Medical Information Technology 10-Q 2008 Q3 Quarterly report

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, 2008

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] Smaller reporting company [ ]

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 35,687,426 shares of Common Stock, $1.00 par value, outstanding at September 30, 2008.

Page 1 of 11

Index to Form 10-Q	Page
Part I - Financial Information
Item 1 - Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet as of December 31, 2007 and September 30, 2008	3
Consolidated Income Statement for the Three and Nine Months Ended
September 30, 2007 and 2008	4
Consolidated Cash Flow Statement for the Nine Months Ended
September 30, 2007 and 2008	5
Notes To Consolidated Financial Statements	6
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations	8
Item 3 - Quantitative and Qualitative Disclosures About Market Risk	10
Item 4 - Controls and Procedures	10
Part II - Other Information
Item 1 - Legal Proceedings	10
Item 1A - Risk Factors	10
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	11
Item 3 - Defaults Upon Senior Securities	11
Item 4 - Submission of Matters to a Vote of Shareholders	11
Item 5 - Other Information	11
Item 6 - Exhibits	11
Signatures	11

Page 2 of 11

Part I - Financial Information

Item 1 - Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheet as of December 31, 2007 and September 30, 2008

	Dec 31, 2007	Sep 30, 2008
Cash and equivalents	$22,567,940	$10,956,638
Marketable securities	210,137,628	144,331,305
Accounts receivable, less reserve	37,445,841	46,166,691
Current assets	270,151,409	201,454,634
Computer equipment	9,361,351	9,498,411
Furniture and fixtures	38,752,354	41,685,727
Building s	175,130,131	179,396,034
Land	33,159,107	33,159,107
Accumulated depreciation	(87,690,598)	(91,685,448)
Fixed assets	168,712,345	172,053,831
Marketable securities	30,000,000	30,000,000
Other assets	13,625,289	12,776,672
Total assets	$482,489,043	$416,285,137
Accounts payable	$395,117	$4,190,497
Taxes payable	5,377,659	4,185,446
Accrued expenses	34,475,953	32,395,530
Customer deposits	25,604,508	26,326,311
Deferred taxes and tax reserves	3,171,231	(7,014,967)
Total liabilities	69,024,468	60,082,817
Common stock, $1.00 par value,
authorized 40,000,000 shares,
issued& nbsp;and outstanding 35,481,271
in 2007 and 35,687,426 in 2008	35,481,271	35,687,426
Additional paid-in capital	54,869,077	62,290,657
Retained income	321,703,233	265,117,299
Unrealized security gains (losses), net of tax	1,410,994	(6,893,062)
Shareholder equity	413,464,575	356,202,320
Total liabilities and shareholder equity	$482,489,043	$416,285,1 37

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Consolidated Income Statement for the Three and Nine
Months Ended September 30, 2007 and 2008

	3 months	ended on	9 months	ended on
	Sep 30, 2007	Sep 30, 2008	Sep 30, 2007	Sep 30, 2008
Product revenue	$46,526,763	$49,521,765	$146,547,700	$144,455,786
Service revenue	46,186,055	51,067,489	132,982,094	150,099,597
Total revenue	92,712,818	100,589,254	279,52 9,794	294,555,383
Operations, development	43,303,274	45,406,484	124,585,924	135,552,242
Selling, G & A	20,200,734	21,946,945	60,563,145	64,086,544
Operating expense	63,504,008	67,353,429	185,149,069	199,638,786
Operating income	29,208,810	33,235,825	94,380,725	94,916,597
Other income (loss)	6,066,417	(44,920,165)	18,766,289	(41,612,949)
Other expense	1,894,851	2,148,216	5,673,766	6,381,386
Pretax income	33,380,376	(13,832,556)	107,473,248	46,922,262
State income tax	2,812,763	2,499,990	9,006,925	7,111,710
Federal income tax	9,604,289	10,731,971	30,919,777	29,077,132
Income tax	12,417,052	13,231,961	39,926,701	36,188,842
Net income	$20,963,324	($27,064,517)	$67,546,547	$10,733,420

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Consolidated Cash Flow Statement for the Nine
Months Ended September 30, 2007 and 2008

	9 months	ended on
	Sep 30, 2007	Sep 30, 2008
Net income	$67,546,547	$10,733,420
Depreciation expense	6,616,499	7,232,706
Amortization expense	0	640,474
Writedown of marketable securities	0	65,016,345
Recoveries of prior writedowns	0	(3,483,834)
Gain on sales of marketable securities	(1,828,334)	(7,126,111)
Deferred taxes on unrealized securities losses	3,048,192	5,536,037
Change in accounts receivable	(1,166,875)	(8,720,850)
Change in accounts payable	3,736,676	3,795,380
Change in taxes payable	(868,254)	(1,192,213)
Change in accrued expenses	1,823,342	(2,080,425)
Change in customer deposits	(1,229,012)	721,803
Change in deferred taxes and tax reserves	(3,465,362)	(10,186,198)
Net cash from operations	74,213,419	60,886,534
Purchases of marketable securities	(69,133,413)	(49,527,010)
Sales of marketable securities	76,307,712	47,086,845
Purchases of fixed assets	(24,663,215)	(10,574,192)
Change in other assets	(3,626,246)	208,141
Net cash used in investing	(21,115,162)	(12,806,216)
Sales of common stock	8,159,830	7,627,735
Dividends paid	(63,582,405)	(67,319,355)
Net cash used in financing	(55,422,575)	(59,691,620)
Net change in cash and equivalents	(2,324,318)	(11,611,302)
Cash and equivalents at beginning	13,660,733	22,567,940
Cash and equivalents at end	$11,336,415	$10,956,638

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Notes To Consolidated Financial Statements

1. The unaudited consolidated 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, 2007 included in MEDITECH's Form 10-K filed on January 31, 2008. 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 MEDITECH's financial position, results of operations and cash flow.

2. MEDITECH 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. MEDITECH has no common share equivalents such as preferred stock, warrants or stock options which would dilute earnings per share. Thus, earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the applicable period.

	3 months	ended on	9 months	ended on
	Sep 30, 2007	Sep 30, 2008	Sep 30, 2007	Sep 30, 2008
Net income (loss)	$20,963,324	($27,064,517)	$67,546,547	$10,733,420
Average number of shares	35,375,367	35,664,520	35,375,367	35,664,520
Earnings per share	$0.59	($0.76)	$1.91	$0.30

The average number of shares outstanding during the periods reflects the issuance of 233,138 shares in February 2007 and 206,155 shares in February 2008 pursuant to the 2004 Stock Purchase Plan.

3. MEDITECH follows the provisions of Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities. SFAS 115 requires companies to classify their investments as trading, available-for-sale or held-to-maturity. MEDITECH'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 value and any unrealized gains (losses) are reported as a component of deferred taxes and shareholder equity. The fair value of marketable securities was determined based on quoted prices in active markets. In addition MEDITECH 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.

SFAS 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 reduced to fair value and the amount of the write-down shall be reflected in earnings. During the 3rd quarter 2008 MEDITECH determined the decline in fair value of 8 equity issues to be other than temporary and reduced their cost basis by $50,000,000 to bring it in line with fair value. Year to date impairments, net of recoveries, amount to $61,532,511.

MEDITECH's resultant marketable securities had a fair value of $174,331,305 which included gross unrealized gains of $3,755,067 and gross unrealized losses of $15,243,502. Most of the securities in loss status are preferred securities, which are current on dividend payments and maintain investment grade ratings. MEDITECH considered the effect of fluctuating interest rates, current economic and industry conditions, and the issuers' current financial position in order to reach its conclusion that these impairments were temporary at September 30, 2008. MEDITECH continues to evaluate whether the situation warrants further write-downs.

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4. MEDITECH 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 on	9 months	ended on
	Sep 30, 2007	Sep 30, 2008	Sep 30, 2007	Sep 30, 2008
Net income (loss)	$20,963,324	($27,064,517)	$67,546,547	$10,733,420
Net unrealized security losses	(2,721,380)	(3,900,098)	(4,572,291)	(8,304,055)
Comprehensive income (loss)	$18,241,944	($30,964,615)	$62,974,256	$2,429,365

5. During the 2nd quarter 2008 MEDITECH began staff member occupancy of a new facility. MEDITECH spent $6,000,404 for the land, $2,581,312 in architectural and engineering fees, and $33,190,036 in construction costs for this facility.

6. MEDITECH follows the provisions of Financial Accounting Standards Board Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities and, as such, accounts for the equity investments in LSS Data Systems Inc. and MEDITECH South Africa in accordance with the cost method. Both companies license MEDITECH'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 MEDITECH serves. Included in these investments is the $2,200,000 balance on a mortgage note from LSS Data Systems Inc. which is fully collateralized by land and buildings owned and occupied as corporate headquarters by the borrower. MEDITECH believes the fair value of these investments which are included in other assets approximates its carrying value of $6,227,561 at September 30, 2008.

Other assets also include both tangible and intangible net assets associated with the 2nd quarter 2007 acquisition of Patient Care Technologies Inc. MEDITECH accounted for this acquisition under the purchase method of accounting in accordance with FASB Statement No. 141, Business Combinations. The values of assets acquired and liabilities assumed, including the identified intangibles, such as developed technology and backlog, are based upon management's estimates of fair value as of the date of acquisition. These identified intangibles are valued at $5,977,801 and are being amortized over their 7 year useful lives. A deferred tax liability was recognized to reflect the tax effect of these identified intangibles as such amounts are not deductible for tax purposes. An acquired deferred tax asset was also recognized to reflect the carryforward of net operating losses expected to be realized.

7. MEDITECH follows the provisions of Financial Accounting Standards Board 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. Based on the criteria set forth in FIN 48, MEDITECH's tax reserves amounted to potential tax assessments of $6,410,803 plus interest and penalties of $8,008,180 at December 31, 2007. These reserves have not changed significantly at September 30, 2008. These reserves relate to the research tax credit, domestic production activities deduction, and state nexus. The years 2006 through 2007 are subject to examination by the IRS, and various years are subject to examination by state tax authorities. Should these tax reserves be reversed in their entirety, the 2008 overall tax amount would drop by a third.

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8. MEDITECH 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, MEDITECH currently operates in one operating segment, medical software and services. MEDITECH derives substantially all of its operating revenue from the sale and support of one group of similar products and services. All of MEDITECH's assets are located within the United States. The following table indicates the source of revenue.

	3 months	ended on	9 months	ended on
Country	Sep 30, 2007	Sep 30, 2008	Sep 30, 2007	Sep 30, 2008
United States	87%	90%	86%	90%
Canada	12%	8%	12%	8%
All others	1%	2%	2%	2%

9. Effective January 1, 2008 MEDITECH adopted the provisions of Statement of Financial Accounting Standards No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 provides for expanded disclosure and guidelines to determine fair value of assets and liabilities. SFAS 157 applies whenever other standards require or permit assets and liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. MEDITECH's marketable securities represent assets measured at fair value on a recurring basis, and are considered Level 1 assets as defined by SFAS 157.

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of	3 months	ended on	Percent
Operations	Sep 30, 2007	Sep 30, 2008	Change
Total revenue	$92,712,818	$100,589,254	8.5%
Operating income	29,208,810	33,235,825	13.8%
Net income (loss)	20,963,324	(27,064,517)	(229.1%)
Average number of shares	35,375,367	35,664,520	0.8%
Earnings per share	$0.59	($0.76)	(228.1%)
Cash div idends per share	$0.60	$0.63	5.0%

Total revenue from both existing and new customers increased by $7.9 million. It was composed of a $3.0 million increase in product revenue and a $4.9 million increase in service revenue.

Operating expense increased by $3.8 million or 6.1% due primarily to higher staff related costs. The resultant operating income increased by $4.0 million.

Other income decreased by $51.0 million due primarily to investment impairments. Other expense increased by $0.3 million due primarily to higher litigation related costs. The resultant pretax income decreased by $47.2 million or 141.4%.

MEDITECH's effective tax rate increased substantially from 37.2% due primarily to $50.0 million in investment impairments without any tax benefit. Net income decreased by $48.0 million due primarily to these impairments.

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MEDITECH acquired Patient Care Technologies, Inc. in the 2nd quarter of 2007. The following table does not include their operating results for the 1st quarter of 2007.

Results of	9 months	ended on	Percent
Operations	Sep 30, 2007	Sep 30, 2008	Change
Total revenue	$279,529,794	$294,555,383	5.4%
Operating income	94,380,725	94,916,597	0.6%
Net income	67,546,547	10,733,420	(84.1%)
Average number of shares	35,375,367	35,664,520	0.8%
Earnings per share	$1.91	$0.30	(84.2%)
Cash dividends per&nb sp;share	$1.80	$1.89	5.0%

Total revenue from both existing and new customers increased by $15.0 million. It was composed of a $2.1 million decrease in product revenue and a $17.1 million increase in service revenue.

Operating expense increased by $14.5 million or 7.8% due primarily to higher staff related costs. The resultant operating income increased by $0.5 million.

Other income decreased by $60.4 million due primarily to investment impairments. Other expense increased by $0.7 million due primarily to higher litigation related costs. The resultant pretax income decreased by $60.6 million or 56.3%.

MEDITECH's effective tax rate increased substantially from 37.2% due primarily to $61.5 million in investment impairments with limited tax benefit. Net income decreased by $56.8 million due primarily to these impairments.

Financial Condition	Dec 31, 2007	Sep 30, 2008
Cash and equivalents	$22,567,940	$10,956,638
Total assets	482,489,043	416,285,137
Total liabilities	69,024,468	60,082,817
Shareholder equity	413,464,575	356,202,320
Outstanding number of shares	35,481,271	35,687,426
Shareholder equity per share	$11.65	$9.98

Accounts payable increased by $3.8 million during the first 9 months primarily because no payroll tax withholding was outstanding at December 31, 2007 while $3.0 million was outstanding at September 30, 2008.

Taxes payable decreased by $1.2 million during the first 9 months due primarily to additional state tax payments in 2008.

Accrued expenses decreased by $2.1 million during the first 9 months primarily as a result of the payment of $27.3 million in bonuses applicable to 2007, offset by the accrual of $25.7 million in bonus expenses applicable to 2008.

At September 30, 2008 MEDITECH's cash, cash equivalents and marketable securities totaled $185.3 million. Marketable securities consisted of preferred equities, common equities and government notes. For the first 9 months of 2008 cash flow from operations was $60.9 million, cash flow used in investing was $12.8 million and cash flow used in financing was $59.7 million. The payment of $67.3 million in dividends to shareholders was the primary use of cash generated by operating activities during the first 9 months.

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MEDITECH has no long-term debt. Shareholder equity at September 30, 2008 was $356.2 million. Management anticipates additions to fixed assets will continue, including new facilities and computer systems for product development, sales and marketing, implementation, customer 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 3 - Quantitative and Qualitative Disclosures About Market Risk

Market risk associated with equity securities is covered in note 4 to Consolidated Financial Statements.

Item 4 - Controls and Procedures

An evaluation was conducted under the supervision and with the participation of MEDITECH's management, including the Chief Executive Officer and Chief Financial Officer, on the effectiveness of MEDITECH'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 MEDITECH's disclosure controls and procedures are, to the best of their knowledge, effective to ensure information requiring disclosure by MEDITECH 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 MEDITECH'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 MEDITECH's internal control over financial reporting.

Part II - Other Information

Item 1 - 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 MEDITECH's Directors. The complaint was subsequently amended to add MEDITECH 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 MEDITECH. 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. During March 2007 the court denied the plaintiff's motion for the complaint to be certified as a class action. Subsequently the plaintiff requested reconsideration of the decision, which was also denied. The plaintiff then soug ht permission to appeal the decision in the United States Court of Appeals for the First Circuit. In July 2007 this was also denied. Discovery was closed on November 27, 2007. In March 2008 plaintiffs filed an amended motion for class certification, which defendants have opposed. In April 2008 defendants filed a motion for summary judgment, which plaintiffs have opposed. A hearing on the class certification and summary judgment motions took place on June 17, 2008. The result is pending.

Item 1A - Risk Factors

No material changes from risk factors as previously disclosed in the prior Form 10-K.

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Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

MEDITECH did not repurchase any of its shares of common stock during the 3rd quarter of 2008. However, during the 3rd quarter the Medical Information Technology, Inc. Profit Sharing Trust purchased 9,735 shares of MEDITECH's common stock for a total of $360,195 in individual private transactions. Below is a table showing the purchases of common stock by the Trust during each month of the 3rd quarter of 2008.

3rd quarter	shares	price per
of 2008	purchased	share
July	0	$37.00
August	5,730	$37.00
September	4,005	$37.00

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Submission of Matters to a Vote of Shareholders

None

Item 5 - Other Information

None

Item 6 - Exhibits

Exhibit 3.1: MEDITECH's Articles of Organization, as amended to date, are incorporated by reference to an exhibit to the quarterly report on Form 10-Q for the quarter ended March 31, 2007.

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, 2008.

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)

November 3, 2008
(Date)

Barbara A. Manzolillo, Chief Financial Officer and Treasurer
(Signature)

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