Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 MARCH 31, 2014
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2014
0-28092
(Commission file number)
(Commission file number)
Medical Information Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts
(State of Incorporation)
(State of Incorporation)
04-2455639
(IRS Employer Identification Number)
(IRS Employer Identification Number)
Meditech Circle, Westwood, MA
(Address of Principal Executive Offices)
(Address of Principal Executive Offices)
02090
(Zip Code)
(Zip Code)
781-821-3000
(Registrant's Telephone Number)
(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 37,140,854 shares of Common Stock, $1.00 par value, outstanding at March 31, 2014.
Page 1 of 11
| Index to Form 10-Q | Page |
| Part I - Financial Information | |
| Item 1 - Financial Statements (Unaudited) | |
| Balance Sheet - December 31, 2013 and March 31, 2014 | 3 |
| Income Statement - Three Months Ended on | |
| March 31, 2013 and 2014 | 4 |
| Cash Flow Statement - Three Months Ended on | |
| March 31, 2013 and 2014 | 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 | 10 |
| 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, 2013 and March 31, 2014
December 31, 2013 and March 31, 2014
| Dec 31, 2013 | Mar 31, 2014 | |
| Cash and equivalents | $42,481,997 | $34,680,473 |
| Marketable securities | 374,023,591 | 340,125,220 |
| Trade receivables, net of reserve | 50,638,740 | 46,922,639 |
| Other receivables and prepaid | 10,681,915 | 25,483,153 |
| Current assets | 477,826,243 | 447,211,485 |
| Computer equipment | 13,416,004 | 13,692,114 |
| Furniture and fixtures | 67,845,622 | 67,932,881 |
| Buildings | 225,948,241 | 230,628,919 |
| Land | 42,730,565 | 42,233,123 |
| Accumulated depreciation | (133,505,381) | (137,211,596) |
| Fixed assets | 216,435,051 | 217,275,441 |
| Other assets | 15,317,332 | 14,684,575 |
| Deferred Taxes | 6,897,379 | 6,834,438 |
| Total assets | $716,476,005 | $686,005,939 |
| Accounts payable | $1,534,485 | $851,098 |
| Taxes payable | 2,054,703 | 3,472,134 |
| Accrued expenses | 53,976,811 | 19,862,715 |
| Deferred revenue | 35,503,326 | 33,142,764 |
| Deferred taxes | 18,649,594 | 24,621,418 |
| Current liabilities | 111,718,919 | 81,950,129 |
| Tax reserves | 18,512,277 | 19,198,899 |
| Total liabilities | 130,231,196 | 101,149,028 |
| Common stock, $1.00 par value, authorized | ||
| 40,000,000 shares, issued and outstanding | ||
| 37,140,854 shares in 2013 and 2014 | 37,140,854 | 37,140,854 |
| Additional paid-in capital | 120,707,959 | 120,707,959 |
| Retained income | 355,301,450 | 389,290,518 |
| Net unrealized security gains | 73,094,546 | 37,717,580 |
| Shareholder equity | 586,244,809 | 584,856,911 |
| Total liabilities and shareholder equity | $716,476,005 | $686,005,939 |
Page 3 of 11
Income Statement
Three Months Ended on March 31, 2013 and 2014
Three Months Ended on March 31, 2013 and 2014
| 3 months | ended on | |
| Mar 31, 2013 | Mar 31, 2014 | |
| Product revenue | $78,059,537 | $55,665,102 |
| Service revenue | 73,123,520 | 75,036,827 |
| Total revenue | 151,183,057 | 130,701,929 |
| Operations, development | 73,609,607 | 73,656,731 |
| Selling, G & A | 31,963,147 | 27,931,404 |
| Operating expense | 105,572,754 | 101,588,135 |
| Operating income | 45,610,303 | 29,113,794 |
| Other income | 4,215,281 | 46,673,431 |
| Other expense | 1,439,486 | 1,767,517 |
| Pretax income | 48,386,098 | 74,019,708 |
| State income tax | 3,549,000 | 2,650,000 |
| Federal income tax | 9,358,000 | 9,525,000 |
| Income tax | 12,907,000 | 12,175,000 |
| Net income | $35,479,098 | $61,844,708 |
| Change in net unrealized security gains | 19,735,529 | (35,376,966) |
| Comprehensive income | $55,214,627 | $26,467,742 |
Page 4 of 11
Cash Flow Statement
Three Months Ended on March 31, 2013 and 2014
Three Months Ended on March 31, 2013 and 2014
| 3 months | ended on | |
| Mar 31, 2013 | Mar 31, 2014 | |
| Net income | $35,479,098 | $61,844,708 |
| Depreciation and amortization expense | 3,090,110 | 4,034,141 |
| Gain on sale of marketable security | (41,381,522) | |
| Deferred taxes on unrealized security gain | (13,157,019) | |
| Change in trade receivables, net of reserve | (4,789,717) | 3,716,101 |
| Change in other receivables and prepaid | 48,581 | (14,801,238) |
| Change in accounts payable | 313,196 | (683,387) |
| Change in taxes payable | 3,033,601 | 1,417,431 |
| Change in accrued expenses | (30,617,429) | (34,114,096) |
| Change in deferred revenue | 2,651,031 | (2,360,562) |
| Change in deferred taxes, net | 14,346,078 | 2,152,742 |
| Change in tax reserves | 241,250 | 686,622 |
| Net cash from (used in) operations | 10,638,780 | (19,489,060) |
| Purchases of marketable securities | (21,279,378) | |
| Sales of marketable securities | 65,064,328 | |
| Purchases of fixed assets | (2,638,352) | (4,391,300) |
| Change in other assets | 522,792 | 149,526 |
| Net cash (used in) from investing | (2,115,560) | 39,543,176 |
| Sales of common stock | 8,129,385 | |
| Dividends paid | (27,701,399) | (27,855,640) |
| Net cash used in financing | (19,572,014) | (27,855,640) |
| Net change in cash and equivalents | (11,048,794) | (7,801,524) |
| Cash and equivalents at beginning | 55,248,919 | 42,481,997 |
| Cash and equivalents at end | $44,200,125 | $34,680,473 |
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, 2013 included in MEDITECH's Form 10-K filed on September 25, 2014. 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 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, 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 cost net of write-downs, unrealized gains, unrealized losses and fair market value of MEDITECH's securities. The unrealized gains and the unrealized losses have been accounted for within comprehensive income. MEDITECH has evaluated the unrealized losses as of March 31, 2014 and has concluded that the unrealized losses are temporary in nature.
| Dec 31, 2013 | Mar 31, 2014 | |
| Cost net of write-downs | $279,666,014 | $277,262,585 |
| Unrealized gains | 95,805,377 | 62,940,162 |
| Unrealized losses | (1,447,800) | (77,527) |
| Fair market value | $374,023,591 | $340,125,220 |
Page 6 of 11
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 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 March 31, 2014 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 uncertainty of domestic production activities deduction and state nexus. Key judgments are reviewed annually and adjusted to reflect current assessments. The years 2011 through 2013 are subject to examination by the IRS, and various years are subject to examination by state tax authorities.
The research tax credit reinstated for all of 2012 has been reflected in the 1st quarter of 2013 which had significantly reduced the effective tax rate. No research tax credit has been taken thus far in 2014, however there were no income taxes associated with the sale of previously impaired marketable securities significantly reducing the effective tax rate.
Page 7 of 11
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 | |
| Mar 31, 2013 | Mar 31, 2014 | |
| Net income | $35,479,098 | $61,844,708 |
| Average number of shares | 37,055,636 | 37,140,854 |
| Earnings per share | $0.96 | $1.67 |
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 net unrealized 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 net unrealized security gains or losses is shown as comprehensive income in the income statement.
| 3 months | ended on | |
| Mar 31, 2013 | Mar 31, 2014 | |
| Changes in unrealized gains | 19,735,529 | (4,034,206) |
| Reclassification of realized gains | (31,342,760) | |
| Change in net unrealized gains | 19,735,529 | (35,376,966) |
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 | |
| Mar 31, 2013 | Mar 31, 2014 | |
| United States | 88% | 90% |
| Canada | 10% | 9% |
| All others | 2% | 1% |
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Item 2 - Management's Discussion and Analysis of Operating Results and Financial Condition
| Operating | 3 months | ended on | Percent |
| Results | Mar 31, 2013 | Mar 31, 2014 | Change |
| Total revenue | $151,183,057 | $130,701,929 | (13.5%) |
| Operating income | 45,610,303 | 29,113,794 | (36.2%) |
| Net income | 35,479,098 | 61,844,708 | 74.3% |
| Average number of shares | 37,055,636 | 37,140,854 | 0.2% |
| Earnings per share | $0.96 | $1.67 | 74.0% |
| Cash dividends per share | $0.75 | $0.75 | 0.0% |
Total revenue from both existing and new customers decreased by $20.5 million. The decrease was composed of a $22.4 million reduction in product revenue due primarily to lower product bookings, offset by a $1.9 million addition in service revenue.
Operating expense decreased by $4.0 million or 3.8% due primarily to lower staff related expenses. The resultant operating income decreased by $16.5 million.
Other income increased by $42.5 million due primarily to the current period's gains on impaired marketable securities sold. Other expense increased by $0.3 million. The resultant pretax income increased by $25.6 million or 53.0%.
MEDITECH's effective tax rate decreased from 26.7% to 16.4% due primarily to the current period's reduced taxes on gains from the sale of impaired marketable securities offset by the prior period's inclusion of 2012's research tax credit. Net income increased by $26.4 million due primarily to security gains.
| Financial Condition | Dec 31, 2013 | Mar 31, 2014 |
| Working capital | $366,107,324 | $365,261,356 |
| Total assets | 716,476,005 | 686,005,939 |
| Total liabilities | 130,231,196 | 101,149,028 |
| Shareholder equity | 586,244,809 | 584,856,911 |
| Outstanding number of shares | 37,140,854 | 37,140,854 |
| Shareholder equity per share | $15.78 | $15.75 |
Accrued expenses decreased by $34.1 million during the period due primarily to the payment of $46.0 million in bonuses applicable to 2013 offset by the accrual of $10.8 million in bonus expenses applicable to 2014.
Deferred taxes increased by $6.2 million during the period due primarily to changes in the fair market value of marketable securities.
At March 31, 2014 MEDITECH's cash, cash equivalents and marketable securities totaled $374.8 million. Marketable securities consisted of preferred and common equities. For the first three months of 2014 cash flow used in operations was $19.5 million, cash flow from investing was $39.5 million and cash flow used in financing was $27.9 million. The payment of $27.9 million in dividends to shareholders was the primary use of cash generated by activities during the period.
Page 9 of 11
MEDITECH has no long-term debt. Shareholder equity at March 31, 2014 was $584.9 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, 2013.
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, and due to the material weakness in internal control over financial reporting as described below, MEDITECH'S disclosure controls and procedures were not effective as of March 31, 2014 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.
A material weakness is defined as deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company's annual or interim consolidated financial statements will not be prevented or detected on a timely basis. In particular, MEDITECH lacked a sufficiently defined revenue recognition policy and verification system along with an insufficient level of oversight, which resulted in errors in its historical financial statements. The impact of the revenue recognition errors and other errors on prior period consolidated financial statements was not material and is being corrected in the current period financial statements.
MEDITECH has developed and is implementing a remediation plan to address the material weakness and continues to refine the standardization of a detailed verification process before revenue is recognized. Staff education and software system modifications have been included to reinforce controls. MEDITECH continues to monitor its remediation plans, development and deployment. MEDITECH expects all internal control design and process changes necessary to remediate the material weakness related to revenue recognition to be completed by the end of 2014. In the interim, manual processes are being used to augment internal controls.
Part II - Other Information
Item 1 - Legal Proceedings
None.
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, 2013.
Page 10 of 11
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
MEDITECH did not repurchase any of its shares of common stock during the 1st quarter of 2014. However, during the 1st quarter the Medical Information Technology, Inc. Profit Sharing Trust purchased MEDITECH's common stock in individual private transactions: 2,000 shares in February at $45 per share and 6,075 shares in March at $45 per share for a total of $363,375. In addition, during February the Trust purchased 455,555 shares at $45.00 per share from the charitable foundations of two MEDITECH founders for an aggregate consideration of $20,499,975.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Mine Safety Disclosures
Not applicable.
Item 5 - Other Information
In October 2013, we discovered certain errors in our revenue recognition practices which affected our reported revenues and related expenses. Upon learning of these errors, we worked with the Audit Committee of MEDITECH's Board of Directors, an independent consultant and MEDITECH's independent registered public accounting firm to determine what changes, if any, to MEDITECH's accounting practices were appropriate. Upon conclusion we began the implementation of changes to our revenue recognition practices and our internal controls over financial reporting. At March 31, 2014 we have implemented the majority of our remediation program. Monitoring, testing and refining results continues. As a result of this, we were delayed in filing our Form 10-Q for the 3rd quarter of 2013, our Form 10-K for the year ended December 31, 2013 and our Form 10-Q for the 1st, 2nd and 3rd quarters of 2014.
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)
(Registrant)
February 9, 2015
(Date)
(Date)
Howard Messing, Chief Executive Officer and President
(Signature)
(Signature)
Barbara A. Manzolillo, Chief Financial Officer and Treasurer
(Signature)
(Signature)
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