Item 1 - Business
COMPANY OVERVIEW
Medical Information Technology, Inc. (MEDITECH) was founded in 1969 to develop and market information system software for the hospital industry. For 2006 combined product and service revenue was $344.6M, operating income was $124.8M and net income was $87.2M, up 13.1%, 12.0% and 12.3% compared to the prior year. Product bookings were $215.2M and the resultant year-end product backlog was $233.1M, up 0.3% and 14.4% compared to the prior year. By year-end MEDITECH had 2,566 staff members, and over 2,000 active hospital sites throughout the United States, Canada and the United Kingdom.
HOSPITAL SOFTWARE
Initially MEDITECH developed a software product to automate one of the main departments in a hospital, the clinical laboratory which performs various diagnostic tests on blood or urine specimens. Within a few years, this product became standardized, thereby requiring minimal adaptation to meet the individual needs of a typical customer. MEDITECH extended the concept and developed additional software products for the rest of a hospital's clinical departments. Eventually, it moved into the financial area by developing a hospital billing and accounts receivable product as well as various general accounting products.
Although the individual products could be operated in a stand alone fashion, a hospital achieved maximum effectiveness when they were used in an integrated mode, sharing access to the common clinical and financial records of the hospital. This concept ultimately led to MEDITECH developing the so-called hospital information system, a cohesive set of software products designed from the outset to work in conjunction with the overall operation of the hospital and to minimize the need for specialized interfaces.
COMPUTER HARDWARE
Sophisticated software, such as MEDITECH's, requires extensive computer and communication equipment to function. In spite of this, MEDITECH continues to be a pure software company, limiting itself to specifying the aggregate components needed as well as suggesting typical configurations from certain hardware vendors. The responsibility is left to the hospital to purchase the requisite hardware and secure a continuing source of maintenance service for it.
The hardware components traditionally consist of a small set of central medium-sized computers and a large set of display terminals and printers distributed throughout the hospital. All of these elements are interconnected by means of a standard high speed communication network. The computers execute the software and include large disk subsystems containing the permanent and common clinical and financial records of the hospital.
Hardware technology evolves rapidly, and the current trend has been to replace the display terminals with desktop and handheld computers, thereby forming a client server network. In this mode of operation, the central computers become the file servers while software is executed locally on the client computer which makes file requests to the servers.
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LICENSED SOFTWARE
MEDITECH requires a hospital customer to sign a standard software license agreement prior to product delivery, implementation and subsequent service of the software. This agreement specifies a front end product fee and a front end implementation fee, both of which are payable over the implementation process, and a monthly service fee after the site goes live. In addition to precluding ownership and restricting transfer, the license mandates the customer hold MEDITECH harmless from any liability arising from incorrect operation of the software.
MEDITECH bases its product fee on a customer's net patient revenue across all of its sites, and sets its implementation fee on the total number of sites. As a result larger hospitals pay more than smaller hospitals. The monthly service fees are 1% of the product fees. A typical 150 bed acute care hospital which licenses most of our software might incur a $3,000,000 product fee, a $750,000 implementation fee and a $30,000 monthly service fee. An order is booked when a signed software license and a 10% deposit are received.
STAFF ORGANIZATION
MEDITECH is organized into functional units grouped around product development, sales, marketing, implementation, customer service, accounting and facility operations. All MEDITECH staff work in company owned facilities in the greater Boston area.
From its inception, MEDITECH utilized communication technology which allowed much of its business activities to be performed by remote access. MEDITECH staff sitting at their desks may access client hospitals, both personnel and computers. As a result, there is no need for remote offices. Although most customer contact is through the phone or e-mail, certain of the sales and implementation staff travel to customer sites.
PRODUCT DEVELOPMENT
Most of the product development staff is working on the incremental evolution of the current product line, as well as the creation of new products each year. The rest of the staff is developing a set of replacement products utilizing a new software technology. Approximately every ten years, MEDITECH introduces the next generation of products based on the new software technology and gradually updates existing customers.
SALES AND MARKETING
Most of the direct sales staff, organized into regions, concentrate on new prospects. In addition, some of the sales staff monitor existing customers to expose them to MEDITECH's entire product line. Marketing activities and promotion are low key 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.
During the sales process, prospects generally visit MEDITECH to talk to product specialists and to view product demonstrations. Thereafter they are encouraged to visit various MEDITECH customer sites to observe first hand the software in actual operation and to discuss issues of concern with hospital personnel.
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IMPLEMENTATION PROCESS
To ensure a successful implementation, the staff must properly train a core group of hospital personnel about the operation of the software and how to use it in their daily activity. To avoid interruptions from normal hospital activities, MEDITECH requires the hospital personnel to come to its offices in the Boston area for intensive training sessions.
As training proceeds, the implementation staff customizes certain dictionaries to fit the specific need of the hospital's environment, provides interfaces to non-MEDITECH systems and assists the hospital in converting data from legacy systems. In addition, MEDITECH delivers, installs and tests the licensed software on the customer's hardware. MEDITECH utilizes remote access communication technology to minimize the need to travel.
CUSTOMER SERVICE
Once a hospital goes live, the responsibility of maintaining the customer is transferred to the service staff. MEDITECH provides 24 hour a day service coverage to these customers in order to respond to problem calls. In addition, the staff updates customers with new releases of the software products as they become available. To ensure the continuing education of the hospital staff, MEDITECH runs seminars on the use of its products.
HCA-THE HEALTHCARE COMPANY
HCA-The Healthcare Company utilizes a MEDITECH clinical information system in over 250 hospitals and has been MEDITECH's largest customer for many years. HCA represented 10%, 10% and 9% of MEDITECH revenues in 2004, 2005 and 2006.
COMPETITION
The market for health care information systems is subject to the technological imperative. Accordingly, MEDITECH has a completely integrated set of application products, implements them successfully, provides ongoing maintenance including updates and continues the developmental process. The Company's competitors who make similar claims include GE, Siemens, McKesson, Cerner, Eclipsys, CPSI and Epic. MEDITECH does not offer the breadth of products and services which the competition offers to hospitals nor does MEDITECH offer the products and services which the competition offers to related medical enterprises. Instead MEDITECH focuses exclusively in the hospital information system software market and believes it competes favorably in this market.
ACCESS TO SEC FILINGS
"www.meditech.com" is the Company's website address which provides access to its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and all amendments thereof just as soon as such reports are filed with the SEC. The links so provided allow access to copies of the reports stored on MEDITECH's website, but a link is also provided to allow access to all of the Company's filings stored on the SEC's website as well.
"http://www.sec.gov/cgi-bin/browse-edgar?CIK=1011452&action=getcompany" may be used to access all of the Company's filings stored on the SEC's website instead.
In addition the Company will provide paper copies of these filings free of charge to its shareholders upon request.
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Item 1A
Item 1A - Risk Factors
There are numerous risk factors which may affect future results of operations. The health care industry is highly regulated and is subject to changing economic and political influences. Federal and state legislatures could modify the health care system in respect to reimbursement and financing. Hospitals may respond to these pressures by delaying the purchase of new information systems. Previous volatility in the market place such as that due to Y2K concerns and September 11th could reappear and cause delays. The Health Insurance Portability and Accounting Act of 1996 directly impacts the industry by specifying standards to protect the security and confidentiality of patient information. It may be possible for patients to bring claims against software providers regarding injuries due to errors. Hospitals consolidating into an integrated health care delivery system may be able to negotiate price reductions. Finally, the Company is dependent on a cohesive group of long time senior managers and staff with vast experience in the hospital industry and software technology.
Item 1B
Item 1B - Unresolved Staff Comments
None.
Item 2
Item 2 - Properties
As of December 31, 2006 the Company owned five facilities containing about 1.1 million square feet of space, all being well maintained Class A properties in the greater Boston area. The Company occupies 66% of the space and the remaining 34% is leased to various tenants. In addition, the Company is currently constructing a sixth facility and renting office space next door during the construction phase. The Company has adequate space for its reasonable needs over the near future.
Item 3
Item 3 - Legal Proceedings
During February 2005 a former employee filed a complaint in the United States District Court for the District of Massachusetts against the Medical Information Technology Profit Sharing Plan and all six of the Company's Directors. The complaint was subsequently amended to add the Company as a defendant. During March 2006 the court dismissed the breach of fiduciary duty claims brought against the individual defendants. The remaining claim is an ERISA benefits claim against the Plan, the Plan's trustee, and the Company. The complaint seeks certification of the case as a class action, a judgment against the defendants, a permanent injunction ordering the Plan to consult an outside appraiser in valuing the Plan's assets, removal of the Plan Trustee, and damages, interest, attorneys' fees and costs. The court has not as yet ruled on the plaintiff's request for the complaint to be certified as a class action.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5
Item 5 - Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
No public trading market exists for the Company's common stock, and accordingly no high and low bid information or quotations are available.
The sale, assignment, transfer, pledge or other disposition of any of the Company's common stock is subject to right of first refusal restrictions set forth in the Company's charter.
There are no shareholder agreements with the Company covering the voting or repurchase of MEDITECH stock.
During February/March 2006 pursuant to the 2004 Stock Purchase Plan, the Company sold 257,696 shares of its common stock at $32 per share to certain staff members for an aggregate consideration of $8,246,272.
During 2006 the Company did not repurchase any of its shares of common stock.
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During the fourth quarter of 2006 the Medical Information Technology, Inc. Profit Sharing Trust purchased 3,010 shares of the Company's common stock for a total of $102,340 in individual private transactions. Below is a table showing the purchases of common stock by the Trust during each month of the fourth quarter of 2006.
4th quarter
of 2006 shares
purchased price per
share
Octobernone
November3,010$34
Decembernone
During all of 2006 the Medical Information Technology, Inc. Profit Sharing Trust purchased 12,200 shares of the Company's common stock for a total of $400,960 in individual private transactions.
At December 31, 2006, there were 1,538 shareholders of record of the Company's common stock and 35,168,133 shares outstanding.
The Company has paid quarterly cash dividends continuously since 1980. Dividends paid per share during the last five years are set forth within the table in Item 6.
Item 6 - Selected Financial Data
For the Five Years Ended December 31, 2006
Full Year Operations:
Total revenue$256,196,823$270,780,703$280,761,569$304,568,166$344,589,232
Operating income94,906,98799,684,703102,124,728111,420,017124,794,398
Net income63,870,93967,423,59671,441,09077,675,85887,211,362
Average shares outstanding33,760,45934,097,34234,381,23934,737,44635,069,992
Net income per share$1.89$1.98$2.08$2.24$2.49
Year End Position:
Total assets$354,809,300$402,406,776$427,315,405$449,570,899$486,654,412
Total liabilities36,813,41350,708,76357,265,28365,558,62773,344,109
Shareholder equity317,995,887351,698,013370,050,122384,012,272413,310,303
Shares outstanding33,877,43934,221,32334,514,54434,830,43735,168,133
Total equity per share$9.39$10.28$10.72$11.03$11.75
Other Financial Data:
Working capital$165,612,766$179,764,041$182,083,959$204,626,809$231,033,476
Cash flow from operations81,966,77783,227,61385,922,63093,283,10294,626,916
Depreciation expense8,633,8628,421,9297,706,8147,654,2268,128,038
Cash dividends per share$1.36$1.56$1.80$2.00$2.16
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Item 7
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Comparison of Fiscal Years ended December 31, 2005 and 2006:
Total revenue from both existing and new customers increased 13.1% from $304.6 million in 2005 to $344.6 million in 2006. It was composed of a $25.8 million increase in product revenue and a $14.2 million increase in service revenue.
Operating expenses increased 13.8% from $193.1 million in 2005 to $219.8 million in 2006 due to an overall increase in staff and additional bonus expense. The resultant operating income increased 12.0% from $111.4 million in 2005 to $124.8 million in 2006.
Other income decreased from $23.7 million in 2005 to $22.6 million in 2006 due primarily to reduced realized gains from the redemption and sale of marketable securities. Other expense decreased from $9.3 million in 2005 to $8.0 million in 2006 due primarily to reduced litigation related legal expenses. The resultant pretax income increased 10.7% from $125.9 million in 2005 to $139.4 million in 2006.
The Company's effective tax rate decreased from 38.3% in 2005 to 37.4% in 2006 due primarily to changes in deferred taxes and tax reserves. Net income increased 12.3% from $77.7 million in 2005 to $87.2 million in 2006 due primarily to the greater increase in revenue compared to expense.
Comparison of Fiscal Years ended December 31, 2004 and 2005:
Total revenue from both existing and new customers increased 8.5% from $280.8 million in 2004 to $304.6 million in 2005. It was composed of a $11.8 million increase in product revenue and a $12.0 million increase in service revenue.
Operating expenses increased 8.1% from $178.6 million in 2004 to $193.1 million in 2005 due to an overall increase in staff and additional bonus expense. The resultant operating income increased 9.1% from $102.1 million in 2004 to $111.4 million in 2005.
Other income increased from $23.0 million in 2004 to $23.7 million in 2005 due primarily to $1.0 million realized gains from the redemption and sale of marketable securities. Other expense increased from $7.8 million in 2004 to $9.3 million in 2005 due primarily to increased litigation related legal expenses and higher charitable donations. The resultant pretax income increased 7.3% from $117.3 million in 2004 to $125.9 million in 2005.
The Company's effective tax rate decreased from 39.1% in 2004 to 38.3% in 2005 due primarily to tax credits provided to domestic manufacturers. Net income increased 8.7% from $71.4 million in 2004 to $77.7 million in 2005 due primarily to the greater increase in revenue compared to expense.
Financial Condition:
Customer deposits increased 13.2% from $21.0 million on December 31, 2005 to $23.8 million on December 31, 2006 due to higher product bookings which resulted in a higher product backlog.
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Liquidity and Capital Resources:
At December 31, 2006 the Company's cash, cash equivalents and marketable securities totaled $291.1 million. Marketable securities consisted of preferred equities, common equities and government notes which can easily be converted to cash. During 2006 cash flow from operations was $94.6 million, cash flow used in investing was $30.3 million and cash flow used in financing was $67.4 million. The payment of $75.7 million in dividends to shareholders was the primary use of cash generated by operating activities during this period.
MEDITECH has no long-term debt. Shareholder equity at December 31, 2006 was $413.3 million. During 2007 management anticipates expending $27 million for new facilities now under construction as well as continued additions of computer systems for product development, sales and marketing, implementation, service and administrative staff. Management believes existing cash, cash equivalents and marketable securities together with funds generated from operations will be sufficient to meet operating and capital expense requirements for the foreseeable future.
Critical Accounting Policies:
All of our significant accounting policies are described in the notes to the financial statements included in Item 8 of this report. We believe four of these constitute our most critical policies requiring estimates and judgments by management which are significant in terms of materiality. Reference Note 1(a) for revenue recognition, Note 2 for marketable securities, Note 3 for allowance for doubtful accounts and Note 9 for income taxes.
Item 7A
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
None.
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Item 8
Item 8 - Financial Statements and Supplementary Data
MEDICAL INFORMATION TECHNOLOGY, INC.
Financial Statements
As of December 31, 2004, 2005 and 2006
Together with Report of Independent Registered Public Accounting Firm
Index to Financial StatementsPage
Report of Independent Registered Public Accounting Firm11
Balance Sheets as of December 31, 2004, 2005 and 200612
Statements of Income for the Years Ended December 31, 2004, 2005 and 200613
Statements of Shareholder Equity for the Years Ended December 31, 2004, 2005 and 200614
Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and 200615
Notes to Financial Statements16-24
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MEDICAL INFORMATION TECHNOLOGY, INC.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Medical Information Technology, Inc.:
We have audited the accompanying balance sheets of Medical Information Technology, Inc. (a Massachusetts corporation) as of December 31, 2004, 2005 and 2006, and the related statements of income, shareholder equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Medical Information Technology, Inc. as of December 31, 2004, 2005 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December, 31, 2006, in conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Boston, Massachusetts
January 25, 2007
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MEDICAL INFORMATION TECHNOLOGY, INC.
The accompanying notes are an integral part of these financial statements.
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MEDICAL INFORMATION TECHNOLOGY, INC.
The accompanying notes are an integral part of these financial statements.
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MEDICAL INFORMATION TECHNOLOGY, INC.
The accompanying notes are an integral part of these financial statements.
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MEDICAL INFORMATION TECHNOLOGY, INC.
The accompanying notes are an integral part of these financial statements.
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MEDICAL INFORMATION TECHNOLOGY, INC.
Notes to Financial Statements December 31, 2006
(1) Operations and Accounting Policies
Medical Information Technology, Inc. (the Company) is engaged in the development, manufacture and licensing of computer software products and related services used in the medical field. The principal market for the Company's products consists of health care providers located primarily in the United States and Canada.
The accompanying financial statements reflect the application of certain accounting policies discussed below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(a) Revenue Recognition
The Company follows the provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition. The Company enters into perpetual software license contracts which provide for a customer deposit upon contract execution, milestone billings and fixed monthly service fees thereafter. The Company classifies product and related implementation fees together as product revenue in the statement of income and recognizes these fees as revenue upon completion of each contract milestone, which approximates the percentage-of-completion method prescribed by SOP 81-1, Accounting for Performance of Construction-type and Certain Production-type Contracts. Software services represent post-implementation support services, which are recognized as the related services are rendered.
The Company follows the provisions of Emerging Issues Task Force's No. 01-14 (EITF 01-14), which requires reimbursements received for out-of-pocket expenses to be characterized as revenue with offsetting operating expenses included in the income statement.
(b) Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed, the Company is required to capitalize software development costs incurred after technological feasibility of the software development projects is established and the realizability of such capitalized costs through future operations is expected, if such costs become material. To date, development costs incurred by the Company after technological feasibility has been established have been immaterial and as such have been charged to operations as incurred.
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MEDICAL INFORMATION TECHNOLOGY, INC.
Notes to Financial Statements December 31, 2006
(c) Fixed Assets
The Company carries all fixed assets on a cost basis and provides for depreciation in amounts estimated to allocate the costs thereof under the following depreciation methods and estimated useful lives:
DescriptionMethodUseful Life
Computer equipmentMACRS3-5 years
Furniture and fixturesMACRS7 years
Furniture and fixturesSL10 years
BuildingsSL31.5-40 years
Maintenance costs are expensed as incurred. Improvements are capitalized and depreciated over the asset's useful life.
During 2006 the Company purchased 17 acres of land for $6,000,404, then entered into an agreement with an architectural firm for $2,230,372 for services to be rendered in connection with the production of plans for a 128,000 sq ft four-story building and a 50,000 sq ft two-story parking garage. In addition, the Company executed a memo of understanding with its general contractor to build said structures for an estimated fee of $31,719,659. At December 31, 2006 a combined $7,264,096 is carried as additions to buildings which are currently not in use and therefore not subject to depreciation.
(d) Cash and Equivalents
The Company considers all highly liquid investments purchased with original maturities of 90 days or less to be cash equivalents.
(e) Fair Value of Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's cash and cash equivalents, accounts receivable and accounts payable approximates their fair value due to the short-term nature of these financial instruments. The Company's marketable securities are carried at fair value and its US government debt securities are carried at cost (see Note 2). The Company's long-term investments are carried at cost, less a valuation reserve, which approximates fair value based on management's assessment.
Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash, cash equivalents, marketable securities and accounts receivable. The Company places its cash and cash equivalents in highly rated institutions. Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom the Company makes substantial sales. To reduce risk, the Company routinely assesses the financial strength of its customers and, as a result, believes that its accounts receivable credit risk exposure is limited. The Company maintains an allowance for potential credit losses but historically has not experienced any significant credit losses related to an individual customer or groups of customers. As of December 31, 2004 and 2006 no individual customers accounted for greater than 10% of the outstanding accounts receivable. At December 31, 2005 one customer accounted for 10.8% of the outstanding accounts receivable.
(f) Investments
The Company accounts for its equity investments in LSS Data Systems Inc., Patient Care Technologies Inc. and MEDITECH South Africa in accordance with the cost method. All three companies license the Company's software technology and re-license it to their respective customers. Each serves a market niche which is part of the overall medical market but is outside of the hospital market which the Company serves. The Company believes the fair value of these investments approximates its carrying value of $10,712,604 at December 31, 2006.
Included in these investments is the $2,620,000 balance on a mortgage note bearing interest at prime plus 2.5% per annum and $20,000 per month in principal payment due from LSS Data Systems Inc. through November of 2017. Also included in these investments is the $2,700,000 balance on a mortgage note bearing interest at 8% per annum and $25,000 per month in principal payment due from Patient Care Technologies Inc. through December of 2017. Both of these mortgage notes are fully collateralized by land and buildings owned and occupied as corporate headquarters by the respective borrowers.
(g) Net Income per Common Share
The Company follows the provisions of Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share. SFAS 128 requires reporting both basic and diluted earnings per share (EPS). The Company has no common share equivalents such as preferred stock, warrants or stock options which would dilute EPS. Thus, EPS is computed by dividing net income by the weighted average number of common shares outstanding during the applicable period.
Net income$71,441,090$77,675,858$87,211,362
Average number of shares34,381,23934,737,44635,069,992
Earnings per share$2.08$2.24$2.49
The increase in the average number of shares outstanding during the periods reflects the issuance of common stock pursuant to the 2004 Stock Purchase Plan and the issuance of common stock to the Profit Sharing Plan.
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MEDICAL INFORMATION TECHNOLOGY, INC.
Notes to Financial Statements December 31, 2006
(h) Comprehensive Income
The Company follows the provisions of Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. Comprehensive income is the total of net income and all other non-owner changes in equity including items such as unrealized gains (losses), net of tax, on securities classified as available for sale, foreign currency translation adjustments and minimum pension liability adjustments. The Company's comprehensive income for the years ended December 31, 2004, 2005 and 2006 includes net unrealized gains (losses) on marketable securities and is as follows:
Net income$71,441,090$77,675,858$87,211,362
Net unrealized gains (losses)933,502(3,731,677)6,691,608
Comprehensive income$72,374,592$73,944,181$93,902,970
(i) Segment, Geographic and Enterprise-Wide Reporting
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable operating segment of an enterprise, as defined. Based on the criteria set forth in SFAS No. 131, the Company currently operates in one operating segment, medical software and services.
SFAS No. 131 also requires that certain enterprise-wide disclosures be made related to products and services, geographic areas and major customers. The Company derives substantially all of its operating revenue from the sale and support of one group of similar products and services. All of the Company's assets are located within the United States. During 2003, 2004 and 2005, the Company derived its operating revenue from the following countries, based on location of customer (as a percentage of total operating revenue):
United States86%87%86%
Canada12%11%12%
Other2%2%2%
100%100%100%
During the years ended December 31, 2004, 2005 and 2006, one customer accounted for approximately 10%, 10% and 9% of total revenue, respectively.
(j) Accounting for Uncertainty in Income Taxes
In July 2006, the Financial Accounting Standards Board issued Financial Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which applies to all tax positions related to income taxes subject to SFAS 109, Accounting for Income Taxes. FIN 48 requires a new evaluation process for all tax positions taken. If the probability for sustaining said tax position is greater than 50%, then the tax position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement. FIN 48 requires expanded disclosure at each annual reporting period unless a significant change occurs in an interim period. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning balance of retained earnings.
The Company has completed it initial evaluation of the impact of the January 1, 2007, adoption of FIN 48 and determined that such adoption is not expected to have a material impact on the Company's financial position or results from operations.
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MEDICAL INFORMATION TECHNOLOGY, INC.
Notes to Financial Statements December 31, 2006
(2) MARKETABLE SECURITIES
The Company accounts for its marketable securities in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 requires companies to classify their investments as trading, available-for-sale or held-to-maturity. The Company's marketable securities consist of common and preferred equities which have been classified as available-for-sale. These are recorded in the financial statements at fair market value and any unrealized gains (losses) are reported as a component of shareholder equity. In addition the Company holds short and long term U.S. government agency issues which have been classified as held-to-maturity. These are recorded in the financial statements at their cost which approximates their fair value. The fair market value of marketable securities was determined based on quoted market prices. At December 31, 2004, 2005 and 2006, the cost basis net of write-downs, unrealized gains, unrealized losses and fair market value of the Company's holdings are as follows:
Net cost of equities$160,808,264$171,281,515$190,591,039
Unrealized Gains22,915,33817,700,13926,840,480
Unrealized Losses(1,022,069)(2,026,331)(13,992)
Cost of agency issues54,999,77569,990,00059,990,000
Fair Market Value$237,701,308$256,945,323$277,407,527
SFAS No. 115 requires that for each individual security classified as available-for-sale, a company shall determine whether a decline in fair value below the cost basis is other than temporary. If the decline in fair value is judged as such, the cost basis of the individual security shall be written down to fair value as a new cost basis and the amount of the write-down shall be reflected in earnings. The gross unrealized loss of $13,992 is represented by 2 equities having an original cost of $13,286,244 and a fair market value of $13,272,252.
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MEDICAL INFORMATION TECHNOLOGY, INC.
Notes to Financial Statements December 31, 2006
(3) ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the allowance for doubtful accounts activity for the years ended December 31, 2004, 2005 and 2006 is as follows:
Balance, beginning of year$800,000$800,000$800,000
Amounts charged to expense17,27919,4210
Amounts written off(17,279)(19,421)0
Balance, end of year$800,000$800,000$800,000
(4) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 2004, 2005 and 2006:
Accrued bonuses$21,300,000$23,600,000$26,200,000
Accrued vacation2,275,0002,400,0002,650,000
Other accrued1,697,3081,789,3071,611,088
$25,272,308$27,789,307$30,461,088
(5) COMMON STOCK DIVIDEND POLICY
The Company's Board of Directors has full discretion regarding the timing and amounts of dividends paid on common stock. During the years ended December 31, 2004, 2005 and 2006, the annual dividend rate per share was $1.80, $2.00 and $2.16, respectively, paid quarterly on shares then outstanding.
(6) REDEEMABLE COMMON STOCK
During the month of February from 1997 through 2003, the Company offered and sold shares of its common stock to its staff members in a manner which may not have complied with the registration requirements of certain federal and state securities laws. During the 4th quarter of 2004 the Company made a recision offer to these individuals so as to extinguish its liability, if any, for these potential securities law violations. None of these individuals accepted the recision offer.
Prior to the 4th quarter of 2004 the shares subject to recision rights were considered and treated as redeemable common stock for financial accounting purposes until such time as the recision rights terminated or were exercised. Therefore the recision amount and the related shares were classified as Temporary Equity. In late December 2004, when the recision offer expired, the Company transferred the recision amount and related shares from Temporary Equity to Shareholder Equity.
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MEDICAL INFORMATION TECHNOLOGY, INC.
Notes to Financial Statements December 31, 2006
(7) QUALIFIED PROFIT SHARING PLAN
The Company has no obligation for post-employment or post-retirement benefits. The Company maintains a qualified profit sharing plan that provides deferred compensation to substantially all of its employees. Contributions to the plan are at the discretion of the Board of Directors and may be in the form of cash or Company stock. A summary of year-end contributions made during the years ended December 31, 2004, 2005 and 2006 is as follows:
Cash$1,980,000$2,940,000$3,600,000
Company common stock:
80,000 shares at $29/share2,320,000--
80,000 shares at $32/share-2,560,000-
80,000 shares at $35/share--2,800,000
$4,300,000$5,500,000$6,400,000
(8) OTHER INCOME AND EXPENSE
Other Income consists of rents, dividends, interest income and realized marketable security gains:
Rents$10,728,321$9,735,148$7,729,917
Dividends10,053,9399,882,85510,633,290
Interest2,129,8123,139,6104,197,408
Gains117,500989,5438,230
Other Income$23,029,572$23,747,156$22,568,845
Other Expense consists of rental costs, charitable contributions, certain professional fees and interest expense:
Rental costs$6,469,282$6,789,238$6,699,183
Charitable contributions600,000835,000660,000
Professional fees750,0001,660,000650,000
Interest-15,589-
Other Expense$7,819,282$9,299,827$8,009,183
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MEDICAL INFORMATION TECHNOLOGY, INC.
Notes to Financial Statements December 31, 2006
(9) INCOME TAXES
The Company follows the provisions of SFAS No. 109, Accounting for Income Taxes. The components of deferred taxes, including reserves which provide for Federal and State income and sales taxes, are as follows:
Deferred tax on unrealized gains$5,847,537$3,359,752$7,820,824
Prepaid tax on deposits over 1 year(1,289,547)(1,342,543)(3,174,557)
Prepaid tax on non-deductible expenses(1,230,000)(1,280,000)(1,380,000)
Tax reserves10,663,66212,136,28813,379,901
Deferred taxes and tax reserves$13,991,652$12,873,497$16,646,168
The components of the provision for income taxes shown in the accompanying statements of income consist of the following:
State Current$9,834,398$11,430,916$10,744,119
State Deferred530,584(279,539)943,168
$10,364,982$11,151,377$11,687,287
Federal Current$33,937,194$37,878,727$37,625,908
Federal Deferred1,591,752(838,616)2,829,503
$35,528,946$37,040,111$40,455,411
The effective income tax rate varies from the amount computed using the statutory U.S. income tax rate as follows:
Statutory tax rate35.0%35.0%35.0%
Increase in taxes resulting from state income
taxes, net of federal income tax benefit5.7%5.8%5.5%
Dividend income exclusion(2.1%)(1.9%)(1.9%)
Other0.5%(0.6%)(1.2%)
39.1%38.3%37.4%
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MEDICAL INFORMATION TECHNOLOGY, INC.
Notes to Financial Statements December 31, 2006
(10) SUPPLEMENTARY DATA
Unaudited operating results by quarter for the three years ended December 31, 2006
1st Q2nd Q3rd Q4th Q2004
Total revenue$68,799,974$69,328,764$70,337,089$72,295,742$280,761,569
Operating income24,905,86725,099,77925,195,31826,923,763102,124,728
Net income17,047,86318,160,95017,600,31918,631,95871,441,090
Net income per share$0.50$0.53$0.51$0.54$2.08
1st Q2nd Q3rd Q4th Q2005
Total revenue$73,522,242$75,654,010$75,935,438$79,456,476$304,568,166
Operating income27,144,36927,814,59227,730,99428,730,062111,420,017
Net income18,956,07819,167,17018,678,09220,874,51877,675,858
Net income per share$0.55$0.55$0.54$0.60$2.24
1st Q2nd Q3rd Q4th Q2006
Total revenue$82,189,658$85,510,655$87,419,158$89,469,761$344,589,232
Operating income29,173,06131,496,43031,261,33932,863,568124,794,398
Net income20,200,41420,528,94121,514,52324,967,48487,211,362
Net income per share$0.58$0.59$0.61$0.71$2.49
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A
Item 9A - Controls and Procedures
An evaluation was conducted under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, on the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)14(c) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded the Company's disclosure controls and procedures are, to the best of their knowledge, effective to ensure information requiring disclosure by the Company in reports which it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
There were no changes in the Company's internal control over financial reporting occurring during the period covered by this report which have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
Item 9B
Item 9B - Other Information
During its regular January 2007 meeting the Board of Directors approved the issuance of up to 260,000 shares of common stock to be sold to staff members at $35.00 per share pursuant to the MEDITECH 2004 Stock Purchase Plan.
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PART III
Item 10
Item 10 - Directors, Executive Officers and Corporate Governance
All Directors are elected each year at the Annual Meeting of Shareholders. All Officers are elected at the first meeting of the Board following the Annual Meeting of Shareholders and hold office for one year. The positions held by each Director and Officer of the Company on December 31, 2006, are shown below. There are no family relationships among the following persons.
Director or OfficerAgePosition with the Company
A. Neil Pappalardo64Chairman, Chief Executive Officer and Director
Lawrence A. Polimeno65Vice Chairman, Prior President and Director
Roland L. Driscoll77Director
Edward B. Roberts71Director
Morton E. Ruderman70Director
L. P. Dan Valente76Director
Howard Messing54President and Chief Operating Officer
Barbara A. Manzolillo54Treasurer, Chief Financial Officer and Clerk
Stuart N. Lefthes53Vice President of Sales
Christopher Anschuetz54Vice President of Technology
Robert G. Gale60Vice President of Product Development
Joanne Wood53Vice President of Client Service
Steven B. Koretz54Vice President of Implementation
Hoda Sayed-Friel48Vice President of Marketing
The following is a description of the business experience during the past five years of each Director and Officer.
A. Neil Pappalardo, founder of the Company, is the Chairman and Chief Executive Officer, and has been a Director since 1969. He is also a Director of Palomar Medical Technologies, Inc.
Lawrence A. Polimeno has been the Vice Chairman since 2002, was President and Chief Operating Officer prior to that, has been a Director since 1985, and has been with the Company since 1969.
Roland L. Driscoll, retired Chief Financial Officer of the Company, has been a Director since 1985.
Edward B. Roberts, co-founder of the Company, is the David Sarnoff Professor of Management of Technology at the Sloan School of Management at the Massachusetts Institute of Technology, and has been a Director since 1969. He is also a Director of Sohu.com Inc.
Morton E. Ruderman, co-founder of the Company, is Chief Executive Officer of CRES Development, a real estate developer, and has been a Director since 1969.
L. P. Dan Valente is Chairman of Palomar Medical Technologies, Inc., and has been a Director since 1972. He is also a Director of MKS Instruments and SurgiLight Inc.
Howard Messing has been the President and Chief Operating Officer since 2002, was the Executive Vice President prior to that, and has been with the Company since 1974.
Barbara A. Manzolillo has been the Treasurer, Chief Financial Officer and Clerk since 1996, was the Treasurer prior to that, and has been with the Company since 1975.
Stuart N. Lefthes has been the Vice President of Sales since 1997, was a Senior Manager prior to that, and has been with the company since 1983.
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Christopher Anschuetz has been the Vice President of Technology since 1995, was a Senior Manager prior to that, and has been with the Company since 1975.
Robert G. Gale has been the Vice President of Product Development since 1995, was a Senior Manager prior to that, and has been with the Company since 1976.
Joanne Wood has been the Vice President of Client Service since 1995, was a Senior Manager prior to that, and has been with the Company since 1983.
Steven B. Koretz has been the Vice President of Implementation since 1997, was a Senior Manager prior to that, and has been with the company since 1982.
Hoda Sayed-Friel has been the Vice President of Marketing since 2003, was a Senior Manager prior to that, and has been with the Company since 1986.
The address of all Officers and Directors is in care of the Company, MEDITECH Circle, Westwood, MA 02090.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors oversees the Company's business affairs and monitors the performance of management, but is not involved in the day-to-day operations. The Directors meet regularly with the CEO, the COO, the CFO, other officers and our independent registered public accounting firm; read reports and other materials; and participate in Board and committee meetings. The Board currently consists of 6 members. During 2006 the Board held 4 regularly scheduled quarterly meetings and five of the Directors attended all 4 meetings and one of the Directors attended 3 meetings. Messrs. Driscoll, Roberts, Ruderman and Valente are "independent" as defined by the rules of the NYSE and NASDAQ.
The Board of Directors has an Audit Committee, an Executive Compensation Committee and a Charitable Contribution Committee. During 2006 each committee member attended all committee meetings. The following is a description of the committees.
The Audit Committee consists of Messrs. Driscoll and Valente. Both members are former CPAs and audit committee financial experts within the meaning of applicable rules under the Securities Exchange Act of 1934, as amended. The committee met 6 times in 2006 to review accounting practices and advise the Company's CFO. In addition, the committee met with the Company's Independent Registered Public Accounting firm and reviewed the Company's business operations, industry, financial performance, business and financial risks, processes and controls, key policies, legal and regulatory requirements, code of ethical conduct and new or unusual transactions. The Committee does not have a written charter. The Committee submits its annual report to the Board of Directors each April.
The Executive Compensation Committee consists of Messrs. Ruderman and Roberts. This committee met once in 2006 to recommend the Chairman and Chief Executive Officer's annual salary, the criteria and amount for his bonus. The full Board of Directors annually approves the salary and bonus amount for each of the officers.
The Charitable Contribution Committee consists of Messrs. Ruderman, Polimeno, Pappalardo and Messing. This committee meets at least 6 times a year to review the criteria for the year's charitable contribution program, meets and evaluates each organization under consideration and determines the amount to be contributed to each organization for the year. During December 2006 the committee contributed $660,000 to 45 cultural, educational and social service organizations within the greater Boston area.
The Board of Directors does not have a nominating committee. Instead, the full Board, because of its small size, carries out the duties of a nominating committee. The Board has not adopted written guidelines regarding nominees for Director.
During 2005 a Code of Ethical Conduct was created by management and adopted by the Board of Directors in an effort to outline the principles established at MEDITECH which help guide the actions of its staff, Officers and Directors. This Code sets forth ethical standards of conduct for all to follow and provides a framework for decision-making. This Code is intended to promote proper conduct at all levels of business in compliance with all applicable laws and regulations as well as to deter wrongdoing. These guiding principles propel MEDITECH forward towards future success in a continued tradition of "ingenuity delivered with integrity" in all of our business relationships. The Code of Ethical Conduct is available on MEDITECH's web site and any waiver for senior management will be disclosed there as well.
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Item 11
Item 11 - Executive Compensation
There are no employment contracts providing for continued compensation in effect for any Officer of the Company. The Company has no Stock Award programs, no Stock Option programs and no Non-equity Incentive plans. The following table sets forth the compensation received by the Company's Chief Executive Officer and the four most highly compensated other Officers for the 3 fiscal years ended December 31, 2004, 2005 and 2006. The deferred column represents both the annual increase in the individual's balance in the MEDITECH Profit Sharing Plan and the individual's share of the Company's annual contribution to this Plan.
Annual Cash Bonus: The Company pays a Staff Bonus to all staff members, including officers, in recognition of services rendered by them during each calendar year. The individual portion of the Staff Bonus payable to each recipient is determined by prorating the sum of the recipient's last five years of cash compensation (capped at $600,000). The Company also pays a Officer Bonus solely to the officers, in recognition of services rendered by them during the calendar year. The individual portion of the Officer Bonus payable to each recipient is determined by the Board. Cash bonuses are paid to the designated recipient during the following January.
Profit Sharing Plan: The Company maintains a qualified defined contribution plan for all of the Company's staff known as the Medical Information Technology, Inc. Profit Sharing Plan. All of the staff who have completed one year of service participate in the Plan. The Board of Directors sets the annual contribution which is allocated in proportion to total compensation of all eligible members for the Plan year (capped at $100,000). No allocation is allowable under this Plan to owners of 10% or more of the Company's common stock. Contributions by members are not permitted. Benefits under the Plan are considered deferred compensation and become fully vested after five years of continuous service with the Company. Members who have at least 20 years of service or who have incurred financial hardship may make in service withdrawals. Lump sum cash payment is made upon retirement, death, disability or termination of employment.
Compensation of Directors: The members of the Board of Directors who are not Officers of the Company currently receive a fee of $8,000 for each quarterly meeting fully attended, with such fee being deemed to also cover any special meetings, conference or committee time, and incidental expenses expended by such directors on behalf of the Company during the year.
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Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The following table provides information as of December 31, 2006 with respect to the shares of common stock beneficially owned by each person known by the Company to own more than 5% of the Company's outstanding common stock, each Director of the Company, each Executive Officer named in the Compensation Table and by all Directors and Officers of the Company as a group. The number of shares beneficially owned is determined according to rules of the Securities and Exchange Commission. Under such rules, a person's beneficial ownership includes any shares as to which such person has sole or shared voting power or investment power.
Name of Number of SharesPercentage
Shareholder,of Common Stockof Shares of
Director or OfficerBeneficially OwnedCommon Stock
A. Neil Pappalardo*13,433,88238.20%
Morton E. Ruderman4,992,70414.20%
MEDITECH Profit Sharing Trust*4,169,58211.86%
Curtis W. Marble3,500,0009.95%
Grossman Group2,061,1445.86%
Lawrence A. Polimeno1,050,0412.99%
Edward B. Roberts956,2302.72%
Roland L. Driscoll528,0001.50%
Howard Messing329,0000.94%
Barbara A. Manzolillo215,0000.61%
L. P. Dan Valente85,0000.24%
Stuart N. Lefthes69,7000.20%
14 Directors and Officers as a Group*21,977,25762.49%
*The number of shares indicated for Mr. Pappalardo includes the shares owned by the MEDITECH Profit Sharing Trust. Mr. Pappalardo is the sole Trustee of the MEDITECH Profit Sharing Trust and therefore is entitled to vote its shares in addition to his own 9,264,300 shares. Likewise the number of shares indicated for the 14 Directors and Officers as a Group includes the shares owned by the MEDITECH Profit Sharing Trust.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
On January 27, 2006, the Medical Information Technology, Inc. Profit Sharing Trust, which has owned more than 10% of the Company's common stock since 2001, filed a late Form 3 initial report of beneficial ownership with the Securities and Exchange Commission. During 2006, the Trust filed Forms 4 for its purchases of Company stock, but some of these filings were late. To the Company's knowledge, based solely on a review of the reports given to the Company, all other Section 16(a) filing requirements applicable to its executive officers, Directors and greater-than-10% shareholders were satisfied in 2006.
Item 13
Item 13 - Certain Relationships and Related Transactions, and Director Independence
A. Neil Pappalardo, Chairman, Chief Executive Officer and Director, purchased for cash from the Company 25,000 shares of common stock at $29 per share in February 2005 and 25,000 shares of common stock at $32 per share in March 2006.
Howard Messing, President and Chief Operating Officer, purchased for cash from the Company 15,000 shares of common stock at $29 per share in February 2005 and 15,000 shares of common stock at $32 per share in March 2006.
Barbara A. Manzolillo, Treasurer, Chief Financial Officer and Clerk, purchased for cash from the Company 5,000 shares of common stock at $29 per share in February 2005 and 5,000 shares of common stock at $32 per share in February 2006.
Stuart N. Lefthes, Vice President of Sales, purchased for cash from the Company 2,000 shares of common stock at $29 per share in February 2005 and 5,000 shares of common stock at $32 per share in February 2006.
On December 31, 2006, the Company contributed 80,000 shares of common stock at $35 per share to the MEDITECH Profit Sharing Trust.
Philip Polimeno, a son of a Director, is employed as a senior manager of the Company and received W-2 compensation of $108,743 in 2006. Tony Polimeno, a son of a Director, is employed as a manager of the Company and received W-2 compensation of $83,126 in 2006. Sheila Lemke, a daughter of a Director, is employed as a manager of the Company and received W-2 compensation of $71,601 in 2006.
Page 27 of 28
Item 14
Item 14 - Principal Accounting Fees and Services
During 2006, Ernst & Young LLP's services included auditing the Company's financial statements, reviewing unaudited quarterly financial information and discussing various accounting, tax, and regulatory matters. Fees paid for audit services rendered by Ernst & Young LLP are as follows:
Annual audit and quarterly reviews$204,000$127,000$128,000
Audit related to Profit Sharing Trust11,00011,00011,000
Tax or all other matters--19,500
$215,000$138,000$158,500
It is the policy of the Audit Committee to pre-approve all audit and non-audit services to be provided to the Company by the Company's Independent Registered Public Accounting Firm.
PART IV
Item 15
Item 15 - Exhibits
Exhibit 3.1: MEDITECH's Articles of Organization, as amended to date, is incorporated by reference to an exhibit to the Form 10 filed with the SEC on March 28, 1996, an exhibit to the annual report on Form 10-K for the year ended December 31, 2001 and an exhibit to the quarterly report on Form 10-Q for the quarter ended September 30, 2004.
Exhibit 3.2: MEDITECH's By-laws, as amended to date, is incorporated by reference to an exhibit to the annual report on Form 10-K for the year ended December 31, 2001.
Exhibit 10: MEDITECH 2004 Stock Purchase Plan is incorporated by reference to the annual report on Form 10-K for the year ended December 31, 2003.
Exhibit 23: Consent of Independent Registered Public Accounting Firm, Exhibit 31: Rule 13a-14(a) Certifications and Exhibit 32: Section 1350 Certifications are appended to this report. There were no reports filed on Form 8-K during the quarter ended December 31, 2006.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Medical Information Technology, Inc.
(Registrant)
By: Barbara A. Manzolillo, Chief Financial Officer and Treasurer
(Signature)
January 31, 2007
(Date)
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 indicated on January 31, 2007.
A. Neil Pappalardo, Chief Executive Officer, Chairman and Director
(Signature)
Lawrence A. Polimeno, Vice Chairman and Director
(Signature)
Roland L. Driscoll, Director
(Signature)
Edward B. Roberts, Director
(Signature)
Morton E. Ruderman, Director
(Signature)
L. P. Dan Valente, Director
(Signature)
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