Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
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)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Securities Exchange Act: Common Stock, par value $1.00 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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 registration was required to submit and post such files). Yes [X] No [ ]
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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. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Smaller reporting company [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revisited financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
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 37,190,854 shares of common stock, $1.00 par value, outstanding at December 31, 2019.
| Index to Form 10-K | Page |
| Part I | |
| Item 1 - Business | 3 |
| Item 1A - Risk Factors | 6 |
| Item 1B - Unresolved Staff Comments | 6 |
| Item 2 - Properties | 6 |
| Item 3 - Legal Proceedings | 6 |
| Item 4 - Mine Safety Disclosures | 6 |
| Part II | |
| Item 5 - Market for Registrant's Common Equity and Related Shareholder Matters | 6 |
| Item 6 - Selected Financial Data | 7 |
| Item 7 - Management's Discussion and Analysis of Operating Results and | |
| Financial Condition | 7 |
| Item 7A - Quantitative and Qualitative Disclosures About Market Risk | 8 |
| Item 8 - Financial Statements and Supplemental Data | 9 |
| Item 9 - Changes in and Disagreements with Accountants on Accounting and | |
| Financial Disclosure | 23 |
| Item 9A - Controls and Procedures | 23 |
| Item 9B - Other Information | 23 |
| Part III | |
| Item 10 - Directors, Executive Officers and Corporate Governance | 24 |
| Item 11 - Executive Compensation | 27 |
| Item 12 - Security Ownership of Certain Beneficial Owners and Management and | |
| Related Shareholder Matters | 28 |
| Item 13 - Certain Relationships and Related Transactions, and Director Independence | 28 |
| Item 14 - Principal Accounting Fees and Services | 29 |
| Part IV | |
| Item 15 - Exhibits | 30 |
| Signatures | 30 |
Page 2 of 30
Part I
Item 1 - Business
COMPANY OVERVIEW
Medical Information Technology, Inc. (MEDITECH) was founded in 1969 to develop, manufacture, license and support computer software products for the hospital market. For 2019 combined product and service revenue was $493.8 million, operating income was $64.5 million and net income was $180.2 million. Product bookings were $189.0 million and the resultant year-end product backlog was $181.7 million. By year-end MEDITECH had 3,531 staff members, and about 2,200 active healthcare sites throughout the United States, Canada and the United Kingdom.
HEALTHCARE SOFTWARE
At the beginning MEDITECH developed a software product to automate one of the main departments in a hospital, the clinical laboratory which performs various diagnostic tests on blood or urine specimens. Within a few years, this product became standardized, thereby requiring minimal adaptation to meet the individual needs of a typical customer. MEDITECH extended the concept and developed additional software products for the rest of a hospital's clinical departments. Eventually, it moved into the financial area by developing a hospital billing and accounts receivable product as well as various general accounting products. More recently, as healthcare organizations have increased the breadth of their services, MEDITECH has expanded its offering to include software that operates in home healthcare, ambulatory, mental health and long-term care settings.
Although the individual products could be operated in a stand alone fashion, a healthcare organization achieved maximum effectiveness when they were used in an integrated mode, sharing access to the common clinical and financial records. This concept ultimately led to MEDITECH developing the so-called hospital information system, a cohesive set of software products designed from the outset to work in conjunction with the overall operation of the hospital and to minimize the need for specialized interfaces. Today MEDITECH calls this an Electronic Health Record abbreviated as an EHR.
COMPUTER HARDWARE
Sophisticated software, such as MEDITECH's, requires extensive computer and communication equipment to function. In spite of this, MEDITECH limits itself to specifying the aggregate components needed as well as suggesting typical configurations from certain hardware vendors. The responsibility is left to the healthcare organization to purchase the requisite hardware and secure a continuing source of maintenance service for it.
The hardware components traditionally consist of a set of central medium-sized computers and a large set of display terminals and printers distributed throughout the healthcare organization. All of these elements are interconnected by means of a standard high speed communication network. The computers execute the software and include large storage subsystems containing the permanent and common clinical, administrative and financial records of the healthcare organization.
Hardware technology evolves rapidly, and the current trend has been to replace the display terminals with desktop computers and mobile devices, thereby forming a client server network. In this mode of operation, the central computers become the file servers while software is executed locally on the client computer which makes file requests to the servers.
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LICENSED SOFTWARE
MEDITECH requires a healthcare customer to sign a standard software license agreement prior to product delivery, implementation and subsequent service of the software. This agreement specifies a front end product fee and a front end implementation fee, both of which are payable over the implementation process, and a monthly service fee after the site goes live. In addition to precluding ownership and restricting transfer, the license minimizes liability arising from incorrect operation of the software.
MEDITECH generally bases its product fee on a customer's net patient revenue across all of its sites, and sets its implementation fee on the total number of installations. As a result larger organizations pay more than smaller organizations. The monthly service fees are typically 1% of the product fees. A typical 150 bed acute care hospital which licenses much of our software might incur a $3,000,000 product fee, a $1,000,000 implementation fee and a $30,000 monthly service fee. An order is booked when a signed software license and a 10% deposit are received.
STAFF ORGANIZATION
MEDITECH is organized into functional units grouped around product development, sales and marketing, implementation, customer service, accounting and facility operations. MEDITECH staff work in eight company owned facilities - six in the greater Boston area, one in Atlanta and one in the Minneapolis area.
From its inception, MEDITECH utilized communication technology which allowed much of its business activities to be performed by remote access. MEDITECH staff sitting at their desks may access client hospitals, both personnel and computers. As a result, there is no need for remote offices. Although most customer contact is through the phone or e-mail, certain of the sales and implementation staff travel to customer sites.
PRODUCT DEVELOPMENT
Most of the product development staff is working on the incremental evolution of the current product lines, as well as the creation of new products each year. The rest of the staff is developing a set of replacement products utilizing a new software technology. Approximately every ten years, MEDITECH introduces the next generation of products based on the new software technology and gradually updates existing customers.
SALES AND MARKETING
Many of the direct sales staff, organized into regions, concentrate on new prospects. In addition, the rest of the sales staff monitor existing customers to expose them to MEDITECH's entire product line. Marketing activities and promotion are low key because healthcare organizations are easily identified, finite in number and generally send a request for proposal to vendors when they contemplate the purchase of an Electronic Health Record.
During the sales process, prospects generally visit MEDITECH to talk to product specialists and to view product demonstrations. Thereafter they are encouraged to visit various MEDITECH customer sites to observe first hand the software in actual operation and to discuss issues of concern with hospital personnel.
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IMPLEMENTATION
To ensure a successful implementation, the staff must properly train a core group of customer personnel about the operation of the software and how to use it in their daily activity. To avoid interruptions from normal activities, MEDITECH invites the customer personnel to come to its corporate offices in the Boston area for intensive training sessions.
As implementation proceeds, the staff trains the customer in the use of certain dictionaries to fit the specific need of the environment, provides interfaces to non-MEDITECH systems and assists the customer in converting data from legacy systems. In addition, MEDITECH delivers, installs and trains the customer to test the licensed software on the customer's hardware. MEDITECH utilizes remote access communication technology to minimize the need to travel.
CUSTOMER SERVICE
Once an organization goes live, the responsibility of maintaining the customer is transferred to the service staff. MEDITECH provides 24 hour a day service coverage to these customers in order to respond to problem calls. In addition, the staff updates customers with new releases of the software products as they become available. To ensure the continuing education of the staff, MEDITECH runs seminars on the use of its products.
HCA-THE HEALTHCARE COMPANY
HCA-The Healthcare Company utilizes a MEDITECH clinical information system in over 200 hospitals and has been MEDITECH's largest customer for many years. HCA represented 7% of MEDITECH revenues in 2019.
COMPETITION
The market for healthcare information systems is subject to the technological imperative. Accordingly, MEDITECH has a completely integrated set of application products, implements them successfully, provides ongoing maintenance including updates and continues the developmental process. MEDITECH's competitors who make similar claims include Epic, Cerner and Allscripts. In addition, there are competitors for components of MEDITECH's offerings. MEDITECH does not offer the breadth of products and services which some of the competition offers nor does some of the competition offer what MEDITECH offers. MEDITECH focuses exclusively on the healthcare information system software market and believes it competes favorably in this market.
ACCESS TO SEC FILINGS
MEDITECH's website address is "www.meditech.com" which provides access to its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and all amendments thereof just as soon as such reports are filed with the SEC. The links so provided allow access to copies of the reports stored on MEDITECH's website, but a link is also provided to allow access to all of MEDITECH's filings stored on the SEC's website as well. One may use "http://www.sec.gov/cgi-bin/browse-edgar?CIK=1011452&action=getcompany" to access all of MEDITECH's filings stored on the SEC's website instead. In addition MEDITECH will provide paper copies of these filings free of charge to its shareholders upon request.
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Item 1A - Risk Factors
There are numerous risk factors which may affect future results of operations. The healthcare industry is highly regulated and is subject to changing economic and political influences. Federal and state legislatures could modify the healthcare system in respect to reimbursement and financing. Healthcare organizations may respond to these pressures by delaying the purchase of new information systems. Previous volatility in the market place such as that due to Y2K concerns and September 11th could reappear and cause delays. The Health Insurance Portability and Accountability Act of 1996 directly impacts the industry by specifying standards to protect the security and confidentiality of patient information. It may be possible to bring claims against software providers regarding injuries due to software or operational errors as well as breaches of security or privacy of medical or financial records. Healthcare organizations consolidating into an integrated healthcare delivery system may be able to negotiate price reductions. Finally, MEDITECH is dependent on a cohesive group of long time senior managers and staff with vast experience in the hospital industry and software technology.
Item 1B - Unresolved Staff Comments
None.
Item 2 - Properties
At year-end 2019 MEDITECH owned 8 facilities containing almost 1.1 million square feet of office space, all being well maintained Class A properties, 6 in the greater Boston area, 1 in Atlanta and 1 in the Minneapolis area. MEDITECH occupies 87% of the space and the remainder is leased to various tenants. MEDITECH has adequate space for its reasonable needs in the near future.
Item 3 - Legal Proceedings
None
Item 4 - Mine Safety Disclosures
Not applicable
PART II
Item 5 - Market for Registrant's Common Equity and Related Shareholder Matters
No public trading market exists for MEDITECH's common stock, and accordingly no high and low bid information or quotations are available. The sale, assignment, transfer, pledge or other disposition of any of MEDITECH's common stock is subject to right of first refusal restrictions set forth in MEDITECH's charter. There are no shareholder agreements with MEDITECH covering the voting or repurchase of MEDITECH stock.
During 2019 MEDITECH did not repurchase any of its shares of common stock. However, during 2019 the MEDITECH Profit Sharing Trust purchased 134,228 shares at $44.00 per share from existing shareholders in individual private transactions for an aggregate consideration of $5,906,032.
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During 2019 no shares of MEDITECH common stock were offered or sold to staff members pursuant to the 2004 Stock Purchase Plan. At December 31, 2019, there were 1,837 shareholders of MEDITECH's common stock and 37,190,854 shares outstanding. MEDITECH has paid quarterly cash dividends continuously since 1980 and such annual 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 in this 10-K. Selected financial data for the past 5 years ended December 31 are as follows:
| 2015 | 2016 | 2017 | 2018 | 2019 | |
| Full Year Operations: | |||||
| Total revenue | $475,525,581 | $462,256,468 | $480,903,895 | $488,188,746 | $493,844,632 |
| Operating income | 67,128,626 | 69,891,192 | 63,981,134 | 64,767,273 | 64,479,662 |
| Net income | 70,066,792 | 72,890,198 | 77,428,576 | 56,205,796 | 180,157,193 |
| Average shares | 37,167,937 | 37,190,854 | 37,190,854 | 37,190,854 | 37,190,854 |
| Net income/share | $1.88 | $1.96 | $2.08 | $1.51 | $4.84 |
| Year End Position: | |||||
| Total assets | $652,479,642 | $634,294,572 | $619,228,517 | $569,459,952 | $669,475,349 |
| Total liabilities | 114,050,584 | 110,759,875 | 122,300,267 | 108,559,224 | 111,724,941 |
| Shareholder equity | 538,429,058 | 523,534,697 | 496,928,250 | 460,900,728 | 557,750,408 |
| Shares outstanding | 37,190,854 | 37,190,854 | 37,190,854 | 37,190,854 | 37,190,854 |
| Shareholder equity/share | $14.48 | $14.08 | $13.36 | $12.39 | $15.00 |
| Other Financial Data: | |||||
| Working capital | $341,333,049 | $334,995,263 | $301,861,999 | $261,462,548 | $419,987,992 |
| Operating cash flow | 79,245,824 | 62,066,105 | 65,337,714 | 90,526,189 | 46,634,394 |
| Depreciation & amortization | 15,277,304 | 15,009,723 | 14,433,528 | 14,396,957 | 13,344,746 |
| Cash dividends/share | $2.72 | $2.48 | $2.48 | $2.48 | $2.24 |
Item 7 - Management's Discussion and Analysis of Operating Results and Financial Condition
Comparison of Fiscal Years ended December 31, 2018 and 2019:
Total revenue from both existing and new customers increased $5.6 million or 1.2% from $488.2 million in 2018 to $493.8 million in 2019. It was composed of a $9.2 million addition in service revenue due primarily to more customers becoming live, offset by a $3.5 million reduction in product revenue due to initial implementation delays.
Operating expense increased $6.0 million or 1.4% from $423.4 million in 2018 to $429.4 million in 2019 due primarily to $6.0 million more contributed to the Profit Sharing Trust. The resultant operating income decreased $0.3 million or 0.4% from $64.8 million in 2018 to $64.5 million in 2019.
Other income decreased $4.5 million due primarily to lower rental income. Gain on sale of property in 2019 of $88.9 million has no comparison to 2018. The change in unrealized securities gains was a $57.8 million increase in 2019 compared a $23.4 million decrease in 2018. Other expense decreased $1.0 million due primarily to lower rental costs. The resultant pretax income increased $166.4 million from $60.2 million in 2018 to $226.6 million in 2019.
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MEDITECH's effective tax rate increased from 6.6% in 2018 to 20.5% in 2019 due primarily to significantly higher income in proportion to credits against taxes. The resultant net income increased $124.0 million from $56.2 million in 2018 to $180.2 million in 2019.
Comparison of Fiscal Years ended December 31, 2017 and 2018:
Total revenue from both existing and new customers increased $7.3 million or 1.5% from $480.9 million in 2017 to $488.2 million in 2018. It was composed of a $10.7 million addition in product revenue due primarily to higher product bookings, offset by a $3.4 million reduction in service revenue.
Operating expense increased $6.5 million or 1.6% from $416.9 million in 2017 to $423.4 million in 2018 due primarily to higher staff related costs. The resultant operating income increased $0.8 million or 1.2% from $64.0 million in 2017 to $64.8 million in 2018.
Other income decreased $12.6 million due primarily to lower gains from the sale of marketable securities. This year includes a $23.4 million decrease in unrealized marketable securities gains. Other expense increased by $1.0 million. The resultant pretax income decreased $36.3 million or 37.6% from $96.5 million in 2017 to $60.2 million in 2018.
MEDITECH's effective tax rate decreased from 19.8% in 2017 to 6.6% in 2018 due primarily to the reduced federal tax rate and credits changes that amount to $12.2 million associated with the Tax Cut and Jobs Act passed in December 2017. In addition, the January 1, 2018 adoption of ASU 2016-01 resulted in the current period's $5.7 million tax reduction related to the unrealized change in marketable securities gains. The resultant net income decreased $21.2 million or 27.4% from $77.4 million in 2017 to $56.2 million in 2018.
Financial Condition:
At December 31, 2019 MEDITECH's cash, cash equivalents and marketable securities totaled $436.6 million. Marketable securities consisted of preferred and common equities. During 2019 cash flow from operations was $46.6 million, cash flow from investing was $28.6 million and cash flow used in financing was $83.3 million. The payment of $83.3 million in dividends to shareholders was the primary use of cash generated by operating and investing activities during this period.
MEDITECH has no long-term debt. Shareholder equity at December 31, 2019 was $557.7 million. During 2019 management expended $5.4 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 and Estimates:
All of our significant accounting policies are described in the notes to the 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 Notes 4, 8, 13 and 14 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 Financial Statements.
Page 8 of 30
Item 8 - Financial Statements and Supplemental Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Medical Information Technology, Inc.:
To the Shareholders and the Board of Directors of Medical Information Technology, Inc.:
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Medical Information Technology, Inc. (the "Company") as of December 31, 2019, 2018 and 2017, the related statements of income and comprehensive income, shareholder equity, and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2014.
Wolf & Company, P.C.
Boston, Massachusetts
January 31, 2020
Boston, Massachusetts
January 31, 2020
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Balance Sheets
as of December 31, 2017, 2018 and 2019
as of December 31, 2017, 2018 and 2019
| Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2019 | |
| Cash and equivalents | $17,436,627 | $23,095,977 | $14,997,613 |
| Marketable securities | 306,086,429 | 268,638,359 | 421,554,499 |
| Trade receivables, net of reserve | 50,522,946 | 36,760,812 | 36,575,028 |
| Contract assets, prepaid and other | 12,376,569 | 12,077,935 | 14,223,037 |
| Current assets | 386,422,571 | 340,573,083 | 487,350,177 |
| Computer equipment | 14,463,275 | 13,979,609 | 13,339,425 |
| Furniture and fixtures | 83,719,079 | 92,804,040 | 76,135,675 |
| Buildings | 250,962,956 | 240,288,774 | 190,105,517 |
| Land | 43,163,211 | 40,959,230 | 26,717,577 |
| Accumulated depreciation | (178,192,159) | (175,832,443) | (138,527,057) |
| Fixed assets | 214,116,362 | 212,199,210 | 167,771,137 |
| Other assets | 9,466,338 | 8,430,515 | 7,193,998 |
| Deferred tax assets | 9,223,246 | 8,257,144 | 7,160,037 |
| Total assets | $619,228,517 | $569,459,952 | $669,475,349 |
| Accounts payable | $227,663 | $701,524 | $211,391 |
| Taxes payable | 3,882,391 | 1,825,528 | 3,111,878 |
| Accrued expenses | 22,831,337 | 23,916,832 | 24,327,709 |
| Deferred revenue | 57,619,181 | 52,666,651 | 39,711,207 |
| Current liabilities | 84,560,572 | 79,110,535 | 67,362,185 |
| Deferred tax liabilities | 19,154,929 | 12,409,407 | 26,951,474 |
| Tax reserves | 18,584,766 | 17,039,282 | 17,411,282 |
| Total liabilities | 122,300,267 | 108,559,224 | 111,724,941 |
| Common stock, $1.00 par value, authorized | |||
| 40,000,000 shares, issued and outstanding | |||
| 37,190,854 shares in 2017, 2018 and 2019 | 37,190,854 | 37,190,854 | 37,190,854 |
| Additional paid-in capital | 122,907,959 | 122,907,959 | 122,907,959 |
| Retained income | 289,634,133 | 300,801,915 | 397,651,595 |
| Unrealized after-tax security gains | 47,195,304 | - | - |
| Shareholder equity | 496,928,250 | 460,900,728 | 557,750,408 |
| Total liabilities and shareholder equity | $619,228,517 | $569,459,952 | $669,475,349 |
The accompanying notes are an integral part of these financial statements.
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Statements of Income and Comprehensive Income
for the Years Ended December 31, 2017, 2018 and 2019
for the Years Ended December 31, 2017, 2018 and 2019
| Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2019 | |
| Product revenue | $154,802,239 | $165,487,109 | $161,975,285 |
| Service revenue | 326,101,656 | 322,701,637 | 331,869,347 |
| Total revenue | 480,903,895 | 488,188,746 | 493,844,632 |
| Operations, development | 328,502,568 | 334,612,704 | 332,551,702 |
| Selling, G & A | 88,420,193 | 88,808,769 | 96,813,268 |
| Operating expense | 416,922,761 | 423,421,473 | 429,364,970 |
| Operating income | 63,981,134 | 64,767,273 | 64,479,662 |
| Other income | 38,622,542 | 25,980,379 | 21,463,262 |
| Gain on sale of property | - | - | 88,948,907 |
| Change in unrealized security gains | - | (23,416,834) | 57,809,294 |
| Other expense | 6,117,897 | 7,124,656 | 6,112,326 |
| Pretax income | 96,485,779 | 60,206,162 | 226,588,799 |
| State income tax (benefit) | 3,535,566 | (387,076) | 7,623,403 |
| Federal income tax | 15,521,637 | 4,387,442 | 38,808,203 |
| Income tax | 19,057,203 | 4,000,366 | 46,431,606 |
| Net income | $77,428,576 | $56,205,796 | $180,157,193 |
| Change in unrealized after-tax security gains | 779,211 | ||
| Comprehensive income | $78,207,787 | ||
The accompanying notes are an integral part of these financial statements.
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Statements of Shareholder Equity
for the Years Ended December 31, 2017, 2018 and 2019
for the Years Ended December 31, 2017, 2018 and 2019
| | Common Stock Paid-in capital | Retained income | Other Comprehensive | Shareholder equity |
| Balance, December 31, 2016 | $160,098,813 | $317,019,791 | $46,416,093 | $523,534,697 |
| Net revenue recognition standard adjustment | (12,580,916) | (12,580,916) | ||
| Net income | 77,428,576 | 77,428,576 | ||
| Change in unrealized after-tax security gains | 779,211 | 779,211 | ||
| Dividends paid | (92,233,318) | (92,233,318) | ||
| Balance, December 31, 2017 | $160,098,813 | $289,634,133 | $47,195,304 | $496,928,250 |
| Net income | 56,205,796 | 56,205,796 | ||
| Dividends paid | (92,233,318) | (92,233,318) | ||
| Cumulative effect of accounting change | 47,195,304 | (47,195,304) | - | |
| Balance, December 31, 2018 | $160,098,813 | $300,801,915 | $460,900,728 | |
| Net income | 180,157,193 | 180,157,193 | ||
| Dividends paid | (83,307,513) | (83,307,513) | ||
| Balance, December 31, 2019 | $160,098,813 | $397,651,595 | $557,750,408 | |
The accompanying notes are an integral part of these financial statements.
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Statements of Cash Flows
for the Years Ended December 31, 2017, 2018 and 2019
for the Years Ended December 31, 2017, 2018 and 2019
| Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2019 | |
| Net income | $77,428,576 | $56,205,796 | $180,157,193 |
| Depreciation and amortization expense | 14,433,528 | 14,396,957 | 13,344,746 |
| Loss (gain) on sale of marketable securities | (17,464,043) | 272,229 | (2,945,147) |
| Loss (gain) on sale of fixed assets | (864,218) | (5,051,454) | (88,416,610) |
| Change in unrealized securities | - | 23,416,834 | (57,809,294) |
| Change in trade receivables, net of reserve | (8,948,463) | 13,762,134 | 185,784 |
| Change in contract assets, prepaid and other | (5,973,753) | 298,634 | (2,145,102) |
| Change in deferred tax assets | 9,069,958 | 966,102 | 1,097,107 |
| Change in accounts payable | 5,048 | 473,861 | (490,133) |
| Change in taxes payable | 1,230,324 | (2,056,863) | 1,286,350 |
| Change in accrued expenses | 289,200 | 1,085,495 | 410,877 |
| Change in deferred revenue | 9,117,378 | (4,952,530) | (12,955,444) |
| Change in deferred tax liabilities | (13,341,414) | (6,745,522) | 14,542,067 |
| Change in tax reserves | 355,593 | (1,545,484) | 372,000 |
| Net cash from operating activities | 65,337,714 | 90,526,189 | 46,634,394 |
| Purchases of marketable securities | (27,705,747) | (11,515,761) | (172,879,796) |
| Sales of marketable securities | 66,146,385 | 25,274,768 | 80,718,097 |
| Purchases of fixed assets | (10,375,066) | (14,541,509) | (5,382,609) |
| Sales of fixed assets | 1,867,600 | 8,238,158 | 125,163,796 |
| Change in other assets | 309,108 | (89,177) | 955,267 |
| Net cash from investing activities | 30,242,280 | 7,366,479 | 28,574,755 |
| Dividends paid | (92,233,318) | (92,233,318) | (83,307,513) |
| Net cash used in financing activities | (92,233,318) | (92,233,318) | (83,307,513) |
| Net change in cash and equivalents | 3,346,676 | 5,659,350 | (8,098,364) |
| Cash and equivalents at beginning of year | 14,089,951 | 17,436,627 | 23,095,977 |
| Cash and equivalents at end of year | $17,436,627 | $23,095,977 | $14,997,613 |
| Supplemental Disclosure: | |||
| Cash paid for income taxes | $22,313,039 | $15,403,260 | $29,057,328 |
| Net revenue recognition standard adjustment | (12,580,916) | - | - |
The accompanying notes are an integral part of these financial statements.
Page 13 of 30
Notes to Financial Statements December 31, 2019
Note 1. Significant 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 healthcare providers located primarily in the United States and Canada.
The accompanying 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.
(a) Revenue Recognition
MEDITECH follows the provisions of ASC 606, Revenue from Contracts with Customers. 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 considers software fees and related implementation fees together as a single performance obligation and classifies it as product revenue in the statement of income. Such revenue is recognized over time with the transfer of promised goods and services to the customer. MEDITECH considers post-implementation support fees as a separate performance obligation and classifies it as service revenue in the statement of income. Such revenue is recognized over time as the related services are rendered.
MEDITECH identifies the performance obligations for each contract, determines the transaction price, allocates the price to the performance obligations, and recognizes revenue when (or as) a performance obligation is satisfied on the percent completion method based on completion of specific events. The primary factors taken into consideration involve tracking and measuring the progress of events needed to complete software delivery, training on software usage, interfacing the software with other vendor software, and bringing the software operational at the customer's site. Events identified are estimated at the outset of a contract and the transaction price is allocated equally over said events. Annual studies are conducted on the events required to complete contracted performance obligations and to verify the validity of total events required. Variable consideration is reviewed at the outset of a contract and if present, included in the percentage completion allocation.
At December 31, 2019, outstanding performance obligations amounted to $181.7 million, with revenue to be recognized over the next 12-36 months as MEDITECH works with respective customers to schedule the corresponding software delivery and implementation events.
MEDITECH's invoices are issued as per contract terms and are typically paid by customers within one month of invoice date. Differences between timing of MEDITECH's invoicing and timing of completed performance obligations are categorized as Deferred Revenues and Contract Assets. Deferred Revenues represent invoices rendered in advance of revenue recognition. Contract Assets represent revenue recognized for which invoices have not yet been rendered.
Deferred product revenue was $42.9 million and $29.0 million at December 31, 2018 and December 31, 2019 respectively. During the year a total of $32.7 million was removed and recognized as revenue when specific events were completed. Also, Contract Assets were $5.9 million and $8.6 million at December 31, 2018 and December 31, 2019 respectively.
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During 2017, 2018 and 2019, additional revenue of $9.1 million, $2.1 million and $4.7 million respectively was claimed based on adoption of the new revenue standard ASC 606 as specific events were attained over time under the new percentage of completion as compared to a point in time using the contract milestone approach previously followed under ASC 985-605.
During 2019 MEDITECH delivered and began installation services on a license agreement for which collectability of substantially all of the consideration was not deemed to be probable at the outset of the arrangement. As a result, MEDITECH did not recognize revenue on delivery of product and installation services amounting to $16.5M. All costs incurred for delivery of product and installation services under this arrangement were expensed as incurred.
(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. MEDITECH's development cost after technological feasibility has been established was immaterial and 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.
(e) Fair Value of Financial Instruments and Concentration of Credit Risk
The carrying value of MEDITECH's cash and cash equivalents, accounts receivable and accounts payable approximates their fair value due to the short-term nature of these financial instruments. MEDITECH's marketable securities are carried at fair value.
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.
Note 2. Marketable Securities
MEDITECH follows the provisions of ASC 321, Investments - Equity Securities, which requires marketable securities to be recorded at fair value and records the unrealized change in marketable securities gains within the income statement.
MEDITECH follows the provisions of ASC 820-10, Fair Value Measurements and Disclosures, which provides for expanded disclosure and guidelines to determine fair 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.
Page 15 of 30
The following table indicates the original cost, unrealized pretax gains and losses, and fair value of MEDITECH's securities for the three years ended December 31. The change in unrealized after-tax security gains for 2017 have been accounted for within comprehensive income. The change in unrealized pre-tax security gains for 2018 are now reported within the income statement with the adoption of ASU 2016-01 on January 1, 2018.
| 2017 | 2018 | 2019 | |
| Original cost | $227,405,667 | $217,169,354 | $309,435,273 |
| Unrealized pretax gains | 78,907,615 | 62,156,967 | 113,038,406 |
| Unrealized pretax losses | (226,853) | (10,687,962) | (919,180) |
| Fair value | $306,086,429 | $268,638,359 | $421,554,499 |
Note 3. Reserve for Doubtful Accounts
The components of the reserve for doubtful accounts for the three years ended December 31 are as follows:
| 2017 | 2018 | 2019 | |
| Reserve at beginning of year | $1,575,000 | $1,100,000 | $1,100,000 |
| Amounts charged to expense | 848,739 | 44,162 | 1,143,187 |
| Amounts written off | (1,323,739) | (44,162) | (1,143,187) |
| Reserve at end of year | $1,100,000 | $1,100,000 | $1,100,000 |
Note 4. Deferred Taxes
Deferred taxes relate to the earlier recognition of certain revenue and the later recognition of certain expense for tax purposes. Deferred tax assets consist primarily of prepaid tax on accrued expenses, prepaid tax on deposits, deferred revenues, and Federal benefit for tax reserves. Deferred tax liabilities consist primarily of tax on unrealized pretax gains. The deferred tax assets and liabilities for the three years ended December 31 are as follows:
| 2017 | 2018 | 2019 | |
| Deferred tax assets | $9,223,246 | $8,257,144 | $7,160,037 |
| Deferred tax liabilities | 19,154,929 | 12,409,407 | 26,951,474 |
Note 5. 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 estimated useful lives. Maintenance costs are expensed as incurred. Improvements are capitalized and depreciated over the asset's useful life.
| Description | Useful Life |
| Computer equipment | 3-5 years |
| Furniture and fixtures | 7-10 years |
| Buildings | 31.5-40 years |
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Note 6. 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 believes the fair value of this investment approximates its December 31, 2019 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 healthcare 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, Goodwill and Other. MEDITECH annually assesses qualitative factors of its goodwill 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. In accordance with ASC 805-10 and ASC 350-20-35, on December 31, 2019, MEDITECH concluded no impairment was needed on a qualitative testing basis. The components of other assets for the three years ended December 31 are as follows:
| 2017 | 2018 | 2019 | |
| Investments | $1,260,054 | $1,260,054 | $1,284,737 |
| Mortgage notes | 130,400 | - | - |
| Goodwill & intangibles | 3,577,533 | 5,985,033 | 5,828,565 |
| Other | 4,498,351 | 1,185,428 | 80,696 |
| Other assets | $9,466,338 | $8,430,515 | $7,193,998 |
Note 7. Accrued Expenses
The components of accrued expenses for the three years ended December 31 are as follows:
| 2017 | 2018 | 2019 | |
| Accrued bonuses | $15,000,000 | $15,000,000 | $15,000,000 |
| Accrued vacation | 5,115,000 | 5,260,000 | 5,100,000 |
| Accrued self insurance | - | 252,136 | 1,039,469 |
| Other | 2,716,337 | 3,404,706 | 3,188,240 |
| Accrued expenses | $22,831,337 | $23,916,832 | $24,327,709 |
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Note 8. Tax Reserves
Tax reserves relate to state nexus. Key judgments are reviewed annually and additional adjustments to state nexus were made to reflect current assessments. The years 2016 through 2019 are subject to examination by the IRS, and various years are subject to examination by state tax authorities. MEDITECH accounts for the annual change in tax reserves as part of its provision for income taxes. The components of tax reserves for the three years ended December 31 are as follows:
| 2017 | 2018 | 2019 | |
| Potential tax assessment | $9,362,662 | $8,586,336 | $11,952,402 |
| Interest and penalties | 9,222,104 | 8,452,946 | 5,458,880 |
| Tax reserves | $18,584,766 | $17,039,282 | $17,411,282 |
Note 9. 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 its 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 percentage of revenue based on customer location plus the percentage of revenue from the largest customer for the three years ended December 31 is as follows:
| 2017 | 2018 | 2019 | |
| Total revenue | $480,903,895 | $488,188,746 | $493,844,632 |
| United States | 88% | 87% | 88% |
| Canada | 11% | 11% | 10% |
| All others | 1% | 2% | 2% |
| Largest customer | 7% | 8% | 7% |
Note 10. Other Income
Other income consists primarily of rents, dividends, interest and realized marketable security activity. The components of other income for the three years ended December 31 are as follows:
| 2017 | 2018 | 2019 | |
| Rents | $7,012,603 | $8,459,277 | $5,038,467 |
| Dividends | 13,078,062 | 12,004,775 | 13,259,412 |
| Interest | 203,617 | 737,103 | 752,533 |
| Security gains (losses) | 17,464,043 | (272,229) | 2,945,147 |
| Fixed asset gains (losses) | 864,217 | 5,051,453 | (532,297) |
| Other income | $38,622,542 | $25,980,379 | $21,463,262 |
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Note 11. Leases
On September 19, 2019 MEDITECH sold property including a building, land, furniture, fixtures and equipment for $120 million and recorded a gain of $88.9 million within the Statement of Income. Note that the terms of the sale allow MEDITECH to hold a small short term lease until its staff can be relocated. Prior to the sale, the property was a mixed use facility with the majority of space available for lease. Accordingly, the following disclosures have been updated to reflect the sale.
MEDITECH follows the provisions of ASC 842, Leases, which requires improved disclosure on timing and uncertainties of cash flow arising from leases. MEDITECH owns all 8 facilities it occupies, containing 1.1 million square feet of office space. MEDITECH occupies 87% of the space and the remainder is leased to various tenants. All are operating leases. Related operating expense are allocated based on square footage ratio of leased to MEDITECH space. The length of MEDITECH's lease agreements vary and may include a rent-free period, extension options, or escalated lease payment. There are no agreements with termination options or variable payments dependent on outside variables. MEDITECH recognizes lease income and related brokerage fees on a straight-line basis for all agreements. MEDITECH will not consider a lease extended until an amendment is signed by both parties, at which point it is accounted for as a new lease.
When a lease agreement is entered into between MEDITECH (lessor) and another party (lessee), the agreement may include non-lease components, being services such as cleaning, utilities, security and grounds maintenance. The company does not separate the lease and non-lease components and treats all as a single lease component. In all cases there is a provision that requires the lessee to pay a proportional share of real estate taxes on a quarterly basis over and above the base year of the lease. Such costs are considered variable and a reimbursement of costs MEDITECH has paid, which are expensed as incurred.
MEDITECH does not lease other property and equipment in its operations. All contracts the company has with vendors are reviewed annually for identification of lease components and none exist.
Lease income was $7.0 million, $8.5 million and $5.0 million for the years ended on December 31, 2017, 2018 and 2019 respectively. Such income is included within Other Income for financial reporting purpose. Cash Flow projections through the end of all outstanding lease terms for properties currently under lease commitment at December 31, 2019 is as follows:
| Year | Cash Flow |
| 2020 | 4,018,000 |
| 2021 | 1,454,000 |
| 2022 | 222,000 |
| 2023 | 44,000 |
| After | 0 |
Investments in Operating leases are as follows at December 31, 2019:
| Building and Office Space, at cost | $28,951,486 |
| Lease Origination Costs | 216,273 |
| Accumulated Depreciation | (9,376,903) |
| Net Investment in Operating Leases | $19,790,856 |
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Note 12. Other Expense
Other expense consists primarily of rental costs and charitable contributions. The components of other expense for the three years ended December 31 are as follows:
| 2017 | 2018 | 2019 | |
| Rental costs | $5,267,922 | $6,305,610 | $5,185,597 |
| Charitable contributions | 755,000 | 735,000 | 755,000 |
| Other | 94,975 | 84,046 | 171,729 |
| Other expense | $6,117,897 | $7,124,656 | $6,112,326 |
Note 13. Income Tax Accounting
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 three years ended December 31 are as follows:
| 2017 | 2018 | 2019 | |
| State current | $3,225,483 | $443,136 | $5,626,874 |
| State deferred | 310,083 | (830,212) | 1,996,529 |
| State income tax | $3,535,566 | ($387,076) | $7,623,403 |
| Federal current | $20,103,177 | $9,336,650 | $24,427,084 |
| Federal deferred | (4,581,540) | (4,949,208) | 14,381,119 |
| Federal income tax | $15,521,637 | $4,387,442 | $38,808,203 |
Note 14. Income Tax
During 2017 the Tax Cut and Jobs Act reduced 2018 corporate tax rate from 35% to 21% requiring adjustment to 2017 deferred taxes. The effective income tax for the three years ended December 31 is as follows:
| 2017 | 2018 | 2019 | |
| Statutory U.S. income tax | $33,770,023 | $12,643,294 | $47,583.648 |
| State income taxes net of federal benefit | 2,298,117 | (305,790) | 5,718,392 |
| Dividend income and FDII exclusion | (3,868,286) | (1,755,823) | (1,803,486) |
| Federal R&D tax credit | (4,942,682) | (6,655,571) | (6,825,117) |
| Tax code revision | (8,818,896) | - | - |
| Other | 618,927 | 74,256 | 1,758,169 |
| Income tax | $19.057,203 | $4,000,366 | $46,431,606 |
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Note 15. 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 three years ended December 31. 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 the annual issuance of shares contributed to the MEDITECH Profit Sharing Trust in December.
| 2017 | 2018 | 2019 | |
| Net income | $77,428,576 | $56,205,796 | $180,157,193 |
| Average number of shares | 37,190,854 | 37,190,854 | 37,190,854 |
| Earnings per share | $2.08 | $1.51 | $4.84 |
Note 16. Comprehensive Income Presentation
Prior to January 1, 2018, MEDITECH followed the provisions of ASU 2011-05, Comprehensive Income, with respect to marketable securities which establishes standards for reporting comprehensive income and its components in financial statements. MEDITECH's Comprehensive income, prior to the adoption of ASU 2016-01, is the total of net income and unrealized after-tax gains or losses on marketable securities classified as available for sale. Results for the year ended December 31, 2017 is as follows:
| 2017 | |
| Unrealized after-tax gains arising during the | |
| period on securities existing at period end | $13,065,056 |
| Unrealized after-tax gains arising before the | |
| period on securities sold during the period | (12,285,845) |
| Change in unrealized after-tax security gains | $779,211 |
With the adoption of ASU 2016-01, Financial Instruments, Recognition and Measurement and Disclosure of Financial Assets and Liabilities, which updates certain aspects of recognition, measurement and disclosure of financial instruments, on January 1, 2018, MEDITECH has no elements of other comprehensive income. The unrealized change in marketable securities gains is now recorded within the Income Statement, a presentation change. The primary effect is the inclusion of such fluctuations in the period's earnings per share calculation presented in Note 14. Additionally, there is a change in presentation within Shareholder Equity in the Balance Sheets. Lastly the Statements of Cash Flows will separately report such fluctuations.
At December 31, 2017, net unrealized marketable securities gains amounted to $78.7 million. The after-tax portion originally recorded within equity of $47.2 million was reclassified to retained income on January 1, 2018 upon adoption of ASU 2016-01. Unrealized marketable securities gains decreased $23.4 million during 2018 but increased $57.8 million during 2019.
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Note 17. 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 Company has contributed $9 million in cash to the Trust in 2017 and 2018, and $15 million in 2019.
Note 18. Litigation
From time to time, the Company is a party to or may be threatened by litigation in the ordinary course of its business. The Company regularly analyzes current information, including, as applicable, the Company's defenses and insurance coverage and, as necessary, provides accruals for probable and estimable liabilities for the eventual disposition of these matters. The Company is not a party to any material legal proceedings.
Note 19. Supplemental Data
Unaudited operating results by quarter for the three years ended December 31 are as follows:
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | 2017 Year | |
| Total revenue | $117,152,968 | $116,723,292 | $121,891,463 | $125,136,172 | $480,903,895 |
| Operating income | 13,249,937 | 13,246,241 | 17,215,933 | 20,269,023 | 63,981,134 |
| Net income | 14,507,354 | 14,518,974 | 17,462,909 | 30,939,339 | 77,428,576 |
| Net income per share | $0.39 | $0.39 | $0.47 | $0.83 | $2.08 |
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | 2018 Year | |
| Total revenue | $122,368,603 | $125,023,182 | $119,108,936 | $121,688,025 | $488,188,746 |
| Operating income | 15,773,695 | 17,998,545 | 14,184,272 | 16,810,761 | 64,767,273 |
| Net income | 2,822,220 | 24,126,675 | 19,163,837 | 10,093,064 | 56,205,796 |
| Net income per share | $0.08 | $0.65 | $0.52 | $0.27 | $1.51 |
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | 2019 Year | |
| Total revenue | $115,359,711 | $119,954,865 | $121,205,017 | $137,325,039 | $493,844,632 |
| Operating income | 10,606,958 | 15,078,671 | 12,882,334 | 25,911,699 | 64,479,662 |
| Net income | 36,147,902 | 16,315,075 | 90,796,290 | 36,897,926 | 180,157,193 |
| Net income per share | $0.97 | $0.44 | $2.44 | $0.99 | $4.84 |
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Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A - Controls and Procedures
Management's Annual Report On Internal Control Over Financial Reporting
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, 2019 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 (2013 Framework). Based on this assessment, we believe that as of December 31, 2019, MEDITECH's internal control over financial reporting was effective based on said criteria.
This Annual Report on Form 10-K does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this Annual Report on Form 10-K.
Item 9B - Other Information
None.
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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, 2019, are shown below. There are no family relationships among the following persons.
| Director or Officer | Age | Position with MEDITECH |
| A. Neil Pappalardo | 77 | Chairman and Director |
| Lawrence A. Polimeno | 78 | Vice Chairman and Director |
| Howard Messing | 67 | Chief Executive Officer and Director |
| Barbara A. Manzolillo | 67 | Treasurer, Chief Financial Officer and Director |
| Edward B. Roberts | 84 | Director |
| Stuart N. Lefthes | 66 | Director |
| Michelle I. O'Connor | 53 | President and Chief Operating Officer |
| Hoda Sayed-Friel | 61 | Executive Vice President |
| Helen M. Waters | 55 | Executive Vice President |
| Christopher J. Anschuetz | 67 | Senior Vice President Emeritus |
| Steven B. Koretz | 67 | Senior Vice President |
| Leah L. Farina | 52 | Vice President |
| Scott M. Radner | 54 | Vice President |
| James W. Merlin | 59 | Controller and Chief Accounting Officer |
| Geoffrey W. Smith | 55 | Vice President |
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 Chief Executive Officer until 2010, and has been a Director since 1969.
Lawrence A. Polimeno has been the Vice Chairman of MEDITECH since 2002, was 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 Chief Executive Officer of MEDITECH since 2019, was President and Chief Executive Officer prior to that, has been a Director since 2011, and has been with MEDITECH since 1974.
Barbara A. Manzolillo has been the Treasurer and Chief Financial Officer since 1996, was the Treasurer prior to that, has been a Director since 2016, and has been with MEDITECH since 1975.
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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.
Stuart N. Lefthes retired as the Senior Vice President in 2016, has been a Director since 2016, and had been with MEDITECH since 1983.
Michelle I. O'Connor has been the President and Chief Operating Officer since 2019, was Executive Vice President and Chief Operating Officer prior to that, and has been with MEDITECH since 1988.
Hoda Sayed-Friel has been an Executive Vice President since 2012, was a Vice President prior to that, and has been with MEDITECH since 1986.
Helen M. Waters has been an Executive Vice President since 2012, was a Vice President prior to that, and has been with MEDITECH since 1990.
Christopher J. Anschuetz has been a Senior Vice President Emeritus since 2019, was a Senior Vice President prior to that, and has been with MEDITECH since 1975.
Steven B. Koretz has been a Senior Vice President since 2012, was a Vice President prior to that, and has been with MEDITECH since 1982.
Leah L. Farina has been a Vice President since 2010, was a Senior Manager prior to that, and has been with MEDITECH since 1989.
Scott M. Radner has been a Vice President since 2011, was a Senior Manager prior to that, and has been with MEDITECH since 1990.
James W. Merlin has been the Controller and Chief Accounting Officer since 2016, was the Controller prior to that, and has been with MEDITECH since 1986.
Geoffrey W. Smith has been a Vice President since 2018, was a Senior Manager prior to that, and has been with MEDITECH since since 1989.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors oversees MEDITECH's business and financial activities and monitors the performance of management, but is not involved in the day-to-day operations. The Directors review MEDITECH's performance, processes and controls, key policies, legal and regulatory requirements, ethical conduct and new or unusual transactions. The Directors are actively involved in oversight of business and financial risks which could affect MEDITECH. The Board receives regular quarterly reports from Officers which cover topics such as financial, technological, regulatory and reputation risk. The Directors meet regularly with the CEO, the CFO, other Officers; read reports and other materials; and participate in Board and committee meetings. The Board consists of 6 members. During 2019 the Board held 4 regularly scheduled quarterly meetings and 5 members attended all 4 meetings. Messrs. Roberts and Lefthes are "independent" as defined by the rules of the NYSE and NASDAQ.
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The Board of Directors does not have an Audit Committee. Ms. Manzolillo is a financial expert within the meaning of applicable rules under the Securities Exchange Act of 1934, as amended. The Board has selected Mr. Lefthes as its representative to meet quarterly with MEDITECH's Independent Registered Public Accounting firm to review accounting practices and advise MEDITECH's CFO.
The Board of Directors does not have a Compensation Committee. Instead, the full Board, because of its small size, carries out the duties of this Committee. The Board annually determines the total amount of the Staff Bonus and the contribution to the MEDITECH Profit Sharing Trust. Once a year the full Board meets with all the Officers to review their performance and responsibilities. The Board annually sets the compensation for each of the Officers.
The Board of Directors does not have 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 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 2019 the committee contributed $755,000 to 39 cultural, educational and social service organizations primarily within the greater Boston area.
During 2019 the 2 members of the Board of Directors who were not Officers of MEDITECH received a fee of $7,000 for each quarterly meeting fully attended, with such fee being deemed to also cover any special meetings, conference or committee time, and incidental expenses expended by such directors on behalf of MEDITECH.
During 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.
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Item 11 - Executive Compensation
There are no employment contracts providing for continued compensation in effect for any Officer of MEDITECH. MEDITECH has no Stock Award programs, no Stock Option programs and no Non-equity Incentive plans. The compensation received by MEDITECH's Chief Executive Officer, 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 |
| Howard Messing | 2019 | $450,000 | $7,584 | $95,942 | $8,812 | $562,338 |
| Chief Executive Officer | 2018 | 450,000 | 7,645 | 17,674 | 9,179 | 484,498 |
| and Director | 2017 | 432,000 | 7,790 | 52,308 | 3,717 | 495,815 |
| Barbara A. Manzolillo | 2019 | $420,000 | $7,584 | $95,942 | $8,812 | $532,338 |
| Chief Financial Officer, | 2018 | 420,000 | 7,645 | 17,674 | 9,179 | 454,498 |
| Treasurer and Director | 2017 | 408,000 | 7,790 | 52,308 | 3,717 | 471,815 |
| Michelle I. O'Connor | 2019 | $408,000 | $7,584 | $68,982 | $8,812 | $493,378 |
| President and Chief | 2018 | 408,000 | 7,645 | 12,327 | 9,179 | 437,151 |
| Operating Officer | 2017 | 384,000 | 7,790 | 34,486 | 3,717 | 429,993 |
| Helen M. Waters | 2019 | $402,000 | $7,584 | $75,131 | $8,812 | $493,527 |
| Executive Vice President | 2018 | 402,000 | 7,645 | 13,440 | 9,179 | 432,264 |
| Sales and Marketing | 2017 | 384,000 | 7,790 | 37,616 | 3,717 | 433,123 |
| Hoda Sayed-Friel | 2019 | $396,000 | $7,584 | $95,942 | $8,812 | $508,338 |
| Executive Vice President | 2018 | 396,000 | 7,645 | 17,674 | 9,179 | 430,498 |
| Strategy and Client Service | 2017 | 384,000 | 7,790 | 52,308 | 3,717 | 447,815 |
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 prior five years of cash compensation capped at $600,000.
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 $150,000. No allocation is allowable under this Plan to owners of 10% or more of MEDITECH's common stock. Contributions by members are not permitted. Benefits under the Plan are considered deferred compensation and become fully vested after five years of continuous service with MEDITECH. Members who have at least 20 years of service or who have incurred financial hardship may make in service withdrawals. Lump sum cash payment is made upon retirement, death, disability or termination of employment.
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Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The following table provides information as of December 31, 2019 with respect to the shares of common stock beneficially owned by each person known by MEDITECH to own more than 5% of MEDITECH's outstanding common stock, each Director of MEDITECH, each Executive Officer named in the Compensation Table and by all Directors and Officers of MEDITECH as a group. The number of shares beneficially owned is determined according to rules of the Securities and Exchange Commission. Under such rules, a person's beneficial ownership includes any shares as to which such person has sole or shared voting power or investment power.
| Name of | Number of Shares | Percentage |
| Shareholder, | of Common Stock | of Shares of |
| Director or Officer | Beneficially Owned | Common Stock |
| A. Neil Pappalardo* | 16,712,211 | 44.94% |
| MEDITECH Profit Sharing Trust* | 6,796,257 | 18.27% |
| Ruderman Group | 3,666,040 | 9.86% |
| Curtis W. Marble | 1,900,000 | 5.11% |
| Grossman Group | 2,061,144 | 5.54% |
| Lawrence A. Polimeno | 1,012,621 | 2.72% |
| Edward B. Roberts | 676,879 | 1.82% |
| Howard Messing | 405,000 | 1.09% |
| Barbara A. Manzolillo | 195,000 | 0.52% |
| Stuart N. Lefthes | 110,800 | 0.30% |
| Helen M. Waters | 44,200 | 0.12% |
| Michelle I. O'Connor | 35,000 | 0.09% |
| Hoda Sayed-Friel | 32,100 | 0.08% |
| 15 Directors and Officers as a Group* | 19,493,711 | 52.42% |
*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 9,915,954 shares. Likewise the number of shares indicated for the 15 Directors and Officers as a Group includes the shares owned by the MEDITECH Profit Sharing Trust.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based on MEDITECH's knowledge and review of reports received, all Section 16(a) filing requirements applicable to its Executive Officers, its Directors, the MEDITECH Profit Sharing Trust and greater-than-10% shareholders were satisfied in 2019.
Item 13 - Certain Relationships and Related Transactions, and Director Independence
No additional shares of MEDITECH stock were purchased from MEDITECH by any Director or Officer in 2017, 2018 or 2019.
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Item 14 - Principal Accounting Fees and Services
During 2019, 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 or to be paid for such services for the three years ended December 31 are as follows:
| 2017 | 2018 | 2019 | |
| Annual audit and quarterly reviews | $305,000 | $295,000 | $305,000 |
| Audit related to Profit Sharing Trust | 24,000 | 24,600 | 24,750 |
| $329,000 | $319,600 | $329,750 | |
It is the policy of the Board of Directors 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 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, 2019.
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)
By: Howard Messing, Chief Executive Officer
(Signature)
(Signature)
By: Barbara A. Manzolillo, Chief Financial Officer and Treasurer
(Signature)
(Signature)
January 31, 2020
(Date)
(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, 2020.
A. Neil Pappalardo, Chairman and Director
(Signature)
(Signature)
Lawrence A. Polimeno, Vice Chairman and Director
(Signature)
(Signature)
Howard Messing, CEO and Director
(Signature)
(Signature)
Edward B. Roberts, Director
(Signature)
(Signature)
Barbara A. Manzolillo, Treasurer, CFO and Director
(Signature)
(Signature)
Stuart N. Lefthes, Director
(Signature)
(Signature)
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