Medical Information Technology, Inc.
(Exact name of registrant as specified in its charter)
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. [ ]
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 definition of large accelerated file, accelerated filer and smaller reporting company in Rule 12b-2 of the Securities 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 Securities Exchange Act). Yes [ ] No [X]
No public trading market exists for the registrant's common stock. There were 36,541,348 shares of common stock, $1.00 par value, outstanding at December 31, 2011.
At December 31, 2011, there were 1,971 shareholders of record of MEDITECH's common stock and 36,541,348 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.
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 and the 1st quarter 2011 acquisition of LSS. Selected financial data for the past 5 years ended December 31 are as follows:
Item 7 - Management's Discussion and Analysis of Operating Results and Financial Condition
Comparison of Fiscal Years ended December 31, 2010 and 2011:
Total revenue from both existing and new customers increased $86.1 million or 18.8% from $459.1 million in 2010 to $545.2 million in 2011. It was composed of $61.5 million in additional product revenue and $24.6 million in additional service revenue.
Operating expenses increased $57.9 million or 19.0% from $304.3 million in 2010 to $362.2 million in 2011 due primarily to additional staff and bookings related costs. The resultant operating income increased $28.2 million or 18.2% from $154.8 million in 2010 to $183.0 million in 2011.
Other income decreased $5.8 million due primarily to investment gains in the prior period. Other expense increased slightly. The resultant pretax income increased $22.3 million or 13.2% from $169.6 million in 2010 to $191.9 million in 2011.
MEDITECH's effective tax rate decreased from 35.8% in 2010 to 35.4% in 2011 due primarily to changes in tax related reserves. The resultant net income increased $15.2 million or 13.9% from $108.8 million in 2010 to $124.0 million in 2011.
Page 7 of 32
Comparison of Fiscal Years ended December 31, 2009 and 2010:
Total revenue from both existing and new customers increased $66.1 million or 16.8% from $393.0 million in 2009 to $459.1 million in 2010. It was composed of $50.9 million in additional product revenue and $15.2 million in additional service revenue.
Operating expenses increased $31.2 million or 11.4% from $273.1 million in 2009 to $304.3 million in 2010 due primarily to additional staff and bookings related costs. The resultant operating income increased $34.9 million or 29.1% from $119.9 million in 2009 to $154.8 million in 2010.
Other income increased $7.6 million due primarily to investment gains. Other expense decreased slightly. The resultant pretax income increased $42.7 million or 33.6% from $126.9 million in 2009 to $169.6 million in 2010.
MEDITECH's effective tax rate increased from 35.5% in 2009 to 35.8% in 2010 due primarily to tax related reserves. The resultant net income increased $27.0 million or 33.0% from $81.8 million in 2009 to $108.8 million in 2010.
Financial Condition:
At December 31, 2011 MEDITECH's cash, cash equivalents and marketable securities totaled $337.2 million. Marketable securities consisted of preferred and common equities. During 2011 cash flow from operations was $140.9 million, cash flow used in investing was $92.5 million and cash flow used in financing was $88.0 million. The payment of $97.5 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, 2011 was $485.9 million. During 2011 management expended $10.6 million for updated 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 2 for marketable securities, Note 3 for doubtful account reserve and Note 8 for income taxes.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Market risk associated with equity securities is disclosed in Note 2 to the Consolidated Financial Statements.
Page 8 of 32
Item 8 - Financial Statements and Supplementary Data
Consolidated Financial Statements of Medical Information Technology, Inc.
As of December 31, 2009, 2010 and 2011
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, 2009, 2010 and 2011, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Medical Information Technology, Inc. as of December 31, 2009, 2010 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December, 31, 2011, in conformity with U. S. generally accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
January 31, 2012
| Index to Consolidated Financial Statements | Page |
|
|
Consolidated Balance Sheets as of December 31, 2009, 2010 and 2011 | 10 |
Consolidated Statements of Income for the Years 2009, 2010 and 2011 | 11 |
Consolidated Statements of Shareholder Equity for the Years 2009, 2010 and 2011 | 12 |
Consolidated Statements of Cash Flows for the Years 2009, 2010 and 2011 | 13 |
| Notes to Consolidated Financial Statements | 14-21 |
Page 9 of 32
Consolidated Balance Sheets
as of December 31, 2009, 2010 and 2011
| | Dec 31, 2009 | Dec 31, 2010 | Dec 31, 2011 |
| |
|
|
|
| Cash and equivalents (Note 1) | $39,233,486 | $97,789,985 | $59,847,020 |
| Marketable securities (Note 2) | 188,182,594 | 188,888,044 | 277,354,769 |
| Accounts receivable, net of reserve (Note 3) | 49,821,769 | 55,393,227 | 61,280,336 |
| Deferred taxes (Note 8) | 13,126,466 | 7,176,778 | 10,449,954 |
| |
|
|
|
| Current assets | 290,364,315 | 349,248,034 | 408,932,079 |
| |
|
|
|
| Computer equipment | 10,042,859 | 10,778,178 | 12,455,809 |
| Furniture and fixtures | 42,985,481 | 46,353,094 | 53,816,542 |
| Buildings | 179,396,034 | 179,391,878 | 183,411,627 |
| Land | 33,407,959 | 33,407,959 | 35,329,565 |
| Accumulated depreciation | (102,027,244) | (108,032,365) | (116,553,548) |
| |
|
|
|
| Fixed assets (Note 1) | 163,805,089 | 161,898,744 | 168,459,995 |
| |
|
|
|
| Other assets (Note 4) | 12,510,412 | 11,334,844 | 18,709,864 |
| |
|
|
|
| Total assets | $466,679,816 | $522,481,622 | $596,101,938 |
| |
|
|
|
| | | | |
| Accounts payable | $155,731 | $395,012 | $326,281 |
| Taxes payable | 5,938,515 | 3,458,044 | 5,213,475 |
| Accrued expenses (Note 5) | 34,794,459 | 43,472,113 | 51,027,125 |
| Deferred revenue | 30,971,813 | 36,476,917 | 41,030,877 |
| Tax reserves (Note 8) | 14,418,983 | 11,499,037 | 12,564,037 |
| |
|
|
|
| Total liabilities | 86,279,501 | 95,301,123 | 110,161,795 |
| |
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| Common stock, $1.00 par value, authorized | | | |
| 40,000,000 shares, issued and outstanding | | | |
| 35,822,426 shares in 2009, 36,186,164 shares | | | |
| in 2010 and 36,541,348 shares in 2011 | 35,822,426 | 36,186,164 | 36,541,348 |
| Additional paid-in capital | 67,150,657 | 80,605,225 | 94,817,401 |
| Retained income | 259,442,204 | 281,854,958 | 308,404,621 |
| Unrealized security gains (losses), net of tax | 17,985,028 | 28,534,152 | 46,176,773 |
| |
|
|
|
| Shareholder equity | 380,400,315 | 427,180,499 | 485,940,143 |
| |
|
|
|
| Total liabilities and shareholder equity | $466,679,816 | $522,481,622 | $596,101,938 |
| |
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|
The accompanying notes are an integral part of these consolidated financial statements.
Page 10 of 32
Consolidated Statements of Income
for the Years Ended December 31, 2009, 2010 and 2011
| | Dec 31, 2009 | Dec 31, 2010 | Dec 31, 2011 |
| |
|
|
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| Product revenue | $175,890,430 | $226,807,931 | $288,351,034 |
| Service revenue | 217,134,584 | 232,290,557 | 256,873,350 |
| |
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|
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| Total revenue (Note 1) | 393,025,014 | 459,098,488 | 545,224,384 |
| |
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| Operations, development | 186,839,275 | 204,445,862 | 245,924,776 |
| Selling, G & A (Note 6) | 86,295,797 | 99,886,559 | 116,314,384 |
| |
|
|
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| Operating expenses | 273,135,072 | 304,332,421 | 362,239,160 |
| |
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|
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| Operating income | 119,889,942 | 154,766,067 | 182,985,224 |
| | | | |
| Other income (Note 7) | 14,123,126 | 21,725,896 | 15,923,805 |
| Other expense (Note 7) | 7,116,343 | 6,902,473 | 7,001,738 |
| |
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| Pretax income | 126,896,725 | 169,589,490 | 191,907,291 |
| | | | |
| State income tax | 9,983,601 | 12,341,123 | 12,980,841 |
| Federal income tax | 35,079,793 | 48,423,063 | 54,925,148 |
| |
|
|
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| Income tax (Note 8) | 45,063,394 | 60,764,186 | 67,905,989 |
| |
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| Net income | $81,833,331 | $108,825,304 | $124,001,302 |
| |
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The accompanying notes are an integral part of these consolidated financial statements.
Page 11 of 32
Consolidated Statements of Shareholder Equity
for the Years Ended December 31, 2009, 2010 and 2011
| Common # of shares | Stock Paid-in capital | Retained income | Shareholder equity |
| |
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| Balance, December 31, 2008 | 35,687,426 | $97,978,083 | $267,569,536 | $353,368,173 |
| Issuance of common stock | | | | |
| sold to a Director | 15,000 | 555,000 | | 555,000 |
| Issuance of common stock | | | | |
| to the Profit Sharing Plan | 120,000 | 4,440,000 | | 4,440,000 |
| Net income | | | 81,833,331 | 81,833,331 |
| Unrealized security gains | | | | 30,164,474 |
| Dividends paid | | | (89,960,663) | (89,960,663) |
| |
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| Balance, December 31, 2009 | 35,822,426 | $102,973,083 | $259,442,204 | $380,400,315 |
| Issuance of common stock pursuant | | | | |
| to the 2004 Stock Purchase Plan | 243,738 | 9,018,306 | | 9,018,306 |
| Issuance of common stock | | | | |
| to the Profit Sharing Plan | 120,000 | 4,800,000 | | 4,800,000 |
| Net income | | | 108,825,304 | 108,825,304 |
| Unrealized security gains | | | | 10,549,124 |
| Dividends paid | | | (86,412,550) | (86,412,550) |
| |
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| Balance, December 31, 2010 | 36,186,164 | $116,791,389 | $281,854,958 | $427,180,499 |
| Issuance of common stock pursuant | | | | |
| to the 2004 Stock Purchase Plan | 235,184 | 9,407,360 | | 9,407,360 |
| Issuance of common stock | | | | |
| to the Profit Sharing Plan | 120,000 | 5,160,000 | | 5,160,000 |
| Net income | | | 124,001,302 | 124,001,302 |
| Unrealized security gains | | | | 17,642,621 |
| Dividends paid | | | (97,451,639) | (97,451,639) |
| |
|
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|
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| Balance, December 31, 2011 | 36,541,348 | $131,358,749 | $308,404,621 | $485,940,143 |
| |
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The accompanying notes are an integral part of these consolidated financial statements.
Page 12 of 32
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2009, 2010 and 2011
| | Dec 31, 2009 | Dec 31, 2010 | Dec 31, 2011 |
| |
|
|
|
| Net income | $81,833,331 | $108,825,304 | $124,001,302 |
| Depreciation expense | 9,916,865 | 9,880,412 | 10,740,217 |
| Stock contributions to qualified profit sharing plan | 4,440,000 | 4,800,000 | 5,160,000 |
| Write-downs of marketable securities | 1,725,000 | 0 | 0 |
| Reversal of prior write-downs | (72,680) | (4,642,893) | 0 |
| (Gain) loss on sales of marketable securities | (3,277) | 865 | 0 |
| Deferred taxes on unrealized securities gain | (1,952,961) | 0 | 0 |
| Change in accounts receivable, net of reserve | (2,251,819) | (5,571,458) | (2,591,106) |
| Change in accounts payable | (469,595) | 239,281 | (128,700) |
| Change in taxes payable | 2,773,202 | (2,480,471) | 1,497,240 |
| Change in accrued expenses | 827,348 | 8,677,654 | 6,609,962 |
| Change in deferred revenues | 6,732,273 | 5,505,104 | 1,187,847 |
| Change in deferred taxes and tax reserves | 914,798 | 3,029,742 | (5,554,176) |
| |
|
|
|
| Net cash from operating activities | 104,412,485 | 128,263,540 | 140,922,586 |
| |
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|
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| Purchases of marketable securities | (44,045,513) | (20,797,646) | (70,824,104) |
| Sales of marketable securities | 58,733,899 | 35,283,348 | |
| Purchases of fixed assets | (3,419,246) | (8,016,749) | (10,644,343) |
| Change in other assets | (7,232) | 1,218,250 | 3,448,317 |
| Acquisition of LSS, net of cash acquired | | | (12,801,142) |
| |
|
|
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| Net cash from (used in) investing activities | 11,261,908 | 7,687,203 | (90,821,272) |
| |
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|
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| Sales of common stock | 555,000 | 9,018,306 | 9,407,360 |
| Dividends paid | (89,960,663) | (86,412,550) | (97,451,639) |
| |
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|
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| Net cash used in financing activities | (89,405,663) | (77,394,244) | (88,044,279) |
| |
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|
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| Net change in cash and equivalents | 26,268,730 | 58,556,499 | (37,942,965) |
| Cash and equivalents at beginning of year | 12,964,756 | 39,233,486 | 97,789,985 |
| |
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| Cash and equivalents at end of year | $39,233,486 | $97,789,985 | $59,847,020 |
| |
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| Supplemental Disclosure: | | | |
| Cash paid for income taxes | $41,842,931 | $60,467,824 | $69,295,676 |
The accompanying notes are an integral part of these consolidated financial statements.
Page 13 of 32
Notes to Consolidated Financial Statements December 31, 2011
(1) OPERATIONS AND ACCOUNTING POLICIES
MEDITECH is engaged in the development, manufacture, licensing and support of computer software products for the hospital market. 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, LSS Data Systems, Inc., in accordance with Accounting Standards Codification (ASC) 810, Consolidation of Financial Statements.
(a) Revenue Recognition
MEDITECH follows the provisions of ASC 985-605-25, Software Revenue Recognition, and ASC 605-35-25, Construction-Type and Production-Type Contracts. MEDITECH enters into perpetual software license contracts which provide for a customer deposit upon contract execution, milestone billings during the implementation phase and fixed monthly support fees thereafter.
MEDITECH classifies software fees 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. MEDITECH classifies post-implementation support fees as service revenue in the statement of income and recognizes these fees as revenue when the related services are rendered.
MEDITECH follows the provisions of ASC 605-45-15, Reimbursements Received for Out-of-Pocket Expenses. Such expenses are characterized as product revenue with offsetting operating expenses included in the consolidated income statement.
(b) Software Development Costs
MEDITECH follows the provisions of ASC 985-20, Accounting for the Costs of Computer Software to Be Sold, Leased or Marketed. ASC 985-20 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.
(d) 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 $2.52, $2.40 and $2.68 per share.
Page 14 of 32
(e) 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 |
| Buildings | SL | 31.5-40 years |
Maintenance costs are expensed as incurred. Improvements are capitalized and depreciated over the asset's useful life. During late 2010 MEDITECH signed an agreement to purchase land for $9.5 million subject to approval to construct a 185,000 sq ft building thereon. During 2011 MEDITECH spent $2.3 million in architecture and engineering fees, but by the end of 2011 MEDITECH had been unable to secure such approval. Therefore, MEDITECH cancelled the agreement and the $2.3 million, previously treated as construction-in-progress, has been expensed and charged to G&A.
(f) 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 (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 a reserve for doubtful accounts but historically has not experienced any significant credit losses related to an individual customer or groups of customers. As of December 31, 2009, 2010 and 2011 no individual customer accounted for greater than 10% of the outstanding accounts receivable.
(g) Net Income per Common 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 computed by dividing net income by the weighted average number of common shares outstanding during the past 3 years ended December 31 is as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| Net income | $81,833,331 | $108,825,304 | $124,001,302 |
| Average number of shares | 35,709,926 | 36,055,853 | 36,411,749 |
| Earnings per share | $2.29 | $3.02 | $3.41 |
The average number of shares outstanding during the periods reflects the issuance of common stock sold to staff members pursuant to the 2004 Stock Purchase Plan, the issuance of common stock to the Profit Sharing Plan and the issuance of shares sold to a Director.
Page 15 of 32
(h) Comprehensive Income
MEDITECH follows the provisions of ASC 220-10, Comprehensive Income, which establishes standards for reporting and display of comprehensive income and its components in financial statements. Comprehensive income is the total of net income and all other non-owner changes in equity including items such as net unrealized gains or losses 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:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| Net income | $81,833,331 | $108,825,304 | $124,001,302 |
| Net unrealized gains | 30,164,474 | 10,549,124 | 17,642,621 |
| |
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| Comprehensive income | $111,997,805 | $119,374,428 | $141,643,923 |
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(i) Segment, Geographic and Enterprise-Wide 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. MEDITECH's operating revenue percentage based on location of customer for the past 3 years ended December 31 is as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
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| United States | 86% | 89% | 90% |
| Canada | 11% | 9% | 8% |
| Other | 3% | 2% | 2% |
One customer accounted for approximately 6%, 8% and 7% of total revenue for the past 3 years ended December 31.
(j) Recent Accounting Pronouncements
Effective December 15, 2011 MEDITECH adopted the provisions of ASC 350-20-35 Intangibles and Goodwill Impairment Evaluation - Qualitative Testing. An entity may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An evaluation shall assess relevant events and circumstances and should include, but are not limited to: a significant adverse change in legal factors or in industry/business climate, unanticipated competition, an adverse action or assessment by a regulator, or overall financial performance. If, after assessing the totality of such events and circumstances, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment test are unnecessary.
Page 16 of 32
(2) MARKETABLE 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 gains or losses, net of tax, 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 represent assets measured at fair value on a recurring basis, and are considered Level 1 assets as defined by ASC 820-10.
At December 31, 2011 MEDITECH's marketable securities had an adjusted cost basis of $231,177,996 and a fair value of $277,354,769. The difference included unrealized gains of $47,060,295 and unrealized losses of $883,522 which have been accounted for within comprehensive income. Those in loss status are marketable securities issued by large financial institutions and each loss is less than 3% of original cost. MEDITECH has evaluated the unrealized losses as of December 31, 2011 and has concluded that the unrealized losses are temporary in nature.
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:
| | 2009 | 2010 | 2011 |
| |
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| Net cost of equities | $170,197,566 | $160,353,893 | $231,177,996 |
| Unrealized gains | 19,052,090 | 28,744,266 | 47,060,295 |
| Unrealized losses | (1,067,062) | (210,115) | (883,522) |
| |
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| Fair market value | $188,182,594 | $188,888,044 | $277,354,769 |
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Page 17 of 32
(3) RESERVE FOR DOUBTFUL ACCOUNTS
The components of the reserve for doubtful accounts for the past 3 years ended December 31 are as follows:
| | 2009 | 2010 | 2011 |
| |
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|
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| Reserve at beginning of year | $1,210,000 | $1,070,000 | $1,250,000 |
| Amounts charged to expense | | 180,000 | 321,585 |
| Amounts written off | (140,000) | | (71,585) |
| |
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| Reserve at end of year | $1,070,000 | $1,250,000 | $1,500,000 |
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|
(4) OTHER ASSETS
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 hospital 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 December 31, 2011 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. The values of acquired assets, assumed liabilities and intangibles are based upon management's estimates of fair value as of the date of acquisition. A deferred tax asset was recognized to reflect the tax benefit expected to be realized from the carryforward of net operating losses. The identified intangibles, consisting of developed software products and backlog, were valued at $5,977,801 and are being amortized over their 7 year useful lives. A deferred tax liability was recognized to reflect the tax effect of these identified intangibles as such amounts are not deductible for tax purposes. The unidentified intangibles were valued at $1,211,786 and are not amortizable. MEDITECH's financials were presented on a consolidated basis upon acquisition. 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. Prior to the 1st quarter 2011 MEDITECH paid $2,587,500 for approximately 22.2% of the outstanding capital stock of LSS. On February 23, 2011 MEDITECH acquired the shares of LSS's founding shareholders for $13,736,250 in cash, thereby increasing its ownership to 96.0%. Immediately thereafter LSS was merged with and into a wholly-owned subsidiary of MEDITECH and MEDITECH paid an additional $762,580 to the remaining LSS shareholders. This acquisition does not represent a material business combination, thus no pro forma financial information is being provided.
MEDITECH accounts for this acquisition under the purchase method of accounting in accordance with ASC 805-10, Business Combinations. The values of $11,904,816 in acquired assets, $4,629,323 in assumed liabilities and $9,810,837 for intangibles are based upon management's estimates of fair value as of the date of acquisition. The identified intangibles, consisting of
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developed software products and customer relations, are valued at $9,000,000 and are being amortized over their 8 year useful lives. A deferred tax liability was recognized to reflect the tax effect of these identified intangibles as such amounts are not deductible for tax purposes. The unidentified intangibles are valued at $810,837 and are not amortizable. MEDITECH's financials are presented on a consolidated basis in this 10-K effective March 31, 2011. During the last 3 quarters of 2011 LSS operations generated $20.5 million in total revenue, $7.8 million in operating profit and $4.7 million in net income.
In accordance with ASC 805-10 and ASC 350-20-35, on an annual basis MEDITECH qualitatively assesses it's investments for impairment testing and on December 31, 2011 concluded no impairment testing was needed. The components of other assets for the past 3 years ended December 31 are as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| Investments | $4,027,561 | $4,027,561 | $1,440,061 |
| Mortgage Notes | 3,001,200 | 2,679,600 | 929,000 |
| Intangibles | 5,481,651 | 4,627,683 | 12,740,8038 |
| Other | | | 3,600,000 |
| |
|
|
|
| Other assets | $12,510,412 | $11,334,844 | $18,709,864 |
| |
|
|
|
(5) ACCRUED EXPENSES
The components of accrued expenses for the past 3 years ended December 31 are as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| Accrued bonuses | $28,200,000 | $37,000,000 | $43,750,000 |
| Accrued vacation | 3,775,000 | 4,000,000 | 4,690,000 |
| Other | 2,819,459 | 2,472,113 | 2,587,125 |
| |
|
|
|
| Accrued expenses | $34,794,459 | $43,472,113 | $51,027,125 |
| |
|
|
|
(6) QUALIFIED PROFIT SHARING PLAN
MEDITECH has no obligation for post-employment or post-retirement benefits. MEDITECH maintains a qualified profit sharing plan which 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 and shares of MEDITECH stock. The components of year-end contributions for the past 3 years ended December 31 are as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| Cash | $2,160,000 | $4,200,000 | $5,840,000 |
| 120,000 shares at $37 per share | 4,440,000 | | |
| 120,000 shares at $40 per share | | 4,800,000 | |
| 120,000 shares at $43 per share | | | 5,160,000 |
| |
|
|
|
| | $6,600,000 | $9,000,000 | $11,000,000 |
| |
|
|
|
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(7) OTHER INCOME AND EXPENSE
Other income consists primarily of rents, dividends, interest and realized marketable security activity. The components of other income for the past 3 years ended December 31 are as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| Rents | $7,032,380 | $6,472,031 | $6,487,580 |
| Dividends | 8,952,947 | 11,136,607 | 10,943,611 |
| Interest | 647,363 | 329,198 | 190,332 |
| Security (losses) gains | (1,655,596) | 4,642,028 | |
| Other | (853,968) | (853,968) | (1,697,718) |
| |
|
|
|
| Other income | $14,123,126 | $21,725,896 | $15,923,805 |
| |
|
|
|
Other expense consists primarily of rental costs and charitable contributions. The components of other expense for the past 3 years ended December 31 are as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| Rental costs | $6,419,382 | $6,142,473 | $5,679,385 |
| Charitable contributions | 715,000 | 760,000 | 820,000 |
| Other | (18,039) | | 502,353 |
| |
|
|
|
| Other expense | $7,116,343 | $6,902,473 | $7,001,738 |
| |
|
|
|
(8) INCOME TAXES, DEFERRED TAXES, AND TAX RESERVES
MEDITECH follows the provisions of ASC 740-10, Accounting for Income Taxes. The current and deferred components of the State and Federal income taxes for the past 3 years ended December 31 are as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| State current | $10,092,590 | $11,235,734 | $14,734,339 |
| State deferred | (108,989) | 1,105,389 | (1,753,498) |
| |
|
|
|
| State income tax | $9,983,601 | $12,341,123 | $12,980,841 |
| |
|
|
|
| Federal current | $36,024,942 | $43,996,148 | $59,803,826 |
| Federal deferred | (945,149) | 4,426,915 | (4,878,678) |
| |
|
|
|
| Federal income tax | $35,079,793 | $48,423,063 | $54,925,148 |
| |
|
|
|
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The effective income tax rate for the past 3 years ended December 31 is as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| 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 | 5.1% | 4.7% | 4.4% |
| Dividend income exclusion | (1.7%) | (1.6%) | (1.5%) |
| Other | (2.9%) | (2.3%) | (2.5%) |
| |
|
|
|
| Effective tax rate | 35.5% | 35.8% | 35.4% |
| |
|
|
|
Deferred taxes relate to the earlier recognition of certain revenue and the later recognition of certain expenses for tax purposes. Cumulative unrealized investment write-downs which have been reflected in earnings are also a non-deductible expense for tax purposes. Because such capital losses can only be offset by future capital gains, a valuation allowance was established to reduce the deferred tax to the net amount expected to be realized. In 2010 this valuation allowance was increased to 100% of investment write-downs based on recoverability expectations. The components of deferred taxes for the past 3 years ended December 31 are as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| Prepaid tax on deposits over 1 year | $3,555,279 | $4,676,286 | $5,052,271 |
| Prepaid tax on accrued expenses | 1,840,000 | 2,100,000 | 2,760,000 |
| Deferred tax on unrealized losses | 19,660,000 | 24,997,240 | 24,997,240 |
| Valuation allowance | (13,533,838) | (24,997,240) | (24,997,240) |
| Other | 1,605,025 | 400,491 | 2,637,683 |
| |
|
|
|
| Deferred taxes | $13,126,466 | $7,176,778 | $10,449,954 |
| |
|
|
|
Tax reserves relate to the uncertainty of domestic production activities deduction and state nexus. Key judgments are reviewed annually and adjusted to reflect current assessments. The years 2008 through 2010 are subject to examination by the IRS, and various years are subject to examination by state tax authorities. The components of tax reserves for the past 3 years ended December 31 are as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| Potential tax assessment | $4,364,877 | $7,405,017 | $8,427,512 |
| Interest and penalties | 10,054,106 | 4,094,020 | 4,136,525 |
| |
|
|
|
| Tax reserves | $14,418,983 | $11,499,037 | $12,564,037 |
| |
|
|
|
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(9) SUPPLEMENTARY DATA
Unaudited operating results by quarter for the three years ended December 31, 2011 are as follows:
| | 1st Q | 2nd Q | 3rd Q | 4th Q | 2009 |
| |
|
|
|
|
|
| Total revenue | $93,662,473 | $96,509,574 | $96,392,669 | $106,460,300 | $393,025,014 |
| Operating income | 27,358,635 | 29,644,781 | 29,539,784 | 33,346,744 | 119,889,942 |
| Net income | 17,176,860 | 20,412,934 | 20,486,154 | 23,757,383 | 81,833,331 |
| Net income per share | $0.48 | $0.57 | $0.57 | $0.67 | $2.29 |
| | | | | | |
| | 1st Q | 2nd Q | 3rd Q | 4th Q | 2010 |
| |
|
|
|
|
|
| Total revenue | $103,555,582 | $108,682,192 | $118,471,248 | $128,389,466 | $459,098,488 |
| Operating income | 31,375,549 | 34,478,714 | 41,323,947 | 47,587,857 | 154,766,067 |
| Net income | 21,526,666 | 23,217,898 | 31,957,358 | 32,123,382 | 108,825,304 |
| Net income per share | $0.60 | $0.64 | $0.89 | $0.89 | $3.02 |
| | | | | | |
| | 1st Q | 2nd Q | 3rd Q | 4th Q | 2011 |
| |
|
|
|
|
|
| Total revenue | $123,805,092 | $136,258,047 | $141,054,763 | $144,106,482 | $545,224,384 |
| Operating income | 41,084,958 | 46,476,482 | 48,188,968 | 47,234,816 | 182,985,224 |
| Net income | 27,904,364 | 31,199,385 | 32,407,718 | 32,489,835 | 124,001,302 |
| Net income per share | $0.77 | $0.86 | $0.89 | $0.89 | $3.41 |
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 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 December 31, 2011 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, 2011 we have made no changes in internal controls, and our internal control over financial reporting is effective at a reasonable assurance level based on said criteria.
Item 9B - Other Information
During its regular January 2012 meeting the Board of Directors approved the issuance of up to 250,000 shares of common stock to be sold to staff members at $43.00 per share pursuant to the MEDITECH 2004 Stock Purchase Plan.
Page 22 of 32
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, 2011, are shown below. There are no family relationships among the following persons.
| Director or Officer | Age | Position with MEDITECH |
|
|
|
| A. Neil Pappalardo | 69 | Chairman and Director |
| Lawrence A. Polimeno | 70 | Vice Chairman and Director |
| Howard Messing | 59 | President, Chief Executive Officer and Director |
| Roland L. Driscoll | 82 | Director |
| Edward B. Roberts | 76 | Director |
| L. P. Dan Valente | 81 | Director |
| Barbara A. Manzolillo | 59 | Treasurer, Chief Financial Officer and Clerk |
| Stuart N. Lefthes | 58 | Vice President of Sales |
| Christopher Anschuetz | 59 | Senior Vice President of Technology |
| Robert G. Gale | 65 | Senior Vice President of Product Development |
| Joanne Wood | 58 | Senior Vice President of Client Services |
| Steven B. Koretz | 59 | Vice President of Client Services |
| Hoda Sayed-Friel | 53 | Vice President of Marketing |
| Michelle O'Connor | 45 | Vice President of Product Development |
| Leah Farina | 44 | Vice President of Client Services |
| Helen Waters | 47 | Vice President of Client Services |
| Scott Radner | 46 | Vice President of Technology |
The address of all Officers and Directors is in care of Medical Information Technology, Inc., MEDITECH Circle, Westwood, MA 02090. The following is a description of the business experience during the past five years of each Director and Officer.
A. Neil Pappalardo, the founder and Chairman of MEDITECH, was its Chief Executive Officer until 2010, 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 of MEDITECH since 2002, was its President and Chief Operating Officer prior to that, has been a Director since 1985, and has been with MEDITECH since 1969.
Howard Messing has been the President and Chief Executive Officer of MEDITECH since 2010, was its President and Chief Operating Officer prior to that, has been a Director since 2011, and has been with MEDITECH since 1974.
Roland L. Driscoll is the retired Chief Financial Officer of MEDITECH, has been a Director since 1985 and had been with MEDITECH since 1972 prior to his retirement in 1990.
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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.
L. P. Dan Valente is Executive Chairman of Palomar Medical Technologies, Inc., retired Senior Vice President of EG&G, Inc. and has been a Director since 1972. He is also a Director of MKS Instruments.
Barbara A. Manzolillo has been the Treasurer, Chief Financial Officer and Clerk since 1996, was 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 Senior Vice President of Technology since 2011, was Vice President of Technology 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 Vice President of Product Development prior to that, and has been with MEDITECH since 1976.
Joanne Wood has been the Senior Vice President of Client Services since 2010, was Vice President of Client Service prior to that, and has been with MEDITECH since 1983.
Steven B. Koretz has been the Vice President of Client Services 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.
Leah Farina has been the Vice President of Client Services since 2010, was a Senior Manager prior to that, and has been with MEDITECH since 1989.
Helen Waters has been the Vice President of Client Services since 2010, was a Senior Manager prior to that, and has been with MEDITECH since 1990.
Scott Radner has been the Vice President of Technology since 2011, was a Senior Manager prior to that, and has been with MEDITECH since 1990.
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 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 2011 the Board held 4 regularly scheduled quarterly meetings and 5 members attended all 4 meetings and 1 member attended only 3 meetings. Messrs. Driscoll, Roberts and Valente are "independent" as defined by the rules of the NYSE and NASDAQ. The Board of Directors has an Audit Committee and a Charitable Contribution Committee. During 2011 each committee member attended all committee meetings. The following is a description of the committees.
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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 5 times in 2011 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 Board of Directors no longer has an Executive Compensation Committee. Instead, the full Board annually establishes the criteria for and the total amount of the Officer Bonus and thereafter sets 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 2011 the committee contributed $820,000 to 43 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 considers a broad range of characteristics related to qualifications, background and diversity of nominees based on MEDITECH's current business needs. The Board has not adopted written guidelines regarding nominees for Director.
The Board of Directors is actively involved in oversight of risks which could affect MEDITECH. The Board receives regular quarterly reports from Officers which cover topics such as financial, technological, regulatory and reputational risk. Once a year the full Board meets with all the Officers to review their performance and responsibilities.
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 are designed to 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.
Page 25 of 32
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, Chief Financial Officer and the three most highly compensated other Officers for the past 3 years ended December 31 is summarized in the following table. The deferred columns represent, respectively, 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 | 2011 | $300,000 | $626,919 | $0 | $0 | $926,919 |
| Chairman and | 2010 | 360,000 | 725,406 | 0 | 0 | 1,085,406 |
| Director | 2009 | 360,000 | 21,782 | 0 | 0 | 381,782 |
|
|
|
|
|
|
|
| Lawrence A. Polimeno | 2011 | $180,000 | $426,919 | $126,322 | $5,866 | $739,107 |
| Vice Chairman and | 2010 | 180,000 | 525,406 | 129,077 | 5,328 | 839,811 |
| Director | 2009 | 180,000 | 421,782 | 49,933 | 4,133 | 655,848 |
|
|
|
|
|
|
|
| Howard Messing | 2011 | $300,000 | $826,919 | $126,322 | $5,866 | $1,259,107 |
| President, CEO and | 2010 | 264,000 | 675,406 | 129,077 | 5,328 | 1,073,811 |
| Director | 2009 | 264,000 | 421,782 | 49,933 | 4,133 | 739,848 |
|
|
|
|
|
|
|
| Barbara A. Manzolillo | 2011 | $252,000 | $426,919 | $126,322 | $5,866 | $811,107 |
| Treasurer, CFO and | 2010 | 228,000 | 375,406 | 129,077 | 5,328 | 737,811 |
| Clerk | 2009 | 228,000 | 321,782 | 49,933 | 4,133 | 603,848 |
|
|
|
|
|
|
|
| Stuart N. Lefthes | 2011 | $252,000 | $426,919 | $126,322 | $5,866 | $811,107 |
| Vice President | 2010 | 228,000 | 375,406 | 129,077 | 5,328 | 737,811 |
| of Sales | 2009 | 216,000 | 321,782 | 49,933 | 4,133 | 591,848 |
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. Because of MEDITECH's reduced revenue and operating profit for 2009, Mr. Pappalardo requested the Board issue him only his share of the Staff Bonus and nothing from the Officer Bonus.
Page 26 of 32
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.
Compensation of Directors: During 2011 the members of the Board of Directors who were not Officers of MEDITECH received 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.
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The following table provides information as of December 31, 2011 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 Officer named in the Executive 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* | 14,156,640 | 38.74% |
| MEDITECH Profit Sharing Trust* | 4,723,627 | 12.93% |
| Morton E. Ruderman Estate | 4,532,704 | 12.40% |
| Curtis W. Marble | 3,500,000 | 9.58% |
| Grossman Group | 2,061,144 | 5.64% |
| Lawrence A. Polimeno | 985,000 | 2.70% |
| Edward B. Roberts | 774,168 | 2.12% |
| Roland L. Driscoll | 528,000 | 1.44% |
| Howard Messing | 388,000 | 1.06% |
| Barbara A. Manzolillo | 185,000 | 0.51% |
| Stuart N. Lefthes | 108,000 | 0.30% |
| L. P. Dan Valente | 100,000 | 0.27% |
| 17 Directors and Officers as a Group* | 17,663,808 | 48.34% |
*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 has the power to vote its shares in addition to his own 9,433,013 shares. Likewise the number of shares indicated for the 17 Directors and Officers as a Group includes the shares owned by the MEDITECH Profit Sharing Trust.
Page 27 of 32
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During 2011, the MEDITECH 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 Section 16(a) filing requirements applicable to its executive officers, Directors and greater-than-10% shareholders were satisfied in 2011.
Item 13 - Certain Relationships and Related Transactions, and Director Independence
A. Neil Pappalardo, Chairman and Director, purchased for cash from MEDITECH 25,000 shares of common stock at $37 per share in February 2010 and 25,000 shares of common stock at $40 per share in February 2011. No shares were purchased from MEDITECH during 2009.
Lawrence A. Polimeno, Vice Chairman and Director, purchased for cash from MEDITECH 8,000 shares of common stock at $37 per share in February 2010 and 5,000 shares of common stock at $40 per share in February 2011. No shares were purchased from MEDITECH during 2009.
Howard Messing, President and Chief Executive Officer, purchased for cash from MEDITECH 15,000 shares of common stock at $37 per share in February 2010 and 15,000 shares of common stock at $40 per share in February 2011. No shares were purchased from MEDITECH during 2009.
Barbara A. Manzolillo, Treasurer, Chief Financial Officer and Clerk, purchased for cash from MEDITECH 5,000 shares of common stock at $37 per share in February 2010 and 5,000 shares of common stock at $40 per share in February 2011. No shares were purchased from MEDITECH during 2009.
Stuart N. Lefthes, Vice President of Sales, purchased for cash from MEDITECH 5,000 shares of common stock at $37 per share in February 2010 and 5,000 shares of common stock at $40 per share in February 2011. No shares were purchased from MEDITECH during 2009.
L. P. Dan Valente, Director, purchased for cash from MEDITECH 15,000 shares of common stock at $37 per share in February 2009. No shares were purchased from MEDITECH during 2010 and 2011.
Item 14 - Principal Accountant Fees and Services
During 2011, audit and non-audit services included auditing MEDITECH's financial statements, reviewing unaudited quarterly financial information and discussing various accounting, tax, and regulatory matters. Fees paid for such services for the three years ended December 31 are as follows:
| | 2009 | 2010 | 2011 |
| |
|
|
|
| Annual audit and quarterly reviews | $365,000 | $284,000 | $304,800 |
| Audit related to Profit Sharing Trust | 14,000 | 14,000 | 14,500 |
| Tax or all other matters | 50,000 | | |
| |
|
|
|
| | $429,000 | $298,000 | $319,300 |
| |
|
|
|
It is the policy of the Audit Committee to approve all audit and non-audit services to be provided to MEDITECH by its Independent Registered Public Accounting Firm and the above amounts were so approved.
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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, Exhibit 32: Section 1350 Certifications and Exhibit 101: Interactive Data Files are appended to this report.
There were no reports filed on Form 8-K during the quarter ended December 31, 2011.
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: Howard Messing, Chief Executive Officer and President
(Signature)
By: Barbara A. Manzolillo, Chief Financial Officer and Treasurer
(Signature)
January 31, 2012
(Date)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on January 31, 2012.
A. Neil Pappalardo, Chairman and Director
(Signature)
Lawrence A. Polimeno, Vice Chairman and Director
(Signature)
Howard Messing, President, CEO and Director
(Signature)
Roland L. Driscoll, Director
(Signature)
Edward B. Roberts, Director
(Signature)
L. P. Dan Valente, Director
(Signature)
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Exhibit 21: Subsidiaries of the Company
Subsidiary of Medical Information Technology, Inc.
LSS Data Systems, Inc. (a Minnesota corporation)
Exhibit 23: Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement on Form S-8, File No. 333-122399 pertaining to the MEDITECH 2004 Stock Purchase Plan of our report dated January 31, 2012, with respect to the consolidated financial statements of Medical Information Technology, Inc. included in its Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Boston, Massachusetts
January 31, 2012
Exhibit 31: Rule 13a-14(a) Certifications
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Howard Messing, Chief Executive Officer and President, certify that:
1. I have reviewed this annual report on Form 10-K of Medical Information Technology, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
January 31, 2012
(Date)
Howard Messing, Chief Executive Officer and President
(Signature)
I, Barbara A. Manzolillo, Chief Financial Officer and Treasurer, certify that:
1. I have reviewed this annual report on Form 10-K of Medical Information Technology, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
January 31, 2012
(Date)
Barbara A. Manzolillo, Chief Financial Officer and Treasurer
(Signature)
Exhibit 32: Section 1350 Certifications
I, Howard Messing, Chief Executive Officer and President, certify this annual report on Form 10-K of Medical Information Technology, Inc. (MEDITECH) for the period ended December 31, 2011, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of MEDITECH.
January 31, 2012
(Date)
Howard Messing, Chief Executive Officer and President
(Signature)
I, Barbara A. Manzolillo, Chief Financial Officer and Treasurer, certify this annual report on Form 10-K of Medical Information Technology, Inc. (MEDITECH) for the period ended December 31, 2011, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of MEDITECH.
January 31, 2012
(Date)
Barbara A. Manzolillo, Chief Financial Officer and Treasurer
(Signature)
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