge services provide recurring revenue opportunities from our current customers, and just as importantly, extend our market penetration beyond those hospitals and providers who utilize our EHR solution. Limited access to expertise and resources is continuing to drive smaller hospitals and providers, regardless of their primary EHR vendor, to outsourcing back office functions and bringing in expertise on an as needed basis. TruBridge’s proven success in delivering these services, tailored specifically for rural hospitals, makes every rural and community hospital a potential client for our services. For this reason, we could not be more positive about TruBridge’s potential. on a national level, due in no small part to the incentives offered by the ARRA, 98 percent of the acute care hospitals in our country now have an EHR. While this is viewed universally as a positive outcome, it has brought into sharp focus a tremendous obstacle that stands in the way of fully realizing the potential of electronic health records to improve patient care. That obstacle is interoperability. CPSI has taken a leadership position in addressing the problem of interoperability through our participation in the CommonWell Health Alliance, which was established in 2013. As one of the founding members of this organization, we have joined other industry leaders in addressing this critical challenge facing our healthcare system – building connections across patient health care records. Together, we are working hard to define and promote a national infrastructure with common standards and policies, as well as develop products and services in our own software to address many of the problems associated with interoperability. We are proud to play a leading role in this initiative that will enable seamless, trusted access to healthcare information across different settings of care. Perhaps more than any time in our history, information technology has changed the landscape of healthcare delivery, with complex challenges from many directions. While much progress has been made, we are far from finished. one of CPSI’s enduring strengths has been our ability to successfully manage change and capitalize on new growth opportunities. We have an exceptional team of employees who work hard every day to provide the best possible complement of products, services and support to our clients with the goal of being their trusted partner in delivering the highest quality of care possible to their communities. We welcome the challenges the healthcare information technology industry brings. With those challenges come opportunities, and we are more than confident in our ability to take full advantage of those that lay before us. As always, we thank our shareholders for their support. Sincerely, J. Boyd Douglas Chief Executive officer and President UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . Commission file number: 000-49796 COMPUTER PROGRAMS AND SYSTEMS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 6600 Wall Street, Mobile, Alabama (Address of Principal Executive Offices) 74-3032373 (I.R.S. Employer Identification No.) 36695 (Zip Code) (251) 639-8100 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, par value $.001 per share Name of Each Exchange on Which Registered The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act No No of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Non-accelerated filer (Do not check if smaller reporting company) Accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes The aggregate market value of common stock held by non-affiliates of the registrant at June 30, 2014 was $665,441,140. As of March 12, 2015 the registrant had outstanding 11,315,573 shares of its common stock. No DOCUMENTS INCORPORATED BY REFERENCE IN THIS FORM 10-K: Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 14, 2015 are incorporated by reference into Part III of this report. Item No. Page No. Special Note Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TABLE OF CONTENTS 1 1A. 1B. 2 3 4 5 6 7 7A. 8 9 9A. 9B. 10 11 12 13 14 PART I Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industry Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Our Solution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Our Products and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . System Implementation and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Product Development and Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customers, Sales and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Health Information Security and Privacy Practices . . . . . . . . . . . . . . . . . . . . . . . . . Internal Management Control System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intellectual Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company Web Site. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships and Related Transactions, and Director Independence . . . . . . . . Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV 15 Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i 1 1 1 3 4 5 15 15 16 16 18 18 19 19 19 19 20 21 22 34 34 34 34 35 36 37 54 55 84 84 85 86 86 86 87 87 88 89 * Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 14, 2015 are incorporated by reference into Part III of this Form 10-K. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified generally by the use of forward-looking terminology and words such as "expects," "anticipates," "estimates," "believes," "predicts," "intends," "plans," "potential," "may," "continue," "should," "will" and words of comparable meaning. Without limiting the generality of the preceding statement, all statements in this Annual Report relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and future financial results are forward-looking statements. We caution investors that any such forward-looking statements are only predictions and are not guarantees of future performance. Certain risks, uncertainties and other factors may cause actual results to differ materially from those projected in the forward-looking statements. Such factors may include: • • • • • • • • • • • • • • • overall business and economic conditions affecting the healthcare industry; government regulation of the healthcare and health insurance industries; government regulation of our products and customers, including changes in healthcare policy affecting Medicare reimbursement rates and qualifying technological standards; potential effects of the federal healthcare reform legislation enacted in 2010, and implementing regulations, on the businesses of our hospital customers; funding uncertainties associated with, and potential expenditures required by, the American Recovery and Reinvestment Act of 2009 in connection with the adoption of electronic health records; saturation of our target market and hospital consolidations; changes in customer purchasing priorities, capital expenditures and demand for information technology systems; competition with companies that have greater financial, technical and marketing resources than we have; failure to develop new technology and products in response to market demands; failure of our products to function properly resulting in claims for medical losses; changes in accounting principles generally accepted in the United States of America; breaches of security and viruses in our systems resulting in customer claims against us and harm to our reputation; potential intellectual property claims against us; general economic conditions, including changes in the financial and credit markets that may affect the availability and cost of credit to us or our customers; and interruptions in our power supply and/or telecommunications capabilities. For more information about the risks described above and other risks affecting us, see "Risk Factors" beginning on page 22 of this Annual Report. We also caution investors that the forward-looking information described herein represents our outlook only as of this date, and we undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this Annual Report. i ITEM 1. BUSINESS Overview PART I Computer Programs and Systems, Inc. ("we," "CPSI" or the "Company") is a leading provider of healthcare information technology solutions for rural (including critical access) and community hospitals, with over 650 client hospitals in 46 states and the District of Columbia. During 2014 we entered the international healthcare information technology marketplace by completing a new system installation in the Caribbean nation of St. Maarten. Founded in 1979, we are a single-source vendor providing comprehensive software and hardware products, complemented by complete installation services and extensive support. Our fully integrated, enterprise-wide system automates clinical and financial data management in each of the functional areas of a hospital. Our software and hardware products and installation and support services are further complemented by business management, consulting and managed information technology ("IT") services offered by our wholly-owned subsidiary, TruBridge, LLC ("TruBridge"). We believe our products and services enhance hospital performance in the critical areas of clinical care, revenue cycle management, cost control and regulatory compliance. Our target market includes rural and community hospitals with 300 or fewer acute care beds. Our primary focus within this defined target market is on hospitals with 100 or fewer acute care beds, which comprise approximately 94% of our hospital customer base. In addition to our target market, we provide information technology services to other entities in the healthcare industry, such as nursing homes, home health agencies and physician clinics. Inclusive of these other entities, our products and services are utilized by over 12,000 healthcare providers in over 1,000 facilities in 49 states and the District of Columbia. During 2014, we generated revenues of $204.7 million from the sale of our products and services. Industry Dynamics The healthcare industry is the largest industry in the United States economy, comprising approximately 17.4% of the U.S. gross domestic product in 2013 according to the Centers for Medicare and Medicaid Services ("CMS"). CMS estimates that by fiscal 2023 total U.S. healthcare spending will reach $5.2 trillion, or 19.3% of the estimated U.S. gross domestic product. Hospital services represents one of the largest categories of total healthcare expenditures, comprising approximately 32.1% of total healthcare expenditures in 2013 according to the CMS. According to the American Hospital Association’s AHA Hospital Statistics, 2015 Edition, there are approximately 4,200 community hospitals in the United States that are in our target market of hospitals with 300 or fewer acute care beds, with approximately 2,600 of those in our primary area of focus of 100 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 long-term acute care. 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 and their dependency on Medicare and Medicaid populations for a substantial portion of their revenue. However, we believe healthcare providers can successfully address these issues with the help of advanced medical information systems and our suite of complementary services. Specific examples of the challenges and opportunities facing healthcare providers include the following: Changing Economic Dynamics. The economy of the healthcare industry, although not immune to general macroeconomic conditions, is heavily impacted by legislative and regulatory initiatives of the federal and state governments. These legislative and regulatory initiatives have a particularly significant impact on our customer base, as rural and community hospitals typically generate a significant portion of their revenues from beneficiaries of the Medicare and Medicaid programs. Consequently, even small changes in these federal and state programs have a disproportionately larger impact on rural and community hospitals as compared to larger facilities where greater portions of their revenues are typically generated from beneficiaries of private insurance programs. Medicare funding and reimbursements fluctuate year to year and, with the growth in healthcare costs, will continue to be 1 scrutinized as the federal government attempts to control the costs and growth of the program. The Medicaid program, which is a federal/state program managed by the individual states and dependent in part on funding from the states, also continues to experience funding issues due to the increasing cost of healthcare and limited state revenues. Mandatory cuts in federal spending resulting from the Budget Control Act of 2011 became effective on March 1, 2013. Although Medicaid is specifically exempted from the cuts mandated by the legislation, it includes a reduction of up to 2% in federal Medicare spending, all of which will be achieved by reduced reimbursements to healthcare providers. Additionally, the Patient Protection and Affordable Care Act, more commonly referred to as the Affordable Care Act (the "ACA"), contains a number of provisions designed to reduce Medicare and Medicaid program spending by significant amounts, many of which are already in effect. As the federal government seeks in the future to further limit deficit spending due to fiscal restraints, it will likely continue to cut entitlement spending programs such as Medicare and Medicaid matching grants which will place further cost pressures on hospitals and other healthcare providers. Furthermore, federal and state budget shortfalls could lead to potential reductions in funding for Medicare and Medicaid. Reductions in reimbursements from Medicare and Medicaid could lead to hospitals postponing expenditures on information technology. While legislative and regulatory initiatives are placing significant pressure on Medicare and Medicaid reimbursements, our customer base of rural and community hospitals are also likely faced with increases in demand for Medicare and Medicaid services. We expect that the demand for Medicare and Medicaid services will increase for the foreseeable future due to the growing number of people born during the post-World War II baby boom becoming eligible for Medicare benefits at age 65 and Medicaid coverage expanding under the provisions of the ACA. The challenges posed by this dual-threat of increased demand for Medicare and Medicaid services and downward pressure on reimbursements are further complicated by the shift away from volume-based reimbursement towards value-based reimbursement, linking reimbursement to quality measurements and outcomes. To compete in the continually changing healthcare environment, providers are increasingly using technology in order to help maximize the efficiency of their business practices, to assist in enhancing patient care, and to maintain the privacy of patient information. Healthcare providers are placing increased demands on their information systems to accomplish these tasks. We believe that information systems must facilitate management of patient information across administrative, financial and clinical tasks. Information systems must also effectively interface with a variety of payor organizations within the increasingly complex reimbursement environment. The American Recovery and Reinvestment Act of 2009. In February 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act (the "ARRA"). This $787 billion economic stimulus package includes a number of healthcare policy provisions, including approximately $19 billion in funding over a ten-year period for health information technology infrastructure and Medicare and Medicaid incentives to encourage doctors, hospitals and other providers to use health information technology to electronically exchange patients’ health information, through the development of health information exchanges ("HIE") and the adoption of electronic health records ("EHR"). Approximately $2 billion of the total funding amount is in appropriated funds for discretionary grants, loans and technical assistance programs designed to aid providers with the development of HIE by individual states and the adoption of EHR. These funds are being disbursed by various agencies within the Department of Health and Human Services, either directly to providers – including private physician offices – or to other entities like states or non-profit organizations. The remaining allocated amounts take the form of Medicare and Medicaid payment incentives. The ARRA identifies four priority areas for spending with respect to health information technology: (1) HIE establishment; (2) EHR adoption; (3) workforce training; and (4) new technology research and development. In order to qualify for EHR funding, providers are required to adopt an EHR system and connect to an HIE, which means funding is dependent on state action to establish HIEs. We have been focused on ensuring that we take the necessary steps to meet the needs of rural and community hospitals to help them gain access to the incentives made available under the ARRA. Primary among those steps is ensuring that our technology meets the ARRA’s EHR certification requirements. During 2010, both our hospital and medical practice EHR solutions were certified as a complete EHR by the Certification Commission for Health Information Technology ("CCHIT®"). Receiving this certification for both our hospital and medical practice EHR products ensures that both hospitals and providers using our EHR systems can attain "meaningful use" 2 of EHRs and qualify for certain EHR incentives. Continuing this focus on ensuring that our technology meets the ARRA's EHR certification requirements, during 2013 Version 19 of our hospital and medical practice EHR systems were each certified by CCHIT® as complete EHRs in compliance with the Office of the National Coordinator for Health Information Technology ("ONC") 2014 Edition criteria. The ONC 2014 Edition criteria support both stage one and stage two meaningful use measures required to qualify eligible hospitals and providers for funding under the ARRA. As a result of our obtaining the CCHIT® certification and our track record with our hospital customers successfully achieving meaningful use, the ARRA has had and should continue to have a positive impact on our business and the businesses of the rural and community hospitals that comprise our target market. Continued Push for Improved Patient Care. With the increased pressure to reduce medical errors and improve patient safety, driven in part by the general shift towards value-based reimbursement, hospitals are actively seeking information technology solutions for clinical decision support. This migration toward clinical decision support solutions is further supported by the ARRA. Provisions of the ARRA offer incentives for hospitals to become meaningful users of EHRs through September 2015. Hospitals and healthcare providers that did not implement and demonstrate meaningful use of EHRs by October 1, 2014 were penalized with lower Medicare payment levels after that date. In the face of decreasing revenue and increasing pressure to improve patient care, healthcare providers are in need of management tools and related services 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. A hospital’s failure to adequately invest in a modern medical information system could result in fewer patient referrals, cost inefficiencies, lower than expected reimbursement, increased malpractice risk and possible regulatory infractions. Despite challenging economic conditions, we believe the industry has increased and will continue to increase its adoption of information technology as a management tool, particularly as a result of the ARRA. Additionally, we believe that the industry will continue to increase its utilization of third party services that contribute to the achievement of these and other objectives necessary for success in the current environment. We believe these dynamics should allow for future revenue growth for both our information technology solutions and our complementary suite of services. 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, rural and 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. These pressures on the operating environments of rural and community hospitals were increased with the passage of the ARRA in 2009 which, in addition to providing incentives to healthcare providers to achieve meaningful use of EHR, has resulted in lowered Medicare payment levels for healthcare providers that have yet to achieve meaningful use of EHR. We believe that the CPSI solution meets these challenges facing rural and community hospitals by providing fully integrated, enterprise-wide and ARRA certified medical information systems and services that are compliant with the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and 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 component of our complete solution, we provide ongoing customer service through regular interaction with customers, customer user groups and extensive customer support. Further, through our wholly- owned subsidiary, TruBridge, we offer business management, consulting and managed IT services that allow customers to avoid some of the fixed costs of a business office and leverage our expertise and resources in helping them identify their IT objectives, define the best way to meet those requirements and manage the resulting projects and associated technologies. As a result, 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 continually 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 3 sensitive and responsive to the ever-changing demands of our customers and regularly updating our products, we believe that we provide an information technology solution that meets the needs of rural and community hospitals. Our business has continued to grow because we have successfully addressed the needs of rural and 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. In January 2013, we formed TruBridge as a wholly-owned subsidiary focusing exclusively on providing business management, consulting and managed IT services to rural and community healthcare organizations. While our traditional customer base for these services has been those rural and community healthcare organizations who have selected CPSI as their single-source healthcare information solutions provider, we believe that the formation of TruBridge will allow for an improved focus of our marketing and service delivery resources and assist us in expanding the customer base for these service offerings to all rural and community healthcare organizations, regardless of their primary healthcare information solutions provider. Strategy Our objective is to continue to grow as a leading provider of healthcare information technology systems and services to rural and community hospitals by expanding on the strategy that we have successfully pursued for over thirty 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. Through TruBridge, we also offer our customers additional services such as business management, consulting and managed IT 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 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 close to 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 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 for our Software and Hardware Products. We will continue to target small hospitals of 100 or fewer acute care beds, as well as expand our presence in midsize hospitals of 300 or fewer acute 4 care beds. In addition, a number of our customers are small specialty hospitals that focus on discrete medical areas such as surgery, rehabilitation and long-term acute care. We intend to continue gaining customers from this market segment. Our system can help these smaller hospitals reduce costs and increase their operating efficiencies. We believe our personalized marketing approach and emphasis on customer relationships are attractive to the management of these hospitals. We also believe our system is well-suited to hospitals of this size because they typically demonstrate a greater commitment than larger hospitals to the concept of an enterprise-wide, fully integrated system. In addition, we will continue to sell software and hardware products and additional services to our existing customers who have not purchased our complete package of products and services. Expand Presence in Target Market for our Suite of Additional Services. In January 2013, we formed TruBridge as a wholly-owned subsidiary focusing exclusively on providing business management, consulting and managed IT services to rural and community healthcare organizations. While we will continue our previous strategy of continuing to sell additional services to those rural and community healthcare organizations that have selected CPSI as their single-source healthcare information solutions provider, we believe that the formation of TruBridge will enable us to more effectively market and further expand our target market for these service offerings to all healthcare providers, regardless of their primary healthcare information solutions provider. There are approximately 4,200 community hospitals in the United States that are in our target market of hospitals with 300 or fewer acute care beds, with approximately 2,600 of those in our primary area of focus of 100 or fewer acute care beds. Given the magnitude of the marketplace for TruBridge’s services, the ability to expand the customer base for our suite of services beyond the more than 650 hospitals who have selected CPSI as their primary healthcare information solutions provider has the potential to drive significant revenue growth. Emphasize Other Recurring Revenue Opportunities. In addition to revenues from new system installations, we have developed and will continue to develop sources of recurring revenues. Our current principal source of recurring revenues is our support and maintenance fees paid by existing customers. As our customer base grows, our recurring revenues from support and maintenance fees should also grow. We believe recurring revenues will also continue to increase from the business management, consulting and managed IT services provided by TruBridge, which we market to all rural and community healthcare organizations, regardless of their primary healthcare information solutions provider. Our business management services include electronic billing, patient statement processing, accounts receivable management, payroll processing, ISP services and web site hosting. Our consulting services include IT staffing, IT infrastructure assessment, and project management for application implementation and meaningful use attestation. Our managed IT services include managed network services, server and storage management, and desktop support, as well as communications, connectivity, security and data center services. Our Products and Services New Products During 2014, our development efforts focused on the completion of our emergency department application. This new application completed beta testing and was made generally available to our customers in the fourth quarter of 2014. The emergency department application is specifically designed for the care environment and workflow of a hospital emergency department. The application will provide comprehensive and customizable patient tracking boards; real time displays of patient locations, statuses and order/results alerts; computerized physician order entry specific to emergency care and workflow; evaluation and management coding specific to emergency department patients; and department-contained order routing and resulting. We feel that our emergency department application will allow customers to apply information system efficiencies to the most costly care environment in the hospital. We also completed development of our Medical Practice EHR5 suite in 2014. Medical Practice EHR5 is a retooling of our original Medical Practice EHR product through which we were able to improve the clinician experience in the ambulatory environment by taking advantage of the techniques and processes developed for ClientWare5, successfully implemented with our ChartLink suite and CPOE application, and used in the development of our Emergency Department suite. With this update, the clinician-focused components of our EHR system now provide both a unified user experience and a consolidated portfolio of functional capabilities across the continuum of care. Medical Practice EHR5 was made generally available to all of our customers in the second quarter of 2014. 5 Development efforts in 2015 include (1) the release of an iPad app, (2) Clinical Content, and (3) Data Analytics with a focus on Population Health. The iPad app will provide users with access to our EHR system from Apple iOS devices. The initial focus is on providers, with the first function delivered through the app being access to our mobile rounding suite. This suite will provide physicians with quick access to patient charts allowing for the review of patient information, vitals, medication lists, test results, problems and history. Additionally, it will allow the providers to pend orders and set reminders for later tasks to be performed from a PC. The iPad app with the mobile rounding suite is scheduled to be made generally available to all of our customers in the third quarter of 2015. Clinical Content will work in conjunction with our existing Emergency Department suite, Multi-Disciplinary Documentation application and Medical Practice EHR5 suite. This content will provide structured specialty-specific patient care documentation using our managed entry methodology and content. Our new Content Services Department will oversee the creation and maintenance of this, ensuring the product reflects on-going best practices. Clinical Content is scheduled to be made generally available to all of our customers in the third quarter of 2015 Data Analytics is an initiative at CPSI that will utilize intelligent data mining across multiple customer facilities in order to perform analytic tasks such as predictive data modeling, scoring, categorization and classification. Our use of big data will provide facilities with the critical indicators they need to manage population health concerns. We are currently reviewing the outcomes of a pilot utilizing a suite of predictive models developed for readmission risk focusing on key disease conditions. Software Systems We offer a full array of software applications designed to streamline the flow of information to the primary functional areas of rural and community hospitals in one fully integrated system. We intend to continue to enhance our existing software applications and develop new applications as required by evolving industry standards and the changing needs of our customers. Pursuant to our customer support agreements, we provide our customers with software enhancements and upgrades periodically on a when-and-if-available basis. See "Support and Maintenance Services." These enhancements enable each customer, regardless of its original installation date, to have the benefit of the most advanced CPSI products available. Our software applications: • • • • • • provide automated processes that improve clinical workflow and support clinical decision-making; allow healthcare providers to efficiently input and easily access the most current patient medical data in order to improve 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 Software as a Service ("SaaS") services; and increase the flow of information by replacing centralized data over which there is limited control 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 6 • 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 have installed the core applications of patient management and financial accounting and all hardware necessary to run these applications. In addition to the core applications, customers may also purchase one or more of our clinical, patient care and enterprise applications. Over two-thirds of our customers have purchased a combination of applications that meet their enterprise-wide information technology needs. The general functional categories, as well as the software applications in each of these categories, are described below. Patient Management. Our patient management software enables a hospital to identify a patient at any point in the healthcare delivery system and to collect and maintain patient information throughout the entire process of patient care on an enterprise-wide basis. The single database structure of our software permits authorized hospital personnel to simultaneously access appropriate portions of a patient’s record from any point on the system. Our patient management software: Registration • records patient admissions, discharges and transfers • manages patient status, room assignments and recurring charges • keeps information available to all hospital personnel in formats designed for their particular requirements Patient Accounting • records patient charges and maintains accounts receivable information including aging, service charges and cash receipts • generates and processes insurance claims Health Information Management • supports the operational needs of the modern medical records department including transcription, case indexing/abstracting and statistical reporting • tracks deficiencies in a patient’s chart and provides chart location information Patient Index • maintains a master index of hospital patients and provides immediate online access to patient financial and medical data associated with a patient stay We also offer the following optional products that may be purchased as part of our core patient management suite: Enterprise Wide Scheduling • maintains all patient scheduling information Contract Management • tracks patients enrolled in managed care plans and conforms billing functions to such plans Quality Improvement • automates hospital-wide total quality management and reporting requirements for utilization activity, risk management, infection surveillance and all accreditation review functions 7 Financial Accounting. Our financial accounting software provides a variety of business office applications designed to efficiently track and coordinate information needed for managerial decision-making. Our financial accounting software: Executive Information System • summarizes daily financial transactions regarding patient revenues, receipts, census statistics and billing information for ready access by hospital administrators General Ledger • provides timely, accurate financial information generated from daily hospital operations • formats financial statements to the specifications of each user and is able to generate up to 999 different user-defined reports Accounts Payable • processes vendor invoices and payments and their related general ledger entries Payroll/Personnel • calculates all employee wages and benefits for an unlimited number of salaried and hourly employees • allocates employee time to user-defined cost centers Time and Attendance • uses touch-screen time clocks to eliminate manual time entry • reduces effort of gathering employee time data and increases access of managers to such data • makes time records more accurate by identifying employees through bar- coding and optional biometric fingerprint technology Electronic Direct Deposits • provides for computerized bank deposits to meet payroll and accounts payable needs Human Resources • provides for computerized employee files through document/image scanning and data entry • allows for complete tracking of benefits and other employee data through a variety of user-defined reports • tracks job applicant information to assist in the employee recruiting and hiring process Budgeting • allows for complete online budget preparation through computerized access to historical data Fixed Assets • allows access to information regarding hospital assets including locations and depreciation scheduling Materials Management • tracks the flow of materials throughout the hospital • automates the process of inventory control, materials purchasing, stock requisitions and patient charging 8 Clinical. Our clinical software automates record keeping and reporting for many clinical functions including laboratory, radiology, physical therapy, respiratory care and pharmacy. These products eliminate tedious paperwork, calculations and written documentation while allowing for easy retrieval of patient data and statistics. Our clinical software: Laboratory Information Systems • provides an interface to laboratory analytical instruments in order to transfer results to nurse stations, mobile point-of-care systems and remote physician offices • allows users to receive orders from any designated location, process orders and report results, and maintain technical, statistical and account information Laboratory Instrument Interfaces • provides an automated solution for reviewing test results and completing patient orders • reduces the amount of required manual data entry thereby reducing the likelihood of human error • reduces time to process laboratory specimens Radiology Information Systems • includes flash card printing, patient scheduling, transcription, patient indexing by X-Ray film number, film tracking and location • receives patient data, patient locations and other interdepartmental communications support ImageLink® • provides a complete picture archiving and communications system (PACS) with comprehensive functionality designed to fit seamlessly with our other applications • allows the realization of an electronic health record complete with diagnostic images • provides physicians real-time access to diagnostic images via the internet through ChartLink® Physical Therapy and Respiratory Care • communicates to nursing the appropriate procedures and patient preparation instructions from orders entered into the CPSI system • keeps a journal of the orders received and processed • handles a variety of processing tasks after a patient order is reviewed • allows a department to customize its results to be sent back to nursing Pharmacy • allows the hospital pharmacist to enter and fill physician orders • performs all of the functions related to patient charging, general ledger upgrading, re-supply scheduling and inventory reduction/statistics maintenance • improves patient care by monitoring drug/drug and food/drug interactions, allergy contraindications, dosage ranges and duplicate therapy • produces drug education information for each patient in an easy-to-read format 9 Patient Care. Our patient care applications allow hospitals to create computerized "patient files" in place of the traditional paper file systems. This software enables physicians, nurses and other hospital staff to improve the quality of patient care through increased access to patient information, assistance with projected care requirements and feedback regarding patient needs. Our software also addresses current safety initiatives in the healthcare industry such as the transition from written prescriptions and physician orders to computerized physician order entry. Our patient care software: Order Entry / Results Reporting • provides efficient order and result communication • automates the entry of patient charges • reduces "lost" charges and mistakes due to illegibility • increases efficiency of nursing stations • provides interactive, real time status reports for orders Point-of-Care System • allows nurses to enter patient data into the network at the patient’s bedside thereby eliminating the duplicate entry of information Patient Acuity • utilizes touch-screen and wireless technology • makes patient information instantly available throughout the entire hospital system • categorizes patients according to an assessment of the acuity of the illness, severity of the symptoms, and projected nursing dependency • allows nurses to project the total character and amount of care that should be provided to each patient ChartLink® • provides physicians with a secure and interactive portal to patient information through a hospital’s web site • optional computerized physician order entry, including the ability to enter medication and ancillary test and treatment orders Medication Verification • verifies the accuracy of patient medication orders at a patient’s bedside by comparing scans of patient and medication bar codes against past medication orders for that patient • screens medication orders for possible patient allergies and/or drug interactions Resident Assessment Instruments • allows nursing staff to complete time consuming resident reporting requirements in an expeditious and efficient manner • generates nursing care plans based on deficiencies in the resident reports 10 Medical Practice EHR Outreach Client Access • provides medical practices and clinics with a complete CCHITSM certified electronic medical record • supports patient account management and insurance processing for single and multiple practices/clinics • automates medical practice workflow with an interactive white board, template driven documentation, image capture/document scanning and an integrated superbill • integrated with CPSI’s ChartLink® EMR portal, the module provides immediate and secure access to the patient’s complete ambulatory and inpatient history • supports both hospital-based and remote practices/clinics • supports patient account management and insurance processing for home health agencies • provides complete, regulatory compliant home care tracking • provides for remote in-home documentation of care • provides the hospital’s outreach clients, such as physicians, their office administrators, nursing homes, home health agencies and local businesses, with remote access to online, real-time, secure patient data as needed and appropriate for each outreach client • includes insurance and billing information, diagnosis and procedure coding, discharge summaries, pharmacy profiles and other clinical and administrative information Electronic Forms • electronic form templates replace paper-based records and care forms • completed forms become a permanent part of the patient’s electronic health record Physician Documentation • electronic documentation of all aspects of a physician/patient encounter • documentation is integrated with clinical applications to allow inclusion of diagnostic results, patient clinical data, patient diagnosis, medications and orders • promotes compliance with regulatory standards while assisting in optimizing reimbursement for services provided Emergency Department • designed for the care environment and workflow of a hospital emergency department • provides comprehensive and customizable patient tracking boards, real- time displays of patient locations, statuses and order/results alerts, computerized physician order entry specific to emergency care and workflow, evaluation and management coding specific to emergency department patients, and department-contained order routing and resultings Enterprise Applications. We provide software applications that support the products described above and are useful to all areas of the hospital. These applications include: ad hoc reporting, automatic batch and real-time system backups, an integrated fax system, archival data repository, document scanning and Microsoft Office integration and an Application Portal. The Application Portal allows clients to access our applications remotely via Microsoft Internet Explorer and the Internet without requiring the loading of any additional client software on the accessing PC. User information and data accessed is secured with HIPAA compliant 128 bit cipher strength Secure Socket Layer (SSL) encryption. Remote access using the Application Portal results in no discernible difference to the user in software functionality. 11 Support and Maintenance Services After a customer installs a CPSI system, we provide software application support, hardware maintenance, continuing education and related services pursuant to a support agreement. The following describes services provided to customers using CPSI systems. Total System Support. We believe the quality of continuing customer support is one of the most critical considerations in the selection of an information system provider. We provide hardware, technical and software support for all aspects of our system which gives us the flexibility to take the necessary course of action to resolve any issue. Unlike our competitors who use third-party services for hardware and software support, we provide a single, convenient and efficient resource for all of our customers’ system support needs. In order to minimize the impact of a system problem, we train our customer service personnel to be technically proficient, courteous and prompt. Because a properly functioning information system is crucial to a hospital’s operations, our support teams are available 24 hours per day to assist customers with any problem that may arise. Customers can also use the Internet to directly access our support system. This allows customers to communicate electronically with our support teams at any time. With approximately 480 employees as of December 31, 2014 who provide customer service and support, we currently have close to a one-to-one support staff to customer ratio. User Group. All of our customers have the opportunity to be members of our user group from which we solicit feedback regarding our products. We host a national user group meeting annually. This group meets to discuss and recommend product modifications and improvements which it then evaluates and prioritizes. Upon confirming that the desired improvements are technically feasible, we agree to allocate a significant amount of programming time each year to undertake the requested modification or improvement. The majority of our product enhancements originate from suggestions from our customers that we receive through the user group structure. Software Releases. We are committed to providing our customers with software and technology solutions that will continue to meet their information system needs. To accomplish this purpose, we continually work to enhance and improve our application programs. As part of this effort, for each customer covered under our general support agreement, we provide software updates as they become available at no additional cost. We design these enhancements to be seamlessly integrated into each customer’s existing CPSI system. The benefit of these enhancements is that each customer, regardless of its original installation date, uses the most advanced CPSI software available. Through this process, we can keep our customers up-to-date with the latest operational innovations in the healthcare industry as well as with changing governmental regulatory requirements. Another benefit of this "one system" concept is that our customer service teams can be more effective in responding to customer needs because they maintain a complete understanding of and familiarity with the one system that all customers use. Purchasing a new information technology system requires the expenditure of a substantial amount of capital and other resources, and many customers are concerned that these systems will become obsolete as technology changes. Our periodic product updates eliminate our customers’ concerns about system obsolescence. We believe providing this benefit is a strong incentive for potential customers to select our products over the products of our competitors. Hardware Replacement. As part of our general support agreements, we are also committed to promptly replacing malfunctioning system hardware in order to minimize the effect of operational interruptions. By offering all hardware used in our system, we believe we are better able to meet and address all of the information technology needs of our customers. Cloud Electronic Health Record (EHR). In some circumstances, we offer Cloud EHR services to customers via remote access telecommunications. Cloud EHR is a "Software as a Service" or "SaaS" configuration and is in essence a subscription to access and use application software maintained by CPSI in a cloud environment for a monthly fee. Under this configuration, a customer is able to obtain access to an advanced EHR without a significant initial capital outlay. We store and maintain all Cloud EHR customers’ critical patient and administrative data using TruBridge Cloud Computing Services. These customers access this information remotely through direct telecommunications connections. 12 Forms and Supplies. We offer our customers the forms that they need for their patient and financial records, as well as their general office supplies. Furnishing these forms and supplies helps us to achieve our objective of being a one-source solution for a hospital’s complete healthcare information system requirements. Business Management, Consulting, and Managed Information Technology Services We offer complementary services through TruBridge, our wholly-owned subsidiary, which can be grouped into the following categories: • Business Management Services • Consulting Services • Managed Information Technology Services Business Management Services. Our business management services consist of the following service offerings: Electronic Billing Insurance Services Statement Processing Accounts Receivable Management Payroll Processing Contract Management • We provide electronic billing for customers at prices competitive with other electronic billing vendors. Once a customer processes patient insurance claims using our system, we then perform the electronic billing function with no other participation by hospital staff. With this service, customers do not need to prepare billing files or maintain interfaces with third-party software, thereby saving the customer both time and money. • In addition to electronic billing, we offer customers complementary insurance services, including insurance follow-up, claim eligibility checking, claim status checking, pharmacy online adjudication, medical necessity database updates, Medicare Connect access, review of health services transactions and electronic remittances. Using these services allows customers to improve their revenue cycle management by reducing the incidents of invalid claims, monitoring the progress of valid claims, and ensuring the timely and accurate application of insurance payments. • Our customers may choose to have us prepare and distribute all patient billing statements. We use our knowledge of a customer’s collection system to produce statements without requiring any action on the part of the hospital data processing personnel. Because we can connect directly with a customer’s system, the customer is not required to build and transfer files to us. All system enhancements are incorporated into the statement process without having to modify any third-party vendor interface. Similar to electronic billing, this service saves the customer both time and money. • We offer customers the option of using us to perform their patient billing functions and accounts receivable management. Using this service allows customers to reduce costs by employing fewer full-time administrative employees. • We offer customers the option of using us to perform their payroll functions, including payroll processing, tax and deduction management, quarterly and yearly reporting, and electronic pay stubs. • We offer customers the option of using us to perform audits of payments from third-party insurers with which a customer executes managed care contracts to ensure payments are made in accordance with the agreed upon metrics. 13 Consulting Services. Our consulting services consist of the following service offerings: Revenue Cycle Consulting Clinical Consulting Information Technology ("IT") Consulting • We offer customers revenue cycle consulting services, including revenue cycle assessment, process redesign, interim management, benchmarking, ICD-10 Readiness and custom contracted services. With decades of experience in healthcare operations, we understand what works in rural and community healthcare contexts and are able to develop achievable plans to help customers meet their revenue cycle goals. • We offer customers clinical consulting services, including computerized physician order entry adoption, meaningful use achievement, point-of- care utilization, clinical application roll-out, physician documentation, medical practice management, medication reconciliation and custom contracted services. With decades of experience in electronic health record technology, our consultants are intimately familiar with what is required to meet regulatory mandates and create useful clinical information systems for caregivers of all kinds. • We offer customers IT consulting services, including strategic planning, IT infrastructure assessment, IT planning, design and deployment, IT resource services, security risk assessment and custom contract services. With a clear understanding of the IT issues and challenges faced by rural and community healthcare enterprises, our consultants can identify a path that will make best use of a hospital’s existing infrastructure, while positioning the hospital for the challenges yet to come. Managed Information Technology ("IT") Services. Our managed IT services consist of the following service offerings: Cloud Computing • We offer customers cloud computing services utilizing server and storage resources maintained in our SOC 1 accredited data center. Cloud computing utilizes virtual environments to meet customer processing and data storage needs for live operations, disaster recovery co-location, testing and training, and system backups. Internet Service Provider • As part of our total information solution, we can provide Internet connection services to our customers. We also can provide web site design and hosting services. Managed Network Services Server and Storage Management Desktop Support • We offer comprehensive support for LAN, WLAN, WAN and VPN infrastructures for those customers needing assistance with their data networks. Security updates, hardware support, network monitoring, wireless access management, VPN and private point-to-point connectivity management and monitoring solutions can be subscribed to based on the client’s unique needs. • We offer complete management of CPSI-installed server and storage technology, including monitoring, administration and change management solutions to enhance client availability strategies for those important assets. • We offer timely support for desktop hardware, operating systems, select application software and peripheral devices. Desktop support offerings can help expedite problem resolution and ensure employees are not hindered by technological obstacles. 14 Communications Solutions • We offer a robust set of fault tolerant communications hosting solutions for web sites and electronic mail, smartphone email integration and DNS services. Connectivity Solutions • We provide a variety of solutions to help ensure clients can stay connected to the Internet in remote locations, including MPLS, Metro-E, DSL, DS-1, DS-3 and other options. Security Services • We offer complete solutions for protecting the integrity of information systems and keeping systems compliant with federal security laws, including HIPAA privacy and security requirements. Solutions for malware (anti-virus protection), Internet content filtering and firewall administration can all be provided by CPSI. Data Center Services • We offer a SOC 1 accredited data center to house and manage client servers and storage technologies. Solutions for managing these environments and the provision of other data center services, such as disaster recovery co-location and remote testing services, are available. The following table presents our revenues by major solutions and services as a percentage of total revenues: Sales revenues: System sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Support and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business management, consulting and managed IT services . . . . . . . . . . Year ended December 31, 2014 2013 2012 36.7% 35.9% 27.4% 100.0% 39.7% 35.6% 24.7% 100.0% 39.6% 36.7% 23.7% 100.0% System Implementation and Training Conversion Services. When a customer purchases our system, we convert its existing data to the CPSI system. Our knowledge of hospital data processing, in conjunction with extensive in-house technical expertise, allows us to accomplish this task in a cost effective manner. When we install a new system, the data conversion has already occurred so that the system is immediately operational. Our goal is for each customer to be immediately productive in order not to waste time and money on the costly and inefficient task of maintaining the same data on parallel systems. Our services also relieve the hospital staff of the time-consuming burden of data conversion. Training. In order to integrate the new system and to ensure its success, we spend approximately three to four weeks providing individualized training on-site at each customer’s facility at the time of installation. We directly train all hospital users, including staff members and healthcare providers, during all hospital shifts in the use of hardware and software applications. In contrast, some of our competitors train only a hospital’s training staff at an off-site location. We employ nurses, medical technicians, and providers in addition to our technical training staff in order to help us communicate more effectively with our customers during the training process. Technology Operating Systems and Server Platform. The CPSI system features a Linux operating system, open source SQL-compliant database, Java™ and a cross-platform user interface (UI). This reliable platform allows CPSI to provide its clients with an extensive range of capabilities to enhance IT operations and implement other new, complementary technologies, such as role-based customization and access from various end-user devices. The SQL- compliant database offers the ability to efficiently mine the mass of clinical data being captured by a hospital EHR system to meet the hospital's internal demands along with regulatory and interoperability requirements. 15 Server and Storage. Whether managing multiple guest machines on a hypervisor or operating a single bare metal server, the enterprise class hardware provided as part of CPSI’s turnkey solution is based on individual customer requirements. The robust infrastructure solutions implemented are scalable while still providing for high availability, redundancy and data integrity. Certified and trained technicians are employed to provide timely support and maintenance on all hardware currently supported by the Company. ClientWare®. CPSI provides a client/server based solution where its ClientWare® application integrates the Linux environment with other end-user devices. This integration brings together the strengths and flexibility of many operating environments and devices. The processing power of Linux combined with the communication and portability aspects of other operating systems creates an information system that allows the use of familiar "point and click" processing. CPSI’s latest versions of ClientWare® offer easy interface with and access to a wide range of devices and applications. Information Availability. EHR availability is crucial for continued patient care during system outages. CPSI offers several hardware and software options to assist its clients in creating an acceptable data recovery and business contingency plan based on the suite of applications utilized. These options range from hardware redundancy, real- time data replication and server clustering to maintaining availability of vital patient information during planned system maintenance. Data Security. Protecting individually identifiable health information and other sensitive data is a critical and essential function of CPSI’s solutions. A variety of industry-standard approaches which meet or exceed regulatory requirements such as HIPAA and HITECH are employed. To assist in avoiding unauthorized access for the life span of this data, diverse methods of identification, authentication, authorization and encryption are utilized at various layers, inclusive of the operating system, application software and hardware. These concepts are shared amongst servers and other end-user devices and are complemented by our Change Management module which allows the software change control cycle to be a formal, defined process. Product Development and Enhancement We continually work to improve and enhance the CPSI system and to develop new products and services for our customers. The primary source of ideas for improvements to our products and services comes from our customers, which submit suggestions to us through our national user group. We believe our interaction with customers and their communication with each other is the most efficient way to learn about and respond to changes in the healthcare operating environment. Our management and customer support and service teams play a significant role in product development by continually monitoring the needs and desires of our customers and our market. In addition to our customer support and service teams, a Product Development Services division was created in 2008. This division is responsible for the design, development, quality assurance/testing, and distribution of all application software. By consolidating all of our development efforts under a single division, we can ensure standardization in our software development processes and effective utilization of our resources. This approach to research and development allows us to quickly adapt to technological advances and improve our products and services to better serve the needs of our customers. As of December 31, 2014, we had 193 employees in our Product Development Services division, including 9 research and development employees whose dedicated function is to develop new uses for and applications of technology available in the marketplace. During the years ended December 31, 2014, 2013 and 2012, we expended approximately $2.9 million, $2.8 million and $2.8 million, respectively, on research and development activities. Customers, Sales and Marketing Target Market. The target market for our EHR system consists of small and midsize hospitals of 300 or fewer acute care beds, with a primary focus on hospitals with 100 or fewer acute care beds. In the United States, there are approximately 4,200 community hospitals with 300 or fewer acute care beds, with approximately 2,600 of these having 100 or fewer acute care beds. In addition, we market our products to small specialty hospitals in the United States that focus on discrete medical areas such as surgery, rehabilitation and long-term acute care. As of the date of this filing, we have installed our system in over 650 facilities in 46 states and the District of Columbia. Approximately 94% of our existing customers are hospitals with 100 or fewer acute care beds, while approximately 99% of our existing customers are hospitals with 200 or fewer acute care beds. 16 During 2014 we entered the international healthcare information technology marketplace by completing a new system installation in the Caribbean nation of St. Maarten. We are actively evaluating opportunities in Canada and believe our EHR system would fit well within the Canadian healthcare system. Our research to date indicates the Canadian adoption of electronic healthcare systems is approximately five years behind that of the United States market. We also believe a significant opportunity exists to sell our ambulatory EHR system on a stand-alone basis, especially to those physician practices located in the same communities as our client hospitals. We believe this would include a significant number of unique physician practices. Our goals in the inpatient hospital market are threefold: (1) target those hospitals under 100 beds in the United States whose vendor has struggled with the federal EHR adoption program, (2) selectively expand into English- speaking international markets with the initial efforts being focused on Canada and (3) selectively target hospitals in the 100 to 300 bed market that we believe offer a reasonable chance of sales success based on size, location and other factors. Our goal in the ambulatory market is to aggressively target physician practices in those communities where the local hospital is a current CPSI client. The following table presents our revenues generated from customers located within the US ("domestic") and all foreign countries, in total ("international"). Year ended December 31, 2014 2013 2012 Sales revenues: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 203,730,687 1,011,450 International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 204,742,137 $ 200,863,332 — $ 200,863,332 $ 183,309,403 — $ 183,309,403 Sales Staff. Most of our new customers are either referrals from our existing customers or approach us directly based on our name recognition in the rural and community hospital EHR market. Our sales lead qualification process allows our new prospect sales staff to be targeted in their efforts, reducing the need for a large sales force. As of December 31, 2014, we had 38 employees dedicated to direct sales, 17 of whom concentrate on new prospects, and 21 of whom are responsible for the sale of additional products and services to existing customers. We hire our sales representatives from our existing employees. Over three-quarters of our sales representatives have over 10 years of experience with the Company, including experience in installation, training and customer support. Our new prospects sales representatives have defined geographic territories in the United States in which to target new customers. Our sales representatives who sell to existing customers have assigned hospitals within their territory, which is also geographically based. A significant portion of the compensation for all sales personnel except for administrative support staff is commission based. Marketing Strategy. Our primary marketing strategy is to generate referrals from our existing customers and directly solicit potential users through presentations at industry seminars and trade shows. Due to the success of the ARRA in fostering EHR adoption, 98% of the hospitals in the United States have implemented an EHR system, the vast majority of which are certified as in compliance with the requirements of the ARRA. In order to differentiate our EHR and related products and services offerings, we have undertaken an extensive re-branding project focused on our use of new technologies and our customer implementation and support model that is specifically focused on the rural and community hospital market. For hospitals that we have targeted as potential customers, most of our direct sales efforts involve product demonstrations, site visits and meetings with hospital management. The typical sales cycle of an EHR system usually takes six to eighteen months from the time of initial contact to the signing of a contract. Therefore, we believe it is important for our sales staff to dedicate a substantial amount of time and energy to building relationships with potential new customers. We do not conduct extensive marketing activities and promotions because hospitals are easily identified, finite in number and generally send a request for proposal to vendors when they contemplate the purchase of a hospital information system. 17 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 and maintenance, business management, consulting and managed IT services. As of December 31, 2014, we had a twelve-month backlog of approximately $36 million in connection with non-recurring system purchases and approximately $123 million in connection with recurring payments under support and maintenance, business management, consulting and managed IT services. The backlog amounts exclude amounts to be recognized in subsequent periods related to First Generation Meaningful Use Installment Plans (see Management's Discussion and Analysis for a detailed discussion of these arrangements). As of December 31, 2013, we had a twelve-month backlog of approximately $51 million in connection with non-recurring system purchases and approximately $116 million in connection with recurring payments under support and maintenance, business management, consulting and managed IT services. Competition The market for our products and services is competitive, and we expect additional competition from established and emerging companies in the future. Our market is characterized by rapidly changing technology, global shifts in the healthcare system, evolving user needs and impactful regulatory and reimbursement changes. We believe the principal competitive factors that hospitals consider when choosing between us and our competitors are: • • • • • • • product features, functionality and performance; level of customer service and satisfaction; ease of integration and speed of implementation; product price; knowledge of the healthcare industry; sales and marketing efforts; and company reputation. Our principal competitors are Medical Information Technology, Inc. ("Meditech"), Healthland Inc. ("Healthland"), and MEDHOST, Inc. ("MEDHOST"). Meditech, Healthland and MEDHOST compete with us directly in our target market of small and midsize hospitals. These companies offer products and systems that are comparable to our system and address the needs of hospitals in the markets we serve. Our secondary competitors include McKesson Corporation, Epic Systems Corporation, Cerner Corporation, Quality Systems, Inc. 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 will sometimes compete with us directly or, more commonly, a larger health system who uses a system from one of these companies will offer it to a smaller hospital as part of a merger or alliance. Our secondary competitors also include Prognosis Health Information Systems LLC and Razor Insights, LLC, which are smaller than us. We also face competition from providers of practice management systems, general decision support and database systems and other segment-specific applications. 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 than we have. Products of our competitors may have better performance, lower prices and broader market acceptance than our products. We expect that competition will continue to increase. 18 Health Information Security and Privacy Practices The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") is a federal law that affects the use, disclosure, transmission and storage of certain individually identifiable health information, referred to as "protected health information," and that was enacted for the purpose of, among other things, protecting the privacy and security of protected health information. As directed by HIPAA, the Department of Health and Human Services (the "DHHS") has promulgated standards and rules for certain electronic health transactions, code sets, data security, unique identification numbers and privacy of protected health information. HIPAA and the standards promulgated by DHHS apply to certain health plans, healthcare clearinghouses and healthcare providers (referred to as "covered entities"), which includes our hospital customers. The Health Information Technology for Economic and Clinical Health Act and its implementing regulations published in January 2013 (the "HITECH Act") significantly expand HIPAA by extending privacy and security standards to "business associates" of healthcare providers that are covered entities. Under the HITECH Act, business associates are required to establish administrative, physical and technical safeguards and are subject to direct penalties for violations. Certain of our services, including those provided through our wholly-owned subsidiary, TruBridge, frequently entail us acting as a healthcare clearinghouse and/or in the capacity of a business associate to the hospitals that we serve. As a result, we are covered by the patient privacy and security standards of HIPAA and subject to oversight by DHHS. We believe that we have taken all necessary steps to comply with HIPAA, as it applies to us as a business associate, but it is important to note that DHHS could, at any time in the future, adopt new rules or modify existing rules in a manner that could require us to change our systems or operations. Internal Management Control System We have developed and maintain an automated enterprise management system which permits us to manage not only all of our internal management, accounting and personnel functions, but also all information relating to each customer’s information system. Our system maintains detailed records of all information regarding each customer’s system, including all system specifications, service history and customer communications, among other things. This internal control system helps us to more effectively respond to customer support needs through complete and current system information and through situation-based problem solving. Intellectual Property We regard some aspects of our internal operations, software and documentation as proprietary, and rely primarily on a combination of contract and trade secret laws to protect our proprietary information. We believe, because of the rapid pace of technological change in the computer software industry, trade secret and copyright protection is less significant than factors such as the knowledge, ability and experience of our employees, frequent software product enhancements and the timeliness and quality of our support services. We cannot guarantee that these protections will be adequate or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. We do not believe our software products or other CPSI proprietary rights infringe on the property rights of third parties. However, we cannot guarantee that third parties will not assert infringement claims against us with respect to current or future software products or that any such assertion may not require us to enter into royalty arrangements or result in costly litigation. Employees As of December 31, 2014, we had 1,379 employees, almost all of whom are located at our offices in Mobile, Fairhope and Lanett, Alabama and Monroe, Louisiana. Our employees can be grouped according to the following general categories: 482 in software services and support, 509 in business management, consulting and managed IT services, 97 in information technology services and support, 193 in product development services, 49 in sales and marketing and 49 in administration. Our general practice is to recruit recent college graduates for entry-level positions and then promote these individuals within the organization to fill vacancies in higher positions. We also hire nurses and other medically-trained professionals in connection with our support services. 19 Since 1991, we have maintained a non-qualified discretionary profit-sharing plan under which all full-time, non-equity compensated and non-commission compensated employees with three years of uninterrupted service are eligible to participate. The plan is designed to provide each eligible employee with periodic cash bonuses based on our profitability. Each eligible employee receives a pro rata share of the amount of cash distributed under the profit- sharing plan based on the amount of his or her base salary compared to the sum of the salaries of all participating employees. Our profit-sharing plan is not a qualified plan for tax purposes or a guaranteed benefit. Contributions to the plan are made periodically at the sole discretion of the Board of Directors. During 2014, we distributed approximately $4.3 million under this profit-sharing plan. We plan to continue to make distributions under this plan based on our profitability. We are fortunate to have a high rate of employee retention, with our executive officers having an average tenure in excess of 22 years. Our performance depends in significant part on our ability to attract, train and retain highly qualified personnel. None of our employees are represented by a labor union, and we believe our relations with our employees are good. Executive Officers The executive officers of CPSI serve at the pleasure of the Board of Directors. Set forth below is a list of the current executive officers of CPSI and a brief explanation of each individual’s principal employment during the last five years. J. Boyd Douglas – President and Chief Executive Officer. J. Boyd Douglas, age 48, has served as our President and Chief Executive Officer since May 2006. He was elected as a director in March 2002. Mr. Douglas began his career with us in August 1988 as a Financial Software Support Representative. From May 1990 until November 1994, Mr. Douglas served as Manager of Electronic Billing, and from December 1994 until June 1999, he held the position of Director of Programming Services. From July 1999 until May 2006, Mr. Douglas served as our Executive Vice President and Chief Operating Officer. Mr. Douglas’s wife’s sister’s husband, Mr. Patrick A. Immel, is an executive officer of the Company. Mr. Immel is not a "family member" of Mr. Douglas under NASDAQ Listing Rule 5605. David A. Dye – Chief Financial Officer, Secretary and Treasurer. David A. Dye, age 45, has served as our Chief Financial Officer, Secretary and Treasurer since July 1, 2010. Mr. Dye served as our President and Chief Executive Officer from July 1999 to May 2006. He was elected as a director in March 2002 and has served as our Chairman of the Board since May 2006. Mr. Dye began his career with CPSI in May 1990 as a Financial Software Support Representative and served in various capacities until July 1999. Mr. Dye has served as a director of Bulow Biotech Prosthetics, LLC, a company headquartered in Nashville, Tennessee that operates prosthetic clinics in the Southeastern United States, since July 2006. Victor S. Schneider – Executive Vice President–Corporate and Business Development. Victor S. Schneider, age 56, has served as our Executive Vice President–Corporate and Business Development since January 2013. Prior to his appointment as Executive Vice President – Corporate and Business Development, Mr. Schneider served as our Senior Vice President – Corporate and Business Development since December 2005. Mr. Schneider is responsible for revenue generation efforts, customer relations, strategic growth initiatives and positioning, and market execution. Mr. Schneider began his career with us in June 1983 as Sales Manager. He served in that capacity until January 1997 when he was promoted to Sales Director. He served as our Vice President–Sales and Marketing from July 1999 until December 2005. Robert D. Hinckle – Senior Vice President–Software Services. Robert D. Hinckle, age 45, served as our Vice President–Software Services from October 2004 until January 2013 and has served as our Senior Vice President – Software Services since January 2013. Mr. Hinckle is responsible for overseeing all aspects of the installation and support of our software products. Since beginning his career with us in 1995 as a Financial Software Support Representative, Mr. Hinckle has worked in various positions in our Software Services Division, including Team Manager, Assistant Director and Director of that division. Troy D. Rosser – Senior Vice President–Sales. Troy D. Rosser, age 50, has served as our Senior Vice President–Sales since January 2012, having previously served as Vice President – Sales since October 2005. 20 Mr. Rosser is responsible for overseeing all of our sales and marketing efforts. Mr. Rosser began his career with us in March 1989 as a Financial Software Support Representative. In 1992, Mr. Rosser was transferred to the Sales and Marketing division where he has worked in various positions, including Sales Manager and, from October 2000 until October 2005, Director of Sales. Michael K. Muscat, Jr. – Senior Vice President–Product Development Services. Michael K. Muscat, Jr., age 41, has served as our Senior Vice President – Product Development Services since March 2008. Mr. Muscat is responsible for overseeing all aspects of the development, quality assurance/testing, documentation, and distribution of all application software. Mr. Muscat began his career with us in July 1996 as a Software Support Representative. Mr. Muscat then served as a Programmer and Manager of Outsourcing Services. From June 2002 to May 2006, Mr. Muscat served as the Director of Business Management Services and from May 2006 until March 2008 as the Vice President of Business Management Services. In January 2013, the Company announced the formation of Trubridge, LLC ("TruBridge"), a wholly-owned subsidiary of CPSI. The executive officers of TruBridge serve at the pleasure of the Board of Directors of CPSI. Set forth below is a list of the current executive officers of TruBridge and a brief explanation of each individual’s principal employment during the last five years. Christopher L. Fowler – President–TruBridge. Christopher L. Fowler, age 39, has served as the President of TruBridge since its formation in January 2013. Mr. Fowler is responsible for overseeing all aspects of the business management, consulting and managed IT services we provide to our customers through TruBridge. Prior to the formation of TruBridge, Mr. Fowler served as CPSI’s Vice President – Business Management Services since March 2008. Mr. Fowler began his career with us in May 2000 as a Software Support Representative and later as a manager of Financial Software Services. From August 2004 until March 2008, Mr. Fowler served as Assistant Director and Director of Business Management Services. Patrick A. Immel – Senior Vice President of Professional Services–TruBridge. Patrick A. Immel, age 44, has served as the Senior Vice President of Professional Services of TruBridge since its formation in January 2013. Mr. Immel is responsible for overseeing the managed IT and consulting services we provide to our customers through TruBridge. Prior to the formation of TruBridge, Mr. Immel served as CPSI’s Vice President–Information Technology Services since January 2000. Mr. Immel began his career with us in July 1993 as a Financial Software Support Representative. Since that time, Mr. Immel has served as a programmer, Manager of Technical Support and Director of Information Technology Services. Mr. Immel’s wife’s sister’s husband, Mr. J. Boyd Douglas, is an executive officer of the Company. Mr. Douglas is not a "family member" of Mr. Immel under NASDAQ Listing Rule 5605. Company Web Site The Company maintains a web site at http://www.cpsi.com. The Company makes available on its web site, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, as soon as it is reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. The Company is not including the information contained on or available through its web site as a part of, or incorporating such information into, this Annual Report on Form 10-K. 21 ITEM 1A. RISK FACTORS There is significant uncertainty in the healthcare industry, both as a result of recently enacted legislation and changing government regulation, which may have a material adverse impact on the businesses of our hospital customers and ultimately on our business, financial condition and results of operations. The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement processes and operation of healthcare facilities, including our hospital customers. During the past several years, the healthcare industry has been subject to an increase in governmental regulation of, among other things, reimbursement rates and certain capital expenditures. Recently enacted public laws reforming the U.S. healthcare system may have an impact on our business. The Patient Protection and Affordable Care Act (H.R. 3590; Public Law 111-148) (the "ACA") and The Health Care and Education Reconciliation Act of 2010 (H.R. 4872) (the "Reconciliation Act"), which amends the ACA (collectively the "Health Reform Laws"), were signed into law in March 2010. The Health Reform Laws contain various provisions which impact us and our customers. Some of these provisions have a positive impact, by expanding the use of electronic health records in certain federal programs, for example, while others, such as reductions in reimbursement for certain types of providers, have a negative impact due to fewer available resources. Increases in fraud and abuse penalties may also adversely affect participants in the healthcare sector, including us. Among other things, the Health Reform Laws require nearly all individuals to have health insurance, expand Medicaid eligibility, mandate material changes to the delivery of healthcare services and reduce the reimbursement paid for such services in order to generate savings in the Medicare program. The Health Reform Laws also modify certain payment systems to encourage more cost-effective care and a reduction of inefficiencies and waste, including through new tools to address fraud and abuse. It is likely that the Health Reform Laws will affect hospitals differently depending upon the populations they serve and their payor mix. Our target market of rural and community hospitals typically serve higher uninsured populations than larger urban hospitals and rely more heavily on Medicare and Medicaid for reimbursement. It remains to be seen whether the increase in the insured population for rural and community hospitals will be sufficient to offset actual and proposed additional cuts in Medicare and Medicaid reimbursements contained in the Health Reform Laws. The Health Reform Laws will ultimately lead to significant changes in the healthcare system. Because not all of the administrative rules implementing the Health Reform Laws have been finalized, and because of ongoing federal fiscal budgetary pressures yet to be resolved for federal health programs, the full impact of the legislation and of further statutory and regulatory actions to reform healthcare on our business is unknown, but there can be no assurances that the legislation will not adversely impact either our operational results or the manner in which we operate our business. Healthcare industry participants may respond to the Health Reform Laws by reducing their investments or postponing investment decisions, including investments in our solutions and services. Various legislators have announced that they intend to examine further proposals to reform certain aspects of the U.S. healthcare system. Healthcare providers may react to these proposals, and the uncertainty surrounding such proposals, by curtailing or deferring investments, including those for our systems and related services. Cost- containment measures instituted by healthcare providers as a result of regulatory reform or otherwise could result in a reduction in the allocation of capital funds. Such a reduction could have an adverse effect on our ability to sell our systems and related services. On the other hand, changes in the regulatory environment have increased and may continue to increase the needs of healthcare organizations for cost-effective data management and thereby enhance the overall market for healthcare management information systems. We cannot predict what effect, if any, such additional proposals or healthcare reforms might have on our business, financial condition and results of operations. As existing regulations mature and become better defined, we anticipate that these regulations will continue to directly affect certain of our products and services, but we cannot fully predict the effect at this time. We have taken steps to modify our products, services and internal practices as necessary to facilitate our compliance with the regulations, but there can be no assurance that we will be able to do so in a timely or complete manner. Achieving 22 compliance with these regulations could be costly and distract management’s attention and divert other company resources, and any noncompliance by us could result in civil and criminal penalties. The healthcare industry is heavily regulated at the local, state and federal levels. Our failure to comply with regulatory requirements could create liability for us, result in adverse publicity and negatively affect our business. The healthcare industry is heavily regulated and is constantly evolving due to the changing political, legislative and regulatory landscapes. In some instances, the impact of these regulations on our business is direct to the extent that we are subject to these laws and regulations ourselves. However, these regulations also impact our business indirectly as, in a number of circumstances, our solutions, devices and services must be capable of being used by our customers in a way that complies with those laws and regulations, even though we may not be directly regulated by the specific healthcare laws and regulations. There is a significant number of wide-ranging regulations, including regulations in the areas of healthcare fraud, e-prescribing, claims processing and transmission, medical devices, the security and privacy of patient data and interoperability standards, that may be directly or indirectly applicable to our operations and relationships or the business practices of our customers. Specific areas that are subject to increased regulation include, but are not limited to, the following: Healthcare Fraud. Federal and state governments continue to enhance regulation of and increase their scrutiny over practices potentially involving healthcare fraud, waste and abuse by healthcare providers whose services are reimbursed by Medicare, Medicaid and other government healthcare programs. Our healthcare provider customers are subject to laws and regulations regarding fraud and abuse that, among other things, prohibit the direct or indirect payment or receipt of any remuneration for patient referrals, or arranging for or recommending referrals or other business paid for in whole or in part by these federal or state healthcare programs. Federal enforcement personnel have substantial funding, powers and remedies to pursue suspected or perceived fraud and abuse. The effect of this government regulation on our customers is difficult to predict. Many of the regulations applicable to our customers and that may be applicable to us, including those relating to marketing incentives offered in connection with medical device sales, are vague or indefinite and have not been interpreted by the courts. They may be interpreted or applied by a prosecutorial, regulatory or judicial authority in a manner that could broaden their applicability to us or require our customers to make changes in their operations or the way in which they deal with us. If such laws and regulations are determined to be applicable to us and if we fail to comply with any applicable laws and regulations, we could be subject to civil and criminal penalties, sanctions or other liability, including exclusion from government healthcare programs, which could have a material adverse effect on our business, results of operations and financial condition. Even an unsuccessful challenge by a regulatory or prosecutorial authority of our activities could result in adverse publicity, could require a costly response from us and could adversely affect our business, results of operations and financial condition. E-Prescribing. The use of our solutions by physicians for electronic prescribing and electronic routing of prescriptions via the Surescripts network to pharmacies is governed by federal and state laws. States have differing regulations that govern the electronic transmission of certain prescriptions and prescription requirements. Standards adopted by the National Council for Prescription Drug Programs and regulations adopted by the Centers for Medicare and Medicaid Services ("CMS") related to "EPrescribing and the Prescription Drug Program" set forth implementation standards for the transmission of electronic prescriptions. These standards are detailed and broad, and cover not only routing transactions between prescribers and pharmacies, but also electronic eligibility, formulary and benefits inquiries. In general, regulations in this area can be burdensome and evolve regularly, meaning that any potential benefits to our customers from utilizing such solutions and services may be superseded by a newly- promulgated regulation that adversely affects our business model. Our efforts to provide solutions that enable our customers to comply with these regulations could be time consuming and expensive. Claims Processing and Transmission. Our system electronically transmits medical claims by physicians to patients’ payors for immediate approval and reimbursement. In addition, we offer business management services that include the manual and electronic processing and submission of medical claims by healthcare providers to patients’ payors for approval and reimbursement. Federal law provides that it is both a civil and a criminal violation for any person to submit, or cause to be submitted, a claim to any payor, including, without limitation, Medicare, Medicaid and all private health plans and managed care plans, seeking payment for any service or product that overbills or 23 bills for items that have not been provided to the patient. We have in place policies and procedures that we believe assure that all claims that are transmitted by our system and through our services are accurate and complete, provided that the information given to us by our customers is also accurate and complete. If, however, we do not follow those procedures and policies, or they are not sufficient to prevent inaccurate claims from being submitted, we could be subject to substantial liability including, but not limited to, civil and criminal liability. Additionally, any such failure of our billing and collection services to comply with these laws and regulations could adversely affect demand for our services and could force us to expend significant capital, research and development, and other resources to address the failure. In most cases where we are permitted to do so, we calculate charges for our billing and collection services based on a percentage of the collections that our customers receive as a result of our services. To the extent that violations or liability for violations of these laws and regulations require intent, it may be alleged that this percentage calculation provides us or our employees with incentive to commit or overlook fraud or abuse in connection with submission and payment of reimbursement claims. CMS has stated that it is concerned that percentage-based billing services may encourage billing companies to commit or to overlook fraudulent or abusive practices. A portion of our business involves billing Medicare claims on behalf of our clients. In an effort to combat fraudulent Medicare claims, the federal government offers rewards for reporting of Medicare fraud which could encourage others to subject us to a charge of fraudulent claims, including charges that are ultimately proved to be without merit. As discussed below, the HIPAA security and privacy standards also affect our claims transmission services, since those services must be structured and provided in a way that supports our customers’ HIPAA compliance obligations. Regulation of Medical Devices. The United States Food and Drug Administration (the "FDA") has determined that certain of our solutions, such as our ImageLink® product, are medical devices that are actively regulated under the Federal Food, Drug and Cosmetic Act, as amended. If other of our solutions are deemed to be actively regulated medical devices by the FDA, we could be subject to extensive requirements governing pre- and post-marketing activities including pre-market notification clearance. Complying with these medical device regulations is time consuming and expensive, and our marketing and other sales activities could be subject to unanticipated and significant delays. Further, it is possible that the FDA may become more active in regulating software and medical devices that are used in the healthcare industry. If we are unable to obtain the required regulatory approvals for any such software or medical devices, our short- to long-term business plans for these solutions or medical devices could be delayed or canceled and 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. Security and Privacy of Patient Information. Federal, state and local laws regulate the confidentiality and security of patient records and the circumstances under which those records may be released. These regulations govern both the disclosure and use of confidential patient medical record information and require the users of such information to implement specified security and privacy measures. United States regulations currently in place governing electronic health data transmissions continue to evolve and are often unclear and difficult to apply. In the United States, HIPAA regulations require national standards for some types of electronic health information transactions and the data elements used in those transactions, security standards to ensure the integrity and confidentiality of health information, and standards to protect the privacy of individually identifiable health information. Covered entities under HIPAA, which include healthcare organizations such as our customers, and our claims processing, transmission and submission services, are required to comply with the privacy standards, transaction regulations and security regulations. Moreover, HITECH and associated regulatory requirements extend many of the HIPAA obligations, formerly imposed only upon covered entities, to business associates as well. As a business associate of our customers who are covered entities, we were in most instances already contractually required to ensure compliance with the HIPAA regulations as they pertain to the handling of covered customer data. 24 However, the extension of these HIPAA obligations to business associates by law has created additional liability risks related to the privacy and security of individually identifiable health information. Evolving HIPAA and HITECH-related laws or regulations could restrict the ability of our customers to obtain, use or disseminate patient information. This could adversely affect demand for our solutions and devices if they are not re-designed in a timely manner in order to meet the requirements of any new interpretations or regulations that seek to protect the privacy and security of patient data or enable our customers to execute new or modified healthcare transactions. We may need to expend additional capital and software development and other resources to modify our solutions to address these evolving data security and privacy issues. Furthermore, our failure to maintain the confidentiality of sensitive personal information in accordance with the applicable regulatory requirements could damage our reputation and expose us to claims, fines and penalties. Federal and state statutes and regulations have granted broad enforcement powers to regulatory agencies to investigate and enforce compliance with these privacy and security laws and regulations. Federal and state enforcement personnel have substantial funding, powers and remedies to pursue suspected or perceived violations. If we fail to comply with any applicable laws or regulations, we could be subject to civil penalties, sanctions or other liability. Enforcement investigations, even if meritless, could have a negative impact on our reputation, cause us to lose existing customers or limit our ability to attract new customers. ARRA Meaningful Use Program. Various federal and state government agencies are developing standards that could become mandatory for systems purchased by entities that are funded by these agencies. For example, the ARRA requires "meaningful use of certified electronic health record technology" by healthcare providers by 2015 in order to receive incentive payments. Regulations have been issued that identify standards and implementation specifications and establish the certification standards for qualifying EHR technology. Nevertheless, these standards and specifications are subject to interpretation by the entities designated to certify such technology. While a combination of our solutions has been certified as meeting both stage one and stage two standards for certified electronic health record technology, the regulatory standards to achieve certification will continue to evolve over time. We may incur increased development costs and delays in delivering solutions if we need to upgrade our software or healthcare devices to be in compliance with these varying and evolving standards. In addition, delays in interpreting these standards may result in postponement or cancellation of our customers’ decisions to purchase our software solutions. If our software solutions are not compliant with these evolving standards, our market position and sales could be impaired and we may have to invest significantly in changes to our software solution. Interoperability Standards. Our customers are concerned with and often require that our software and systems be interoperable with other third party healthcare information technology systems. Market forces or governmental or regulatory authorities could create software interoperability standards that would apply to our software and systems, and if our software and systems are not consistent with those standards, we could be forced to incur substantial additional development costs. For example, the HITECH Act contains interoperability standards that healthcare providers are required to adhere to in order to receive stimulus funds from the federal government under the ARRA. Compliance with these and related standards is becoming a competitive requirement and, although a combination of our solutions has been certified as meeting all such required interoperability standards to date, maintaining such compliance with these varying and evolving rules may result in increased development costs and delays in upgrading our customer software and systems. To the extent these rules are narrowly construed, subsequently changed or supplemented, or that we are delayed in achieving certification under these evolving rules for applicable products, our customers may postpone or cancel their decisions to purchase or implement our software and systems. As it relates specifically to interoperability, during 2013 we announced our membership in CommonWell Health Alliance ("CommonWell"), a not-for-profit trade association comprised of healthcare information technology vendors devoted to the notion that patient data should be safely, securely and immediately available to patients and healthcare providers to support better care delivery, regardless of where that care occurs. CommonWell is committed to fostering standards that make this possible, and to having healthcare information technology companies embed these capabilities natively and cost effectively into their EHR systems. Despite our membership in CommonWell, there is no guarantee that we will successfully manage the interoperability of our software and systems with third-party health IT providers. 25 Standards for Submission of Healthcare Claims. CMS has mandated the use of new patient codes for reporting medical diagnosis and inpatient procedures, referred to as the ICD-10 codes. CMS is requiring all providers, payors, clearinghouses and billing services to utilize these ICD-10 codes when submitting claims for payment. ICD-10 codes will affect medical diagnosis and inpatient procedure coding for everyone covered by HIPAA, not just those who submit Medicare or Medicaid claims. Claims for services provided on or after October 1, 2015 must use ICD-10 codes for medical diagnosis and inpatient procedures or they will not be paid. We do not anticipate significant remaining costs associated with implementing the use of the ICD-10 codes within our products and services. However, if our products and services do not accommodate CMS mandates at any future date, customers may cease to use those products and services that are not compliant and may choose alternative vendors and products that are compliant. This could adversely impact future revenues. Economic, market and other 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 that could adversely affect overall spending on healthcare information technology and services. For example, the recent economic recession and continued decrease in availability of credit, combined with actual and potential reductions in federal and state funding for Medicare and Medicaid, has caused hospitals to reduce, eliminate or postpone information technology related and other 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 revenue growth rate. There are a limited number of hospitals in our target market. Saturation or consolidation in the healthcare industry could result in the loss of existing customers, a reduction in our potential customer base and downward pressure on the prices of our products and services. The limited number of hospitals with 300 or fewer acute care beds in our general target market, coupled with the accelerated adoption of EHRs resulting from the ARRA's EHR incentive program, has resulted in an ever narrowing market for new system installations which could materially and adversely impact our business, financial condition and operating results. We have identified opportunities for continued growth and expansion in the form of (1) an expanded replacement market for EHRs as certain existing EHR vendors have struggled and are expected to continue to struggle with the expanding requirements of the ARRA's EHR adoption program, (2) selective expansion into English-speaking international markets, (3) selective expansion within the 100 to 300 bed hospital market, and (4) targeted expansion of the footprint for our ambulatory solutions by aggressively targeting physician practices in those communities where the local hospital is a current CPSI customer. Although we have formulated strategic responses for capitalizing on each of the identified opportunities, there is no guarantee that such responses will ultimately prove successful. Additionally, to the extent that these opportunities fail to develop or develop more slowly than expected, our business, financial condition and operating results could be materially and adversely impacted. 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. 26 Volatility in and disruption to the global capital and credit markets and tightened lending standards may adversely affect our ability to access credit in the future, the cost of any credit obtained in the future, and the financial soundness of our customers and our business. Domestic and international events during the last several years have resulted in volatility and disruption to the global capital and credit markets, manifested in the bankruptcy or restructuring of certain financial institutions and reduced lending activity by other financial institutions. Although certain indices and economic data have shown signs of stabilization in the United States and certain global markets, there can be no assurance that these improvements will be broad-based or sustainable. While the Company does not currently have any debt, continued or increased volatility and disruption in the global capital and credit markets may adversely affect the availability, terms and cost of credit should we seek it in the future. Although we believe that our operating cash flow and financial assets will give us the ability to meet our financing needs for the foreseeable future, there can be no assurance that the continued or increased volatility and disruption in the global capital and credit markets will not impair our liquidity or increase the costs of any future borrowing. Our business could also be negatively impacted to the extent that our hospital customers experience disruptions resulting from tighter capital and credit markets, the recent economic recession or cuts in Medicare and Medicaid funding. As a result, hospitals may modify, delay or cancel plans to purchase our software systems or services. Additionally, if hospitals’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, they may not be able to pay, or may delay payment of, accounts receivable owed to us. Any inability of customers to pay us for our products and services may adversely affect our earnings and cash flow. Tightened lending standards and the absence of third-party credit has resulted in many of our hospital customers seeking financing arrangements from us to purchase our software systems and services. These financing arrangements impact our short-term operating cash flow and cash available. Should the requests for these financing arrangements continue or increase, our business could be negatively impacted by our inability to finance these arrangements. In addition, the absence of credit could negatively impact our existing financing receivables should our customers with financing arrangements be unable to meet their obligations. Competition with companies that have greater financial, technical and marketing resources than we have could result in a 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 Meditech, Healthland and MEDHOST. Meditech, Healthland and MEDHOST compete with us directly in our target market of rural and community hospitals with 300 or fewer acute care beds. These companies offer products and services that are comparable to our system and are designed to address the needs of rural and community hospitals. Our secondary competitors include McKesson Corporation, Epic Systems Corporation, Cerner Corporation, Quality Systems, Inc., Siemens Corporation, Prognosis Health Information Systems LLC, and Razor Insights, LLC. Most of 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, consequently, experience lower revenues, revenue growth and profit margins. 27 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. 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 and viruses in our systems could result in customer claims against us and harm to our reputation causing us to incur expenses and/or lose customers. In the course of our business operations, we compile and transmit confidential information, including patient health information. We have included security features in our systems that are intended to protect the privacy and integrity of this information. 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 information technology networks of our customers. In addition, the other systems with which we may interface, such as the Internet and related systems, may be vulnerable to security breaches, viruses, programming errors or similar disruptive problems. 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. Additionally, the effect of security breaches and related issues could disrupt our ability to perform certain key business functions and could potentially reduce demand for our products and services. Accordingly, we have expended significant resources toward establishing and enhancing the security of our related infrastructures, although no assurance can be given that these systems will be entirely free from potential breach. Maintaining and enhancing our infrastructure security may require us to expend significant capital in the future. New products that we introduce or enhancements to our existing products may contain undetected errors or problems that 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 28 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. The vast majority of our facilities and employees are located within 30 miles of 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 business management, consulting and managed IT 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, including back-up systems in remote locations, there can be no 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, business management, and managed IT and professional 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 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 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. 29 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. Because we believe that proprietary rights are material to our success, misappropriation of these rights could limit our ability to compete effectively and adversely affect our financial condition. We are heavily dependent on the maintenance and protection of our intellectual property and we rely largely on a combination of confidentiality provisions in our customer agreements, employee nondisclosure agreements, trademark and trade secret laws and other measures to protect our intellectual property. Additionally, our software is not patented or copyrighted. Although we attempt to control access to our intellectual property, unauthorized persons may attempt to copy or otherwise use our intellectual property. There can be no assurance that the legal protections and precautions we take will be adequate to prevent misappropriation of our technology or that competitors will not independently develop technologies equivalent or superior to ours. 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. Third parties could obtain patents that may require us to negotiate licenses to conduct our business, and the required licenses may not be available on reasonable terms or at all. We also rely on nondisclosure agreements with certain employees, and we cannot be certain that these agreements will not be breached or that we will have adequate remedies for any breach. If we are deemed to infringe on the intellectual property rights of third parties, we could incur unanticipated expense and be prevented from providing our products and services if we cannot obtain licenses to these rights on commercially acceptable terms. We do not believe that our operations or products infringe on the intellectual property rights of others. However, there can be no assurance that others will not assert infringement or trade secret claims against us with respect to our current or future products. 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. In addition, claims against third parties from which we purchase software could adversely affect our ability to access third-party software for our systems. 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. We are dependent on the continued and unimpeded access to the Internet by us and our customers, which is not within our control. We deliver Internet-based services and, accordingly, depend on our ability and the ability of our customers to access the Internet. This access is currently provided by third parties that have significant market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies, mobile communications companies and government-owned service providers - all of whom are outside of our control. In the event of any difficulties, outages and delays by Internet service providers, we may be impeded from providing services, resulting in a loss of potential or existing customers. 30 We may be subject to liability in the event we provide inaccurate claims data to payors. We offer electronic claims submission services as part of our business management services. While we have implemented certain product features designed to maximize the accuracy and completeness of claims submissions, these features may not be sufficient to prevent inaccurate claims data from being submitted to payors. Should inaccurate claims data be submitted to payors, we may be subject to liability claims. We are dependent on our licenses of rights, products and services from third parties, disruptions of which may cause us to discontinue, delay or reduce product shipments. We are increasingly dependent upon licenses for some of the technology used in our products as well as other products and services from third-party vendors, and the costs of these licenses have increased in recent years. Most of these arrangements can be continued/renewed only by mutual consent and may be terminated for any number of reasons. We may not be able to continue using the technology, products or services made available to us under these arrangements on commercially reasonable terms or at all. As a result, we may have to discontinue, delay or reduce product shipments or services provided until we can obtain equivalent technology or services. Most of our third- party licenses are non-exclusive. Our competitors may obtain the right to use any of the business elements covered by these arrangements and use these elements to compete directly with us. In addition, if our vendors choose to discontinue providing their technology, products or services in the future or are unsuccessful in their continued research and development efforts, we may not be able to modify or adapt our own products. We are subject to changes in and interpretations of financial accounting matters that govern the measurement of our performance, one or more of which could adversely affect our business, financial condition, cash flows, revenue and results of operations. Based on our reading and interpretations of relevant guidance, principles or concepts issued by, among other authorities, the American Institute of Certified Public Accountants, the Financial Accounting Standards Board and the Securities and Exchange Commission, we believe revenue received pursuant to our current sales and licensing contract terms and business arrangements have been properly recognized. However, there continue to be issued interpretations and guidance for applying the relevant standards to a wide range of sales and licensing contract terms and business arrangements that are prevalent in the software industry. Future interpretations or changes by the regulators of existing accounting standards or changes in our business practices could result in changes in our revenue recognition and/or other accounting policies and practices that could adversely affect our business, financial condition, cash flows, revenue and results of operations. The unpredictability of our quarterly operating results may cause us to fail to meet revenues or earnings expectations which could cause the price of our common stock to fluctuate or decline. There is no assurance that consistent quarterly growth in our business will occur. 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; the ability of our customers to obtain financing for the purchase of our products; the financial stability of our customers; the specific mix of software, hardware and services in orders from customers; 31 • the timing of new product announcements and product introductions by us and our competitors; • market acceptance of new products, product enhancements and services from us and our competitors; • • • • • • • • • product and price competition; our success in expanding our sales and marketing programs; the availability and cost of system components; delay of revenue recognition to future quarters due to an increase in the sales of our remote access SaaS services; the length of sales cycles and installation processes; changes in revenue recognition or other accounting guidelines employed by us and/or established by the Financial Accounting Standards Board or other rulemaking bodies; accounting policies concerning the timing of recognition of revenue; personnel changes; and general market and economic factors. 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. Because a significant percentage of our expenses are relatively fixed, a variation in the timing of systems sales, implementations and installations can cause significant variations in operating results from quarter to quarter. As a result, we believe that interim period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Further, our historical operating results are not necessarily indicative of future performance for any particular period. We currently recognize revenue pursuant to Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 985-605, Software, Revenue Recognition, or ASC 985-605. ASC 985-605 summarizes the FASB’s views in applying generally accepted accounting principles to revenue recognition in financial statements. There can be no assurance that application and subsequent interpretations of this pronouncement will not further modify our revenue recognition policies, or that such modifications would not adversely affect our operating results reported in any particular quarter or year. Due to all of the foregoing factors, it is possible that our operating results may be below the expectations of securities analysts and investors. In such event, the price of our common stock would likely be adversely affected. Our common stock price has periodically experienced significant volatility, which could result in substantial losses for investors purchasing shares of our common stock and in litigation against us. Volatility may be caused by a number of factors including but not limited to: • • • • • • actual or anticipated quarterly variations in operating results; rumors about our performance, software solutions, or merger and acquisition activity; changes in expectations of future financial performance or changes in estimates of securities analysts; governmental regulatory action; healthcare reform measures; customer relationship developments; 32 • • purchases or sales of Company stock; changes occurring in the markets in general; • macroeconomic conditions, both nationally and internationally; and • other factors, many of which are beyond our control. Furthermore, the stock market in general, and the market for software, healthcare and high technology companies in particular, has experienced significant volatility in recent years that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of actual operating performance. Moreover, in the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources. 33 ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our corporate campus is located on approximately 16.5 acres in Mobile, Alabama and includes approximately 135,500 square feet of office space. Our main campus headquarters building consists of approximately 66,000 square feet of office and warehouse space. We also have eleven additional smaller campus buildings consisting of approximately 6,000 square feet of office space each. Each of these smaller buildings is designed to accommodate a team of employees assigned to install and support a particular software application. We also occupy an additional campus building consisting of approximately 3,500 square feet of office space which houses our sales personnel. The Company also owns 11.3 acres of undeveloped real property adjacent to our corporate campus. On January 1, 2007, we entered into a lease with Riverside Corporation to house a call center to support the growth of our business management services (now offered by our subsidiary, TruBridge). This building consists of approximately 10,000 square feet and is located in Lanett, Alabama. On January 20, 2009, we entered into a lease agreement with Strauss Properties, LLC to house a call center to further support the growth of our business management services (now offered by our subsidiary, TruBridge). This lease consists of approximately 10,800 square feet of space and is located in Monroe, Louisiana. On September 14, 2009, we entered into a lease agreement with 3725 Airport Boulevard, LP to house the majority of our employees providing business management services (now offered by our subsidiary, TruBridge). This lease consists of approximately 32,240 square feet and is located in Mobile, Alabama, approximately 5 miles from our corporate campus location. On February 1, 2010, we entered into a lease agreement with 3725 Airport Boulevard, LP to lease additional space for our employees providing business management services (now offered by our subsidiary, TruBridge). This lease consists of approximately 11,240 square feet and is located in Mobile, Alabama, approximately 5 miles from our corporate campus location. On March 19, 2012, we entered into a lease agreement with Fairhope Group, LLC to lease additional space for our software services employees. This lease consists of approximately 45,020 square feet and is located in Fairhope, Alabama, approximately 30 miles from our corporate campus location. On September 2, 2014, we entered into a lease agreement with Empire Schuylkill, L.P. to house a call center to further the growth of our business management services (now offered by our subsidiary, TruBridge). This lease consists of approximately 12,400 square feet of space and is located in Frackville, Pennsylvania. We do not anticipate the need to lease additional office space in 2015, as we expect that our existing facilities will be sufficient to meet our needs until the end of 2015 and beyond. ITEM 3. LEGAL PROCEEDINGS From time to time, we are involved in routine litigation that arises in the ordinary course of business. We are not currently involved in any claims outside the ordinary course of business that are material to our financial condition or results of operations. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 34 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market for CPSI Common Stock As of March 12, 2015, CPSI had 83 stockholders of record (which does not include the number of beneficial owners whose shares are held in "street" names by broker-dealers and other nominees who are the record holders) and 11,315,573 shares of common stock outstanding. CPSI’s common stock is listed on the NASDAQ Global Select Market under the symbol "CPSI." The following table sets forth, for the calendar quarters indicated, the high and low sales prices per share for CPSI’s common stock on the NASDAQ Global Select Market, and the cash dividends declared per share in each such quarter: High Low Dividends Declared Per Share 2014 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 71.89 67.42 66.71 64.86 54.50 56.31 59.53 62.87 $ $ 56.60 59.21 57.22 57.13 46.08 48.02 47.23 55.36 0.57 0.57 0.57 0.57 0.51 0.51 0.51 0.51 The last reported sales price of CPSI’s common stock as reported on the NASDAQ Global Select Market on March 12, 2015 was $53.04. Dividends During 2014, we paid a quarterly dividend in the amount of $0.57 per share, compared to $0.51 per share during 2013. Additionally, our strong cash position resulted in the decision by our Board of Directors on January 29, 2015 to approve a $0.07 increase in our quarterly dividend to $0.64 per share. We believe that paying dividends is an effective way of providing an investment return to our stockholders and a beneficial use of our cash. However, the declaration of dividends by CPSI is subject to the discretion of our Board of Directors. Our Board of Directors will take into account such matters as general business conditions, our financial results and such other factors as our Board of Directors may deem relevant. 35 ITEM 6. SELECTED FINANCIAL DATA INCOME DATA: Total sales revenues . . . . . . . . . . . . . . . . . . $ Total costs of sales . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses. . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . Total other income . . . . . . . . . . . . . . . . . . . Income before taxes . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . $ Net income per share - basic. . . . . . . . . . . . $ Net income per share - diluted . . . . . . . . . . $ Weighted average shares outstanding: Year Ended December 31, 2014 2013 2012 2011 2010 (in thousands except for share and per share data) 204,742 110,766 93,976 44,389 49,587 152 49,739 16,819 32,920 2.94 2.94 $ $ $ $ 200,863 107,126 93,737 43,493 50,244 466 50,710 17,967 32,743 2.95 2.95 $ $ $ $ 183,309 102,648 80,661 39,384 41,277 721 41,998 12,025 29,973 2.71 2.71 $ $ $ $ 173,476 94,065 79,411 38,116 41,295 667 41,962 16,129 25,833 2.34 2.34 $ $ $ $ 153,247 88,863 64,384 35,287 29,097 674 29,771 11,033 18,738 1.71 1.71 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . 11,025,897 Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 11,026,406 10,997,890 10,997,890 10,976,982 10,976,982 10,961,245 10,961,245 10,941,104 10,941,104 Cash dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.28 $ 2.04 $ 2.84 $ 1.44 $ 1.44 2014 2013 2012 2011 2010 As of December 31, BALANCE SHEET DATA Cash and cash equivalents . . . . . . . . . . . . . $ Working capital. . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . Total stockholders’ equity. . . . . . . . . . . . . . $ 23,792 63,355 99,325 18,161 80,781 $ 11,729 51,301 92,535 21,451 69,083 $ 8,912 32,486 77,839 18,461 57,202 $ 6,664 37,498 75,645 16,671 57,384 2,940 35,135 62,735 14,485 46,464 36 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations in conjunction with the "Selected Financial Data" and our financial statements and the related notes included elsewhere in this Annual Report. 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 Annual Report. Background CPSI was founded in 1979 and specializes in delivering comprehensive healthcare information systems and related services to rural and community hospitals. Our systems and services are designed to support the primary functional areas of a hospital and to enhance access to necessary financial and clinical information. Our comprehensive system enables healthcare providers to improve clinical, financial and administrative processes and outcomes. Our products and services provide solutions in key areas, including patient management, financial accounting, clinical, patient care and enterprise applications. In addition to servicing small to medium-sized hospitals, we provide information technology services to other related entities in the healthcare industry, such as nursing homes, home health agencies and physician clinics. 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 business management, consulting and managed information technology ("IT") services, including electronic billing submissions, patient statement processing and accounts receivable management, as part of our overall information system solution. Our system currently is installed and operating in over 650 hospitals in 46 states and the District of Columbia. During 2014, we entered the international healthcare information technology marketplace by completing a new system installation in the Caribbean nation of St. Maarten. Our customers primarily consist of rural and community hospitals with 300 or fewer acute care beds, with hospitals having 100 or fewer acute care beds comprising approximately 94% of our customers. Inclusive of other entities in the healthcare industry, such as nursing homes, home health agencies and physician clinics, our products and services are utilized by over 12,000 healthcare providers in over 1,000 facilities in 49 states and the District of Columbia. Management Overview Historically we have primarily sought revenue growth through sales of healthcare information technology systems and related services to existing and new customers within our target market. Our strategy has produced consistent revenue growth over the long term, as reflected in five- and ten-year compounded annual growth rates in revenues of approximately 9.9% and 9.5%, respectively. Selling new and additional products and services to our existing customer base is an important part of CPSI’s future revenue growth. We believe that as our customer base grows, the demand for additional products and services, including business management, consulting and managed IT services, will also continue to grow, supporting further increases in recurring revenues. We also expect to drive revenue growth from new product development that we may generate from our research and development activities. In January 2013, we announced the formation of TruBridge, LLC ("TruBridge"), a wholly-owned subsidiary of CPSI. TruBridge provides the business management, consulting and managed IT services that historically had been provided by CPSI, with the expectation of expanding both our service offerings and our footprint in this particular marketplace in the future. We expect this strategic initiative to allow us to more fully take advantage of the market opportunities in providing such services by facilitating the expansion of our target market to include the entire rural and community hospital market, no longer limiting the market for our services to hospitals where CPSI already serves as the primary IT vendor. In addition to revenue growth, our business model is focused on earnings growth. Once a hospital has installed our system, we continue to provide support and maintenance services to the customer on an ongoing basis. These 37 services are typically provided by the same personnel who perform our system installations, resulting in an increased gross margin as the substantial majority of the related costs are relatively fixed. We also look to increase margins through cost containment measures where appropriate. Turbulence in the U.S. and worldwide economies and financial markets impacts almost all industries. While the healthcare industry is not immune to economic cycles, we believe it is more significantly affected by U.S. regulatory and national health projects than the economic cycles of our economy. Additionally, healthcare organizations with a large dependency on Medicare and Medicaid populations, such as rural and community hospitals, have been impacted by the challenging financial condition of the federal government and many state governments and government programs. Accordingly, we recognize that prospective hospital customers often do not have the necessary capital to make investments in information technology. Additionally, in response to these challenges, hospitals have become more selective regarding where they invest capital, resulting in a focus on strategic spending that generates a return on their investment. Despite these challenges, we believe healthcare information technology is often viewed as more strategically beneficial to hospitals than other possible purchases because the technology offers the possibility of a quick return on investment. Information technology also plays an important role in healthcare by improving safety and efficiency and reducing costs. Additionally, we believe most hospitals recognize that they must invest in healthcare information technology to meet current and future regulatory, compliance and government reimbursement requirements. As our new system installation customers expect significant cash inflows in the form of electronic health record ("EHR") incentive payments from the federal and state governments, we have experienced a significant demand for financing arrangements allowing these customers to minimize the near-term impact on their current cash resources. Our response to such demand has been the implementation of financing arrangements that allow customers to utilize anticipated cash inflows under the EHR incentive program in satisfaction of their payment obligations in purchasing our EHR solution. These payment terms have been particularly pervasive in the population of our new system installations since 2011, with such arrangements comprising nearly all new system installations during 2013, as this was the last year an eligible hospital could begin participation in the EHR incentive program and receive the full four years of incentive payments under the program. Customers seeking and receiving such financing arrangements comprised approximately one-third of our new system installations during the year ended December 31, 2014. Historically, we have made financing arrangements available to customers on a case-by- case basis depending upon various aspects of the proposed contract and customer attributes. These financing arrangements include short-term payment plans, longer-term lease financing through us or third-party financing companies, and Software as a Service ("SaaS") arrangements. We intend to continue to work with prospective customers to provide for financing arrangements to purchase our systems so long as such arrangements do not adversely affect our financial position or long-term liquidity. We believe that meeting the financial needs of rural and community hospitals while allowing for the profitable expansion of our footprint in this market will remain both an opportunity and a challenge for us in the foreseeable future. American Recovery and Reinvestment Act of 2009 While ongoing financial challenges facing healthcare organizations have impacted and are expected to continue to impact the rural and community hospitals that comprise our target market, we believe that the incentives offered by the American Recovery and Reinvestment Act of 2009 (the "ARRA") for the adoption of qualifying EHRs has increased and will continue to support demand for healthcare information technology and will have a positive impact on our business prospects through 2015. As of January 31, 2015, incentive payments totaling $29.1 billion have been made to aid healthcare organizations in modernizing their operations through the acquisition and wide-spread use of healthcare information technology. Eligible hospitals can begin receiving these incentive payments in any year from 2011 through 2015, but the total incentive payment will decrease for hospitals that started receiving payments in 2014 and later. Additionally, if an eligible healthcare provider did not begin to demonstrate meaningful use of an EHR by October 1, 2014, then reimbursement under Medicare will begin to be reduced. We have been focused on ensuring that we take the necessary steps to meet the needs of rural and community hospitals to help them gain access to the incentives made available under the ARRA. Primary among those steps is ensuring that our technology meets the ARRA’s EHR certification requirements. During 2010, both our hospital and 38 medical practice EHR solutions were certified as a complete EHR by CCHIT®. Receiving this certification for both our hospital and medical practice EHR products ensures that both hospitals and providers using our EHR systems can attain "meaningful use" of EHRs and qualify for certain EHR incentives. Continuing this focus on ensuring that our technology meets the ARRA's EHR certification requirements, during 2013 Version 19 of our hospital and medical practice EHR systems were certified by CCHIT® as complete EHRs in compliance with the Office of the National Coordinator for Health Information Technology ("ONC") 2014 Edition criteria. The ONC 2014 Edition criteria support both stage one and stage two meaningful use measures required to qualify eligible hospitals and providers for funding under the ARRA. According to the most recently available data reported by the ONC and the Centers for Medicare and Medicaid Services ("CMS"), as of January 31, 2015, CPSI is third among all vendors in terms of the number of successful hospital customer attestations for complete EHR systems. As a result of our obtaining the necessary certifications and our track record with our hospital customers successfully achieving meaningful use, the ARRA has had and should continue to have a positive impact on our business and the businesses of the rural and community hospitals that comprise our target market. The accelerated adoption of EHRs resulting from the ARRA's EHR incentive program has resulted in an ever narrowing market for new system installations and has accelerated the purchases of incremental applications by our existing customer base to satisfy the current meaningful use rules, thereby narrowing the market for add-on sales to existing customers for Stage 2-related incremental applications. Despite these narrowing markets, we expect to continue to benefit from the ARRA's EHR incentive program in the medium-to-long term as the expanded requirements for continued eligibility for incentive payments and related payment adjustments for those healthcare providers not in compliance with meaningful use rules are expected to result in both an expanded replacement market for EHRs and additional orders from our existing customer base to purchase incremental applications necessary to satisfy such expanded requirements, particularly as the Stage 3 rules become effective. However, as the replacement market is not likely to develop rapidly and the market for add-on sales to existing customers for incremental Stage 3-related applications is not likely to significantly expand until the related Stage 3 rules become effective, our system sales revenues and profitability are expected to be materially and adversely impacted during the short term. Although we are pursuing other strategic initiatives designed to result in system sales revenue growth in the future in the form of selective expansion into English-speaking international markets, selective expansion within the 100 to 300 bed hospital market and targeted expansion for our ambulatory solutions, there can be no guarantee that such initiatives will prove successful or will benefit the Company in a sufficiently timely fashion to offset the short-term effects of the afore-mentioned narrowing markets. Health Care Reform In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, collectively referred to as the "Health Reform Laws." This sweeping legislation implements changes to the healthcare and health insurance industries from 2010 through 2015, with the ultimate goal of requiring substantially all U.S. citizens and legal residents to have qualifying health insurance coverage by 2014 and providing the means by which it will be made available to them. We anticipate that the Health Reform Laws will have little direct impact on our internal operation but may have a significant impact on the businesses of our hospital customers once fully in effect. We have not been able to determine at this point whether the impact will be positive, negative or neutral; however, it is likely that the Health Reform Laws will affect hospitals differently depending upon the populations they service. Rural and community hospitals typically service higher uninsured populations than larger urban hospitals and rely more heavily on Medicare and Medicaid for reimbursement. It remains to be seen whether the increase in the insured populations for rural and community hospitals, as well as the increase in Medicare and Medicaid reimbursements under the ARRA for hospitals that implement EHR technology, will be enough to offset cuts in Medicare and Medicaid reimbursements contained in the Health Reform Laws or as a result of sequestration or other federal legislation. We believe healthcare initiatives will continue during the foreseeable future. If adopted, some aspects of previously proposed reforms, such as further reductions in Medicare and Medicaid payments, could adversely affect the businesses of our customers and thereby harm our business. 39 Sequestration Automatic across-the-board budget cuts to federal discretionary programs under the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012, known as "sequestration," commenced in March 2013, including a reduction in Medicare payments to healthcare providers beginning April 1, 2013. The percentage reduction to Medicare reimbursement rates may not be more than 2%, on a non-cumulative basis. Under current law, as amended by subsequent legislation, Medicare sequestration is scheduled to last through federal fiscal year 2024, although legislation could be enacted at any time to end or modify the terms of sequestration. As our hospital customers rely heavily on reimbursements from Medicare to fund their operations, this reduction in reimbursement rates, although capped at 2%, could negatively affect the businesses of our customers and our business. As of the date of this filing, we have not experienced significant adverse effects on our business or results from operations from this reduction in reimbursement rates. As the federal government seeks to further limit deficit spending in the future due to fiscal restraints, it will likely continue to cut entitlement spending programs such as Medicare and Medicaid matching grants which will place further cost pressures on hospitals and other healthcare providers. Furthermore, federal and state budget shortfalls could lead to potential reductions in funding for Medicare and Medicaid. Reductions in reimbursements from Medicare and Medicaid could lead to hospitals postponing expenditures on information technology. 2014 Financial Overview 2014 represented a record year for the Company in terms of both the top and bottom lines, as our gross revenues increased 1.9%, while our net income increased 0.5%. Our cash flow from operations also reached record levels, increasing 34.1% over 2013. Our successful facilitation of our hospital customers' achievement of meaningful use of EHR and thereby qualifying for related EHR incentive payments resulted in the collection of over $20.0 million of amounts due under Second Generation Meaningful Use Installment Plans (see below) during 2014, allowing us to more than double our available balances of cash and cash equivalents from December 31, 2013 to December 31, 2014 despite an 11.8% increase in our quarterly dividend rate during the same period. We have maintained and strengthened a strong cash position that we believe is sufficient to meet our operating requirements. We believe that a strong cash position enables us to compete better in the marketplace and maintain the consistently high quality of our customer service and product offerings. As mentioned above, our operations have been significantly affected by the EHR incentives offered under the ARRA and the related reduction in Medicare reimbursement rates for those providers that failed to demonstrate meaningful use of EHR by October 1, 2014. "Meaningful use" of EHR under the ARRA refers to a set of core criteria that medical providers must meet in order to prove that they are using their EHR as an effective tool in their practice, plus additional a la carte menu items. Meaningful use is measured in three stages, with each stage representing a level of adoption of EHR. EHR incentive payments to eligible hospitals meeting the stage one criteria began in 2011. Eligible hospitals that did not meet the stage one criteria by October 1, 2013 have begun to experience a decrease in the overall incentive payments for which they are eligible under the incentive program. Providers who began participation in the incentive program in 2011 are required to meet three consecutive years of meaningful use under the stage one criteria before advancing to the stage two criteria in their fourth year, with all other providers required to meet two years of meaningful use under the stage one criteria before advancing to the stage two criteria in their third year. In August 2014, CMS released a final rule granting flexibility to providers who are experiencing difficulties fully implementing ONC 2014 Edition EHR, effectively giving all providers the option to defer demonstrating meaningful use under the stage two criteria until the federal government's 2015 fiscal year (October 1, 2014 - September 30, 2015). To achieve the stage one criteria, eligible hospitals are required to meet 14 core objectives and five menu objectives that they select from a total list of 10. Stage two criteria were published in September 2012 and became effective at the beginning of the federal government's 2014 fiscal year (October 1, 2013) and require eligible hospitals to meet 16 core objectives and three menu objectives to be selected from a total list of six. Most of the stage one objectives are core objectives under stage two, but the thresholds that providers must meet to satisfy these objectives for stage two have been raised. Stage three criteria (the final rules for which have not yet been published) are expected to become effective at the beginning of the federal government's 2017 fiscal year (October 1, 2016). 40 In the first year of participation in the EHR incentive program, eligible hospitals are required to report compliance with stage one requirements for a consecutive 90-day period during the federal government's fiscal year to qualify for incentive payments. For subsequent years, the original rules required eligible hospitals to report compliance with meaningful use standards for a full EHR reporting year. However, for federal fiscal 2014 CMS has permitted a one-time three-month reporting period. For eligible hospitals, this three-month reporting period is fixed to the quarter of the federal government's fiscal year. In January of 2015, CMS announced its intention to apply a similar shortened reporting period for fiscal 2015, with a final rule expected during the spring of 2015. As a result of the deadlines associated with these compliance periods, in order for eligible hospitals to maximize potential EHR incentive payments and avoid the aforementioned reduction in Medicare reimbursement rates for failure to demonstrate meaningful use of EHR by October 1, 2014, our financial results have become and will remain uneven during the term of the ARRA program, with system sales activity relating to the ARRA likely being higher in the first two quarters of our fiscal year and lower in the last two quarters of our fiscal year. First Generation Meaningful Use Installment Plans. During 2012, we included language in certain of our customer license agreements that more evenly matched customers’ anticipated cash inflows under the EHR incentive program with the necessary cash outflows for purchasing our EHR solution ("First Generation Meaningful Use Installment Plans"). Under these arrangements, a customer is required to remit to us Medicare and Medicaid incentive payments (not to exceed the remaining balance under the arrangement) received for adoption of qualifying EHRs upon receipt of such funds, with only nominal payments required until the customer’s receipt of such incentive payments. If no such incentive payments are received by the customer or if such payments are not sufficient to pay the remaining balance under the arrangement, payments continue at contracted nominal amounts until the balance of the contract price is paid in full. EHR incentive payments aside, these nominal payment amounts would result in the overall duration of the payment periods significantly exceeding that of our historical financing arrangements. As a result, revenue from these arrangements is recognized as the amounts become due. As of December 31, 2014, we have remaining accumulated unrecognized revenue of $0.5 million to be recognized as the amounts become due under these contracts, with substantially all of the amount due from a single customer. The final new system installation under a First Generation Meaningful Use Installment Plan was performed during the fourth quarter of 2012, and the Company does not expect to offer such payment terms going forward. As a result, aside from the anticipated recognition of the $0.5 million of accumulated unrecognized revenue as of December 31, 2014, we do not expect First Generation Meaningful Use Installment Plans to have a significant impact on our future financial statements. Second Generation Meaningful Use Installment Plans. Beginning in the fourth quarter of 2012, we ceased offering First Generation Meaningful Use Installment Plans to our customers, opting instead for license agreements with payment terms that provide us with greater visibility into and control over the customer's meaningful use attestation process and significantly reducing the maximum timeframe over which customers must satisfy their full payment obligations in purchasing our system ("Second Generation Meaningful Use Installment Plans"). Under these arrangements, for the first two years following execution of the contract, a customer is only required to remit to us Medicare and Medicaid incentive payments (not to exceed the remaining balance under the arrangement) received for adoption of a qualifying EHR upon receipt of such funds. Upon the expiration of this two-year period, the remaining balance (if any) is required to be paid in full over a period not to exceed 12 months. As the overall payment period durations of the Second Generation Meaningful Use Installment Plans are consistent with that of our historical system sale financing arrangements, revenues under the Second Generation Meaningful Use Installment Plans are recognized upon installation of our EHR solution. Approximately one third of our new customer installations during 2014 were under Second Generation Meaningful Use Installment Plans. Comparatively, nearly all of our new system installations during 2013 were under such arrangements. We expect the demand for financing arrangements to continue for the next few years, but at a lower frequency than that experienced during 2012 and 2013 due to the mechanics of the ARRA program. As a result, our financing receivables balances are expected to continue to decrease as collections of currently outstanding amounts are expected to exceed additional receivables recorded under such arrangements. 41 Revenues The Company allocates revenue to its multiple element arrangements, including software and software-related services, based on a hierarchy of evidence to support selling prices in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). Revenue from general support agreements for post-contract support services (support and maintenance) and information technology management and consulting services are recognized by the Company ratably over the term of the agreement. System Sales. Revenues from system sales are derived from the sale of information systems (including software, conversion and installation services, hardware and peripherals) to new customers and from the sale of new or additional products to existing customers. We do not record revenue upon the execution of a sales contract. Revenue from the sale of the software perpetual license and system installation and training is recognized on a module-by-module basis after the installation and training have been completed and the system is functioning as designed for each individual module. Revenue from the sale of hardware is recognized upon shipment of the hardware to the customer. Support and Maintenance. We also derive revenues from the provision of system support services, including software application support, hardware maintenance, continuing education and related services, and sales of forms and supplies. 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 typically ranges from three to five years. Upon expiration of the initial term, these contracts renew automatically on a year-to-year basis thereafter until terminated. Revenues from support services are recognized in the month when these services are performed. We provide our products to some customers utilizing the "Software as a Service" model, or "SaaS," which includes our Cloud EHR service. We provide SaaS services on a remote access basis by storing and maintaining servers at our headquarters which contain customers’ patient and administrative data. Revenues from our SaaS services are recognized in the month when these services are performed. Business Management, Consulting and Managed IT Services. Our business management services include electronic billing, statement processing, payroll processing and business office management (primarily accounts receivable management and private pay services). Most of these business management services are sold pursuant to one-year customer agreements, with automatic one-year renewals until terminated. We also provide web site design, hosting services, and other managed IT and professional IT services if needed. Revenues from business management, consulting and managed IT services are recognized when these services are performed. Reference is made to Note 2 to the financial statements for additional discussion of our revenue recognition policies. 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, third-party software costs and certain other overhead expenses. These costs are expensed as incurred. For the sale of equipment, we incur costs to acquire these products from the respective distributors or manufacturers. The costs related to the acquisition of equipment are capitalized into inventory and expensed upon the sale of the equipment utilizing the average cost method. Support and Maintenance. The principal costs associated with our system support and maintenance services are employee salaries, benefits and certain other overhead expenses. These costs are expensed as incurred. Our employees that perform system installations also provide support and maintenance services. We allocate their time equally between the two functions to provide them with an equal amount of time at home providing support services versus traveling away from home performing system installations. As such, 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. We had 528 software installation and support employees as of December 31, 2014 compared to 558 as of December 31, 2013. 42 Additionally, as the employees in our Product Development Services division devote a portion of their time to the development of software enhancements governed by our support arrangements with our customers, we similarly allocate this division's salary-related expenses between cost of system sales and cost of support and maintenance services. The average headcount in this division increased slightly from 195 during 2013 to 196 during 2014. Supplies and forms represent an additional cost associated with our support and maintenance services. These costs are expensed as incurred. Business Management, Consulting and Managed IT Services. The principal cost related to our statement processing services is postage. The principal costs related to our other business management, consulting and managed IT services are employee-related expenses, such as salaries and benefits, and telecommunication fees. 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, 2014, expressed as a percentage of our total revenues for these periods (dollar amounts in thousands): Year ended December 31, 2014 2013 2012 Amount % Revenues Amount % Revenues Amount % Revenues INCOME DATA: Sales revenues: System sales . . . . . . . . . . . . . . . . . . . . . $ Support and maintenance . . . . . . . . . . . Business management, consulting and managed IT services. . . . . . . . . . . . . . . Total sales revenues. . . . . . . . . . . . . . . . . . . . Costs of sales: System sales . . . . . . . . . . . . . . . . . . . . . Support and maintenance . . . . . . . . . . . Business management, consulting and managed IT services. . . . . . . . . . . . . . . Total costs of sales. . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Sales and marketing . . . . . . . . . . . . . . . General and administrative. . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . Other income: Other income . . . . . . . . . . . . . . . . . . . . Total other income. . . . . . . . . . . . . . . . . . . . . Income before taxes. . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2014 Compared to 2013 75,099 73,553 56,090 204,742 44,620 29,081 37,065 110,766 93,976 14,370 30,019 44,389 49,587 152 152 49,739 16,819 32,920 36.7% $ 35.9% 79,792 71,506 39.7% $ 35.6% 72,553 67,293 27.4% 49,565 24.7% 43,463 100.0% 200,863 100.0% 183,309 21.8% 14.2% 18.1% 54.1% 45.9% 7.0% 14.7% 21.7% 24.2% 0.1% 0.1% 24.3% 8.2% 16.1% $ 47,840 28,640 30,646 107,126 93,737 14,737 28,756 43,493 50,244 466 466 50,710 17,967 32,743 23.8% 14.3% 15.3% 53.4% 46.6% 7.3% 14.3% 21.6% 25.0% 0.2% 0.2% 25.2% 8.9% 16.3% $ 49,019 27,710 25,919 102,648 80,661 14,290 25,094 39,384 41,277 721 721 41,998 12,025 29,973 39.6% 36.7% 23.7% 100.0% 26.7% 15.1% 14.1% 55.9% 44.1% 7.8% 13.7% 21.5% 22.6% 0.4% 0.4% 23.0% 6.6% 16.4% Revenues. Total revenues increased 1.9%, or $3.9 million. This was largely attributable to a combined $8.6 million increase in support and maintenance revenues and business management, consulting and managed IT services revenues due to a larger customer base and increased applications within that customer base requiring 43 support and maintenance services, as well as increased demand for and market acceptance of our business management, consulting and managed IT services. The combined increase in support and maintenance revenues and business management, consulting and managed IT services revenues was partially offset by a $4.7 million decrease in system sales revenues as increased add-on sales to existing customers were not sufficient to fully offset a decrease in new system installation activity, compounded by a decrease in revenue recognized under First Generation Meaningful Use Installment Plans. System sales revenues decreased by 5.9%, or $4.7 million. The accelerated adoption of EHRs resulting from the ARRA's EHR incentive program has resulted in an ever narrowing market for new system installations. Consequently, we experienced a significant decrease in new system installations during 2014, as we completed financial and patient accounting system installations at 24 new hospital clients during 2014 (two of which were under SaaS arrangements) compared to 30 during 2013 (one of which was under a SaaS arrangement). This decrease in the number of new system installations, coupled with a 30.5% decrease in average installation size, resulted in decreased new customer installation revenues of 42.3%, or $12.7 million. This decrease in revenues from new customer installations was partially offset by an increase in add-on sales to existing customers of 19.1%, or $8.8 million, as a result of increased installations within our existing customer base of our physician documentation application, a critical application in achieving stage two of meaningful use criteria. In total, add-on sales to existing customers accounted for 73.3% of our system sales revenues during 2014 compared to 58.0% during 2013. Lastly, we experienced a $1.7 million decrease in revenue recognized under First Generation Meaningful Use Installment Plans. Under these arrangements, for which the related installations were completed during 2012, a substantial majority of the consideration is not received or revenue recognized until the customers successfully achieve "meaningful use" designation and receive related stage one ARRA incentive payments. These arrangements resulted in $2.2 million and $3.9 million of revenue recognized (net of additional unrecognized revenue accumulated) during 2014 and 2013, respectively. Excluding the net effect on revenue resulting from these arrangements, adjusted system sales (as hereinafter defined in the "Non-GAAP Financial Measures" section below) decreased $3.0 million, or 4.0%, due to the decrease in new customer installations. Support and maintenance revenues increased by 2.9%, or $2.0 million. Support service fees increased by 4.4%, or $3.0 million, due to an increase in recurring revenues as a result of a larger customer base, an increase in support fees for add-on business sold to existing customers, and an increase in support rates from contractually agreed upon Consumer Price Index ("CPI") rate increases. The increase in support service fees was partially offset by a 23.4%, or $0.5 million, decrease in SaaS, hosting and other fees as a result of the high volume during 2013 and 2014 of conversions of previously installed SaaS arrangements to perpetual licenses at the customers' request. Business management, consulting and managed IT services revenues increased by 13.2%, or $6.5 million. We experienced this increase in business management, consulting and managed IT services revenues primarily as a result of an expansion of service offerings complemented by an expanding customer base for our previously existing service offerings. Of our previously existing service offerings, we have experienced growth in customer demand for accounts receivables management (increasing 10.6%, or $1.6 million) and private pay services (increasing 12.2%, or $1.3 million) as a result of more effective marketing of these services. The continued expansion and growth of our recently introduced service offerings have resulted in increased demand for our clinical consulting services (increasing 7.8%, or $0.2 million), revenue cycle management consulting services (increasing 76.7%, or $0.6 million), IT consulting services (increasing 78.1%, or $0.3 million) and cloud computing services (a component of managed IT services, increasing 42.1%, or $0.5 million). The introduction of medical coding and clinical help desk services (components of consulting services) in the fourth quarter of 2013 resulted in revenues of $1.5 million during 2014 compared to only $0.1 million in 2013. We also experienced a $0.5 million increase in reimbursed travel costs as a result of the increased utilization of our consulting resources. Costs of Sales. Total costs of sales increased by 3.4%, or $3.6 million. As a percentage of revenues, costs of sales increased from 53.4% to 54.1%. Costs of system sales decreased by 6.7%, or $3.2 million. The decrease in costs of system sales was primarily due to a $2.5 million decrease in travel costs and a $1.2 million decrease in cost of equipment as a result of the decrease in new system installations, which are more travel and hardware intensive than the Company's add-on sales to existing customers. These cost decreases were partially offset by a $0.5 million increase in stock-based 44 compensation expense as a result of additional grants of restricted stock and performance share awards to our executive officers and certain key employees during the trailing twelve months. The gross margin on system sales increased to 40.6% in 2014 from 40.0% in 2013. Excluding the net effect on revenue resulting from First Generation Meaningful Use Installment Plans (which were used by the Company in 2012) and the deferral of the related cost of equipment, the adjusted gross margin on system sales (as hereinafter defined in the "Non-GAAP Financial Measures" section below) increased to 38.8% in 2014 from 37.5% in 2013. The table below summarizes the major components of costs of system sales as a percentage of system sales revenues: Year Ended December 31, 2014 2013 Payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Travel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.8% 11.7% 6.3% 31.0% 14.1% 7.3% Excluding the net effect on revenue and cost of equipment resulting from First Generation Meaningful Use Installment Plans, payroll and related expenses, travel expense, and adjusted cost of equipment (as hereinafter defined in the "Non-GAAP Financial Measures" section below) would represent 32.8%, 12.1% and 6.5%, respectively, of adjusted system sales (as hereinafter defined in the "Non-GAAP Financial Measures" section below) for 2014 compared to 32.6%, 14.9% and 7.7%, respectively, for 2013. Please see the tables set forth below under the caption "Non-GAAP Financial Measures" for a reconciliation of each of these non-GAAP financial measures to the comparable financial measure determined in accordance with GAAP. Costs of support and maintenance increased 1.5%, or $0.4 million, primarily due to an increase in payroll and related costs of 1.6%, or $0.4 million, due to increased personnel and standard cost of living adjustments effected during the trailing twelve months. The gross margin on support and maintenance revenues increased slightly to 60.5% in 2014 from 60.0% in 2013. Our costs associated with business management, consulting and managed IT services increased 20.9%, or $6.4 million, due primarily to an increase in payroll and related expenses. The gross margin on these services decreased to 33.9% in 2014 from 38.2% in 2013 due to the disproportionate increase in payroll and related expenses versus revenues. Payroll and related expenses increased 18.3%, or $3.2 million, as a result of adding more employees during the trailing twelve months in order to support and develop our growing customer base and increase capacity in advance of anticipated future increases in demand. For similar reasons, we have experienced a $1.2 million increase in temporary labor costs. We also experienced a $0.8 million increase in related travel costs, primarily due to the increased volume of clinical consulting engagements and increased sales generation efforts. Lastly, stock-based compensation expense increased by $0.5 million as a result of additional grants of restricted stock and performance share awards to our executive officers and certain key employees during the trailing twelve months. Sales and Marketing Expenses. Sales and marketing expenses decreased 2.5%, or $0.4 million. This decrease is primarily attributable to a decrease in commission expense of 18.5%, or $1.3 million, due to decreased billings for new system installations. The decrease in commission expense is partially offset by a $0.5 million increase in stock- based compensation expense as a result of additional grants of restricted stock and performance share awards to our executive officers and certain key employees during the trailing twelve months. Lastly, we experienced a $0.2 million increase in costs associated with collaborative arrangements associated with our membership in CommonWell Health Alliance, in particular relating to the development of interoperability standards for the healthcare information technology industry. General and Administrative Expenses. General and administrative expenses increased 4.4%, or $1.3 million, with the largest contributing factor being a $0.8 million increase in stock-based compensation expense due to additional grants of restricted stock and performance share awards to our executive officers, certain key employees and non-employee directors during the trailing twelve months. Costs associated with healthcare benefits offered to our employees increased $0.5 million primarily due to the addition of on-site healthcare clinics as an added benefit for our employees beginning in the fourth quarter of 2013. Costs associated with our defined contribution employee 45 retirement plan increased 20.1%, or $0.4 million, due to an increased number of participants eligible for the Company's discretionary employer matching contribution. Depreciation expense increased 10.5%, or $0.3 million, as a result of capital expenditures during the trailing twelve months. Payroll and related costs increased 6.6%, or $0.3 million, due mostly to standard cost of living adjustments effected during the trailing twelve months. The combined $2.3 million increase in costs noted above has been mostly offset by a $1.3 million decrease in bad debt expense, mostly due to the combined factors of decreased growth in gross accounts receivable and financing receivables ("total gross receivables") during 2014 compared to 2013 and the lack of any substantial write-offs of receivables balances in 2014. Total gross receivables grew by 42.8%, or $14.5 million, during 2013, necessitating increases in our allowance for doubtful accounts and allowance for credit losses to accommodate the expanding receivables base. Comparatively, total gross receivables decreased by 8.8%, or $4.3 million, during 2014. This decreased growth in total gross receivables is due to the decreased utilization of Second Generation Meaningful Use Installment Plans in 2014 compared to 2013. Additionally, 2013 was impacted by substantial write-offs of receivable balances due from a single customer experiencing significant financial difficulty, with no such events occurring in 2014. As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses increased slightly to 21.7% in 2014 compared to 21.6% in 2013. As a result of the foregoing factors, income before taxes decreased by 1.9%, or $1.0 million. Income Taxes. Our effective income tax rate for the years ended December 31, 2014 and 2013 was 33.8% and 35.4%, respectively. This decrease in effective income tax rate is mostly due to the combined effects of a $0.4 million decrease in expense related to unrecognized tax benefits and a $0.2 million increase in beneficial provision- to-return adjustments. During 2013, recent developments resulting from the Internal Revenue Service's examination of our 2004 through 2006 federal tax returns (as amended), primarily as they relate to federal research and development tax credits, necessitated an increase in our reserves for uncertain tax positions for all impacted years, with a corresponding increase in the related expense related to unrecognized tax benefits. The related expense during 2014 has been limited to tax positions related to the current year, with no further developments impacting prior years. The increase in beneficial provision to return adjustments is primarily attributable to differences between credits claimed on the 2013 federal income tax return and amounts previously estimated. 2013 Compared to 2012 Revenues. Total revenues increased 9.6%, or $17.6 million. This was largely attributable to an increase in system sales revenues, primarily caused by an increase in new system installations under Second Generation Meaningful Use Installment Plans combined with revenue recognized related to First Generation Meaningful Use Installment Plans of $3.9 million (net of approximately $0.6 million of additional unrecognized revenue accumulated during 2013 related to these arrangements) compared to accumulated unrecognized revenue of $7.1 million (net of approximately $5.5 million of revenue recognized) related to these arrangements during 2012. Additionally, we experienced an increase in support and maintenance revenues and business management, consulting and managed IT services revenues due to a larger customer base and increased applications within that customer base requiring support and maintenance services, as well as increased demand for and market acceptance of our business management, consulting and managed IT services. System sales revenues increased by 10.0%, or $7.2 million. We completed financial and patient software system installations at 30 new hospital clients in 2013 (none of which was under a First Generation Meaningful Use Installment Plan and one of which was under a SaaS arrangement) compared to 34 in 2012 (10 of which were under First Generation Meaningful Use Installment Plans and one of which was under a SaaS arrangement). Sales to existing customers accounted for 58.0% of our system sales revenues during 2013 compared to 64.1% during 2012. During 2012, the Company installed systems under First Generation Meaningful Use Installment Plans for which a substantial majority of the consideration is not received or revenue recognized until the customers successfully achieve "meaningful use" designation and receive related stage one ARRA incentive payments. These arrangements resulted in revenue recognized (net of additional unrecognized revenue accumulated) of $3.9 million during 2013 and $7.1 million of accumulated unrecognized revenue during 2012. Excluding the net effect on revenue resulting from these arrangements, adjusted system sales (as hereinafter defined in the "Non-GAAP Financial Measures" 46 section below) decreased $3.7 million, or 4.7%, due to the decrease in add-on sales to existing customers. Add-on sales in 2012 benefited from those customers purchasing necessary incremental applications in order to satisfy both stage one and stage two meaningful use criteria, whereas during 2013 the opportunities for add-on sales for stage one incremental applications had largely been exhausted. Support and maintenance revenues increased by 6.3%, or $4.2 million. Support service fees increased by 8.5%, or $5.3 million, due to an increase in recurring revenues as a result of a larger customer base, an increase in support fees for add-on business sold to existing customers, and increases in support rates from contractually agreed upon CPI rate increases. The increase in support service fees was partially offset by a 27.7%, or $0.8 million, decrease in SaaS, hosting and other fees as a result of the high volume during 2012 of conversions of previously installed SaaS arrangements to perpetual licenses at the customers' request. Business management, consulting and managed IT services revenues increased by 14.0%, or $6.1 million. We experienced this increase in business management, consulting and managed IT services revenues primarily as a result of growth in customer demand for accounts receivable management (increasing 29.5%, or $3.4 million), consulting services (increasing 88.5%, or $2.0 million, due to an approximately 80% increase in related contract signings), cloud computing (a component of managed IT services, increasing 58.4%, or $0.5 million), and private pay services (increasing 3.3%, or $0.3 million) due to more effective marketing of these services. Costs of Sales. Total costs of sales increased by 4.4%, or $4.5 million. As a percentage of revenues, costs of sales decreased from 55.9% to 53.4%. Costs of system sales decreased 2.4%, or $1.2 million. The decrease in costs of system sales was primarily due to a $1.6 million decrease in travel expenses and a $1.2 million decrease in cost of equipment as a result of the decrease in new system installations. These cost decreases were partially offset by a $2.0 million increase in the cost of third-party software subscriptions as a result of our expanding customer base utilizing such third-party software services and new royalty payments for newly copyrighted and newly provided third-party content. The gross margin on system sales increased to 40.0% in 2013 from 32.4% in 2012. Excluding the net effect on revenue resulting from First Generation Meaningful Use Installment Plans (which were used by the Company in 2012) and the deferral of the related cost of equipment, the adjusted gross margin on system sales (as hereinafter defined in the "Non-GAAP Financial Measures" section below) decreased slightly to 37.5% in 2013 from 37.8% in 2012. The table below summarizes the major components of costs of system sales as a percentage of system sales revenues: Year Ended December 31, 2013 2012 Payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Travel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.0% 14.1% 7.3% 34.5% 17.7% 9.7% Excluding the net effect on revenue and cost of equipment resulting from First Generation Meaningful Use Installment Plans, payroll and related expenses, travel expenses, and adjusted cost of equipment (as hereinafter defined in the "Non-GAAP Financial Measures" section below) would represent 32.6%, 14.9% and 7.7%, respectively, of adjusted system sales (as hereinafter defined in the "Non-GAAP Financial Measures" section below) for 2013 compared to 31.4%, 16.1% and 9.5%, respectively, for 2012. Please see the tables set forth below under the caption "Non-GAAP Financial Measures" for a reconciliation of each of these non-GAAP financial measures to the comparable financial measure determined in accordance with GAAP. Costs of support and maintenance increased 3.4%, or $0.9 million, primarily due to an increase in payroll and related costs of 4.7%, or $1.2 million, due to increased personnel in our Product Development Services division. The gross margin on support and maintenance revenues increased slightly to 60.0% in 2013 from 58.8% in 2012. Our costs associated with business management, consulting and managed IT services increased 18.2%, or $4.7 million, due primarily to an increase in payroll and related expenses. The gross margin on these services decreased to 38.2% in 2013 from 40.4% in 2012 due to the disproportionate increase in payroll and related expenses 47 versus revenues. Payroll and related expenses increased 20.8%, or $3.4 million, as a result of adding more employees during the trailing twelve months in order to support and develop our growing customer base and increase capacity in advance of anticipated future increases in demand. We also experienced a $0.9 million increase in related travel costs, primarily due to the increased volume of clinical consulting engagements and increased sales generation efforts. Sales and Marketing Expenses. Sales and marketing expenses increased 3.1%, or $0.4 million. This increase was primarily attributable to increased commissions resulting from an increase in system sales revenues and increased salary expense due to the promotion of two new vice presidents during the fourth quarter of 2012. General and Administrative Expenses. General and administrative expenses increased 14.6%, or $3.7 million, with the largest contributing factor being a $1.4 million increase in bad debt expense due to the continued significant increase in our financing receivables balances and the write-off of substantial amounts related to a single customer experiencing considerable financial difficulty. Our group health insurance expense increased 11.9%, or $0.9 million, due to continuing increases in healthcare costs. Depreciation expense increased $0.4 million as a result of significant capital expenditures over the trailing twelve months, mostly related to the build-out of our new facility in Fairhope, Alabama. This new facility also resulted in a $0.3 million increase in utilities expense. Payroll and related expenses increased 6.5%, or $0.3 million, due to increased stock-based compensation costs resulting from additional grants of restricted stock to our executive officers and non-employee directors and increased costs related to our incentive bonus program for certain members of management as profitability growth improved from 2012 to 2013. Lastly, our expenses related to our customer user group increased $0.3 million as, in addition to our annual User Group Conference, we held our Financial, Clinical, and Physician Conferences in May 2013; the only such large event to take place during 2012 was the annual User Group Conference. As a percentage of total revenues, sales and marketing expenses, and general and administrative expenses increased slightly to 21.6% in 2013 compared to 21.5% in 2012. As a result of the foregoing factors, income before taxes increased by 20.8%, or $8.7 million. Income Taxes. Our effective income tax rate for the years ended December 31, 2013 and 2012 was 35.4% and 28.6%, respectively. The significant increase in our effective income tax rate was primarily due to $3.1 million in favorable provision-to-return adjustments recorded during 2012. These provision-to-return adjustments were primarily related to differences between the Domestic Production Activities Deduction ("DPAD") reported on the 2011 federal income tax return and amounts previously estimated, as well as the estimated additional net federal tax benefit to be realized by the Company upon amending federal income tax returns for all open years for revised DPAD amounts. This increase in our effective tax rate resulting from the significant provision-to-return adjustments recorded during 2012 was partially offset as our effective tax rate for 2013 included a tax benefit from federal research and development tax credits attributable to the entire 2012 and 2013 fiscal years. The federal research and development tax credit expired effective December 31, 2011 and was extended retroactively for amounts incurred between January 1, 2012 through December 31, 2013 when the American Taxpayer Relief Act of 2012 (the "ATRA") was signed into law in January 2013. As the ATRA was signed into law after December 31, 2012, the tax benefit from credits related to 2012 were recorded during 2013. Liquidity and Capital Resources As of December 31, 2014, we had $23.8 million in cash and cash equivalents and $10.7 million in investments. Management believes that cash and investments plus cash generated from our normal operating activities should be adequate to fund our business through the remainder of 2015. 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 of our business and return cash to our shareholders in the form of dividends. Because of our cash position, our Board of Directors decided to begin paying a quarterly dividend in 2003. We declared and paid dividends in the aggregate amount of $25.5 million in 2014, $22.6 million in 2013, and $31.4 million in 2012 (including a special, one-time dividend of approximately $11.1 million during December 2012 in anticipation of a significant increase in tax rates on dividends beginning in 2013). We believe that paying dividends is an effective way of providing an investment return to our stockholders and a beneficial use of our cash. However, the declaration of dividends by CPSI is subject to the discretion of our Board of Directors. Our Board of Directors will continue to 48 take into account such matters as general business conditions, our financial results and such other factors as our Board of Directors may deem relevant. Net cash provided by operating activities totaled $38.9 million, $29.0 million and $32.2 million for 2014, 2013 and 2012, respectively. This 34.1% increase in net cash provided by operating activities in 2014 far outpaces our 0.5% increase in net income from 2013 to 2014 and primarily results from the decreased utilization of Second Generation Meaningful Use Installment Plans in 2014 compared to 2013. As previously stated, for the first two years following execution of a Second Generation Meaningful Use Installment Plan, customers are only required to remit to us Medicare and Medicaid incentive payments (not to exceed the remaining balance under the arrangement) received for adoption of a qualifying EHR upon receipt of such funds. All but five of our 30 new customer installations during 2013 were under Second Generation Meaningful Use Installment Plans, resulting in significant increases in our financing receivables balances. Of the 24 new customer installations during 2014, only eight were under Second Generation Meaningful Use Plans while two were under SaaS arrangements, with the remaining 14 mostly containing more traditional payment terms resulting in payments becoming due as the respective installations are completed. We continue to experience customers seeking financing arrangements for system installations, in particular due to the desire and ability of customers to minimize the near-term impact that purchasing our system will have on their current cash resources by utilizing cash inflows expected under the EHR incentive program. We expect this demand for financing arrangements for system installations to continue during the next twelve months, which could result in increases in our financing receivables, although at lower levels than that experienced during 2013. The potential increase in financing receivables, although offset by periodic collections of previously outstanding amounts, could temporarily have a negative impact on our net cash provided by operating activities. Net cash used in investing activities totaled $1.5 million in 2014, compared to net cash used in investing activities of $3.7 million in 2013 and $1.5 million of net cash provided by investing activities during 2012. We used cash for the purchase of property and equipment of $1.5 million, $3.6 million and $4.4 million in 2014, 2013 and 2012, respectively. The significant decrease in capital expenditures from 2013 to 2014 was due to the completion of the build-out of our new facility in Fairhope, Alabama during 2013, coupled with the lack of any major capital expenditure projects during 2014. We believe that our existing physical facilities provide us with ample infrastructure to continue and grow our existing operations and, as such, we do not anticipate the need for significant capital expenditures during 2015. Purchases of investments, net of cash inflows from liquidated positions, were $0.1 million in 2014 and 2013 compared to net cash inflows from investments of $5.8 million in 2012. We liquidated $7.0 million of our investment portfolio in December 2012 to partially fund the aforementioned one-time, special dividend of $11.1 million. Net cash used in financing activities totaled $25.4 million, $22.5 million and $31.4 million for 2014, 2013 and 2012, respectively. We declared and paid dividends in the aggregate amount of $25.5 million, $22.6 million, and $31.4 million (including the aforementioned one-time, special dividend of $11.1 million) during 2014, 2013 and 2012, respectively. Our days sales outstanding, which represents the average collection time for accounts receivable, for the years 2014, 2013 and 2012 were 43, 38, and 41 days, respectively. This increase in days sales outstanding from 2013 to 2014 is primarily attributable to the decreased utilization of Second Generation Meaningful Use Installment Plans in 2014 compared to 2013, resulting in more sales dollars entering accounts receivable. Despite this increase in days sales outstanding, we have not experienced a significant deterioration within the agings of our accounts receivable. We currently do not have a bank line of credit or other credit facility in place. Because we have no debt, we are not 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 the demand by lenders for immediate payment of substantial funds and substantial restrictions on expenditures, among other things. Additional capital, if needed, may not be available on terms favorable to us, or at all. 49 Our future capital requirements will depend upon a number of factors, including the rate of growth of our sales, cash collections from our customers and future investments in fixed assets. We believe that our available cash and cash equivalents, investments and anticipated cash generated from operations will be sufficient to meet our operating requirements for at least the next 12 months. Non-GAAP Financial Measures We have included in the discussion under the captions "2014 Compared to 2013" and "2013 Compared to 2012" above financial measures that were not prepared in accordance with US GAAP. Any analysis of non-GAAP financial measures should be made only in conjunction with results presented in accordance with US GAAP. Below, we define each of these non-GAAP financial measures, provide a reconciliation of each non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with US GAAP, and discuss the reasons that we believe this information is useful to management and may be useful to investors. We use the non-GAAP financial measures "adjusted gross margin on system sales," "adjusted cost of equipment," and "adjusted system sales." Management believes these non-GAAP financial measures provide our Board of Directors, investors, potential investors, securities analysts and others with useful information to evaluate our performance because they exclude the impact of unrecognized revenue, recognized revenue and related deferral of cost of equipment resulting from our use of First Generation Meaningful Use Installment Plans. First Generation Meaningful Use Installment Plans were new to the Company in 2012, resulting in the Company not having sufficient experience with comparable arrangements to establish evidence of a standard business practice of historically collecting under the original payment terms of such contracts without making concessions. As a result, the provisions of the Software topic and Revenue Recognition subtopic of the FASB Accounting Standards Codification resulted in a conclusion that the fee was not fixed or determinable and, as a result, the revenue is to be recognized as the amounts become due. Because the timing of our recognition of revenue under First Generation Meaningful Use Installment Plans is not related to any remaining obligation on the part of the Company, the Company and our Board of Directors use these non-GAAP financial measures to evaluate our performance relative to other periods. We believe that the most directly comparable US GAAP measures to adjusted gross margin on system sales, adjusted cost of equipment, and adjusted system sales are gross margin on system sales, cost of equipment, and system sales, respectively. Set forth below are reconciliations of adjusted gross margin on system sales, adjusted cost of equipment, and adjusted system sales to the comparable financial measures calculated in accordance with US GAAP (dollar amounts in thousands): Adjusted Gross Margin on System Sales Gross margin on system sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Add: Unrecognized revenue accumulated related to First Generation Meaningful Use Installment Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Revenue recognized related to First Generation Meaningful Use Installment Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Deferred cost of equipment related to First Generation Meaningful Use Installment Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: Amortization of deferred cost of equipment related to First Generation Meaningful Use Installment Plans . . . . . . . . . . . . . . . . . . . . . Adjusted gross margin on system sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Year ended December 31, 2014 2013 2012 30,479 $ 31,953 $ 23,534 11 597 12,581 (2,243) (4,488) (5,524) — 47 — 416 (983) 462 28,294 $ 28,478 $ 30,070 50 Adjusted Cost of Equipment Cost of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,734 $ 5,836 $ 7,055 Add: Deferred cost of equipment related to First Generation Meaningful Use Installment Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 983 Less: Amortization of deferred cost of equipment related to First Generation Meaningful Use Installment Plans . . . . . . . . . . . . . . . . . . . . . Adjusted cost of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (47) 4,687 $ (416) 5,420 $ (462) 7,576 Year ended December 31, 2014 2013 2012 Adjusted System Sales System sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Add: Unrecognized revenue accumulated related to First Generation Meaningful Use Installment Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Revenue recognized related to First Generation Meaningful Use Installment Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted system sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Contractual Obligations Year ended December 31, 2014 2013 2012 75,099 $ 79,792 $ 72,553 11 597 12,581 (2,243) 72,867 $ (4,488) 75,901 $ (5,524) 79,610 Our real estate leases are the only material contractual obligations requiring payments in the future. Our payments under these leases subsequent to December 31, 2014, are set forth below: Operating lease obligations. . . . . . . . . . . . . $ 3,809,116 $ Total Payment due by period Less than 1 Year 601,138 1-3 Years 3-5 Years $ 906,690 $ 846,496 More than 5 Years $ 1,454,792 The table above excludes any amounts related to the $1,455,871 of unrecognized tax benefit as the Company cannot make a reasonably reliable estimate of the periods of cash settlements with the respective taxing authorities. See Note 7 to the financial statements for additional information. Off-Balance Sheet Arrangements We had no off-balance sheet arrangements as of December 31, 2014 or December 31, 2013. 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 accounting principles generally accepted in the United States of America. 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. Revenue Recognition. We generate revenue from the following sources: • The sale of information systems, which includes perpetual software licenses, conversion, installation and training services, hardware and peripherals; 51 • The provision of system support services, which includes software application support, hardware maintenance, continuing education, Software as a Service (or "SaaS") products, and forms and supplies; and • The provision of business management services, which includes electronic billing, statement processing, payroll processing, accounts receivable management, contract management and insurance services, as well as Internet service provider ("ISP") services and consulting and managed IT services (collectively, "other professional IT services"). We recognize revenue in accordance with the accounting principles required by the Software topic and Revenue Recognition subtopic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (the "Codification") and those prescribed by the Securities and Exchange Commission, as well as the accounting principles relevant to multiple-element arrangements in the Revenue Recognition topic and Multiple- Element Arrangements subtopic of the Codification. These standards 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) collectability is reasonably assured. The recognition of revenue pursuant to these criteria involves estimates and judgments regarding: 1) The allocation of total arrangement consideration to the various elements of our multiple-element arrangements, including, for certain elements, estimates and judgments regarding vendor-specific objective evidence ("VSOE") of fair value, which we base on either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. VSOE calculations are updated and reviewed regularly depending on the nature of the product or service. We base VSOE for the related undelivered elements on either renewals or stand-alone sales as appropriate. 2) Our determination that total fees for our products and services are fixed or determinable, which we base on signed contracts and orders. 3) Our assessment that collection of amounts due is reasonably assured, which we base on our standard payment terms and collection history. Risks associated with these estimates and judgments and the effects thereof include: (1) if VSOE of fair value of any undelivered element does not exist, all revenue is deferred until VSOE of fair value of the undelivered element is established or the element has been delivered and (2) if the fees are not fixed or determinable, or if collection is not reasonably assured, then the revenue recognized in various periods will be less than amounts that would have been otherwise recognizable using the residual method provided under the Codification. See Note 2 to the financial statements for further discussion of our revenue recognition policies. Although we believe that our approach to estimates and judgments regarding revenue recognition is reasonable, actual results could differ and we may be exposed to increases or decreases in revenue that could be material. Allowance for Doubtful Accounts. Trade accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The collectability of trade receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns, resulting in the establishment of general reserves. Additionally, if it is determined that a customer will be unable to fully meet its financial obligation, such as in the case of a bankruptcy filing or other material event impacting its business, a specific reserve for bad debt may be recorded to reduce the related receivable to the amount expected to be recovered. Although we believe that our approach to estimates and judgments regarding our allowance for doubtful accounts is reasonable, actual results could differ and we may be exposed to increases or decreases in required reserves that could be material. 52 Allowance for Credit Losses. The Company has sold information and patient care systems to certain healthcare providers under short-term payment plans and sales-type leases. The Company establishes an allowance for credit losses for these financing receivables based on the historical level of customer defaults under such financing arrangements. Additionally, if it is determined that a customer will be unable to meet its financial obligation, such as in the case of a bankruptcy filing or other material event impacting its business, a specific reserve may be recorded to reduce the related receivable to the amount expected to be recovered. Reference is made to Note 10 to the financial statements for further information about our financing receivables. Although we believe that that our approach to estimates and judgments regarding our allowance for credit losses is reasonable, actual results could differ and we may be exposed to increases or decreases in required reserves that could be material. Estimates. The Company uses estimates to record certain transactions and liabilities. These estimates are generally based on management’s best judgment, past experience, and utilization of third party services such as actuarial and other expert services. Because these estimates are subjective and variable, actual results could differ significantly from these estimates. Significant estimates included in our financial statements include those for self- insurance reserves under our health insurance plan, reserves for uncertain tax positions, bad debt and credit allowances, legal liability exposure or lack thereof, and accrued expenses. Quantitative and Qualitative Disclosures about Market and Interest Rate Risk Our exposure to market risk relates primarily to the potential change in the value of our investment portfolio as a result of fluctuations in interest rates. The primary purpose of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk of loss. As of December 31, 2014, our investment portfolio consisted of a variety of financial instruments, primarily including, but not limited to, money market securities and high quality government and corporate obligations. It is our intent to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We do not hold financial instruments for trading or other speculative purposes. The securities in our investment portfolio are classified as available-for-sale and, consequently, are recorded on our balance sheet at fair market value with their related unrealized gain or loss reflected as a component of accumulated other comprehensive (loss) income in stockholders’ equity. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectation due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. We believe that the market risk arising from our holdings of these financial instruments is minimal. Due to the conservative allocation of our investment portfolio, we do not believe that an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio. Additionally, since we believe we have the ability to liquidate this portfolio, we do not expect our operating results or cash flows to be materially affected to any significant degree by a sudden change in market interest rates on our investment portfolio. We do not utilize derivative financial instruments to manage our interest rate risks. 53 The table that follows presents fair values of principal amounts and weighted average interest rates for our investment portfolio as of December 31, 2014 and 2013. Cash and Cash Equivalents: Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 23,791,748 $ 11,729,185 —% —% Short-Term Investments:(1) Aggregate Fair Value 2014 2013 Weighted Average Interest Rate 2014 2013 Accrued income . . . . . . . . . . . . . . . . . . . . . . . . . $ Money market funds . . . . . . . . . . . . . . . . . . . . . . Obligations of the U.S. Treasury, U.S government corporations and agencies . . . . . . . . Corporate debt securities. . . . . . . . . . . . . . . . . . . 1,116,703 1,987,945 Total short-term investments . . . . . . . . . . . . $ 3,199,243 61,371 33,224 $ 45,607 3,357,314 1,444,257 2,799,905 $ 7,647,083 Long-Term Investments:(2) Obligations of the U.S. Treasury, U.S government corporations and agencies . . . . . . . . $ Mortgage backed securities. . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . Corporate debt securities. . . . . . . . . . . . . . . . . . . 69,532 1,975,245 4,555,023 Total long-term investments . . . . . . . . . . . . $ 7,503,883 81,112 — 1,669,838 $ 3,055,543 904,083 $ 1,304,593 —% 0.07% 1.93% 1.92% 0.36% 1.63% 1.85% 2.33% —% 0.02% 2.39% 2.84% 1.19% 1.63% —% 2.68% (1) Reflects instruments with a contractual maturity of less than one year. (2) Reflects instruments with a contractual maturity of one year or more. As of December 31, 2014, the Company had no borrowings and, therefore, is not subject to interest rate risks related to debt instruments. Recent Accounting Pronouncements Reference is made to Note 2 to the financial statements for a discussion of accounting pronouncements that have been recently issued which we have not yet adopted. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this Item is contained in Item 7 herein under the heading "Quantitative and Qualitative Disclosures about Market and Interest Rate Risk." 54 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of Grant Thornton LLP, Independent Registered Public Accounting Firm, on Internal Control Over Financial Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of Grant Thornton LLP, Independent Registered Public Accounting Firm, on Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets — December 31, 2014 and 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income — Years ended December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . Consolidated Statements of Comprehensive Income — Years ended December 31, 2014, 2013, and 2012 . . . Consolidated Statements of Stockholders’ Equity — Years ended December 31, 2014, 2013 and 2012. . . . . . Consolidated Statements of Cash Flows — Years ended December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Index to Financial Statement Schedules Page 56 57 58 59 60 61 62 63 64 Schedule II — Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 All other schedules to the financial statements required by Article 9 of Regulation S-X are not applicable and therefore have been omitted. 55 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Computer Programs and Systems, Inc.’s ("CPSI") internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. CPSI’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of CPSI; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of CPSI are being made only in accordance with authorizations of management and directors of CPSI; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of CPSI’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of CPSI’s internal control over financial reporting as of December 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on our assessment and those criteria, management believes that CPSI maintained effective internal control over financial reporting as of December 31, 2014. The independent registered public accounting firm, Grant Thornton LLP, has audited the consolidated financial statements as of and for the year ended December 31, 2014, and has also issued its report on the effectiveness of the Company’s internal control over financial reporting included in this report on page 57. 56 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Board of Directors and Stockholders Computer Programs and Systems, Inc.: We have audited the internal control over financial reporting of Computer Programs and Systems, Inc. (a Delaware corporation) and its subsidiary (collectively, the “Company”) as of December 31, 2014, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2014, and our report dated March 13, 2015 expressed an unqualified opinion on those financial statements. /s/ GRANT THORNTON LLP Atlanta, Georgia March 13, 2015 57 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS To the Board of Directors and Stockholders Computer Programs and Systems, Inc.: We have audited the accompanying consolidated balance sheets of Computer Programs and Systems, Inc. (a Delaware corporation) and its subsidiary (collectively, the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 8. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Computer Programs and Systems, Inc. and its subsidiary as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 13, 2015 expressed an unqualified opinion thereon. /s/ GRANT THORNTON LLP Atlanta, Georgia March 13, 2015 58 COMPUTER PROGRAMS AND SYSTEMS, INC. Consolidated Balance Sheets December 31, 2014 December 31, 2013 Assets Current assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,791,748 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,703,126 Accounts receivable, net of allowance for doubtful accounts of $1,253,000 and $1,125,000, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing receivables, current portion, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing receivables, net of current portion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,101,575 18,111,633 1,431,560 2,318,988 1,120,487 936,915 81,516,032 17,038,619 770,169 Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,324,820 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,990,368 5,890,431 Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,930,778 Accrued vacation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,349,207 Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,160,784 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383,050 Stockholders’ equity: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock, $0.001 par value; 30,000,000 shares authorized; 11,208,879 and 11,159,142 shares issued and outstanding. . . . . . . . . . . . . . . 11,209 38,983,350 (19,337) 41,805,764 80,780,986 Total liabilities and stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,324,820 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,729,185 10,702,626 20,076,592 25,387,637 1,588,673 2,366,369 — 901,228 72,752,310 19,231,372 550,956 $ 92,534,638 $ 3,213,714 9,581,357 3,694,600 797,101 4,164,242 21,451,014 2,001,077 11,159 34,643,900 11,368 34,416,120 69,082,547 $ 92,534,638 The accompanying notes are an integral part of these consolidated financial statements. 59 COMPUTER PROGRAMS AND SYSTEMS, INC. Consolidated Statements of Income Year ended December 31, 2014 2013 2012 Sales revenues: System sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,099,075 73,552,764 Support and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,090,298 Business management, consulting and managed IT services . . . . Total sales revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,742,137 Costs of sales: System sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Support and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business management, consulting and managed IT services . . . . 44,620,446 29,080,564 37,065,515 Total costs of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,766,525 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,975,612 Operating expenses: $ 79,792,563 71,505,736 49,565,033 200,863,332 $ 72,553,036 67,293,101 43,463,266 183,309,403 47,839,794 28,639,891 30,646,789 107,126,474 93,736,858 49,018,946 27,710,252 25,919,236 102,648,434 80,660,969 Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income: 14,369,752 30,019,270 44,389,022 49,586,590 14,737,440 28,755,477 43,492,917 50,243,941 14,290,061 25,093,527 39,383,588 41,277,381 152,419 Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,419 Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,739,009 Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,818,730 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,920,279 2.94 Net income per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Net income per share - diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.94 Weighted average shares outstanding used in per common share computations: 466,678 466,678 50,710,619 17,967,381 $ 32,743,238 2.95 $ 2.95 $ 720,573 720,573 41,997,954 12,024,482 $ 29,973,472 2.71 $ 2.71 $ Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,025,897 11,026,406 10,997,890 10,997,890 10,976,982 10,976,982 The accompanying notes are an integral part of these consolidated financial statements. 60 COMPUTER PROGRAMS AND SYSTEMS, INC. Consolidated Statements of Comprehensive Income Year Ended December 31, Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,920,279 Other comprehensive (loss) income, net of tax 2014 Unrealized (loss) gain on investments available for sale, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other comprehensive (loss) income, net of tax. . . . . . . . . . . . . . (30,705) (30,705) Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,889,574 2013 $ 32,743,238 2012 $ 29,973,472 (16,325) (16,325) $ 32,726,913 20,313 20,313 $ 29,993,785 The accompanying notes are an integral part of these consolidated financial statements. 61 COMPUTER PROGRAMS AND SYSTEMS, INC. Consolidated Statements of Stockholders’ Equity Common Shares Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Income(Loss) Retained Earnings Total Stockholders’ Equity Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . 11,063,220 Net income . . . . . . . . . . . . . — Unrealized gain on investments held for sale, net of tax . . . . . . . . . . . . . . . — Issuance of restricted stock. Stock-based compensation . Dividends . . . . . . . . . . . . . . Income tax benefit from restricted stock dividends . . Deficient tax benefit from restricted stock . . . . . . . . . . 14,452 — — — — Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . 11,077,672 Net income . . . . . . . . . . . . . — Unrealized loss on investments held for sale, net of tax . . . . . . . . . . . . . . . Issuance of restricted stock. Stock-based compensation . Dividends . . . . . . . . . . . . . . Income tax benefit from restricted stock dividends . . Income tax benefit from restricted stock . . . . . . . . . . — 81,470 — — — — Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . 11,159,142 Net income . . . . . . . . . . . . . — Unrealized loss on investments held for sale, net of tax . . . . . . . . . . . . . . . — Issuance of restricted stock. Stock-based compensation . Dividends . . . . . . . . . . . . . . Income tax benefit from restricted stock dividends . . Income tax benefit from restricted stock . . . . . . . . . . 49,737 — — — — Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . 11,208,879 $ 11,063 — $ 31,582,108 — $ 7,380 $ 25,783,486 — 29,973,472 $ 57,384,037 29,973,472 — 15 — — — — — (15) 1,264,779 — 98,163 (96,934) 20,313 — 20,313 — — — — — (31,441,638) — 1,264,779 (31,441,638) — — — — 98,163 (96,934) 11,078 — 32,848,101 — 27,693 24,315,320 — 32,743,238 57,202,192 32,743,238 — 81 — — — — — (81) 1,699,128 — 74,939 21,813 (16,325) — — — — — — (22,642,438) (16,325) — 1,699,128 (22,642,438) — — — — 74,939 21,813 11,159 — 34,643,900 — 11,368 34,416,120 — 32,920,279 69,082,547 32,920,279 — 50 — — — — — (50) 4,172,174 — 140,571 26,755 — (30,705) — — — — — (25,530,635) (30,705) — 4,172,174 (25,530,635) — — — — 140,571 26,755 $ 11,209 $ 38,983,350 $ (19,337) $ 41,805,764 $ 80,780,986 The accompanying notes are an integral part of these consolidated financial statements. 62 COMPUTER PROGRAMS AND SYSTEMS, INC. Consolidated Statements of Cash Flows Year ended December 31, 2014 2013 2012 Operating Activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,920,279 Adjustments to net income: Provision for bad debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Excess) deficient tax benefit from restricted stock . . . . . . . . . . . Income tax benefit from restricted stock dividends . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581,943 (1,551,828) 4,172,174 (26,755) (140,571) 3,665,414 Changes in operating assets and liabilities: (3,956,206) 7,406,071 157,113 (35,687) 776,654 (3,690,926) 421,143 (1,750,262) 38,948,556 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid income taxes/income taxes payable. . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . Investing Activities Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . Financing Activities (25,530,635) Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,755 Excess (deficient) tax benefit from restricted stock. . . . . . . . . . . . . . . 140,571 Income tax benefit from restricted stock dividends. . . . . . . . . . . . . . . (25,363,309) Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . 12,062,563 Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . 11,729,185 Cash and cash equivalents at end of year. . . . . . . . . . . . . . . . . . . . . . . $ 23,791,748 Supplemental disclosure of cash flow information Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,068,807 Reclassification of inventory to property and equipment . . . . . . . . . . $ Write-off of fully depreciated assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,974,025 (1,472,661) (50,023) — (1,522,684) The accompanying notes are an integral part of these consolidated financial statements. 63 $ 32,743,238 $ 29,973,472 1,911,480 (67,848) 1,699,128 (21,813) (74,939) 3,429,053 (974,145) (14,766,789) 93,335 180,193 233,540 2,128,745 575,668 1,958,368 29,047,214 515,138 654,093 1,264,779 96,934 (98,163) 3,164,184 1,516,349 (4,858,589) (255,037) (583,249) 511,017 1,862,820 (597,169) (959,882) 32,206,697 (3,630,451) (2,733,109) 2,678,760 (3,684,800) (4,362,961) (1,155,352) 7,000,000 1,481,687 (22,642,438) 21,813 74,939 (22,545,686) 2,816,728 8,912,457 $ 11,729,185 (31,441,638) (96,934) 98,163 (31,440,409) 2,247,975 6,664,482 $ 8,912,457 — $ — $ $ 16,236,693 — $ — $ $ 2,360,563 — $ 12,330,270 411,966 $ 8,687,631 COMPUTER PROGRAMS AND SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2014 1. NATURE OF OPERATIONS Computer Programs and Systems, Inc. ("CPSI" or the "Company") is a healthcare information technology solutions provider which was formed and commenced operations in 1979. The Company provides, on an integrated basis, enterprise-wide clinical management, access management, patient financial management, health information management, strategic decision support, resource planning management and enterprise application integration solutions to healthcare organizations throughout the United States. Additionally, CPSI provides other information technology solutions, including business management services, remote hosting, networking technologies and other related services. The Company operates in a single segment reporting to the chief executive officer, based on the criteria of the Segment Reporting topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (the "Codification"). In January 2013, the Company announced the formation of TruBridge, LLC ("TruBridge"), a wholly-owned subsidiary of CPSI. TruBridge provides business management, consulting and managed information technology ("IT") services specifically targeted at rural and community healthcare organizations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements of CPSI include the accounts of TruBridge, a wholly-owned subsidiary of CPSI. All significant intercompany balances and transactions have been eliminated. Cash and Cash Equivalents Cash and cash equivalents can include time deposits and certificates of deposit with original maturities of three months or less that are highly liquid and readily convertible to a known amount of cash. These assets are stated at cost, which approximates market value, due to their short duration or liquid nature. Investments The Company accounts for investments in accordance with FASB Codification topic, Investments – Debt and Equity Securities. Accordingly, investments are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders’ equity. The Company’s management determines the appropriate classifications of investments in fixed maturity securities at the time of acquisition and re-evaluates the classifications at each balance sheet date. An average cost method is used for purposes of determining the cost of investments sold. Income Taxes We account for income taxes in accordance with FASB Codification topic – Income Taxes. Under this topic, deferred income taxes are determined utilizing the asset and liability approach. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of assets and liabilities. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize interest and penalties accrued related to unrecognized tax benefits in the consolidated statements of income as a component of the provision for income taxes. We also make a provision for uncertain income tax positions in accordance with the Income Taxes Codification topic. These provisions require that a tax position taken in a tax return be recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit 64 that is greater than fifty percent likely of being realized upon settlement. The topic also requires that changes in judgment that result in subsequent recognition, derecognition, or change in a measurement date of a tax position taken in a prior annual period (including any related interest and penalties) be recognized as a discrete item in the interim period in which the change occurs. Accounts Receivable and Allowance for Doubtful Accounts Trade accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The Company establishes a general allowance for doubtful accounts based on collections history. In the case of a bankruptcy filing or other similar event indicating the collectability of specific customer accounts is no longer probable, a specific reserve for bad debt may be recorded to reduce the related receivable to the amount expected to be recovered. Financing Receivables Financing receivables are comprised of short-term payment plans and sales-type leases. Short-term payment plans are stated at the amount the Company expects to collect and do not bear interest. Sales-type leases are initially recorded at the present value of the related minimum lease payments, computed at the interest rate implicit in the lease, and are presented net of unearned income. Unearned income is amortized over the lease term to produce a constant periodic rate of return on the net investment in the lease (the interest method). An allowance for credit losses has been established for our financing receivables based on the historical level of customer defaults under such arrangements. In the case of a bankruptcy filing or other similar event indicating the collectability of specific customer accounts is no longer probable, a specific reserve may be recorded to reduce the related receivable to the amount expected to be recovered. Customer payments are considered past due if a scheduled payment is not received within contractually agreed upon terms, with amounts reclassified to accounts receivable when they become due. As a result, we evaluate the credit quality of our financing receivables on an ongoing basis utilizing an aging of receivables and write-offs, customer collection experience, the customer’s financial condition and known risk characteristics impacting the respective customer base, as well as existing economic conditions, to determine if any further allowance is necessary. Amounts are specifically charged off once all available means of collection have been exhausted. Inventories Inventories are stated at lower of cost or market using the average cost method. The Company’s inventories are comprised of computer equipment, forms and supplies. For cash flow presentation, inventory used by the Company and capitalized as property and equipment is shown as a change in inventory. Property and Equipment Property and equipment is recorded at cost, less accumulated depreciation. Additions and improvements to property and equipment that materially increase productive capacity or extend the life of an asset are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. Upon retirement or other disposition of such assets, the related costs and accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in the results of operations. Depreciation expense is computed using the straight-line method over the asset’s useful life, which is generally 5 years for computer equipment, furniture, and fixtures and 30 years for buildings. Leasehold improvements are depreciated over the shorter of the asset’s useful life or the remaining lease term. The Company reviews for the possible impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Depreciation expense is reported in the consolidated statements of income as a component of support and maintenance costs and operating expenses. Deferred Revenue Deferred revenue represents amounts received from customers under licensing agreements and implementation fees for which the revenue recognition process has not been completed. 65 Revenue Recognition The Company recognizes revenue in accordance with accounting principles generally accepted in the United States of America ("US GAAP"), principally those required by the Software topic and Revenue Recognition subtopic of the Codification and those prescribed by the Securities and Exchange Commission (the "SEC"). The Company's revenue is generated from three sources: • • System Sales - the sale of information systems, which includes perpetual software licenses, conversion, installation and training services, hardware and peripherals; Support and Maintenance - the provision of system support services, which includes software application support, hardware maintenance, continuing education, "Software as a Service" (or "SaaS") services, and forms and supplies; and • Business Management, Consulting and Managed IT Services - the provision of business management services, which includes electronic billing, statement processing, payroll processing, accounts receivable management, contract management and insurance services, as well as Internet service provider ("ISP") services and consulting and managed IT services (collectively, "other professional IT services"). System Sales, Software Application Support and Hardware Maintenance The Company enters into contractual obligations to sell perpetual software licenses, conversion, installation and training services, hardware and software application support and hardware maintenance services. On average, the Company is able to complete a system installation in three to four weeks. The methods employed by the Company to recognize revenue, which are discussed by element below, achieve results materially consistent with the provisions of Accounting Standards Update ("ASU") 2009-13, Multiple-Deliverable Revenue Arrangements, due to the relatively short period during which there are multiple undelivered elements, the relatively small amount of non-software related elements in the system sale arrangements, and the limited number of contracts in-process at the end of each reporting period. The Company recognizes revenue on the elements noted above as follows: • Perpetual software licenses and conversion, installation and training services – The selling price of perpetual software licenses and conversion, installation and training services is based on management’s best estimate of selling price. In determining management’s best estimate of selling price, we consider the following: (1) competitor pricing, (2) supply and demand of installation staff, (3) overall economic conditions, and (4) our pricing practices as they relate to discounts. With the exception of certain arrangements with extended payment terms that were entered into in 2012 and that are not comparable to our historical or current arrangements (see Note 10), the method of recognizing revenue for the perpetual license of the associated modules included in the arrangement, and the related conversion, installation and training services over the term the services are performed, is on a module by module basis as the related perpetual licenses are delivered and the respective conversion, installation and training for each specific module is completed, as this is representative of the pattern of provision of these services. • Hardware – We recognize revenue for hardware upon shipment. The selling price of hardware is based on management’s best estimate of selling price, which consists of cost plus a targeted margin. • Software application support and hardware maintenance – We have established vendor-specific objective evidence ("VSOE") of the fair value of our software application support and hardware maintenance services by reference to the price our customers are required to pay for the services when sold separately via renewals. Support and maintenance revenue is recognized on a straight-line basis over the term of the maintenance contract, which is generally three to five years. 66 SaaS, ISP and Other Professional IT Services The Company accounts for SaaS arrangements in accordance with the requirements of the Hosting Arrangement section under the Software topic and Revenue Recognition subtopic of the Codification. The Codification states that the software elements of SaaS services should not be accounted for as a hosting arrangement "if the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software." Each SaaS contract entered into by the Company includes a system purchase and buyout clause, and this clause specifies the total amount of the system buyout. In addition, a clause is included in the contract which states that should the system be bought out by the customer, the customer would be required to enter into a general support agreement (for post-contract support services) for the remainder of the original SaaS term. Accordingly, the Company has concluded that SaaS customers do not have the right to take possession of the system without significant penalty (i.e., the purchase price of the system), resulting in the determination that these contracts are service contracts for which revenue is recognized when the services are performed. The Company will occasionally provide ISP and other professional IT services. Depending on the nature of the services provided, these services may be considered software elements or non-software elements. The selling price of services considered to be software elements is based on VSOE of the fair value of the services by reference to the price our customers are required to pay for the services when sold separately. The selling price of services considered to be non-software elements is based on third-party evidence of selling price of similar services. Revenue from these elements are recognized as the services are performed. Business Management Services Business management services consist of electronic billing, statement processing, payroll processing, accounts receivable management, contract management and insurance services. While business management service arrangements are contracts separate from the system sale and support and maintenance contracts, these contracts are often executed within a short time frame of each other. The amount of the total arrangement allocated to these services is based on VSOE of fair value by reference to the rate at which our customers renew as well as the rate at which the services are sold to customers when the business management services agreement is not executed within a short time frame of the system sale and support and maintenance contracts. If VSOE of fair value does not exist for these services, we allocate arrangement consideration based on third-party evidence ("TPE") of selling price or, if neither VSOE nor TPE is available, estimated selling price. Because the pricing is transaction based (per unit pricing), customers are billed and revenue recognized as services are performed based on transaction levels. Stock-Based Compensation The Company accounts for stock-based compensation according to the provisions of FASB Codification topic, Compensation – Stock Compensation, which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at the grant date based on the fair value of the award, and is recognized as an expense over the employee’s or non-employee director’s requisite service period. Research and Development Costs Research and development costs are expensed as incurred. Research and development costs totaled approximately $2,866,000, $2,761,000 and $2,757,000 for the years ended December 31, 2014, 2013 and 2012, respectively. Research and development costs are included in costs of support and maintenance in the accompanying consolidated statements of income. 67 Advertising Advertising costs are expensed as incurred. Advertising expense was approximately $93,000, $97,000 and $132,000 for the years ended December 31, 2014, 2013 and 2012, respectively, and is recorded in sales and marketing expenses in the accompanying consolidated statements of income. Shipping and Handling Costs Shipping and handling costs are expensed as incurred and included in general and administrative expenses and costs of business management, consulting and managed IT services. Shipping and handling costs totaled approximately $571,000, $491,000 and $617,000 for the years ended December 31, 2014, 2013 and 2012, respectively. Use of Estimates The preparation of financial statements in conformity with GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported revenues and expenses during the reporting periods. Actual results could differ from those estimates. New Accounting Standards Adopted in 2014 There were no new standards required to be adopted during the year ended December 31, 2014 that had or will have a material impact on our financial statements. New Accounting Standards Yet to be Adopted In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, to clarify the principles for recognizing revenue and to develop a common revenue standard for US GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2016, which is effective for the Company as of the first quarter of our fiscal year ending December 31, 2017. The Company is currently evaluating the impact that the implementation of this standard will have on its financial statements. 3. INVESTMENTS Investments were comprised of the following at December 31, 2014: Short-term investments (money market funds and accrued income) . . . . . . . . . . . . . . . . . . . . . $ Obligations of U.S. Treasury, U.S. government corporations and agencies . . . . . . . . . . . . . . . . . Mortgaged-backed securities. . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . Corporate debt securities . . . . . . . . . . . . . . . . . . Amortized Cost Unrealized Gains Unrealized Losses Fair Value 94,595 $ — $ — $ 94,595 69,532 2,020,786 (349) — (24,755) (21,343) 6,542,968 (46,447) $ 10,703,126 1,975,245 2,017,250 66,982 2,000,000 6,555,485 3,885 2,550 — 8,826 $ 10,734,312 $ 15,261 $ 68 Shown below are the amortized cost and estimated fair value of securities with fixed maturities at December 31, 2014, by contract maturity date. Actual maturities may differ from contractual maturities because issuers of certain securities retain early call or prepayment rights. Due in 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,189,557 1,956,598 Due in 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493,072 Due in 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,416,215 Due in 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,678,870 Due thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,734,312 Amortized Cost Fair Value $ 3,199,242 1,957,169 490,872 2,402,062 2,653,781 $ 10,703,126 Investments were comprised of the following at December 31, 2013: Amortized Cost Unrealized Gains Unrealized Losses Fair Value Short-term investments (money market funds and accrued income) . . . . . . . . . . . . . . . . . . . . . $ 3,402,921 Obligations of U.S. Treasury, U.S. government corporations and agencies . . . . . . . . . . . . . . . . . 2,748,721 Mortgaged-backed securities. . . . . . . . . . . . . . . Corporate debt securities . . . . . . . . . . . . . . . . . . 78,540 4,454,107 $ — $ — $ 3,402,921 250 2,572 17,038 2,748,850 (121) — (1,402) 4,469,743 (1,523) $ 10,702,626 81,112 $ 10,684,289 $ 19,860 $ The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at December 31, 2014 and December 31, 2013, respectively: At December 31, 2014 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Obligations of U.S. Treasury, U.S. government corporations and agencies . . . . . . . . . . . . . . $ Certificates of deposit. . . . . . . Corporate debt securities . . . . 904,083 1,975,245 3,975,432 $ (349) $ (24,755) (21,220) — $ — — $ 904,083 — 1,975,245 149,838 (123) 4,125,270 (123) $ 7,004,598 $ (349) (24,755) (21,343) $ (46,447) $ 6,854,760 $ (46,324) $ 149,838 $ At December 31, 2013 Less than 12 Months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Obligations of U.S. Treasury, U.S. government corporations and agencies . . . . . . . . . . . . . . $ 1,321,511 Corporate debt securities . . . . 148,911 $ (121) $ — $ — $ 1,321,511 (380) 310,181 (380) $ 1,631,692 $ (121) (1,402) $ (1,523) (1,022) 161,270 $ 1,470,422 $ (1,143) $ 161,270 $ 69 Our investment portfolio, including those securities in unrealized loss positions at December 31, 2014, is comprised almost entirely of investment-grade corporate and government debt securities and certificates of deposit with large financial institutions. The Company does not intend to sell the investments that are in an unrealized loss position, and it is not likely that the Company will be required to sell any investments before recovery of their amortized cost basis. As a result, the Company has determined that the unrealized losses are deemed to be temporary impairments as of December 31, 2014. The Company believes that the unrealized losses generally are caused by liquidity discounts and increases in risk premiums required by market participants rather than an adverse change in cash flows or a fundamental weakness in the credit quality of the issuer or underlying assets. 4. PROPERTY AND EQUIPMENT Property and equipment are comprised of the following at December 31, 2014 and 2013: 2014 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,848,276 9,422,696 Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,230,714 Maintenance equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,668,006 Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,680,233 Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,061,899 Office furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334,398 Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,246,222 (10,207,603) Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,038,619 2013 $ 2,848,276 9,309,951 1,607,256 5,524,304 4,543,559 3,597,842 316,398 27,747,586 (8,516,214) $ 19,231,372 5. OTHER ACCRUED LIABILITIES Other accrued liabilities are comprised of the following at December 31, 2014 and 2013: Salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,782,862 504,952 Commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 668,800 Self-insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392,593 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,349,207 2014 2013 $ 2,379,202 718,524 706,600 359,916 $ 4,164,242 6. NET INCOME PER SHARE The Company presents basic and diluted earnings per share ("EPS") data for its common stock. Basic EPS is calculated by dividing the net income attributable to stockholders of the Company by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is determined by adjusting the net income attributable to stockholders of the Company and the weighted average number of shares of common stock outstanding during the period for the effects of all dilutive potential common shares, including awards under stock-based compensation arrangements. The Company's unvested restricted stock awards (see Note 8) are considered participating securities under FASB Codification topic, Earnings Per Share, because they entitle holders to non-forfeitable rights to dividends until the awards vest or are forfeited. When a company has a security that qualifies as a "participating security," the Codification requires the use of the two-class method when computing basic EPS. The two-class method is 70 an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net income to allocate to common stockholders, income is allocated to both common stock and participating securities based on their respective weighted average shares outstanding for the period, with net income attributable to common stockholders ultimately equaling net income less net income attributable to participating securities. Diluted EPS for the Company's common stock is computed using the more dilutive of the two-class method or the treasury stock method. The following is a calculation of the basic and diluted EPS for the Company's common stock, including a reconciliation between net income and net income attributable to common stockholders: 2014 2013 2012 Basic EPS Numerator Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,920,279 (499,270) Less: Net income attributable to participating securities. . . . . Net income attributable to common stockholders . . . . . . . . . . $ 32,421,009 $ 32,743,238 (298,939) $ 32,444,299 $ 29,973,472 (271,182) $ 29,702,290 Denominator Weighted average shares outstanding used in basic per common share computations . . . . . . . . . . . . . . . . . . . . . . . . . . 11,025,897 10,997,890 10,976,982 Basic EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.94 $ 2.95 $ 2.71 Diluted EPS Numerator Net income attributable to common stockholders . . . . . . . . . . $ 32,421,009 Reallocation of net income attributable to participating securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to common stockholders for diluted EPS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,421,014 5 $ 32,444,299 $ 29,702,290 — — $ 32,444,299 $ 29,702,290 Denominator Weighted average shares outstanding used in basic per common share computations . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average effect of dilutive securities: . . . . . . . . . . . . Performance share awards. . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average shares outstanding used in diluted per common share computations . . . . . . . . . . . . . . . . . . . . . . . . . . 11,025,897 10,997,890 10,976,982 509 — — 11,026,406 10,997,890 10,976,982 Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.94 $ 2.95 $ 2.71 7. INCOME TAXES The Company accounts for income taxes in accordance with the FASB’s Codification topic, Income Taxes. These provisions require a company to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. If the more-likely-than-not threshold 71 is met, a company must measure the tax position to determine the amount to recognize in the financial statements. We applied these provisions to all tax positions for which the statute of limitations remained open. A reconciliation of the beginning and ending amount of unrecognized tax benefit, included as a component of "Income taxes payable" or "Prepaid income taxes" (as determined by the status of the Company's overall federal and state income tax position at the respective balance sheet dates) within the Consolidated Balance Sheets, is as follows: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,317,977 112,492 Additions based on tax positions related to the current year . . . . . . . . . . . . . . . . 25,402 Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions for tax positions of prior years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,455,871 2014 $ 2013 744,705 62,800 580,099 (69,627) $ 1,317,977 The total amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate is $1,455,871. The Company classifies interest and penalties arising from the underpayment of income taxes in the consolidated statements of income under provision for income taxes. As of December 31, 2014, we had recorded $143,997 of accrued interest related to uncertain tax positions. The federal returns for the tax years 2004 through 2009 are currently under examination by the Internal Revenue Service, primarily in relation to research credits claimed on those returns, as amended, by the Company. The federal returns for tax years 2010 through 2013 remain open to examination, and the tax years 2006 through 2013 remain open to examination by certain other taxing jurisdictions to which the Company is subject. It is reasonably possible that the amount of unrecognized tax benefits, inclusive of related interest, will change in the next twelve months. At December 31, 2014, there is no estimated increase or decrease in the amount of unrecognized tax benefits. Deferred income taxes arise from the temporary differences in the recognition of income and expenses for tax purposes. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Deferred tax assets and liabilities are comprised of the following at December 31, 2014 and 2013: 2014 2013 Deferred tax assets: Accounts receivable and financing receivables. . . . . . . . . . . . . . . . . . . . . . . $ Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 879,094 1,158,764 1,133,986 105,554 175,575 11,851 Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,464,824 Deferred tax liabilities: $ 971,132 1,191,286 491,921 48,383 155,569 — $ 2,858,291 Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,528,886 Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,528,886 — $ 6,967 2,486,032 $ 2,492,999 72 Significant components of the income tax provision for the years ended December 31, 2014, 2013 and 2012 are as follows: 2014 2013 2012 Current provision: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,546,110 2,824,448 State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,437,727 2,597,502 $ 9,997,468 1,372,921 Deferred provision: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,392,666) (159,162) Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,818,730 (60,890) (6,958) $ 17,967,381 587,008 67,085 $ 12,024,482 The difference between income taxes at the U.S. federal statutory income tax rate of 35% and those reported in the consolidated statements of income for the years ended December 31, 2014, 2013 and 2012 are as follows: 2014 Income taxes at U. S. federal statutory rate . . . . . . . . . . . . . . . . $ 17,408,653 (464,049) Provision-to-return adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 1,772,595 State income tax, net of federal tax effect. . . . . . . . . . . . . . . . . . (1,606,060) Domestic production activities deduction. . . . . . . . . . . . . . . . . . (596,807) Tax credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,894 Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,504 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,818,730 2013 $ 17,748,717 (217,206) 1,824,908 (1,423,425) (502,400) 573,272 (36,485) $ 17,967,381 2012 $ 14,699,284 (3,085,812) 1,558,169 (1,236,701) — 13,359 76,183 $ 12,024,482 Our effective tax rates for the years ended December 31, 2014, 2013 and 2012 were 33.81%, 35.43% and 28.63%, respectively. The significantly reduced effective tax rate for the year ended December 31, 2012 (when compared to both 2013 and 2014) is mostly due to provision-to-return adjustments recorded during 2012, primarily related to differences between the DPAD amount reported on the 2011 federal income tax return and amounts previously estimated, as well as the expected additional net federal tax benefit to be realized by the Company upon amending federal income tax returns for all open years for revised DPAD amounts. 8. STOCK-BASED COMPENSATION The Company's stock-based compensation awards are in the form of restricted stock and performance share awards made pursuant to the Company's 2005 Restricted Stock Plan, 2012 Restricted Stock Plan for Non- Employee Directors, and 2014 Incentive Plan (the "Plans"). Stock-based compensation cost is measured at the grant date based on the fair value of the award, and is recognized as an expense over the employee’s or non- employee director’s requisite service period. As of December 31, 2014, there were a total of 608,836 shares of common stock reserved under the Plans for issuance under future share-based payment arrangements. 73 The following table details total stock-based compensation expense for the years ended December 31, 2014, 2013 and 2012, included in the consolidated statements of income: Costs of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,648,311 2,523,863 Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,172,174 Pre-tax stock-based compensation expense . . . . . . . . . . . . . . . . (1,627,148) Less: income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,545,026 Net (after tax) stock-based compensation expense . . . . . . . . . . . $ 2014 $ 2013 601,377 1,097,751 1,699,128 (662,660) 1,036,468 2012 459,996 804,783 1,264,779 (493,264) 771,515 Cash flows resulting from excess or deficient tax benefits are required to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for the vested portion of restricted share awards that are in excess of the deferred tax asset attributable to stock compensation costs for such restricted share awards. Conversely, deficient tax benefits are realized tax benefits from tax deductions for the vested portion of restricted share awards that are less than the deferred tax asset attributable to stock compensation costs for such restricted share awards. As a result, excess (deficient) tax benefits of $26,755, $21,813 and $(96,934) have been classified as financing cash inflows (outflows) for the years ended December 31, 2014, 2013 and 2012, respectively. In addition to tax benefits related to the vested portion of restricted share awards, the Company also pays dividends on unvested restricted stock which resulted in excess tax benefits of $140,571, $74,939 and $98,163 for the years ended December 31, 2014, 2013 and 2012, respectively, which are classified as cash inflows from financing activities. Restricted Stock The Company grants restricted stock to executive officers, certain key employees and non-employee directors under the Plans with the fair value of the awards representing the fair value of the common stock on the date the restricted stock is granted. Shares of restricted stock generally vest in equal annual installments over the applicable vesting period, which ranges from one to five years. The Company records expenses for these grants on a straight-line basis over the applicable vesting periods. A summary of restricted stock activity under the Plans during the years ended December 31, 2014, 2013 and 2012 is as follows: Nonvested stock outstanding at January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares 100,346 $ 14,452 (20,069) — Nonvested stock outstanding at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . 94,729 $ Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,470 (22,525) — Nonvested stock outstanding at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . 153,674 $ Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performance share awards converted to restricted stock . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,737 — (43,195) — Nonvested stock outstanding at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . 160,216 $ 74 Weighted- Average Grant-Date Fair Value 60.79 49.82 60.79 — 59.12 57.39 59.48 — 58.15 61.63 — 58.48 — 59.14 As of December 31, 2014, there was $7,267,059 of total unrecognized compensation cost related to non-vested restricted stock arrangements granted under the Plans, which is expected to be recognized over a weighted- average period of 2.25 years. Performance Share Awards In 2014, the Company began to grant performance share awards to executive officers and certain key employees under the 2014 Incentive Plan. The number of shares of common stock earned and issuable under the award is determined at the end of each performance period, based on the Company's achievement of performance goals predetermined by the Compensation Committee of the Board of Directors at the time of grant. If certain levels of the performance criteria are met, the award results in the issuance of shares of restricted stock corresponding to such level, which shares are then subject to time-based vesting pursuant to which the shares of restricted stock vest in equal annual installments over the applicable vesting period, which is generally three years for restricted stock issued pursuant to performance share awards. In the event that the Company's financial performance meets the predetermined target for the performance criteria, the Company will issue each award recipient the number of restricted shares equal to the target award specified in the individual's underlying performance share award agreement. In the event the financial results of the Company exceed the predetermined target, additional shares up to the maximum award may be issued. In the event the financial results of the Company fall below the predetermined target, a reduced number of shares may be issued. If the financial results of the Company fall below the threshold performance level, no shares will be issued. The recipients of performance share awards do not receive dividends or possess voting rights during the performance period and, accordingly, the fair value of the performance share awards is the quoted market value of the Company stock on the grant date less the present value of the expected dividends not received during the relevant period. Expense is recognized using the accelerated attribution (graded vesting) method over the period beginning on the date the Company determines that it is probable that the performance criteria will be achieved and ending on the last day of the vesting period for the restricted stock issued in satisfaction of such awards. In the event the Company determines it is no longer probable that the minimum performance level will be achieved, all previously recognized compensation expense related to the applicable awards is reversed in the period such a determination is made. A summary of performance share award activity under the 2014 Incentive Plan for the year ended December 31, 2014 is as follows, based on the target award amounts set forth in the performance share award agreements: Performance share awards outstanding at December 31, 2013 . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performance share awards converted to restricted stock . . . . . . . . . . . . . . . . . . . Performance share awards outstanding at December 31, 2014 . . . . . . . . . . . . . . Weighted- Average Grant-Date Fair Value — 60.28 — 60.28 Shares — $ 46,541 — 46,541 $ As of December 31, 2014, there was $2,108,759 of total unrecognized compensation cost related to performance share awards granted under the Plans, which is expected to be recognized over a weighted-average period of 2.25 years. 9. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of temporary cash investments and trade receivables. The Company places its temporary cash investments with credit-worthy, high-quality financial institutions. 75 The Company’s customer base is concentrated in the healthcare industry. Customers are located throughout the United States. The Company requires no collateral or other security to support customer accounts receivable. An allowance for doubtful accounts has been established for potential credit losses based on historical collection experience. The Company maintains its cash and cash equivalents in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on cash and cash equivalents. 10. FINANCING RECEIVABLES Short-Term Payment Plans The Company has sold information and patient care systems to certain healthcare providers under Second Generation Meaningful Use Installment Plans (see below) with maximum contractual terms of three years and expected terms of less than one year and other arrangements requiring fixed monthly payments over terms ranging from 3 to 12 months ("Fixed Periodic Payment Plans"). These receivables, collectively referred to as short-term payment plans and included in the current portion of financing receivables, were comprised of the following on December 31, 2014 and 2013: Second Generation Meaningful Use Installment Plans, gross . . . . . . . . . . . . . . . $ 15,554,900 Fixed Periodic Payment Plans, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,239,817 Short-term payment plans, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,794,717 2014 2013 $ 23,901,435 1,416,335 $ 25,317,770 (889,736) Less: allowance for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Short-term payment plans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,904,981 (1,265,889) — $ 24,051,881 The significant decrease in amounts due under short-term payment plans from December 31, 2013 to December 31, 2014 is due to those factors described under the caption "Second Generation Meaningful Use Installment Plans" below. Sales-Type Leases Additionally, the Company leases its information and patient care systems to certain healthcare providers under sales-type leases expiring in various years through 2017. These receivables typically have terms from two to five years, bear interest at various rates, and are usually collateralized by a security interest in the underlying assets. Since the Company has a history of successfully collecting amounts due under the original payment terms of these extended payment arrangements without making any concessions to its customers, the Company satisfies the requirement for revenue recognition. The Company’s history with these types of extended payment term arrangements supports management’s assertion that revenues are fixed and determinable and collection is probable. 76 The components of these lease receivables were as follows on December 31: Sales-type leases, gross. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,152,218 (111,450) Less: allowance for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (63,947) Less: unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,976,821 Sales-type leases, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 2013 $ 2,081,512 (99,301) (95,499) 1,886,712 Future minimum lease payments to be received subsequent to December 31, 2014 are as follows: 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,346,014 668,131 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,073 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,152,218 Total minimum lease payments to be received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (63,947) Less unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net lease receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,088,271 Credit Quality of Financing Receivables and Allowance for Credit Losses The following table is a roll-forward of the allowance for financing credit losses for the years ended December 31, 2014 and 2013: Beginning Balance Provision Charge-offs Recoveries Ending Balance December 31, 2014 . . . . . . . . . $ 1,365,190 662,315 December 31, 2013 . . . . . . . . . $ $ $ 1,309,160 (349,280) $ $ (14,724) $ (606,285) $ — $ 1,001,186 — $ 1,365,190 The Company’s financing receivables are comprised of a single portfolio segment, as the balances are all derived from short-term payment plan arrangements and sales-type leasing arrangements within our target market of rural and community hospitals. The Company evaluates the credit quality of its financing receivables based on a combination of factors, including, but not limited to, customer collection experience, economic conditions, the customer’s financial condition, and known risk characteristics impacting the respective customer base of rural and community hospitals, the most notable of which relate to enacted and potential changes in Medicare and Medicaid reimbursement rates as rural and community hospitals typically generate a significant portion of their revenues and related cash flows from beneficiaries of these programs. In addition to specific account identification, the Company utilizes historical collection experience to establish the allowance for credit losses. Financing receivables are written off only after the Company has exhausted all collection efforts. The Company has been successful in collecting its financing receivables and considers the credit quality of such arrangements to be good, especially as the underlying assets act as collateral for the receivables. 77 Customer payments are considered past due if a scheduled payment is not received within contractually agreed upon terms. To facilitate customer collection and credit monitoring efforts, financing receivable amounts are invoiced and reclassified to trade accounts receivable when they become due, with all invoiced amounts placed on nonaccrual status. As a result, all past due amounts related to the Company’s financing receivables are included in trade accounts receivable in the accompanying consolidated balance sheets. The following is an analysis of the age of financing receivables amounts (excluding short-term payment plans) that have been reclassified to trade accounts receivable and were past due as of December 31, 2014 and December 31, 2013: December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . $ December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . $ 161,160 511,792 $ $ 16,978 85,738 $ $ 10,072 57,429 $ $ 188,210 654,959 1 to 90 Days Past Due 91 to 180 Days Past Due 181 + Days Past Due Total Past Due From time to time, the Company may agree to alternative payment terms outside of the terms of the original financing receivable agreement due to customer difficulties in achieving the original terms. In general, such alternative payment arrangements do not result in a re-aging of the related receivables. Rather, payments pursuant to any alternative payment arrangements are applied to the already outstanding invoices beginning with the oldest outstanding invoices as the payments are received. Because amounts are reclassified to trade accounts receivable when they become due, there are no past due amounts included within the financing receivables or the financing receivables, current portion, net amounts in the accompanying consolidated balance sheets. The Company utilizes an aging of trade accounts receivable as the primary credit quality indicator for its financing receivables, which is facilitated by the reclassification of customer payment amounts to trade accounts receivable when they become due. The table below categorizes customer financing receivable balances (excluding short term payment plans), none of which are considered past due, based on the age of the oldest payment outstanding that has been reclassified to trade accounts receivable: December 31, 2014 December 31, 2013 Customer balances with amounts reclassified to trade accounts receivable that are: 1 to 90 Days Past Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91 to 180 Days Past Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181+ Days Past Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total customer balances with past due amounts reclassified to trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total customer balances with no past due amounts reclassified to trade accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361,303 $ 1,322,823 349,721 27,500 368,424 37,537 738,524 $ 1,728,784 1,349,747 257,229 Total financing receivables with contractual maturities of one year or less. . . . . 17,794,717 Less allowance for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,001,186) Total financing receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,881,802 25,317,770 (1,365,190) $ 25,938,593 First Generation Meaningful Use Installment Plans During 2012, the Company entered into multiple customer license agreements with payment terms requiring the customer to remit to the Company incentive payments (not to exceed the remaining balance of the contract price) received under the American Recovery and Reinvestment Act of 2009 (the "ARRA") for adoption of qualifying electronic health records ("EHRs"), with only nominal payment amounts required until the customer’s receipt of such incentive payments ("First Generation Meaningful Use Installment Plans"). If no such incentive payments are received by the customer or if such payments are not sufficient to pay the 78 remaining balance under the arrangement, payments continue at contracted nominal amounts until the balance of the contract price is paid in full. Because of the significant difference in the underlying economics of these arrangements compared to our historical financing receivables, management determined that these arrangements were not comparable to historical arrangements. In accordance with the Software topic and Revenue Recognition subtopic of the Codification, the Company recognizes revenue related to these arrangements as the amounts become due. Anticipated future cash flows from these First Generation Meaningful Use Installment Plans are excluded from the Company’s financing receivables and deferred revenue in the accompanying consolidated balance sheets. Direct, incremental costs in the amount of $40,170, included as a component of prepaid expenses and other in the accompanying consolidated balance sheets, have been capitalized as of December 31, 2014 related to these arrangements. Second Generation Meaningful Use Installment Plans Beginning in the fourth quarter of 2012, we ceased offering First Generation Meaningful Use Installment Plans to our customers, opting instead for license agreements with payment terms that provide us with greater visibility into and control over the customer’s meaningful use attestation process and significantly reducing the maximum timeframe over which customers must satisfy their full payment obligations in purchasing our system (“Second Generation Meaningful Use Installment Plans”). As the overall payment period durations of the Second Generation Meaningful Use Installment Plans are consistent with that of our historical system sale financing arrangements, revenues under the Second Generation Meaningful Use Installment Plans are recognized upon installation of our EHR solution. Although these arrangements provide for a maximum payment term of three years, management has determined the expected term for these arrangements to be less than one year due to (a) historical collection patterns of required EHR incentive payment amounts and (b) the estimated significance of those amounts, the receipt of which is expected to result in minimal or no remaining balance for the related arrangements. As a result, all related amounts are included as a component of financing receivables, current portion, net in the accompanying consolidated balance sheets and as a component of short- term payment plans within this Note 10. Second Generation Meaningful Use Installment Plans comprised nearly all of our new system installations during the year ended December 31, 2013, compared to approximately one-third of our new system installations during the year ended December 31, 2014. This decreased utilization of Second Generation Meaningful Use Installment Plans, coupled with payments received under such arrangements during the year ended December 31, 2014, has resulted in the overall significant decrease in our financing receivables balance related to short-term payment plans from December 31, 2013 to December 31, 2014. 11. BENEFIT PLANS In January 1994, the Company adopted the CPSI 401(k) Retirement Plan that covers all eligible employees of the Company who have completed one year of service. The plan allows eligible employees to contribute up to 60% of their pre-tax earnings up to the statutory limit prescribed by the Internal Revenue Service. The Company matches a discretionary amount determined by the Board of Directors. The Company contributed approximately $2,183,000, $2,020,000 and $1,749,000 to the plan for the years ended December 31, 2014, 2013 and 2012, respectively. The Company provides certain health and medical benefits to eligible employees, their spouses and dependents pursuant to a benefit plan funded by the Company. Each participating employee contributes to the Company’s costs associated with such benefit plan. The Company’s obligation to fund this benefit plan and pay for these benefits is limited through the Company’s purchase of an insurance policy from a third-party insurer. The amount established as a reserve is intended to recognize the Company’s estimated obligations with respect to its payment of claims and claims incurred but not yet reported under the benefit plan. Management believes that the recorded liability for medical self-insurance at December 31, 2014 and 2013 is adequate to cover the losses and claims incurred, but these reserves are based on estimates and the amount ultimately paid may be more or less than such estimates. 79 12. OPERATING LEASES The Company leased during 2014 office space in Mobile, Fairhope and Lanette, Alabama, and Monroe, Louisiana and during 2015 will commence lease payments on office space in Frackville, Pennsylvania. These leases have terms expiring from 2015 through 2024 but do contain optional extension terms. The future minimum lease payments payable under operating leases subsequent to December 31, 2014 are as follows: 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601,138 428,021 478,669 426,098 420,398 1,454,792 $ 3,809,116 Total rent expense for the years ended December 31, 2014, 2013, and 2012 was $934,223, $882,215, and $934,206, respectively. 13. COMMITMENTS AND CONTINGENCIES From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. Management does not believe it is reasonably possible that such matters will have a material adverse effect on the Company’s financial statements. 14. FAIR VALUE FASB Codification topic, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value and expands financial statement disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Codification topic does not require any new fair value measurements, but rather applies to all other accounting pronouncements that require or permit fair value measurements. The Codification topic requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data. The fair values of the Company’s available-for-sale securities are based on matrix pricing for the periods ended December 31, 2014 and 2013, which uses observable market-based inputs (such as benchmark yields) in addition to quoted prices in active markets to derive fair values. As a result, these inputs are classified as Level 2 within the fair value hierarchy. We generally apply fair value techniques on a non-recurring basis associated with (1) valuing potential impairment loss related to financing receivables accounted for pursuant to Codification topic, Leases, and (2) valuing potential impairment loss related to long-lived assets accounted for pursuant to Codification topic, Property, Plant and Equipment, when events or circumstances indicate a possible impairment. 80 The following table summarizes the carrying amounts and fair values of certain assets and liabilities at December 31, 2014 and December 31, 2013: Fair Value at December 31, 2014 Using Quoted Prices in Carrying Active Markets for Significant Other Significant Amount at 12/31/2014 Identical Assets Observable Inputs Unobservable Inputs (Level 1) (Level 2) (Level 3) Description Available-for-sale securities Short-term investments (money market funds and accrued income). . . . . . . . . . . . . . . . . . . . . $ Mortgage backed securities . . . . . Certificates of deposit. . . . . . . . . . Obligations of U.S. Treasury, U.S. government corporations and agencies . . . . . . . . . . . . . . . . . 69,532 1,975,245 2,020,786 Corporate debt securities . . . . . . . 6,542,968 Total available-for-sale securities . . . . $ 10,703,126 $ 94,595 $ — $ 94,595 $ — — — — 69,532 1,975,245 2,020,786 6,542,968 — $ 10,703,126 $ — — — — — — Fair Value at December 31, 2013 Using Quoted Prices in Carrying Active Markets for Significant Other Significant Amount at 12/31/2013 Identical Assets Observable Inputs Unobservable Inputs (Level 1) (Level 2) (Level 3) Description Available-for-sale securities Short-term investments (money market funds and accrued income). . . . . . . . . . . . . . . . . . . . . $ 3,402,921 Mortgage backed securities . . . . . 81,112 Obligations of U.S. Treasury, U.S. government corporations and agencies . . . . . . . . . . . . . . . . . 2,748,850 4,469,743 Total available-for-sale securities . . . . $ 10,702,626 Corporate debt securities . . . . . . . $ $ — $ 3,402,921 $ — — — 81,112 2,748,850 4,469,743 — $ 10,702,626 $ — — — — — Accrued income in the above tables represents earnings due and payable to our investment portfolio at any point in time but not yet received. The carrying amount of other financial instruments reported in the consolidated balance sheets for current assets and current liabilities approximates their fair values because of the short-term nature of these instruments. 81 15. SUBSEQUENT EVENTS Declaration of Dividends On January 29, 2015, the Company announced a dividend for the first quarter of 2015 in the amount of $0.64 per share. The dividend was paid on February 27, 2015 to stockholders of record as of the close of business on February 12, 2015. Issuance of Restricted Stock On February 5, 2015, the Compensation Committee of the Board of Directors (the "Committee") approved the grant of a total of 6,750 shares of restricted stock, effective February 5, 2015, to certain of the non-employee directors of the Company under the Company’s 2012 Restricted Stock Plan for Non-Employee Directors. The grant date fair value was $51.85 per share. Under the terms of the restricted stock award agreements with the non-employee directors, the shares of restricted stock are scheduled to vest on the first anniversary of the date of grant, assuming that the recipient of the grant continues to serve as a director of the Company on the vesting date. Compensation expense for this grant will be recognized on a straight-line basis over one year. Additionally, on February 5, 2015, the Committee approved the grant of a total of 54,100 shares of restricted stock, effective February 5, 2015, to executive officers and certain key employees under the 2014 Incentive Plan. The grant date fair value was $51.85 per share. Under the terms of the restricted stock award agreements with the executive officers and certain key employees, the shares of restricted stock are scheduled to vest in three equal annual installments commencing on the first anniversary of the grant date, assuming that the recipient of the award continues to serve as an employee of the Company on each applicable vesting date. Compensation expense for this grant will be recognized on a straight-line basis over three years. Finally, on February 5, 2015, the Committee approved the grant of a total of 45,843 shares of restricted stock, effective February 5, 2015, to executive officers and certain key employees related to performance share awards issued during 2014 under the 2014 Incentive Plan as a result of the achievement of performance goals predetermined by the Committee. Achievement of these performance goals during 2014 resulted in a grant of restricted stock equal to 98.5% of the total target award amount of 46,541 shares. The grant date fair value of the performance share awards was $60.28 per share. Under the terms of the restricted stock award agreements with the executive officers and certain key employees, the shares of restricted stock are scheduled to vest in three equal annual installments commencing on the first anniversary of the Vesting Determination Date, defined by the Committee as February 5, 2015. Compensation expense for this grant is being recognized using the accelerated attribution (graded vesting) method over the period beginning on May 15, 2014, the date the Company determined that it was probable that the performance criteria would be achieved, and ending on the last day of the vesting period for the restricted stock issued in satisfaction of the performance share awards. Issuance of Performance Share Awards On February 5, 2015, the Committee approved the grant of performance share awards to executive offices and certain key employees with a total target award of 52,364 shares of common stock. The number of shares of common stock earned and issuable under the award will be determined at the end of the performance period, based on the Company's achievement of performance goals predetermined by the Committee at the time of grant. If certain levels of the performance criteria are met, the award results in the issuance of shares of restricted stock corresponding to such level, which shares are then subject to time-based vesting pursuant to which the shares of restricted stock vest in equal annual installments over the applicable vesting period, which is generally three years for restricted stock issued pursuant to performance share awards. In the event that the Company's financial performance meets the predetermined target for the performance criteria, the Company will issue each award recipient the number of restricted shares equal to the target award specified in the individual's underlying performance share award agreement. In the event the financial results of the Company exceed the predetermined target, additional shares up to the maximum award of 78,549 shares may be issued. In the event the financial results of the Company fall below the predetermined target, a reduced 82 number of shares may be issued. If the financial results of the Company fall below the threshold performance level, no shares will be issued. The grant date fair value of the performance share awards was $49.29 per share. Expense will be recognized using the accelerated attribution (graded vesting) method over the period beginning on the date the Company determines that it is probable that the performance criteria will be achieved and ending on the last day of the vesting period for the restricted stock issued in satisfaction of such awards. In the event the Company determines it is no longer probable that the minimum performance level will be achieved, all previously recognized compensation expense related to the applicable awards will be reversed in the period such a determination is made. 16. QUARTERLY FINANCIAL STATEMENTS (UNAUDITED) The following table presents a summary of our results of operations for our eight most recent quarters ended December 31, 2014. The information for each of these quarters is unaudited and has been prepared on a basis consistent with the audited financial statements. This information includes all adjustments, consisting only of normal recurring adjustments, we consider necessary for fair presentation of this information when read in conjunction with the audited financial statements and related notes. Our operating results have varied on a quarterly basis and may fluctuate significantly in the future. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (In thousands except for share and per share data) Year Ended December 31, 2014 Sales revenues . . . . . . . . . . . . . . . . . . . . . . $ Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . Net income per share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted. . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2013 Sales revenues . . . . . . . . . . . . . . . . . . . . . . $ Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . Net income per share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted. . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 52,094 24,435 11,987 7,715 0.69 0.69 49,549 22,119 10,109 6,944 0.63 0.63 $ $ $ $ 53,053 25,179 14,069 9,106 0.81 0.81 53,261 25,477 13,148 8,486 0.77 0.77 $ $ $ $ 53,327 25,260 14,175 9,355 0.83 0.83 46,780 20,654 11,026 7,269 0.66 0.66 46,268 19,102 9,356 6,744 0.60 0.60 51,273 25,487 15,961 10,044 0.90 0.90 83 SCHEDULE II COMPUTER PROGRAMS AND SYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS Description Allowance for doubtful accounts deducted from accounts receivable in the balance sheet. . . . . . . . . . . . . . . . . . . . . . . Balance at beginning of period Additions charged to cost and expenses (1) Deductions (2) Balance at end of period 2012 2013 2014 $ 1,276,000 $ 1,124,000 $ 1,125,000 $ $ $ 300,144 602,000 931,000 $ $ $ (452,144) $ 1,124,000 (601,000) $ 1,125,000 (803,000) $ 1,253,000 (1) Adjustments to allowance for change in estimates. (2) Uncollectible accounts written off, net of recoveries. Description Allowance for credit losses deducted from financing receivables in the balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at beginning of period Additions charged to cost and expenses (1) Deductions (2) Balance at end of period 2012 2013 2014 447,321 $ 662,315 $ $ 1,365,190 $ 214,994 $ 1,309,160 $ $ $ (349,280) $ — $ 662,315 (606,285) $ 1,365,190 (14,724) $ 1,001,186 (1) Adjustments to allowance for change in estimates. (2) Uncollectible accounts written off, net of recoveries. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations to the effectiveness of any system of disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that all control issues and instances of fraud, if any, with a company have been prevented or detected on a timely basis. Even disclosure controls and procedures determined to be effective can only provide reasonable assurance that their objectives are achieved. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) pursuant to Rule 13a-15 of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level. 84 Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s Annual Report on Internal Control Over Financial Reporting This report is included in Item 8 on page 56 and is incorporated herein by reference. Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting This report is included in Item 8 on page 57 and is incorporated herein by reference. ITEM 9B. OTHER INFORMATION. None. 85 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE We have adopted a Code of Business Conduct and Ethics applicable to all of our directors, officers (including our Chief Executive Officer and senior financial officers) and employees. We have also adopted a separate code of ethics with additional guidelines and responsibilities applicable to our Chief Executive Officer and senior financial officers, known as the Code of Ethics for CEO and Senior Financial Officers. Copies of the Code of Business Conduct and Ethics and the Code of Ethics for CEO and Senior Financial Officers are available on CPSI’s web site at www.cpsi.com in the "Investors" section under "Governance." Other information required by this Item regarding executive officers is included in Part I of this Form 10-K under the caption "Executive Officers" in accordance with Instruction 3 of the Instructions to Paragraph (b) of Item 401 of Regulation S-K. Other information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from CPSI’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from CPSI’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from CPSI’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. 86 Securities Authorized for Issuance Under Equity Compensation Plans The following table summarizes the securities that have been authorized for issuance as of December 31, 2014 under our 2005 Restricted Stock Plan, 2012 Restricted Stock Plan for Non-Employee Directors and 2014 Incentive Plan. All of these plans were previously approved by CPSI's stockholders. These plans are described in Note 8 of the notes to the consolidated financial statements. Equity Compensation Plan Information Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights Plan Category Equity compensation plans approved by stockholders . . . . . . . . . . . . . . . . . . . . . . . . Equity compensation plans not approved by stockholders . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . (a) -0- N/A -0- (b) N/A N/A Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) 608,836 (1) N/A 608,836 (1) (1) Represents (i) 5 shares of common stock issuable pursuant to our 2005 Restricted Stock Plan, (ii) 89,513 shares of common stock issuable pursuant to our 2012 Restricted Stock Plan for Non-Employee Directors, and (iii) 519,318 shares of common stock issuable pursuant to our 2014 Incentive Plan. We do not intend to use the 2005 Restricted Stock Plan to make any future grants of restricted stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from CPSI’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated by reference pursuant to General Instruction G(3) of Form 10-K from CPSI’s definitive Proxy Statement for the 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. 87 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV (a)(1) and (2) and (c) – Financial Statements and Financial Statement Schedules. Financial Statements: The Financial Statements and related Financial Statements Schedule of CPSI are included herein in Part II, Item 8. (a)(3) and (b) – Exhibits. The exhibits listed on the Exhibit Index beginning on page 90 of this Form 10-K are filed herewith or are incorporated herein by reference. 88 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this the 13th day of March, 2015. SIGNATURES COMPUTER PROGRAMS AND SYSTEMS, INC. By: /s/ J. Boyd Douglas J. Boyd Douglas President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name /s/ David A. Dye David A. Dye /s/ J. Boyd Douglas J. Boyd Douglas /s/ James B. Britain James B. Britain /s/ W. Austin Mulherin, III W. Austin Mulherin, III /s/ William R. Seifert, II William R. Seifert, II /s/ John C. Johnson John C. Johnson /s/ Charles P. Huffman Charles P. Huffman /s/ A. Robert Outlaw, Jr. A. Robert Outlaw, Jr. Title Date Chairman of the Board and Director, Chief Financial Officer (principal financial officer) March 13, 2015 President, Chief Executive Officer and Director (principal executive officer) March 13, 2015 Vice President – Finance and Controller (principal accounting officer) March 13, 2015 March 13, 2015 March 13, 2015 March 13, 2015 March 13, 2015 March 13, 2015 Director Director Director Director Director 89 Exhibit Number Description Exhibit Index 3.1 3.2 10.1 10.2 10.3 10.4 10.5* 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* 10.12* 10.13* 10.14* Certificate of Incorporation (filed as Exhibit 3.4 to CPSI’s Registration Statement on Form S-1 (Registration No. 333-84726) and incorporated herein by reference) Amended and Restated Bylaws (filed as Exhibit 3 to CPSI’s Current Report on Form 8-K dated October 28, 2013 and incorporated herein by reference) Form of Indemnity Agreement entered into by CPSI and each of its non-employee directors (filed as Exhibit 10.1 to CPSI’s Quarterly Report on Form 10-Q for the period ended September 30, 2002 and incorporated herein by reference) Real Property Lease Agreement, dated September 14, 2009 between CPSI and 3725 Airport Boulevard, LP (filed as Exhibit 10.1 to CPSI’s Quarterly Report on Form 10-Q for the period ended September 30, 2009 and incorporated herein by reference) First Amendment to Real Property Lease Agreement, dated October 9, 2009, between CPSI and 3725 Airport Boulevard, LP (filed as Exhibit 10.2 to CPSI’s Quarterly Report on Form 10-Q for the period ended September 30, 2009 and incorporated herein by reference) Real Property Lease Agreement, dated March 19, 2012, between CPSI and Fairhope Group, LLC (filed as Exhibit 10.6 to CPSI's Annual Report on Form 10-K for the period ended December 31, 2012 and incorporated herein by reference) Amendment and Restatement of the Computer Programs and Systems, Inc. 2005 Restricted Stock Plan (filed as Exhibit 10.6 to CPSI's Annual Report on Form 10-K for the period ended December 31, 2005 and incorporated herein by reference) Form of Five-Year Restricted Stock Award Agreement under the Amended and Restated 2005 Restricted Stock Plan (filed as Exhibit 10.1 to CPSI's Current Report on Form 8-K dated January 30, 2006 and incorporated herein by reference) Form of Four-Year Restricted Stock Award Agreement under the Amended and Restated 2005 Restricted Stock Plan (filed as Exhibit 10.1 to CPSI's Current Report on Form 8-K dated September 25, 2013 and incorporated herein by reference) Computer Programs and Systems, Inc. Amended and Restated 2012 Restricted Stock Plan for Non-Employee Directors (filed as Exhibit 10.16 to CPSI's Annual Report on Form 10-K for the period ended December 31, 2013 and incorporated herein by reference) Form of Restricted Stock Award Agreement under the Amended and Restated 2012 Restricted Stock Plan for Non-Employee Directors (filed as Exhibit 10.2 to CPSI's Quarterly Report on Form 10-Q for the period ended June 30, 2012 and incorporated herein by reference) Computer Programs and Systems, Inc. 2014 Incentive Plan (filed as Exhibit 10.1 to CPSI’s Current Report on Form 8-K dated May 16, 2014 and incorporated herein by reference) Form of Performance Share Award Agreement under the 2014 Incentive Plan (filed as Exhibit 10.2 to CPSI’s Current Report on Form 8-K dated May 16, 2014 and incorporated herein by reference) Form of Performance-Based Cash Bonus Award Agreement under the 2014 Incentive Plan (filed as Exhibit 10.3 to CPSI’s Current Report on Form 8-K dated May 16, 2014 and incorporated herein by reference) Form of Restricted Stock Award Agreement under the 2014 Incentive Plan (filed as Exhibit 10.4 to CPSI’s Current Report on Form 8-K dated May 16, 2014 and incorporated herein by reference) 2011 Executive Officer Incentive Program (filed as Exhibit 10.1 to CPSI's Current Report on Form 8-K dated April 18, 2011 and incorporated herein by reference) 90 10.15* 10.16* 10.17* 10.18* 23.1 31.1 31.2 32.1 101 2012 Executive Officer Incentive Program (filed as Exhibit 10.1 to CPSI's Current Report on Form 8-K dated January 23, 2012 and incorporated herein by reference) 2013 Executive Officer Incentive Program (filed as Exhibit 10.1 to CPSI's Current Report on Form 8-K dated March 4, 2013 and incorporated herein by reference) Commission Program for Victor S. Schneider (filed as Exhibit 10.9 to CPSI's Annual Report on Form 10-K for the period ended December 31, 2012 and incorporated herein by reference) Commission Program for Troy D. Rosser (filed as Exhibit 10.10 to CPSI's Annual Report on Form 10-K for the period ended December 31, 2012 and incorporated herein by reference) Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Interactive Data Files for CPSI’s Annual Report on Form 10-K for the period ended December 31, 2014 * Management compensation plan or arrangement 91 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We have issued our reports dated March 13, 2015, with respect to the consolidated financial statements, schedule, and internal control over financial reporting included in the Annual Report of Computer Programs and Systems, Inc. on Form 10-K for the year ended December 31, 2014. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Computer Programs and Systems, Inc. on Form S-8 (File No. 333-131165, File No. 333-181352, and File No. 333-196020). Exhibit 23.1 /s/ GRANT THORNTON LLP Atlanta, Georgia March 13, 2015 Exhibit 31.1 I, J. Boyd Douglas, certify that: CERTIFICATION 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of Computer Programs and Systems, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 13, 2015 /s/ J. Boyd Douglas J. Boyd Douglas Chief Executive Officer Exhibit 31.2 I, David A. Dye, certify that: CERTIFICATION 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of Computer Programs and Systems, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: March 13, 2015 /s/ David A. Dye David A. Dye Chief Financial Officer Exhibit 32.1 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Computer Programs and Systems, Inc. (the “Company”) on Form 10- K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), J. Boyd Douglas, Chief Executive Officer of the Company, and David A. Dye, Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 13, 2015 /s/ J. Boyd Douglas J. Boyd Douglas Chief Executive Officer /s/ David A. Dye David A. Dye Chief Financial Officer Directors and Officers Officers J. Boyd Douglas, Jr. President and Chief Executive Officer David A. Dye Chief Financial Officer W. Austin Mulherin, III Attorney Frazer, Greene, upchurch & Baker, LLC A. Robert Outlaw, Jr. Chief Executive Officer China Doll Rice and Beans, Inc. William R. Seifert, II Retired Executive Vice President Regions Bank Chairman South Alabama Advisory Board of Regions Bank Board of Directors David A. Dye Chairman and Chief Financial Officer Computer Programs and Systems, Inc. J. Boyd Douglas, Jr. President and Chief Executive Officer Computer Programs and Systems, Inc. Charles P. Huffman Retired Executive Vice President and Chief Financial Officer EnergySouth, Inc. John C. Johnson Retired Real Estate Appraiser 2 Courtney & Morris Appraisals, Inc. Stock Performance Graph The following graph sets forth the cumulative total return (assuming reinvestment of dividends) to our stockholders during the period beginning December 31, 2009, and ending on December 31, 2014, compared to an overall stock market index (S&P 500 Index), and the NASDAQ Computer and Data Processing Group. $300 $275 $250 $225 $200 $175 $150 $125 $100 $75 $50 $25 $0 12/09 12/10 12/11 12/12 12/13 12/14 Computer Programs and Systems, Inc. S&P 500 NASDAQ Computer and Data Processing Computer Programs and Systems, Inc. S&P 500 NASDAQ Computer & Data Processing 12/09 $ 100.00 $ 100.00 $ 100.00 12/10 $ 105.23 $ 115.06 $ 106.82 12/11 $ 117.71 $ 117.49 $ 107.70 12/12 $ 121.22 $ 136.30 $ 115.65 12/13 $ 154.64 $ 180.44 $ 176.58 12/14 $ 157.53 $ 205.14 $ 202.04 Corporate Data Independent Registered Public Accounting Firm Grant Thornton LLP 1100 Peachtree Street, Suite 1200 Atlanta, GA 30309 Transfer Agent American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 Toll free: (800) 937-5449 Local & international: (718) 921-8124 Email: info@amstock.com Web site: www.amstock.com Legal Counsel Maynard, Cooper & Gale, P.C. 1901 Sixth Avenue North, Suite 2400 Regions/Harbert Plaza Birmingham, AL 35203-2618 Corporate Headquarters Computer Programs and Systems, Inc. 6600 Wall Street Mobile, AL 36695 (251) 639-8100 www.cpsi.com Common Stock Computer Programs and Systems, Inc.’s common stock is traded on The NASDAQ Stock Market’s Global Select Market under the symbol “CPSI.” 6600 Wall Street | Mobile, Alabama 36695 

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