<PAGE> 1
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, 1998
Commission file number 0-28092
Medical Information Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts
(State or Other Jurisdiction of Incorporation or Organization)
04-2455639
(I.R.S. Employer Identification No.)
Meditech Circle, Westwood, MA
(Address of Principal Executive Offices)
02090
(Zip Code)
781-821-3000
(Registrant's Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock, $.25 par value, outstanding at December
31, 1998 was 16,265,711
<PAGE> 2
Index to Form 10-K
Part I
Item 1 - Business Page 3
Item 2 - Properties Page 5
Item 3 - Legal Proceedings Page 6
Item 4 - Submission of Matters to a Vote of Security Holders Page 6
Part II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters Page 6
Item 6 - Selected Financial Data Page 6
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations Page 7
Item 8 - Financial Statements and Supplementary Data Page 8
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Page 8
Part III
Item 10 - Directors and Executive Officers of the Registrant Page 8
Item 11 - Executive Compensation Page 10
Item 12 - Security Ownership of Certain Beneficial Owners
and Management Page 11
Item 13 - Certain Relationships and Related Transactions Page 11
Part IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports
on Form 8-K Page 12
Signatures Page 12
<PAGE> 3
Part I
Item 1 - Business
COMPANY OVERVIEW
Medical Information Technology, Inc. (MEDITECH or the Company) was founded
in 1969 to develop and market information system software for the hospital
industry. 1998 revenues reached $204 million and at year-end MEDITECH had a
product backlog of $144 million and more than 1,900 employees.
By the end of 1998 MEDITECH had over 1,175 active hospital customers throughout
the U.S., Canada and the U.K., as well as a backlog of over 100 hospitals
waiting implementation. The implementation process consists of teaching
hospital personnel about the operation of the software as well as training them
on how to use it in their daily activity. Once the hospital goes live,
MEDITECH maintains and updates the software thereafter.
HOSPITAL SOFTWARE
Initially MEDITECH developed a software product to automate one of the main
hospital departments, the clinical laboratory that performs various diagnostic
tests on blood and 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.
Although the individual products could be operated in a stand alone fashion,
a hospital achieved maximum effectiveness when they were used in an integrated
mode, sharing access to the common clinical and financial records of the
hospital. This concept ultimately led to MEDITECH developing the so-called
hospital information system, a cohesive set of software products designed from
the onset to work in conjunction with the overall operation of the hospital and
to minimize the need for specialized interfaces.
COMPUTER HARDWARE
Software requires extensive computer and communication equipment to function.
In spite of this, MEDITECH continues to be a pure software company, limiting
itself to specifying the aggregate components needed as well as suggesting
typical configurations from certain hardware vendors. The responsibility is
left to the hospital to purchase the requisite hardware and secure a continuing
source of maintenance service for it.
The hardware components traditionally consist of a small set of central medium-
sized computers and a large set of display terminals and printers distributed
throughout the hospital. All of these elements are interconnected by means of
a standard high speed communication network. The computers execute the
software and include large disk subsystems containing the permanent and common
clinical and financial records of the hospital.
<PAGE> 4
Hardware technology evolves rapidly, and the current trend is to replace the
display terminals with desktop computers, 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
common file requests to the servers.
LICENSED SOFTWARE
MEDITECH requires a 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 mandates the hospital hold
MEDITECH harmless from any liability arising from incorrect operation of the
software.
MEDITECH bases its product fee on the total number of hospital beds that a
customer operates at all of its sites, and sets its implementation fee on the
total number of sites. Large hospitals pay more than small hospitals, but
incremental fees continue to diminish. The monthly service fees are always 1%
of the product fees. A typical 250 bed acute care hospital might incur a
$500,000 product fee, $100,000 implementation fee and a $5,000 monthly service
fee. An order is booked and goes into the backlog when a signed software
license and 10% of both front end fees are received.
STAFF ORGANIZATION
MEDITECH is organized into functional units grouped around product development,
sales and marketing, implementation, customer service, accounting and facility
operations. All MEDITECH staff work in company owned buildings located in the
greater Boston 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. The need for remote offices is thereby negated. Although most
customer contact is through the phone, 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 line, as well as creating a few more new products each
year. The rest of the staff is developing a set of replacement products
utilizing a new technology. Approximately every seven years, the company
introduces the next generation of products based on the new technology and
gradually updates existing customers.
<PAGE> 5
SALES AND MARKETING
Most of the direct sales staff, organized into regions, concentrate on new
prospects. In addition, some of the sales staff monitor existing customers to
expose them to the Company's entire product line. Marketing activities and
promotion are low key because hospitals are easily identified, finite in number
and generally send an RFP to vendors when they are contemplating the purchase
of a hospital information system.
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.
IMPLEMENTATION PROCESS
To ensure a successful implementation, the staff must properly train a core
group of hospital personnel. To preclude interruptions from normal hospital
activities, MEDITECH mandates that the hospital personnel come to Boston for
intensive training sessions.
As training proceeds, the implementation staff will customize certain
dictionaries to fit the specific need of the hospital's environment, provide
interfaces to non-MEDITECH systems and to assist the hospital in converting
data from legacy systems. In addition, the licensed software will be
delivered, installed and tested on the customer's hardware. MEDITECH will
utilize remote access communication technology to minimize or eliminate the
need to travel.
CUSTOMER SERVICE
Once a hospital 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 hospital staff,
MEDITECH runs seminars on the use of its products.
COLUMBIA HEALTH CARE
Columbia/HCA owns and operates over 300 hospitals in the U.S., Canada, and the
U.K. and is MEDITECH's largest customer. By the end of 1998 MEDITECH had
implemented clinical systems in most of their hospitals. They represented 21%
of our revenues in 1997 and 17% of our revenues in 1998. In the 3rd quarter
1997 Columbia/HCA underwent a major change in leadership and since then have
made public statements to the effect that they are undergoing a transition in
business strategy and will be downsizing. During 1998 we saw a decline in
revenues generated from them and a decline in new orders received. This trend
is expected to continue indefinitely.
ITEM 2 - Properties
As of December 31, 1998 the Company owned five facilities containing about
1.1 million square feet of space, all being well maintained Class A properties
in the greater Boston area. The Company occupies 60% of the space and the
remaining 40% is leased to various tenants. The Company has adequate space
for its reasonable needs over the next few years.
<PAGE> 6
ITEM 3 - Legal Proceedings
There are no material pending legal proceedings against the Company, nor were
any initiated during the year 1998.
ITEM 4 - Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5 - Market for Registrant's Common Equity and Related
Stockholder Matters
No trading market exists for the Company's Common Stock, and accordingly no
high and low bid information or quotations are available with respect to the
Company's Common Stock.
The Company's Common Stock is subject to right of first refusal restrictions
upon sale, assignment, transfer, pledge or other disposition of any of its
shares.
At December 31, 1998 there were 790 holders of record of its Common Stock and
16,265,711 shares outstanding.
The Company has paid quarterly cash dividends continously since 1980.
ITEM 6 - Selected Financial Data
<TABLE>
For the Five Years Ended December 31, 1998 (in thousands where applicable):
<CAPTION>
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Operations:
Revenue $124,223 $143,721 $167,884 $193,805 $203,813
Operating income 51,255 58,513 69,550 78,286 79,583
Net income 32,190 37,085 44,350 50,284 53,281
Average shares 15,641 15,782 15,863 16,029 16,203
Earnings per share $2.06 $2.35 $2.80 $3.14 $3.29
Financial Position:
Cash and cash equivalents $12,907 $6,512 $18,063 $8,379 $10,014
Total assets 137,755 197,998 218,339 263,108 266,600
Total liabilities 20,006 60,170 55,871 73,577 49,328
Shareholders' equity 117,749 137,828 162,468 189,531 217,272
Shares outstanding 15,686 15,831 15,938 16,087 16,266
Book value per share $7.51 $8.71 $10.19 $11.78 $13.36
Other Data:
Working capital $60,711 $47,573 $60,373 $44,911 $59,032
Cash flow from operations 35,218 41,443 56,413 62,195 59,788
Depreciation 3,294 4,809 6,155 9,084 10,078
Cash dividends per share $1.04 $1.24 $1.40 $1.68 $1.88
</TABLE>
<PAGE> 7
ITEM 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of Fiscal Years ended December 31, 1997 and 1998:
1998 Revenue increased 5% to $203.8 million, while 1998 Operating Income
increased only 2% to $79.6 million. During the year the Company experienced a
decrease in the product revenue attributable to a decline in implementations
for Columbia/HCA. Staff size was not reduced in response as new orders
requiring future implementations increased significantly during the second half
of the year. The result of this caused growth in Operating Expenses to exceed
growth in Revenue. 1998 Operating Expenses increased 8% to $124.2M due to a 6%
increase in staff size and a continued moderate increase in employee salaries.
Other Income, net of Other Expense, increased from $6.4 million in 1997 to $8.5
million in 1998 due primarily to an increase in rental income ($0.9 million)
and a gain on redemptions and sales of marketable securities ($1.4 million).
The Company's effective tax rate decreased from 41% to 40% in 1998.
Comparison of Fiscal Years Ended December 31, 1996 and 1997:
1997 Revenue increased 15% to $193.8 million, while 1997 Operating Income
increased by 13% to $78.3 million. During the 4th quarter the Company
experienced a decrease in the product revenue attributable to a slowdown in
implementations for Columbia/HCA. During the quarter staff size was not
reduced in response. The result of this caused growth in Operating Expenses
to exceed growth in Revenue. 1997 Operating Expenses increased 17% to
$115.5 million due to a 12% increase in staff size, a moderate increase in
employee salaries and a significant increase in depreciation.
1997 Other Income, net of Other Expense, increased from $4.4 million to $6.4
million due to an increase of $3.3 million in rental income offset by a
one-time gain of $1.4 million on the 1996 sale of our Cambridge facility.
The Company's effective tax rate increased from 40% to 41% in 1997.
<PAGE> 8
ITEM 8 - Financial Statements and Supplementary Data
The Financial Statements are included as part of Exhibit 13 (Annual Report to
Shareholders)
<TABLE>
OPERATING RESULTS BY QUARTER:
For the Two Years Ended December 31, 1998 (in thousands where applicable):
<CAPTION>
Mar 31 Jun 30 Sep 30 Dec 31
<S> <C> <C> <C> <C>
1997
Revenue $46,705 $49,462 $51,184 $46,454
Operating income 19,310 20,448 20,998 17,530
Net income 12,201 12,838 13,507 11,738
Earnings per share $.76 $.80 $.84 $.73
1998
Revenue $48,493 $48,933 $49,922 $56,465
Operating income 18,756 18,719 18,855 23,253
Net income 12,137 12,353 12,387 16,404
Earnings per share $.75 $.76 $.77 $1.01
</TABLE>
ITEM 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
ITEM 10 - Directors and Executive Officers of the Registrant
The positions held by each Director and Officer of the Company are shown below.
There are no family relationships among the following persons.
Name of Director or Officer Age Position with the Company
A. Neil Pappalardo 56 Chief Executive Officer, Chairman of
the Board and Director
Lawrence A. Polimeno 57 Chief Operating Officer, President and
Director
Morton E. Ruderman 62 Director
Jerome H. Grossman 59 Director
Edward B. Roberts 63 Director
Roland L. Driscoll 69 Director
L.P. Dan Valente 68 Director
Howard Messing 46 Executive Vice President
Barbara A. Manzolillo 46 Chief Financial Officer, Treasurer and
Assistant Clerk
Edward G. Pisinski 55 Senior Vice President
Roberta E. Grigg 55 Senior Vice President
Christopher J. Anschuetz 46 Vice President
Robert S. Gale 52 Vice President
Steven B. Koretz 46 Vice President
Stuart N. Lefthes 45 Vice President
Joanne Wood 45 Vice President
Jane E. Currier 46 Chief Corporate Counsel and Clerk
<PAGE> 9
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 Board of Directors
has an Audit Committee, an Executive Compensation Committee, and a Charitable
Contribution Committee.
The following is a description of the business experience during the past five
years of each Director and Officer.
A. Neil Pappalardo, founder of the Company, is the Chief Executive Officer and
Chairman of the Board, and has been a Director since 1969.
Lawrence A. Polimeno is the President and Chief Operating Officer, has been a
Director since 1985, and has been with the Company since 1969.
Morton E. Ruderman, Chief Executive Officer of CRES Development, has been a
Director since 1969.
Jerome H. Grossman, Chief Executive Officer of Health Quality, Inc., has been
a Director since 1970.
Edward B. Roberts, Professor at Sloan School, Massachusetts Institute of
Technology, has been a Director since 1969.
Roland L. Driscoll, retired Chief Financial Officer of the Company, has been
a Director since 1985.
L.P. Dan Valente, Chief Executive Officer of Palomar Medical Technologies,
Inc., has been a Director since 1972.
Howard Messing has been the Executive Vice President since 1995, was a Vice
President prior to that, and has been with the Company since 1974.
Barbara A. Manzolillo has been the Chief Financial Officer since 1996, was
the Treasurer prior to that, and has been with the Company since 1975.
Edward G. Pisinski has been a Senior Vice President since 1997, was a Vice
President prior to that, and has been with the Company since 1973.
Roberta E. Grigg has been a Senior Vice President since 1997, was a Vice
President prior to that, and has been with the Company since 1975.
Christopher J. Anschuetz has been a Vice President since 1995, was a Senior
Manager prior to that, and has been with the Company since 1975.
Robert S. Gale has been a Vice President since 1995, was a Senior Manager
prior to that, and has been with the Company since 1976.
Steven B. Koretz has been a Vice President since 1997, was a Senior Manager
prior to that, and has been with the company since 1982.
Stuart N. Lefthes has been a Vice President since 1997, was a Senior Manager
prior to that, and has been with the company since 1983.
Joanne Wood has been a Vice President since 1995, was a Senior Manager prior
to that, and has been with the Company since 1983.
Jane E. Currier has been the Chief Corporate Counsel and the Clerk since
1986, and has been with the Company since 1983.
<PAGE> 10
There were no failures to file or late filings under Section 16(a)
ITEM 11 - Executive Compensation
The following table sets forth the compensation received by the Company's Chief
Executive Officer and the four most highly compensated other Officers for the
three fiscal years ended December 31, 1996, 1997 and 1998.
SUMMARY COMPENSATION TABLE
Name and Position Year Salary Bonus Other
A. Neil Pappalardo 1998 $360,000 $725,345 0
Chairman and Chief 1997 360,000 727,676 0
Executive Officer 1996 360,000 725,000 0
Lawrence A. Polimeno 1998 $240,000 $625,345 $5,816
President and Chief 1997 240,000 627,676 6,042
Operating Officer 1996 240,000 625,000 5,962
Howard Messing 1998 $180,000 $375,345 $5,816
Executive Vice President 1997 180,000 377,676 6,042
1996 156,000 375,000 5,962
Edward G. Pisinski 1998 $156,000 $300,345 $5,816
Senior Vice President 1997 156,000 302,676 6,042
Sales and Marketing 1996 156,000 300,000 5,962
Barbara A. Manzolillo 1998 $144,000 $225,345 $5,816
Chief Financial Officer 1997 144,000 227,676 6,042
and Treasurer 1996 132,000 225,000 5,962
Compensation of Executive Officers: There are no employment contracts or
agreements in effect for any officer of the Company. The Board of Directors
annually sets the total amount to be allocated in the General Bonus Program
instituted for the recognition of services rendered by all officers and
employees. In addition, the Board of Directors annually sets the total amount
to be allocated in the Officer Bonus Program instituted for the recognition
of services rendered exclusively by the officers. Finally, the Executive
Compensation Committee (composed of Mr. Roberts and Mr. Ruderman) sets Mr.
Pappalardo's annual salary and individual bonus.
Pension Plan: The Company maintains a qualified defined contribution plan for
all employees known as the Medical Information Technology, Inc. Profit Sharing
Plan. All employees of the Company 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 (capped at $100,000) of
all eligible members for the Plan year. No allocation is allowable under this
Plan to owners of 10% or more of the Company's common stock. Contributions by
members are not permitted. Benefits under the plan become fully vested after
five years of continuous service with the Company. Lump sum cash payment is
made upon retirement, death, disability, financial hardship or termination of
employment.
Compensation of Directors: The members of the Board of Directors who are not
Officers of the Company currently receive a fee of $7,000 for each fully
attended quarterly meeting, with such fee being deemed to also cover any
incidental expenses or directorial conference or committee time expended by
such directors in behalf of the Company during the year.
<PAGE> 11
ITEM 12 - Security Ownership of Certain Beneficial Owners
and Management
The following table provides information as of December 31, 1998 with respect
to the shares of Common Stock beneficially owned by each person known by the
Company to own more than 5% of the Company's outstanding Common Stock, each
Director of the Company, each Executive Officer named in the Summary
Compensation Table and by all Directors and Officers of the Company 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.
Number of Shares Percentage
of Common Stock of Shares of
Name Beneficially Owned Common Stock
A. Neil Pappalardo 4,300,000 26.44%
Morton E. Ruderman 2,207,919 13.57%
Jerome Grossman 600,675 3.69%
Lawrence A. Polimeno 560,630 3.45%
Edward B. Roberts 366,713 2.25%
Roland L. Driscoll 264,000 1.62%
Edward G. Pisinski 147,500 <1%
Howard Messing 125,000 <1%
Barbara A. Manzolillo 84,500 <1%
L. P. Dan Valente 42,500 <1%
Directors and Executive Officers
as a Group (16 persons) 8,924,437 54.87%
Curtis W. Marble 1,865,052 11.47%
Medical Information Technology Inc.
Profit Sharing Trust 1,545,331 9.50%
The address of all Officers and Directors is in care of the Company, MEDITECH
Circle, Westwood, MA 02090.
ITEM 13 - Certain Relationships and Related Transactions
None.
<PAGE> 12
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
Exhibit 3i (Articles of Incorporation) and Exhibit 3ii (By-Laws) are
incorporated by reference from the registration statement on Form 10 effective
April 27, 1996 and from exhibit under Item 6 on Form 10-Q for the quarter ended
June 10, 1997 (Amendment to By-Laws), File # 0-28092.
Exhibit 13 (Annual Report to Shareholders) and Exhibit 27 (Financial Data
Schedule) are appended to this document.
There were no reports filed on Form 8-K during the quarter ended December 31,
1998.
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)
March 24, 1999
(Date)
Barbara A. Manzolillo, Chief Financial Officer and Treasurer
(Signature)
MEDICAL INFORMATION TECHNOLOGY, INC.
Financial Statements
as of December 31, 1997 and 1998
Together with Auditors' Report
<PAGE>
MEDICAL INFORMATION TECHNOLOGY, INC.
Index
Page
Report of Independent Public Accountants 1
Balance Sheets as of December 31, 1997 and 1998 2
Statements of Income for the Years Ended
December 31, 1996, 1997 and 1998 3
Statements of Shareholders' Investment for the
Years Ended December 31, 1996, 1997 and 1998 4
Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 5
Notes to Financial Statements 6-10
<PAGE> 1
Report of Independent Public Accountants
To the Shareholders and Board of Directors of
Medical Information Technology, Inc.:
We have audited the accompanying balance sheets of Medical Information
Technology, Inc. (a Massachusetts corporation) as of December 31, 1997 and
1998, and the related statements of income, shareholders' investment and cash
flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Medical Information
Technology, Inc. as of December 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
February 3, 1999
<PAGE> 2
MEDICAL INFORMATION TECHNOLOGY, INC.
<TABLE>
Balance Sheets
<CAPTION>
December 31,
1997 1998
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents (Note 1) $ 8,379,358 $ 10,013,957
Marketable securities (Note 2) 62,348,881 67,923,022
Accounts receivable, less reserve of
$270,000 in 1997 and 1998 26,259,940 27,770,548
Prepaid expenses and other current assets 99,487 152,667
------------ ------------
Total current assets 97,087,666 105,860,194
------------ ------------
Property, Plant and Equipment, at cost (Note 1):
Computer equipment 11,887,006 9,693,702
Furniture and fixtures 18,506,896 19,976,372
Buildings and improvements 143,125,594 143,125,594
Land 26,603,703 26,603,703
------------ ------------
200,123,199 199,399,371
Less Accumulated depreciation 36,154,751 40,416,433
------------ ------------
163,968,448 158,982,938
------------ ------------
Investments 2,051,752 1,757,293
------------ ------------
$263,107,866 $266,600,425
============ ============
Liabilities and Shareholders' Investment
Current Liabilities:
Current maturities of note payable
to a bank (Note 5) $ 18,000,000 $ 15,000,000
Accounts payable 694,869 589,511
Accrued taxes 1,748,464 2,642,654
Accrued expenses (Note 4) 15,598,342 16,510,518
Customer deposits 16,135,386 12,085,748
------------ ------------
Total current liabilities 52,177,061 46,828,431
------------ ------------
Note Payable to a Bank, less current
maturities (Note 5) 19,500,000 -
------------ ------------
Deferred Federal and State Income Taxes (Note 7) 1,900,000 2,500,000
------------ ------------
Shareholders' Investment:
Common stock, $.25 par value,
Authorized 17,000,000 shares
Issued and outstanding 16,087,212 shares
in 1997 and 16,265,711 shares in 1998 4,021,803 4,066,428
Additional paid-in capital 11,335,259 16,190,107
Retained earnings 174,173,743 197,015,459
------------ ------------
Total shareholders' investment 189,530,805 217,271,994
------------ ------------
$263,107,866 $266,600,425
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
MEDICAL INFORMATION TECHNOLOGY, INC.
<TABLE>
Statements of Income
<CAPTION>
For the Years Ended December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Operating Revenue:
Software products $115,729,765 $131,775,141 $133,635,527
Software services 52,154,032 62,029,361 70,177,095
------------ ------------ ------------
Total operating revenue 167,883,797 193,804,502 203,812,622
------------ ------------ ------------
Costs and Expenses:
Operating and product development 61,453,443 74,666,248 81,046,899
Selling, general and administrative 36,880,437 40,852,721 43,182,408
------------ ------------ ------------
Total costs and expenses 98,333,880 115,518,969 124,229,307
------------ ------------ ------------
Income from operations 69,549,917 78,285,533 79,583,315
Dividend, Interest and Other Income 8,937,691 12,236,282 16,723,587
Interest and Other Expense 4,526,848 5,879,160 8,228,173
------------ ------------ ------------
Income before provision
for income taxes 73,960,760 84,642,655 88,078,729
Provision for Income Taxes (Note 7):
State 6,457,439 6,343,141 7,795,428
Federal 23,153,534 28,015,459 27,002,343
------------ ------------ ------------
Net income $ 44,349,787 $ 50,284,055 $ 53,280,958
============ ============ ============
Basic and Diluted Net Income
per Common Share $2.80 $3.14 $3.29
============ ============ ============
Shares Used in Computing Basic and
Diluted Net Income per Share 15,862,838 16,029,071 16,202,628
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
MEDICAL INFORMATION TECHNOLOGY, INC.
<TABLE>
Statements of Shareholders' Investment
<CAPTION>
Common Stock Total
Number Paid-in Retained Shareholders
of Shares Capital Earnings Investment
---------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 15,831,402 $ 9,179,274 $128,648,995 $137,828,269
Sale of 106,963 shares of
common stock 106,963 2,139,260 - 2,139,260
Purchase of 230,400 shares
of treasury stock (230,400) (4,838,400) - (4,838,400)
Sale of 195,400 shares
of treasury stock 195,400 4,344,600 - 4,344,600
Issuance of 35,000 shares of
treasury stock to qualified
employee profit sharing trust 35,000 840,000 - 840,000
Net income - - 44,349,787 44,349,787
Dividends - - (22,195,494) (22,195,494)
---------- ----------- ------------ ------------
Balance, December 31, 1996 15,938,365 $11,664,734 $150,803,288 $162,468,022
Sale of 108,847 shares of
common stock 108,847 2,612,328 - 2,612,328
Issuance of 40,000 shares of
common stock to qualified
employee profit sharing trust 40,000 1,080,000 - 1,080,000
Net income - - 50,284,055 50,284,055
Dividends - - (26,913,600) (26,913,600)
---------- ----------- ------------ ------------
Balance, December 31, 1997 16,087,212 $15,357,062 $174,173,743 $189,530,805
Sale of 138,499 shares of
common stock 138,499 3,739,473 - 3,739,473
Issuance of 40,000 shares of
common stock to qualified
employee profit sharing trust 40,000 1,160,000 - 1,160,000
Net income - - 53,280,958 53,280,958
Dividends - - (30,439,242) (30,439,242)
---------- ----------- ------------ ------------
Balance, December 31, 1998 16,265,711 $20,256,535 $197,015,459 $217,271,994
========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
MEDICAL INFORMATION TECHNOLOGY, INC.
<TABLE>
Statements of Cash Flows
<CAPTION>
For the Years Ended December 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <S>
Cash Flows from Operating Activities:
Net income $44,349,787 $50,284,055 $53,280,958
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation 6,155,719 9,084,216 10,078,344
Deferred income taxes 257,850 768,337 600,000
Stock contributions to employee
profit sharing plan 840,000 1,080,000 1,160,000
Gain on sale of securities, net (3,852) (6,361) (1,419,291)
Gain on sale of fixed assets, net (1,409,475) - -
Write-down of investments 400,000 - -
Allowance for doubtful accounts 50,000 60,000 -
Changes in assets and liabilities
Accounts receivable (1,682,409) (4,504,151) (1,510,608)
Prepaid expenses and
other current assets 12,647 (9,179) (53,180)
Accounts payable 516,581 (142,626) (105,357)
Accrued expenses 2,976,059 1,282,422 1,806,367
Customer deposits 3,950,208 4,297,963 (4,049,638)
----------- ----------- -----------
Net cash provided by
operating activities 56,413,115 62,194,676 59,787,595
----------- ----------- -----------
Cash Flows from Investing Activities:
Purchases of property, plant
and equipment (6,837,576) (57,936,029) (5,092,834)
Sales of property, plant and equipment 1,592,466 - -
Purchases of marketable securities (11,822,721) (18,373,509) (52,312,705)
Sales of marketable securities 4,756,207 17,173,099 48,157,854
Decrease in investments
resulting from distributions - 59,131 294,458
----------- ----------- -----------
Net cash used in
investing activities (12,311,624) (59,077,308) (8,953,227)
----------- ----------- -----------
Cash Flows from Financing Activities:
Borrowings on note payable to a bank - 43,000,000 -
Payments of note payable to a bank (12,000,000) (31,500,000) (22,500,000)
Sale of common stock 2,139,260 2,612,328 3,739,473
Purchase of treasury stock (4,838,400) - -
Sale of treasury stock 4,344,600 - -
Dividends paid (22,195,494) (26,913,600) (30,439,242)
----------- ----------- -----------
Net cash used in
financing activities (32,550,034) (12,801,272) (49,199,769)
----------- ----------- -----------
Net (Decrease) Increase in Cash and
Cash Equivalents 11,551,457 (9,683,904) 1,634,599
Cash and Cash Equivalents,
beginning of year 6,511,805 18,063,262 8,379,358
----------- ----------- -----------
Cash and Cash Equivalents,
end of year $18,063,262 $ 8,379,358 $10,013,957
=========== =========== ===========
Supplemental Disclosure of
Cash Flow Information:
Cash paid for Income taxes $28,761,470 $34,482,284 $33,224,366
=========== =========== ===========
Cash paid in Interest $ 2,733,229 $ 2,394,030 $ 2,119,642
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
MEDICAL INFORMATION TECHNOLOGY, INC.
Notes to Financial Statements
December 31, 1998
(1) Operations and Accounting Policies
Medical Information Technology, Inc. (the Company) is engaged in the
development, manufacture and licensing of computer software products and
related services used in the medical field. The principal market for the
Company's products consists of health care providers primarily located 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
During 1998, the Company adopted the provisions of the American Institute of
Certified Public Accountants (AICPA) Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2). The Company enters into software product
contracts that provide for a customer deposit upon contract execution,
milestone billings and fixed monthly service fees thereafter. As a result,
SOP 97-2 requires the Company to recognize product and service revenue using
the percentage-of-completion method prescribed by SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts.
Accordingly, product revenue is recognized at the completion of each
milestone and service revenue, including maintenance, is recognized as
services are rendered.
(b) Software Development and Production Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software To Be Sold, Leased or Otherwise
Marketed, the Company capitalizes software development costs incurred after
technological feasibility of the software development projects is established
and the realizability of such capitalized costs through future operations is
expected if such costs become material. To date, all of the Company's costs
for research and development of software products have been charged to
operations as incurred, because the amount of software development costs
incurred subsequent to the establishment of technological feasibility has been
immaterial.
(c) Depreciation
The Company provides for depreciation on its property, plant and equipment in
amounts estimated to allocate the costs thereof under various depreciation
methods over the following estimated useful lives:
Description Useful Life
Computer equipment 5 years
Furniture and fixtures 7-10 years
Buildings and improvements 15-40 years
<PAGE> 7
(d) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of ninety days or less to be cash equivalents.
Cash equivalents include short-term time deposits of approximately $5,700,000
and $8,600,000 at December 31, 1997 and 1998, respectively.
(e) Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk are principally cash, cash equivalents and accounts receivable.
The Company 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 the Company makes substantial sales. To reduce risk,
the Company routinely assesses the financial strength of its customers and, as
a result, believes that its accounts receivable credit risk exposure is limited.
The Company maintains an allowance for potential credit losses but historically
has not experienced any significant credit losses related to an individual
customer or groups of customers.
(f) Net Income per Common Share
In accordance with SFAS No. 128, Earnings Per Share, the Company reports both
basic and diluted earnings per share (EPS). The Company has no common stock
equivalents, thus both basic EPS and diluted EPS are the same and computed by
dividing net income by the weighted-average number of common shares outstanding
during the year.
(g) Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all
components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. For the years ended December 31, 1996, 1997 and 1998,
the Company had no items of comprehensive income.
(h) Segment and Enterprise-Wide Reporting
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis
for each reportable operating segment of an enterprise, as defined. Based on
the criteria set forth in SFAS No. 131, the Company currently operates in one
operating segment, medical software and services.
<PAGE> 8
SFAS No. 131 also requires that certain enterprise-wide disclosures be made
related to products and services, geographic areas and major customers. The
Company derives substantially all of its operating revenue from the sale and
support of one group of similar products and services. All of the Company's
assets are located within the United States. During 1996, 1997 and 1998, the
Company derived its operating revenue from the following countries (as a
percentage of total operating revenue):
1996 1997 1998
---- ---- ----
United States 87% 86% 90%
Canada 10 10 8
Other 3 4 2
---- ---- ----
100% 100% 100%
==== ==== ====
During the years ended December 31, 1996, 1997 and 1998, one customer accounted
for approximately 21%, 21% and 17% of operating revenue, respectively.
(2) Marketable Securities
The Company accounts for its investments in accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115
requires companies to classify their short-term investments as either trading,
available-for-sale or held-to-maturity. The Company's marketable securities
consist of preferred equity securities that are callable by the issuer and
common equity securities. The Company has classified the securities as
available for sale and, as such, they should be carried at fair market value.
The fair market value of these equity securities as of December 31, 1997 and
1998 was approximately $68,773,000 and $74,401,000, respectively. The Company,
however, has elected to record these investments at cost since the differences
between fair market value and cost are not material to the financial statements.
(3) Allowance for Doubtful Accounts
A summary of the allowance for doubtful accounts activity is as follows at
December 31, 1996, 1997 and 1998:
1996 1997 1998
-------- -------- --------
Balance, beginning of period $160,000 $210,000 $270,000
Amounts charged to expense 50,000 66,900 9,826
Amounts written off - (6,900) (9,826)
-------- -------- --------
Balance, end of period $210,000 $270,000 $270,000
======== ======== ========
(4) Accrued Expenses
Accrued expenses consist of the following at December 31, 1997 and 1998:
1997 1998
----------- -----------
Accrued bonus $13,100,000 $13,550,000
Accrued vacation 1,500,000 1,650,000
Other accruals 998,342 1,310,518
----------- -----------
$15,598,342 $16,510,518
=========== ===========
<PAGE> 9
(5) Note Payable to a Bank
In connection with the purchase of real estate in August 1997, the Company
amended its loan agreement and entered into an unsecured note payable with a
bank. The amount of the note payable was $54,000,000, of which $15,000,000 was
outstanding at December 31, 1998. The note is payable in monthly installments
of $1,500,000 plus accrued interest. Interest on the outstanding principal
balance is payable at the bank's prime rate less 1% (6.75% at December 31,
1998). In connection with this note, the Company must maintain certain levels
of net income, as defined. At December 31, 1998, the Company was in compliance
with the required covenant.
(6) Qualified Profit Sharing Plan
The Company has no obligation for postemployment or postretirement benefits.
The Company maintains a qualified profit sharing plan that provides deferred
compensation to substantially all of its employees. Contributions to the plan
are at the discretion of the Board of Directors and may be in the form of
Company stock or cash. A summary of contributions made during the years ended
December 31, 1996, 1997 and 1998 is as follows:
1996 1997 1998
---------- ---------- ----------
Cash $2,060,000 $2,320,000 $2,340,000
Company common stock
35,000 shares at $24/share 840,000 - -
40,000 shares at $27/share - 1,080,000 -
40,000 shares at $29/share - - 1,160,000
---------- ---------- ----------
$2,900,000 $3,400,000 $3,500,000
========== ========== ==========
(7) Income Taxes
The Company follows the provisions of SFAS No. 109, Accounting for Income
Taxes. The components of the net deferred tax liability recognized in the
accompanying balance sheets are as follows:
1997 1998
---------- ----------
Tax reserves $3,133,000 $3,886,700
Deferred revenue (1,195,500) (618,700)
Other reserves and expenses (708,000) (768,000)
Depreciation 670,500 -
---------- ----------
Total net deferred tax liability $1,900,000 $2,500,000
========== ==========
<PAGE> 10
The components of the provision for income taxes shown on the accompanying
statements of income consist of the following:
1996 1997 1998
----------- ----------- -----------
State
Current $ 6,508,839 $ 6,151,057 $ 7,645,428
Deferred (51,400) 192,084 150,000
----------- ----------- -----------
$ 6,457,439 $ 6,343,141 $ 7,795,428
=========== =========== ===========
Federal
Current $22,844,284 $27,439,206 $26,552,343
Deferred 309,250 576,253 450,000
----------- ----------- -----------
$23,153,534 $28,015,459 $27,002,343
=========== =========== ===========
The effective income tax rate varies from the amount computed using the
statutory U.S. income tax rate as follows:
1996 1997 1998
----- ----- -----
Statutory tax rate 35.0% 35.0% 35.0%
Increase in taxes resulting from state income
taxes, net of federal income tax benefit 5.7 4.9 5.8
Dividend income exclusion (1.4) (1.4) (1.2)
Other 0.7 2.1 (0.1)
----- ----- -----
40.0% 40.6% 39.5%
===== ===== =====
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,014
<SECURITIES> 67,923
<RECEIVABLES> 25,922
<ALLOWANCES> 270
<INVENTORY> 0
<CURRENT-ASSETS> 105,860
<PP&E> 199,399
<DEPRECIATION> 40,416
<TOTAL-ASSETS> 266,600
<CURRENT-LIABILITIES> 46,829
<BONDS> 0
0
0
<COMMON> 4,066
<OTHER-SE> 213,206
<TOTAL-LIABILITY-AND-EQUITY> 266,600
<SALES> 133,636
<TOTAL-REVENUES> 203,813
<CGS> 0
<TOTAL-COSTS> 124,229
<OTHER-EXPENSES> 6,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,120
<INCOME-PRETAX> 88,079
<INCOME-TAX> 34,798
<INCOME-CONTINUING> 53,281
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,281
<EPS-PRIMARY> 3.29
<EPS-DILUTED> 3.29
</TABLE>
