-----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, WVw7T9Ev8Gdv79DGMUY2p6QJkjOjqpDgGWZd8y4EXbSjERX2ctx0CoSz+eu2My6K SgfRIWY9LLdevJJNHUkFwg== 0001036050-99-000685.txt : 19990402 0001036050-99-000685.hdr.sgml : 19990402 ACCESSION NUMBER: 0001036050-99-000685 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHARED MEDICAL SYSTEMS CORP CENTRAL INDEX KEY: 0000089415 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 231704148 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13303 FILM NUMBER: 99581179 BUSINESS ADDRESS: STREET 1: 51 VALLEY STREAM PKWY CITY: MALVERN STATE: PA ZIP: 19355 BUSINESS PHONE: 6102196300 MAIL ADDRESS: STREET 1: 51 VALLEY STREAM PKWY CITY: MALVERN STATE: PA ZIP: 19355 10-K405 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 for the fiscal year ended December 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 of (I.R.S. Employer Identification Number) 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: Common Stock, par value $.01 per share New York Stock Exchange (Title of class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None 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. X --- The aggregate market value of the voting stock (Common Stock) held by non-affiliates of the registrant as of February 26, 1999, was $1,332,076,000. See page 13 herein for assumptions on which this calculation is based. On February 26, 1999, there were 26,627,937 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, 1998 are incorporated by reference into Part I and Part II of this Form 10-K. Certain portions of the Company's definitive Proxy Statement to be mailed to stockholders on or about March 31, 1999, are incorporated by reference into Part III of this Form 10-K. 2 Part I Item 1. Business. General - ------- The Company, incorporated in Delaware in 1969, is a leading supplier of information solutions to health providers in 20 countries and territories in North America, Europe, and Asia Pacific. The Company's customers include hospitals, physician offices, clinics, ambulatory care facilities, psychiatric facilities, hospices, home health providers, pharmacies, rehabilitation and long-term care facilities, and health enterprises, which are comprehensive networks comprised of multiple health providers. The Company develops and delivers a wide range of comprehensive solutions to meet the information technology needs of its customers. These solutions include clinical, financial and administrative, and enterprise mangement systems. Complementary services offered by the Company include system support, remote processing, networking, specialized clinical, financial and technology consulting services; and information technology, managed care administration and business office outsourcing. The Company's information systems operate on hardware platforms that range from personal computers, to client/server networks, to minicomputers, to mainframes, which are operated remotely at the Company's Information Services Center (ISC), at the customer's site, or as part of a distributed network. The Company has two geographic segments, North America and International. Financial information by business segment and geographic area can be found on page 30 of the Company's 1998 Annual Report to Stockholders, Notes to Consolidated Financial Statements, Business Segment Information (Note 9), which is incorporated herein by reference. North America has historically been the Company's largest market, accounting for approximately 88% of 1998 revenues. The Company currently has contracts with health providers in 47 states, the District of Columbia, Puerto Rico, and Canada. The Company markets its information services and systems and provides installation services and ongoing technical and educational support with a field staff working from branch offices. At its Corporate Headquarters and ISC, the Company has customer service staff, applications specialists, and communications and computer operations personnel who assist customers in their day-to-day use of the Company's systems, and system designers and programmers who work to improve existing software applications and develop additional information systems. In 1998, the Company increased its ownership interest in Delta Health Systems, a provider of home health information systems, from 50% to 100%. The Company's international operations accounted for approximately 12% of 1998 revenues. The Company entered the health information market in Europe in 1981 and the Asia Pacific market in New Zealand in 1997. Currently, the Company has customers in 15 European countries. In 1998, the Company acquired Data-Plan Software GmbH, a provider of client/server health information systems in Germany, D.P. Informatica, Srl, a provider of health information systems and services in Italy, and Pyrenees Informatique, SA, a provider of health information systems in France. 3 Industry Overview - ----------------- The health industry continues to experience significant changes. In order to reduce increasing costs, the industry has moved in recent years from a traditional fee-for-service reimbursement model to alternative payment models, which shift the financial risk from the payer to the health provider. The resulting pressures to control costs have caused the health industry to focus on providing quality care in the most efficient and cost-effective manner. The health industry is also experiencing significant consolidation among health providers and the formation of large health enterprises, which are designed to better manage risk and create continuity of quality patient care. Health industry consolidation and changes in the way health providers are structured and reimbursed, combined with pressures to control costs, improve quality, and increase market share, continue to create new demands for information solutions. The growth of health enterprises in particular has resulted in demands for information systems, which can gather financial and clinical information from diverse and dispersed sources and make it consistent and easily accessible throughout the enterprise. The effort to control costs has meant increased demands for systems and services, which can enable health providers to measure quality and outcomes by capturing, analyzing, and storing information. Services and Systems - -------------------- Service and system fees earned by the Company for the years ended December 31, 1998, 1997, and 1996 were $946,212,000, $802,528,000, and $717,096,000, respectively. Service and system fees are derived primarily from software and related services and professional services. Software and Related Services - ----------------------------- The Company offers software systems and related remote processing and support services, which are proprietary to the Company or offered as part of strategic alliances with other vendors. These systems are designed to meet the information needs of hospitals, physicians, continuing care providers, and consumers, and include clinical, financial and administrative, and enterprise management applications. Clinical applications provide clinicians with point-of-care data entry and access to clinical information. These systems automate many labor-intensive tasks performed in the admissions, nursing, radiology, laboratory, pharmacy, and other departments within health organizations, while facilitating communications among them. Financial and administrative applications include provider accounting (including billing and receivables), human resources, payroll, materials management, general ledger, and property. Enterprise management systems are designed to meet the clinical and financial information needs of consolidating health provider networks. The Company's NOVIUS product line is specifically designed to meet the clinical and financial information needs of these health enterprises by offering a single-platform, fully integrated client/server solution. Enterprise management systems connect all points of care in the enterprise to assist in the administration of patient care through patient indices that identify patients anywhere within the network, schedule network-wide resources, and retain cumulative electronic patient records for various health organization support functions. As part of its enterprise management solutions the Company offers decision support and electronic data interchange (EDI) systems. Decision support systems enable health executives and managers to set performance standards, identify variances, and analyze results by providing access to a range of strategic information collected from clinical, financial, and other enterprise management systems. EDI facilitates the sharing and standardization of information, such as eligibility verifications, and claims and remittance transmissions between health providers and payers. 4 The Company's principal systems are as follows: BASE SYSTEMS: INVISION(R) A clinical, financial and administrative system offered either in-house or by remote processing operating on an IBM-based platform. MedSeries4(R) A turnkey or remote system offering a range of integrated clinical and financial applications, operating on the IBM AS/400 platform. UNITY(R) A system offering in-house processing of clinical information and remote processing of financial information. ALLEGRA(R) A turnkey system offering a suite of clinical, financial and administrative applications operating on a Compaq-based platform. Eagle 2000(R) A financial management system designed primarily for health providers in the State of New York. CLINICOM* A clinical, financial and administrative system sold in Europe. 5 AMBULATORY CARE SYSTEMS: SIGNATURE(R) A financial and administrative system for large group physician practices. NOVIUS(R) Physician Enterprise A clinical and financial suite of ManagerTM integrated applications for physician practices. CONTINUING CARE SYSTEMS: Delta Health Systems(R) A clinical and financial system for home health providers. Long-Term Care Information systems for skilled nursing providers. CONSUMER RESOURCES & EDUCATION SYSTEM: HealthAnswers** Internet/Intranet applications to address the healthcare information needs of consumers, patients and professionals. CLINICAL SYSTEMS: Common Vocabulary Engine Provides a single information source of terms and concepts that comprise the medical vocabulary of a health provider. Clinical Documentation Enables clinicians to design their own views of information. Clinical Observations and Results Provides a common repository for all of a patient's active clinical observations and charting. Order Processing Provides online order processing. Patient Management Provides online, interactive admissions, discharges, transfers, registration, and planning. Rules Engine Provides a rule-based system of alerts and reminders for clinicians. Protocols Enables implementation of treatment guidelines, variance management, and outcomes measurement. Medical Imaging Provides access to medical images for review. Radiology Management Supports radiology department operations. SMS OPENLab(R) Supports clinical laboratory operations. Pharmacy System Supports the pharmacy department operations. 6 FINANCIAL & ADMINISTRATIVE SYSTEMS: General Financials Provides general accounting and financial applications, which include general ledger, accounts payable, materials management and property for hospitals. Patient Accounting Provides applications that support the management of patient billing and receivables for hospitals. Human Resources Management System Provides human resource and payroll applications for hospitals. Document Imaging Provides electronic imaging of documents and records for the business office. ENTERPRISE MANAGEMENT SYSTEMS: Enterprise Access Directory(R) A common repository for patient demographic, insurance and visit information. Lifetime Clinical Record(R) A clinical data repository of a longitudinal view of a patient's lifetime clinical history. NOVIUS(R) Data Warehouse A centralized source of management information for decision support. NOVIUS(R) Scheduling An application for scheduling of provider services. NOVIUS(R) Quality Advisor An application that allows organizations to identify and monitor performance using key quality indicators. NOVIUS(R) General Financials Provides general accounting and financial applications, which include general ledger, accounts payable, materials management, property, human resources, and payroll. NOVIUS(R) Integrated Multimedia Document and medical imaging applications to support clinical and business office operations. NOVIUS(R) Encounter An electronic patient record application, which supports a physician practice. Groupware Applications that act as a repository of policies and procedures. Medico A clinical, financial and administrative system for European providers. 7 Contract Management Operational tools for administration and assessment of managed care agreements for the provider. Managed Care Administration A set of applications to support administrative and financial management for the provider/payer. Integrated Eligibility Service Provides automatic eligibility verification for patient insurance information. Electronic Claims and Remittance Enables customers to electronically Services submit UB-92 and HCFA1500 claims to Medicare and other payers and receive automatic same-day posting of remittances to patient accounts. SMS OPENLink(R) Provides a tool for application integration. The product names marked with a (R) are registered trademarks of the Company or its subsidiaries. *CLINICOM is a registered trademark of the Company or its subsidiaries in Germany, Ireland, Switzerland and the United Kingdom. **HealthAnswers is a trademark of Healthway Communications International, Inc. used under license. Remote Processing Services -------------------------- The Company offers its customers remote processing services for certain of its information systems. Remote processing involves processing a customer's applications using the Company's equipment and personnel. This service frees the Company's customers from having to maintain the facilities, equipment and technical staff required for systems processing. The Company processes information for over 900 customer facilities at the ISC. Support Services ---------------- The Company offers support services to maintain the operation of its information systems in accordance with the corresponding documentation. Professional Services --------------------- The Company offers a wide variety of professional services that complement the Company's information systems. These services include system installation, Internet services, networking, customer education, specialized clinical, financial and technology consulting, and information technology, business office and managed care administration outsourcing. Implementation Services ----------------------- The Company offers services to facilitate the implementation of its information systems and technology offerings to health providers using a well-defined implementation methodology. 8 Networking Services ------------------- The Company offers networking services consisting of systems integration and network assessment, planning, design and management. Consulting Services ------------------- The Company offers clinical, financial and technology consulting services. Clinical consulting services help customers analyze their clinical performance and develop critical pathways, case management processes, and outcome management programs. Financial consulting services assist customers by analyzing current operational and technical processes and automating processes to improve cash flows. Technology consulting services include strategic planning, systems integration, and process re-engineering services designed to assist the Company's customers in synchronizing both systems and processes throughout their organizations. Outsourcing Services -------------------- The Company offers information technology, business office, and managed care administration outsourcing services. Information technology outsourcing encompasses a range of engagements, from interim management arrangements, where the responsibilities of the chief information officer are assumed, to full facilities management partnerships, where all datacenter and other information technology responsibilities are assumed. In business office outsourcing engagements, the Company assumes administrative responsibility for the business and operational aspects of a customer's billing, collections, cash management, and related functions. Managed care administration outsourcing provides customers with the information technology and managed care administrative methodology to assist with the management and administrative aspects of customers' risk- bearing contracts with managed care payers. Education Services ------------------ The Company provides education and training services to support users of the Company's applications and related technologies. Services are provided at the Company's education and training sites, at customer sites or through computer-based training. Hardware Sales -------------- In connection with sales of its software systems, the Company may also sell to its customers third-party hardware ranging from personal computers, to client/server networks, to minicomputers, to mainframes. Hardware sales revenues for the years ended December 31, 1998, 1997, and 1996 were $189,181,000, $118,813,000, and $89,854,000, respectively. Customers --------- The Company's customers include health providers, such as health enterprises and hospitals, as well as other health providers along the continuum of care, including physician offices, clinics, ambulatory care facilities, psychiatric facilities, hospices, home health providers, pharmacies, and rehabilitation and long-term care facilities. 9 The Company's services and systems are provided to customers under long-term service contracts and perpetual license agreements. Revenues from individual customers 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 single customer under a long-term service contract would reduce the Company's net income by a greater percentage than the percentage of total revenues lost. Presently, no more than one quarter of the Company's long-term service 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. In 1998, 1997, and 1996, no single customer accounted for 10.0% or more of consolidated revenues. At December 31, 1998, total future revenues under contract exceeded $2.4 billion. Competition - ----------- The health information system (HIS) market is intensely competitive. Competition among HIS vendors is based on a combination of breadth of product offerings, service, and price. In the United States, the Company's principal competitors are other national vendors focused on the health market, including McKesson HBOC, Inc., IDX Systems Corporation, Medical Information Technology, Inc. (Meditech), and Cerner Corporation. In each sector of the HIS market, however, the Company also competes with niche vendors serving only that sector. In addition, some hospitals have developed their own proprietary systems. The Company competes for consulting, planning, re-engineering, integration and management engagements with regional, national and international consulting firms. In its international business, the Company competes with one or more regional or local providers in each country. Research and Development - ------------------------ The Company continually enhances existing services and systems and develops new services and systems to meet the information processing needs of the health industry. Profitability of newly-developed services and systems depends upon attainment of sufficient sales volumes and continued improvement and efficiency of the services and 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, which are primarily for salaries of personnel and computer costs, were $80,141,000 in 1998, $65,919,000 in 1997, and $56,402,000 in 1996. The Company capitalizes costs of internally produced computer software intended to be licensed to customers. Capitalization for internally produced software begins when a project reaches technological feasibility and ends when the software is available for general release to customers. Technological feasibility for computer software development projects is established when detailed program designs, which substantiate that the software product can be produced to meet its design specifications, including applicable program functions, features and technical performance requirements, are completed. The Company amortizes computer software on a product-by-product basis using the greater of the amount computed by the straight-line method over the estimated useful life of the product, or the ratio of current revenues compared to total estimated revenues. Capitalized internally produced computer software costs, net of accumulated amortization, were $49,739,000 and $40,911,000 as of December 31, 1998 and 1997, respectively. Amortization related to capitalized internally produced software was $9,871,000 in 1998, $7,867,000 in 1997, and $7,993,000 in 1996. 10 Intellectual Property - --------------------- The Company depends upon a combination of trade secret, copyright and trademark laws, license agreements, employee education, and nondisclosure, noncompetition and other contractual provisions to protect its proprietary rights and its products. The Company attempts to protect its trade secrets and other proprietary information through agreements with its customers, employees, and consultants. Personnel - --------- As of December 31, 1998, the Company had 7,657 full-time employees. Item 2. Properties. The Company owns 116 acres of land in Chester County, Pennsylvania and 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. In 1999, the Company plans to complete construction of a 230,000 square-foot office building at its corporate headquarters in order to consolidate corporate-based personnel currently located nearby in leased office space. The Company also leases office space in most major metropolitan areas in the United States for marketing, installation and support personnel. The Company also owns office buildings in Spain and the United Kingdom and leases office space in various locations to support its international operations. These properties are adequate for existing operations. The Company also owns a separate tract of 241 acres of land in Chester County, Pennsylvania for possible future expansion. The Company's ISC, which is used primarily to process customer information and to support the Company's internal systems operations, contains IBM CMOS processors obtained under operating leases. The Company's ISC also contains IBM AS/400 minicomputers, various types of servers, as well as related mainframe peripherals and network communications equipment that have been purchased or leased. These leases are generally contracted with terms that range from one to five years. 11 Item 3. Legal Proceedings. The Company is currently in discussions with federal authorities regarding a civil investigation of billing and accounting practices at Straub Clinic & Hospital, a former Company customer. In September 1998, Straub paid federal and state authorities $2.4 million to settle allegations of wrongdoing, including Straub's improper retention of funds from government reimbursement programs. The current investigation is not focused on the operation of the Company's billing software used at Straub, and the government does not allege any improper receipt or retention of federal funds by the Company or any of its employees. Rather, the investigation concerns the role of a single Company employee in this situation. The Company believes that its employee's actions were appropriate and lawful, and does not believe that the outcome of this matter will have a material adverse effect on the Company's financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders. None. 12 Executive Officers of the Registrant Listed below are the name, age as of December 31, 1998, position(s) with the Company and principal occupation(s) for the past five years of each of the current executive officers of the Company.
Name Age Positions with Company and Principal Occupation(s) - Past Five Years - -------------------------------------------------------------------------------------------------------- R. James Macaleer 64 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 55 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 and Chief Operating Officer of SMS Europe, October 1993 - March 1995. Mr. Cadwell originally joined the Company in 1975. James C. Kelly 59 Secretary since June 1990. Mr. Kelly originally joined the Company in 1972. V. Brewster Jones 54 Senior Vice President since May 1997. Prior to this, Mr. Jones served in a variety of executive positions for Multimedia Medical Systems, Inc., an information technology provider for the health industry, September 1995 - May 1997; and President and Chief Executive Officer of Pharmakinetics Laboratories, Inc., a pharmaceutical research company, October 1990 - July 1995. Terrence W. Kyle 48 Senior Vice President, Treasurer, and Assistant Secretary since August 1996. Prior to this, Mr. Kyle served as Vice President of Finance, Treasurer, and Assistant Secretary, June 1990 - August 1996. Mr. Kyle originally joined the Company in 1976. Francis W. Lavelle 49 Senior Vice President of U.S. Customer Operations since December 1993. Mr. Lavelle originally joined the Company in 1988.
13
Name Age Positions with Company and Principal Occupation(s) - Past Five Years - -------------------------------------------------------------------------------------------------------- David F. Perri 49 Senior Vice President since August 1996. Prior to this, Mr. Perri served as Vice President of Technology Solutions, March 1995 - August 1996; and Vice President of Technical Affairs, June 1990 - March 1995. Mr. Perri originally joined the Company in 1980. Guillermo N. Ramas, Sr. 53 Senior Vice President and President of SMS International since August 1996. Prior to this, Mr. Ramas served as Managing Director of SMS Europe, October 1993 - August 1996. Mr. Ramas originally joined the Company in 1987. Michael B. Costello 55 Vice President of Administration and Corporate Communications since January 1991. Mr. Costello originally joined the Company in 1979. Edward J. Grady 46 Vice President, Controller, and Assistant Treasurer since September 1996. Prior to this, Mr. Grady served as Controller and Assistant Treasurer, February 1993 - September 1996. Mr. Grady originally joined the Company in 1980. Bonnie L. Shuman 50 Vice President, General Counsel, and Assistant Secretary since September 1996. Prior to this, Ms. Shuman served as General Counsel and Assistant Secretary, June 1990 - September 1996. Ms. Shuman originally joined the Company in 1983. - --------------------------------------------------------------------------------------------------------
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 high and low prices of the stock as of February 26, 1999. 14 Part II The following information contained in the Company's Annual Report to Stockholders for the year ended December 31, 1998 is incorporated herein by reference: Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Page 19, Section titled Market Price and Dividends Declared Per Share *- "1998" and "1997**" columns and the related footnotes Item 6. Selected Financial Data. Page 19, Section titled Summary of Consolidated Operations - "Revenues," "Net Income," "Net Income Per Share - Basic," and "Net Income Per Share - Diluted" line items Page 19, Section titled Summary of Consolidated Financial Position - "Total Assets" and "Long-Term Debt and Capital Leases" line items Page 19, 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 13 through 18, Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. Pages 20 through 30 Page 31, Report of Independent Public Accountants Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 15 Part III The following information contained in the Company's definitive Proxy Statement to be mailed to stockholders on or about March 31, 1999 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" (For information concerning the Company's Executive Officers see pages 12 and 13 hereof, section titled "Executive Officers of the Registrant") Item 11. Executive Compensation. Section titled "Election of Directors": 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" 16 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 20 through 31 in the Company's Annual Report to Stockholders for the year ended December 31, 1998 are included in this report. o Consolidated Balance Sheet as of December 31, 1998 and 1997 (page 20) o Consolidated Statement of Income for the years ended December 31, 1998, 1997, and 1996 (page 21) o Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997, and 1996 (page 22) o Consolidated Statement of Stockholders' Investment for the years ended December 31, 1998, 1997, and 1996 (page 23) o Notes to Consolidated Financial Statements for the years ended December 31, 1998, 1997, and 1996 (pages 24 through 30) o Selected Quarterly Financial Data (Unaudited) for the years ended December 31, 1998 and 1997 as reported in Note 10 to Consolidated Financial Statements (page 30) o Report of Independent Public Accountants (page 31) 2. Financial Statement Schedules - the following Financial Statement Schedules required by Article 5 of Regulation S-X are included in this report: o Report of Independent Public Accountants on Schedule o Schedule II - Valuation and Qualifying Accounts o Schedules omitted - the following schedules are omitted since they are not required, or not applicable: I, III, IV, and V 17 3. The following exhibits are included in this report: No. Description ---- ----------------------------------------------------------------- (3) Articles of Incorporation and By-laws - Certificate of Amendment of Restated Certificate of Incorporation dated May 21, 1997 (filed as Exhibit (3) to the Company's Form 10-Q Report for the quarter ended June 30, 1997)* Restated Certificate of Incorporation dated May 14, 1992 (filed as Exhibit (3) to the Company's Form 10-Q Report for the quarter ended June 30, 1997)*, 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)* (4) Instruments defining the rights of security holders, including indentures - Rights Agreement dated as of May 1, 1991, between the Registrant and Pittsburgh National Bank, as Rights Agent (filed as Exhibit (4) to Company's Form 10-K Report for the year ended December 31, 1996)* (10) Material Contracts - Deferred compensation agreements:** R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)* James C. Kelly (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)* Form of deferred compensation agreement:** Marvin S. Cadwell V. Brewster Jones Terrence W. Kyle Francis W. Lavelle David F. Perri Guillermo N. Ramas, Sr. (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1997)* *Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or compensatory arrangement. 18 No. Description ---- ----------------------------------------------------------------- Performance bonus plans - 1998:** Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1998)* Form of performance bonus plan (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1998)*: V. Brewster Jones Terrence W. Kyle Francis W. Lavelle David F. Perri Guillermo N. Ramas, Sr. Performance bonus plans - 1997:** Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1997)* Form of performance bonus plan (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1997):* V. Brewster Jones Terrence W. Kyle Francis W. Lavelle David F. Perri Guillermo N. Ramas, Sr. Insurance agreement:** R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)* Employment agreements:** Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1996)* V. Brewster Jones (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1997)* *Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or compensatory arrangement. 19 No. Description ---- ----------------------------------------------------------------- Form of executive employment agreement (filed as Exhibit (10.2) to the Company's Form 10-Q Report for the quarter ended September 30, 1996)*: Terrence W. Kyle Francis W. Lavelle David F. Perri Guillermo N. Ramas, Sr. Form of senior management employment agreement (filed as Exhibit (10.3) to the Company's Form 10-Q Report for the quarter ended September 30, 1996)*: Michael B. Costello Edward J. Grady Bonnie L. Shuman Construction contract for new office building located at the Company's corporate headquarters (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1997)** (13) Annual Report to Stockholders for the year ended December 31, 1998*** (21) Significant Subsidiaries of the Registrant (23) Consent of Independent Public Accountants (27) Financial Data Schedule (b) As previously reported in the Company's Form 10-Q Report for the quarter ended September 30, 1998, a report on Form 8-K was filed on October 20, 1998 reporting a press release issued by the Company on October 19, 1998 concerning its financial results for the quarter ended September 30, 1998. *Previously filed as indicated and incorporated herein by reference. May be deemed a management contract or compensatory arrangement. **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, 1998 is not to be deemed "filed" as part of this Form 10-K. 20 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 31, 1999 ----------------------------------------- -------------- 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 31, 1999 ----------------------------------------- -------------- R. James Macaleer - Chairman of the Board By: /S/ Marvin S. Cadwell Date: March 31, 1999 ----------------------------------------- -------------- Marvin S. Cadwell - Director, President, and Chief Executive Officer By: /S/ Raymond K. Denworth Date: March 31, 1999 ----------------------------------------- -------------- Raymond K. Denworth, Jr. - Director By: /S/ Frederick W. DeTurk Date: March 31, 1999 ----------------------------------------- -------------- Frederick W. DeTurk - Director By: /S/ Josh S. Weston Date: March 31, 1999 ----------------------------------------- -------------- Josh S. Weston - Director By: /S/ Jeffrey S. Rubin Date: March 31, 1999 ----------------------------------------- -------------- Jeffrey S. Rubin - Director By: /S/ Gail R. Wilensky Date: March 31, 1999 ----------------------------------------- -------------- Gail R. Wilensky - Director By: /S/ Terrence W. Kyle Date: March 31, 1999 ----------------------------------------- -------------- Terrence W. Kyle - Senior Vice President, Treasurer, and Assistant Secretary By: /S/ Edward J. Grady Date: March 31, 1999 ----------------------------------------- -------------- Edward J. Grady - Vice President, Controller, and Assistant Treasurer 21 ARTHUR ANDERSEN LLP 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 1998 Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 8, 1999. 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 the responsibility of the Company's management and 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 8, 1999 22 SCHEDULE II SHARED MEDICAL SYSTEMS CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997*, AND 1996* -------------------------------------------------------
Balance Balance Beginning of Charges to Additions/ End of Year Expenses (Deductions) Year ----------- ----------- ----------- ----------- Reserve for Doubtful Accounts: December 31, 1998 $10,828,000 $5,237,000 $(2,696,000) (1) $13,369,000 =========== ========== =========== =========== December 31, 1997 $ 9,389,000 $5,339,000 $(3,900,000) (1) $10,828,000 =========== ========== =========== =========== December 31, 1996 $ 6,767,000 $2,802,000 $ (180,000) (1) $ 9,389,000 =========== ========== =========== ===========
(1)Additions/(Write-offs) of uncollectible accounts * Restated to reflect the acquisition of Data-Plan Software GmbH in 1998, which was accounted for as a pooling of interests. 23 Exhibit Index No. Description ---- ----------------------------------------------------------------- (3) Articles of Incorporation and By-laws - Certificate of Amendment of Restated Certificate of Incorporation dated May 21, 1997 (filed as Exhibit (3) to the Company's Form 10-Q Report for the quarter ended June 30, 1997)* Restated Certificate of Incorporation dated May 14, 1992 (filed as Exhibit (3) to the Company's Form 10-Q Report for the quarter ended June 30, 1997)*, 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)* (4) Instruments defining the rights of security holders, including indentures - Rights Agreement dated as of May 1, 1991, between the Registrant and Pittsburgh National Bank, as Rights Agent (filed as Exhibit (4) to Company's Form 10-K Report for the year ended December 31, 1996)* (10) Material Contracts - Deferred compensation agreements:** R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)* James C. Kelly (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)* Form of deferred compensation agreement:** Marvin S. Cadwell V. Brewster Jones Terrence W. Kyle Francis W. Lavelle David F. Perri Guillermo N. Ramas, Sr. (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1997)* *Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or compensatory arrangement. 24 No. Description ---- ----------------------------------------------------------------- Performance bonus plans - 1998:** Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1998)* Form of performance bonus plan (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1998)*: V. Brewster Jones Terrence W. Kyle Francis W. Lavelle David F. Perri Guillermo N. Ramas, Sr. Performance bonus plans - 1997:** Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1997)* Form of performance bonus plan (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1997):* V. Brewster Jones Terrence W. Kyle Francis W. Lavelle David F. Perri Guillermo N. Ramas, Sr. Insurance agreement:** R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)* Employment agreements:** Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1996)* V. Brewster Jones (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1997)* *Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or compensatory arrangement. 25 No. Description ---- ----------------------------------------------------------------- Form of executive employment agreement (filed as Exhibit (10.2) to the Company's Form 10-Q Report for the quarter ended September 30, 1996)*: Terrence W. Kyle Francis W. Lavelle David F. Perri Guillermo N. Ramas, Sr. Form of senior management employment agreement (filed as Exhibit (10.3) to the Company's Form 10-Q Report for the quarter ended September 30, 1996)*: Michael B. Costello Edward J. Grady Bonnie L. Shuman Construction contract for new office building located at the Company's corporate headquarters (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1997)** (13) Annual Report to Stockholders for the year ended December 31, 1998*** (21) Significant Subsidiaries of the Registrant (23) Consent of Independent Public Accountants (27) Financial Data Schedule *Previously filed as indicated and incorporated herein by reference. May be deemed a management contract or compensatory arrangement. **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, 1998 is not to be deemed "filed" as part of this Form 10-K. EX-10 2 DEFERRED COMPENSATION AGREEMENT Exhibit (10) DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT is made as of the 30th day of September, 1998, between SHARED MEDICAL SYSTEMS CORPORATION (the "Company") and ______________("Employee"), who is a member of a select group of management or highly compensated employees within the meaning of section 201(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The parties hereto, intending to be legally bound, agree as follows: 1. Grantor Trust; Deferred Compensation Account. -------------------------------------------- The Company has established an irrevocable grantor trust (the "Trust") within the meaning of section 671 of the Internal Revenue Code of 1986, as amended (the "Code"), pursuant to a trust agreement (the "Trust Agreement") executed on September 30, 1998 with a trustee selected by the Company (the "Trustee"). Concurrent with the execution of this Agreement, the Company will contribute to the Trust _______ newly-issued shares of Company Common Stock ("Original Shares") by delivery of such Shares to the Trustee. The Trustee shall, on behalf of the Company, hold a deferred compensation account for Employee (the "Deferred Compensation Account" or the "Account"). The Account shall have two sub-accounts, the Stock Account and the Cash Account. The Trustee shall hold the Original Shares in the Stock Account. Any stock dividends, stock splits, and other non-cash distributions received on the Original Shares shall be held in the Stock Account, while any cash dividends received on the Original Shares shall be held in the Cash Account and shall be invested in accordance with investment guidelines established by the Company. The Accounts shall also be reduced for distributions made under the terms of this Agreement. Notwithstanding the foregoing, the Trust assets shall be treated as assets of the Company and shall remain, in the event the Company becomes Insolvent (as such term is defined in Section 5(a)(i) of the Trust Agreement) subject to the claims of the Insolvency Creditors (within the meaning of Section 5(a)(ii) of the Trust Agreement) of the Company. Employee shall not have any property interest in the assets held in the Trust. Employee shall have only the rights of an unsecured creditor against the Company for any distribution due under this Agreement, and this Agreement shall constitute a mere promise by the Company to make such -1- distributions in the future. It is the intention of the parties that the Agreement be unfunded for Federal income tax purposes and for purposes of Title I of ERISA. 2. Entitlement to Benefits. ----------------------- (a) Benefits at Normal Retirement. ----------------------------- Upon the termination of Employee's employment with the Company occurring on or after the Employee attains the age of 60 (his "Normal Retirement Age"), Employee shall be entitled to receive and shall have distributed to him the balance in his sub-accounts, as provided in Exhibit A. (b) Termination Before Normal Retirement Age. ---------------------------------------- If Employee's employment with the Company is terminated for any reason prior to his Normal Retirement Age, Employee shall not be entitled to receive any amount in his Account, and no distributions shall be made to Employee, except under the following circumstances: (i) Disability. ---------- If Employee's termination of employment results from his permanent disability prior to his Normal Retirement Age, Employee shall be entitled to receive and shall have distributed to him the balance in his sub-accounts, as provided in Exhibit A. Employee shall be deemed "permanently disabled," only if he can no longer perform the duties of his position, as determined by the Management and Compensation Committee of the Company's Board of Directors, in his or their sole discretion. (ii) Death. ----- If Employee's termination of employment results from the Employee's death prior to his Normal Retirement Age, Employee's beneficiary designated pursuant to Section 3(b) below shall be entitled to receive within 30 days of Employee's death and shall have distributed to him or her the balance in Employee's sub-accounts, in a lump sum. -2- (iii) Discharge After Age 50. ---------------------- Except as otherwise provided in Section 2(b)(iv) below, if Employee is discharged by the Company for any reason other than "cause" after he reaches age 50 but prior to his Normal Retirement Age, the balance in his sub-accounts shall be reduced to the balance in his sub-accounts as of his date of termination multiplied by the Adjustment Fraction. For purposes of this subsection only, "Adjustment Fraction" shall mean a fraction, the numerator of which shall be the number of full months the Employee worked for the Company after attaining age 50, and the denominator of which shall be 120. The balance in his sub-accounts shall be distributed to the Employee, as provided in Exhibit A. As used herein, the term "cause" shall mean Employee's (A) dishonest or illegal conduct, (B) conduct contrary to the best interests of the Company, (C) insubordination, incompetence, misconduct, or neglect of his duties, or (D) willful violation of any express direction of the senior management or the Board of Directors of the Company, as determined by the Management and Compensation Committee of the Company's Board of Directors, in his or their sole discretion. (iv) Change in Control. ----------------- (A) Acceleration of Account. ----------------------- (I) Notwithstanding the foregoing, if, prior to Employee's Normal Retirement Age, (aa) there is a "Change in Control" which is approved by a majority of the members of the "Prior Board," and (bb) within 30 months after the "Change in Control" the Company or any successor or purchasing entity terminates Employee's employment for a reason other than dishonesty, illegal conduct of a serious nature, gross misconduct, or gross neglect of Employee's duties to the Company, or Employee suffers an "Adverse Employment Change" and resigns, and at the time of such termination or resignation (and immediately thereafter) the chief executive officer of the Company immediately prior to such Change in Control is not the chief executive officer of the Company or any successor or purchasing entity, then, Employee shall be -3- entitled to receive and shall have distributed to him the balance in his sub-accounts, as provided in Exhibit A. (II) Notwithstanding the foregoing, if, prior to Employee's Normal Retirement Age, there is a "Change in Control" which is not approved by a majority of the members of the "Prior Board," then, Employee shall be entitled to receive and shall have distributed to him immediately the balance in his sub-accounts, in a lump sum. (B) Definitions. ----------- As used herein, the term "Change in Control" shall mean the acquisition by any person (other than the Company or any affiliate or associate of the Company), 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 the Company's then outstanding securities, or the consummation of (aa) any merger or consolidation where stockholders of the Company 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 the Company, or (cc) a sale of all or substantially all of the Company's assets. As used herein, the term "Adverse Employment Change" shall mean (aa) a reduction in the salary or incentive compensation opportunity of Employee when compared to that in effect immediately prior to the Change in Control, (bb) a clear and material reduction in the duties, responsibilities or authority of Employee when compared to those in effect immediately prior to the Change in Control, or (cc) any change in Employee's principal place of work which would increase Employee's commute by 50 miles or more. As used herein, the term "Prior Board" shall mean the group of individuals most recently elected as directors by stockholders of the Company, or -4- appointed to fill Board vacancies by a majority of such stockholder-elected individuals then serving on the Board, and not affiliates (as defined by SEC rules) or nominees of the person or entity (1) acquiring 40% or more of the combined voting power of the Company's then outstanding securities described in the definition of Change in Control, (2) merging or consolidating with the Company as described in clause (aa) of the definition of Change in Control, (3) succeeding to the Company's business as a result of a liquidation or dissolution of the Company as described in clause (bb) of the definition of Change in Control, or (4) purchasing all or substantially all of the Company's assets as described in clause (cc) of the definition of Change in Control. (c) Forfeiture of Benefits. ---------------------- Notwithstanding the foregoing, if at any time after the date hereof, Employee, without the express written consent of the Company, manages, operates, or controls, or becomes an officer, director or employee of, or consultant to, any business or enterprise determined by the Company to be engaged in the manufacture, distribution or marketing of any product, or the provision of any service, substantially similar to or in competition with any product or service offered by the Company, Employee shall forfeit all rights to receive any benefits under this Agreement, and no distributions under this Agreement shall be made to Employee, or continued to be made, as the case may be. (d) Acceleration of Payments. ------------------------ Notwithstanding any other provision of this Agreement or the Trust Agreement, if the Company's independent public accountants determine, based on a change in the tax or revenue laws of the United States of America, a published ruling or similar announcement issued by the Internal Revenue Service, a regulation issued by the Secretary of the Treasury or his delegate, a final decision by a court of competent jurisdiction involving the Employee, or a closing agreement involving the Employee made under section 7121 of the Code that is approved by the Commissioner, that the Employee has recognized or will recognize income for Federal income tax purposes with respect to benefits that are or will be payable to the Employee hereunder, before they otherwise would be paid to the -5- Employee, the Company shall discuss with the Employee appropriate measures to eliminate a negative economic impact on the Employee, including if approved by the Company, an immediate distribution by the Trustee from the Trust to the Employee or Beneficiary of the amount so taxable. 3. Beneficiaries. (a) Death of Employee Entitled to Benefits. -------------------------------------- If Employee dies after becoming entitled to benefits under Section 2(a) or 2(b)(i), 2(b)(iii) or 2(b)(iv), the balance then in his Account, shall, within 30 days of Employee's death, be distributed in a lump sum to Employee's beneficiary designated pursuant to Section 3(b) below. (b) Beneficiary Designation. ----------------------- Employee shall have the right to designate a beneficiary or beneficiaries to receive any benefits hereunder which may be distributed upon Employee's death. Employee shall have the right to change any beneficiaries so designated, provided, however, that a change of a beneficiary designation will be effective only if made in a manner acceptable to the Company. If Employee fails to designate a beneficiary or if no designated beneficiary survives the Employee, his estate shall be his beneficiary. 4. Claims and Appeals Procedure. ---------------------------- The Company has provided to the Employee a copy of the Claims and Appeals procedures which will be followed under this Agreement and which are incorporated herein by reference. 5. Non-alienation. -------------- No benefits under this Agreement shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, or encumbrance, and any attempt to do so shall be void and unenforceable. Such benefits shall not be subject to or liable for the debts, contracts, liabilities, engagements, or torts of Employee or his beneficiary or beneficiaries. -6- 6. Investment Purposes. ------------------- Unless the Company has theretofore notified Employee that a registration statement covering Shares deposited with the Trustee has become effective under the Securities Act of 1933 and the Company has not thereafter notified Employee that such registration is no longer effective, it shall be a condition of this Agreement that any Shares to be distributed to Employee hereunder shall be acquired for investment and not with a view to distribution in violation of the Securities Act of 1933 (or of any rules or regulations promulgated thereunder), and Employee hereby agrees to submit to the Company a certificate of such investment intent, together with such other evidence supporting the same as the Company may request. The Company shall be entitled to restrict the transferability of any Shares distributed hereunder to the extent necessary to avoid a risk of violations of the Securities Act of 1933 (or of any rules or regulations promulgated thereunder) or of any state laws or regulation. Such restrictions may, at the option of the Company, be noted or set forth in full on the Share certificates. 7. Amendment or Termination of Agreement. ------------------------------------- This Agreement may be amended or terminated upon the mutual agreement of Company, by resolution of the Management and Compensation Committee of its Board of Directors adopted at a duly held meeting of said Committee or by unanimous written consent of said Committee, and Employee. 8. Authority to Interpret Agreement Vested in Company. -------------------------------------------------- The Company shall have full power and authority to interpret, construe, administer and make factual determinations with respect to this Agreement, and the interpretation and construction thereof, and actions thereunder, including any valuation of the Deferred Compensation Account, or any decisions regarding the amount or recipient of any distribution to be made therefrom, shall be binding and conclusive on all persons for all purposes. The Company shall not be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Agreement unless attributable to its own willful misconduct or lack of good faith. 9. No Contract of Employment. ------------------------- Nothing contained herein shall be construed as conferring upon the Employee the right to continue in the employ of the Company. -7- 10. Right to Withhold. ----------------- The Company and the Trustee shall have the right to withhold from all distributions under the Agreement any Federal, state, or local taxes required by law to be withheld with respect to such distributions. 11. Governing Law. ------------- This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania to the extent not preempted by federal law. 12. Agreement Binding. ----------------- This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and Employee and his heirs, executors, administrators and legal representatives. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. ATTEST: SHARED MEDICAL SYSTEMS CORPORATION [SEAL] - ----------------------------- By: Assistant Secretary ------------------------------ Name: Title: WITNESS: - ----------------------------- ------------------------------ -8- Exhibit A I. Distribution of Benefits. ------------------------ (a) Timing of Distributions. ----------------------- Distributions pursuant to Section 2(a) shall be made in 20 annual installment payments, commencing on a date no later than 30 days after the date of Employee's termination of employment. Distributions pursuant to Sections 2(b)(i), 2(b)(iii), and 2(b)(iv) shall be made in 20 annual installment payments, commencing on a date no later than 30 days after the date the Employee reaches his Normal Retirement Age. Annual installments shall be distributed on the anniversary of the first such distribution. (b) Amount of Distributions Under Sections 2(a), 2(b)(i) and 2(b)(iv). ------------------------------------------------------------------ For each installment payment made pursuant to Sections 2(a), 2(b)(i) and 2(b)(iv), the Employee shall receive (i) an amount (payable in Shares, or with respect to non-cash assets other than Company stock, in kind) equal to the percentage of the Original Shares (and the stock dividends, stock splits and other non-cash distributions deemed received on the Original Shares) as indicated for the installment under II below, and (ii) cash in the amount of _____. In the event that the amount of cash to be distributed in an installment exceeds the current balance in the Cash Account on the date of such distribution, then the amount of the cash distribution shall be limited to the balance in the Cash Account on such date. In the event that the balance in the Cash Account on the date of the last installment is greater than _____ then the entire balance in the Cash Account shall be distributed with such last installment. Fractional Shares shall be disregarded in computing the amount of distributions hereunder. All applicable taxes shall be withheld from distributions under the Agreement. (c) Amount of Distributions under Section 2(b)(iii). ----------------------------------------------- For each installment payment made pursuant to Section 2(b)(iii), the Employee shall receive (i) an amount (payable in Shares, or with respect to non-cash assets other than Company stock, in kind)) equal to the percentage of the Original Shares then remaining in the Stock Account, as provided in Section 2(b)(iii) (and the stock dividends, stock splits and other non- A-i cash distributions received on such remaining Original Shares) indicated for the installment under II below, and (ii) cash in an amount equal to (aa) _____, multiplied by (bb) the Adjustment Fraction set forth in Section 2(b)(iii). In the event that the amount of cash to be distributed in an installment exceeds the current balance in the Cash Account on the date of such distribution, then the amount of the cash distribution shall be limited to the balance in the Cash Account on such date. In the event that the balance in the Cash Account on the date of the last installment is greater than the amount of cash determined pursuant to subclause (ii) of the preceding sentence, then the entire balance in the Cash Account shall be distributed with such last installment. Fractional Shares shall be disregarded in computing the amount of distributions hereunder. All applicable taxes shall be withheld from distributions under the Agreement. II. Distribution Schedule. ---------------------
Percentage of Original Shares (and other assets in Stock Account) Installment Distributed #1 9.6% #2 8.8% #3 8.1% #4 7.4% #5 6.8% #6 6.3% #7 5.8% #8 5.4% #9 5.0% #10 4.6% #11 4.3% #12 4.0% #13 3.7% #14 3.5% #15 3.2% #16 3.0% #17 2.9% #18 2.7% #19 2.5% #20 2.4% ---- Total: 100%
A-ii Schedule to Exhibit (10) A deferred compensation agreement in the form presented in the preceding pages was implemented for each of the following executive officers of the Company: Marvin S. Cadwell V. Brewster Jones Terrence W. Kyle Francis W. Lavelle David F. Perri Messrs. Jones, Kyle, Lavelle and Perri executed agreements effective September 30, 1998, substantially in such form, covering the following amounts of shares: Mr. Jones (7,809 shares), Mr. Kyle (5,382 shares), Mr. Lavelle (6,027 shares), and Mr. Perri (5,036 shares). Mr. Jones will be entitled to receive all of such shares if he is continually employed by the company until age 65, and will be entitled to receive a designated portion of the shares if his termination of employment occurs between the ages of 60 and 65. Mr. Cadwell's deferred compensation agreement, previously filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended September 30, 1995, was amended, effective October 1997, so that it is now substantially in such form, except that Mr. Cadwell's agreement provides for partial vesting in the event of a voluntary termination of employment. EX-13 3 1998 ANNUAL REPORT Exhibit (13) Annual Report 1998 Proven Solutions in a World of Change [ART WORK APPEARS HERE] [SMS LOGO APPEARS HERE] [ARTWORK APPEARS HERE] SMS Annual Report 1998 Contents A Message from the President and CEO 2 Financial Highlights 4 Proven Solutions for the Changing World of Health 5 A New World of Networks 6 E-commerce and Healthcare 8 Future Preparedness 10 Solutions into the 21st Century 12 Management's Discussion and Analysis 13 Selected Financial Data 19 Consolidated Balance Sheet 20 Consolidated Statement of Income 21 Consolidated Statement of Cash Flows 22 Consolidated Statement of Stockholders' Investment 23 Notes to Consolidated Financial Statements 24 Report of Independent Public Accountants 31 General Company Information 32 (C) Copyright 1999 SMS Shared Medical Systems Corporation 1 Changing Times, Changing Industries The business of healthcare has changed profoundly over the past 30 years with the global focus on managed care. Today's dynamic healthcare systems - comprising multiple hospitals, clinics, outpatient treatment centers, physician offices, long-term care facilities, rehabilitation centers, home health agencies, and other providers - not only care for the sick but promote wellness in the communities they serve. Continued mergers, acquisitions, consolidations, and innovations are driving constant change within the health provider industry, creating more complex, more powerful, and more competitive healthcare entities. Further, new government regulations continue to add new challenges to the management of healthcare. The past three decades have also seen the dynamic advancement and proliferation of technology. Computers that once occupied whole rooms now fit in the palm of a hand. "Hot" technology now becomes obsolete just months or even weeks after its introduction. Frequent advancements in technology are radically altering the way we live and work. Technology has continuously become cheaper, smaller, and more accessible, leading to more sophisticated users who demand easy access to information, anytime, anywhere. Change in these two dynamic industries - and the Company's ability to adapt and respond - have fueled SMS' success. At no other time have healthcare customers had such a critical need for SMS' assistance in cost effectively managing and applying technology to meet strategic information needs. The approach of the year 2000 further intensifies this critical need, and, as always, SMS is well prepared to help customers manage continuing change. For more than 30 years, healthcare customers have relied on SMS for proven solutions to anticipate and successfully navigate the world of change. [ART WORK APPEARS HERE] Our Vision: To be the information solutions company of choice for the health industry and its professionals - working together to improve health worldwide. Our Mission: 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. Our Beliefs: Focus on people as our most important asset. Satisfy our customers and exceed their expectations. Strive for excellence in everything we do. [PICTURE OF MARVIN S. CADWELL, DIRECTOR, PRESIDENT, AND CHIEF EXECUTIVE OFFICER APPEARS HERE] To Our Shareholders: Amidst new challenges and an ever-accelerating rate of change, SMS' 30th year was highlighted by much success. The Company achieved a number of key objectives and continued to provide results-oriented, customer-focused information solutions for healthcare. Our overall results were very good despite challenges in Europe. Net income exceeded $70 million, up nearly 16 percent over 1997. Diluted net income per share was $2.62, an increase of nearly 14 percent over 1997. Total revenues for 1998 increased more than 23 percent over 1997 to exceed $1.1 billion. Consolidated gross sales for 1998 also hit a Company high at over $1.4 billion. The total amount of future revenues under contract exceeded $2.4 billion. In 1998, SMS made significant strides worldwide by announcing new products, expanding services, and entering new markets. New products in 1998 strengthened the Company's market position and provided new functionality for customers. Notably, the general availability of several NOVIUS(R) applications was met with outstanding results in the marketplace. Leveraging a clear strength in network computing, SMS continued to expand remote processing services to include new platforms and applications. The SMS Information Services Center (ISC) - perhaps the largest healthcare data processing center in the world - is a resource customers have relied upon, and we believe, will continue to depend upon. SMS is already prepared, for example, to take on new customers who require urgent implementations of Year 2000 (Y2K) compliant systems. New SMS product and service offerings capitalize on the Company's networking expertise as well as the power of the SMS network and global networks such as the Internet, to provide customers with "e-health" opportunities. For example, SMS now offers clinicians easy, secure, Internet-based access to clinical information from virtually any location. As well, SMS' subsidiary, Healthcare Data Exchange (HDX), added multiple services to its electronic data interchange roster in 1998 and achieved a 40 percent increase in the number of providers receiving new services. To further improve our global market presence, SMS completed important acquisitions in Europe and North America. Acquisitions in Germany, France, and Italy enhanced SMS' systems and platform offerings overseas and significantly increased our European customer base. Acquisitions in the US solidified our presence in the home health marketplace as well as forged our entry into the long-term care market. While our overall financial results were strong, our International results, as well as overall profitability rates, fell below our expectations in 1998. The planning and implementation of the common European economy continued to weaken sales across Europe throughout 1998. While combined International revenues increased 13 percent, SMS International operations experienced operating losses. 2 3 The Company's 1999 goals are very clear. We intend to progress toward our growth and margin objectives while providing superior service for our loyal customers during this year of unique change. In both International results and consolidated profitability, we have taken steps toward better performance in 1999. We were encouraged by fourth quarter sales in Europe and are optimistic of improved results in 1999. The strong need for Y2K compliance in our overseas markets will increase demand for our proven solutions. The increasing complexity of networks and technology, and the need for accurate information anytime, anywhere, are generating increased demand worldwide for professional services and other solutions from SMS. Likewise, we will continue to focus on convergence of applications and technology to improve efficiency. We continued in 1998 to consolidate duplicate functions throughout the Company, and we will continue the effort in 1999. These actions will not only improve our efficiency; they will create products and services that are more easily integrated at a time when our markets will be demanding integration. While our 1998 results were good, we are already working to make 1999 even better. As we look ahead, we approach 2000 not with trepidation, but with enthusiasm, and the knowledge that SMS is well positioned to address what will be another year of dramatic change, followed by the opportunities of the new millennium. SMS' people remain our greatest asset. Their expertise, customer focus, and breadth of knowledge related to technology and healthcare provide a strong foundation upon which to build the solutions the health industry will demand as we enter the 21st Century. Every day, SMS provides proven solutions that help customers streamline operations, improve the quality of decision-making and care, and better manage their information systems resources. It is this vision of improving health worldwide - and SMS' very real contribution toward that vision - that inspires and motivates our employees and leads us to higher levels of performance. This, in turn, leads to higher levels of performance for our customers and our shareholders. In the next year, the Company looks forward to providing higher levels of service; improving the Company's overall value for employees, customers, and shareholders; and confidently leading the way with proven solutions in a world of change. Sincerely, /S/ Marvin S. Cadwell Marvin S. Cadwell President and CEO Achievements of Note . Achieved record revenues and sales. . Attained Year 2000 Certification by the Information Technology Association of America (ITAA), which said SMS meets the industry's best software development practices for addressing the Year 2000 issue. . Announced the general availability of new products, such as the first seven NOVIUS(R) solutions, HealthAnswers(R), and Net Access(TM). . Increased other service offerings, including those related to remote processing, customer education, and customer services. . Grew electronic data interchange services and added 40 percent more provider customers for these services. . Maintained a high level of customer retention and signed significant new customer agreements. . Enhanced existing SMS products with additional functionality. . Acquired key companies to expand product and service offerings worldwide. . Created new development and marketing partnerships that enhance SMS' products and services. . Focused on organization convergence and alignment to continue reducing redundancy. . Received industry recognition for excellence with the SMS Clinician Workstation(TM), SMS Lifetime Clinical Record(R), NOVIUS Clinical Manager, and Delta Home Health. . Recorded, at one site alone, over 65 million results stored within the SMS Lifetime Clinical Record(R) clinical data repository, perhaps the most widely deployed clinical data repository in the industry. . Achieved "Gold Certified Partner" status with networking partner, Cisco Systems, and was the only healthcare information systems provider to do so. . Named "Best Employer for Working Parents" by the Delaware Valley Child Care Council. . Received the "Corporate Lifetime Achievement/ Master Technology Award" from the Eastern Technology Council. [ART WORK APPEARS HERE] [SMS LOGO APPEARS HERE] Annual Report 1998 Financial Highlights (Amounts in thousands, except per share amounts) - ------------------------------------------------------------------------------- Operating Results: 1998 1997* % Increase - ------------------------------------------------------------------------------- Revenues $1,135,393 $921,341 23.2% - ------------------------------------------------------------------------------- Income Before Income Taxes $114,199 $98,551 15.9% - ------------------------------------------------------------------------------- Net Income $70,803 $61,102 15.9% - ------------------------------------------------------------------------------- Net Income Per Share - Diluted $2.62 $2.30 13.9% - ------------------------------------------------------------------------------- Cash Dividends Declared Per Share $.84 $.84 - - ------------------------------------------------------------------------------- Weighted Average Common Shares - Diluted 27,043 26,608 1.6% - ------------------------------------------------------------------------------- Year End Position: - ------------------------------------------------------------------------------- Total Assets $808,448 $613,976 31.7% - ------------------------------------------------------------------------------- Retained Earnings $385,401 $334,981 15.1% - ------------------------------------------------------------------------------- Total Stockholders' Investment $399,350 $329,857 21.1% - ------------------------------------------------------------------------------- Common Stock Outstanding 26,606 26,206 - ------------------------------------------------------------------------------- Number of Stockholders of Record 7,332 5,992 - ------------------------------------------------------------------------------- * Restated to reflect the acquisition of Data-Plan Software GmbH in 1998, which was accounted for as a pooling of interests. [BAR GRAPHS OF 5-YEAR HISTORY FOR TOTAL REVENUES, NET INCOME, AND NET INCOME INCOME PER SHARE-DILUTED APPEAR HERE] 4 5 Proven Solutions for the Changing World of Health SMS solutions facilitate the cost-effective delivery and management of care across the many organizations that comprise a health enterprise, such as hospitals, physician groups, clinics, diagnostic and therapeutic centers, extended care settings, and home health agencies. Our systems and services streamline patient intake and access, optimize health and care management, deliver workflow support to physicians and other providers, and provide information support to enable healthcare organization leaders to monitor and manage outcomes. Our goal? To integrate all relevant healthcare information into a unified, secure computer-based patient record system. SMS systems capture and manage full patient or member data starting the moment that person enters the health system - from initial registration, scheduling, and insurance verification; to clinical records, lab results, x-rays, and pharmacy orders; to billing and financial records. Collective patient information across the health enterprise is a powerful tool for clinicians and health organization leaders, who can use the information to spot and track trends, manage chronic disease, provide needed education, and manage the overall health of the populations they serve. SMS solutions also support physicians and other providers by streamlining workflow and making it easier to capture and retrieve patient data and by providing online tools and knowledge bases that aid in better decision making and patient care. Additionally, SMS systems enable health executives to manage cost and quality while planning effectively to stay competitive. Executives use SMS tools to review services being provided, monitor utilization rates, ensure regulatory compliance, benchmark best practices, and assess costs and return on investment. At the core of every SMS solution is service. Our global team of 7,000 health and technology professionals provides expert service, from planning through implementation to ongoing support and education. Over 60 worldwide support offices, our 24-hour-per-day customer service center, and our regional education centers provide assistance when and where needed. From creating and managing networks and end-user requirements, to implementing systems, reengineering business processes, and directing IS and business office operations, SMS' comprehensive services cover everything from technology and business consulting to outsourcing and education. Alliances with key allied and strategic partners enable SMS to address specialty needs. These partners, for example, provide customers with tools such as clinical reference databases and critical care charting products. SMS' comprehensive and proven solutions - comprising applications, technology, and services that address our customers' processes - provide customers a single source for their information needs now and into the future. In total, SMS solutions support the health enterprise in its goals of improving overall quality of care, financial performance, and the satisfaction of those they serve. [ART WORK APPEARS HERE] SMS' comprehensive and proven solutions - comprising applications, technology, and services that address our customers' processes - provide customers a single source for their information needs now and into the future. [ART WORK APPEARS HERE] A New World of Networks Vast networks are changing global communication and commerce. Transactions that once took days to complete now take seconds with instant connections made possible over networks. New wireless technologies facilitate computing anytime, anywhere. Through today's technologies, a physician, for instance, can check e-mail, prescribe treatment, or respond to clinical alerts from any location - home, hospital, office, or airport. Information can be communicated via laptops, palmtop PCs, and other go-anywhere devices. An unmatched networks expert, SMS operates a vast private health-related intranet, the SMS Information Services Center (ISC). The ISC's 500,000 miles of communication lines connect 900 customer locations with nearly 300,000 end-user devices across the most responsive, reliable environment in our industry. This extensive network supports both SMS and non-SMS systems and a variety of technologies and platforms, and it boasts an immense 23 terabytes of online disk storage. The ISC recently hit a milestone with more than 40,600,000 transactions processed in a single day, and its capacity continues to grow with need. SMS has over 30 years of network knowledge, cultivated by founding, expanding, and operating this sophisticated network. [ART WORK APPEARS HERE] SMS is developing uses for new communication devices, such as the two-way pager shown here, that will enable healthcare providers to receive and respond to patient alerts from any location. [CUSTOMER CALL-OUT QUOTE APPEARS HERE] ETMC Regional Healthcare System Tyler, Texas The East Texas Medical Center (ETMC) Regional Healthcare System provides care for communities from Dallas, Texas, to Louisiana. More than 40 facilities, including hospitals, laboratories, and other ambulatory care centers, make up the 30-county regional health system network. ETMC chose SMS as an information solutions partner that could help them cost effectively provide healthcare services to local and, in many cases, rural communities. In particular, ETMC Diagnostic Reference Laboratories use SMS solutions in a highly successful, decentralized referral laboratory business. While much of the actual lab testing is done at ETMC headquarters or at other designated testing facilities, SMS technology enables ETMC to keep track of this activity and send lab results online to hundreds of physicians throughout the region. Over the last three years, the ETMC lab business has grown threefold in terms of gross revenue and testing volume - yet it has one of the lowest production costs per test in the United States. "Our ability to offer cost-effective, high-quality healthcare in all the communities we serve is largely technology-dependent," said Paula Anthony, CIO of ETMC Regional Healthcare System. "The level of service and partnership we receive from SMS, as well as the SMS systems we rely on, enables us to achieve our goals." 6 7 [ART WORK APPEARS HERE] Smaller, versatile, portable devices such as this handheld computer model can truly "go anywhere" with a physician or other clinician and provide quick access to needed applications at the bedside or in the office. This screen can swivel upright for desktop use, as shown here, or fold flat for use as a tablet using touch screen or pen computing capabilities. In 1998, the Company had an extraordinary opportunity to demonstrate this expertise with the much-publicized acquisition of eight Allegheny Health and Research Foundation (AHERF) East hospitals by Tenet Healthcare Corporation. (See customer profile, this page.) The Company's exclusive ISC environment, our strong focus on service, as well as the expertise of our people uniquely positioned SMS to proficiently accomplish the task. SMS also helps healthcare customers manage a variety of network needs, from planning, implementing, and managing complete networks and the connected desktops and servers to cost effectively outsourcing full information systems operations. SMS even assists customers with remote management of their networks, monitoring and assessing the operations and identifying and addressing issues, all from the ISC at SMS headquarters. As a solution provider, SMS is well-equipped to provide and support the technology and network infrastructure needed to manage the many information needs across a health enterprise. [CUSTOMER CALL-OUT QUOTE] Tenet Healthcare Corporation Pennsylvania Region Following its purchase of the eight former Allegheny Health and Research Foundation (AHERF) East hospitals in Philadelphia, Tenet Healthcare Corporation faced monumental and immediate challenges to migrate, consolidate, and centralize its information systems. Tenet selected SMS, with a reputation for developing successful solutions to complex problems, as the clear choice to accomplish this critical mission. Despite significant obstacles - including a stringent migration deadline - SMS led the team effort with Tenet, AHERF, and others to successfully migrate 1.3 terabytes of data from the AHERF data center in Pittsburgh to the SMS Information Services Center in Malvern, Pennsylvania. "This process involved the most critical areas of operation for Tenet, including our clinical systems, billing, and the desktops in our hospitals and physician offices," noted Stephen Brown, CIO at Tenet Healthcare. "We needed a failsafe IT migration plan to move these systems. Ensuring a smooth transition topped our concerns so that our ability to provide high-quality patient care would not be disrupted in any way. The fact that a complex migration of this size was successfully and rapidly completed must be considered an important achievement for both Tenet and SMS." [ART WORK APPEARS HERE] E-commerce and Healthcare The expansion of global networks is spawning many new business opportunities as consumers worldwide increasingly use networks to access and share information and buy and sell goods or services directly - without ever leaving home. "E-commerce" opportunities in virtually every type of business, healthcare included, seem limitless. SMS is leading healthcare customers in using networks, such as the Internet, to deliver community health services. A first-of-its-kind "e-health" initiative is already under way with the Virtua Health* community in New Jersey. Through an innovative "Community Health Advancement through Technology" project, 240 diabetic patients and 60 physicians are reporting daily health information over the World Wide Web. Using Intel technology and the Internet-based, medical management tools of HealthAnswers, participants track and report information such as blood sugar levels, medication use, diet, and activity. Virtua Health physicians and other health professionals then provide online, real-time medical assessment and advice. The Company also offers comprehensive Internet and intranet services to customers to help them not only access but create and maintain a presence on the World Wide Web. SMS creates, maintains, and hosts Web sites; establishes secure "firewalls"; and acts as an Internet Service Provider for customers, providing secure Internet access through SMS servers. [CUSTOMER CALL-OUT QUOTE] Istituti Clinici di Perfezionamento Milan, Italy Located in Milan, the center of Italy's commerce and industry, Istituti Clinici di Perfezionamento comprises four public, acute, multispecialized hospitals. The Institute is known for excellence in gynecology, obstetrics, and pediatrics, and is the reference center in these fields across northern Italy. In the continuous search for care excellence and improvement, the Institute, which manages more than 1,500 beds, contracted with SMS for facilities management outsourcing of their information systems operations. SMS manages the system as well as the integration of hardware, software, and network solutions of different suppliers, and trains and supports the users. The Institute uses SMS systems to support the entire health arena, from admission/discharge/transfer to scheduling, outpatient management, medical records, orders, and executive systems. The Institute says the SMS system is flexible and modular and effectively supports the hospital's day-to- day needs. They say it has been able to supply the basis for improvements in the organization. "The adoption of the SMS information system is positively proceeding and gives the Institute the possibility to manage its own information knowledge in the most efficient way, without any redundancies and with advantages in efficiency and information accessibility," said General Manager Dr. Andrea Matiussi. He added, "The hospital's information systems operation has been made easier by the outsourcing, which allows a real partnership on common projects between the hospital and SMS." * Virtua Health is the result of the partnership between West Jersey Health System and Memorial Health Alliance. 8 9 This year, we also introduced tools such as Net Access, a Web browser-based tool that allows physicians to easily access and organize patient clinical data from a variety of sources. Net Access enables physicians to easily and securely view, via the Internet, extensive clinical information, such as orders, results, and lab, radiology, and document images, housed in SMS applications. Another tool, SMS HEALTHConX/TM/, provides secure Internet access to the SMS intranet. Further, SMS provides e-commerce services to help health providers manage their business-to-business relationships. SMS' industry-leading electronic data interchange services connect providers to payers with services that verify patient identification and insurance coverage; automate referrals; electronically process Medicare and other payer claims; and provide electronic remittances. These services help customers increase revenue by reducing claim denials, increasing cash collections, decreasing the risk of unauthorized patient care, and improving overall efficiency of administrative processes. SMS remains involved as electronic commerce standards are defined as part of the Health Insurance Portability and Accountability Act (HIPAA) in the United States. As customers seek ways to exploit networks and create new ways of doing business, they rely on SMS, a proven leader in network solutions. Through relatively inexpensive, small-scale devices such as this Internet phone, clinicians can cost effectively access SMS applications or Internet- based medical databases in areas where there may not be physical space for a PC. [ART WORK APPEARS HERE] [CUSTOMER CALL-OUT QUOTE] L'adozione del sistema informativo della SMS sta procedendo positivamente e permette all'Istituto di gestire il proprio patrimonio informativo nel modo piu funzionale e senza alcuna ridondanza con i conseguenti vantaggi in termini di efficienza e accessibilita delle informazioni. L'attivita di informatizzazione degli ospedali e resa piu facile dalla formula dell'outsourcing che permette una partnership reale su progetti comuni tra l'azienda e la SMS." Dr. Andrea Matiussi General Manager Istituti Clinici di Perfezionamento Future Preparedness At no time has future preparedness been a more visible, critical issue. As we approach the new millennium, the world is hurriedly preparing to become Year 2000 (Y2K) compliant to avoid systems confusion between the years 1900 and 2000. Most recently, after a rigorous certification process, SMS was the first US healthcare information systems company to achieve Y2K certification from the Information Technology Association of America. This certification means that SMS meets the information technology industry's best software development practices for addressing the Y2K issue. SMS is working with customers to help them ensure their operations are compliant by year-end 1999. The Company continues to invest in development, ensuring we provide solutions that meet the needs of those transitioning from a hospital or physician environment to an integrated health enterprise world. SMS consistently makes significant investments in research and development. SMS seeks customer input through our leading-edge integration and testing facility where we solicit customer input and testing feedback on systems in development. This customer-focused testing and development leads SMS to stronger solutions that more effectively meet customer needs. To gain additional perspective, SMS hosted a first-of-its-kind Clinical Vision 2005 conference, encompassing more than 70 experts and practitioners from the fields of health, higher education, and technology. The group spent three days discussing the healthcare delivery environment of the year 2005, forces affecting the healthcare market, and the roles SMS will play in addressing the needs from a system, service, and relationship perspective. We also continue to explore the future of technology to give customers effective tools to meet their business objectives. Telemedicine tools, such as videoconferencing and voice integration, are already in use by some customers for such things as cross-continent cardiology consulting and medical education. SMS is also researching and developing uses for new technology devices (e.g., Internet phones), high-speed wireless networks, biometric security systems (e.g., handprint, fingerprint, and retinal scan recognition), and other high-speed networking tools. Our participation and leadership on over 80 standards boards and associations ensure SMS solutions are both present-and future-focused and can be deployed globally and integrated effectively with non-SMS systems. [ART WORK APPEARS HERE] 10 11 [ART WORK APPEARS HERE] SMS customers are already using state-of-the-art security measures to access their systems. This tiny key fob, for instance, generates a new, personalized ID number every 30 seconds, which the user enters in combination with traditional passwords and logons. The device is an added security measure for those accessing systems via the Internet. Our participation and leadership on over 80 standards boards and associations ensures SMS solutions are both present- and future-focused and can be deployed globally and integrate effectively with non-SMS systems. At no time have standards been more important as health organizations merge and combine multiple, disparate systems. Strategic partnerships with other world-class service providers extend SMS' ability to provide value for customers. Partnerships with companies such as AT&T, Cisco Systems, IBM, Lawson, Microsoft, and others enable SMS to quickly and cost effectively advance our strategic goals and expand our offerings for customers. SMS also provides the voice of healthcare to these partners and can thereby influence development activities that directly affect our customers. SMS ensures customers are empowered through information solutions to compete effectively as healthcare and technology environments evolve. [CUSTOMER CALL-OUT QUOTE] Meridian Health System Neptune, New Jersey Formed in 1997 from the merger of Jersey Shore Medical Center, Riverview Medical Center, and The Medical Center of Ocean County, Meridian Health System serves central New Jersey with more than 1,300 inpatient beds, a rehabilitation facility, several skilled nursing facilities, 2 home health agencies, multiple ambulatory service facilities, and a growing network exceeding 1,500 affiliated physicians. SMS and Meridian partnered to create and implement, in a matter of months, a master plan to consolidate disparate information systems to improve quality of care and financial performance. A key clinical component of the plan targeted savings in Meridian's critical care units, which typically incur the highest inpatient costs. Meridian implemented a sophisticated SMS system with clinical alerts and remind- ers to warn physicians of potential conflicts in care orders, including prescriptions, lab results, and dietary factors. The SMS system also allows physicians to assess treatment options, based on patient history, and identify medications that are more cost effective. As a result of the SMS system, Meridian has identified the potential for significant savings and improved quality of care. "By identifying potential allergic reactions and drug-drug interactions, SMS clinical notices provide our physicians with rapid access and up-to-the-minute information while placing medication orders," noted Becki Weber, Vice President and CIO at Meridian Health System. "SMS' solutions have improved our financial performance, our competitive position, and the quality of patient care. Our partnership with SMS continues to produce results that benefit physicians, patients, and the community we serve." [ART WORK APPEARS HERE] SMS and its outstanding team of professionals look forward to the new technologies, new modes of healthcare, new partnerships, and other certain changes that await us as we enter the next century. Solutions into the 21st Century For more than 30 years, SMS has anticipated and leveraged advancements in the technology and healthcare industries to meet our customers' changing needs. Our single vision remains our compass: to be the information solutions company of choice for the health industry and its professionals - working together to improve health worldwide. While focused on the future, SMS provides proven information solutions for today's health providers - helping them manage current needs while anticipating change and laying a strong foundation for tomorrow. SMS and its outstanding team of professionals look forward to the new technologies, new modes of healthcare, new partnerships, and other certain changes that await us as we enter the next century. We look forward to leading the way with proven solutions in a world of change. [ART WORK APPEARS HERE] [CUSTOMER CALL-OUT QUOTE] Denver Health and Hospitals Denver, Colorado In 1996, data quality issues identified during a periodic grant review threatened Denver Health and Hospital's federal funding, worth over $8.2 million a year. A model for integrated community health, Denver Health relies on this funding to operate its network of 12 clinics located throughout Denver's low-income neighborhoods. Denver Health unanimously selected SMS as its partner of choice and launched the partnership with an aggres- sive effort that leveraged SMS systems to capture the data needed to satisfy its federal reporting requirements. At the same time, SMS' process reengineering and stan- dardization efforts addressed user compliance issues. Just over a year after implementing SMS systems, Denver Health began noticing improvements to its bottom line. Equipped with new billing workflows that enhanced billing and staff productivity, Denver Health increased cash collections by more than $20 million. Furthermore, new reports and quality indicators enabled Denver Health to capture and monitor data for decision support purposes while fulfilling federal reporting requirements. In fact, when federal reviewers returned to observe the new systems and reporting structures, they deemed the grant secure. According to Dr. Patty Gabow, Medical Director and CEO, "The combination of SMS systems, training, and process reengineering efforts brought discipline as well as automation to previously inconsistent, manual processes." Additionally, Dr. Gabow said the achievements made to date have given Denver Health employees a sense of pride. "When you give good data, you get credibility with people who are really important to you," she said. "Our partnership with SMS enabled us to change a culture. We raised the bar and adapted the way people were doing things to a proven system. In short, we hit a home run." 12 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - OVERVIEW The Company provides information solutions to health enterprises, such as integrated health networks, multientity health corporations, hospitals, physician groups, and other health providers worldwide. The Company's revenues are comprised of service and system fees and the sale of computer hardware. Service and system fees are derived primarily from software and related services and professional services. Fees from software and related services are generated from term or perpetual software licenses and associated processing and support. The Company's professional services consist of a variety of services related to its information processing systems, such as system installation, software and network customization, information system planning and integration, business office consulting, facilities management, and education. The Company's information systems operate on hardware platforms that range from personal computers, to client/server networks, to minicomputers, to mainframes, which can be operated 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 system or service selected. Equipment utilized by the customer can be provided by the Company under fixed-period lease or sales agreements. Revenues recognized from the sale of computer hardware can fluctuate due to variations in the mix of products sold and the timing of sales and installations. As the information processing requirements of the health industry have continued to grow, the business of providing information solutions has become more complex. Changes in the way health enterprises 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 majority of the Company's business is provided to customers through long-term contracts. These long-term contracts range from one to ten years and generally allow price increases annually based on external measures of inflation. The Company has increased some of its prices under these contract provisions. Revenues under long-term contracts are recognized as they are earned over the life of the contract. The Company has a significant amount of revenues that will be realized in the future as installation work is completed and services are performed. Management estimates the total amount of future revenues under contract at December 31, 1998 was in excess of $2.4 billion. Prior period financial results have been restated to reflect the Company's acquisition of Data-Plan Software GmbH, which was completed on January 28, 1998 and accounted for as a pooling of interests. RESULTS OF OPERATIONS FOR 1998 COMPARED TO 1997 In 1998, revenues grew 23.2%, to $1,135,393,000, compared to 1997. Income before income taxes and net income for the year ended December 31, 1998 were $114,199,000, an increase of 15.9%, and $70,803,000, an increase of 15.9%, respectively, compared to 1997. . Service and system fees revenues were $946,212,000, an increase of 17.9% in 1998 compared to 1997. North American revenues increased primarily due to higher levels of professional services and software and related services. The higher level of professional services was generally attributable to system installations, consulting, and facilities management fees. The increase in software and related services was due to higher levels of sales and installations to new and existing customers and support fees. International revenues grew due to increased sales and installations in certain countries and the effect of companies acquired during 1998. These increases were partially offset by the adverse impact of weak demand and difficult economic conditions in various European countries, due in part to governmental spending restrictions caused by the economic requirements of the European Monetary Union. International revenues were also reduced by approximately $3,300,000 due to the stronger US dollar relative to certain foreign currencies in 1998 compared to the prior year. . Hardware sales revenues increased to $189,181,000 in 1998 from $118,813,000 in 1997, primarily due to higher installations of mainframe systems to new and existing customers that process the Company's INVISION(R) product at their sites, and networking equipment, and changes in the timing and product mix of systems installed. 13 Shared Medical Systems Corporation - ----------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Analysis of Changes in Consolidated Cost and Expenses 1998 1997* - ----------------------------------------------------------------------------- Expenses as a percentage of service and system fees revenues: Operating and development................. 47.3% 47.2% Marketing and installation................ 35.0% 33.6% General and administrative................ 8.1% 9.1% Interest.................................. 0.9% 0.5% Cost as a percentage of hardware sales revenues: Cost of hardware sales.................... 82.3% 82.4% * Restated to reflect the acquisition of Data-Plan Software GmbH in 1998, which was accounted for as a pooling of interests. - ----------------------------------------------------------------------------- . Operating and development expenses increased to 47.3% of service and system fees revenues in 1998 from 47.2% in 1997. This change was largely due to a higher rate of growth, as compared to the growth in service and system fees revenues, for personnel and related costs associated with support and consulting services provided to customers; and certain customer-related expenses, partially offset by a lower rate of growth for computer hardware and associated costs at the Company's Information Services Center. . Marketing and installation expenses increased to 35.0% of service and system fees revenues in 1998 from 33.6% in 1997. This increase was primarily due to a higher rate of growth, as compared to the growth in service and system fees revenues, for customer implementation costs, including costs incurred for external consultants, partially offset by a lower rate of growth for personnel expenses. . General and administrative expenses, as a percentage of service and system fees revenues, decreased to 8.1% in 1998 from 9.1% in 1997. This change was principally due to a lower rate of growth for personnel and related costs as part of the Company's continuing efforts to leverage administrative costs over an increasing revenue base. . Interest expense was $8,808,000 in 1998 compared to $3,987,000 in 1997. This change was attributable to a higher level of average outstanding short-term borrowings in 1998 compared to 1997. The increase in average outstanding short-term borrowings was partially due to funds used for businesses and investments acquired in 1998 and the fourth quarter of 1997. . Cost of hardware sales decreased to 82.3% of hardware sales revenues in 1998 from 82.4% in 1997. This change was primarily due to the different product mixes of systems installed during 1998 when compared to 1997. . Income taxes increased $5,947,000 in 1998 when compared to 1997. This change was due to an increase of $15,648,000 in income before income taxes. The Company's effective rate for federal, state, and foreign income taxes was 38.0% in 1998 and 1997. RESULTS OF OPERATIONS FOR 1997 COMPARED TO 1996 In 1997, revenues grew 14.2%, to $921,341,000, compared to 1996. Income before income taxes and net income for the year ended December 31, 1997 were $98,551,000, an increase of 26.2%, and $61,102,000, an increase of 25.3%, respectively, compared to 1996. . Service and system fees revenues were $802,528,000, an increase of 11.9% in 1997 compared to 1996. This increase was primarily due to higher levels of professional services and software and related services in North America. The higher level of professional services was attributable to growth in facilities management and system installation fees. The increase in software and related services was due to higher levels of sales and installations to new and existing customers and support fees. The increase in North American revenues was partially offset by a decrease in international revenues due to a lower level of service and system fees that was generally attributable to the negative impact on public spending in certain countries caused by the economic requirements of the European Monetary Union, and the negative impact of the stronger US dollar relative to certain foreign currencies in 1997 when compared to 1996 of approximately $9,500,000. . Hardware sales revenues increased to $118,813,000 in 1997 from $89,854,000 in 1996, primarily due to the installation of mainframe systems to new and existing customers that process the Company's INVISION(R) product at their sites, and changes in the timing and product mix of systems installed. 14 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Analysis of Changes in Consolidated Cost and Expenses 1997* 1996* - ----------------------------------------------------------------------------- Expenses as a percentage of service and system fees revenues: Operating and development.................. 47.2% 48.0% Marketing and installation................. 33.6% 33.2% General and administrative................. 9.1% 9.2% Interest................................... 0.5% 0.5% Cost as a percentage of hardware sales revenues: Cost of hardware sales..................... 82.4% 85.1% * Restated to reflect the acquisition of Data-Plan Software GmbH in 1998, which was accounted for as a pooling of interests. - ----------------------------------------------------------------------------- . Operating and development expenses decreased to 47.2% of service and system fees revenues in 1997 from 48.0% in 1996. This change was largely due to a lower rate of growth, as compared to the growth in service and system fees revenues, for computer hardware and associated costs at the Company's Information Services Center, partially offset by a higher rate of personnel and related costs for software development and facilities management services provided to customers. . Marketing and installation expenses increased to 33.6% of service and system fees revenues in 1997 from 33.2% in 1996. This increase was primarily due to a higher rate of growth, as compared to the growth in service and system fees revenues, for customer implementation costs. . General and administrative expenses, as a percentage of service and system fees revenues, decreased to 9.1% in 1997 from 9.2% in 1996. This change was principally due to the Company's continuing efforts to leverage administrative costs over an increasing revenue base, partially offset by provisions for bad debts and costs incurred for the acquisition of American Healthware Systems, Inc. . Interest expense was $3,987,000 in 1997 compared to $3,655,000 in 1996. This change was generally attributable to a higher level of average outstanding borrowings in 1997 compared to 1996. . Cost of hardware sales decreased to 82.4% of hardware sales revenues in 1997 from 85.1% in 1996. This change was primarily due to the different product mixes of systems installed during 1997 when compared to 1996. . Income taxes increased $8,127,000 in 1997 when compared to 1996. This change was principally due to an increase of $20,455,000 in income before income taxes. The Company's effective tax rate for federal, state, and foreign income taxes was 38.0% in 1997, which was in line with the 1996 rate of 37.5%. INFLATION Significant portions of the Company's expenses are inflation sensitive. Rising costs for the years ended December 31, 1998, 1997, and 1996 have been partially offset by increased employee and computer productivity. LIQUIDITY AND CAPITAL RESOURCES The Company's financial position remained strong through 1998. Total assets increased from $522,592,000 at January 1, 1997 to $808,448,000 at December 31, 1998. Stockholders' investment increased from $286,098,000 to $399,350,000 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 by short-term borrowings. The major uses of funds during this period were for investments in computer software and equipment, construction of a corporate office building addition, the payment of quarterly dividends, and businesses and investments acquired. At December 31, 1998, cash and short-term investments were $40,070,000 compared to $42,124,000 at January 1, 1997. Net cash flows from operating activities generated $37,991,000 in 1998 compared to $36,479,000 in 1997. Cash flows from operating activities in 1998 were primarily attributable to net income, adjusted for non-cash expenses such as depreciation and amortization, of $116,486,000, partially offset by a $67,457,000 increase in accounts receivable, principally due to higher business levels, and a $29,173,000 increase in other assets, primarily due to the growth of long-term financing arrangements with customers. Net cash flows from operating activities generated $36,479,000 in 1997 compared to $79,488,000 in 1996. Cash flows from operating activities in 1997 were primarily attributable to net income, adjusted for non-cash expenses such as depreciation and amortization, of $100,551,000, partially offset by a $41,817,000 increase in other assets, primary due to the growth of long-term financing arrangements, and a $37,437,000 increase in accounts receivable, principally due to higher business levels. 15 Shared Medical Systems Corporation - ----------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - ----------------------------------------------------------------------------- The Company's investing activities were $119,628,000, $57,559,000, and $47,278,000 in 1998, 1997, and 1996, respectively. During this period, the Company's investments were primarily for equipment, computer software, construction of a corporate office building addition, and business investments and acquisitions. The following summarizes the Company's significant investments in computer software and equipment for the three-year period ended December 31, 1998: - ---------------------------------------------------------------------------- (Amounts in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------- In-house computer and network communications equipment .............. $18,556 $14,373 $17,205 Capitalized internally produced software ..................... $18,687 $12,737 $11,250 Purchased software ....................... $9,194 $7,619 $7,563 - ---------------------------------------------------------------------------- In-house computer and network communications equipment is used to process, store, and retrieve customer information at the Company's Information Services Center and to service and support customers from the Company's corporate headquarters and branch offices. Capital expenditures for in-house computer equipment can vary depending upon whether the equipment is purchased or obtained under operating leases. Capitalized internally produced software and purchased software expenditures can fluctuate based on business decisions regarding the scope and timing of internal development projects and third-party agreements. The Company expended $24,592,000 during 1998, and $2,324,000 in 1997, as part of the cost to construct an office building addition at its corporate headquarters. In 1998, the Company increased its ownership in Delta Health Systems, a provider of information systems and services to home health organizations, from 50% to 100%, by purchasing the remaining equity for $21,176,000, and acquired Pyrenees Informatique, SA, a provider of healthcare information systems in France, for $10,812,000. In 1997, the Company invested $10,280,000 for a 15% share in the equity of Avio International Corporation (formerly Visteon Corporation), a provider of physician practice management software. The most significant use of cash for financing activities was for the payment of common stock dividends, which were $21,943,000 in 1998, $20,647,000 in 1997, and $21,983,000 in 1996. The most significant source of cash provided by financing activities was from short-term borrowings of $107,954,000, $26,594,000, and $884,000 in 1998, 1997 and 1996, respectively; and the exercise of stock options, for $6,246,000 in 1998, $8,903,000 in 1997, and $8,676,000 in 1996. 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: . Office building addition - The Company plans to complete construction of a 230,000 square-foot office building at the Company's corporate headquarters in mid-1999. The primary purpose of this addition is to consolidate corporate-based personnel currently located in leased office space. The estimated cost to complete this addition is $11,000,000. . Equipment - During 1999, the Company anticipates that capital expenditures for equipment will be in line with 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 past three years ended December 31, 1998, 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 $23,000,000 in dividends in 1999. . 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, 1998, 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, 1998. The Company expects to finance most of its capital requirements from operations and from short-term and long-term borrowings. The Company plans a private placement of approximately $175,000,000 of long-term unsecured notes in early 1999 to reduce current notes payable, fund the cost to complete the corporate office building addition, and fund working capital requirements. Currently, the Company has lines of credit with banks, primarily based on LIBOR, of approximately $268,000,000. At December 31, 1998, approximately $109,000,000 of these lines of credit were unused. 16 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- YEAR 2000 Computer systems which are designed to accept only two digits in the date field identifying the year may fail or malfunction when attempting to process dates after December 31, 1999. In 1995, the Company established a task force consisting of representatives from affected areas of the Company to oversee a Company-wide effort to deal with this "Year 2000" issue. This project team established a plan to coordinate the software changes necessary for the Company's products, the migration of Company customers to Year 2000 compliant versions of Company products, and the assessment and remediation, if necessary, of the Company's internal systems. The Company has completed development of Year 2000 ready versions for most of its applications, including all of the Company's major product offerings. The Company is continuing its efforts to complete the remaining application development work by mid-1999. The Company's primary efforts are now to assist its customers in migrating to the Year 2000 compliant versions of the Company's products. The Company is continuing to conduct an extensive customer education, training and communications program, which began in 1996, to provide information to customers regarding the necessary steps to be taken to achieve Year 2000 readiness of their Company systems. The Company believes that approximately 70% of the required upgrades of Company products in the North American customer base have been completed, and that most of the remaining upgrades in the North American customer base and most of the required upgrades in the Company's International customer base will be completed by mid-1999. The ability of the Company to assist its customers in installing Year 2000 compliant versions of its products will be dependent on the availability of Company and external resources, and the readiness and ability of customers to participate in such installations. The Company is continually assessing and informing customers of the Year 2000 compliance status of third-party products that customers use in connection with Company products. In many cases, customers have been or will be required to upgrade to newer software and or hardware products offered by such third-party vendors to achieve Year 2000 compliance of their information systems. While the Company expects a continued demand for its services, it is possible that the Year 2000 issue may cause a delay in the introduction of new products, and/or a decline in decisions to purchase new products by healthcare providers as they focus instead on efforts to update their current systems. Customer efforts to update their current systems, and potential constraints on available resources, could also cause delays in installation of the Company's products. Although the Company believes that it has taken adequate protective steps, it is possible that claims will be made against the Company should its customers experience Year 2000 problems. Among other matters such claims could relate to (i) malfunctions in Company products, which have not been upgraded, whether because an enhancement has not been provided by the Company or because the Company-provided enhancement has not been installed by the customer, (ii) difficulties resulting from Year 2000 problems in third-party hardware or software used in connection with the operation of Company products, or (iii) consulting services provided by the Company to its customers concerning Year 2000 issues. The Company anticipates that claims may be made even in cases where the Company is not ultimately responsible. Costs incurred modifying products sold to customers have been recorded in accordance with the Company's policies for internally produced software. The majority of the Company's Year 2000 software development work has been integrated into the Company's operations in the normal course of business. The costs for such work have not been separately tracked and are therefore not practicably estimable. The Company continues to assess, test (where possible) and or seek assurance from third-party vendors regarding Year 2000 compliance of the Company's critical internal information technology and non-information technology systems such as utilities, including telecommunications used internally and at the Company's Information Services Center. Based on these efforts, the Company believes that a majority of such systems are now Year 2000 compliant. The Company is currently pursuing the remediation or replacement of its remaining non-compliant internal systems and expects that all of its critical internal systems will be compliant by mid-1999. Any failure in a critical internal system relating to Year 2000 problems, whether in a system maintained by the Company or by a third-party vendor, could have a material adverse effect on the Company's business operations. The costs to the Company of addressing the Year 2000 issue with respect to its internal systems have not been material and have been expensed as incurred. The Company does not expect the remaining costs of remediation with respect to such systems to be material. 17 Shared Medical Systems Corporation - ----------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) - ----------------------------------------------------------------------------- The Company is currently in the process of developing contingency plans to deal with issues which may arise in 1999 and 2000, such as expected increases in customer upgrade and support activities, problems caused by customer delays in implementing Company or third-party upgrades, and possible disruptions in the Company's external support systems and internal systems. In addition to the alternate power and fuel source contingency systems already in place for the Company's Information Services Center, these plans include supplementing the Company's headquarters-based software support organization with additional technical resources from other areas of the Company during the critical period from Friday, December 31, 1999 through Monday, January 3, 2000, and forming auxiliary support centers in the Company's field organization. The Company expects that this contingency planning process will continue through 1999. EURO CONVERSION On January 1, 1999, the participating countries of the European Union (EU) established fixed conversion rates between their existing currencies (legacy currencies) and the euro. Also on that date, the new European Central Bank began to direct monetary policy for each of the participating countries. Legacy currencies will remain legal tender in the participating countries as denominations of the euro through January 1, 2002. At that point, the participating countries will issue new euro-denominated bills and coins for use in cash transactions. All legacy currencies are to be withdrawn from circulation by July 1, 2002. The delivery and payment for healthcare services in Europe continue to be regulated on a country by country basis despite the creation of the EU. The Company's European businesses have historically been conducted directly in each European country in which the Company has customers. There are currently no significant cross border transactions among the Company's various European operating entities. Accordingly, the Company does not anticipate the euro conversion will have a material impact on its business operations. The Company is currently modifying or replacing its internal systems to be euro-compliant and does not expect the costs of such remediation to be material. The Company's European products have been developed for specific country requirements. These existing products are in the process of being modified to be euro-compliant. The Company also believes that its new client-server platform, which is intended to be marketed throughout Europe, is euro-compliant. While the Company believes that the measures it has taken in preparation for the euro conversion are adequate, certain risk factors could have a material adverse impact on the Company's European business operations including: (i) more intense competition in certain countries as a result of the new common currency, and (ii) malfunctions in critical information systems. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report contains forward-looking statements. Such statements, and any other forward-looking statements made by, or on behalf of the Company, are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in such statements. Among such factors are changes in length and composition of sales cycles; non-renewals of customer contracts; inability to keep pace with competitive, technological and market developments; failure to protect proprietary software; delays in product development; undetected errors in software products; customer reductions caused by health industry consolidation; difficulties in product installation; dependence on suppliers; interruption of availability of resources necessary to provide products and services; difficulties encountered by the Company, customers, or others in dealing with the Year 2000 and euro conversion issues; inability to successfully integrate acquired business operations; changes in economic, political and regulatory conditions on the health industry; regulation of additional products as medical devices by the US federal Food and Drug Administration; and fluctuations in the value of foreign currencies relative to the US dollar, interest rates, and taxes. 18
- ----------------------------------------------------------------------------------------------------------------------------------- Selected Financial Data (Amounts in thousands, except per share amounts) - ----------------------------------------------------------------------------------------------------------------------------------- 1998 1997** 1996** 1995** 1994** - ----------------------------------------------------------------------------------------------------------------------------------- Summary of Consolidated Operations - ----------------------------------------------------------------------------------------------------------------------------------- Revenues............................................ $1,135,393 $921,341 $806,950 $689,978 $575,966 Cost and Expenses................................... $1,021,194 $822,790 $728,854 $622,706 $516,210 Income Before Income Taxes.......................... $114,199 $98,551 $78,096 $67,272 $59,756 Income Taxes........................................ $43,396 $37,449 $29,322 $25,437 $22,441 Net Income.......................................... $70,803 $61,102 $48,774 $41,835 $37,315 Net Income Per Share - Basic........................ $2.68 $2.34 $1.89 $1.64 $1.48 Net Income Per Share - Diluted...................... $2.62 $2.30 $1.84 $1.60 $1.45 Weighted Average Common Shares - Basic.............. 26,391 26,063 25,850 25,527 25,254 Weighted Average Common Shares - Diluted............ 27,043 26,608 26,523 26,093 25,665 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Summary of Consolidated Financial Position - ----------------------------------------------------------------------------------------------------------------------------------- Current Assets...................................... $411,205 $319,260 $290,243 $239,894 $196,455 Total Assets........................................ $808,448 $613,976 $522,592 $459,075 $402,907 Current Liabilities................................. $366,958 $229,584 $185,331 $150,554 $133,860 Long-Term Debt and Capital Leases................... $14,386 $16,291 $15,361 $17,939 $6,379 Total Liabilities................................... $409,098 $284,119 $236,494 $204,987 $179,287 Stockholders' Investment............................ $399,350 $329,857 $286,098 $254,088 $223,620 Common Shares Outstanding........................... 26,606 26,206 25,920 25,636 25,317 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Operating Ratios and Other Selected Financial Data - ----------------------------------------------------------------------------------------------------------------------------------- Operating Margin.................................... 8.5% 9.7% 9.0% 8.4% 9.4% Hardware Margin..................................... 17.7% 17.6% 14.9% 21.6% 20.0% Pretax Margin....................................... 10.1% 10.7% 9.7% 9.7% 10.4% Net Margin.......................................... 6.2% 6.6% 6.0% 6.1% 6.5% Effective Tax Rate.................................. 38.0% 38.0% 37.5% 37.8% 37.6% Return on Average Investment........................ 19.4% 19.8% 18.1% 17.5% 17.6% Working Capital..................................... $44,247 $89,676 $104,912 $89,340 $62,595 Current Ratio....................................... 1.12:1 1.39:1 1.57:1 1.59:1 1.47:1 Stockholders' Investment Per Share.................. $15.01 $12.59 $11.04 $9.91 $8.83 Cash Dividends Declared Compared to Prior Year's Net Income........................................ 36.4% 43.0% 52.7% 55.6% 60.3% Cash Dividends Declared Per Share................... $.84 $.84 $.84 $.84 $.84 Research and Development............................ $80,141 $65,919 $56,402 $46,846 $39,984 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Market Price and Dividends Declared Per Share * - ----------------------------------------------------------------------------------------------------------------------------------- First Quarter High............................................. $79 3/8 $58 3/8 $62 7/8 $37 7/8 $29 3/8 Low.............................................. $59 7/16 $44 3/4 $47 7/8 $30 7/8 $23 5/8 Dividends Declared............................... $.21 $.21 $.21 $.21 $.21 Second Quarter High............................................. $82 11/16 $55 1/2 $72 1/8 $41 1/2 $28 1/4 Low.............................................. $67 $36 3/4 $59 1/4 $32 $22 1/8 Dividends Declared............................... $.21 $.21 $.21 $.21 $.21 Third Quarter High............................................. $86 1/2 $61 3/4 $66 3/4 $42 3/4 $28 1/2 Low.............................................. $52 $47 1/2 $43 3/4 $35 5/8 $22 3/4 Dividends Declared............................... $.21 $.21 $.21 $.21 $.21 Fourth Quarter High............................................. $56 5/8 $66 13/16 $58 3/4 $57 5/8 $34 1/2 Low.............................................. $40 1/16 $52 $42 1/4 $37 3/8 $25 3/8 Dividends Declared............................... $.21 $.21 $.21 $.21 $.21 - -----------------------------------------------------------------------------------------------------------------------------------
* As of December 31, 1998, there were 7,332 stockholders of record and approximately 10,100 beneficial holders of the Company's common stock. The Company's common stock began trading on the New York Stock Exchange, Inc. (NYSE) under the symbol SMS on September 18, 1997. Prior to being listed on the NYSE, the Company's common stock was traded on the Nasdaq Stock Market under the symbol SMED. The prices shown in the table above are the high and low transaction prices for the last five years on the NYSE and the Nasdaq National Market, as applicable. ** Restated to reflect the acquisition of Data-Plan Software GmbH in 1998, which was accounted for as a pooling of interests. 19
Shared Medical Systems Corporation - ------------------------------------------------------------------------------------------------------------------ Consolidated Balance Sheet (Amounts in thousands) December 31 - ------------------------------------------------------------------------------------------------------------------ 1998 1997* - ------------------------------------------------------------------------------------------------------------------ Assets Current Assets: Cash and short-term investments................................................ $ 40,070 $ 30,692 Accounts receivable, net....................................................... 337,669 254,801 Prepaid expenses and other current assets...................................... 33,466 33,767 ----------------------------- Total Current Assets......................................................... 411,205 319,260 Property and Equipment, net....................................................... 137,521 106,305 Computer Software, net............................................................ 75,709 60,921 Other Assets...................................................................... 184,013 127,490 ----------------------------- $808,448 $613,976 ============================= Liabilities and Stockholders' Investment Current Liabilities: Notes payable.................................................................. $158,808 $ 49,692 Current portion of long-term debt and capital leases........................... 3,437 2,670 Dividends payable.............................................................. 5,589 5,268 Accounts payable............................................................... 42,029 33,562 Accrued expenses............................................................... 86,499 75,370 Current deferred revenues...................................................... 40,206 36,677 Accrued and current deferred income taxes...................................... 30,390 26,345 ----------------------------- Total Current Liabilities.................................................... 366,958 229,584 ----------------------------- Deferred Revenues................................................................. 6,908 7,398 ----------------------------- Long-Term Debt and Capital Leases................................................. 14,386 16,291 ----------------------------- Deferred Income Taxes............................................................. 20,846 30,846 ----------------------------- Commitments and Contingencies Stockholders' Investment: Preferred stock, par value $.10; authorized 1,000,000 shares; none issued................................................................. - - Common stock, par value $.01; authorized 120,000,000 shares; 30,635,512 shares issued in 1998 and 30,266,512 in 1997..................... 306 303 Paid-in capital............................................................... 79,773 59,897 Retained earnings............................................................. 385,401 334,981 Common stock in treasury, at cost, 4,029,773 shares in 1998 and 4,060,785 in 1997...................................................... (55,497) (56,021) Cumulative translation adjustment............................................. (10,633) (9,303) ----------------------------- Total Stockholders' Investment.............................................. 399,350 329,857 ----------------------------- $808,448 $613,976 =============================
* Restated to reflect the acquisition of Data-Plan Software GmbH in 1998, which was accounted for as a pooling of interests. The accompanying notes are an integral part of these statements. 20
Shared Medical Systems Corporation - ----------------------------------------------------------------------------------------------------------------- Consolidated Statement of Income (Amounts in thousands, except per share amounts) Year Ended December 31 - ----------------------------------------------------------------------------------------------------------------- 1998 1997* 1996* - ----------------------------------------------------------------------------------------------------------------- Revenues: Service and system fees.................................. $ 946,212 $802,528 $717,096 Hardware sales........................................... 189,181 118,813 89,854 -------------------------------------------------- 1,135,393 921,341 806,950 -------------------------------------------------- Cost and Expenses: Operating and development................................ 447,961 378,512 344,192 Marketing and installation............................... 331,627 269,719 238,264 General and administrative............................... 77,082 72,700 66,319 Cost of hardware sales................................... 155,716 97,872 76,424 Interest................................................. 8,808 3,987 3,655 -------------------------------------------------- 1,021,194 822,790 728,854 -------------------------------------------------- Income Before Income Taxes.................................. 114,199 98,551 78,096 Provision for Income Taxes.................................. 43,396 37,449 29,322 -------------------------------------------------- Net Income.................................................. $ 70,803 $ 61,102 $ 48,774 ================================================== Net Income Per Share: Basic.................................................... $2.68 $2.34 $1.89 ================================================== Diluted.................................................. $2.62 $2.30 $1.84 ================================================== Number of shares used to compute per share amounts: Basic.................................................... 26,391 26,063 25,850 ================================================== Diluted.................................................. 27,043 26,608 26,523 ================================================== - -----------------------------------------------------------------------------------------------------------------
* Restated to reflect the acquisition of Data-Plan Software GmbH in 1998, which was accounted for as a pooling of interests. 21
Shared Medical Systems Corporation - ------------------------------------------------------------------------------------------------------------------- Consolidated Statement of Cash Flows (Amounts in thousands) Year Ended December 31 - ------------------------------------------------------------------------------------------------------------------- 1998 1997* 1996* - ------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income............................................... $ 70,803 $ 61,102 $ 48,774 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization........................ 45,683 39,449 39,389 Asset (increase) decrease - Accounts receivable............................... (67,457) (37,437) (35,406) Prepaid expenses and other current assets......... 2,564 (3,013) 1,669 Other assets...................................... (29,173) (41,817) (5,809) Liability increase (decrease) - Accounts payable and accrued expenses............. 9,222 17,908 13,137 Accrued and current deferred income taxes......... 4,481 11,180 3,982 Deferred revenues................................. 869 (11,929) 14,194 Deferred income taxes............................. 2,900 4,092 2,769 Other................................................ (1,901) (3,056) (3,211) -------------------------------------------------- Net cash provided by operating activities......... 37,991 36,479 79,488 -------------------------------------------------- Cash Flows from Investing Activities: Property and equipment additions......................... (56,251) (27,255) (29,074) Computer software additions.............................. (27,881) (20,356) (18,813) Businesses and investments acquired...................... (35,913) (11,180) - Equipment dispositions................................... 417 1,232 609 -------------------------------------------------- Net cash used for investing activities............ (119,628) (57,559) (47,278) -------------------------------------------------- Cash Flows from Financing Activities: Dividends paid........................................... (21,943) (20,647) (21,983) Exercise of stock options................................ 6,246 8,903 8,676 Increase in notes payable................................ 107,954 26,594 884 Payments of long-term debt and capital lease obligations. (1,138) (5,560) (3,090) Other.................................................... (104) 358 (85) -------------------------------------------------- Net cash provided by (used for) financing activities ............................ 91,015 9,648 (15,598) -------------------------------------------------- Net Increase (Decrease) in Cash and Short-Term Investments.. 9,378 (11,432) 16,612 Cash and Short-Term Investments, Beginning of Year.......... 30,692 42,124 25,512 -------------------------------------------------- Cash and Short-Term Investments, End of Year................ $ 40,070 $ 30,692 $ 42,124 ================================================== - -------------------------------------------------------------------------------------------------------------------
* Restated to reflect the acquisition of Data-Plan Software GmbH in 1998, which was accounted for as a pooling of interests. The accompanying notes are an integral part of these statements. 22
Shared Medical Systems Corporation - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statement of Stockholders' Investment* For the Years Ended December 31, 1998, 1997, and 1996 (Amounts in thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock ------------ Cumulative Compre- Par Paid-in Retained Treasury Translation hensive Shares Value Capital Earnings Stock Adjustment Income - ---------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1996.......................................... 29,664 $296 $41,317 $268,119 $(55,286) $ (358) Common stock transactions - Exercise of stock options, grant of restricted shares and issuance of stock.................... 291 3 4,765 (507) Employee stock purchase plan................................. 11 Tax benefit from the exercise of non-qualified stock options and vesting of restricted shares............. 4,319 Dividends on common stock ($.84 per share)..................... (22,043) Net income..................................................... 48,774 $48,774 Translation adjustment......................................... (3,312) (3,312) ------------------------------------------------------------- Balance, December 31, 1996........................................ 29,955 299 50,401 294,850 (55,782) (3,670) $45,462 ======= Common stock transactions - Exercise of stock options, grant of restricted shares and issuance of stock.................... 312 4 5,785 (236) Employee stock purchase plan................................. (3) Tax benefit from the exercise of non-qualified stock options and vesting of restricted shares............. 3,711 Dividends on common stock ($.84 per share)..................... (20,971) Net income..................................................... 61,102 $61,102 Translation adjustment......................................... (5,633) (5,633) ------------------------------------------------------------- Balance, December 31, 1997........................................ 30,267 303 59,897 334,981 (56,021) (9,303) $55,469 ======= Common stock transactions - Exercise of stock options and grant of restricted shares ......................................... 181 1 3,655 521 Employee stock purchase plan................................. 3 Tax benefit from the exercise of non-qualified stock options and vesting of restricted shares............. 3,062 Merger and acquisition transactions.......................... 188 2 13,159 1,881 Dividends on common stock ($.84 per share)..................... (22,264) Net income..................................................... 70,803 $70,803 Translation adjustment......................................... (1,330) (1,330) ------------------------------------------------------------- Balance, December 31, 1998........................................ 30,636 $306 $79,773 $385,401 $(55,497) $(10,633) $69,473 ============================================================= - ----------------------------------------------------------------------------------------------------------------------------------
* Restated to reflect the acquisition of Data-Plan Software GmbH in 1998, which was accounted for as a pooling of interests. 23 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements December 31, 1998, 1997, and 1996 - -------------------------------------------------------------------------------- 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. Ownership investments in affiliates between 20% - 50% are accounted for under the equity method. Prior period financial results have been restated to reflect the Company's acquisition of Data-Plan Software GmbH, which was completed on January 28, 1998 and accounted for as a pooling of interests. 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. Actual results could differ from these estimates. Recognition of Revenues - The Company provides services, systems, and hardware based upon contractual agreements. Service revenues, which include software, processing, support, and professional services provided under term agreements, are recorded as services are performed over the life of the agreement. Service contracts have terms that range from one to ten years. System fees, consisting of software applications provided under perpetual licensing agreements and installation fees, are recognized, when collection is deemed probable, primarily over the system's installation period. Service and system fees are billable according to the terms in each customer contract. Hardware sales are recognized upon installation of the equipment at the customer site. Current and noncurrent deferred revenues totaling $47,114,000 at December 31, 1998 and $44,075,000 at December 31, 1997, 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 $417,000 in 1998, $383,000 in 1997, and $368,000 in 1996. Accounts Receivable - Accounts receivable consists primarily of unsecured amounts due from the Company's customers. Included in accounts receivable at December 31, 1998 and 1997, were unbilled revenues recognized under certain long-term software license, installation, and hardware contracts of $128,864,000 and $119,641,000, respectively. Such unbilled receivables arise from the consistent application of the Company's revenue recognition policies. 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 governmental 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, 1998 and 1997, the allowance for doubtful accounts was $13,369,000 and $10,828,000, respectively. The Company has provided long-term financing arrangements for services, 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 interest rates, which may be stated or imputed, ranging from 5% to 12%. The long-term portion of these financing arrangements, which approximate fair value, was $76,450,000 and $53,401,000 at December 31, 1998 and 1997, respectively. Interest income earned on long-term financing arrangements was $8,103,000, $2,789,000, and $2,670,000 in 1998, 1997, and 1996, 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 $10,132,000 at December 31, 1998 and $7,250,000 at December 31, 1997, representing the cost of computer equipment, which will be expensed when the related hardware revenues are earned. 24 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Property and Equipment, net - 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 depreciated using a 45-year life. The major classes of property and equipment at December 31, 1998 and 1997 were as follows: - ------------------------------------------------------------------------------ (Amounts in thousands) 1998 1997 - ------------------------------------------------------------------------------ Land and land improvements................. $ 11,616 $ 11,615 Buildings, including construction in progress............................ 92,193 64,559 Equipment.................................. 212,481 188,563 ----------------------- 316,290 264,737 Less: accumulated depreciation and amortization....................... 178,769 158,432 ----------------------- $137,521 $106,305 ======================= - ------------------------------------------------------------------------------ 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, which were primarily for salaries of personnel and computer costs, were $80,141,000 in 1998, $65,919,000 in 1997, and $56,402,000 in 1996. Computer Software - Included in computer software are capitalized costs of internally produced computer software intended to be licensed to customers and capitalized and deferred costs of third-party software arrangements for customer use and internal operations. Capitalization for internally produced software begins when a project reaches technological feasibility and ends when the software is available for general release to customers. Technological feasibility for computer software development projects is established when detailed program designs, which substantiate that the software product can be produced to meet its design specifications, including applicable program functions, features and technical performance requirements, are completed. The Company amortizes computer software on a product-by-product basis using the greater of the amount computed by the straight-line method over the estimated useful life of the product, or the ratio of current revenues compared to total estimated revenues. Capitalized internally produced software costs, net of accumulated amortization, were $49,739,000 and $40,911,000 as of December 31, 1998 and 1997, respectively. Amortization related to capitalized internally produced software was $9,871,000 in 1998, $7,867,000 in 1997, and $7,993,000 in 1996. At December 31, 1998 and 1997, capitalized and deferred costs of third-party software arrangements, net of accumulated amortization, were $25,970,000 and $20,010,000, respectively. Accumulated amortization for computer software at December 31, 1998 and 1997 was $80,357,000 and $66,549,000, respectively. Businesses and Investments Acquired - On January 28, 1998, the Company acquired Data-Plan Software GmbH (Data-Plan), a provider of client/server clinical, financial, and administrative health information systems. Under the terms of the agreement, the Company issued 1,119,428 shares of common stock. This acquisition was treated as a pooling of interests. Separate operating results for Shared Medical Systems Corporation (SMS) and Data-Plan for 1997 and 1996 were as follows: - ------------------------------------------------------------------------------ (Amounts in thousands) 1997 1996 - ------------------------------------------------------------------------------ Revenues: SMS.................................... $896,235 $779,074 Data-Plan.............................. 25,106 27,876 ----------------------- $921,341 $806,950 ======================= Net income: SMS.................................... $60,422 $49,000 Data-Plan.............................. 680 (226) ----------------------- $61,102 $48,774 ======================= - ------------------------------------------------------------------------------ On July 16, 1998, the Company acquired Pyrenees Informatique, SA, a provider of healthcare information systems in France, for $10,812,000. This acquisition was accounted for as a purchase. On June 30, 1998, the Company acquired D.P. Informatica, Srl, a provider of information systems and services in Italy, for 130,081 shares of common stock. This acquisition was accounted for as a pooling of interests. Prior periods have not been restated due to immateriality. On May 29, 1998, the Company acquired JJO Enterprises, a provider of decision support applications, for 57,593 shares of common stock. This acquisition was accounted for as a pooling of interests. Prior periods have not been restated due to immateriality. On January 31, 1998, the Company increased its ownership interest in Delta Health Systems from 50% to 100% by purchasing the remaining equity from Delta Computer Systems, Inc. for $21,176,000. 25 Shared Medical Systems Corporation - ---------------------------------------------------------------------------- Notes to Consolidated Financial Statements December 31, 1998, 1997, and 1996 - ---------------------------------------------------------------------------- The following unaudited pro forma consolidated results of operations reflect the combined effect of the Company's purchase acquisitions described above as though each transaction had occurred on January 1, 1997. These results, however, are not necessarily indicative of the results of operations that would have occurred had the acquisitions been made on January 1, 1997, or future results of operations of the combined companies. - ----------------------------------------------------------------------------- (Amounts in thousands) 1998 1997 - ----------------------------------------------------------------------------- Revenues............................ $1,143,206 $966,937 ======================= Net income.......................... $70,184 $59,651 ======================= Net income per share: Basic........................... $2.66 $2.29 ======================= Diluted......................... $2.60 $2.24 ======================= - ----------------------------------------------------------------------------- On December 4, 1997, the Company acquired a 15% equity interest in Avio International Corporation (formerly Visteon Corporation), a provider of practice management systems to physician groups, for $10,280,000. On February 28, 1997, the Company completed a merger with American Healthware Systems, Inc. (AHS), a provider of financial information systems and outsourcing services. Under the terms of the merger, the Company issued 1,255,325 shares of common stock in exchange for all outstanding shares of AHS. This acquisition was treated as a pooling of interests. 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. The Company periodically assesses the recoverability of goodwill for potential impairment. Goodwill is amortized using the straight-line method over twenty years. Goodwill included in other assets, net of accumulated amortization, was $57,995,000 and $26,639,000 as of December 31, 1998 and 1997, respectively. Accrued Expenses - Included in accrued expenses are incentive compensation plan accruals of $21,065,000 at December 31, 1998 and $29,337,000 at December 31, 1997. Accruals for incentive compensation plan payments are primarily based on sales and revenues generated from the signing of new and renewal contracts, draws, and related settlements. Income Taxes - The Company uses the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are recorded based upon temporary differences in the recognition of revenues and expenses (principally accrued and deferred revenues, depreciation and amortization, and the cost of capitalized internally produced computer 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. The Company periodically hedges these foreign currency transactions in order to minimize exposure to potential fluctuations. There were no material gains or losses arising from foreign currency transactions during 1998, 1997, and 1996. 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, 1998 and 1997, the carrying amount of cash and short-term investments approximates fair value. The Company paid income taxes, net of refunds, of $33,635,000 in 1998, $19,169,000 in 1997, and $18,223,000 in 1996; and interest of $8,725,000 in 1998, $4,385,000 in 1997, and $3,250,000 in 1996. Capital lease obligations of $1,439,000 and $5,014,000 were added by the Company in 1998 and 1997, respectively. 26 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 2. NET INCOME PER SHARE: - ------------------------------------------------------------------------------ For each of the three years in the period ended December 31, 1998, the reconciliation of basic and diluted net income per share was as follows: - ------------------------------------------------------------------------------ (Amounts in thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------ Net income............................. $70,803 $61,102 $48,774 =========================== Average shares outstanding: Basic.............................. 26,391 26,063 25,850 Dilutive Securities: Stock Options...................... 652 545 673 --------------------------- Average shares outstanding: Diluted............................ 27,043 26,608 26,523 =========================== Net income per share - basic........... $2.68 $2.34 $1.89 =========================== Net income per share - diluted......... $2.62 $2.30 $1.84 =========================== - ------------------------------------------------------------------------------ 3. INCOME TAXES: The provision for income taxes consisted of: - ------------------------------------------------------------------------------ (Amounts in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Federal: Current................................ $34,813 $18,259 $20,492 Current deferred....................... 1,713 11,302 3,111 Noncurrent deferred.................... 2,610 3,692 2,425 --------------------------- 39,136 33,253 26,028 --------------------------- State and foreign: Current................................ 3,777 2,098 2,587 Current deferred....................... 193 1,283 362 Noncurrent deferred.................... 290 815 345 --------------------------- 4,260 4,196 3,294 --------------------------- Provision for income taxes................ $43,396 $37,449 $29,322 =========================== - ------------------------------------------------------------------------------ The provision for income taxes resulted in effective tax rates for the years ended December 31, 1998, 1997, and 1996, which differ from the statutory federal income tax rate as follows: - ------------------------------------------------------------------------------ Percentage of Income ----------------------- 1998 1997 1996 - ------------------------------------------------------------------------------ Statutory federal income tax rate................ 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit.................... 2.6 2.3 2.3 Other............................................ 0.4 0.7 0.2 ----------------------- 38.0% 38.0% 37.5% ======================= - ------------------------------------------------------------------------------- The significant components of the combined current and noncurrent net deferred tax liability for the years ended December 31, 1998 and 1997 were as follows: - ------------------------------------------------------------------------------ (Amounts in thousands) 1998 1997 - ------------------------------------------------------------------------------ Capitalized internally produced software........... $18,010 $14,693 Depreciation and amortization...................... 12,111 10,328 Accrued and deferred revenues, net................. 22,869 18,899 Other temporary differences........................ (5,730) 11,050 ------------------ $47,260 $54,970 ================== - ------------------------------------------------------------------------------ Other temporary differences in 1998 includes $12,900,000 of tax benefits for a step-up in the tax basis of Data-Plan Software GmbH's assets upon its acquisition by the Company. This tax benefit was credited to paid-in capital on the date of acquisition. At December 31, 1998, the Company had foreign net operating loss carryforwards of $11,800,000, of which $8,600,000 can be carried forward indefinitely while the remainder will expire over the next seven years. 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 US income and foreign withholding taxes on the unremitted earnings of its foreign subsidiaries, which the Company considers to be permanently invested. Cumulative unremitted foreign earnings were $14,143,000 at December 31, 1998. 4. EMPLOYEE BENEFIT PLAN: The Company has a Section 401(k) retirement 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 1998, 1997, and 1996 were $4,510,000, $3,760,000, and $3,327,000, respectively. 27 Shared Medical Systems Corporation - ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements December 31, 1998, 1997, and 1996 - ------------------------------------------------------------------------------- 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, 1998, 2,873,500 shares had been acquired, at a cumulative cost of $54,325,000. During 1998, 1997, and 1996 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 and non-employee directors under various non-qualified stock option plans. Stock options granted under these plans may have terms ranging up to 20 years and may be 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. All stock options granted under these plans have exercise prices equal to the fair market value of the Company's common stock on the date of grant. The Company accounts for stock options under the intrinsic value method, and accordingly, no compensation expense was recorded in 1998, 1997, and 1996. The following pro forma amounts show the effect as if the Company had accounted for its stock options using the fair value method. - ------------------------------------------------------------------------------ (Amounts in thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------ Net income: As reported.......................... $70,803 $61,102 $48,774 Pro forma............................ $65,760 $58,639 $47,889 Net income per share: As reported: Basic.............................. $2.68 $2.34 $1.89 Diluted............................ $2.62 $2.30 $1.84 Pro forma: Basic.............................. $2.49 $2.25 $1.85 Diluted............................ $2.43 $2.20 $1.81 - ------------------------------------------------------------------------------ Because the fair value method was not applied to stock options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of compensation cost to be disclosed in future years. The fair value of stock options granted was $18.02 per option, $13.85 per option, and $12.28 per option in 1998, 1997, and 1996, respectively. The fair value was estimated at the date of grant using the Black-Scholes stock option pricing model with the following average assumptions for 1998, 1997, and 1996, respectively: risk free interest rates of 5.0%, 6.1%, and 6.3%; dividend yields of 1.8%, 2.4%, and 2.6%; volatility factors of 33.6%, 33.3%, and 31.6%; and expected lives of five, four, and four years. 28 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- The following table summarizes the activity of the Company's stock option plans during the three-year period ended December 31, 1998: - ------------------------------------------------------------------------------- Stock Options -------------------------- Average Price Shares Per Share - ------------------------------------------------------------------------------- Outstanding - January 1, 1996................ 2,035,125 $22.88 Granted.................................. 484,000 $47.30 Exercised................................ (265,066) $14.86 Canceled................................. (75,480) $20.42 --------- Outstanding - December 31, 1996.............. 2,178,579 $29.35 Granted.................................. 615,300 $48.06 Exercised................................ (279,451) $18.11 Canceled................................. (178,763) $33.03 --------- Outstanding - December 31, 1997.............. 2,335,665 $35.39 Granted.................................. 1,121,350 $61.53 Exercised................................ (172,264) $23.74 Canceled................................. (494,250) $73.23 --------- Outstanding - December 31, 1998.............. 2,790,501 $39.91 ========= - ------------------------------------------------------------------------------- Exercisable stock options during the three-year period ended December 31, 1998, were as follows: - ------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------- Stock options................................. 780,913 547,213 448,721 Average option price per share................ $28.76 $21.71 $15.09 - ------------------------------------------------------------------------------- At December 31, 1998, exercise prices for stock options outstanding ranged from $12.50 to $74.50 per share and the average term to expiration was seven years. As of December 31, 1998 and 1997, a maximum of 2,049,192 and 900,080, respectively, of additional stock options were available for grant under the Company's stock option plans. The outstanding stock options expire on various dates through 2015. In November 1998, the Company offered certain employees, excluding its six highest executive officers, the opportunity to exchange options granted earlier in 1998 for options with an exercise price equal to the then current market price of the Company's common stock. The new options contained delayed vesting terms, and original grants in excess of 6,000 options were reduced by 20% of such excess. 467,525 options were cancelled and 457,825 new options were granted under this offer. The Company may also grant restricted shares of its common stock under some 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, 1998, there were 48,589 restricted shares outstanding. 7. LONG-TERM DEBT AND LINES OF CREDIT: In 1995 the Company entered into long-term borrowing agreements with a bank, which are repayable through 2002. These loans were used to partially finance acquisitions of businesses and for operations. Long-term debt consisted of the following at December 31, 1998 and 1997: - ------------------------------------------------------------------------------- (Amounts in thousands) 1998 1997 - ------------------------------------------------------------------------------- Payable in foreign currency: 7.87% British Pound Sterling note due through 2002................................ $ 7,939 $ 8,408 4.64% German Mark note due through 2002.................................... 2,204 2,432 Payable in US dollars: 6.75% note due through 2002..................... 1,892 2,286 --------------------- 12,035 13,126 Less current portion............................ 1,606 1,181 --------------------- $10,429 $11,945 ===================== - ------------------------------------------------------------------------------ Aggregate maturities of long-term debt are: 1999 - $1,606,000, 2000 - $1,812,000, 2001 - $2,057,000, and 2002 - $6,560,000. At December 31, 1998, the carrying amount of long-term debt approximates fair value. At December 31, 1998, the Company had lines of credit with banks totaling $267,916,000, generally based on LIBOR, of which $109,108,000 of these lines of credit were unused. 8. LONG-TERM LEASES AND 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 - ------------------------------------------------------------------------------ 1999............................................... $26,892 $2,206 2000............................................... 19,435 2,105 2001............................................... 8,586 1,515 2002............................................... 1,928 565 2003............................................... 249 197 --------------------- $57,090 6,588 ======= Less interest................................................... 800 ------ Present value of future capital lease obligations............................................ $5,788 ====== - ------------------------------------------------------------------------------ Rental expenses for the operating leases described above were $28,316,000 in 1998, $27,990,000 in 1997, and $30,217,000 in 1996. 29 Shared Medical Systems Corporation - ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements December 31, 1998, 1997, and 1996 - ------------------------------------------------------------------------------- The Company leases office space to support its North American and International operations. These leases expire at various dates through 2003 and require minimum aggregate annual rentals of: 1999 - $16,011,000, 2000 - $12,622,000, 2001 - $11,643,000, 2002 - $10,177,000, 2003 - $8,829,000. Rental expenses for these facilities amounted to $15,248,000 in 1998, $12,945,000 in 1997, and $11,354,000 in 1996. 9. BUSINESS SEGMENT INFORMATION: The Company has two geographic segments - North America and International. The Company manages its operations geographically due to differences in the way healthcare enterprises are organized and funded between these two segments. The following table summarizes certain financial information by geographic segment: - ------------------------------------------------------------------------------ (Amounts in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Revenues from customers: North America..................... $1,000,993 $802,712 $667,167 International..................... 134,400 118,629 139,783 ------------------------------------ Consolidated................... $1,135,393 $921,341 $806,950 ==================================== Interest expense: North America..................... $5,156 $1,252 $1,498 International..................... 3,652 2,735 2,157 ------------------------------------ Consolidated................... $8,808 $3,987 $3,655 ==================================== Depreciation and amortization: North America..................... $37,560 $34,207 $34,777 International..................... 8,123 5,242 4,612 ------------------------------------ Consolidated................... $45,683 $39,449 $39,389 ==================================== Income before income taxes: North America..................... $129,803 $106,864 $74,272 International..................... (15,604) (8,313) 3,824 ------------------------------------ Consolidated................... $114,199 $98,551 $78,096 ==================================== Total assets: North America..................... $663,165 $499,387 $405,494 International..................... 145,283 114,589 117,098 ------------------------------------ Consolidated................... $808,448 $613,976 $522,592 ==================================== - ------------------------------------------------------------------------------ The Company's revenues are primarily derived from software and related services, professional services, and the sale of hardware. For the three years ended December 31, 1998, 1997, and 1996, revenues derived from software and related services were $595,748,000, $534,597,000 and $484,148,000; professional services were $300,877,000, $222,485,000 and $194,057,000; and hardware sales were $189,181,000, $118,813,000 and $89,854,000, respectively. In 1998, 1997, and 1996, no single customer accounted for 10% or more of consolidated revenues. 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): The following table summarizes quarterly financial data for 1998 and 1997: - ------------------------------------------------------------------------------- (Amounts in thousands, except per share amounts) Income Net Before Income Income Net Per Share Quarter Revenues Taxes Income Diluted - ------------------------------------------------------------------------------- 1997: First......................... $217,344 $22,494 $13,945 $.53 Second........................ 217,367 22,864 14,177 .53 Third......................... 229,847 24,037 14,902 .56 Fourth........................ 256,783 29,156 18,078 .67 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1998: First......................... $255,466 $28,743 $17,821 $.66 Second........................ 256,992 29,203 18,101 .67 Third......................... 283,633 26,136 16,205 .60 Fourth........................ 339,302 30,117 18,676 .69 - ------------------------------------------------------------------------------- 30 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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, 1998 and 1997, and the related consolidated statements of income, stockholders' investment and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shared Medical Systems Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Philadelphia, PA Arthur Andersen LLP February 8, 1999 - ------------------------------------------------------------------------------- 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 1995. Raymond K. Denworth, Jr., Director Mr. Denworth has been a Director since 1976. He is Of Counsel to Drinker Biddle & Reath LLP, 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 Honorary Chairman of Automatic Data Processing, Inc., an information processing services company. Jeffrey S. Rubin, Director Mr. Rubin has been a Director since 1993. He is a partner of Boles Knop and Company LLC, an investment banking company. Marvin S. Cadwell, Director, President and Chief Executive Officer Mr. Cadwell has been a Director since 1995. He has served as President and Chief Executive Officer since 1995. Mr. Cadwell previously served in a variety of executive positions since joining the Company in 1975. Gail R. Wilensky, Ph.D., Director Dr. Wilensky has been a Director since 1996. She is a Senior Fellow at Project HOPE, an international health education foundation. Executive Officers R. James Macaleer, Chairman of the Board Marvin S. Cadwell, President and Chief Executive Officer James C. Kelly, Secretary V. Brewster Jones, Senior Vice President Terrence W. Kyle, Senior Vice President, Treasurer, and Assistant Secretary Francis W. Lavelle, Senior Vice President David F. Perri, Senior Vice President Guillermo N. Ramas, Sr., Senior Vice President and President of SMS International Michael B. Costello, Vice President, Administration and Corporate Communications Edward J. Grady, Vice President, Controller, and Assistant Treasurer Bonnie L. Shuman, Vice President, General Counsel, and Assistant Secretary 31 Shared Medical Systems Corporation - ------------------------------------------------------------------------------- SMS Office Locations - ------------------------------------------------------------------------------- Corporate Headquarters SMS 51 Valley Stream Parkway Malvern, PA 19355 610-219-6300 www.smed.com International Administration SMS International Key House Sarum Hill Basingstoke, Hampshire RG21 8SR, England 011-44-1256-467556 SMS Corp y Cia SRC Edificio Lariza Avenida de los Encuartes, 21 28760 Tres Cantos Madrid, Spain 011-34-9180-77500 Primary US Offices Altoona, PA Nashville, TN 814-944-1651 615-902-9292 Atlanta, GA New Orleans, LA 770-993-2490 504-835-3894 Boston, MA New York, NY 781-224-0817 212-563-2380 Brooklyn, NY Oakland, CA 718-435-6300 510-444-0171 Charlotte, NC Philadelphia, PA 704-362-4802 610-640-4490 Chicago, IL Phoenix, AZ 847-806-0666 602-248-0328 Cleveland, OH Pittsburgh, PA 216-524-0313 412-921-6400 Columbus, OH Rochester, NY 614-885-0198 716-872-6450 Dallas, TX Salt Lake City, UT 972-407-6047 800-243-8483 Detroit, MI San Francisco, CA 248-449-2500 925-846-9490 Edison, NJ San Juan, PR 732-906-8900 787-756-6700 Ft. Lauderdale, FL Santa Barbara, CA 954-771-4880 805-964-5561 Herndon, VA Seattle, WA 703-713-3490 425-827-4455 Indianapolis, IN St. Louis, MO 317-464-5148 314-542-0100 Kansas City, KS Tulsa, OK 913-384-4811 918-524-5400 Los Angeles, CA Wilmington, DE 562-596-4554 302-478-3242 Primary International Offices Belgium United Kingdom Zaventem Basingstoke 011-32-2725-0407 011-44-1256-357100 Czech Republic Manchester Brno 011-44-1617-739211 011-42-0542-221290 France Montpellier 011-33-4670-41143 Paris 011-33-1534-66767 Germany Berlin 011-49-3066-79110 Eschborn 011-49-0619-69240 St. Wolfgang 011-49-0808-5170 Hungary Budapest 011-36-1251-14540 Ireland Dublin 011-35-3180-60800 Italy Rome 011-39-0643-93350 Netherlands Nieuwegein 011-31-3060-52852 New Zealand Wellington 011-64-4471-1793 Spain Barcelona 011-34-9320-16811 32 Company Profile Shared Medical Systems (SMS) provides superior information solutions for the worldwide health industry. Our more than 5,000 customers include hospitals, physician offices, clinics, and major health provider networks and organizations in 20 countries and territories in North America, Europe, and Asia Pacific. SMS is focused first on service - that is, on understanding, anticipating, and responding to our customers' continuously changing needs in the highly dynamic environments of healthcare and technology. Through the appropriate combination of applications, technology, and services, SMS provides solutions that best meet our customers' performance objectives. We provide superior service through our people - more than 7,000 dedicated and skilled professionals who are committed to a common vision of improving health worldwide. Our people are located in over 60 offices around the globe, enabling them to service our customers when and where needed. With our combination of unparalleled service, dedicated professionals, and comprehensive solutions, SMS is best positioned to address the information needs of health providers, whether those needs are in the hospital, business office, clinic, physician's office, emergency room, skilled nursing facility, CEO's office, or at home. Annual Stockholders Meeting The Annual SMS Stockholders Meeting will be held on Thursday, May 13, 1999, 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 New York Stock Exchange under the symbol SMS. Transfer Agent ChaseMellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 800-851-9677 www.chasemellon.com Counsel Drinker Biddle & Reath LLP Philadelphia, PA Independent Public Accountants Arthur Andersen LLP Philadelphia, PA SMS Investor Relations Director Julie McDowell 610-219-6528 MEMBER AMERICAN BUSINESS CONFERENCE SMS is an Equal Opportunity/ Affirmative Action Employer. HealthAnswers is a registered trademark of Healthway Communications International, Inc., used under license. [RECYCLE LOGO] This annual report is printed on recycled paper. Design by Warkulwiz Design Associates. Original photography by H. Mark Weidman. Printing by Tursack Printing. [SMS LOGO APPEARS HERE] Shared Medical Systems Corporation 51 Valley Stream Parkway Malvern, PA 19355 610-219-6300 www.smed.com EX-21 4 SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT Exhibit (21) Significant Subsidiaries of the Registrant ------------------------------------------ SMS Holdings GmbH (a German corporation) EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit (23) ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Shared Medical Systems Corporation: As independent public accountants, we hereby consent to the incorporation of our report dated February 8, 1999 included (or incorporated by reference) in Shared Medical Systems Corporation's 10-K for the year ended December 31, 1998, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 2-83465, 2-85345, 2-85346, 2-96224, 2-96225, 33-18161, 33-25010, 33-34089, 33-34410, 33-37742, 33-47572, 33-61967, 333-73315) and S-3 (File Nos. 333-23683, 333-47071, 333-58011, and 333-64097). /s/ Arthur Andersen LLP Philadelphia, PA March 31, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 1000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 40,070 0 351,038 13,369 0 411,205 316,290 178,769 808,448 366,958 14,386 0 0 306 399,044 808,448 189,181 1,135,393 155,716 779,588 77,082 0 8,808 114,199 43,396 70,803 0 0 0 70,803 2.68 2.62
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