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EX-32 - SECTION 1350 CERTIFICATIONS - Medical Information Technology, Inc.ex32.htm
EX-31 - RULE 13A-14(A) CERTIFICATIONS - Medical Information Technology, Inc.ex31.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2017

0-28092
(Commission file number)

Medical Information Technology, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Massachusetts
(State of Incorporation)

04-2455639
(IRS Employer Identification Number)

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 [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 [ ]

Page 1 of 12

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 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 March 31, 2017.


Index to Form 10-QPage


Part I - Financial Information 
   Item 1 - Financial Statements (Unaudited) 
      Balance Sheets - December 31, 2016 and March 31, 20173
      Statements of Income and Comprehensive Income - Three Months 
         Ended on March 31, 2016 and 20174
      Statements of Cash Flow - Three Months Ended on  
         March 31, 2016 and 20175
      Notes to Financial Statements6
   Item 2 - Management's Discussion and Analysis of Operating Results and 
      Financial Condition10
   Item 3 - Quantitative and Qualitative Disclosures About Market Risk11
   Item 4 - Controls and Procedures11
Part II - Other Information 
   Item 1 - Legal Proceedings11
   Item 1A - Risk Factors11
   Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds11
   Item 3 - Defaults Upon Senior Securities11
   Item 4 - Mine Safety Disclosures11
   Item 5 - Other Information11
   Item 6 - Exhibits12
Signatures12

Page 2 of 12

Part I - Financial Information

Item 1 - Financial Statements (Unaudited)

Balance Sheets
December 31, 2016 and March 31, 2017

 Dec 31, 2016Mar 31, 2017
 

Cash and equivalents$14,089,951$16,613,671
Marketable securities325,878,440315,486,745
Trade receivables, net of reserve41,574,48339,034,251
Contract assets, prepaid and other12,571,5409,532,278
 

  Current assets394,114,414380,666,945
 

Computer equipment14,948,50315,031,446
Furniture and fixtures75,710,29778,001,729
Buildings251,410,624251,410,624
Land43,195,57643,195,576
Accumulated depreciation(167,211,794)(170,597,134)
 

  Fixed assets218,053,206217,042,241
   
Other assets10,764,42210,855,925
Deferred taxes11,362,53015,674,907
 

  Total assets$634,294,572$624,240,018
 

   
Accounts payable$222,615$386,221
Taxes payable2,652,0674,848,866
Accrued expenses22,542,13614,666,836
Deferred revenue33,702,33352,667,724
 

  Current liabilities59,119,15172,569,647
   
Deferred taxes33,411,55130,888,384
Tax reserves18,229,17318,462,700
 

  Total liabilities110,759,875121,920,731
 

Common stock, $1.00 par value, authorized  
  40,000,000 shares, issued and outstanding  
  37,190,854 shares in 2016 and 201737,190,85437,190,854
Additional paid-in capital122,907,959122,907,959
Retained income317,019,791295,887,899
Unrealized after-tax security gains46,416,09346,332,575
 

  Shareholder equity523,534,697502,319,287
 

  Total liabilities and shareholder equity$634,294,572$624,240,018
 


Page 3 of 12

Statements of Income and Comprehensive Income
Three Months Ended on March 31, 2016 and 2017

 3 monthsended on
 Mar 31, 2016Mar 31, 2017
 

Product revenue$34,390,867$34,778,441
Service revenue83,535,41682,374,527
 

  Total revenue117,926,283117,152,968
 

Operations, development76,020,10281,539,132
Selling, G & A25,913,10022,363,899
 

  Operating expense101,933,202103,903,031
 

  Operating income15,993,08113,249,937
   
Other income13,305,7238,442,937
Other expense1,443,3481,537,520
 

  Pre-tax income27,855,45620,155,354
 

State income tax2,347,0001,031,000
Federal income tax6,528,0004,617,000
 

  Income tax8,875,0005,648,000
 

  Net income$18,980,456$14,507,354
   
Change in unrealized after-tax security gains6,869,274(83,518)
 

  Comprehensive income$25,849,730$14,423,836
 


Page 4 of 12

Statements of Cash Flow
Three Months Ended on March 31, 2016 and 2017

 3 monthsended on
 Mar 31, 2016Mar 31, 2017
 

Net income$18,980,456$14,507,354
Depreciation and amortization expense3,865,8593,666,589
Pre-tax gain on sale of marketable securities(8,254,680)(3,562,168)
Pre-tax gain on sale of fixed assets----
Change in trade receivables, net of reserve6,170,3662,540,232
Change in contract assets, prepaid and other(1,342,637)(3,129,461)
Change in accounts payable214,687163,606
Change in taxes payable1,782,8002,196,799
Change in accrued expenses(22,071,944)(7,875,300)
Change in deferred revenue2,762,5134,165,921
Change in net deferred taxes(535,106)1,551,734
Change in tax reserves633,000289,204
 

  Net cash from operations2,205,31414,514,510
 

Sales of marketable securities19,958,08913,814,668
Purchases of fixed assets(622,799)(2,374,375)
Sales of fixed assets----
Change in other assets81,542(372,754)
 

  Net cash from investing19,416,83211,067,539
 

Dividends paid(23,058,329)(23,058,329)
 

  Net cash used in financing(23,058,329)(23,058,329)
 

Net change in cash and equivalents(1,436,183)2,523,720
Cash and equivalents at beginning23,565,89914,089,951
 

  Cash and equivalents at end$22,129,716$16,613,671
 

Supplemental Non-Cash Disclosure:  
  Net Adjustment for Revenue Recognition Standard (Note 8)--$12,580,916

Page 5 of 12

Notes To Financial Statements

Note 1. Significant Accounting Policies

The unaudited financial statements presented herein have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2016 included in MEDITECH's Form 10-K filed on January 31, 2017. The unaudited financial statements presented herein have not been audited by our Independent Registered Public Accounting Firm in accordance with the standards of the Public Company Accounting Oversight Board (United States), but in the opinion of management such financial statements include all normal recurring adjustments necessary to present fairly MEDITECH's financial position, operating results and cash flow.

Note 2. Available For Sale Securities

MEDITECH follows the provisions of ASC 320-10, Investments - Debt and Equity Securities, which requires marketable securities be classified as trading, available-for-sale or held-to-maturity. MEDITECH classifies its marketable securities as available-for-sale and records them at fair value with any unrealized after-tax gains or losses reported as a component of shareholder equity. The fair value was determined based on quoted prices in active markets. ASC 320-10 requires that for each individual security classified as available-for-sale, a company shall determine whether a decline in fair value below the cost basis is temporary in nature. If the decline in fair value is not judged as such, the cost basis of the individual security shall be reduced to fair value and the amount of the write-down shall be reflected in earnings.

MEDITECH follows the provisions of ASC 320-10-35 Subsequent Measurement, and evaluates its marketable securities for other-than-temporary impairment using an impairment model consistent with a debt security. The factors considered include the severity and duration of the loss, the intent and ability to hold the securities for an extended period of time until recovery, and whether issuers are current on dividend payments and maintain investment grade ratings. Finally, the effect of fluctuating interest rates, current economic and industry conditions, and the issuers' current financial position are also taken into consideration.

MEDITECH follows the provisions of ASC 820-10, Fair Value Measurements and Disclosures, which provides for expanded disclosure and guidelines to determine fair market value of assets and liabilities. ASC 820-10 applies whenever other standards require or permit assets and liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances. MEDITECH's marketable securities represent assets measured at fair value on a recurring basis, and are considered Level 1 assets as defined by ASC 820-10.

The following table indicates the original cost, unrealized pre-tax gains and losses, and fair market value of MEDITECH's securities. The change in unrealized after-tax security gains and losses have been accounted for within comprehensive income. There are no unrealized pre-tax losses as of March 31, 2017.

 Dec 31, 2016Mar 31, 2017
 

Original cost$248,518,286$238,265,786
Unrealized pre-tax gains77,360,15477,220,959
Unrealized pre-tax losses----
 

Fair market value$325,878,440$315,486,745
 


Page 6 of 12

Note 3. Equity Method Investments

MEDITECH follows the provisions of ASC 323-10, Investments - Equity Method and Joint Ventures, and as such, accounts for the equity investment in Meditech South Africa in accordance with the cost method. Meditech South Africa licenses MEDITECH's software technology and re-licenses it to its respective customers. Meditech South Africa serves a market niche which is part of the overall medical market but is outside of the health care market which MEDITECH serves. MEDITECH holds a fully collateralized mortgage note for a loan to Meditech South Africa to purchase land and a building used as its corporate headquarters. MEDITECH believes the fair value of this investment and loan balance approximates its March 31, 2017 carrying value.

During the 2nd quarter 2007 MEDITECH acquired Patient Care Technologies, Inc. (PtCT), a company engaged in the development, manufacture, licensing and support of computer software products for the home health care market. MEDITECH accounted for this acquisition under the purchase method of accounting in accordance with ASC 805-10, Business Combinations. PtCT merged with and into MEDITECH effective December 31, 2009.

During the 1st quarter 2011 MEDITECH acquired LSS Data Systems, Inc. (LSS), a company engaged in the development, manufacture, licensing and support of ambulatory information system software for physician practices. MEDITECH accounted for this acquisition under the purchase method of accounting in accordance with ASC 805-10, Business Combinations. LSS merged with and into MEDITECH effective December 31, 2013.

MEDITECH follows the provisions of ASC 350-20-35 Intangibles, Goodwill and Other Qualitative Testing. MEDITECH annually assesses qualitative factors of its goodwill and intangible assets for impairment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The evaluation assesses all relevant economic, industry, regulatory, and legal facts and circumstances as well as overall performance. If, after assessing the totality of such facts and circumstances, MEDITECH determines that it is more likely than not that the fair value of a reporting unit is not less than its carrying amount, then no further goodwill impairment testing is necessary.

Note 4. Income Tax Accounting

MEDITECH follows the provisions of ASC 740-10, Accounting for Income Taxes. Deferred taxes relate to the earlier recognition of certain revenue and the later recognition of certain expenses for tax purposes. They also relate to the increase in fair market value over the cost basis of marketable securities. Tax reserves relate to the uncertainty of state nexus. Key judgments are reviewed annually and adjusted to reflect current assessments. The years 2014 through 2016 are subject to examination by the IRS, and various years are subject to examination by state tax authorities.

Note 5. Earnings Per Share

MEDITECH follows the provisions of ASC 260-10, Earnings per Share, which requires reporting both basic and diluted earnings per share. MEDITECH has no common share equivalents such as preferred stock, warrants or stock options which would dilute earnings per share. Thus, earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the applicable period. In general, the average number of shares reflects the annual issuance of shares sold to staff members in February pursuant to the 2004 Stock Purchase Plan and contributed to the MEDITECH Profit Sharing Trust in December.

Page 7 of 12

 3 monthsended on
 Mar 31, 2016Mar 31, 2017
 

Net income$18,980,456$14,507,354
Average number of shares37,190,85437,190,854
Earnings per share$0.51$0.39

Note 6. Comprehensive Income Presentation

MEDITECH follows the provisions of ASU 2011-05, Presentation of Comprehensive Income, which establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income is the total of net income and all other non-owner changes in equity including items such as unrealized after-tax gains or losses on marketable securities classified as available for sale, foreign currency translation adjustments and minimum pension liability adjustments. In MEDITECH's case net income plus the change in unrealized after-tax security gains is shown as comprehensive income in the income statement.

 3 monthsended on
 Mar 31, 2016Mar 31, 2017
 

Unrealized after-tax gains arising during the  
  period on securities existing at period end12,930,2292,052,782
   
Unrealized after-tax gains arising before the  
  period on securities sold during the period(6,060,955)(2,136,300)
 

Change in unrealized after-tax security gains6,869,274(83,518)

Note 7. Segment Reporting

MEDITECH follows the provisions of ASC 280-10, Segment Reporting. Based on the criteria set forth in ASC 280-10, MEDITECH currently operates in one operating segment, medical software and services. MEDITECH derives most of its operating revenue from the sale and support of one group of similar products and services. All of MEDITECH's assets are located within the United States. The following table indicates the operating revenue percentage based on location of customer.

 3 monthsended on
 Mar 31, 2016Mar 31, 2017
 

United States89%87%
Canada10%12%
All others1%1%

Page 8 of 12

Note 8. New Revenue Recognition Standard Adoption

Effective January 1, 2017 MEDITECH adopted the provisions of ASU 985-606, Revenue from Contracts with Customers, the new revenue recognition standard, with modified retrospective application.

Under the new standard MEDITECH enters into perpetual software license contracts that provide for a customer deposit upon contract execution, milestone billings during the implementation phase and fixed monthly support fees thereafter. MEDITECH classifies software fees and related implementation fees together as product revenue in the statement of income. Such revenue is recognized over time with the transfer of promised goods and services to the customer. MEDITECH classifies post-implementation support as service revenue in the statement of income and recognizes said revenue over time when the related services are rendered.

MEDITECH identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to the performance obligations, and recognizes revenue upon completion of performance obligations on the percent completion method based on completion of specific events. The primary factors taken into consideration involve tracking and measuring progress to complete software delivery, training on the use the software, interfacing the software with other vendor software, and confirming when the software becomes operational at the customer's site.

Modified retrospective application is effective January 1, 2017 for certain contracts not completed by December 31, 2106. Such revenue previously recognized based on completion of contract milestones will be based on the percentage of completion of specific events and all previously paid product installation costs are removed from Contract Assets, Prepaid and Other on balance sheet. The cumulative effect of applying the new standard is a reduction to the opening balance of retained earnings. The following summarizes these changes:
  • Deferred Revenues increased by $14,799,470, for the addition of transitional revenues, resulting in an after-tax reduction of Retained Earnings of $8,879,682. The tax impact was recorded as an increase to Deferred Taxes of $5,919,788.
  • Contract Assets, Prepaid and Other were reduced by $6,168,724, for the removal of product installation costs, resulting in an after-tax reduction to retained earnings of $3,701,234. The tax impact was recorded as an increase to Deferred Taxes of $2,467,490.
During the first quarter of 2017, a total of $4,266,111 was removed from deferred revenues and revenue claimed as specific events were attained under the new percentage of completion standard. Deferred Revenues were $33,702,333 and $52,667,724 at December 31, 2016 and March 31, 2017, respectively. Also, during the quarter Contract Assets increased $1,127,239. Contract Assets, Prepaid and Other were $12,571,540 and $9,532,278 at December 31, 2016 and March 31, 2017, respectively.

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Item 2 - Management's Discussion and Analysis of Operating Results and Financial Condition

Operating3 monthsended onPercent
ResultsMar 31, 2016Mar 31, 2017Change




Total revenue$117,926,283$117,152,968(0.7%)
Operating income15,993,08113,249,937(17.2%)
Net income18,980,45614,507,354(23.6%)
Average number of shares37,190,85437,190,854--
Earnings per share$0.51$0.39(23.6%)
Cash dividends per share$0.62$0.62--

Product revenue increased by $0.4 million due primarily to certain transitional revenue. Service revenue decreased by $1.2 million due primarily to the consolidation of certain customers. The resultant total revenue decreased by $0.8 million.

Operating expense increased by $2.0 million or 1.9% due primarily to higher staff related expenses. The resultant operating income decreased by $2.7 million.

Other income decreased by $4.9 million due primarily to lower realized pre-tax marketable securities gains. Other expense increased by $0.1 million. The resultant pre-tax income decreased by $7.7 million or 27.6%.

MEDITECH's effective tax rate decreased from 31.9% to 28.0% due primarily to a lower taxable revenues in the current period. Net income decreased by $4.5 million due primarily to higher staff related expenses and lower realized after-tax marketable securities gains in the current period.

Financial ConditionDec 31, 2016Mar 31, 2017



Working capital$334,995,263$308,097,298
Total assets634,294,572624,240,018
Total liabilities110,759,875121,920,731
Shareholder equity523,534,697502,319,287
Outstanding number of shares37,190,85437,190,854
Shareholder equity per share$14.08$13.51

Retained earnings at January 1, 2017 was reduced by $12.6 million as a result of the new revenue recognition standard as described in Note 8.

Accrued expenses decreased by $7.9 million during the period due primarily to the payment of $15.0 million in bonuses applicable to 2016 offset by the accrual of $6.1 million in bonus expenses applicable to 2017.

At March 31, 2017 MEDITECH's cash, cash equivalents and marketable securities totaled $332.1 million. Marketable securities consisted of preferred and common equities. For the first three months of 2017 cash flow from operations was $14.5 million, cash flow from investing was $11.1 million and cash flow used in financing was $23.1 million. The $23.1 million dividend payment to shareholders was the primary use of cash generated by operating and investing activities during the period. MEDITECH has no long-term debt. Shareholder equity at March 31, 2017 was $502.3 million. Management anticipates additions to fixed assets will continue, including new facilities and computer systems for product development, sales and marketing, implementation, service and administrative staff.

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Management believes existing cash, cash equivalents and marketable securities together with funds generated from operations will be sufficient to meet operating and capital expense requirements for the foreseeable future.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes from the market risk disclosed in MEDITECH's Annual Report on Form 10-K for the year ended December 31, 2016.

Item 4 - Controls and Procedures

An evaluation was conducted under the supervision and with the participation of MEDITECH's management, including the Chief Executive Officer and Chief Financial Officer, on the effectiveness of MEDITECH's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded MEDITECH's disclosure controls and procedures are effective at March 31, 2017 to ensure information requiring disclosure by MEDITECH in reports which it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in MEDITECH's internal control over financial reporting occurring during the fiscal quarter covered by this report which have materially affected or are reasonably likely to materially affect MEDITECH's internal control over financial reporting.

Part II - Other Information

Item 1 - Legal Proceedings

None.

Item 1A - Risk Factors

There have been no material changes from the risk factors disclosed in MEDITECH's Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

MEDITECH did not repurchase any of its shares of common stock during the 1st quarter of 2017. However, during the 1st quarter the Medical Information Technology, Inc. Profit Sharing Trust purchased MEDITECH's common stock in individual private transactions: 14,000 shares in February at $45 per share and 15,643 shares in March at $45 per share for a total of $1,333,935.

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Mine Safety Disclosures

Not applicable.

Item 5 - Other Information

The Annual Meeting of Shareholders of Medical Information Technology, Inc. was held at its corporate offices, 1 Constitution Way, Foxborough, Massachusetts, on Monday, April 24, 2017.

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The meeting was convened at 9am with the Chairman, A. Neil Pappalardo, presiding and the Secretary, Shannon M. Connell, keeping the minutes. On the March 24, 2017 record date there were a total of 37,190,854 shares of MEDITECH's common stock, par value $1.00 per share outstanding. A total of 35,920,289 shares or 96.0% of the outstanding shares, constituting a quorum, were represented at the meeting by proxy or in person by ballot.

The following six directors of MEDITECH were elected to serve until the 2018 Annual Meeting and thereafter until their successors are chosen and qualified, with votes cast as follows:

Name of Nominee     For Withheld



A. Neil Pappalardo35,740,539179,750
Lawrence A. Polimeno35,848,74971,540
Howard Messing35,838,15882,131
Barbara A. Manzolillo35,866,68353,606
Edward B. Roberts35,831,25289,037
Stuart N. Lefthes35,820,56999,720

The proposal to ratify the selection of Wolf & Company, P.C. as MEDITECH's Independent Registered Public Accounting Firm for the fiscal year ending December 31, 2017 was approved, with 33,854,118 shares in favor, 380 shares against and 2,065,791 shares abstaining.

A non-binding resolution to approve the compensation of MEDITECH's named executive officers voted as follows: 31,449,225 shares in favor, 139,711 shares against, and 4,331,353 shares abstaining. A non-binding resolution to select the frequency of a shareholder vote to approve the compensation of MEDITECH's named executive officers voted as follows: 8,908,898 shares in favor of 1 year, 1,256,030 shares in favor of 2 years, 17,770,365 shares in favor of 3 years and 7,984,996 shares abstaining. MEDITECH has elected a frequency of 3 years based on such shareholder vote.

Item 6 - Exhibits

Exhibit 3.1: MEDITECH's Articles of Organization, as amended to date, are incorporated by reference to an exhibit to the quarterly report on Form 10-Q for the quarter ended March 31, 2007. Exhibit 3.2: MEDITECH's By-Laws, as amended to date, are incorporated by reference to an exhibit to the current report on Form 8-K filed on July 2, 2010. Exhibit 31: Rule 13a-14(a) Certifications, Exhibit 32: Section 1350 Certifications and Exhibit 101: Interactive Data Files are appended to this report.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Medical Information Technology, Inc.
(Registrant)

April 28, 2017
(Date)

Howard Messing, Chief Executive Officer and President
(Signature)

Barbara A. Manzolillo, Chief Financial Officer and Treasurer
(Signature)

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