SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2011
(Commission file number)
Medical Information Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
(State of Incorporation)
(IRS Employer Identification Number)
Meditech Circle, Westwood, MA
(Address of Principal Executive Offices)
(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 (§232.405 of this chapter) 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 Exchange Act). Yes [ ] No [X]
There were 36,421,348 shares of Common Stock, $1.00 par value, outstanding at October 28, 2011.
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Part I - Financial Information
Item 1 - Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet
December 31, 2010 and September 30, 2011
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Consolidated Income Statement
Three and Nine Months Ended September 30, 2010 and 2011
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Consolidated Cash Flow Statement
Nine Months Ended September 30, 2010 and 2011
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Notes To Consolidated Financial Statements
1. The unaudited financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2010 included in MEDITECH's Form 10-K filed on January 31, 2011. 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.
2. 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.
The average number of shares outstanding during the periods reflects the issuance of 235,184 shares in February 2011 pursuant to the 2004 Stock Purchase Plan.
3. 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 which consist of common and preferred equities as available-for-sale and records them at fair value with any unrealized 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 other-than-temporary. If the decline in fair value is judged as such, the cost basis of the individual security shall be reduced to fair value and the amount of the write-down shall be reflected in earnings.
MEDITECH follows the provisions of ASC 320-10-35 Subsequent Measurement, and evaluates its preferred and common 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.
At September 30, 2011 MEDITECH's marketable securities had an adjusted cost basis of $229,819,398 and a fair value of $260,986,942. The difference included unrealized gains of $36,454,184 and unrealized losses of $5,284,640 both of which have been accounted for within comprehensive income. The unrealized losses consist of 9 individual issues which have gone into loss status in the 3rd quarter. MEDITECH has evaluated the unrealized losses as of September 30, 2011 and has concluded that the unrealized losses are temporary in nature.
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4. 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.
5. 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 loans to Meditech South Africa to purchase land and buildings used as its corporate headquarters. MEDITECH believes the fair value of this investment and loan balance approximates its September 30, 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 assets acquired and liabilities assumed, including the identified intangibles, such as developed technology and backlog, and unidentified intangibles are based upon management's estimates of fair value as of the date of acquisition. An acquired deferred tax asset was also recognized to reflect the tax benefit expected to be realized from the carryforward of net operating losses. Since the date of acquisition MEDITECH has presented the financial statements on a consolidated basis.
The identified intangibles were valued at $5,977,801, are being amortized over their 7 year useful lives and are included in other assets. A deferred tax liability was recognized to reflect the tax effect of these identified intangibles as such amounts are not deductible for tax purposes. The unidentified intangibles were valued at $1,211,786, are not amortizable and are also included in other assets. In accordance with ASC 805-10, this amount is measured at fair value on an annual basis for impairment testing, but reported at cost in our financial statements. MEDITECH conducted its annual income based fair value measurement test as of December 31, 2010 and has concluded these assets to be recoverable. PtCT merged with and into MEDITECH effective December 31, 2009.
Other assets also included both tangible and intangible net assets associated with the acquisition of LSS Data Systems, Inc (LSS). Refer to Part II Item 5 for more disclosure regarding this acquisition.
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6. 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. Cumulative unrealized write-downs in investments which have been reflected in earnings are also non-deductible 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. This valuation allowance is 100% of investment write-downs based on current recoverability expectations. Tax reserves relate to the uncertainty of research tax credit, 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.
7. 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.
8. Effective January 1, 2008 MEDITECH adopted 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.
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Item 2 - Management's Discussion and Analysis of Operating Results and Financial Condition
Total revenue from both existing and new customers increased by $22.6 million. The increase was composed of $15.5 million in additional product revenue and $7.1 million in additional service revenue.
Operating expense increased by $15.7 million or 20.4% due primarily to additional staff related expenses. The resultant operating income increased by $6.9 million.
Other income decreased by $5.0 million due primarily to the prior period's security gain. Other expense increased slightly. The resultant pretax income increased by $1.8 million or 3.7%.
MEDITECH's effective tax rate increased from 34.3% to 35.7% due primarily to the prior period's lower tax rate of the security gain. Net income increased by $0.5 million due primarily to additional revenue.
Total revenue from both existing and new customers increased by $70.4 million. The increase was composed of $52.2 million in additional product revenue and $18.2 million in additional service revenue.
Operating expense increased by $41.8 million or 18.7% due primarily to additional staff and bookings related expenses. The resultant operating income increased by $28.6 million.
Other income decreased by $5.8 million due primarily to the prior period's security gain. Other expense decreased slightly. The resultant pretax income increased by $22.8 million or 19.1%.
MEDITECH's effective tax rate decreased slightly from 35.8% to 35.7%. Net income increased by $14.8 million due primarily to additional revenue.
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Accrued expenses increased by $4.8 million during the first 9 months primarily as a result of the payment of $37.0 million in bonuses applicable to 2010, offset by the accrual of $40.2 million in bonus expenses applicable to 2011.
Deferred revenue increased by $5.7 million during the first 9 months primarily as a result of additions to product backlog.
At September 30, 2011 MEDITECH's cash, cash equivalents and marketable securities totaled $304.2 million. Marketable securities consisted of preferred and common equities. For the first 9 months of 2011 cash flow from operations was $96.1 million, cash flow used in investing was $87.0 million and cash flow used in financing was $63.6 million. The payment of $73.0 million in dividends to shareholders was the primary use of cash generated by operating activities during the period.
MEDITECH has no long-term debt. Shareholder equity at September 30, 2011 was $457.7 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, 2010.
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, our Chief Executive Officer and Chief Financial Officer have concluded MEDITECH's disclosure controls and procedures are effective at September 30, 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. 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.
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Part II - Other Information
Item 1 - Legal Proceedings
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, 2010.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
MEDITECH did not repurchase any of its shares of common stock during the 3nd quarter of 2011. However, during this quarter the Medical Information Technology, Inc. Profit Sharing Trust purchased MEDITECH's common stock in individual private transactions: 100 shares in July at $41 per share, 200 shares in August at $41 per share and 250 shares in September at $42 per share for a total of $22,800.
Item 3 - Defaults Upon Senior Securities
Item 4 - (Removed and Reserved)
Item 5 - Other Information
Acquisition of LSS Data Systems
LLS Data Systems, Inc. (LSS) is 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, subject to a 10% holdback through December 31, 2011, 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.
MEDITECH's financials are being presented on a consolidated basis in this 10-Q effective March 31, 2011. This acquisition does not represent a material business combination, thus no pro forma financial information is being provided. During the 1st quarter 2011 LSS operations generated $5.4 million in revenue and $0.8 million in net income.
MEDITECH accounts for this acquisition under the purchase method of accounting in accordance with ASC 805-10, Business Combinations, and United States generally accepted accounting principles. Although MEDITECH has not completed its final purchase price allocation, the preliminary values of tangible assets acquired of $11,904,816 and liabilities of $4,629,323 assumed, including the intangibles, are based upon management's estimates of fair value as of the date of acquisition. The identified intangibles, consisting of developed software products, are currently valued at $9,000,000 and are being amortized over their 8 year useful lives. The unidentified intangibles are currently valued at $810,837 but are not amortizable. The final purchase price allocations will be completed by the end of 2011, and any adjustments are not expected to have a material impact on MEDITECH's consolidated financial position or results of operations.
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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.
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.
October 28, 2011
Howard Messing, Chief Executive Officer and President
Barbara A. Manzolillo, Chief Financial Officer and Treasurer
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