Item 1 - Business
COMPANY OVERVIEW
Medical Information Technology, Inc. (MEDITECH) was founded in 1969 to develop and market information system software for the hospital industry. During 1999 combined product and service revenue reached $225 million. By the year's end MEDITECH had more than 1,900 employees, almost 1,600 active hospital customers throughout the U.S., Canada and the U.K., as well as a backlog of almost 100 hospitals waiting implementation.
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.
Hardware technology evolves rapidly, and the current trend is to replace the display terminals with desktop and handheld 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 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 five company owned facilities 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, Meditech introduces the next generation of products based on the new technology and gradually updates existing customers.
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 Meditech'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 about the operation of the software and how to use it in their daily activity. 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 or operates over 300 hospitals in the U.S., Canada, and the U.K. and has been MEDITECH's largest customer for some time now. By the end of 1998 MEDITECH had completed implementation of clinical systems at all of their hospitals. They represented 17% of MEDITECH revenues in 1998 and 9% of MEDITECH revenues in 1999.
ITEM 2
ITEM 2 - Properties
As of December 31, 1999 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.
ITEM 3
ITEM 3 - Legal Proceedings
There are no material pending legal proceedings against the Company, nor were any initiated during the year 1999.
ITEM 4
ITEM 4 - Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5
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, 1999 there were 838 holders of record of its Common Stock and 16,457,286 shares outstanding.
The Company has paid quarterly cash dividends continuously since 1980. Dividends paid per share in the last five years is set forth under Item 6.
ITEM 6 - Selected Financial Data
ITEM 7
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Comparison of Fiscal Years ended December 31, 1998 and 1999:
Total revenue increased 11% from $203.8 million in 1998 to $225.6 million in 1999 as a result of increased services provided to both existing and new customers. Operating expenses increased 8% from $124.2 million in 1998 to $134.1 million in 1999 due primarily to higher staffing costs associated with producing increased revenues. Operating expenses did not grow at the same pace as revenues due to a disproportionate decrease in depreciation expense in 1999. Additional depreciation expenses of $3.4 million were absorbed In 1997 and 1998 as a result of one-time adjustments made to unify the varying depreciation methods in use for book versus tax calculation purposes. As a result, 1999's depreciation expense dropped by $2.0 million and 1999 operating income increased 15% from $79.6 million in 1998 to $91.5 million in 1999.
Other income, net of other expense, increased from $8.5 million in 1998 to $8.6 million in 1999. Two significant component changes offset each other during the year. Interest expense decreased $1.6 million year to year as outstanding bank debt was paid-down but 1998's results included a gain of $1.4 million from the redemption and sale of marketable securities while there were no such gains in 1999.
The Company's effective tax rate remained unchanged at 40% in 1999.
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 of $0.9 million in rental income and a gain of $1.4 million on redemptions and sales of marketable securities.
The Company's effective tax rate decreased from 41% in 1997 to 40% in 1998.
ITEM 8
ITEM 8 - Financial Statements and Supplementary Data
The Financial Statements are included as part of Exhibit 13 (Annual Report to Shareholders)
ITEM 9
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
ITEM 10
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 57 Chief Executive Officer, Chairman of the Board and Director Lawrence A. Polimeno 58 Chief Operating Officer, President and Director Roland L. Driscoll 70 Director Jerome H. Grossman 60 Director Edward B. Roberts 64 Director Morton E. Ruderman 63 Director L.P. Dan Valente 69 Director Howard Messing 47 Executive Vice President Barbara A. Manzolillo 47 Chief Financial Officer, Treasurer and Assistant Clerk Roberta E. Grigg 56 Senior Vice President Edward G. Pisinski 56 Senior Vice President Christopher J. Anschuetz 47 Vice President Robert S. Gale 53 Vice President Steven B. Koretz 47 Vice President Stuart N. Lefthes 46 Vice President Joanne Wood 46 Vice President Jane E. Currier 47 Chief Corporate Counsel and Clerk 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, the President and Chief Operating Officer, has been a Director since 1985, and has been with the Company since 1969.
Roland L. Driscoll, retired Chief Financial Officer of the Company, has been a Director since 1985.
Jerome H. Grossman, Chief Executive Officer of Lion Gate Management Corp., has been a Director since 1970.
Edward B. Roberts, Professor at Sloan School, Massachusetts Institute of Technology, has been a Director since 1969.
Morton E. Ruderman, Chief Executive Officer of CRES Development, has been a Director since 1969.
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.
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.
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.
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. There were no failures to file or late filings under Section 16(a)
ITEM 11
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, 1997, 1998 and 1999.
SUMMARY COMPENSATION TABLE
Name and Position Year Salary Bonus Other
A. Neil Pappalardo 1999 $360,000 $800,455 0 Chairman and Chief 1998 360,000 725,345 0 Executive Officer 1997 360,000 727,676 0
Lawrence A. Polimeno 1999 $240,000 $675,455 $5,811 President and Chief 1998 240,000 625,345 5,816 Operating Officer 1997 240,000 627,676 6,042
Howard Messing 1999 $216,000 $425,455 $5,811 Executive Vice President 1998 180,000 375,345 5,816 1997 180,000 377,676 6,042
Edward G. Pisinski 1999 $192,000 $325,455 $5,811 Senior Vice President 1998 156,000 300,345 5,816 Sales and Marketing 1997 156,000 302,676 6,042
Barbara A. Manzolillo 1999 $180,000 $275,455 $5,811 Chief Financial Officer 1998 144,000 225,345 5,816 and Treasurer 1997 144,000 227,676 6,042
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. ITEM 12
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
The following table provides information as of December 31, 1999 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 4,335,000 26.34% Morton E. Ruderman 2,207,919 13.42% Curtis W. Marble 1,865,052 11.33% Meditech Profit Sharing Trust 1,605,809 9.76% Jerome Grossman 600,675 3.65% Lawrence A. Polimeno 558,563 3.39% Edward B. Roberts 360,688 2.19% Roland L. Driscoll 264,000 1.60% Edward G. Pisinski 147,500 <1% Howard Messing 135,000 <1% Barbara A. Manzolillo 90,000 <1% L. P. Dan Valente 42,500 <1% 17 Directors and Officers as a Group 8,992,845 54.64%
The address of all Officers and Directors is in care of the Company, MEDITECH Circle, Westwood, MA 02090.
ITEM 13
ITEM 13 - Certain Relationships and Related Transactions
None. PART IV
ITEM 14
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, 1999.
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 14, 2000 (Date)
Barbara A. Manzolillo, Chief Financial Officer and Treasurer (Signature)