UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, par value $1.00 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Page 1 of 30
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]
No public trading market exists for the registrant's common stock. There were 35,687,426 shares of common stock, $1.00 par value, outstanding at December 31, 2008.
| Index to Form 10-K | Page |
|
|
|
| Part I | | |
| Item 1 | Business | 3 |
| Item 1A | Risk Factors | 6 |
| Item 1B | Unresolved Staff Comments | 6 |
| Item 2 | Properties | 6 |
| Item 3 | Legal Proceedings | 6 |
| Item 4 | Submission of Matters to a Vote of Security Holders | 6 |
| Part II | | |
| Item 5 | Market for Registrant's Common Equity and Related Shareholder&n bsp;Matters | 7 |
| Item 6 | Selected Financial Data | 8 |
| Item 7 | Management's Discussion and Analysis of Financial Condition and | |
| Results of Operation | 8 |
| Item 7A | Quantitative and Qualitative Disclosures About Market Risk | 9 |
| Item 8 | Financial Statements and Supplementary Data | 10 |
| Item 9 | Changes in and Disagreements with Accountants on Accounting and | |
| Financial Disclosure | 23 |
| Item 9A | Controls and Procedures | 23
| Item 9B | Other Information | 24 |
| Part III | | |
| Item 10 | Directors, Executive Officers and Corporate Governance | 24 |
| Item 11 | Executive Compensation | 27 |
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and | |
| Related Shareholder Matters | 28 |
| Item 13 | Certain Relationships and Related Transactions, and Director Independence | 29 |
| Item 14 | Principal Accountant Fees and Services | 29 |
| Part I V | | |
| Item 15 | Exhibits | 30 |
| Signatures | 30 |
Page 2 of 30
Part I
Item 1 - Business
COMPANY OVERVIEW
Medical Information Technology, Inc. (MEDITECH) was founded in 1969 to develop, manufacture and market computer software products for the hospital industry. For 2008 on a consolidated basis combined product and service revenue was $397.9M, operating income was $130.1M and net income was $35.7M. Product bookings were $172.6M and the resultant year-end product backlog was $193.3M. By year-end MEDITECH had 2,865 staff members, and over 2,200 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. With the acquisition of Patient Care Technologies, Inc. (PtCT) in April 2007, MEDITECH included home health care software products.
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.
Page 3 of 30
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 and marketing, implementation, customer service, accounting and facility operations. MEDITECH staff work in six company owned facilities in the greater Boston area and one company owned facility in Atlanta.
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.
Page 4 of 30
IMPLEMENTATION
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 6% of MEDITECH revenues in 2008.
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. MEDITECH'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
MEDITECH's website address is "www.meditech.com" 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 MEDITECH's filings stored on the SEC's website as well.
One may use "http://www.sec.gov/cgi-bin/browse-edgar?CIK=1011452&action=getcompany" to access all of MEDITECH's filings stored on the SEC's website instead.
In addition MEDITECH will provide paper copies of these filings free of charge to its shareholders upon request.
Page 5 of 30
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 Accountability 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, MEDITECH 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 - Unresolved Staff Comments
None.
Item 2 - Properties
As of December 31, 2008 MEDITECH owned seven facilities containing over 1.2 million square feet of office space, all being well maintained Class A properties, six in the greater Boston area and one in Atlanta. MEDITECH occupies 70% of the space and the remaining 30% is leased to various tenants. MEDITECH has adequate space for its reasonable needs over the near future.
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 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 4 - Submission of Matters to a Vote of Security Holders
None.
Page 6 of 30
PART II
Item 5 - Market for Registrant's Common Equity and Related Shareholder Matters
No public trading market exists for MEDITECH'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 MEDITECH's common stock is subject to right of first refusal restrictions set forth in MEDITECH's charter.
There are no shareholder agreements with MEDITECH covering the voting or repurchase of MEDITECH stock.
During February 2008 pursuant to the 2004 Stock Purchase Plan, MEDITECH sold 206,155 shares of its common stock at $37 per share to certain staff members for an aggregate consideration of $7,627,735.
During 2008 MEDITECH did not repurchase any of its shares of common stock.
During the fourth quarter of 2008 the Medical Information Technology, Inc. Profit Sharing Trust purchased 3,150 shares of MEDITECH's common stock for a total of $116,550 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 2008.
| 4th quarter | shares | price per |
| of 2008 | purchased | share |
|
|
|
| October | 3,150 | $37 |
| November | 0 | |
| December | 0 | |
During all of 2008 the Medical Information Technology, Inc. Profit Sharing Trust purchased 45,764 shares of MEDITECH's common stock for a total of $1,693,268 in individual private transactions.
During the 4th quarter A. Neil Pappalardo purchased 4,995 shares of MEDITECH's common stock for a total of $184,815 in individual private transactions.
At December 31, 2008, there were 1,636 shareholders of record of MEDITECH's common stock and 35,687,426 shares outstanding.
MEDITECH 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.
Page 7 of 30
Item 6 - Selected Financial Data
MEDITECH's financial statements are presented on a consolidated basis in this 10-K. The results include the effect of the 2nd quarter 2007 acquisition of PtCT.
Selected financial data for the past 5 years ended December 31 are as follows:
| | 2004 | 2005 | 2006 | 2007 | 2008 |
| |
|
|
|
|
|
| Full Year Operations: | | | | | |
| Total revenue | $280,761,569 | $304,568,166 | $344,589,232 | $376,233,882 | $397,929,595 |
| Operating income | 102,124,728 | 111,420,017 | 124,794,398 | 126,461,550 | 130,063,109 |
| Net income | 71,441,090 | 77,675,858 | 87,211,362 | 88,542,508 | 35,668,739 |
| Average shares | 34,381,239 | 34,737,446 | 35,069,992 | 35,388,510 | 35,670,246 |
| Net income/share | $2.08 | $2.24 | $2.49 | $2.50 | $1.00 |
| Year End Position: | | | | | |
| Total assets | $427,315,405 | $449,570,899 | $491,208,968 | $493,736,795 | $430,584,445 |
| Total liabilities | 57,265,283 | 65,558,627 | 77,898,665 | 80,272,220 | 77,216,272 |
| Shareholder equity | 370,050,122 | 384,012,272 | 413,310,303 | 413,464,575 | 353,368,173 |
| Shares outstanding | 34,514,544 | 34,830,437 | 35,168,133 | 35,481,271 | 35,687,426 |
| Total equity/share | $10.72 | $11.03 | $11.75 | $11.65 | $9.90 |
| Other Financial Data: | | | | | |
| Working capital | $182,083,959 | $204,626,809 | $231,033,476 | $201,126,941 | 150,562,285 |
| Operating cash flow | 85,922,630 | 93,283,102 | 94,626,916 | 108 ,982,620 | 89,326,267 |
| Depreciation expense | 7,706,814 | 7,654,226 | 8,128,038 | 8,795,511 | 9,660,920 |
| Cash dividends/share | $1.80 | $2.00 | $2.16 | $2.40 | $2.52 |
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Comparison of Fiscal Years ended December 31, 2007 and 2008:
Total revenue from both existing and new customers increased 5.8% from $376.2 million in 2007 to $397.9 million in 2008. It was composed of a $149 thousand increase in product revenue and a $21.5 million increase in service revenue.
Operating expenses increased 7.2% from $249.8 million in 2007 to $267.9 million in 2008 due primarily to higher staff related costs. The resultant operating income increased 2.8% from $126.5 million in 2007 to $130.1 million in 2008.
Other income decreased substantially from $21.0 million in 2007 to a $37.2 million loss in 2008 due primarily to investment impairments. Other expense increased from $7.7 million in 2007 to $8.4 million in 2008 due primarily to higher litigation related costs. The resultant pretax income decreased 39.6% from $139.7 million in 2007 to $84.5 million in 2008.
MEDITECH's effective tax rate increased substantially from 36.6% in 2007 to 57.8% in 2008 due primarily to a limited tax benefit from investment impairments. The resultant net income decreased 59.7% from $88.5 million in 2007 to $35.7 million in 2008.
Page 8 of 30
Comparison of Fiscal Years ended December 31, 2006 and 2007:
Total revenue from both existing and new customers increased 9.2% from $344.6 million in 2006 to $376.2 million in 2007. It was composed of a $9.6 million increase in product revenue and a $22.0 million increase in service revenue.
Operating expenses increased 13.6% from $219.8 million in 2006 to $249.8 million in 2007 due to an overall increase in staff and the acquisition of PtCT. The resultant operating income increased 1.3% from $124.8 million in 2006 to $126.5 million in 2007.
Other income decreased from $22.6 million in 2006 to $21.0 million in 2007 due primarily to higher losses than gains on marketable securities. Other expense decreased from $8.0 million in 2006 to $7.7 million in 2007 due primarily to lower litigation related legal expenses. The resultant pretax income increased 0.3% from $139.4 million in 2006 to $139.7 million in 2007.
MEDITECH's effective tax rate decreased from 37.4% in 2006 to 36.6% in 2007 due primarily to a higher tax deduction for domestic manufacturing. The resultant net income increased 1.5% from $87.2 million in 2006 to $88.5 million in 2007 due primarily to slightly lower effective tax rate.
Financial Condition:
Accounts receivables have increased $10.1 million due primarily to transactions related to tenant rentals as disclosed in Note 3 to Consolidated Financial Statements.
Liquidity and Capital Resources:
At December 31, 2008 MEDITECH's cash, cash equivalents and marketable securities totaled $185.4 million. Marketable securities consisted of preferred and common equities plus bank and government notes. During 2008 cash flow from operations was $89.3 million, cash flow used in investing was $16.8 million and cash flow used in financing was $82.2 million. The payment of $89.8 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, 2008 was $353.4 million. During 2008 management expended $11.3 million for new facilities 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 consolidated 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 1(j) for uncertainty in income taxes, Note 2 for marketable securities, Note 3 for doubtful accounts and Note 9 for income taxes.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Market risk associated with equity securities is disclosed in Note 2 to Consolidated Financial Statements.
Page 9 of 30
Item 8 - Financial Statements and Supplementary Data
Consolidated Financial Statements of Medical Information Technology, Inc.
As of December 31, 2006, 2007 and 2008
Together with Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Medical Information Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Medical Information Technology, Inc. (a Massachusetts corporation) and subsidiary as of December 31, 2006, 2007 and 2008, and the related consolidated statements of income, shareholder equity and cash flows for each of the three years in the period ended December 31, 2008. 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 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our 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 consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe tha t our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards No. 157, Fair Value Measurement.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medical Information Technology, Inc. and subsidiary as of December 31, 2006, 2007 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December, 31, 2008, in conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Boston, Massachusetts
January 30, 2009
| Index to Consolidated Financial Statements | Page |
|
|
| Consolidated Balance Sheets as of December 31, 2006, 2007 and 2008 | 11 |
| Consolidated Statements of Income for the Years Ended December 31, | |
| 2006, 2007 and 2008 | 12 |
| Consolidated Statements of Shareholder Equity for the Years Ended | |
| December 31, 2006, 2007 and 2008 | 13 |
| Consolidated Statements of Cash Flows for the Years Ended December 31, | |
| 2006, 2007 and 2008 | 14 |
| Notes to Consolidated Financial Statements | 15-23 |
Page 10 of 30
Consolidated Balance Sheets as of December 31, 2006, 2007 and 2008
| Dec 31, 2006 | Dec 31, 2007 | Dec 31, 2008 |
|
|
|
|
| | | | |
| Cash and equivalents (Note 1) | $13,660,733 | $22,567,940 | $12,964,756 |
| Marketable securities (Note 2) | 247,407,527 | 210,137,628 | 152,402,588 |
| Accounts receivable, less reserves (Note 3) | 43,309,325 | 37,445,841 | 47,569,950 |
| Deferred taxes (Note 8) | 4,554,556 | 11,247,752 | 14,841,263 |
|
|
|
|
| Current assets | 308,932,141 | 281,399,161 | 227,778,557 |
|
|
|
|
| Computer equipment | 7,729,814 | 9,361,351 | 9,513,945 |
| Furniture and fixtures | 34,739,785 | 38,752,354 | 42,068,652 |
| Buildings | 146,934,058 | 175,130,131 | 179,396,034 |
| Land | 32,604,107 | 33,159,107 | 33,407,959 |
| Accumulated depreciation | (80,443,541) | (87,690,598) | (94,083,882) |
|
|
|
|
| &nb sp;Fixed assets (Note 1) | 141,564,223 | 168,712,345 | 170,302,708 |
|
|
|
|
| Marketable securities (Note 2) | 30,000,000 | 30,000,000 | 20,000,000 |
| Other assets (Note 4) | 10,712,604 | 13,625,289 | 12,503,180 |
|
|
|
|
| Total assets | $491,208,968 | $493,736,795 | $430,584,445 |
|
|
|
|
| | | | |
| Accounts payable | $239,804 | $395,117 | $625,326 |
| Taxes payable | 2,226,632 | 5,377,659 | 3,165,313 |
| Accrued expenses (Note 5) | 30,461,088 | 34,475,953 | 33,967,110 |
| Customer deposits | 23,770,417 | 25,604,508 | 24,239,540 |
| Deferred taxes and tax reserves (Note 8) | 21,200,724 | 14,418,983 | 15,218,983 |
|
|
|
|
| Total liabilities | 77,898,665 | 80,272,220 | 77,216,272 |
|
|
|
|
| Common stock,&nb sp;$1.00 par value, authorized | | | |
| 40,000,000 shares, issued and outstanding | | | |
| 35,168,133 shares in 2006, 35,481,271 shares | | | |
| in 2007 and 35,687,426 shares in 2008 | 35,168,133 | 35,481,271 | 35,687,426 |
| Additional paid-in capital | 44,062,385 | 54,869,077 | 62,290,657 |
| Retained income | 317,983,893 | 321,703,233 | 267,569,536 |
| Unrealized security gains (losses), net of tax | 16,095,892 | 1,410,994 | (12,179,446) |
|
|
|
|
| Shareholder equity | 413,310,303 | 413,464,575 | 353,368,173 |
|
|
|
|
| Total liabilities and shareholder equity | $491,208,968 | $493,736,795 | $430,584,445 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 11 of 30
Consolidated Statements of Income for the Years Ended December 31, 2006, 2007 and 2008
| Dec 31, 2006 | Dec 31, 2007 | Dec 31, 2008 |
|
|
|
|
| | | | |
| Product revenue | $185,936,114 | $195,539,439 | $195,688,275 |
| Service revenue | 158,653,118 | 180,694,443 | 202,241,320 |
|
|
|
|
| Total revenue (Note 1) | 344,589,232 | 376,233,882 | 397,929,595 |
|
|
|
|
| | | | |
| Operations, development | 145,05 9,169 | 168,439,266 | 181,856,359 |
| Selling, G & A (Note 6) | 74,735,665 | 81,333,066 | 86,010,127 |
|
|
|
|
| Operating expenses | 219,794,834 | 249,772,332 | 267,866,486 |
|
|
|
|
| Operating income | 124,794,398 | 126,461,550 | 130,063,109 |
| | | | |
| Other income (Note 7) | 22,568,845 | 20,962,020 | (37,219,151) |
| Other expense (Note 7) | 8,009,183 | 7,687,500 | 8,387,120 |
|
|
|
|
| Pretax income | 139,354,060 | 139,736,070 | 84,456,838 |
| | | | |
| State income tax | 11,687,287 | 11,399,110 | 10,677,916 |
| Federal income tax | 40,455,411 | 39,794,452 | 38,110,183 |
|
|
|
|
| Income tax (Note 8) | 52,142,698 | 51,193,562 | 48,788,099 |
|
|
|
|
| Net&nb sp;income | $87,211,362 | $88,542,508 | $35,668,739 |
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 12 of 30
Consolidated Statements of Shareholder Equity for the Years Ended December 31, 2006, 2007 and 2008
| Common | Stock | Retained | Shareholder |
| # of shares | Paid-in capital | income | equity |
|
|
|
|
|
| Balance, December 31, 2005 | 34,830,437 | $68,184,246 | $306,423,742 | $384,012,272 |
| Issuance of common stock | | | | |
| pursuant to the 2004 | | | | |
| Stock Purchase Plan | 257,696 | 8,246,272 | | 8,246,272 |
| Issuance of common stock | | | | |
| to Profit Sharing Plan | 80,000 | 2,800,000 | | 2,800,000 |
| Net income | | | 87,211,362 | 87,211,362 |
| Unrealized security gains, net of tax | | | | 6,691,608 |
| Dividends paid | | | (75,651,211) | (75,651,211) |
|
|
|
|
|
| Balance, December 31, 2006 | 35,168,133 | $79,230,518 | $317,983,893 | $413,310,303 |
| Issuance of common stock | | | | |
| pursuant to&nbs p;the 2004 | | | | |
| Stock Purchase Plan | 233,138 | 8,159,830 | | 8,159,830 |
| Issuance of common stock | | | | |
| to Profit Sharing Plan | 80,000 | 2,960,000 | | 2,960,000 |
| Net income | | | 88,542,508 | 88,542,508 |
| Unrealized security losses, net of tax | | | | (14,684,898) |
| Dividends paid | | | (84,823,168) | (84,823,168) |
|
|
|
|
|
| Balance, December 31, 2007 | 35,481,271 | $90,350,348 | $321,703,233 | $413,464,575 |
| Issuance of common stock | | | | |
| pursuant to the 2004 | | | | |
| Stock Purchase Plan | 206,155 | 7,627,735 | | 7,627,735 |
| Net income | | | 35,668,739 | 35,668,739 |
| Unrealized security losses, net of tax | | | | (13,590,440) |
| Dividends paid | | | (89,802,436) | (89,802,436) |
|
|
|
|
|
| Balance, Dec ember 31, 2008 | 35,687,426 | $97,978,083 | $267,569,536 | $353,368,173 |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 13 of 30
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2007 and 2008
| Dec 31, 2006 | Dec 31, 2007 | Dec 31, 2008 |
|
|
|
|
| Net income | $87,211,362 | $88,542,508 | $35,668,739 |
| Depreciation expense | 8,128,038 | 8,795,511 | 9,660,920 |
| Write-downs of marketable securities | | 9,500,000 | 65,016,345 |
| Reversal of prior write-downs | | (2,516,721) | (13,790,380) |
| (Gain) loss on sales of marketable securities | (8,230) | (5,656,843) | 6,650, 590 |
| Stock contributions to qualified profit sharing plan | 2,800,000 | 2,960,000 | |
| Deferred taxes on unrealized securities (gains) losses | (4,461,072) | 9,789,935 | 2,893,620 |
| Change in accounts receivable | (6,828,664) | 7,036,267 | (10,124,109) |
| Change in accounts payable | (228,923) | 25,633 | 230,209 |
| Change in taxes payable | (1,196,194) | 3,150,307 | (2,212,346) |
| Change in accrued expenses | 2,671,781 | 3,162,324 | (508,842) |
| Change in customer depos its | 2,766,147 | (2,017,092) | (1,364,968) |
| Change in deferred taxes and tax reserves | 3,772,671 | (13,789,159) | (2,793,511) |
|
|
|
|
| Net cash from operating activities | 94,626,916 | 108,982,620 | 89,326,267 |
|
|
|
|
| Purchases of marketable securities | (57,301,294) | (94,883,413) | (60,262,610) |
| Sales of marketable securities | 48,000,000 | 106,352,092 | 53,637,034 |
| Purchases of&n bsp;fixed assets | (18,549,402) | (31,336,410) | (11,251,283) |
| Change in other assets | (2,460,000) | (3,544,344) | 1,122,109 |
|
|
|
|
| Net cash used in investing activities | (30,310,696) | (23,412,075) | (16,754,750) |
|
|
|
|
| Sales of common stock | 8,246,272 | 8,159,830 | 7,627,735 |
| Dividends paid | (75,651,211) | (84,823,168) | (89,802,436) |
|
|
|
|
| Net cash used in financing activities | (67,404,939) | (76,663,338) | (82,174,701) |
|
|
|
|
| Net change in cash and equivalents | (3,088,719) | 8,907,207 | (9,603,184) |
| Cash and equivalents at beginning of year | 16,749,452 | 13,660,733 | 22,567,940 |
|
|
|
|
| Cash and equivalents at end of year | $13,660,733 | $22,567,940 | $12,964,756 |
|
|
|
|
| Supplemental Disclosure: | | | |
| Cash paid for income taxes | $54,402,795 | $53,633,563 | $53,396,731 |
| Cash paid for interest | $0 | $0 | $0 |
The accompanying notes are an integral part of these consolidated financial statements.
Page 14 of 30
Notes to Consolidated Financial Statements December 31, 2008
(1) Operations and Accounting Policies
MEDITECH is engaged in the development, manufacture and licensing of computer software products for the hospital industry. The principal market for its products consists of health care providers located primarily in the United States and Canada.
The accompanying consolidated 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.
The consolidated financial statements include MEDITECH's wholly owned subsidiary, Patient Care Technologies, Inc., in accordance with Accounting Research Bulletin No. 51, Consolidation of Financial Statements.
(a) Revenue Recognition
MEDITECH follows the provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position No. 97-2 (SOP 97-2), Software Revenue Recognition, as amended by SOP 98-9. MEDITECH enters into perpetual software license contracts which provide for a customer deposit upon contract execution, milestone billings and fixed monthly service fees thereafter. MEDITECH 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.
MEDITECH 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 product revenue with offsetting operating expenses included in the consolidated income statement.
(b) Software Development Costs
MEDITECH follows the provisions of Statement of Financial Accounting Standards No. 86 (SFAS 86), Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. SFAS 86 establishes standards for capitalizing 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 MEDITECH after technological feasibility has been established have been immaterial and as such have been charged to operations as incurred.
(c) Cash and Equivalents
MEDITECH considers all highly liquid investments purchased with original maturities of 90 days or less to be cash equivalents.
Page 15 of 30
(d) Fixed Assets
MEDITECH 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:
| Description | Method | Useful Life |
|
|
|
| Computer equipment | MACRS | 3-5 years |
| Furniture and fixtures | MACRS | 7 years |
| Furniture and fixtures | SL | 10 years |
| Land improvements | SL | 15 years |
| Buildings | SL | 31.5-40 years |
Maintenance costs are expensed as incurred. Improvements are capitalized and depreciated over the asset's useful life.
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.
(e) Fair Value of Financial Instruments and Concentration of Credit Risk
The carrying value of MEDITECH's cash and cash equivalents, accounts receivable and accounts payable approximates their fair value due to the short-term nature of these financial instruments. MEDITECH's marketable securities are carried at fair value and its US government debt securities are carried at cost (see Note 2).
Financial instruments that potentially subject MEDITECH to concentrations of credit risk are principally cash, cash equivalents, marketable securities and accounts receivable. MEDITECH 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 MEDITECH makes substantial sales. To reduce risk, MEDITECH routinely assesses the financial strength of its customers and, as a result, believes that its accounts receivable credit risk exposure is limited. MEDITECH 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, 2006, 2007 and 2008 no individual customer accounted for greater than 10% of the outstanding accounts receivable.
(f) Net Income per Common Share
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 computed by dividing net income by the weighted average number of common shares outstanding for the past 3 years ended December 31 is as follows:
| 2006 | 2007 | 2008 |
|
|
|
| |
| Net income | $87,211,362 | $88,542,508 | $35,668,739 |
| Average number of shares | 35,069,992 | 35,388,510 | 35,670,246 |
| Earnings per share | $2.49 | $2.50 | $1.00 |
Page 16 of 30
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.
(g) Comprehensive Income
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 unrealized gains or losses, net of tax, on marketable securities classified as available for sale, foreign currency translation adjustments and minimum pension liability adjustments. MEDITECH's comprehensive income including net unrealized gains or losses on marketable securities for the past 3 years ended December 31 is as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| Net income | $87,211,362 | $88,542,508 | $35,668,739 |
| Net unrealized gains (losses) | 6,691,608 | (14,684,898) | (13,590,440) |
|
|
|
|
| Comprehensive income | $93,902,970 | $73,857,610 | $22,078,299 |
|
|
|
|
(h) Segment, Geographic and Enterprise-Wide Reporting
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. MEDITECH's operating revenue percentage based on location of customer for the past 3 years ended December 31 is as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| United States | 86% | 87% | 90% |
| Canada | 12% | 11% | 8% |
| Other | 2% | 2% | 2% |
One customer accounted for approximately 9%, 6% and 6% of total revenue for the past 3 years ended December 31.
Page 17 of 30
(i) Accounting for Uncertainty in Income Taxes
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 and potential tax assessments of $5,378,971 plus interest and penalties of $9,840,012 at December 31, 2008. These reserves relate to the research tax credit, domestic production activities deduction, and state nexus. The years 2006 through 2008 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.
| Potential Tax |
| Assessment |
|
|
| December 31, 2007 | $6,410,803 |
| Current year reductions | (762,928) |
| Prior year additions | 2,522,331 |
| Prior year reductions | (2,198,642) |
| Prior year audit reductions | (592,593) |
|
|
| December 31, 2008 | $5,378,971 |
|
|
(j) Common Stock Dividend Policy
MEDITECH's Board of Directors has full discretion regarding the timing and amounts of dividends paid on common stock. The annual dividend paid quarterly on shares then outstanding for the past 3 years ended December 31 was $2.16, $2.40 and $2.52 per share.
(k) Recent Accounting Pronouncements
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.
Page 18 of 30
(2) MARKETABLE SECURITIES
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 bank and government notes 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 2008 MEDITECH determined the decline in fair value of 11 equity issues to be other than temporary and reduced their cost basis by $65,016,345 to bring it in line with fair value.
MEDITECH's resultant marketable securities had a fair value of $172,402,588 which included gross unrealized gains of $709,603 and gross unrealized losses of $14,842,010. 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 December 31, 2008. MEDITECH has the intent and ability to hold these securities until recovery, based on recent announcements regarding the debt-like characteristic of preferred equities. MEDITECH continues to evaluate whether the situation warrants further write-downs.
The cost basis net of write-downs, unrealized gains, unrealized losses and fair market value of MEDITECH's holdings for the past 3 years ended December 31 are as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| Net cost of equities | $190,591,039 | $182,785,974 | $128,534,995 |
| Unrealized gains | 26,840,480 | 16,640,146 | 709,603 |
| Unrealized losses | (13,992) | (14,288,492) | (14,842,010) |
| Cost of notes | 59,990,000 | 55,000,000 | 58,000,000 |
|
|
|
|
| Fair market value | $277,407,527 | $240,137,628 | $172,402,588 |
|
|
|
|
(3) ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, 2008 includes $7.7 million of non-trade receivables primarily related to tenant rentals and tax refunds.
The components of the reserve for doubtful accounts for the past 3 years ended December 31 are as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| Balance, beginning of year | $800,000 | $800,000 | $1,000,000 |
| Amounts charged to expense | 0 | 200,000 | 210,000 |
|
|
|
|
| Balance, end of year | $800,000 | $1,000,000 | $1,210,000 |
|
|
|
|
Page 19 of 30
(4) OTHER ASSETS
MEDITECH follows the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 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 $2,140,000 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 $6,167,561 at December 31, 2008.
Patient Care Technologies, Inc. (PtCT) is engaged in the development, manufacture and licensing of computer software products and their support for the home health care market. During the 2nd quarter 2007 MEDITECH acquired PtCT which then became a wholly-owned subsidiary of MEDITECH. The financial statements for 2007 and thereafter are presented on a consolidated basis. 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, and unidentified intangibles are based upon management's estimates of fair value as of the date of acquisition. An acquired deferred tax asset was also recognized to reflect the carryforward of net operating losses expected to be realized.
The identified intangibles were valued at $5,977,801, are being amortized over their 7 year useful lives and are included in other assets. A deferred tax liability was recognized to reflect the tax effect of these identified intangibles as such amounts are not deductible for tax purposes. The unidentified intangibles were valued at $1,211,786, are not amortizable and are also included in other assets. This amount is evaluated annually for impairment. MEDITECH conducted it annual impairment test as of December 31, 2008 and has concluded this asset to be recoverable.
(5) ACCRUED EXPENSES
The components of accrued expenses for the past 3 years ended December 31 are as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| Accrued bonuses | $26,200,000 | $27,300,000 | $28,300,000 |
| Accrued vacation | 2,650,000 | 3,178,689 | 3,514,564 |
| Accrued construction | | 2,030,000 | |
| Other accrued | 1,611,088 | 1,967,264 | 2,152,546 |
|
|
|
|
| Accrued expenses | $30,461,088 | $34,475,953 | $33,967,110 |
|
|
|
|
Page 20 of 30
(6) QUALIFIED PROFIT SHARING PLAN
MEDITECH has no obligation for post-employment or post-retirement benefits. MEDITECH maintains a qualified profit sharing plan that provides deferred compensation to substantially all of its staff members. Contributions to the plan are at the discretion of the Board of Directors and may be in the form of cash or MEDITECH stock. The components of year-end contributions for the past 3 years ended December 31 are as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| Cash | $3,600,000 | $3,640,000 | $7,000,000 |
| 80,000 shares of MEDITECH common | | | |
| stock at $35 and $37 per share | | | |
| in 2006 and 2007 respectively | 2,800,000 | 2,960,000 | |
|
|
|
|
| $6,400,000 | $6,600,000 | $7,000,000 |
|
|
|
|
(7) OTHER INCOME AND EXPENSE
The components of Other income consisting of rents, dividends, interest income and realized marketable security gains or losses for the past 3 years ended December 31 are as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| Rents | $7,729,917 | $6,598,350 | $8,312,652 |
| Dividends | 10,633,290 | 11,668,892 | 10,443,755 |
| Interest | 4,197,408 | 4,021,164 | 2,754,966 |
| Gains (Losses) | 8,230 | (1,326,386) | (57,876,556) |
| Miscellaneous | | | (853,968) |
|
|
|
|
| Other income | $22,568,845 | $20,962,020 | ($37,219,151) |
|
|
|
|
The components of Other expense consisting of rental costs, charitable contributions and certain professional fees for the past 3 years ended December 31 are as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| Rental costs | $6,699,183 | $6,304,666 | $6,732,120 |
| Charitable contributions | 660,000 | 715,000 | 705,000 |
| Professional fees | 650,000 | 667,834 | 950,000 |
|
|
|
|
| Other expense | $8,009,183 | $7,687,500 | $8,387,120 |
|
|
|
|
Page 21 of 30
(8) INCOME TAX, DEFERRED TAXES AND TAX RESERVES
MEDITECH follows the provisions of SFAS No. 109, Accounting for Income Taxes. In prior years deferred tax assets were recorded as a reduction of deferred tax liabilities in the consolidated balance sheet. These deferred taxes have now been reclassified to conform to the current presentation. This reclassification had no impact on the accompanying consolidated statements of income or cash flows for the prior years. The components of deferred taxes and tax reserves for the past 3 years ended December 31 are as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| Prepaid tax on deposits over 1 year | $3,174,557 | $4,342,001 | $3,489,868 |
| Prepaid tax on non-deductible expenses | 1,380,000 | 1,580,000 | 1,710,000 |
| Deferred tax on unrealized losses | | 4,762,422 | 31,846,437 |
| Valuation allowance | | | (23,700,000) |
| Other deferred tax | | 563,329 | 1,494,958 |
|
|
|
|
| Deferred tax ;assets | $4,554,556 | $11,247,752 | $14,841,263 |
|
|
|
|
| | | |
| 2006 | 2007 | 2008 |
|
|
|
|
| Tax reserves | $13,379,901 | $14,418,983 | $15,218,983 |
| Deferred tax on unrealized gains | 7,820,824 | | |
|
|
|
|
| Deferred tax liabilities and tax reserves | $21,200,724 | $14,418,983 | $15,218,983 |
|
|
|
|
Valuation allowances are established when necessary to reduce deferred taxes to the amount expected to be realized.
The current and deferred components of the State and Federal income taxes for the past 3 years ended December 31 are as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| State current | $12,110,963 | $12,701,898 | $10,852,888 |
| State deferred | (423,676) | (1,302,788) | (174,972) |
|
|
|
|
| State income tax | $11,687,287 | $11,399,110 | $10,677,916 |
|
|
|
|
| Federal current | $42,120,136 | $43,702,820 | $38,635,102 |
| Federal deferred | (1,664,725) | (3,908,368) | (524,919) |
|
|
|
|
| Federal income tax | $40,455,411 | $39,794,452 | $38,110,183 |
|
|
|
|
The effective income tax rate for the past 3 years ended December 31 is as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| Statutory U.S. income tax rate | 35.0% | 35.0% | 35.0% |
| Increase in taxes resulting from state income | | | |
| taxes, net of federal income tax benefit | 5.5% | 5.3% | 8.2% |
| Dividend income exclusion | (1.9%) | (2.0%) | (2.9%) |
| Valuation allowance | | | 20.7% |
| Other | (1.2%) | (1.7%) | (3.2%) |
|
|
|
|
| Effective tax rate | 37.4% | 36.6% | 57.8% |
|
|
|
|
Page 22 of 30
(9) SUPPLEMENTARY DATA
Unaudited operating results by quarter for the three years ended December 31, 2008 are as follows:
| 1st Q | 2nd Q | 3rd Q | 4th Q | 2006 |
|
|
|
|
|
|
| Total revenue | $82,189,658 | $85,510,655 | $87,419,158 | $89,469,761 | $344,589,232 |
| Operating income | 29,173,061 | 31,496,430 | 31,261,339 | 32,863,568 | 124,794,398 |
| Net income | 20,200,414 | 20,528,941 | 21,514,523 | 24,967,484 | 87,211,362 |
| Net income per share | $0.58 | $0.59 | $0.61 | $0.71 | $2.49 |
| | | | | | |
| 1st Q | 2nd Q | 3rd Q | 4th Q | 2007 |
|
|
|
|
|
|
| Total revenue | $91,683,091 | $95,133,885 | $92,712,818 | $96,704,088 | $376,233,882 |
| Operating income | 33,166,303 | 32,005,612 | 29,208,810 | 32,080,825 | 126,461,550 |
| Net income | 22,986,988 | 23,596,234 | 20,963,324 | 20,995,965 | 88,542,508 |
| Net income per share | $0.65 | $0.67 | $0.59 | $0.59 | $2.50 |
| | | | | |
| 1st Q | 2nd Q | 3rd Q | 4th Q | 2008 |
|
|
|
|
|
|
| Total revenue | $96,757,127 | $97,209,002 | $100,589,254 | $103,374,212 | $397,929,595 |
| Operating income | 31,095,144 | 30,585,628 | 33,235,825 | 35,146,512 | 130,063,109 |
| Net income | 21,474,242 | 16,323,695 | (27,064,517) | 24,935,320 | 35,668,739 |
| Net income per share | $0.60 | $0.46 | ($0.76) | $0.70 | $1.00 |
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A - 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, the 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.
MEDITECH's management is responsible for establishing, designing and maintaining internal controls over financial reporting that provide reasonable assurance to our Board of Directors and shareholders that the financial statements prepared are fairly presented. We have set assessment criteria in accordance with the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control's Integrated Framework. For the year ended December 31, 2007 we have made no changes in internal controls and we believe our internal control over financial reporting are effective at a reasonable assurance level based on said criteria.
This annual report does not include an attestation report of MEDITECH's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.
Page 23 of 30
Item 9B - Other Information
During its regular January 2009 meeting the Board of Directors approved the issuance of up to 225,000 shares of common stock to be sold to staff members at $37.00 per share pursuant to the MEDITECH 2004 Stock Purchase Plan.
PART III
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 MEDITECH on December 31, 2008, are shown below. There are no family relationships among the following persons.
| Director or Officer | Age | Position with MEDITECH |
|
|
|
| A. Neil Pappalardo | 66 | Chairman, Chief Executive Officer and Director |
| Lawrence A. Polimeno | 67 | Vice Chairman, Prior President and Director |
| Roland L. Driscoll | 79 | Director |
| Edward B. Roberts | 73 | Director |
| Morton E. Ruderman | 72 | Director |
| L. P. Dan Valente | 78 | Director |
| Howard Messing | 56 | President and Chief Operating Officer |
| Barbara A. Manzolillo | 56 | Treasurer, Chief Financial Officer and Clerk |
| Stuart N. Lefthes | 55 | Vice President of Sales |
| Christopher Anschuetz | 56 | Vice President of Technology |
| Robert G. Gale | 62 | Senior Vice President of Product Development |
| Joanne Wood | 55 | Vice President of Client Service |
| Steven B. Koretz | 56 | Vice President of Implementation |
| Hoda Sayed-Friel | 50 | Vice President of Marketing |
| Michelle O'Connor | 42 | Vice President of Product Development |
The following is a description of the business experience during the past five years of each Director and Officer.
A. Neil Pappalardo, founder of MEDITECH, 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 MEDITECH since 1969.
Roland L. Driscoll, retired Chief Financial Officer of MEDITECH, has been a Director since 1985.
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Edward B. Roberts, co-founder of MEDITECH, 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 MEDITECH, 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.
Howard Messing has been the President and Chief Operating Officer since 2002, was the Executive Vice President prior to that, and has been with MEDITECH 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 MEDITECH 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 MEDITECH since 1983.
Christopher Anschuetz has been the Vice President of Technology since 1995, was a Senior Manager prior to that, and has been with MEDITECH since 1975.
Robert G. Gale has been the Senior Vice President of Product Development since 2007, was a Vice President of Product Development prior to that, and has been with MEDITECH 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 MEDITECH 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 MEDITECH 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 MEDITECH since 1986.
Michelle O'Connor has been the Vice President of Product Development since 2007, was a Senior Manager prior to that, and has been with MEDITECH since 1988.
The address of all Officers and Directors is in care of Medical Information Technology, Inc., MEDITECH Circle, Westwood, MA 02090.
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THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors oversees MEDITECH'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 2008 the Board held 4 regularly scheduled quarterly meetings and all 6 members attended all 4 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 2008 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 2008 to review accounting practices and advise MEDITECH's CFO. In addition, the committee met with MEDITECH's Independent Registered Public Accounting firm and reviewed MEDITECH'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 2008 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. Pappalardo, Polimeno 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 2008 the committee contributed $705,000 to 44 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 - Executive Compensation
There are no employment contracts providing for continued compensation in effect for any Officer of MEDITECH. MEDITECH has no Stock Award programs, no Stock Option programs and no Non-equity Incentive plans. The compensation received by MEDITECH's Chief Executive Officer and the four most highly compensated other Officers for the past 3 years ended December 31 is summarized in the following table. The deferred columns represent both the annual increase in the individual's balance in the MEDITECH Profit Sharing Plan and the individual's share of MEDITECH's annual contribution to this Plan.
| Name and Position | Year | Salary | Bonus | Deferred | Deferred | Total |
|
|
|
|
|
|
|
| A. Neil Pappalardo | 2008 | $360,000 | $24,159 | $0 | $0 | $384,159 |
| Chairman and Chief | 2007 | 360,000 | 699,562 | 0 | 0 | 1,059,562 |
| Executive Officer | 2006 | 360,000 | 700,921 | 0 | 0 | 1,060,921 |
|
|
|
|
|
|
|
| Lawrence A. Polimeno | 2008 | $180,000 | $524,159 | $77,597 | $4,844 | $786,600 |
| Vice Chairman and | 2007 | 180,000 | 499,562 | 119,586 | 5,074 | 804,222 |
| Prior President | 2006 | 180,000 | 500,921 | 147,384 | 5,643 | 833,948 |
|
|
|
|
|
|
|
| Howard&nbs p;Messing | 2008 | $264,000 | $549,159 | $77,597 | $4,844 | $895,600 |
| President and Chief | 2007 | 264,000 | 549,562 | 119,586 | 5,074 | 938,222 |
| Operating Officer | 2006 | 264,000 | 550,921 | 147,384 | 5,643 | 967,948 |
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|
|
|
|
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| Barbara A. Manzolillo | 2008 | $228,000 | $24,159 | $77,597 | $4,844 | $334,600 |
| Treasurer and Chief | 2007 | 228,000 | 349,562 | 119,586 | 5,074 | 702,222 |
| Financial Officer | 2006 | 228,000 | 350,921 | 147,384 | 5,643 | 731,948 |
|
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|
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| Stuart N. Lefthes | 2008 | $216,000 | $349,159 | $77,597 | $4,844 | $647,600 |
| Vice President | 2007 | 216,000 | 349,562 | 119,586 | 5,074 | 690,222 |
| of Sales | 2006 | 192,000 | 400,921 | 147,384 | 5,643 | 745,948 |
Annual Cash Bonus: MEDITECH 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). MEDITECH also pays an 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. In light of MEDITECH's overall financial performance for 2008, Mr. Pappalardo and Ms. Manzolillo requested the Board issue them only their share of the Staff Bonus and nothing from the Officer Bonus.
Profit Sharing Plan: MEDITECH maintains a qualified defined contribution plan for all of MEDITECH'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 MEDITECH'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 MEDITECH. 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.
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Compensation of Directors: The members of the Board of Directors who are not Officers of MEDITECH 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 MEDITECH during the year.
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The following table provides information as of December 31, 2008 with respect to the shares of common stock beneficially owned by each person known by MEDITECH to own more than 5% of MEDITECH's outstanding common stock, each Director of MEDITECH, each Executive Officer named in the Compensation Table and by all Directors and Officers of MEDITECH 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 Shares | Percentage |
| Shareholder, | of Common Stock | of Shares of |
| Director or Officer | Beneficially Owned | Common Stock |
|
|
|
| A. Neil Pappalardo* | 13,633,991 | 38.20% |
| Morton E. Ruderman | 4,932,704 | 13.82% |
| MEDITECH Profit Sharing Trust* | 4,317,096 | 12.10% |
| Curtis W. Marble | 3,500,000 | 9.81% |
| Grossman Group | 2,061,144 | 5.78% |
| Lawrence A. Polimeno | 1,042,586 | 2.92% |
| Edward B. Roberts | 826,805 | 2.32% |
| Roland L. Driscoll | 528,000 | 1.48% |
| Howard Messing | 358,000 | 1.00% |
| Barbara A. Manzolillo | 225,000 | 0.63% |
| Stuart N. Lefthes | 98,000 | 0.27% |
| L. P. Dan Valente | 85,000 | 0.24% |
| 15 Directors and Officers as a Group* | 22,074,536 | 61.86% |
*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 9,316,895 shares. Likewise the number of shares indicated for the 15 Directors and Officers as a Group includes the shares owned by the MEDITECH Profit Sharing Trust.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During 2008, the Medical Information Technology, Inc. Profit Sharing Trust filed Forms 4 for its purchases of MEDITECH stock, but some of these filings were late. To MEDITECH's knowledge, based solely on a review of the reports given to MEDITECH, all other Section 16(a) filing requirements applicable to its executive officers, Directors and greater-than-10% shareholders were satisfied in 2008.
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Item 13 - Certain Relationships and Related Transactions, and Director Independence
A. Neil Pappalardo, Chairman, Chief Executive Officer and Director, purchased for cash from MEDITECH 25,000 shares of common stock at $35 per share in March 2007 and 25,000 shares of common stock at $37 per share in February 2008.
Howard Messing, President and Chief Operating Officer, purchased for cash from MEDITECH 15,000 shares of common stock at $35 per share in March 2007 and 15,000 shares of common stock at $37 per share in February 2008.
Barbara A. Manzolillo, Treasurer, Chief Financial Officer and Clerk, purchased for cash from MEDITECH 5,000 shares of common stock at $35 per share in February 2007 and 5,000 shares of common stock at $37 per share in February 2008.
Stuart N. Lefthes, Vice President of Sales, purchased for cash from MEDITECH 5,000 shares of common stock at $35 per share in February 2007 and 5,000 shares of common stock at $37 per share in February 2008.
Item 14 - Principal Accountant Fees and Services
During 2008, Ernst & Young LLP's services included auditing MEDITECH'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 for the three years ended December 31, 2008 is as follows:
| 2006 | 2007 | 2008 |
|
|
|
|
| Annual audit and quarterly reviews | $128,000 | $207,400 | $305,000 |
| Audit of Profit Sharing Trust | 11,000 | 12,000 | 12,000 |
| Tax or all other matters | 19,500 | | 10,000 |
|
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|
|
| $158,500 | $219,400 | $327,000 |
|
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|
It is the policy of the Audit Committee to pre-approve all audit and non-audit services to be provided to MEDITECH by MEDITECH's Independent Registered Public Accounting Firm.
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PART IV
Item 15 - Exhibits
Exhibit 3.1: MEDITECH's Articles of Organization, as amended to date, is 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, 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 21: Subsidiaries of the Company, 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, 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)
By: Barbara A. Manzolillo, Chief Financial Officer and Treasurer
(Signature)
January 30, 2009
(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 30, 2009.
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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