Medical Information Technology 10-Q 2015 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, 2015

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. 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]

No public trading market exists for the registrant's common stock. There were 37,165,854 shares of Common Stock, $1.00 par value, outstanding at September 30, 2015.

Page 1 of 11

Index to Form 10-Q	Page
Part I - Financial Information
Item 1 - Financial Statements (Unaudited)
Balance Sheet - December 31, 2014 and September 30, 2015	3
Statement of Income and Comprehensive Income - Three and Nine Months
Ended on September 30, 2014 and 2015	4
Statement of Cash Flow - Nine Months Ended on September 30, 2014 and 2015	5
Notes to Financial Statements	6
Item 2 - Management's Discussion and Analysis of Operating Results and
Financial Condition	9
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	11
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	11
Item 3 - Defaults Upon Senior Securities	11
Item 4 - Mine Safety Disclosures	11
Item 5 - Other Information	11
Item 6 - Exhibits	11
Signatures	11

Page 2 of 11

Part I - Financial Information

Item 1 - Financial Statements (Unaudited)

Balance Sheet
December 31, 2014 and September 30, 2015

	Dec 31, 2014	Sep 30, 2015
Cash and equivalents	$21,089,887	$20,340,373
Marketable securities	363,742,759	306,251,149
Trade receivables, net of reserve	48,572,645	44,566,648
Other receivables and prepaid	20,496,029	16,566,805
Current assets	453,901,320	387,724,975
Computer equipment	14,546,084	14,537,390
Furniture and fixtures	71,174,810	73,632,457
Buildings	245,099,444	250,360,816
Land	42,233,123	42,137,323
Accumulated depreciation	(146,165,740)	(153,833,994)
Fixed assets	226,887,721	226,833,992
Other assets	13,627,126	12,357,919
Deferred taxes	7,293,479	6,180,832
Total assets	$701,709,646	$633,097,718
Accounts payable	$479,882	$1,126,738
Taxes payable	3,869,303	2,675,223
Accrued expenses	45,125,716	36,482,783
Deferred revenue	20,093,200	24,645,141
Deferred taxes	34,525,433	20,950,856
Current liabilities	104,093,534	85,880,741
Tax reserves	21,289,052	17,478,677
Total liabilities	125,382,586	103,359,418
Common stock, $1.00 par value, authorized
40,000,000 shares, issued and outstanding
37,165,854 shares in 2014 and 2015	37,165,854	37,165,854
Additional paid-in capital	121,807,959	121,807,959
Retained income	367,387,243	342,189,350
Unrealized after-tax security gains	49,966,004	28,575,137
Shareholder equity	576,327,060	529,738,300
Total liabilities and shareholder equity	$701,709,646	$633,097,718

Page 3 of 11

Statement of Income and Comprehensive Income
Three and Nine Months Ended on September 30, 2014 and 2015

	3 months	ended on	9 months	ended on
	Sep 30, 2014	Sep 30, 2015	Sep 30, 2014	Sep 30, 2015
Product revenue	$44,133,616	$37,004,099	$162,219,334	$106,796,235
Service revenue	79,311,110	82,102,999	231,016,934	242,492,267
Total revenue	123,444,726	119,107,098	393,236,268	349,288,502
Operations, development	72,918,567	75,693,989	221,353,255	225,862,867
Selling, G & A	24,866,533	26,548,910	83,154,891	75,357,078
Operating expense	97,785,100	102,242,899	304,508,146	301,219,945
Operating income	25,659,626	16,864,199	88,728,122	48,068,557
Other income	5,284,973	4,986,286	57,146,195	29,623,971
Other expense	1,669,227	1,747,408	5,147,886	5,498,078
Pretax income	29,275,372	20,103,077	140,726,431	72,194,450
State income tax	2,356,000	364,000	8,018,000	2,105,000
Federal income tax	8,494,000	6,148,000	28,882,000	19,469,000
Income tax	10,850,000	6,512,000	36,900,000	21,574,000
Net income	$18,425,372	$13,591,077	$103,826,431	$50,620,450
Change in unrealized after-tax security gains	1,255,553	(3,911,859)	(26,984,984)	(21,390,867)
Comprehensive income	$19,680,925	$9,679,218	$76,841,447	$29,229,583

Page 4 of 11

Statement of Cash Flow
Nine Months Ended on September 30, 2014 and 2015

	9 months	ended on
	Sep 30, 2014	Sep 30, 2015
Net income	$103,826,431	$50,620,450
Depreciation and amortization expense	11,187,927	11,436,185
Pre-tax gain on sale of marketable securities	(41,381,522)	(13,821,395)
Pre-tax gain on sale of fixed assets	0	(29,000)
Change in trade receivables, net of reserve	3,467,139	4,005,997
Change in other receivables and prepaid	(13,721,334)	3,929,224
Change in accounts payable	(378,713)	646,856
Change in taxes payable	763,105	(1,194,080)
Change in accrued expenses	(10,671,275)	(8,642,933)
Change in deferred revenue	(12,509,208)	4,551,941
Change in net deferred taxes	3,380,782	1,798,647
Change in tax reserves	2,068,422	(3,810,375)
Net cash from operations	46,031,754	49,491,517
Purchases of marketable securities	(24,482,878)	(18,781,845)
Sales of marketable securities	65,064,329	54,443,406
Purchases of fixed assets	(19,666,046)	(10,634,507)
Sales of fixed assets	0	124,800
Change in other assets	291,420	425,457
Net cash from investing	21,206,825	25,577,311
Dividends paid	(83,566,922)	(75,818,342)
Net cash used in financing	(83,566,922)	(75,818,342)
Net change in cash and equivalents	(16,328,343)	(749,514)
Cash and equivalents at beginning	42,481,997	21,089,887
Cash and equivalents at end	$26,153,654	$20,340,373

Page 5 of 11

Notes To Financial Statements

Note 1. Significant Accounting Policies

The unaudited financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2014 included in MEDITECH's Form 10-K filed on March 13, 2015. 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, operating results and cash flow.

Note 2. Available For Sale Securities

MEDITECH follows the provisions of ASC 320-10, Investments - Debt and Equity Securities, which requires marketable securities be classified as trading, available-for-sale or held-to-maturity. MEDITECH classifies its marketable securities as available-for-sale and records them at fair value with any unrealized after-tax gains or losses reported as a component of shareholder equity. The fair value was determined based on quoted prices in active markets. ASC 320-10 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 temporary in nature. If the decline in fair value is not 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.

MEDITECH follows the provisions of ASC 320-10-35 Subsequent Measurement, and evaluates its marketable securities for other-than-temporary impairment using an impairment model consistent with a debt security. The factors considered include the severity and duration of the loss, the intent and ability to hold the securities for an extended period of time until recovery, and whether issuers are current on dividend payments and maintain investment grade ratings. Finally, the effect of fluctuating interest rates, current economic and industry conditions, and the issuers' current financial position are also taken into consideration.

MEDITECH follows the provisions of ASC 820-10, Fair Value Measurements and Disclosures, which provides for expanded disclosure and guidelines to determine fair market value of assets and liabilities. ASC 820-10 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, comprised of common and preferred stock, represent assets measured at fair value on a recurring basis, and are considered Level 1 assets as defined by ASC 820-10.

The following table indicates the original cost, unrealized pre-tax gains and losses, and fair market value of MEDITECH's marketable securities. The unrealized after-tax gains and losses have been accounted for within comprehensive income. MEDITECH has evaluated the unrealized pre-tax losses as of September 30, 2015 and has concluded that these are temporary in nature.

	Dec 31, 2014	Sep 30, 2015
Original cost	$280,466,086	$258,625,920
Unrealized pre-tax gains	83,276,673	50,502,084
Unrealized pre-tax losses	0	(2,876,855)
Fair market value	$363,742,759	$306,251,149

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Note 3. Equity Method Investments

MEDITECH follows the provisions of ASC 323-10, Investments - Equity Method and Joint Ventures, and as such, accounts for the equity investment in Meditech South Africa in accordance with the cost method. Meditech South Africa licenses MEDITECH's software technology and re-licenses it to its respective customers. Meditech South Africa serves a market niche which is part of the overall medical market but is outside of the health care market which MEDITECH serves. MEDITECH holds a fully collateralized mortgage note for a loan to Meditech South Africa to purchase land and a building used as its corporate headquarters. MEDITECH believes the fair value of this investment and loan balance approximates its September 30, 2015 carrying value.

During the 2nd quarter 2007 MEDITECH acquired Patient Care Technologies, Inc. (PtCT), a company engaged in the development, manufacture, licensing and support of computer software products for the home health care market. MEDITECH accounted for this acquisition under the purchase method of accounting in accordance with ASC 805-10, Business Combinations. PtCT merged with and into MEDITECH effective December 31, 2009.

During the 1st quarter 2011 MEDITECH acquired LSS Data Systems, Inc. (LSS), a company engaged in the development, manufacture, licensing and support of ambulatory information system software for physician practices. MEDITECH accounted for this acquisition under the purchase method of accounting in accordance with ASC 805-10, Business Combinations. LSS merged with and into MEDITECH effective December 31, 2013.

MEDITECH follows the provisions of ASC 350-20-35 Intangibles and Goodwill Impairment Evaluation - Qualitative Testing. MEDITECH annually assesses qualitative factors of its goodwill and intangible assets for impairment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The evaluation assesses all relevant economic, industry, regulatory, and legal facts and circumstances as well as overall performance. If, after assessing the totality of such facts and circumstances, MEDITECH determines that it is more likely than not that the fair value of a reporting unit is not less than its carrying amount, then no further goodwill impairment testing is necessary.

Note 4. Income Tax Accounting

MEDITECH follows the provisions of ASC 740-10, Accounting for Income Taxes. Deferred taxes relate to the earlier recognition of certain revenue and the later recognition of certain expenses for tax purposes. They also relate to the increase in fair market value over the cost basis of marketable securities. Tax reserves relate to the state nexus. During the 2nd quarter the tax reserve for domestic production activities deduction was removed. Key judgments are reviewed annually and adjusted to reflect current assessments. The years 2013 and 2014 are subject to examination by the IRS, and various years are subject to examination by state tax authorities.

No research tax credit is reflected in the first 9 months of 2014 or 2015. The 3rd quarter's effective tax rate decreased due primarily to the current period's reduced tax reserves. The first 9 months effective tax rate increased due primarily to the prior period's reduced taxes on gains from the sale of impaired marketable securities.

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Note 5. Earnings Per Share

MEDITECH follows the provisions of ASC 260-10, Earnings per Share, which 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. In general, the average number of shares reflects the annual issuance of shares sold to staff members in February pursuant to the 2004 Stock Purchase Plan and contributed to the MEDITECH Profit Sharing Trust in December.

	3 months	ended on	9 months	ended on
	Sep 30, 2014	Sep 30, 2015	Sep 30, 2014	Sep 30, 2015
Net income	$18,425,372	$13,591,077	$103,826,431	$50,620,450
Average number of shares	37,140,854	37,165,854	37,140,854	37,165,854
Earnings per share	$0.50	$0.37	$2.80	$1.36

Note 6. Comprehensive Income Presentation

Effective January 1, 2012 MEDITECH adopted the provisions of ASU 2011-05, Presentation of Comprehensive Income, which establishes standards for reporting 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 after-tax gains or losses on marketable securities classified as available for sale, foreign currency translation adjustments and minimum pension liability adjustments. In MEDITECH's case net income plus the change in unrealized after-tax gains or losses is shown as comprehensive income in the income statement.

	3 months	ended on	9 months	ended on
	Sep 30, 2014	Sep 30, 2015	Sep 30, 2014	Sep 30, 2015
Unrealized gains arising during the period	1,255,553	(3,911,859)	4,357,776	(13,327,656)
Reclassification of realized gains	0	0	(31,342,760)	(8,063,211)
Change in unrealized after-tax security gains	1,255,553	(3,911,859)	(26,984,984)	(21,390,867)

Note 7. Segment Reporting

MEDITECH follows the provisions of ASC 280-10, Segment Reporting. Based on the criteria set forth in ASC 280-10, 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 operating revenue percentage based on location of customer.

	3 months	ended on	9 months	ended on
	Sep 30, 2014	Sep 30, 2015	Sep 30, 2014	Sep 30, 2015
United States	90%	86%	90%	87%
Canada	9%	10%	9%	11%
All others	1%	4%	1%	2%

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

Operating	3 months	ended on	Percent
Results	Sep 30, 2014	Sep 30, 2015	Change
Total revenue	$123,444,726	$119,107,098	(3.5%)
Operating income	25,659,626	16,864,199	(34.3%)
Net income	18,425,372	13,591,077	(26.2%)
Average number of shares	37,140,854	37,165,854	0.1%
Earnings per share	$0.50	$0.37	(26.2%)
Cash dividends per share	$0.75	$0.68	(9.3%)

Total revenue from both existing and new customers decreased by $4.3 million. The decrease was composed of a $7.1 million reduction in product revenue due primarily to lower product bookings, offset by a $2.8 million addition in service revenue.

Operating expense increased by $4.5 million or 4.6% due primarily to higher staff related bonus expenses. The resultant operating income decreased by $8.8 million.

Other income decreased by $0.3 million due primarily to lower dividend and rental income. Other expense increased by $0.1 million. The resultant pretax income decreased by $9.2 million or 31.3%.

MEDITECH's effective tax rate decreased from 37.1% to 32.4% due primarily to the current period's reduced tax reserves. Net income decreased by $4.8 million due primarily to the current period's lower product revenue.

Operating	9 months	ended on	Percent
Results	Sep 30, 2014	Sep 30, 2015	Change
Total revenue	$393,236,268	$349,288,502	(11.2%)
Operating income	88,728,122	48,068,557	(45.8%)
Net income	103,826,431	50,620,450	(51.2%)
Average number of shares	37,140,854	37,165,854	0.1%
Earnings per share	$2.80	$1.36	(51.3%)
Cash dividends per share	$2.25	$2.04	(9.3%)

Total revenue from both existing and new customers decreased by $43.9 million. The decrease was composed of a $55.4 million reduction in product revenue due primarily to lower product bookings, offset by an $11.5 million addition in service revenue.

Operating expense decreased by $3.3 million or 1.1% due primarily to lower overall staff related expenses. The resultant operating income decreased by $40.7 million.

Other income decreased by $27.5 million due primarily to the prior period's gains from the sale of marketable securities. Other expense increased by $0.3 million. The resultant pretax income decreased by $68.5 million or 48.7%.

MEDITECH's effective tax rate increased from 26.2% to 29.9% due primarily to the prior period's reduced taxes on gains from the sale of impaired marketable securities. Net income decreased by $53.2 million due primarily to the prior period's gains from the sale of impaired marketable securities and the current period's lower product revenue.

Page 9 of 11

Financial Condition	Dec 31, 2014	Sep 30, 2015
Working capital	$349,807,786	$301,844,234
Total assets	701,709,646	633,097,718
Total liabilities	125,382,586	103,359,418
Shareholder equity	576,327,060	529,738,300
Outstanding number of shares	37,165,854	37,165,854
Shareholder equity per share	$15.51	$14.25

Accrued expenses decreased by $8.6 million during the period due primarily to the payment of $37.2 million in bonuses applicable to 2014 offset by the accrual of $28.0 million in bonus expenses applicable to 2015.

Deferred tax liabilities decreased by $13.6 million during the period due primarily to changes in the fair market value of marketable securities.

At September 30, 2015 MEDITECH's cash, cash equivalents and marketable securities totaled $326.6 million. Marketable securities consisted of preferred and common equities. For the first nine months of 2015 cash flow from operations was $49.5 million, cash flow from investing was $25.6 million and cash flow used in financing was $75.8 million. The payment of $75.8 million in dividends to shareholders was the primary use of cash generated by investing activities during the period.

MEDITECH has no long-term debt. Shareholder equity at September 30, 2015 was $529.7 million. Management anticipates additions to fixed assets will continue, including new facilities and computer systems for product development, sales and marketing, implementation, service and administrative staff. Management believes existing cash, cash equivalents and marketable securities together with funds generated from operations will be sufficient to meet operating and capital expense requirements for the foreseeable future.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes from the market risk disclosed in MEDITECH's Annual Report on Form 10-K for the year ended December 31, 2014.

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 Rules 13a-15(e) and 15d-15(e) 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 effective at September 30, 2015 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

None.

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Item 1A - Risk Factors

There have been no material changes from the risk factors disclosed in MEDITECH's Annual Report on Form 10-K for the year ended December 31, 2014.

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 2015. However, during the 3rd quarter the Medical Information Technology, Inc. Profit Sharing Trust purchased MEDITECH's common stock in individual private transactions: 9,160 shares in July at $45 per share, 21,097 shares in August at $45 per share and 5,450 shares in September at $45 per share for a total of $1,606,815.

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Mine Safety Disclosures

Not applicable.

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 current report on Form 8-K filed on July 2, 2010.

Exhibit 31: Rule 13a-14(a) Certifications, Exhibit 32: Section 1350 Certifications and Exhibit 101: Interactive Data Files are appended to this report.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Medical Information Technology, Inc.
(Registrant)

October 30, 2015
(Date)

Howard Messing, Chief Executive Officer and President
(Signature)

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

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