-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QvZ3o5BL4OjMxg0/vk61X2P0e8cihaW2hSzjwxjd2VuAIBw0390paHsu3SAZ8FVT PyLSdSbVPvKCCPa1++ehBw== 0000950109-96-001871.txt : 19960401 0000950109-96-001871.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950109-96-001871 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHARED MEDICAL SYSTEMS CORP CENTRAL INDEX KEY: 0000089415 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 231704148 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07416 FILM NUMBER: 96541506 BUSINESS ADDRESS: STREET 1: 51 VALLEY STREAM PKWY CITY: MALVERN STATE: PA ZIP: 19355 BUSINESS PHONE: 2152196300 MAIL ADDRESS: STREET 1: 51 VALLEY STREAM PKWY CITY: MALVERN STATE: PA ZIP: 19355 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ___________ to___________ Commission file number 0-7416 SHARED MEDICAL SYSTEMS CORPORATION (Exact name of registrant as specified in its charter) Delaware 23-1704148 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 51 Valley Stream Parkway Malvern, Pennsylvania 19355 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (610) 219-6300 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None Not Applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ The aggregate market value of the voting stock (Common Stock) held by non- affiliates of the registrant as of February 29, 1996, was $1,243,236,000. See page 9 herein for assumptions on which this calculation is based. On February 29, 1996, there were 23,381,457 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Certain portions of the Company's Annual Report to Stockholders for the year ended December 31, 1995 are incorporated by reference into Part I and Part II of this Form 10-K. Certain portions of the Company's definitive Proxy Statement that was mailed to stockholders on or about March 22, 1996, are incorporated by reference into Part III of this Form 10-K. 2 Part I Item 1. Business. The Company, incorporated in Delaware in January 1969, and its subsidiaries provide computer-based information processing systems and associated services to the health industry in North America and Europe. The Company's products are offered to integrated health networks, multi- entity health corporations, community health information networks, hospitals, physician groups, and other health providers. These products include a full range of financial, patient management, clinical, ambulatory care, managed care, imaging, decision support, and electronic data interchange systems that use diverse computing and networking technologies, ranging from remote processing, to distributed processing systems, to onsite systems. The Company also provides professional services related to its information processing systems business. Domestically, the Company markets its products and provides installation services and ongoing technical and educational support with a field staff working from branch offices. At its Corporate Headquarters and Information Services Center, the Company has a customer service staff, applications specialists, and communications and computer operations personnel, who assist customers in their day-to-day use of the Company's products, and system designers and programmers who work to improve existing programs and develop additional data processing products. In Europe, the Company markets, installs, and supports its products through local offices in nine countries. The Company's primary customers are acute-care hospitals, generally with 100 or more beds, multi-entity health corporations, integrated health networks, community health information networks, physician groups, and other health providers. In the United States, which has historically been the Company's most significant market, the Company currently has contracts with hospitals in 47 states, the District of Columbia, and Puerto Rico. In 1981, the Company entered the health information processing services and systems market in Europe. The Company currently has customer contracts in Belgium, the Czech Republic, France, Germany, Hungary, Ireland, Italy, the Netherlands, Poland, Spain, and the United Kingdom. For financial information by geographic area, refer to page 34 of the Company's 1995 Annual Report to Stockholders, Notes to Consolidated Financial Statements, Business Segment Information (Note 10), which is incorporated herein by reference. Although the number of stand-alone acute-care hospital beds has declined slightly in recent years, the demand for integrated information systems in the health industry has grown due to the emergence of integrated health networks, multi-entity health organizations, and community health information networks. As the information processing requirements of the health industry have continued to grow, the business of providing information services and systems has become more complex. Additionally, 3 changes in the way health organizations are structured and reimbursed, combined with pressures to control costs, improve quality, and increase market share have created new and increased demands for the Company's services and systems. Services and Systems Offered ---------------------------- The principal health information systems and related services offered by the Company are: Health Information Systems - -------------------------- . Financial Systems, which consist of a full range of financial functions that include patient accounting (including billing and receivables), accounting and financial management, materials management, personnel, and property. . Patient Management Systems, which assist in the administration of patient care through specialized programs for various hospital departments, such as admissions, outpatient, utilization review, and medical records. . Clinical Systems, which automate many labor-intensive tasks performed in the nursing, radiology, laboratory, pharmacy, and other departments within health organizations. These systems also facilitate communications among departments. . Ambulatory Care Systems, which provide integrated systems that facilitate the sharing of clinical and financial information between health providers in non-acute care settings. . Decision Support Systems, which provide access to a range of strategic information collected from the clinical, financial, and patient management systems. . Physician Information Systems, which provide information processing and administrative support to physician groups, clinics, and medical schools with features such as scheduling, electronic claims processing, automated billing and rebilling, and online collections. . Systems for integrated health networks, which are generally comprised of a variety of health delivery organizations, such as acute-care hospitals, skilled nursing facilities, home health agencies, rehabilitation facilities, clinics, physician practices, and others. These systems include patient indexes that provide for rapid identification of patients anywhere in the network, scheduling of network-wide resources, a cumulative electronic patient record, sophisticated software that addresses the issues involved with managed care, and communications facilities that enhance communications among all elements of the network. 4 Electronic Data Interchange Systems - these systems facilitate the ----------------------------------- sharing and standardization of information, such as eligibility verifications, claims and remittance transmissions, throughout the health industry. Professional Services - these services consist of a variety of --------------------- activities related to the Company's health information processing systems. These professional services include installation, support and education. In addition, the Company provides specialized consulting services for the design and integration of software and networks, facilities management, information systems planning, and system-related process re-engineering. The Company's health information systems and related services operate on computer systems that range from personal computers to minicomputers to mainframes. These systems are offered on computers operating at the customer's site, at the Company's Information Services Center (i.e. remotely), or as part of a distributed network. Distributed network systems generally process the financial applications at the Company's Information Services Center, while the patient management and clinical applications operate on computers located at the customer's site. These systems are also offered with networking features that enable multi- entity health organizations to process information for affiliated hospitals, physician groups and clinics. The service and system fees earned by the Company for the years ended December 31, 1995, 1994, and 1993 were $592,509,000, $504,386,000, and $452,797,000, respectively. The hardware at the customer sites associated with these services and systems, can be sold or leased to the Company's customers. Hardware sales for the years ended December 31, 1995, 1994, and 1993 were $58,132,000, $46,383,000, and $48,486,000, respectively. Customers --------- The Company's services and systems are provided to customers under various contractual agreements. These agreements may be structured as fixed-period contracts, with terms generally ranging from one to ten years, or perpetual license contracts. Fixed-period agreements produce recurring revenues over the term of each contract, in contrast to perpetual license agreements, where software fees are recognized over the installation period and the related support fees are recognized over the term of the support agreement. Management estimates that the total amount of future revenues under contract as of December 31, 1995 are in excess of $1.5 billion. In 1995, 1994, and 1993, no single customer accounted for 10% or more of consolidated revenues. Revenues from individual customers will vary, depending on the number and type of the Company's services and systems that are used. Because of the high fixed costs of the Company's operations, the loss of any customer under a fixed-period contract would have the effect of reducing the Company's net income by a greater percentage than the percentage of total revenues lost. 5 Presently, no more than one quarter of the Company's fixed-period contracts expire in any future year. Although the Company strives to retain its customers, not all of the Company's past contracts have been renewed, and there can be no assurance that existing customers will either renew their contracts or convert to another type of system offered by the Company upon the expiration of their current contract. Competition ----------- The Company experiences intense competition from a number of firms in the health information services and systems market. Virtually all health organizations use some form of computer-based information processing. The Company's competitors vary in size, in geographical coverage, and in scope and breadth of products and services offered. The Company considers itself to be a major supplier of information processing services and systems to health organizations. Competition among those providing information processing services and systems to health organizations, physician groups, and other health providers is based upon the breadth and reliability of the services and systems provided and, to the extent that the services are comparable, upon price. Research and Development ------------------------ The Company is continually investigating the feasibility of enhancing existing systems and developing new systems to meet the information processing needs of health organizations. Profitability of newly developed services and systems depends upon attainment of sufficient sales volumes and continuing improvement and efficiency of the systems. The Company expenses all research and non-capitalized development costs, which generally consist of costs incurred to establish the technological feasibility of internally produced computer software. These expenses are primarily for computer costs and salaries of personnel. These expenses amounted to $45,385,000 in 1995, $39,226,000 in 1994, and $37,087,000 in 1993. The Company capitalizes the cost of certain internally produced computer software and purchased software. Capitalization for internally produced software begins when a project reaches technological feasibility and ceases when the software is available for general release to customers. The Company amortizes computer software using the straight-line method over its expected useful life, which is generally five years. Capitalized internally produced computer software costs, net of accumulated amortization, were $32,785,000 and $31,657,000 as of December 31, 1995 and 1994, respectively. Amortization related to capitalized internally produced software was $7,722,000 in 1995, $6,290,000 in 1994 and $5,464,000 in 1993. Purchased software, net of accumulated amortization, was $10,170,000 and $7,144,000 as of December 31, 1995 and 1994, respectively. Personnel --------- As of December 31, 1995, the Company had a total of 4,826 full-time employees. 6 Item 2. Properties. The Company owns 116 acres of land in Chester County, Pennsylvania. The Company has constructed three buildings on this site; an information services center (81,000 square feet), which was put into service in 1979, and two office buildings with an aggregate of 431,000 square feet, the first of which was placed in service in 1981 and the second of which was placed in service in 1983. These office buildings serve as the Company's corporate headquarters. The unused portion of this land can be used for possible future expansion. In addition, the Company leases office space near the Company's corporate headquarters, which is utilized by certain corporate-based operations. The Company also leases office space in most major metropolitan areas in the United States for marketing, installation and support personnel. In Europe the Company owns an office building in Spain and leases office space in various locations to support its operations. These properties are adequate for existing operations. The Company also owns 241 acres of land in Chester County, Pennsylvania for possible future expansion. As of December 31, 1995, the Company's Information Services Center, which is used primarily to process customer information and to support the Company's internal software development, contains one 5995-8650 AMDAHL processor, one 9672/RX3 IBM processor, and three 9021-982 IBM processors, all of which were obtained under operating leases. The Company's Information Services Center also includes related mainframe peripherals and network communications equipment that has been purchased or obtained under leases. These leases are generally contracted on a month-to-month basis or under fixed-period agreements with terms that range from one to five years. Item 3. Legal Proceedings. None. Item 4. Submission of Matters to a Vote of Security Holders. None. 7 Executive Officers of the Registrant Listed below are the name, age as of December 31, 1995, position(s) with the Company and principal occupation(s) for the past five years of each of the executive officers of the Company.
Positions with Company and Principal Name Age Occupation(s) - Past Five Years ------------------- --- ---------------------------------------------- R. James Macaleer 61 Chairman of the Board since August 1995. Prior to this, Mr. Macaleer served as Chairman of the Board and Chief Executive Officer since the Company's founding in 1969. Marvin S. Cadwell 52 Director, President and Chief Executive Officer since August 1995. Prior to this, Mr. Cadwell served as Director, President and Chief Operating Officer, May 1995 - August 1995; President and Chief Operating Officer, March 1995 - May 1995; Executive Vice President, October 1993 - March 1995; Senior Vice President, Managing Director and Chief Operating Officer of SMS Europe, March 1992 - March 1995; and Vice President, Managing Director and Chief Operating Officer of SMS Europe, September 1986 - March 1992. Mr. Cadwell originally joined the Company in 1975. Michael B. Costello 52 Vice President of Administration and Corporate Communications since January 1991. Mr. Costello originally joined the Company in 1979. Edward J. Grady 43 Controller and Assistant Treasurer since February 1993. Prior to this, Mr. Grady served as Controller, May 1985 - February 1993. Mr. Grady originally joined the Company in 1980. James C. Kelly 56 Secretary since June 1990. Mr. Kelly originally joined the Company in 1972. Terrence W. Kyle 45 Vice President of Finance, Treasurer and Assistant Secretary since June 1990. Mr. Kyle originally joined the Company in 1976. Francis W. Lavelle 46 Senior Vice President of U.S. Customer Operations since December 1993. Prior to this, Mr. Lavelle served as Vice President of New Business Development, January 1991 - December 1993. Mr. Lavelle originally joined the Company in 1988.
8
Positions with Company and Principal Name Age Occupation(s) - Past Five Years ------------------- --- ---------------------------------------------- Robert J. McNeill 57 Vice President of Marketing and Customer Service since March 1995. Prior to this, Mr. McNeill served as Vice President of Customer Service, January 1993 - March 1995; and Vice President of Marketing, Installations and Support, January 1991 - January 1993. Mr. NcNeill originally joined the Company in 1981. David F. Perri 46 Vice President of Technology Solutions since March 1995. Prior to this, Mr. Perri served as Vice President of Technical Affairs, June 1990 - March 1995. Mr. Perri originally joined the Company in 1980. Terry A. Pitts 46 Vice President of the Company's Outsourcing Services, Strategic Services and MedSeries4 Divisions since August 1995. Prior to this Mr. Pitts served as Vice President of the Company's Outsourcing Services and Strategic Services Divisions, October 1994 - August 1995; National Managing Partner of Information Technology Health Services, Coopers and Lybrand LLP, October 1993 - October 1994; and General Manager of the Company's Strategic Services Division, September 1989 - October 1993. Mr. Pitts originally joined the Company in 1989. Bonnie L. Shuman 47 General Counsel and Assistant Secretary since June 1990. Ms. Shuman originally joined the Company in 1983. Marion G. Tomlin 56 Senior Vice President of the Company's Turnkey Systems Division since January 1991. Mr. Tomlin originally joined the Company in 1988. Matthew B. Townley 39 Vice President of Health Solutions of the Company since March 1995. Prior to this, Mr. Townley served as General Manager of the Company's Healthcare Data Exchange and Physician Services Divisions, February 1994 - March 1995; General Manager of the Company's Physicians Services Division, September 1992 - February 1994; Regional Manager of the Company's Northwest Region, February 1991 - September 1992; and President of Healthcare Recruiters of the Northwest, a sole proprietorship, November 1989 - February 1991. Mr. Townley originally joined the Company in 1982. - ------------------------------------------------------------------------------------
9 In calculating the aggregate market value of voting stock held by non- affiliates as shown on the cover page of this Form 10-K Report, the Company has included all of its directors, and only its directors, as affiliates of the Company. This is not an admission by the Company that any or all of its directors are in fact affiliates. The aggregate market value of voting stock held by non-affiliates was computed by using the average bid and asked prices of the stock as of February 29, 1996. Part II The following information contained in the Company's Annual Report to Stockholders for the year ended December 31, 1995 is incorporated herein by reference: Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Page 23, Section titled Market Price and Dividends Declared Per Share - "1995" and "1994" columns and related footnote Item 6. Selected Financial Data. Page 23, Section titled Summary of Consolidated Operations - "Revenues", "Net Income", and "Net Income Per Share" line items Page 23, Section titled Summary of Consolidated Financial Position - "Total Assets" and "Long-Term Debt and Capital Leases" line items Page 23, Section titled Operating Ratios and Other Selected Financial Data - "Cash Dividends Declared Per Share" line item Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Pages 18 through 22, Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data. Pages 24 through 34 Page 35, Report of Independent Public Accountants Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 10 Part III The following information contained in the Company's definitive Proxy Statement that was mailed to stockholders on or about March 22, 1996 is incorporated herein by reference: Item 10. Directors and Executive Officers of the Registrant. Section titled "Security Ownership": subsection titled "Directors and Management": columns "Name of Beneficial Owner" and "Director Since" for the portion of the table titled "Directors" Section titled "Compliance with Section 16(a) of the Securities Exchange Act of 1934" (For information concerning the Company's Executive Officers see pages 7 and 8 hereof, section titled "Executive Officers of the Registrant") Item 11. Executive Compensation. Section titled "Election of Directors": the subsection titled "Compensation of Directors" Section titled "Executive Compensation": subsections titled "Compensation Committee Interlocks and Insider Participation" and "Compensation Summaries" Item 12. Security Ownership of Certain Beneficial Owners and Management. Section titled "Security Ownership" Item 13. Certain Relationships and Related Transactions. Section titled "Executive Compensation": subsection titled "Compensation Committee Interlocks and Insider Participation", paragraph two of this subsection 11 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements - the following consolidated financial statements included on pages 24 through 34 in the Company's Annual Report to Stockholders for the year ended December 31, 1995 are included in this report. . Consolidated Balance Sheet as of December 31, 1995 and 1994 (page 24) . Consolidated Statement of Income for the years ended December 31, 1995, 1994, and 1993 (page 25) . Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994, and 1993 (page 26) . Consolidated Statement of Stockholders' Investment for the years ended December 31, 1995, 1994, and 1993 (page 27) . Notes to Consolidated Financial Statements for the years ended December 31, 1995, 1994, and 1993 (pages 28 through 34) . Report of Independent Public Accountants (page 35) . Selected Quarterly Financial Data (Unaudited) for the years ended December 31, 1995 and 1994 as reported in Note 9 to Consolidated Financial Statements (page 33) 2. Financial Statement Schedules - the following Financial Statement Schedules required by Article 5 of Regulation S-X are included in this report: . Report of Independent Public Accountants . Schedule II - Valuation and Qualifying Accounts . Schedules omitted - the following schedules are omitted since they are not required, or not applicable: I, III, IV, and V 12 3. The following exhibits are included in this report: No. Description ---- ------------------------------------------------------ (3) Articles of Incorporation and By-Laws - Certificate of Amendment of Certificate of Incorporation dated June 19, 1992 (filed as Exhibit (4) to the Company's Form 10-Q Report for the quarter ended June 30, 1992)*, By-laws as amended through August 10, 1995 (filed as Exhibit (3) to the Company's Form 10-Q Report for the quarter ended September 30, 1995)* (10) Material Contracts - Deferred compensation agreements:** R. James Macaleer James C. Kelly Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended September 30, 1995)* Performance bonus plans - 1995:** R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)* Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)* Marion G. Tomlin (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1995)* Francis W. Lavelle (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended September 30, 1995)* Robert J. McNeill David F. Perri Terry A. Pitts Matthew B. Townley *Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or compensatory arrangement. 13 No. Description ---- ------------------------------------------------------ Performances bonus plans - 1994:** R. James MaCaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)* Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31,1994)* Marion G. Tomlin (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)* Insurance Agreements:** R. James Macaleer Marion G. Tomlin (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1991)* Employment agreements:** Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1991)* Marion G. Tomlin (filed as Exhibit (10) to the Commpany's Form 10-K report for the year ended December 31, 1991)* Stock Option Plans: 1987 Non-Qualified Stock Option Plan for Non- Employee Directors (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1993)* 1991 Non-Qualified Stock Option Plan for Non- Employee Directors (filed as Exhibit B to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 1, 1991)* (13) Annual Report to Stockholders for the year ended December 31, 1995*** *Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or comlpensatory arrangement. ***With the exception of the material specifically incorporated by reference in Part I and Part II of this Form 10-K, the Annual Report to Stockholders for the year ended December 31, 1995 is not to be deemed "filed" as part of this Form 10-K. 14 No. Description ---- ------------------------------------------------------ (21) Subsidiaries of the Registrant (23) Consent of Independent Public Accountants (27) Financial Data Schedule (99) Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 (b) No reports on Form 8-K were filed during the three month period ended December 31, 1995. 15 Signatures Pursuant to the requirements of Section 13 or 15(d) 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. SHARED MEDICAL SYSTEMS CORPORATION By: /s/ R. James Macaleer Date: March 29, 1996 ------------------------------------- ------------------ R. James Macaleer - Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ R. James Macaleer Date: March 29, 1996 ------------------------------------- ------------------ R. James Macaleer - Chairman of the Board By: /s/ Raymond K. Denworth, Jr. Date: March 29, 1996 ------------------------------------- ----------------- Raymond K. Denworth, Jr. - Director By: /s/ Frederick W. DeTurk Date: March 29, 1996 ------------------------------------- ------------------ Frederick W. DeTurk - Director By: /s/ Josh S. Weston Date: March 29, 1996 ------------------------------------- ------------------ Josh S. Weston - Director By: /s/ Jeffrey S. Rubin Date: March 29, 1996 ------------------------------------- ------------------ Jeffrey S. Rubin - Director By: /s/ Marvin S. Cadwell Date: March 29, 1996 ------------------------------------ ----------------- Marvin S. Cadwell - Director, President and Chief Executive Officer By: /s/ Terrence W. Kyle Date: March 29, 1996 ------------------------------------- ------------------ Terrence W. Kyle - Vice President of Finance, Treasurer and Assistant Secretary By: /s/ Edward J. Grady Date: March 29, 1996 ------------------------------------- ------------------ Edward J. Grady Controller and Assistant Treasurer 16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To Shared Medical Systems Corporation: We have audited in accordance with generally accepted auditing standards, the financial statements included in Shared Medical Systems Corporation's 1995 Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 6, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 14 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /S/ Arthur Andersen LLP Philadelphia, PA February 6, 1996 17 SCHEDULE II SHARED MEDICAL SYSTEMS CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 -----------------------------------------------------
Balance Balance Beginning of Charges to Additions/ End of Year Expenses Deductions Year ------------ ---------- ---------- ----------- Reserve for Doubtful Accounts: December 31, 1995 $5,317,000 $820,000 $(1,290,000) (1) $4,847,000 ========== ======== =============== ========== December 31, 1994 $4,279,000 $818,000 $ 220,000 (2) $5,317,000 ========== ======== =============== ========== December 31, 1993 $4,991,000 $810,000 $(1,522,000) (1) $4,279,000 ========== ======== =============== ==========
(1)Write-offs of uncollectible accounts (2)Write-offs of uncollectible accounts offset by additions resulting from the Company's acquisition of GTE Health Systems Incorporated on September 30, 1995. 18 Exhibit Index No. Description ---- -------------------------------------------- (3) Articles of Incorporation and By-Laws - Certificate of Amendment of Certificate of Incorporation dated June 19, 1992 (filed as Exhibit (4) to the Company's Form 10-Q Report for the quarter ended June 30, 1992)*, By-laws as amended through August 10, 1995 (filed as Exhibit (3) to the Company's Form 10-Q Report for the quarter ended September 30, 1995)* (10) Material Contracts - Deferred compensation agreements:** R. James Macaleer James C. Kelly Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended September 30, 1995)* Performance bonus plans - 1995:** R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)* Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)* Marion G. Tomlin (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1995)* Francis W. Lavelle (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended September 30, 1995)* Robert J. McNeill David F. Perri *Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or compensatory arrangement. 19 No. Description ---- --------------------------------------------- Terry A. Pitts Matthew B. Townley Performance bonus plans - 1994:** R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)* Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)* Marion G. Tomlin (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)* Insurance agreements:** R. James Macaleer Marion G. Tomlin (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1991)* Employment agreements:** Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1991)* Marion G. Tomlin (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1991)* Stock Option Plans: 1987 Non-Qualified Stock Option Plan for Non-Employee Directors (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1993)* *Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or compensatory arrangement. 20 No. Description ---- ------------------------------------------- 1991 Non-Qualified Stock Option Plan for Non-Employee Directors (filed as Exhibit B to the Company's Proxy Statement for the Annual Meeting of Stockholders held on May 1, 1991)* (13) Annual Report to Stockholders for the year ended December 31, 1995** (21) Subsidiaries of the Registrant (23) Consent of Independent Public Accountants (27) Financial Data Schedule (99) Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 *Previously filed as indicated and incorporated herein by reference. **With the exception of the material specifically incorporated by reference in Part I and Part II of this Form 10-K, the Annual Report to Stockholders for the year ended December 31, 1995 is not to be deemed "filed" as part of this Form 10-K. EX-10 2 MATERIAL CONTRACTS Exhibit (10) DEFERRED COMPENSATION AGREEMENT AGREEMENT made this 1st day of January, 1977 by and between SHARED MEDICAL SYSTEMS CORPORATION, a Delaware corporation ("SMS") and R. James Macaleer ("Employee"). WHEREAS, since the founding of SMS Employee has rendered valuable services to SMS; and WHEREAS, in further consideration for such services the parties hereto wish to provide for certain deferred benefits for Employee pursuant to an arrangement that also provides certain advantages to SMS; NOW, THEREFORE, in consideration of Employee's past services and of the mutual promises herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. SMS agrees to pay to Employee, subsequent to the termination of Employee's employment with SMS for any reason (other than (a) for conduct deemed by the Board of Directors of SMS to have been fraudulent against SMS, or (b) for total and permanent disability as provided for in paragraph 3 hereof) a sum of money on the first day of each month for a period of months as indicated in Exhibit A. Should Employee die while he is receiving such payments, and before the last payment to him by SMS hereunder, the payments shall be continued in their entirety to Employee's beneficiary, as designated as Exhibit B (the "Beneficiary"). (Employee shall have the right from time to time to change the Beneficiary by appropriate written notice to SMS). Employee shall give the SMS Board of Directors (the "Board") at least twelve months' prior notice in writing of the termination of his employment, through normal retirement or otherwise. Should Employee give SMS less than twelve month's prior notice, Employee shall forfeit to SMS an amount, from the first payments to be made hereunder, equal to one month's payment times the difference between twelve months and the number of full months' notice actually given. The first month's payment under this paragraph shall be made on the first day of the month following the month in which employment terminated; provided however that the first payment shall not be payable prior to the later of January 1, 1989 or the expiration of a twelve month period following the date of Employee's notice of the termination of his employment. 2. Should Employee die (while employed by SMS or otherwise), prior to the beginning of payments under paragraph 1, above, to which he would otherwise have been entitled, then such monthly payments shall be made to Employee's Beneficiary, starting on the first day of the month following the month in which the Employee's death occurred. 3. Should Employee become totally and permanently disabled while employed by SMS but prior to January 1, 1986, such that either (a) pursuant to the terms of any insurance policy procured by SMS pursuant to paragraph 7, such policy may, because of such dis- ability, be maintained in force without payment of any premium thereon or (b) if there is no such insurance policy, the Board determines in its absolute discretion on the basis of medical evidence that employee is physically or mentally incapable of performing his customary duties and that such incapacity is expected to continue until January 1, 1987, then SMS shall pay to Employee monthly the amounts listed in Exhibit C, 2 starting on January 1 of the year in which the first premium which need not be paid on such insurance policy would otherwise be due or, if there is no such insurance policy, on the first January 1 which occurs after the Board's determination of Employee's total disability (but only for so long as the total and permanent disability, determined as provided above, continues). Starting on the later of January 1, 1987 (assuming Employee, while employed by SMS, has become totally and permanently disabled as defined above) or the first day of the month following the month in which Employee, while employed by SMS, has become totally and permanently disabled as defined above, SMS shall pay to Employee monthly the amounts listed in Exhibit A. Should Employee die after he has become totally and permanently disabled as defined above but prior to January 1, 1987, the monthly payments designated in Exhibit A shall be made to Employee's Beneficiary, starting on the first day of the month following the month in which Employee's death occurred. Should Employee die after he has become totally and permanently disabled as defined above but on or after January 1, 1987, the remaining payments listed in Exhibit A shall be continued to Employee's Beneficiary. The Board shall have no obligation to determine that Employee is disabled as contemplated above if Employee declines to permit a physician selected by SMS to examine him or re- examine him, or materially hinders any investigation ordered by SMS. 4. Employee agrees that he will not enter into competition with SMS at any time from the date hereof through a period of two years after the completion of the payments listed in Exhibit A. Employee shall be deemed to be in competition if he directly or indirectly, whether as consultant, agent, officer, director, holder of at least 1% of a class of 3 equity security, employee or otherwise enters into an association with another business enterprise which then is one of the competitors of SMS respecting one or more of SMS' business activities. The parties agree that one of the essential considerations for the deferred compensation provided Employee hereunder is to protect and preserve the good will of SMS and its respective enterprises, and that said good will would be substantially diminished in value if Employee were to enter into competition with SMS while this Agreement is in effect or for two years thereafter. As SMS' business activities are national in scope, the prohibition against competition relates to any competitor wherever it may be located within the United States. In the event Employee is deemed to be in competition contrary to the provisions of this paragraph, thereupon he shall forfeit all rights to any unmade payments of deferred compensation under this Agreement. 5. The benefits payable under this Agreement shall be independent of, and in addition to, any other agreement relating to Employee's employment that may exist from time to time between the parties hereto, or any other compensation payable by SMS to Employee, whether salary, bonus or otherwise. This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof, except as expressly stated, restrict the right of SMS to discharge Employee or restrict the right of Employee to terminate his employment. 6. This Agreement shall be binding upon SMS, its successors and 4 assigns. Employee may not assign this Agreement or any of his rights hereunder, except that he may designate a beneficiary to receive payments in the event of his death as provided herein. 7. SMS in its discretion may apply for and procure as owner and for its own benefit insurance on the life of Employee, in such amounts and in such forms as SMS may choose. Employee shall have no interest whatsoever in any such policy or policies, but at the request of SMS he shall submit to medical examinations and supply such information and execute such documents as may be required by the insurance company or companies to whom SMS has applied for insurance. The rights of Employee, or his beneficiary, or estate, to benefits under this Agreement shall be solely those of an unsecured creditor of SMS. Any insurance policy or other assets acquired or held by SMS in connection with the liabilities assumed by it pursuant to this Agreement shall not be deemed to be held under any trust for the benefit of Employee, a beneficiary of his estate, or to be security for the performance of the obligations of SMS. This Agreement may be canceled by SMS if insurance procured by SMS under this paragraph is canceled by the insurance company because of misrepresentation by Employee. 8. This Agreement shall be governed by the laws of Pennsylvania. /s/ Gwen M. Martin /s/ R. James Macaleer ---------------------------- --------------------------- Witness Employee /s/ James C. Kelly --------------------------- SMS Corporate Officer 5 EXHIBIT A ---------
Year of Termination of Monthly Number of Total Deferred Employment Payments Monthly Payments Compensation - ---------------- -------- ---------------- -------------- 1977 $ 295 240 $ 70,800 1978 709 240 170,160 1979 1085 240 260,400 1980 1422 240 341,280 1981 1743 240 418,320 1982 2048 240 491,520 1983 2335 240 560,400 1984 2601 240 624,240 1985 2836 240 680,640 1986 and 3052 240 732,480 subsequent
(1) Employee may elect fewer than 240 payments but not less than 120 payments. If fewer than 240 payments are selected, the amount of each monthly payment shall equal the Total Deferred Compensation (determined by the year of Termination of Employment as shown on the table above) divided by the number of months selected, with the quotient thereof divided by (1.01) 20-n [Exponent],where n equals one-twelfth of the number of months selected for payment rounded to the nearest whole number plus the number of whole years subsequent to 1989, if any, by which Employee has elected to delay the start of the deferred compensation, provided, however, that n shall never exceed 20. (2) The deferred payments shall not start before January 1, 1989. Employee may defer the start of the deferred payments to any date subsequent to the termination of his employment. However, the total amount of deferred compensation shall depend on the year of termination of employment, as listed above, and as modified in footnote (1), above. EXHIBIT B --------- I, R. James Macaleer, hereby designate L. Jean Macaleer ----------------- ---------------- as my beneficiary for payments to be made subsequent to my death under the Deferred Compensation Agreement dated January 1, 1977 between me and Shared Medical Systems Corporation. I hereby revoke all prior beneficiary designations made by me pursuant to such Deferred Compensation Agreement. If my wife should not survive me, I designate my children as beneficiaries in equal shares. /s/ Gwen M. Martin /s/ R. James Macaleer ------------------------------ ----------------------------------- Witness Employee Dated: 1/23/77 EXHIBIT C --------- Monthly Payments /(1)/By Year (In Dollars) -----------------------------
Year of Designated Disability 1978 1979 1980 1981 1982 1983 1984 1985 1986 - ---------- ------ ---- ---- ---- ---- ---- ---- ---- ---- 1977 3424 3424 3424 3424 3424 3424 3424 3424 3424 1978 -- 5444 5444 5444 5444 5444 5444 5444 5444 1979 -- -- 5793 5793 5793 5793 5793 5793 5793 1980 -- -- -- 6153 6153 6153 6153 6153 6153 1981 -- -- -- -- 6176 6176 6176 6176 6176 1982 -- -- -- -- -- 6176 6176 6176 6176 1983 -- -- -- -- -- -- 6176 6176 6176 1984 -- -- -- -- -- -- -- 6176 6176 1985 -- -- -- -- -- -- -- -- 6176
(1) Payments start on the first day of January, following the year of Employee's disability. Exhibit (10) SPLIT DOLLAR AGREEMENT This split dollar agreement (the "Agreement") is entered into on the dates set forth below, to be effective as of July 28, 1995, by and between SHARED MEDICAL SYSTEMS CORPORATION (the "Corporation") and RAYMOND K. DENWORTH, JR. and WILLIAM C. BULLITT, TRUSTEES under The LJM 95 Trust under deed of trust of L. Jean Macaleer dated as of July 28, 1995 ("Trustees"). RECITALS: A. R. James Macaleer (the "Employee") is employed by the Corporation; and B. The Trustees wish to acquire life insurance on the life of the Employee to be owned by the Trustees; and C. The Corporation wishes to provide this life insurance protection under the policies which are described in Exhibit A to this Agreement (separately "the Policy" and collectively "the Policies"); and D. The Corporation is willing to pay a portion of the premiums due on the Policies as an additional employment or retirement benefit to the Employee, on the term and conditions hereinafter set forth; and E. Trustees will be the owners of the Policies and, as such, will possess all of the incidents of ownership in and to the Policies; and F. The Corporation wishes to have the Policies collaterally assigned to it by the Trustees, in order to secure the repayment of the amounts it will pay towards the premiums on the Policies; and G. The parties intend that by such collateral assignment, the Corporation shall receive only the right to such repayment, with the Trustees retaining all incidents of ownership and other rights in the Policies, as specified herein. AGREEMENTS: NOW, THEREFORE, in consideration of the mutual promises contained in this Agreement, the parties agree as follows: 1: Purchase of the Policy The parties agree that they will take all necessary actions to cause the Policies to be issued to the Trustees and to cause the Policies to conform to the terms of this Agreement. The parties agree that the Policies will be subject to the terms and conditions of the Agreement and of the collateral assignment filed with the insurance company issuing the Policy (the "Insurer") relating to such Policy. 2: Incidents of Ownership The Trustees shall be the sole and absolute owner of each Policy, and they alone may exercise all ownership rights and incidents of ownership granted to the Policy's owner by the Insurer, except as may be expressly provided to the contrary in its Agreement. It is the intention of the parties that the Trustees retain all rights which the Policy grants to the owner thereof, except the Corporation's right to be repaid the amounts that it pays, net of any reimbursement received by the Corporation from the Employee or the Trustees, towards the 2 premiums on the Policy (such net amounts referred to hereinafter as the Corporation's "Policy Interest"). Specifically (but not limited thereto), the Corporation may neither have nor exercise any right as collateral assignee of the Policy that could in any way defeat or impair the Trustees' right to receive the cash surrender value or the death proceeds of the Policy in excess of the amount due the Corporation under this Agreement. All provisions of this Agreement and of the collateral assignment shall be construed so as to carry out such intention. 3: Dividends Or Other Payments Before the death of the Insured, all dividends, excess interest credits, or other amounts paid or declared with respect to any Policy shall be applied to build the internal value of the Policy in the most efficient manner set forth in the Policy until such time as such dividends, excess interest credits or other amounts are sufficient to pay all future Policy charges to maturity based on the Insurer's then current interest, mortality and expense assumptions. At such time as future dividends, excess interest credits or other amounts are projected to be sufficient to pay such future Policy charges to maturity, such amounts shall be applied first to the payment of such premiums, and any excess shall be applied further to increase Policy values. 3 4: Premium Payments Except as otherwise provided in this Agreement, on or before the due date of each Policy premium, or within the grace period provided in the Policy, the Corporation shall pay to the Insurer the full amount of the premium. Within 30 days of being notified by the Company that it has made such payment, the Trustees shall pay to the Company that portion of the premium listed on Exhibit "A" of this Agreement, so that the net premium payment borne by the Corporation shall be the amount shown in the column headed "Corporation" on Exhibit "A" (the provisions of which are incorporated herein and made a part hereof). 5: Right of Repayment 5.1 Source. To secure the repayment to the Corporation of ------ the Corporation's Policy Interest, the Trustees have, contemporaneously herewith, assigned each Policy to the Corporation as collateral, under a form accepted by the Insurer for such assignments, which collateral assignment specifically limits the Corporation's right thereunder to the repayment of its Policy Interest. Such repayment shall be made from the Policy's cash surrender value (as defined in the Policy) if this Agreement is terminated or if the Trustees surrender or cancel the Policy, or from the Policy's death proceeds if the insured should die while the Policy and this Agreement remain in force. In no event shall the Corporation have any right to borrow against the Policy. 4 5.2 Timing. At such time after premiums are no longer required ------ to be paid in cash to an Insurer with respect to a Policy but before the termination of this Agreement or the death of the insured, the Trustees shall commence repayment of the Corporation's Policy Interest with respect to such Policy in installments as set forth in Exhibit "A." Any payment made by the Trustees pursuant to this paragraph shall reduce the remaining amount of the Corporation's Policy Interest. 5.3 Termination of Assignment. Except as provided in Paragraph ------------------------- 8.2., the Policy's collateral assignment shall not be terminated, altered or amended by the Trustees without the express written consent of the Corporation. The parties hereto agree to take all actions necessary to cause such collateral assignment to conform to the provisions of this Agreement. 6: Rights of Trustees in the Policy 6.1 Rights of the Corporation Protected. The Trustees shall take no ----------------------------------- action with respect to any Policy that would in any way compromise or jeopardize the Corporation's right to be repaid its Policy Interest. 6.2 Right to Borrow. --------------- (a) The Trustees may pledge or assign any Policy, subject to the terms and conditions of this Agreement, in order to secure a loan from the Insurer or from a third party, in an amount which, except as provided in subparagraph 6.2(b), shall not exceed the Policy's cash surrender value (as defined in the Policy) as of the date on which the premiums have been paid, less 5 the amount of the Corporation's Policy Interest. Interest charges on such loan shall be the responsibility of and shall be paid by the Trustees. For each Policy year in which the Trustees borrow against the Policy, the Corporation shall be correspondingly relieved of its obligation to pay any amounts towards premiums for a Policy year. (b) The limitation on the amount that the Trustees may borrow against the Policy hereunder shall be not apply to the extent that the amount borrowed is paid over to the Corporation to reduce its Policy Interest. 6.3 Right to Cancel. The Trustees shall have the sole right to --------------- surrender or cancel the Policy and to receive the Policy's full cash surrender value directly from the Insurer. Upon any surrendering or cancellation of the Policy, the Corporation shall have the unqualified right to receive a portion of the cash surrender value equal to its Policy Interest. Immediately upon receipt of the cash value, the Trustees shall pay to the Corporation the portion of such cash value to which it is entitled under this Agreement, and shall retain the balance, if any. 7: Upon The Insured's Death Upon the death of the Insured, the Corporation and the Trustees shall promptly take all action necessary to obtain the death benefit provided under the Policies. The Corporation shall have the unqualified right to receive a portion of such death benefits from each Policy equal to its Policy Interest in that 6 Policy. The balance of the death benefits provided under each Policy, if any, shall be paid directly to the beneficiary designated by the Trustees in the manner and in the amount provided in the Policy's beneficiary designation provisions. In no event shall the amount payable to the Corporation on account of payments made for each Policy under this Agreement exceed the Policy proceeds payable at the death of the Employee. No amount shall be paid from the death benefits of a specific Policy to the beneficiary designated by the Trustees until the full amount due to the Corporation on account of such Policy has been paid. 8: Termination and Release of Collateral Assignment 8.1 Notice of Termination. The Trustees may terminate this Agreement --------------------- with regard to any or all of the Policies, by written notice to the Corporation, effective on the date of such notice. 8.2 Release of Assignment. For sixty (60) days after the date this --------------------- Agreement is terminated under this Section, the Trustees shall have the option of obtaining the release of the collateral assignment of all or any of the Policies to the Corporation. The Trustees may exercise this option by repaying the Corporation the total amount of its Policy Interest with respect to such Policy and upon receipt of such amount, the Corporation shall release the Policy's collateral assignment by its execution and delivery of an appropriate instrument of release. If the Trustees fail to exercise such option with regard to any such Policy within the said sixty-day period, then at the Corporation's written request, the Trustees shall execute 7 any document required by the Insurer to transfer the Trustees' interest in the Policy to the Corporation. Alternatively, the Corporation may enforce its right to be repaid the amount of its Policy Interest from the Policy's cash surrender value under the Policy's collateral assignment, and if the cash surrender value exceeds the amount of such premium payments, the excess will be paid to the Trustees. 9: Source of Funds The Corporation's obligations hereunder shall be satisfied from the general assets of the Corporation. Any assets which may be set aside, earmarked or identified by the Corporation as being intended for the payment of premiums under this Agreement shall remain assets of the Corporation and shall be subject to the claims of its general creditors. The Trustees shall be a general and unsecured creditor of the Corporation and shall have no right, title or interest in any specific asset that the Corporation may set aside, earmark, or identify as for the payment of premiums under this Agreement. The Corporation's obligations under this Agreement shall be merely that of an unfunded and unsecured promise of the Corporation to pay money in the future. 10: Miscellaneous 10.1 Insurer Protected. Each Insurer shall be fully discharged from ----------------- its obligations under the Policy by payment of the Policy's death benefit to the beneficiary named in the 8 Policy, subject to the Policy's terms and conditions. In no event shall the Insurer be considered a party to this Agreement. No provision of this Agreement shall in any way be construed as enlarging, changing, varying, or in any other way affecting the Insurer's obligations as expressly provided in the Policy, except insofar as the provisions of this Agreement are made a part of the Policy by the collateral assignment document executed by the Trustees and filed with the Insurer in connection with this Agreement. 10.2 Binding Agreement. This Agreement is binding on and enforceable ----------------- by and against the parties, their successors, legal representatives, and assigns. 10.3 Governing Law. This Agreement will be governed by ------------- and construed according to the laws of Pennsylvania. 10.4 Severability. No part of this Agreement will be affected ------------ if any other part of it is held invalid or unenforceable. 10.5 Notices. All notices required or permitted to be given under ------- this Agreement must be given in writing, and will be deemed given when personally delivered or, if earlier, when received after mailing by registered or certified United States mail, postage prepaid, with return receipt requested. Notice to the Trustees is valid if sent to them at their address as it appears in the Corporation's records. 9 10.6 "Days" Defined. Any reference in this Agreement to "days" means -------------- all calendar days, whether or not such days are legal holidays under the laws of the United States or any state. 10.7 Waiver. Any party's failure to insist on compliance or ------ enforcement of any provision of this Agreement shall not affect its validity or enforceability or constitute a waiver of future enforcement of that provision or of any other provision of this Agreement. 10.8 Copies. More than one (1) copy of this Agreement may be ------ executed and all parties agree and acknowledge that each executed copy shall be a duplicate original. 10.9 Gender and Number. Whenever the context of this Agreement ----------------- requires, the masculine gender includes the feminine and neuter, and the singular number includes the plural and vice versa. 10.10 Facility of Payment. Either party shall have the right ------------------- to advance funds due on behalf of the other. Agreed to by each of the undersigned effective as of July 28, 1995. Dated: 12/12/95 /s/ William C. Bullitt ------------------ ----------------------------------- TRUSTEE Dated: 12/14/95 /s/ Raymond K. Denworth [SEAL APPEARS ------------------ ---------------------------- HERE] TRUSTEE SHARED MEDICAL SYSTEMS CORPORATION 10 Dated: 12/22/95 By:/s/ Marvin S. Cadwell [SEAL APPEARS ------------------ ------------------------ HERE] President Attest: Bonnie L. Shuman [SEAL APPEARS -------------------- HERE] Secretary 11 EXHIBIT "A" TO SPLIT DOLLAR AGREEMENT ALLOCATION OF PAYMENTS WITH RESPECT TO THE POLICIES ---------------------------------------------------
PREMIUM YEAR TRUSTEES CORPORATION ------------ -------- ----------- 1 $62,787 $371,997 2 64,719 369,151 3 67,218 366,652 4 70,003 363,867 5 73,387 360,483 6 76,616 357,254 7 80,194 353,676 8 84,141 349,729 9 88,381 345,489 10 60,187 178,853 11* 67,898* * 12 82,537 13 99,227 14 117,978 15 139,465 16 157,916 17 179,030 18 201,625 19 262,725 20 289,479 21 333,532 22 382,968 23 441,198 24 375,772 25 285,801
* The parties recognize that the actual amount of the premiums payable after Policy Year 9 may vary from that set out above and that adjustments to the Schedule may be necessary in light of the actual performance of the Policy. If additional amounts are required to be paid in cash to the Insurers, such amounts shall be paid by the Corporation, and the Trustees' obligation to repay the Corporation shall be extended beyond Year 25 (if the Insured has not died before then) until the Corporation has been repaid its entire Policy Interest. 12 Exhibit (10) This AMENDED AND RESTATED DEFERRED COMPENSATION AGREEMENT is made as of the 1st day of November, 1995 by and between SHARED MEDICAL SYSTEMS CORPORATION, a Delaware corporation ("SMS") and JAMES C. KELLY ("Employee"). BACKGROUND SMS and Employee have entered into a Deferred Compensation Agreement dated March 8, 1991 (the "Original Agreement"). SMS and Employee desire to amend and restate the Original Agreement. NOW THEREFORE, intending to be legally bound, the parties hereto agree that the Original Agreement shall be amended and restated to read as follows: 1. Pre-Retirement Payments. SMS shall pay to Employee $3,000 per month on ----------------------- the first day of each month during the period beginning on October 1, 1995 and ending on the earlier of (i) Employee's Retirement (as defined below), or (ii) June 1, 2014. 2. Deferral Account. SMS shall establish on its books a deferral account ---------------- for Employee, which will be credited with $3,000 as of the date of each payment made to Employee under Section 1. Interest shall be credited to the Employee's deferral account at a rate of 7% per annum, compounded monthly as of the end of each month. Any amounts credited to the Employee's deferral account shall be merely book entries and no assets shall be held in such account. 3. Post-Retirement Payments; Distribution of Deferral Account. ---------------------------------------------------------- (a) SMS shall pay to Employee or his beneficiary $6,000 per month on the first day of each month during the period beginning on the first day of the first full calendar month following Employee's Retirement and ending on June 1, 2014 (the "Post-Retirement Period"). (b) The amount credited to Employee's deferral account shall be paid to him or his beneficiary in substantially equal monthly installments over the Post-Retirement Period (or if Employee's Retirement has not occurred prior to June 1, 2014, in a single lump sum distribution on such date). Such monthly installment payments shall be in addition to, and made on the same dates as, the $6,000 monthly payments referred to in subparagraph (a). Amounts credited to Employee's deferral account shall continue to bear interest as specified in Section 2 during the installment payout period. 4. Retirement. As used herein the term "Retirement" shall mean (i) the ---------- termination of Employee's employment with SMS, whether part-time or full-time, for any reason, including death or disability, or (ii) a "Change-in-Control" (as defined below). As used herein, the term "Change in Control" shall mean the acquisition by any person (other than SMS or any affiliate or associate of SMS), as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of 40% or more of the combined voting power of SMS' then outstanding securities, or the approval by the stockholders of SMS of (aa) any merger or consolidation where stockholders of SMS immediately prior to the merger or consolidation do not immediately thereafter hold more than 50% of the combined voting power of the surviving company's then outstanding securities, (bb) a liquidation or dissolution of SMS, or (cc) a sale of all or substantially all of SMS' assets. 5. Death of Employee. Upon Employee's death, the payments required to be ----------------- made under Section 3 shall be made to a beneficiary designated by Employee to SMS (the current beneficiary is Employee's wife, Lyn E. Kelly). 6. Forfeiture of Benefits. Notwithstanding the foregoing, if Employee ---------------------- violates the Non-Competition Agreement between Employee and SMS dated April 2, 1990, Employee shall thereupon forfeit all rights to receive to any unmade payments under this Agreement. 7. Agreement Unfunded. The obligation of SMS to pay any benefits under ------------------ this Agreement shall be unfunded and unsecured and any payment under this Agreement shall be made from the general assets of SMS. 8. No Contract of Employment. The benefits payable under this Agreement ------------------------- shall be independent of, and in addition to, any other agreement relating to Employee's employment that may exist from time to time between the parties hereto, or any other compensation payable by SMS to Employee, whether salary, bonus or otherwise. This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of SMS to discharge Employee or restrict the right of Employee to terminate his employment. 9. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the Commonwealth of Pennsylvania. 10. Agreement Binding. This Agreement shall be binding upon and inure to ----------------- the benefit of SMS, its successors and assigns, and Employee and his heirs, executors, administrators and legal representatives. Employee may not assign this Agreement or any of his rights hereunder. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first written above. SHARED MEDICAL SYSTEMS CORPORATION By: /s/ Terrence W. Kyle -------------------------- Name: Title: /s/ James C. Kelly ------------------------------ James C. Kelly EX-10.B 3 PERFORMANCE BONUS PLANS Exhibit (10) Performance Bonus Plans - 1995: Robert J. McNeill, David F. Perri, Terry A. Pitts and Matthew B. Townley The performance bonus plans for Messrs. McNeill, Perri, Pitts and Townley for 1995 were not set forth in formal documents. Mr. Pitts' plan operated as follows: A portion of Mr. Pitts' bonus (approximately 50%) was based on the extent to which the actual attainment of pre-tax income for two divisions of the Company for which Mr. Pitts was responsible exceeded pre-determined target levels. The remainder of Mr. Pitts' bonus was determined based on subjective considerations of his managerial performance against certain pre-defined goals. The plans for Messrs. McNeill, Perri and Townley operated in a manner similar to the performance bonus plan for 1995 for Francis W. Lavelle filed as Exhibit 10 to the Company's Form 10-Q Report for the quarter ended September 30, 1995 and incorporated by reference as an exhibit to this filing. Thus, under each plan, 90% of the base bonus value was tied to corporate sales, revenue and profit performance and the remaining 10% of the base bonus value was tied to subjective considerations of managerial performance against certain pre-defined goals. EX-13 4 ANNUAL REPORT 1995 EXHIBIT (13) 1995 Annual Report [LOGO OF SMS CORP.] Through long-term partnerships in the health industry, we help our customers improve their quality of care, financial performance, and strategic position by providing superior, cost-effective solutions based on information systems and services. SMS Mission Statement /(C)/ Copyright 1996 SMS Shared Medical Systems Corporation [SMS LOGO APPEARS HERE] Annual Report 1995 SMS is the leading provider of health information service and system solutions worldwide. SMS customers include integrated health networks, multi- entity health corporations, community health information networks (which include payers and employers), hospitals, physician groups, and other health providers in North America and Europe. SMS solutions include a comprehensive line of health information systems, providing clinical, financial, administrative, ambulatory care, managed care, decision support, and EDI systems for both the public and private health sectors. To meet each health organization's requirements, SMS provides these systems on computers operating at the customer site, at the SMS Information Services Center, or as part of a distributed network. SMS solutions also include a broad array of professional services critical to the successful design and management of our customers' strategic information systems. These professional services include system installation, support, and education. In addition, SMS provides specialized consulting services for the design and integration of software and networks, for facilities management, for information systems planning, and for system-related process re-engineering. Financial Highlights (Amounts in thousands, except per share amounts) - --------------------------------------------------------------------------------
Operating Results: 1995 1994 % Increase - -------------------------------------------------------------------------------- Revenues $650,641 $550,769 18.1% - -------------------------------------------------------------------------------- Income Before Income Taxes $ 65,220 $ 57,540 13.3% - -------------------------------------------------------------------------------- Net Income $ 39,783 $ 35,099 13.3% - -------------------------------------------------------------------------------- Net Income Per Share $ 1.68 $ 1.51 11.3% - -------------------------------------------------------------------------------- Cash Dividends Declared Per Share $ .84 $ .84 - - -------------------------------------------------------------------------------- Weighted Average Common Shares 23,697 23,280 1.8% - -------------------------------------------------------------------------------- Year End Position: - -------------------------------------------------------------------------------- Total Assets $434,973 $380,065 14.4% - -------------------------------------------------------------------------------- Retained Earnings $265,010 $244,698 8.3% - -------------------------------------------------------------------------------- Total Stockholders' Investment $248,820 $219,196 13.5% - -------------------------------------------------------------------------------- Current Ratio 1.7 1.5 - -------------------------------------------------------------------------------- Common Stock Outstanding 23,261 22,943 - -------------------------------------------------------------------------------- Number of Stockholders of Record 6,124 5,627 - --------------------------------------------------------------------------------
-1- TO OUR STOCKHOLDERS: From The Chairman... For more than 26 years (from January of 1969 to August of 1995) it was my privilege to serve as Chief Executive Officer and Chairman of the Board of SMS. However, at the beginning of 1995 I indicated to our Board of Directors a desire to spend less time on day-to-day operational activities. As a result, on August 10 of this past year, our Board enthusiastically selected our President and Chief Operating Officer, Marvin S. Cadwell, as SMS' new Chief Executive Officer. I will continue as Chairman of the Board. Mr. Cadwell has over 30 years of experience in the health information systems industry. He joined SMS in 1975 and has since held a series of increasingly important positions within the Company. In 1986 he moved to London, England, where for the next five years he directed the very successful turnaround of our European operations. Mr. Cadwell is eminently qualified to lead SMS into the twenty-first century. I look forward to working with him, our Board of Directors, and our very talented and dedicated group of SMS employees. Together we expect to increase shareholder value through the strengthening of SMS' position as the leading provider of health information systems worldwide. [R. JAMES MACALEER SIGNATURE APPEARS HERE] R. James Macaleer Chairman of the Board From The Chief Executive Officer... The health services delivery system in the United States continues to evolve, with more and more emphasis on treatment in ambulatory care settings, such as outpatient clinics, physician offices, and the home. Similar evolutions are occurring in many European countries, where SMS has a substantial presence. Change, however, generally creates opportunities, and the changes noted above are no exception. As health provider organizations become larger (primarily through mergers and acquisitions), they become more complex. Their information needs are also more complex, and as a result these organizations want more from suppliers of information systems than just a disparate array of hardware, software, systems, networks, and services. What they want and need are solutions. That is what SMS is providing and what distinguishes SMS among a crowded field of health information systems companies. SMS focuses on solving our customers' problems through a coordinated approach to application design, systems development, sales and marketing, installation activities, and follow-on services. Our sales results during 1995 and early 1996 appear to indicate that this approach to the marketplace is being favorably received by both existing and potential customers. During the past several years we have spent over $200 million on the development of application and delivery systems to enable our customers to cope with the changing environment. We have placed 2 particular emphasis on systems and services that will help our customers reduce their operating costs -- our document and medical imaging systems, our EDI-based eligibility system, our managed care contract management system, our consulting services, and our newly formed Outsourcing Services Division (OSD), to name a few. All of these systems and services, and others as well, have been very successful in providing both short-term and longer-term cost savings. OSD is the newest of these, but during the end of 1995 and the beginning of 1996, OSD was selected by seven customers for services worth in excess of $200 million over the next ten years. SMS will provide these customers with software, information processing, personnel management, and technical support. SMS' European operations continued to grow in each of the eleven countries in which we have a significant presence. We continued to add customers in three Eastern European countries (Hungary, Poland, and the Czech Republic), as well as in Western European countries. In Germany, in particular, we increased our market share significantly through our normal sales activities. In addition, we added several dozen customers through the acquisition of a German competitor. We also increased our presence in the United Kingdom (UK) through the acquisition of a major regional healthcare data center. This acquisition provides SMS with the resources to offer remote computing and other services in the UK, where we were already the major supplier of information systems to UK hospitals. During 1995, SMS' revenues increased by $100 million over 1994 revenues to $650 million. Most of this increase was achieved through internal growth. Net income and earnings per share increased by 13.3% and 11.3%, respectively, compared to the previous year. Our revenue backlog increased during 1995 to more than $1.5 billion, which is quite possibly larger than the combined backlog of all other health information system companies. In 1995 SMS was again successful in many areas: achieving meaningful earnings growth, making substantial sales to new and existing customers, improving customer satisfaction, and introducing new and improved product and service solutions. And despite the uncertainty that surrounds healthcare reform, we are optimistic that in 1996 we will continue the progress we have made during the past several years in these and other areas, thereby delivering more value to our customers and stockholders, while providing more opportunities for our employees. [MARVIN S. CADWELL SIGNATURE APPEARS HERE] Marvin S. Cadwell President and Chief Executive Officer 3 SMS Information Solutions [ART WORK APPEARS HERE] The Synthesis of Information Information is the lifeblood of the health industry. The practice of medicine, the provision of health services, and the successful management of the business of health involve the synthesis of information from many different and frequently unique sources. Health systems need information to accommodate changes in policy, evaluate clinical protocols, achieve their business metrics, improve their business processes, establish and track health status, and continue to improve quality. Care providers need immediate access to up-to-date individual and global information in order to make informed, effective clinical decisions. Patient data must be current, comprehensive, integrated, and cumulative, even though it may have been collected at multiple locations over multiple episodes of care. In addition, the patients themselves need information, such as eligibility status, co-pay amounts, appointments, referrals, discharge summaries, and statements. As a result, information is no longer simply a necessity for contemporary health systems, it is a vital strategic asset. To accommodate the ever- increasing demand for information, to unite, manage, and support their networks of provider entities, and to continue to improve business metrics while maintaining the highest possible standards for care, health systems require fully integrated information solutions - a combination of information technology, 4 processes, applications, and services - that create a seamless continuum of information. This information continuum, in turn, enables effective decision making on every level of the organization because all users have all the information they need at their fingertips - whatever they need, wherever and whenever they need it, and in whatever format is most useful to them. Strategic Information Partners Contemporary health systems are actively seeking strategic partners who will help them in this new information venture. Health systems want strategic information partners who are experienced enough to provide solutions to their current problems, bold enough to share their risks, and visionary enough to anticipate their future needs. SMS is such a partner. We have the most experience in the industry, and we are producing results on a daily basis with health systems around the world. At the same time, we are creating new solutions that both enhance our customers' capability to meet their current needs and anticipate what will be needed tomorrow as well. What follows is a description of what will be possible within the next two years, for those who have access to our complete spectrum of solutions. Much of what is described on the following pages is already in use by our customers around the world. [CUSTOMER CALL-OUT QUOTE] - -------------------------------------------------------------------------------- Without a continuum of information, you cannot provide a continuum of care. We challenged SMS to provide an enterprise-wide solution to our automation needs, to assist us in standardizing our information systems, and to integrate the flow of information among all ten of our facilities, and they really came through for us. We are now standardizing our related processes and procedures in order to capitalize on the strategic value of our SMS information system. David Bowen Chief Information Officer and Senior Vice President of Information Systems Baptist Health System, Birmingham, Alabama - -------------------------------------------------------------------------------- 5 A Vision of Health Service Delivery... Maria H. is preparing to leave for Dr. Crewe's office for an early morning appointment. Maria is thinking about the way she chose Dr. Crewe as her family practitioner, and about how different her experience with this health services organization has been when compared to her previous provider. Almost two years ago, her company introduced the new health provider organization to its employees. Maria sat at a personal computer and answered a series of questions about her health services preferences. She was, for example, able to indicate the service areas and locations that were most convenient for her. In addition, she indicated the most convenient times for her appointments as well as her preference for female clinicians. Based on her choices, Maria received a list of primary care physicians who met her criteria. She was then able to review their education, credentials, and even their pictures online. From among the choices available to her, she chose Dr. Amanda Crewe. Maria could not believe how easy it was to schedule her first appointment. When Maria called, Dr. Crewe's staff had all her demographic information and even knew about her $7.00 co-pay. They were aware of her preference for early morning appointments and offered her an appointment four days later. Since then, all of Maria's health services have been completely coordinated. When she needed some blood tests and an X ray, the system automatically scheduled them 30 minutes apart in adjacent facilities. When she was referred to another physician, all her referrals and medical information were available to the specialist online, just as they always are to Dr. Crewe. That same morning, as Maria is preparing to drive to Dr. Crewe's office, the doctor is at home using her laptop to check her electronic "to do" list for the day. As Dr. Crewe scans the list left over from the previous day, she notices an item that she had highlighted for immediate follow-up. She also notices that a new item was added over night. This item is also flagged, and represents an abnormal result from an EKG that Dr. Crewe ordered late yesterday. [CUSTOMER CALL-OUT QUOTE] - -------------------------------------------------------------------------------- We saved $210,000 in the first six months. SMS' integrated eligibility was definitely the right choice for us. Mary Wells Assistant Director of Finance Santa Clara Valley Medical Center Santa Clara, California - -------------------------------------------------------------------------------- 6 Dr. Crewe decides to explore the new message first. Using "point and click" technology, she displays Michael R.'s electronic patient folder. The doctor notes that Michael was admitted through the emergency room of the local hospital for injuries sustained in an automobile accident. Dr. Crewe then reviews Michael's flowsheets for vital signs for the last 24 hours. The online graphing features quickly show Dr. Crewe that all vital signs appear normal and stable. Satisfied, Dr. Crewe displays the most recent EKG and compares it to his prior EKG, concluding that there have not been any significant changes. Satisfied, she charts a brief note in Michael's electronic patient folder and inserts a reminder on her electronic "to do" list to visit Michael in the hospital later in the day. Before leaving for the office, Dr. Crewe decides to access the other flagged "to do" item from the previous day. Upon doing so, she discovers a follow-up reminder on Matthew R., one of her elderly patients with a recent hip replacement, whom she discharged from the hospital yesterday. The follow-up item reminds Dr. Crewe to ensure that there is continuity of care and that the appropriate rehabilitation is continued at home by the home health agency. [ART WORK APPEARS HERE] Accessing Matthew's chart online, Dr. Crewe sees that Matthew received a detailed system-generated discharge summary when he left the hospital. She also sees that Matthew has already been scheduled for assessment in his home by a therapist. Knowing that all of Matthew's demographic and clinical information is online and accessible to the physical therapist, the doctor closes out the "to do" window and leaves for the office. Arriving at her office a short time later, Dr. Crewe turns on her workstation to review her appointment schedule for the day. Her first appointment is with Maria H. The doctor has not seen Maria for some time. To review Maria's clinical history, Dr. Crewe switches to the screen that allows her to access Maria's electronic patient record and notices that a health maintenance flag is highlighted in red. 7 Dr. Crewe sees that Maria is overdue for her annual mammogram and places the order by using the "point and click" method. She continues to peruse Maria's clinical history online, noting all the various incidences of health maintenance service as well as the various episodes of care that Maria has had since joining the health network a little over two years ago. Maria's online clinical record reveals that a few months ago Maria was treated by one of the HMO orthopedic services in another part of the state. In fact, Maria has had surgery to correct a condition stemming from rheumatoid arthritis. Dr. Crewe reviews Maria's discharge summary and X rays, which are part of her online patient record. The doctor also reviews online graphs of Maria's blood chemistries, her problem list, current medications, and vital signs. Dr. Crewe is troubled by Maria's most recent blood work and notices that while in the hospital Maria was started on an investigational medication. She immediately switches to the protocol for rheumatoid arthritis, which is online, and is relieved to note that although some blood variations are typical with this particular medication, Maria's blood values are still well within the expected range. Satisfied, Dr. Crewe notes her observation in Maria's electronic patient record and is ready to see Maria. Maria is waiting in the exam room. Dr. Crewe performs a physical exam and updates Maria's clinical record. Her doctor's workstation includes a clinical knowledge expert system, which facilitates documentation for both the physical exam and the clinical record and helps the doctor coordinate Maria's care plan. Dr. Crewe notes that Maria has some white cells in her urine and has complained about a burning sensation. Clearly, she requires an antibiotic. Dr. Crewe orders Ampicillin, but the system automatically generates a contraindication warning that Maria has allergies, which might cross-react with Ampicillin. The doctor has had some good results with Ciprofloxicin for urinary infections and chooses that. [ART WORK APPEARS HERE] However, the system generates another message that Ciprofloxicin is quite expensive relative to the payment guide of Maria's HMO and displays a list of less expensive alternatives. The doctor chooses Gantricin; the system displays the recommended dose of this drug, which has been automatically calculated specifically for Maria. Dr. Crewe approves the order with a single "click." 8 Maria also requests a refill for her arthritis medicine. Dr. Crewe selects the medication from her medication list and authorizes three refills. The order for the antibiotic is electronically sent to Maria's local pharmacy. The order for the arthritis medication goes to the mail order drug supply company. Furthermore, when Maria is ready to leave, Dr. Crewe's staff will give her system-generated information on her rheumatoid arthritis, her urinary infection, and the medications she is currently receiving. That evening Dr. Crewe attends the regularly scheduled health network executive meeting at which both financial and clinical issues are discussed. The health network's Executive Information System (EIS) produces reports about the performance of the entire enterprise and of each health delivery unit within the network, and provides quick access to contracts, costs, and receivables. The quality of the care being provided is also monitored. Immunization rates, wellness status, and patient satisfaction results are displayed along with the financial data. Tonight there is discussion of a problem with cost overruns with several contracts. A major component of the overrun are costs for MRI studies at one facility, which far exceed projections. The executives agree to use the EIS to study the operational effectiveness of that particular facility. [CUSTOMER CALL-OUT QUOTE] - -------------------------------------------------------------------------------- "Gemeinsam mit unserem Partner SMS werden wir unsere strategische Ausrichtung zum Gesundheitszentrum vorantreiben. "With SMS as our partner, we are moving forward on our strategic direction of being a regional integrated health center. Jurgen Jung Kaufmunnischer Direktor (Chief Executive Officer) Stadtklinik Baden-Baden Baden-Baden, Germany - -------------------------------------------------------------------------------- In addition, the executives note that patient satisfaction remains high, but that there are problems with compliance with some health maintenance reminders. This will probably require some new education efforts aimed at the entire member population. As she heads home after the meeting, Dr. Crewe reflects on how reassuring it is to know that her health network now has ways of verifying the quality of the care they are providing. 9 What does this scenario demonstrate?... Satisfied patients moving smoothly through a health services network; skillful care providers treating them efficiently and effectively; and a health services network that is well positioned to operate successfully in its market because services are integrated and coordinated. The patients, the physician, and the parent health enterprise are all supported by the information they need, whenever and wherever they need it. SMS is singularly qualified to turn this scenario into reality by virtue of our unique combination of assets - financial resources, experience, and all the requisite technology, applications, processes, and services. The Industry Leader SMS supplies more information solutions to more customers in more countries than does any other HIS supplier. Whether one considers number of customers, types of customers, customer retention, number of countries served, number of systems installed and operational, integrated technologies, revenues, sales, or revenue backlog, SMS is the recognized industry leader and has been since the early 1970s. As the industry leader, we have been setting the standard of excellence for health information solutions, and we expect to continue doing so into the next century. The Leader in Information Solutions SMS offers the broadest array of integrated information solutions - technology, applications, processes, and services - in the HIS industry. SMS solutions include applications and services for clinical results, orders, laboratory, radiology, pharmacy, nursing, patient registration, medical and document imaging, scheduling, physicians' offices, payroll and HR, billing and receivables, managed care, outcomes management, [CUSTOMER CALL-OUT QUOTE] - -------------------------------------------------------------------------------- We have been an SMS customer for 25 years, and our relationship is a true partnership. We required a scaleable network solution to support existing systems, new client/server applications, such as imaging, and remote access. SMS partnered with us through all stages of building a network solution, including the design and implementation of a high-speed infrastructure. SMS is helping us to achieve our goal of providing universal access to an electronic patient record. Joe Fisne Chief Information Officer Community Medical Center Scranton, Pennsylvania - -------------------------------------------------------------------------------- 10 financial reporting, ambulatory care, EDI services, clinical and financial decision making, and a full complement of executive information systems. SMS is particularly strong in the clinical areas and has more clinical systems installed worldwide than any other HIS supplier. SMS also provides extensive business and professional services to our customers. So many, in fact, that SMS is fast becoming the service vendor of choice within the health industry. Progressive, proactive health enterprises that are searching for strategic information partners capable of delivering real solutions are increasingly turning to SMS to help them craft the solutions they need. [ART WORK APPEARS HERE] SMS services include systems installation, integration, and optimization; education and training; outsourcing and facilities management; network design, installation, and monitoring; re-engineering of business offices, patient protocols, and medical records; custom programming; and general consulting. SMS consultants around the world help our customers identify opportunities, resolve problems, and create action plans that coordinate with their strategic business objectives. The Leader in Networking Solutions For 27 years, SMS has operated the largest health communications networks and the largest health communications network operations center in the industry. For example, one of our U.S. health communications networks connects more than 130,000 terminals at over 900 provider sites via more than one-half million miles of communications lines, and transmits more than 50 billion characters of information each day. SMS plans, designs, installs, and provides remote monitoring for hundreds of customer communications networks, supporting our customers with invaluable diagnostic and troubleshooting utilities and services. SMS creates networks for the future today, integrating voice, data, and imaging capabilities that position our customers for continued success. We enable single-device access for our customers, who, as a result, are able to switch back and forth from clinical applications, 11 such as Orders, to office automation products, such as e-mail and word processing, to departmental systems, such as Pharmacy, all from the same workstation. In conjunction with AT&T and local phone companies, SMS uses frame- relay and ISDN (integrated services digital network) technology to provide our physician customers and other authorized users with access to patient information and clinical results from remote locations, such as their homes and offices. SMS takes pride in providing our customers with enterprise-wide networking communications solutions in support of the total spectrum of their business activities - not simply their SMS systems and applications. To ensure that our customers have the strategic advantage of the best in network technology solutions combined with a seamless, single-vendor approach, SMS has formed alliances with industry leaders in networking and telecommunications. AT&T, Novell, Microsoft, Memorex Telex, and Digital are among our communications business partners. The Leader in IHN and CHIN Solutions SMS is the most experienced HIS vendor in the integrated health network (IHN) and community health information network (CHIN) marketplaces. We currently provide more systems and services to more provider organizations and physicians associated with more IHNs and CHINs than does any other supplier of health information systems. SMS' experience with IHNs and IHN solutions dates back to 1987, when we were involved in creating information solutions for one of the very first integrated health networks to form in the United States. SMS provides our IHN and CHIN customers with information solutions at every level of their organization - enterprise-wide, institutional, and departmental - linking their existing systems horizontally and vertically and connecting all of these to payers and other organizations outside of their networks. [ART WORK APPEARS HERE] We currently support health networks as diverse as the national military patient identification network in Spain, the statewide public health system in Oregon, the regional healthcare district model in Great Britain, the largest CHIN in the United States, a statewide system of ambulatory clinics in Mississippi, a regional health network in the Netherlands, and a myriad of university health networks throughout North America. 12 The Leader in EDI Services EDI services are fundamental to the successful operation and management of the IHN, and SMS is the clear leader among HIS vendors in providing these services. SMS' EDI services connect the providers with the insurers, purchasing entities, and governmental agencies that finance and regulate the delivery of health services. In 1996 we estimate that SMS EDI services will handle more than 50 million eligibility transactions, which will save our customers millions of real dollars, in addition to reducing registration time, increasing claims acceptance, reducing discrepancies, and resolving conflicts at the point of service. In fact, one of our large urban IHN customers generates over 35,000 transactions per day using SMS' eligibility services and estimates that these services alone save them in excess of $14 million each year. [CUSTOMER CALL-OUT QUOTE] - -------------------------------------------------------------------------------- C' est a ma connaissance le premier exemple en France ou une telle installation est devenue operationnelle dans un delai aussi court. Ce fut un travail d'equipe client-fournisseur ou personne n'a menage ses efforts. I believe this is the first time in France that such an installation has gone operational in such a short time frame. This was a customer-supplier partnership in which nobody spared any effort. A. Lecherf Director Centre Hospitalier de l'Arrondissement de Montreuil Montreuil-sur-Mer, France - -------------------------------------------------------------------------------- The Leader in Systems Integration SMS is the leading systems integrator in the HIS industry and ranks in the top twenty among systems integrators across all industries, including such technology giants as IBM, EDS, and AT&T. SMS' extensive capabilities in systems integration are a direct result of our technical expertise with many different technologies. SMS offers information solutions on a variety of industry-standard hardware platforms (RISC, PC, mainframe, and mini) and operating systems, including DEC VMS and OSF1 (UNIX); IBM MVS, OS2, and AIX (UNIX); and HP/UX (UNIX). We employ a variety of relational data base technologies including DB2, Sybase, Oracle, RDB, and SQL Server. Our communications technologies include TCPIP, Ethernet, Token Ring, and Novell Netware, among others. In addition, our solutions include the use of expert systems, sound, image, voice, and computer-based training, along with the extensive use of client/server technologies. 13 SMS focuses on providing solutions that meet our customers' needs while protecting their investment in technology. The ability to integrate our solutions with those developed by others is critically important to our customers and to the health industry as a whole. Therefore, SMS solutions enable any-to-any connectivity regardless of the vendor or technology platform. We are committed to providing our customers with solutions that address the total needs of their business, solutions that are efficient, effective, and interconnectable. The Leader in HIS Outsourcing SMS has been the leading provider of remote processing services to the HIS industry for over 27 years. Many people refer to this type of service as a form of outsourcing. Others may define outsourcing as being responsible for a health organization's in-house computer operations and associated personnel. And, in fact, both can be viewed as types of outsourcing. SMS, however, also offers a more comprehensive spectrum of outsourcing services. These services include remote or on-site processing (or a combination, also known as distributed processing), total personnel management, design and management of communications networks, management of a help desk, systems integration, and software selection, some of which may be SMS software and some of which could be supplied by other vendors. Some contracts also include the management of a business office for an IHN or the operation of a department responsible for the analysis and processing of managed care contracts. Frequently, these outsourcing contracts are based on performance service levels that match the goals and objectives of the customer, so that SMS is a true partner with the IHN, MSO, or other health organization. [CUSTOMER CALL-OUT QUOTE] - -------------------------------------------------------------------------------- The staff used to spend half of their time chasing paper. Now they can sit at their desks and focus on the task at hand and I can measure productivity. SMS document imaging provides direct access to all documents. Our savings are significant; we now have greater control and the tools we need to get the job done efficiently. Mark Paraska Director of Financial Patient Services Bethesda Memorial Hospital Boynton Beach, Florida - -------------------------------------------------------------------------------- 14 One of SMS' outsourcing customers is a large IHN located in the northeastern part of the United States. This state-of-the-art health services enterprise includes four acute-care hospitals, both visiting nurse and home health organizations, a wellness complex, five long-term care facilities, and a managed care organization that is associated with a network of more than 3,000 physicians. Interestingly, this large IHN has a permanent information services (IS) staff of only five people who handle all of the information processing requirements for their dozens of affiliated health delivery providers. This IHN outsources most of its IS needs to SMS. Consequently, we supplement their staff of five with SMS employees who provide support and technical expertise in areas such as installations, operations, networking, applications, distribution, and the help desk. [ART WORK APPEARS HERE] Leading from Strength SMS' financial strength significantly differentiates us from all other HIS vendors. Founded in 1969 and profitable every year since 1972, SMS revenues have been over one-half billion dollars each of the past two years. In addition, our revenue backlog now exceeds $1.5 billion. SMS' financial resources enable us to invest tens of millions of dollars each year in research and development. In the last few years, our R&D expenditures alone have exceeded $200 million. This, in turn, enables us and our customers to contend with the rapid pace of technological change. We have the resources to avail ourselves of that which is state-of-the-art in the multiplicity of technologies with which we create our information solutions. SMS employees collectively constitute one of the largest, most experienced, most well-informed group of health information professionals in the world, more than 70% of whom are dedicated solely to providing support for our thousands of customers. SMS has dozens of offices in a dozen countries so that we can literally be close to our customers. In addition, because of worldwide networking and teleconferencing capabilities, virtually our entire support staff is available to address customer issues and concerns, regardless of how specific or unique 15 those concerns might be. Physically, our support specialists cannot be everywhere, but virtually they can be wherever they are needed whenever they are needed. At SMS, we support our customers around the clock, seven days a week. As we enter the last half of the last decade of the twentieth century, we find ourselves in a health industry that has been transforming itself for some time and will apparently continue to do so into the next century. As a result, health organizations are choosing strategic information partners whose long-term goals are in concert with their own and who have demonstrated the bold, visionary leadership that emanates from strength, singular focus, and decades of accumulated experience. SMS is such a partner. Leading with Confidence There is not much certainty within the health industry today, other than that more change is inevitable. There is, however, a great deal of certainty at SMS. Regardless of how or when the health industry completes its metamorphosis, we are certain that this inexorable process of transformation will necessitate new information solutions for all health providers. We are equally certain that SMS will continue to anticipate the need for those solutions, and having anticipated them, will continue to lead the industry in delivering them. [CUSTOMER CALL-OUT QUOTE] - -------------------------------------------------------------------------------- SMS invested in our success. From the beginning, we were impressed with SMS' approach. They wanted to be part of the Good Samaritan team and adopted our goals as their own. SMS approached their tasks not as a single, short-term project, but as a long-term investment in our success. That made the difference. Gary J. Guidetti Vice President of Rehabilitation Services Good Samaritan Hospital Baltimore, Maryland - -------------------------------------------------------------------------------- There is also a great deal of optimism and confidence at SMS. We are optimistic about our customers' future success, and we believe that their success will ensure our own. We are confident that we have the knowledge, the resources, the experience, and the sheer determination to work in tandem with our customers, so that together we might transform our shared vision of health delivery at its best into reality for the communities our customers serve. And we are equally confident that through our dedication and our efforts, we will continue to make a vital contribution to the world community by serving those whose ultimate purpose is to improve the quality of health delivery worldwide. 16 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Financial Statements Index - ------------------------------------------------------------------------------------------------ Management's Discussion and Analysis of Financial Condition and Results of Operations 18 - ------------------------------------------------------------------------------------------------ Selected Financial Data 23 - ------------------------------------------------------------------------------------------------ Consolidated Balance Sheet 24 - ------------------------------------------------------------------------------------------------ Consolidated Statement of Income 25 - ------------------------------------------------------------------------------------------------ Consolidated Statement of Cash Flows 26 - ------------------------------------------------------------------------------------------------ Consolidated Statement of Stockholders' Investment 27 - ------------------------------------------------------------------------------------------------ Notes to Consolidated Financial Statements 28 - ------------------------------------------------------------------------------------------------ Report of Independent Public Accountants 35 - ------------------------------------------------------------------------------------------------
17 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Results of Operations - General The Company's only line of business is providing information service and system solutions to health organizations, such as integrated health networks, multi-entity health corporations, community health information networks, hospitals, physician groups, and other health providers in North America and Europe. The Company's revenues are derived from service and system fees for computer- based information processing systems and software, and related professional services and support. The Company's professional services consist of a variety of services related to its information processing systems, such as systems installation and support, software and network customization, information system planning and integration, business office consulting, facilities management, and customer education. The remainder of the Company's revenues are primarily generated from hardware sales to its customers. As the information processing requirements of the health industry have continued to grow, the business of providing information solutions has become more complex. Additionally, changes in the way health organizations are structured and reimbursed, combined with pressures to control costs, improve quality, and increase market share have created new and increased demands for the Company's services and systems. The Company's services and systems are provided to customers under both fixed-period contracts and perpetual license contracts. Fixed-period contracts have terms primarily ranging from one to ten years, and generally allow price increases annually, limited to the increase in the Consumer Price Index. The Company has increased some of its prices under these contract provisions. Fixed- period agreements produce recurring revenues over the term of each contract, in contrast to perpetual license agreements, where software fees are recognized over the installation period and the related support fees are recognized over the term of the support agreement. There is an important distinction to be drawn in comparing the revenues reported by the Company with other companies that provide software to their customers under perpetual licenses. Such companies generally recognize software revenue and related installation fees, if there are any, during the course of the customer's installation. Excluding support fees, all revenues recognized are non-recurring. The Company does sell some of its software products under perpetual licenses. However, the majority of the Company's business is primar- ily focused around providing services to customers through long-term contracts. Revenues under these service agreements are recognized as they are earned over the life of the long-term contract. A substantial portion of these revenues are recognized after installation is complete, as contrasted to perpetual license arrangements where revenue recognition generally ends upon completion of the installation. As a result, the Company's revenues tend to be more stable than those of many software companies. Also, at any point in time, the Company has a significant amount of revenues to be realized in the future as installation work is completed and processing services are performed. Management estimates the total amount of future revenues under contract at December 31, 1995 is in excess of $1.5 billion. The Company's health information systems and related services operate on computer systems that range from personal computers to minicomputers to mainframes. These systems are offered on computers operating at the customer's site, at the Company's Information Services Center (i.e., remotely), or as part of a distributed network. Depending on the type of product or service selected, equipment utilized by the customer can be provided by the Company under fixed- period lease agreements or sales agreements. Results of Operations for 1995 Compared to 1994 In 1995, revenues grew 18.1%, to $650,641,000, compared to 1994. Net income was $39,783,000 and net income per share was $1.68 for the year ended December 31, 1995, which represented increases of 13.3% and 11.3%, respectively, compared to 1994. 18 - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- Analysis of Changes in Consolidated Cost and Expenses (Amounts in thousands) - ---------------------------------------------------------------------------------------------------------------------------------- Change Change from from 1995 Prior Year 1994 Prior Year 1993 - ---------------------------------------------------------------------------------------------------------------------------------- Operating and development....................................... $282,763 $47,788 $234,975 $24,727 $210,248 Percentage of service and system fees revenues............. 47.7% 46.6% 46.4% Marketing and installation...................................... 200,191 29,250 170,941 15,611 155,330 Percentage of service and system fees revenues............. 33.8% 33.9% 34.3% General and administrative...................................... 51,619 4,111 47,508 3,401 44,107 Percentage of service and system fees revenues............. 8.7% 9.4% 9.8% Interest........................................................ 2,976 1,533 1,443 94 1,349 Percentage of service and system fees revenues............. 0.5% 0.3% 0.3% ---------------------------------------------------------------- Total.................................................... $537,549 $82,682 $454,867 $43,833 $411,034 ================================================================ Percentage of service and system fees revenues........ 90.7% 90.2% 90.8% ================================================================ - ---------------------------------------------------------------------------------------------------------------------------------- Cost of hardware sales.......................................... $ 47,872 $ 9,510 $ 38,362 $ (209) $ 38,571 ================================================================ Percentage of hardware sales revenues...................... 82.4% 82.7% 79.6% ================================================================ - ----------------------------------------------------------------------------------------------------------------------------------
. Service and system fees revenues were $592,509,000, an increase of 17.5%, in 1995 compared to 1994. This increase was primarily due to higher levels of professional services, system processing fees, and system sales. Also affecting the change were revenues associated with the Company's MedSeries4 Division, which was acquired and recorded as a purchase on September 30, 1994; the acquisitions of two businesses in Europe during 1995, both of which were recorded as a purchase; and a weaker U.S. dollar relative to certain European exchange rates in 1995 compared to 1994. The higher level of professional services was generally attributable to system support, installations, and consulting fees. The increase in system processing fees was primarily due to the higher level of customer applications processed at the Company's Information Services Center. . Hardware sales revenues increased to $58,132,000 in 1995 from $46,383,000 in 1994, primarily due to the change in the timing and product mix of systems installed. . Operating and development expenses increased to 47.7% of service and system fees revenues in 1995 from 46.6% in 1994. This increase was primarily due to increased computer hardware and associated costs related to the higher levels of system processing services provided to customers by the Company's Information Services Center, and the addition of new operations in Europe. . Marketing and installation expenses decreased to 33.8% of service and system fees revenues in 1995 from 33.9% in 1994, primarily due to improved efficiency in providing installations and support services to customers, and the Company's ongoing efforts to control certain marketing and installation costs. . General and administrative expenses, as a percentage of service and system fees revenues, decreased to 8.7% in 1995 from 9.4% in 1994, primarily due to the Company's continuing efforts to control the growth of administrative costs. . Interest expense was $2,976,000 in 1995 compared to $1,443,000 in 1994. This change was primarily due to a higher level of outstanding short-term borrowings, which was partially attributable to funds used to acquire businesses in 1995 and 1994. . Cost of hardware sales decreased to 82.4% of hardware sales revenues in 1995 from 82.7% in 1994. This change was primarily due to the different product mixes of systems installed in each year. . Income taxes increased $2,996,000 in 1995 when compared to 1994. This change was due to an increase of $7,680,000 in income before income taxes. The Company's effective rate for federal, state and foreign income taxes was 39.0% in 1995 and 1994. 19 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- Results of Operations for 1994 Compared to 1993 In 1994, revenues grew 9.9%, to $550,769,000 compared, to 1993. Net income was $35,099,000 and net income per share was $1.51 for the year ended December 31, 1994, which represented increases of 13.2% and 11.9%, respectively, compared to 1993. . Service and system fees revenues increased 11.4% to $504,386,000 in 1994 compared to 1993. This increase was primarily due to higher levels of professional services, system processing fees, and system sales. The higher level of professional services was generally attributable to systems installation and support fees. . Hardware sales revenues decreased to $46,383,000 in 1994 from $48,486,000 in 1993, primarily due to the change in the timing and product mix of systems installed. . Operating and development expenses increased to 46.6% of service and system fees revenues in 1994 from 46.4% in 1993. This change was primarily due to increased personnel costs to support higher levels of professional services, and computer hardware and associated costs to support the growth in the base of customers operating their systems at the Company's Information Services Center. . Marketing and installation expenses decreased to 33.9% of service and system fees revenues in 1994 from 34.3% in 1993. This decrease was primarily due to improved efficiency in providing installations and support services to the Company's growing base of customers. This decrease was partially offset by higher costs incurred for equipment and training to improve staff productivity. . General and administrative expenses, as a percentage of service and system fees revenues, decreased to 9.4% in 1994 from 9.8% in 1993, primarily due to the Company's ongoing efforts to control administrative costs. . Interest expense was $1,443,000 in 1994 compared to $1,349,000 in 1993. This change was primarily due to a higher level of average outstanding borrowings associated with the Company's short-term loan and capital lease obligations in 1994 compared to 1993. . Cost of hardware sales increased to 82.7% of hardware sales revenues in 1994 from 79.6% in 1993. This change was primarily due to the different product mixes of systems installed in each year, and reduced hardware margins in line with industry trends. . Income taxes were $22,441,000 in 1994 and $20,665,000 in 1993. The Company's effective tax rate for federal, state, and foreign income taxes was 39.0% in 1994 compared to 40.0% in 1993. The lower rate in 1994, when compared to 1993, was primarily due to the additional provision made in 1993 to adjust the Company's deferred tax liability to the increased federal tax rate of 35.0%. The impact of currency fluctuations on the Company's European operations was not significant in 1994. Inflation Significant portions of the Company's expenses are inflation sensitive. Rising costs for the years ended December 31, 1995, 1994, and 1993 have been partially offset by increased employee and computer productivity. 20 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Liquidity and Capital Resources The Company's financial position remained strong in 1995. Total assets increased from $341,442,000 at January 1, 1994 to $434,973,000 at December 31, 1995. Stockholders' investment increased from $198,206,000 to $248,820,000 over the same period. This growth resulted primarily from operations. Most of the Company's capital expenditures and working capital requirements were financed from operations, supplemented with short-term and long-term borrowings. The major uses of funds during this period were for investments in computer equipment and software, the payment of quarterly dividends, and the acquisition of businesses. At the end of 1995, cash and short-term investments were $23,310,000 compared to $35,826,000 at the beginning of 1994. Net cash flows from operating activities decreased to $38,294,000 in 1995 compared to $46,932,000 in 1994. This change was primarily due to an increase in the growth of accounts receivable of $12,719,000 and prepaid expenses and other current assets of $7,327,000. The growth in accounts receivable was caused by higher business levels and greater amounts of revenues recognized which are contractually billable in future periods. The increase in prepaid expenses and other current assets was primarily related to deferred equipment expenses associated with upcoming customer installations. These reductions in cash flows were partially offset by the increase in net income, adjusted for non-cash expenses such as depreciation and amortization, of $9,329,000. Net cash flows from operating activities decreased to $46,932,000 in 1994 compared to $67,778,000 in 1993. This change was primarily due to the growth in accounts receivable of $17,391,000 and reductions in deferred revenues of $14,765,000. The increase in accounts receivable was caused by higher business levels and greater amounts of revenues recognized which are contractually billable in future periods. These reductions in cash flows were partially offset by the increase in net income, adjusted for non-cash expenses such as depreciation and amortization, of $5,393,000. The Company's investing activities were $44,248,000, $49,664,000, and, $44,021,000 in 1995, 1994, and 1993, respectively. During this period, the Company's investments were primarily for equipment, software, and business acquisitions. The following summarizes the Company's significant investments for the three-year period ended December 31, 1995.
- -------------------------------------------------------------------------------- (Amounts in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Inhouse computer and network communications equipment......................... $11,514 $14,093 $11,316 Capitalized internally produced software................................ 8,850 8,725 8,700 Purchased software.................................. 4,984 4,349 2,411 Minicomputers and peripherals leased to customers.............................. 2,496 2,859 3,259 - --------------------------------------------------------------------------------
21 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - -------------------------------------------------------------------------------- Additionally, the Company invested in the following during the three-year period ended December 31, 1995: . In 1995, the Company purchased Professional Datacare (PDC), a provider of processing services to health organizations in the United Kingdom, for $8,497,000, and the health division of Atlas Datensysteme GmbH (ADS), a provider of patient management and financial systems in Germany, for $3,611,000. These acquisitions were financed primarily through long-term borrowings. . In 1994, the Company acquired all of the outstanding capital stock of GTE Health Systems Incorporated, which became the Company's MedSeries4 Division, a provider of information systems to the domestic health industry, for $17,287,000. . In 1993, the Company acquired a 50% ownership share in Delta Health Systems, a partnership related to home health software, for $6,500,000. The most significant use of cash for financing activities for each of the three years in the period ended December 31, 1995 was for the payment of common stock dividends, which were $19,404,000 in 1995, $19,192,000 in 1994, and $18,989,000 in 1993. The most significant source of cash provided from financing activities was short-term and long-term borrowings of $23,715,000 in 1995 and $6,553,000 in 1994. Management is not aware of any potential material impairments to the Company's financial position. The most significant requirements for funds now anticipated are as follows: . Equipment - During 1996, the Company anticipates that capital expenditures for equipment will be in line with similar expenditures in recent years. Factors such as business activity levels, buy versus lease decisions, and vendor pricing will continue to affect capital equipment expenditures. . Dividends - During each of the three years in the period ended December 31, 1995, cash dividends declared were $.84 per share. All dividends were declared in the last month of each calendar quarter and paid the following month. The Company anticipates paying approximately $19,600,000 in dividends in 1996. . Stock repurchase - The Company's Board of Directors has authorized the repurchase of up to 5,000,000 shares of the Company's common stock. As of December 31, 1995, 2,873,500 shares, at a cumulative cost of $54,325,000, have been repurchased. No shares were repurchased under this plan during the three- year period ended December 31, 1995. The Company expects to finance most of its capital requirements with internally generated funds, supplemented from time to time with short-term borrowings. Currently, the Company has lines of credit with banks, primarily at their prime interest rates, of approximately $69,500,000. At December 31, 1995, approximately $48,500,000 of these lines of credit were unused. 22 - -------------------------------------------------------------------------------- Selected Financial Data (Amounts in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Summary of Consolidated Operations - ------------------------------------------------------------------------------------------------------------------- Revenues..................................................... $650,641 $550,769 $501,283 $469,624 $438,705 Cost and Expenses............................................ $585,421 $493,229 $449,605 $424,578 $399,193 Income Before Income Taxes................................... $ 65,220 $ 57,540 $ 51,678 $ 45,046 $ 39,512 Income Taxes................................................. $ 25,437 $ 22,441 $ 20,665 $ 16,667 $ 14,224 Net Income................................................... $ 39,783 $ 35,099 $ 31,013 $ 28,379 $ 25,288 Net Income Per Share......................................... $ 1.68 $ 1.51 $ 1.35 $ 1.24 $ 1.11 Weighted Average Common Shares............................... 23,697 23,280 23,046 22,880 22,761 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Summary of Consolidated Financial Position - ------------------------------------------------------------------------------------------------------------------- Current Assets............................................... $220,605 $177,478 $165,536 $156,428 $151,007 Total Assets................................................. $434,973 $380,065 $341,442 $305,604 $292,790 Current Liabilities.......................................... $132,699 $116,847 $ 92,840 $ 87,944 $ 81,956 Long-Term Debt and Capital Leases............................ $ 16,960 $ 4,974 $ 6,395 $ 2,291 $ 4,237 Total Liabilities............................................ $186,153 $160,869 $143,236 $119,008 $115,577 Stockholders' Investment..................................... $248,820 $219,196 $198,206 $186,596 $177,213 Common Shares Outstanding.................................... 23,261 22,943 22,753 22,566 22,454 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Operating Ratios and Other Selected Financial Data - ------------------------------------------------------------------------------------------------------------------- Operating Margin............................................. 9.3% 9.8% 9.2% 8.2% 7.2% Hardware Margin.............................................. 17.6% 17.3% 20.4% 21.9% 23.9% Pretax Margin................................................ 10.0% 10.4% 10.3% 9.6% 9.0% Net Margin................................................... 6.1% 6.4% 6.2% 6.0% 5.8% Effective Tax Rate........................................... 39.0% 39.0% 40.0% 37.0% 36.0% Return on Average Investment................................. 17.0% 16.8% 16.1% 15.6% 14.5% Working Capital.............................................. $ 87,906 $ 60,631 $ 72,696 $ 68,484 $ 69,051 Current Ratio................................................ 1.66 :1 1.52 :1 1.78 :1 1.78 :1 1.84 :1 Stockholders' Investment Per Share........................... $ 10.70 $ 9.55 $ 8.71 $ 8.27 $ 7.89 Cash Dividends Declared Compared to Prior Year's Net Income.. 55.5% 62.0% 67.0% 74.8% 83.2% Cash Dividends Declared Per Share............................ $ .84 $ .84 $ .84 $ .84 $ .84 Depreciation and Amortization................................ $ 36,767 $ 32,122 $ 30,815 $ 29,617 $ 29,007 Research and Development..................................... $ 45,385 $ 39,226 $ 37,087 $ 33,703 $ 33,639 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Market Price and Dividends Declared Per Share * - ------------------------------------------------------------------------------------------------------------------- First Quarter High.................................................... $ 37 7/8 $ 29 3/8 $ 24 3/8 $ 24 3/8 $ 19 1/8 Low..................................................... $ 30 7/8 $ 23 5/8 $ 20 3/4 $ 19 1/4 $ 13 7/8 Dividends Declared...................................... $ .21 $ .21 $ .21 $ .21 $ .21 Second Quarter High.................................................... $ 41 1/2 $ 28 1/4 $ 23 7/8 $ 20 5/8 $ 22 3/4 Low..................................................... $ 32 $ 22 1/8 $ 19 1/2 $ 16 7/8 $ 16 1/8 Dividends Declared...................................... $ .21 $ .21 $ .21 $ .21 $ .21 Third Quarter High.................................................... $ 42 3/4 $ 28 1/2 $ 24 1/2 $ 22 3/8 $ 23 3/8 Low..................................................... $ 35 5/8 $ 22 3/4 $ 17 1/2 $ 17 3/4 $ 19 7/8 Dividends Declared...................................... $ .21 $ .21 $ .21 $ .21 $ .21 Fourth Quarter High.................................................... $ 57 5/8 $ 34 1/2 $ 26 $ 22 3/4 $ 22 7/8 Low..................................................... $ 37 3/8 $ 25 3/8 $ 21 1/2 $ 19 7/8 $ 17 Dividends Declared...................................... $ .21 $ .21 $ .21 $ .21 $ .21 - -------------------------------------------------------------------------------------------------------------------
* As of December 31, 1995 there were 6,124 stockholders of record of the Company's common stock. The Company's common stock trades on The Nasdaq Stock Market under the symbol SMED. The prices shown in the table above are the high and low transaction prices as quoted in the Nasdaq National Market. 23 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Consolidated Balance Sheet (Amounts in thousands)
December 31 - -------------------------------------------------------------------------------- 1995 1994 - -------------------------------------------------------------------------------- Assets Current Assets: Cash and short-term investments................... $ 23,310 $ 21,249 Accounts receivable, net.......................... 171,320 138,554 Prepaid expenses and other current assets......... 25,975 17,675 -------------------- Total Current Assets............................ 220,605 177,478 Property and Equipment, net............................ 101,164 105,087 Computer Software, net................................. 42,955 38,801 Other Assets........................................... 70,249 58,699 -------------------- $434,973 $380,065 ==================== Liabilities and Stockholders' Investment Current Liabilities: Notes payable..................................... $ 20,920 $ 12,383 Current portion of long-term debt and capital leases........................................... 4,654 3,100 Dividends payable................................. 4,885 4,818 Accounts payable.................................. 28,301 23,633 Accrued expenses.................................. 39,469 38,189 Current deferred revenues......................... 23,557 28,133 Accrued and current deferred income taxes......... 10,913 6,591 -------------------- Total Current Liabilities....................... 132,699 116,847 -------------------- Deferred Revenues...................................... 13,209 17,352 -------------------- Long-Term Debt and Capital Leases...................... 16,960 4,974 -------------------- Deferred Income Taxes.................................. 23,285 21,696 -------------------- Commitments Stockholders' Investment: Preferred stock, par value $.10; authorized 1,000,000 shares; none issued.................... - - Common stock, par value $.01; authorized 60,000,000 shares; 27,288,942 shares issued in 1995 and 26,964,821 in 1994............. 273 270 Paid-in capital................................... 39,561 32,365 Retained earnings................................. 265,010 244,698 Common stock in treasury, at cost, 4,027,815 shares in 1995 and 4,022,275 in 1994............. (55,286) (55,116) Cumulative translation adjustment................. (738) (3,021) -------------------- Total Stockholders' Investment.................. 248,820 219,196 -------------------- $434,973 $380,065 ====================
- -------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. 24 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Consolidated Statement of Income (Amounts in thousands, except per share amounts)
Year Ended December 31 - -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Revenues: Service and system fees....................... $592,509 $504,386 $452,797 Hardware sales................................ 58,132 46,383 48,486 ------------------------------ 650,641 550,769 501,283 ------------------------------ Cost and Expenses: Operating and development..................... 282,763 234,975 210,248 Marketing and installation.................... 200,191 170,941 155,330 General and administrative.................... 51,619 47,508 44,107 Cost of hardware sales........................ 47,872 38,362 38,571 Interest...................................... 2,976 1,443 1,349 ------------------------------ 585,421 493,229 449,605 ------------------------------ Income Before Income Taxes...................... 65,220 57,540 51,678 Provision for Income Taxes...................... 25,437 22,441 20,665 ------------------------------ Net Income...................................... $ 39,783 $ 35,099 $ 31,013 ============================== Net Income Per Common Share..................... $1.68 $1.51 $1.35 ============================== Number of shares used to compute per share amounts........................................ 23,697 23,280 23,046 ============================== - --------------------------------------------------------------------------------
25 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Consolidated Statement of Cash Flows (Amounts in thousands)
Year Ended December 31 - ---------------------------------------------------------------------------------------------------- 1995 1994 1993 - ---------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income................................................... $ 39,783 $ 35,099 $ 31,013 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization............................ 36,767 32,122 30,815 Asset (increase) decrease - Accounts receivable.................................... (32,766) (20,047) (2,656) Prepaid expenses and other current assets.............. (8,300) (973) (1,480) Other assets........................................... (1,960) (5,321) (7,982) Liability increase (decrease) - Accounts payable and accrued expenses.................. 5,948 11,585 4,030 Accrued and current deferred income taxes.............. 4,322 (788) 39 Deferred revenues...................................... (8,719) (4,977) 9,788 Deferred income taxes.................................. 1,589 (686) 6,192 Other.................................................... 1,630 918 (1,981) ------------------------------- Net cash provided by operating activities.............. 38,294 46,932 67,778 ------------------------------- Cash Flows from Investing Activities: Property and equipment additions............................. (18,764) (20,328) (24,945) Investment in computer software.............................. (13,834) (13,074) (11,111) Dispositions of equipment.................................... 458 1,025 235 Acquisition of businesses.................................... (12,108) (17,287) (8,200) ------------------------------- Net cash used for investing activities................. (44,248) (49,664) (44,021) ------------------------------- Cash Flows from Financing Activities: Dividends paid............................................... (19,404) (19,192) (18,989) Change in treasury stock..................................... (170) (168) (84) Payments of capital lease obligations........................ (3,325) (2,576) (1,845) Increase (decrease) in notes payable......................... 8,537 6,553 (1,104) Proceeds from long-term debt................................. 15,178 -- -- Exercise of stock options.................................... 7,199 3,538 3,237 ------------------------------- Net cash provided by (used for) financing activities... 8,015 (11,845) (18,785) ------------------------------- Net Increase (Decrease) in Cash and Short-Term Investments........ 2,061 (14,577) 4,972 Cash and Short-Term Investments, Beginning of Year................ 21,249 35,826 30,854 ------------------------------- Cash and Short-Term Investments, End of Year...................... $ 23,310 $ 21,249 $ 35,826 =============================== - --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 26 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Consolidated Statement of Stockholders' Investment For the Years Ended December 31, 1995, 1994, and 1993 (Amounts in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------- Common Stock Cumulative ----------------------- Paid-in Retained Treasury Translation Shares Par Value Capital Earnings Stock Adjustment - ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1993........................ 26,580 $266 $25,594 $216,846 $(54,864) $(1,246) Common stock transactions - Exercise of stock options and grant of restricted shares..................... 191 2 2,610 (91) Employee stock purchase plan............... 7 Tax benefit from the exercise of non-qualified stock options and vesting of restricted shares............. 625 Dividends on common stock ($.84 per share)......................... (19,028) Net income................................. 31,013 Translation adjustment..................... (3,528) ----------------------------------------------------------------------------- Balance, December 31, 1993...................... 26,771 268 28,829 228,831 (54,948) (4,774) Common stock transactions - Exercise of stock options and grant of restricted shares................... 194 2 2,622 (132) Employee stock purchase plan............. (36) Tax benefit from the exercise of non-qualified stock options and vesting of restricted shares........... 914 Dividends on common stock ($.84 per share)......................... (19,232) Net income................................. 35,099 Translation adjustment..................... 1,753 ----------------------------------------------------------------------------- Balance, December 31, 1994...................... 26,965 270 32,365 244,698 (55,116) (3,021) Common stock transactions - Exercise of stock options and grant of restricted shares................... 324 3 4,544 (126) Employee stock purchase plan............. (44) Tax benefit from the exercise of non-qualified stock options and vesting of restricted shares........... 2,652 Dividends on common stock ($.84 per share)......................... (19,471) Net income................................. 39,783 Translation adjustment..................... 2,283 ----------------------------------------------------------------------------- Balance, December 31, 1995...................... 27,289 $273 $39,561 $265,010 $(55,286) $ (738) ============================================================================= - ------------------------------------------------------------------------------------------------------------------------------------
27 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements December 31, 1995, 1994, and 1993 - -------------------------------------------------------------------------------- 1. Summary of Significant Accounting Policies: Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries. The financial statements of the Company's foreign branches and subsidiaries are included in the accompanying consolidated financial statements on the basis of their fiscal year ends, all of which are within three months of the calendar year end. All significant intercompany transactions and accounts have been eliminated. The Company's investment in Delta Health Systems, a 50%-owned affiliate, is accounted for under the equity method. Accounting Estimates - 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, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. During 1995, the Financial Accounting Standards Board issued a statement on accounting for the impairment or disposition of long-lived assets. The Company will adopt this new statement effective January 1, 1996, and, based on a preliminary review, no material impact is anticipated. Recognition of Revenues - The Company's services and systems are provided based upon contractual agreements. Service revenues, which include processing, professional service and support fees, are recorded in the period in which the services are performed. Service contracts can have terms which range from one to ten years. System fees, consisting of software applications provided under perpetual licensing agreements, are recognized primarily over the system's installation period and when collection is deemed probable in order to properly match revenues with expenses incurred. Hardware sales are recognized generally upon installation of the equipment at the customer site. All service and system fees are billable according to the terms in each customer contract. Current and noncurrent deferred revenues totaling $36,766,000 at December 31, 1995 and $45,485,000 at December 31, 1994, represent funds received by the Company in advance of the performance of services or installation of systems, which are deferred and recognized as revenues when earned. Interest income from short-term investments included in revenues was $319,000 in 1995, $484,000 in 1994, and $745,000 in 1993. Accounts Receivable - Accounts receivable consists primarily of unsecured short-term amounts due from the Company's customers. Included in accounts receivable at December 31, 1995 and 1994 were unbilled revenues recognized under certain long-term software license, installation, and hardware contracts of $64,068,000 and $55,800,000, respectively. Such unbilled receivables arise from the consistent application of the Company's revenue recognition policies described previously. Invoicing of unbilled receivables, which generally occurs within six months of the recognition of the related revenues, is based upon the terms of the individual customer contracts. The Company's credit risk with respect to accounts receivable is concentrated in the health industry, which is highly influenced by government regulations. This concentration of credit risk is limited due to the number and types of entities comprising the Company's customer base and their geographic distribution. The Company routinely monitors its exposure to credit losses and maintains an allowance for anticipated losses. At December 31, 1995 and 1994, the allowance for doubtful accounts was $4,847,000 and $5,317,000, respectively. The Company has provided long-term financing arrangements for systems and hardware to some of its customers. Some of these long-term financing arrangements are partially collateralized by customer equipment. The long-term portion of these financing arrangements, which are included in other assets, have terms ranging from three to ten years and bear interest at rates, which may be stated or imputed, ranging from 7% to 12%. The long-term portion of these financing arrangements, which approximate fair value, was $24,262,000 and $29,162,000 at December 31, 1995 and 1994, respectively. Interest income earned on long-term financing arrangements was $2,184,000, $2,018,000, and $1,541,000 in 1995, 1994, and 1993, respectively. The Company has had no material negative collection experience associated with these long-term financing arrangements. Prepaid Expenses and Other Current Assets - Included in prepaid expenses and other current assets are deferred charges of $10,745,000 at December 31, 1995 and $6,562,000 at December 31, 1994, representing the cost of equipment which will be expensed when the related hardware revenues are earned. 28 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Property and Equipment - Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives, which range from two to fifteen years. The Company's buildings, not including equipment therein, are being depreciated using a 45- year life. The major classes of property and equipment at December 31, 1995 and 1994 were as follows:
- -------------------------------------------------------------------------------- (Amounts in thousands) 1995 1994 - -------------------------------------------------------------------------------- Land and land improvements............................ $ 10,719 $ 10,711 Buildings............................................. 60,597 59,402 Equipment............................................. 172,335 169,487 ------------------ 243,651 239,600 Less accumulated depreciation and amortization................................. 142,487 134,513 ------------------ $101,164 $105,087 ================== - --------------------------------------------------------------------------------
Research and Development - The Company expenses all research and non- capitalized development costs, which generally consist of costs incurred to establish the technological feasibility of internally produced computer software. These expenses were primarily for computer costs and salaries of personnel, and amounted to $45,385,000 in 1995, $39,226,000 in 1994, and $37,087,000 in 1993. Computer Software - The Company capitalizes the cost of certain internally produced computer software and purchased software. Capitalization for internally produced software begins when a project reaches technological feasibility and ceases when the software is available for general release to customers. The Company amortizes computer software using the straight-line method over its expected useful life, which is generally five years. Capitalized internally produced software costs, net of accumulated amortization, were $32,785,000 and $31,657,000 as of December 31, 1995 and 1994, respectively. Amortization related to capitalized internally produced software was $7,722,000 in 1995, $6,290,000 in 1994, and $5,464,000 in 1993. Purchased software, net of accumulated amortization, was $10,170,000 and $7,144,000 as of December 31, 1995 and 1994, respectively. The accumulated amortization for capitalized internally produced and purchased software at December 31, 1995 and 1994 was $45,317,000 and $36,158,000, respectively. Acquisition of Businesses - On June 1, 1995, the Company acquired the assets and business of Professional Datacare (PDC), a provider of financial processing services, from the National Health Service's North West Regional Health Authority in the United Kingdom for $8,497,000. On September 1, 1995, the Company acquired the assets and business of Atlas Datensysteme GmbH (ADS), a provider of patient management and financial systems in Germany, for $3,611,000. These acquisitions were accounted for using the purchase method. PDC's and ADS' results of operations have been included in the Company's consolidated results of operations since their respective dates of acquisition. Pro forma financial information has not been provided since neither of these acquisitions was material to the Company's consolidated results. On September 30, 1994, the Company acquired all of the outstanding capital stock of GTE Health Systems Incorporated, a provider of information systems to the domestic health industry, from GTE Directories Corporation for $17,287,000. This acquisition was accounted for using the purchase method. During 1993, the Company acquired a 50% ownership share in Delta Health Systems for approximately $6,500,000. Delta Health Systems provides information systems and services to home health organizations. Goodwill - Included in other assets are amounts for goodwill which represent the excess of the purchase price of acquisitions over the fair value of the net assets acquired. Goodwill is amortized using the straight-line method over twenty years. The amount of goodwill included in other assets, net of accumulated amortization, was $30,346,000 and $20,089,000 as of December 31, 1995 and 1994, respectively. Accrued Expenses - Included in accrued expenses are incentive compensation plan accruals of $17,485,000 at December 31, 1995 and $14,136,000 at December 31, 1994. Incentive compensation plan payments are primarily based on revenues generated and on the signing of new and renewal contracts. Accrual balances for incentive compensation plans can vary based on the timing of revenues recognized, draws and related settlements, and are not necessarily indicative of sales activities for the year. 29 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements December 31, 1995, 1994, and 1993 - -------------------------------------------------------------------------------- Income Taxes - The Company uses the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are provided based upon temporary differences in the recognition of revenues and expenses (principally depreciation and the cost of internally produced software) for tax and financial reporting purposes. Translation of Foreign Currencies - Assets and liabilities of foreign branches and subsidiaries are translated at current exchange rates, and the effects of these translation adjustments are reported as a separate component of stockholders' investment. Revenues and expenses of foreign branches and subsidiaries are translated at the average exchange rates that prevailed over the applicable year. Foreign Currency Transactions - Transactions of the Company and its foreign branches and subsidiaries are periodically made in currencies other than their own and are included in income as they occur. There were no material gains or losses arising from foreign currency transactions during 1995, 1994, and 1993. Statement of Cash Flows - The Company's short-term investments have original maturities of less than 91 days and are deemed to be cash equivalents for purposes of reporting cash flows. At December 31, 1995 and 1994, the carrying amount of cash and short-term investments approximates fair value. The Company paid income taxes, net of refunds, of $16,397,000 in 1995, $23,018,000 in 1994, and $13,959,000 in 1993. During the same periods, interest payments were $2,853,000, $1,404,000, and $1,360,000, respectively. Capital lease obligations of $1,917,000, $1,822,000, and $7,089,000 were added by the Company in 1995, 1994, and 1993, respectively. 2. Net Income per Common Share: For each of the three years in the period ended December 31, 1995, net income per common share was computed using the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents result from the assumed exercise of stock options. Primary income per share and fully diluted income per share were the same in each period. 3. Income Taxes: The provision for income taxes consists of:
- ------------------------------------------------------------------------------- (Amounts in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------- Federal: Current...................................... $17,900 $17,131 $16,527 Current deferred............................. 3,277 3,495 1,265 Noncurrent deferred.......................... 1,438 (578) 626 -------------------------- 22,615 20,048 18,418 -------------------------- State and foreign: Current...................................... 2,288 2,226 2,011 Current deferred............................. 383 275 (241) Noncurrent deferred.......................... 151 (108) 477 -------------------------- 2,822 2,393 2,247 -------------------------- Provision for income taxes................................. $25,437 $22,441 $20,665 ========================== - --------------------------------------------------------------------------------
The provision for income taxes results in effective tax rates for the years ended December 31, 1995, 1994, and 1993, which differ from the statutory federal income tax rate as follows:
- -------------------------------------------------------------------------------- Percentage of Income ------------------------ 1995 1994 1993 - -------------------------------------------------------------------------------- Statutory federal income tax rate................... 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit..................... 2.6 2.7 2.8 Effect on deferred tax liability of statutory federal income tax rate increase.................................. -- -- 1.0 Other............................................... 1.4 1.3 1.2 ------------------------ 39.0% 39.0% 40.0% ======================== - --------------------------------------------------------------------------------
The significant components of the combined current and noncurrent net deferred tax liability for the years ended December 31, 1995 and 1994 were as follows:
- -------------------------------------------------------------------------------- (Amounts in thousands) 1995 1994 - -------------------------------------------------------------------------------- Depreciation and amortization........................ $10,432 $10,402 Capitalized internally produced software............. 11,999 11,606 Accrued and deferred revenues, net................... 5,675 2,065 Other temporary differences.......................... 3,244 2,029 -------------------- $31,350 $26,102 ==================== - --------------------------------------------------------------------------------
30 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- At December 31, 1995 the Company had foreign net operating loss carryforwards of approximately $8,600,000, most of which can be carried forward indefinitely. The Company also has approximately $9,800,000 of tax basis in excess of book value, which may be utilized to offset taxable income in the future. Due to their contingent nature, these deferred tax assets have been fully offset by a valuation allowance. The Company does not provide for U.S. income and foreign withholding taxes on the unremitted earnings of its foreign subsidiaries, which the Company considers to be permanently invested. The cumulative unremitted foreign earnings amounted to $12,560,000 at December 31, 1995. 4. Employee Benefit Plan: The Company has a Section 401(k) retirement and savings plan. As part of this plan, employees may contribute a portion of their earnings which are then invested, as specified by the employees, in the common stock of the Company or in any of nine mutual investment funds. The Company matches a certain portion of employee contributions under the plan. The Company's matching contributions charged to expenses in 1995, 1994, and 1993 were $3,025,000, $2,096,000, and $1,640,000, respectively. 5. Capital Stock: The Board of Directors may authorize the issuance of one or more series of preferred stock with dividend rates, redemption prices, conversion privileges, and sinking fund requirements as determined by the Board. During 1987 and 1988, the Board adopted resolutions authorizing, but not requiring, the Company to repurchase up to a total of 5,000,000 shares of its common stock from time to time. As of December 31, 1995, 2,873,500 shares had been acquired, at a cumulative cost of $54,325,000. During 1995, 1994, and 1993 no additional shares were repurchased under these resolutions. In 1991, the Board of Directors adopted a stockholder rights plan and declared a dividend of one preferred stock purchase right for each outstanding share of common stock. In general, such rights only become exercisable, or transferable apart from the common stock, after a person or group (Acquiring Person) acquires beneficial ownership of, or commences a tender or exchange offer for, 15% or more of the Company's common stock. Each right then may be exercised to acquire one one-thousandth of a share of a newly-created Series A Junior Participating Preferred Stock at an exercise price of $80. Alternatively, upon the occurrence of certain events (for example, if the Company is the surviving corporation in a merger with an Acquiring Person), the rights entitle holders other than the Acquiring Person to acquire common stock having a value of twice the exercise price of the rights, or, upon the occurrence of certain other events (for example, if the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation), to acquire common stock of the Acquiring Person having a value twice the exercise price of the rights. In general, the rights may be redeemed by the Company at $.001 per right at any time until the tenth day following public announcement that a 15% position has been acquired. The rights will expire on December 31, 2001. 6. Stock Options: The Company has issued stock options to key employees under various incentive and non-qualified stock option plans. These stock options may have terms ranging up to twenty years. Incentive stock options are exercisable at the fair market value of the Company's common stock as determined on the date of the grant. Non- qualified stock options are exercisable at prices no less than 75% of the fair market value of the Company's common stock as determined on the date of the grant. The Company also has issued stock options under two non-qualified stock option plans for non-employee directors. Under one of these plans a committee of the Board, comprised of members who may not participate in this plan, may grant options at prices no less than the fair market value of the Company's common stock on the date of the grant. These non-qualified options become exercisable as determined by the committee and may have terms ranging from two to ten years. Under the other plan for non-employee directors, options were granted on the effective date of the plan to all 31 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements December 31, 1995, 1994, and 1993 - -------------------------------------------------------------------------------- non-employee directors then on the Board. Subsequent to the effective date of the plan, options are issued upon a director's initial election to the Board and on each five-year anniversary of continuous service by the director on the Board. These non-qualified options become exercisable during the five-year period from the date of grant and have a ten-year term. The following table summarizes the activity of all option plans during the three years ended December 31:
- -------------------------------------------------------------------------------- 1995 1994 1993 - -------------------------------------------------------------------------------- Outstanding, beginning of year............. 1,894,505 1,606,772 2,065,077 Granted............................... 489,400 524,815 62,500 Exercised............................. (297,445) (176,642) (173,079) Cancelled............................. (51,335) (60,440) (347,726) --------------------------------- Outstanding, end of year................... 2,035,125 1,894,505 1,606,772 ================================= - --------------------------------------------------------------------------------
As of December 31, 1995, a maximum of 1,898,729 and 241,000 of additional options may be granted to key employees and non-employee directors, respectively, under these plans. As of December 31, 1995, options to purchase 2,035,125 shares were outstanding at option prices ranging from $12.50 to $37.00 per share. Options covering 381,607 shares, with an average option price of $14.78 per share and an aggregate option price of $5,642,000, were exercisable as of December 31, 1995. The outstanding options expire on various dates through 2015. Options were exercised at prices ranging from $12.50 to $23.38 in 1995, $12.50 to $19.94 in 1994, and $12.50 to $20.13 in 1993. The Company may also grant restricted shares of its common stock under two of these plans. Restricted stock grants are recorded as compensation expense during the vesting terms, which currently range from three to six years. As of December 31, 1995, there were 37,345 restricted shares outstanding under these plans. 7. Long-Term Debt and Lines of Credit: In 1995, the Company entered into long-term borrowing agreements with a bank, which are repayable over seven years. Under certain conditions, these loans are callable in 1998. These loans were used to partially finance acquisitions of businesses and for operations. Long-term debt consisted of the following at December 31, 1995:
- -------------------------------------------------------------------------------- (Amounts in thousands) 1995 - -------------------------------------------------------------------------------- Payable in foreign currency: 7.87% Pound Sterling note due through 2002..................... $8,479 6.75% Deustche Mark note due through 2002...................... 3,699 Payable in U.S. dollars: 5.47% note due through 2002.................................... 3,000 ------- 15,178 Less current portion........................................... 874 ------- $14,304 ======= - --------------------------------------------------------------------------------
Aggregate maturities of long-term debt are: 1996 - $874,000, 1997 - $1,128,000, 1998 - $1,321,000, 1999 - $1,644,000, 2000 - $1,875,000, 2001 through 2002 - $8,336,000. At December 31, 1995, the carrying amount of long-term debt approximates fair value. The Company had lines of credit with banks totaling $69,463,000, generally at their prime interest rates. At December 31, 1995, $48,543,000 of these lines of credit were unused. 32 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 8. Long-Term Leases and Other Commitments: The Company leases equipment, which is primarily used at the Company's Information Services Center, for periods ranging up to 60 months. Obligations for this type of equipment for the next five years are as follows:
- -------------------------------------------------------------------------------- Operating Capital (Amounts in thousands) Leases Leases - -------------------------------------------------------------------------------- 1996........................................................ $24,595 $4,082 1997........................................................ 22,340 2,623 1998........................................................ 9,302 168 1999........................................................ 7,577 -- 2000........................................................ 2,689 -- --------------- $66,503 6,873 ======= Less interest................................................... 437 Present value of future capital lease obligations............... $6,436 ====== - --------------------------------------------------------------------------------
Rental expenses for the operating leases described above were $29,031,000 in 1995, $20,124,000 in 1994, and $17,453,000 in 1993. Operating lease obligations for office space, primarily branch offices, expiring at various dates through 2001 require minimum aggregate annual rentals of: 1996 - $9,660,000, 1997 - $8,811,000, 1998 - $5,587,000, 1999 - $4,601,000, 2000 - $3,193,000. Rental expenses for these facilities amounted to $9,760,000 in 1995, $9,078,000 in 1994, and $8,198,000 in 1993. In 1995, the Company entered into a resale agreement with a supplier of client/server software applications. This agreement, which is renewable, expires in 2005. The minimum payments due under this agreement are: 1996 - $2,100,000, 1997 - $2,600,000, 1998 - $3,100,000, 1999 - $2,600,000. 9. Selected Quarterly Financial Data (Unaudited): The following table summarizes quarterly financial data for 1995 and 1994 (refer to Note 1 for businesses acquired in 1995 and 1994):
- -------------------------------------------------------------------------------- (Amounts in thousands, except per share amounts) Income Before Income Net Net Quarter Revenues Taxes Income Per Share - -------------------------------------------------------------------------------- 1994: First................................. $125,170 $14,007 $ 8,544 $.37 Second................................ 132,607 14,036 8,562 .37 Third................................. 138,834 14,639 8,930 .38 Fourth................................ 154,158 14,858 9,063 .39 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1995: First................................. $145,339 $15,722 $ 9,591 $.41 Second................................ 155,279 15,871 9,681 .41 Third................................. 169,213 16,391 9,998 .42 Fourth................................ 180,810 17,236 10,513 .44 - --------------------------------------------------------------------------------
33 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements December 31, 1995, 1994, and 1993 - -------------------------------------------------------------------------------- 10. Business Segment Information: The Company's only line of business is providing information service and system solutions to health organizations in North America and Europe. Revenues and operating profits for the three years ended December 31, 1995, and identifiable assets at the end of each of those years, classified by geographic area, were as follows:
- -------------------------------------------------------------------------------- North (Amounts in thousands) America Europe Consolidated - -------------------------------------------------------------------------------- 1995: Revenues............................. $557,877 $92,764 $650,641 ================================== Operating profit..................... $ 60,663 $ 7,533 $ 68,196 ==================== Interest expense..................... 2,976 -------- Income before income taxes......... $ 65,220 ======== Identifiable assets.................. $329,555 $82,108 $411,663 ==================== Corporate assets..................... 23,310 -------- Total assets....................... $434,973 ======== - -------------------------------------------------------------------------------- 1994: Revenues............................. $480,076 $70,693 $550,769 ================================== Operating profit..................... $ 52,904 $ 6,079 $ 58,983 ==================== Interest expense..................... 1,443 -------- Income before income taxes......... $ 57,540 ======== Identifiable assets.................. $304,131 $54,685 $358,816 ==================== Corporate assets..................... 21,249 -------- Total assets....................... $380,065 ======== - -------------------------------------------------------------------------------- 1993: Revenues............................. $439,260 $62,023 $501,283 ================================== Operating profit..................... $ 47,255 $ 5,772 $ 53,027 ==================== Interest expense..................... 1,349 -------- Income before income taxes......... $ 51,678 ======== Identifiable assets.................. $264,208 $41,408 $305,616 ==================== Corporate assets..................... 35,826 -------- Total assets....................... $341,442 ======== - --------------------------------------------------------------------------------
Operating profit equals total revenues less operating expenses and cost of hardware sales. In computing operating profit, interest expense is excluded. Identifiable assets are those assets of the Company that are identified with the operations in each geographic area. Corporate assets are cash and short-term investments. In 1995, 1994, and 1993, no single customer accounted for 10% or more of consolidated revenues. 34 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Report of Independent Public Accountants To the Stockholders and Board of Directors, Shared Medical Systems Corporation: We have audited the accompanying consolidated balance sheet of Shared Medical Systems Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' investment and cash flows for each of the three years in the period ended December 31, 1995. 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 Shared Medical Systems Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Philadelphia, PA Arthur Andersen LLP February 6, 1996 - -------------------------------------------------------------------------------- Directors R. James Macaleer, Chairman of the Board Mr. Macaleer has been Chairman since the Company's founding in 1969. He also served as Chief Executive Officer from the Company's founding in 1969 until August 1995. Raymond K. Denworth, Jr., Director Mr. Denworth has been a Director since 1976. He is a partner of Drinker Biddle & Reath, attorneys and counsel to the Company. Frederick W. DeTurk, Director Mr. DeTurk has been a Director since 1981. He is President of DeTurk Enterprises, Inc., a management consulting firm. Josh S. Weston, Director Mr. Weston has been a Director since 1987. He is Chairman and Chief Executive Officer of Automatic Data Processing, Inc., an information processing services company. Jeffrey S. Rubin, Director Mr. Rubin has been a Director since 1993. He is Vice Chairman of Vanstar Corporation, a technology services company. Marvin S. Cadwell, Director, President and Chief Executive Officer Mr. Cadwell was elected as a Director in May 1995. He has served as President and Chief Executive Officer since August 1995. Mr. Cadwell previously served in a variety of executive positions since joining the Company in 1975. Executive Officers R. James Macaleer, Chairman of the Board Marvin S. Cadwell, President and Chief Executive Officer Michael B. Costello, Vice President, Administration and Corporate Communications Edward J. Grady, Controller and Assistant Treasurer James C. Kelly, Secretary Terrence W. Kyle, Vice President of Finance, Treasurer, and Assistant Secretary Francis W. Lavelle, Senior Vice President Robert J. McNeill, Vice President David F. Perri, Vice President Terry A. Pitts, Vice President Bonnie L. Shuman, General Counsel and Assistant Secretary Marion G. Tomlin, Senior Vice President Matthew B. Townley, Vice President 35 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Domestic and International Offices - -------------------------------------------------------------------------------- Domestic Corporate Headquarters SMS 51 Valley Stream Parkway Malvern, PA 19355 610-219-6300 Branch Offices Ann Arbor New Orleans 313-994-8300 504-835-3894 Atlanta New York 770-993-2490 212-563-2380 Atlanta (MedSeries4 Division) Oakland 800-783-4833 510-444-3434 Boston Philadelphia 617-224-0817 610-640-4490 Charlotte Pittsburgh 704-362-4802 412-921-6400 Chicago Salt Lake City 708-806-0666 800-243-8483 Cleveland San Francisco 216-524-0313 510-463-9750 Columbus San Juan 614-885-0198 809-756-6700 Dallas Santa Barbara 214-783-6737 805-964-5561 Florida Seattle 954-771-4880 206-827-4455 Indianapolis St. Louis 317-293-3360 314-542-0100 Kansas City Virginia 913-384-4811 703-713-3490 Los Angeles Wilmington 310-596-4554 302-655-8514 Nashville 615-377-1244 New Jersey 908-906-8900 International Administration-Europe SMS Europe Key House Sarum Hill Basingstoke, Hants Hampshire RG21 1SR England 011-44-256-467556 Operating Companies Belgium The Netherlands SMS Belgium SMS Nederland b.v. Zaventem Nieuwegein 011-32-2-725-0407 011-31-3402-52852 France United Kingdom SMS France SMS United Kingdom, Ltd. Montpellier Basingstoke 011-33-6-704-1143 011-44-256-57100 Germany Belfast Zweigniederlassung 011-44-1232-854333 der SMS Corporation Huntingdon Berlin 011-44-1480-456155 011-49-30-66-32034 Warrington Frankfurt 011-44-1925-851171 011-49-6196-9240 Hungary SMS Hungary Budapest 011-36-1252-7345 Ireland SMS Ireland, Unlimited Dublin 011-353-1-8420022 Italy SMS Italia, S.r.l. Rome O11-39-6-439-3350 Spain SMS Corp y Cia S.R.C. Barcelona 011-34-3-201-6811 Madrid 011-34-1-807-7500 36 Corporate Headquarters Shared Medical Systems Corporation 51 Valley Stream Parkway Malvern, PA 19355 610-219-6300 Annual Stockholders Meeting The Annual Stockholders Meeting will be held on Thursday, April 25, 1996, at the Union League of Philadelphia, 140 South Broad Street, Philadelphia, Pennsylvania at 11:30 a.m. You are cordially invited to attend. Common Stock SMS common stock trades on The Nasdaq Stock Market under the symbol SMED. Transfer Agent Chemical Mellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 800-851-9677 Counsel Drinker Biddle & Reath Philadelphia, PA Independent Public Accountants Arthur Andersen LLP Philadelphia, PA Member [LOGO of American Business Conference] American Business Conference SMS is an Equal Employment Opportunity/Affirmative Action Employer. [LOGO FOR RECYCLE] This annual report is printed on recycled paper. [LOGO OF SMS CORP.] Shared Medical Systems Corporation 51 Valley Stream Parkway Malvern, PA 19355 610-219-6300 EX-21 5 SUBSIDIARIES OF THE REGISTRANT Exhibit (21) Subsidiaries of the Registrant ------------------------------ SMS Enterprises Corporation (a Delaware corporation) SMS Europe Unlimited (a United Kingdom Unlimited corporation) EX-23 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit (23) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Shared Medical Systems Corporation: As independent public accountants, we hereby consent to the incorporation of our reports dated February 6, 1996 included (or incorporated by reference) in Shared Medical Systems Corporation's 10-K for the year ended December 31, 1995, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 2-72055, 2-83465, 2-84938, 2-85345, 2- 85346, 2-96224, 2-96225, 33-18161, 33-25009, 33-25010, 33-34089, 33- 34410, 33-37742, 33-47572 and 33-61967). /s/ Arthur Andersen LLP Philadelphia, PA March 25, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 23,310 0 176,167 4,847 0 220,605 243,651 142,487 434,973 132,699 16,960 0 0 273 248,547 434,973 58,132 650,641 47,872 482,954 51,619 0 2,976 65,220 25,437 39,783 0 0 0 39,783 1.68 1.68
EX-99 8 "SAFE HARBOR" CAUTIONARY STATEMENTS Exhibit (99) Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 ------------------------------------------------------------------------ The Company wishes to identify the following important factors which could cause the Company's actual financial and operational results to differ materially from those included in any forward-looking statement made by, or on behalf of, the Company. (a) Increasing and changing governmental regulation in the health industry, including especially regulation concerning reimbursement and capital expenditures, which could cause health providers to curtail or defer investment in the Company's products or services; (b) Regulation of additional Company products as medical devices by the federal Food and Drug Administration, which could cause increases in the costs associated with developing and manufacturing such products and delays in marketing such products; (c) The Company's ability to keep pace with technological developments and to change its existing products or introduce new products to meet the evolving needs of its customers; (d) The Company's ability to protect its proprietary rights in its software; (e) Intense competition in the health information services and systems market, including increasing price competition; the entry of new competitors and the introduction of new products by new and existing competitors; (f) The frequency of termination or non-renewal of customer contracts, or renewal on less favorable terms; (g) Any interruption in the availability of Company resources necessary to provide the Company's software products and services; (h) Errors or bugs in software products, which could result in delays in delivery and market acceptance of the products; (i) Difficulties in installation of the Company's products, which could affect the Company's ability to fully realize its future revenues under contract; (j) The Company's ability to successfully integrate other business operations which it acquires; (k) The dependence of the Company on third party suppliers of software, hardware and technologies; (l) Exchange rate fluctuations and significant changes in interest rates and taxes. -----END PRIVACY-ENHANCED MESSAGE-----