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. 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. 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
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.
ITEM 3
ITEM 3 - Legal Proceedings
There are no material pending legal proceedings against the Company, nor were any initiated during the year 1998.
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, 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
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, 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.
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 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 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. 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, 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. ITEM 12
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
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, 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)