UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
0-28092
(Commission file number)
Medical Information Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts
(State of Incorporation)
04-2455639
(IRS Employer Identification Number)
Meditech Circle, Westwood, MA
(Address of Principal Executive Offices)
02090
(Zip Code)
781-821-3000
(Registrant's Telephone Number)
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 of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
There were 35,088,133 shares of Common Stock, $1.00 par value, outstanding at September 30, 2006.
Page 1 of 10
| Index to Form 10-Q | Page |
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| Part I - Financial Information | |
| Item 1 - Financial Statements (Unaudited) | |
| Balance Sheet as of December 31, 2005 and September 30, 2006 | 3 |
| Statement of Income for the Three and Nine Months Ended September 30, 2005 and 2006 | 4 |
| Statement of Cash Flow for the Nine Months Ended September 30, 2005 and 2006 | 5 |
| Notes To Financial Statements | 6 |
| Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations | 8 |
| Item 4 - Controls and Procedures | 9 |
| Part II - Other Information | |
| Item 1 - Legal Proceedings | 10 |
| Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds | 10 |
| Item 6 - Exhibits | 10 |
| Signatures | 10 |
Page 2 of 10
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Balance Sheet as of December 31, 2005 and September 30, 2006
| | Dec 31, 2005 | Sep 30, 2006 |
| |
|
|
| Cash and equivalents | $16,749,452 | $14,573,446 |
| Marketable securities | 216,955,323 | 239,950,390 |
| Accounts receivable, less reserve | 36,480,661 | 38,520,818 |
| |
|
|
| Current assets | 270,185,436 | 293,044,654 |
| |
|
|
| Computer equipment | 8,163,198 | 7,477,824 |
| Furniture and fixtures | 30,855,824 | 34,256,483 |
| Buildings | 140,326,869 | 142,928,113 |
| Land | 26,603,703 | 32,604,107 |
| Accumulated depreciation | (74,806,735) | (78,432,691) |
| |
|
|
| Fixed assets | 131,142,859 | 138,833,836 |
| |
|
|
| Marketable securities | 39,990,000 | 30,000,000 |
| Investments | 8,252,604 | 10,172,604 |
| |
|
|
| Total assets | $449,570,899 | $472,051,094 |
| |
|
|
| Accounts payable | $468,727 | $4,019,232 |
| Taxes payable | 3,422,826 | 1,760,324 |
| Accrued expenses | 27,789,307 | 28,927,693 |
| Customer deposits | 21,004,270 | 22,806,111 |
| Deferred taxes and tax reserves | 12,873,497 | 14,239,671 |
| |
|
|
| Total liabilities | 65,558,627 | 71,753,031 |
| |
|
|
| Common stock $1.00 par value, | | |
| authorized 40,000,000 shares, | | |
| issued and outstanding 34,830,437 | | |
| in 2005 and 35,088,133 in 2006 | 34,830,437 | 35,088,133 |
| Additional paid-in capital | 33,353,809 | 41,342,385 |
| Retained income | 306,423,742 | 311,964,000 |
| Unrealized security gains, net of tax | 9,404,284 | 11,903,545 |
| |
|
|
| Shareholder equity | 384,012,272 | 400,298,063 |
| |
|
|
| Total liabilities and shareholder equity | $449,570,899 | $472,051,094 |
| |
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Page 3 of 10
Statement of Income for the Three and Nine Months Ended September 30, 2005 and 2006
| | 3 months ended Sep 30 | 9 months ended Sep 30 |
| | 2005 | 2006 | 2005 | 2006 |
| |
|
|
|
|
| Product revenue | $39,548,414 | $47,451,694 | $118,147,871 | $137,676,404 |
| Service revenue | 36,387,024 | 39,967,464 | 106,963,819 | 117,443,067 |
| |
|
|
|
|
| Total revenue | 75,935,438 | 87,419,158 | 225,111,690 | 255,119,471 |
| |
|
|
|
|
| Operations, development | 31,305,798 | 37,096,622 | 91,817,436 | 107,459,387 |
| Selling, G & A | 16,898,648 | 19,061,197 | 50,604,299 | 55,729,254 |
| |
|
|
|
|
| Operating expense | 48,204,446 | 56,157,819 | 142,421,735 | 163,188,641 |
| |
|
|
|
|
| Operating income | 27,730,992 | 31,261,339 | 82,689,955 | 91,930,830 |
| |
|
|
|
|
| Other income | 5,708,103 | 5,659,052 | 17,836,823 | 16,883,768 |
| Other expense | 3,039,004 | 2,141,868 | 7,375,438 | 6,334,720 |
| |
|
|
|
|
| Pretax income | 30,400,091 | 34,778,523 | 93,151,340 | 102,479,878 |
| |
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|
|
| State income tax | 2,752,000 | 2,818,000 | 8,521,000 | 8,640,000 |
| Federal income tax | 8,970,000 | 10,446,000 | 27,829,000 | 31,596,000 |
| |
|
|
|
|
| Income tax | 11,722,000 | 13,264,000 | 36,350,000 | 40,236,000 |
| |
|
|
|
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| Net income | $18,678,091 | $21,514,523 | $56,801,340 | $62,243,878 |
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Page 4 of 10
Statement of Cash Flow for the Nine Months Ended September 30, 2005 and 2006
| | 9 months ended Sep 30 |
| | 2005 | 2006 |
| |
|
|
| Net income | $56,801,340 | $62,243,878 |
| Depreciation expense | 5,655,600 | 6,117,188 |
| Gain on sales of marketable securities | (989,536) | (8,230) |
| Deferred taxes on unrealized securities (gains) losses | 1,191,126 | (1,666,174) |
| Change in accounts receivable | (11,863) | (2,040,157) |
| Change in accounts payable | 3,043,665 | 3,550,505 |
| Change in taxes payable | (1,707,243) | (1,662,502) |
| Change in accrued expenses | 845,989 | 1,138,386 |
| Change in customer deposits | 4,524,158 | 1,801,841 |
| Change in deferred taxes and tax reserves | (545,191) | 1,366,174 |
| |
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| Net cash from operations | 68,808,045 | 70,840,909 |
| |
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| Purchases of marketable securities | (63,967,633) | (56,831,402) |
| Sales of marketable securities | 38,243,818 | 48,000,000 |
| Purchases of fixed assets | (2,897,986) | (13,808,165) |
| Increase in investments | | (2,100,000) |
| Proceeds from mortgage note receivable | 180,000 | 180,000 |
| |
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| Net cash used in investing | (28,441,801) | (24,559,567) |
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| Sales of common stock | 6,840,897 | 8,246,272 |
| Dividends paid | (52,007,709) | (56,703,620) |
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| Net cash used in financing | (45,166,812) | (48,457,348) |
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| Net change in cash and equivalents | (4,800,568) | (2,176,006) |
| Cash and equivalents at beginning | 14,565,840 | 16,749,452 |
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| Cash and equivalents at end | $9,765,272 | $14,573,446 |
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Page 5 of 10
Notes To Financial Statements:
1. The unaudited financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2005 included in the Company's Form 10-K filed on January 31, 2006. The unaudited financial statements presented herein have not been audited by our Independent Registered Public Accounting Firm in accordance with the standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management such financial statements include all normal recurring adjustments necessary to present fairly the Company's financial position, results of operations and cash flow.
2. 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.
| | 3 months ended Sep 30 | 9 months ended Sep 30 |
| | 2005 | 2006 | 2005 | 2006 |
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| Net income | $18,678,091 | $21,514,523 | $56,801,340 | $62,243,878 |
| Average number of shares | 34,724,227 | 35,055,056 | 34,724,227 | 35,055,056 |
| Earnings per share | $0.54 | $0.61 | $1.64 | $1.78 |
The average number of shares outstanding during the periods reflects the issuance of 235,893 shares in February 2005 and 257,696 shares in February/March 2006 pursuant to the 2004 Stock Purchase Plan.
3. 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 net unrealized gains/losses/reclassifications on marketable securities classified as available for sale, foreign currency translation adjustments and minimum pension liability adjustments.
| | 3 months ended Sep 30 | 9 months ended Sep 30 |
| | 2005 | 2006 | 2005 | 2006 |
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| Net income | $18,678,091 | $21,514,523 | $56,801,340 | $62,243,878 |
| Net unrealized security gains (losses) | (155,136) | 6,332,629 | (1,786,690) | 2,499,261 |
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| Comprehensive income | $18,522,955 | $27,847,152 | $55,014,650 | $64,743,139 |
Page 6 of 10
4. At September 30, 2006 the Company's marketable securities had a fair market value of $269,950,390 which includes a gross unrealized gain of $21,958,342 and a gross unrealized loss of $2,119,099. The gross unrealized loss is composed of 5 equities with an original cost of $52,547,364 and a fair market value of $50,428,265. None of these 5 equities had been in loss status for more than 10% of cost for longer than 10 consecutive days. The Company considered the effect of rising interest rates and the issuers' current financial position in order to reach its conclusion that these impairments are temporary at September 30, 2006. The details are as follows:
Description
of Securities | Fair Market
Value | Unrealized
Loss |
|
|
|
| 1 common equity | $7,374,600 | $913,275 |
| 4 preferred equities | $43,053,665 | $1,205,824 |
5. The Company follows the provisions of Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosure About Segments of an Enterprise and Related Information. Based on the criteria set forth in SFAS 131 the Company currently operates in one operating segment, medical software and services. 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. The following table indicates the source of operating revenue.
| | 9 months ended Sep 30 |
| Country | 2005 | 2006 |
|
|
|
| United States | 90% | 85% |
| Canada | 9% | 13% |
| All others | 1% | 2% |
6. During March 2006, the Company extended a $3,000,000 line of credit to an entity in which the Company holds an equity investment. As of September 30, 2006, $2,100,000 had been borrowed against the commitment. The borrowing bears interest at 8.0% per annum and is repayable in monthly installments over a ten year period commencing January 2007. The borrowing is fully collateralized by a building which is owned by the borrower and used as its corporate headquarters.
7. As of September 30, 2006, the Company had capitalized $6,000,404 in land costs, $1,994,542 in architectural and engineering fees, and $1,263,608 in construction costs for a facility under development to be used for the Company's ongoing operations.
8. 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 is currently evaluating the impact of the adoption of FIN 48 on January 1, 2007, but has not yet determined what impact, if any, the adoption will have on the Company's financial position or statement of income.
Page 7 of 10
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
| Results of Operations | 3 months ended Sep 30 | |
| | 2005 | 2006 | Change |
|
|
|
|
| Total revenue | $75,935,438 | $87,419,158 | 15.1% |
| Operating income | 27,730,992 | 31,261,339 | 12.7% |
| Net income | 18,678,091 | 21,514,523 | 15.2% |
| Average number of shares | 34,724,227 | 35,055,056 | 1.0% |
| Earnings per share | $0.54 | $0.61 | 14.1% |
| Cash dividends per share | $0.50 | $0.54 | 8.0% |
Total revenue from both existing and new customers increased by $11.5 million. It was composed of a $7.9 million increase in product revenue and a $3.6 million increase in service revenue.
Operating expense increased by $8.0 million or 16.5% due to an overall increase in staff and additional bonus expense accruals. The resultant operating income increased by $3.5 million.
Other income decreased by $49.0 thousand due primarily to reduced rental income. Other expense decreased by $0.9 million due primarily to reduced legal expenses. The resultant pretax income increased by $4.4 million or 14.4%.
The Company's effective tax rate decreased from 38.6% to 38.1% due primarily to an over accrual of income taxes during the first half of 2006. Net income increased by $2.8 million due primarily to the greater increase in revenue compared to expense.
| Results of Operations | 9 months ended Sep 30 | |
| | 2005 | 2006 | Change |
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| Total revenue | $225,111,690 | $255,119,471 | 13.3% |
| Operating income | 82,689,955 | 91,930,830 | 11.2% |
| Net income | 56,801,340 | 62,243,878 | 9.6% |
| Average number of shares | 34,724,227 | 35,055,056 | 1.0% |
| Earnings per share | $1.64 | $1.78 | 8.5% |
| Cash dividends per share | $1.50 | $1.62 | 8.0% |
Total revenue from both existing and new customers increased by $30.0 million. It was composed of a $19.5 million increase in product revenue and a $10.5 million increase in service revenue.
Operating expense increased by $20.8 million or 14.6% due to an overall increase in staff and additional bonus expense accruals. The resultant operating income increased by $9.2 million.
Other income decreased by $1.0 million due primarily to reduced realized gains in marketable securities. Other expense decreased by $1.0 million due primarily to reduced legal expenses. The resultant pretax income increased by $9.3 million or 10.0%.
The Company's effective tax rate increased from 39.0% to 39.3% due primarily to the suspension of the R&D credit in 2006. Net income increased by $5.4 million due primarily to the greater increase in revenue compared to expense.
Page 8 of 10
| Financial Condition | Dec 31, 2005 | Sep 30, 2006 |
|
|
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| Cash and equivalents | $16,749,452 | $14,573,446 |
| Total assets | 449,570,899 | 472,051,094 |
| Total liabilities | 65,558,627 | 71,753,031 |
| Shareholder equity | 384,012,272 | 400,298,063 |
| Outstanding number of shares | 34,830,437 | 35,088,133 |
| Shareholder equity per share | $11.03 | $11.41 |
During the first 9 months accounts payable increased by $3.6 million primarily because no payroll tax withholding was outstanding at December 31, 2005 while $2.8 million was outstanding at September 30, 2006.
During the first 9 months taxes payable decreased by $1.7 million due primarily to additional state tax payments in 2006.
Liquidity and Capital Resources:
At September 30, 2006 the Company's cash, cash equivalents and marketable securities totaled $284.5 million. Marketable securities consisted of preferred equities, common equities and government notes which can easily be converted to cash. For the first 9 months of 2006 cash flow from operations was $70.8 million, cash flow used in investing was $24.6 million and cash flow used in financing was $48.5 million. The payment of $56.7 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 September 30, 2006 was $400.3 million. Management anticipates additions to fixed assets will continue, including new facilities and 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.
Item 4 - 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, our 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 fiscal quarter covered by this report which have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
Page 9 of 10
Part II - Other Information
Item 1 - Legal Proceedings
On February 10, 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 6 of the Company's Directors. The substance of the complaint is summarized in the 2005 Annual Report on Form 10-K. The complaint was subsequently amended to add the Company as a defendant. On March 20, 2006 the judge 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 judge has not as yet ruled on the plaintiff's request for the complaint to be certified as a class action.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
The Company did not repurchase any of its shares of common stock during the third quarter of 2006. However, during the quarter the Medical Information Technology, Inc. Profit Sharing Trust purchased 2,470 shares of the Company's common stock for a total of $81,510 in individual private transactions. Below is a table showing the purchases of common stock by the Trust during each month of the third quarter of 2006.
3rd quarter
of 2006 | shares
purchased | price per
share |
|
|
|
| July | none | |
| August | 2,470 | $33.00 |
| September | none | |
Item 6 - 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, are incorporated by reference to an exhibit to the annual report on Form 10-K for the year ended December 31, 2001.
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 September 30, 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)
October 31, 2006
(Date)
By: Barbara A. Manzolillo, Chief Financial Officer and Treasurer
(Signature)
Page 10 of 10
