-----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, JRDd1OlNmqsSL7Bzk55tqFSibgDTbwim6+ff5kRuBtbwshoeyCppBJ6DwwsjXlb8 yNPVH5Vj4b08hYqdL/9VTw== 0001036050-99-002389.txt : 19991117 0001036050-99-002389.hdr.sgml : 19991117 ACCESSION NUMBER: 0001036050-99-002389 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 001-13303 FILM NUMBER: 99754029 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-Q 1 SHARED MEDICAL SYSTEMS CORPORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 1999 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 (I.R.S. Employer of incorporation or organization) Identification No.) 51 Valley Stream Parkway Malvern, Pennsylvania 19355 (Address of principal executive offices) (Zip Code) (610) 219-6300 (Registrant's telephone number, including area code) Not Applicable (Former name, former address, and former fiscal year, if changed since last report) 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 --- --- On October 29, 1999, there were 26,899,296 shares of Common Stock outstanding. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. SHARED MEDICAL SYSTEMS CORPORATION CONSOLIDATED BALANCE SHEET ---------------------------------- (Amounts in thousands)
September 30 December 31 1999 1998 ------------ ----------- (unaudited) ASSETS Current Assets: Cash and short-term investments.................... $ 65,558 $ 40,070 Accounts receivable, net........................... 361,286 337,669 Prepaid expenses and other current assets.......... 39,515 33,466 ------------ ----------- Total Current Assets............................. 466,359 411,205 Property and Equipment, net......................... 148,980 137,521 Computer Software, net.............................. 86,513 75,709 Other Assets........................................ 180,941 184,013 ------------ ----------- $882,793 $808,448 ============ =========== LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Notes payable...................................... $ 44,144 $158,808 Current portion of long-term debt and capital leases.................................... 1,876 3,437 Dividends payable.................................. 5,648 5,589 Accounts payable................................... 28,672 42,029 Accrued expenses................................... 73,249 86,499 Current deferred revenues.......................... 44,227 40,206 Accrued and current deferred income taxes.......... 32,606 30,390 ------------ ----------- Total Current Liabilities........................ 230,422 366,958 ------------ ----------- Deferred Revenues................................... 5,526 6,908 ------------ ----------- Long-Term Debt and Capital Leases................... 178,052 14,386 ------------ ----------- Deferred Income Taxes............................... 25,346 20,846 ------------ ----------- Commitments Stockholders' Investment: Preferred stock, par value $.10; authorized 1,000,000 shares; none issued......... - - Common stock, par value $.01; authorized 120,000,000 shares; 30,773,674 shares issued in 1999 and 30,635,512 in 1998...................... 308 306 Paid-in capital................................... 82,823 79,773 Retained earnings................................. 428,279 385,401 Common stock in treasury, at cost, 3,879,281 shares in 1999 and 4,029,773 in 1998............. (52,694) (55,497) Cumulative translation adjustment................. (15,269) (10,633) ------------ ----------- Total Stockholders' Investment................... 443,447 399,350 ------------ ----------- $882,793 $808,448 ============ ===========
The accompanying notes are an integral part of this statement. 2 SHARED MEDICAL SYSTEMS CORPORATION CONSOLIDATED STATEMENT OF INCOME ---------------------------------- (Amounts in thousands except for per share amounts)
Three Months Ended Nine Months Ended September 30 September 30 -------------------------- -------------------------- 1999 1998 1999 1998 -------------------------- -------------------------- (unaudited) (unaudited) Revenues: Service and system fees.................. $275,478 $241,485 $806,464 $675,881 Hardware sales........................... 29,878 42,148 90,400 120,210 -------- -------- -------- -------- 305,356 283,633 896,864 796,091 -------- -------- -------- -------- Cost and Expenses: Operating and development................ 128,651 119,514 377,498 326,900 Marketing and installation............... 93,389 81,723 282,322 224,106 General and administrative............... 19,779 20,572 58,497 57,213 Cost of hardware sales................... 24,828 33,200 73,565 97,778 Interest................................. 3,476 2,488 8,653 6,012 -------- -------- -------- -------- 270,123 257,497 800,535 712,009 -------- -------- -------- -------- Income Before Income Taxes................ 35,233 26,136 96,329 84,082 Provision for Income Taxes................ 13,387 9,931 36,605 31,955 -------- -------- -------- -------- Net Income................................ $ 21,846 $ 16,205 $ 59,724 $ 52,127 ======== ======== ======== ======== Net Income Per Common Share: Basic................................... $.82 $.61 $2.24 $1.98 ======== ======== ======== ======== Diluted................................. $.80 $.60 $2.20 $1.93 ======== ======== ======== ======== Number of shares used to compute per share amounts: Basic................................... 26,674 26,496 26,623 26,337 ======== ======== ======== ======== Diluted................................. 27,217 27,147 27,171 27,074 ======== ======== ======== ======== Dividends Declared Per Common Share......................... $.21 $.21 $.63 $.63 ======== ======== ======== ========
The accompanying notes are an integral part of this statement. 3 SHARED MEDICAL SYSTEMS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------ (Amounts in thousands)
Nine Months Ended September 30 -------------------- 1999 1998 --------- -------- (unaudited) Cash Flows from Operating Activities: Net income...................................... $ 59,724 $ 52,127 Adjustments to reconcile net income to cash flows from operating activities - Depreciation and amortization................ 36,294 32,901 Asset (increase) decrease - Accounts receivable........................ (23,617) (47,014) Prepaid expenses and other current assets.. (6,049) (4,570) Other assets............................... (182) (21,554) Liability increase (decrease) - Accounts payable and accrued expenses...... (26,607) (32,278) Accrued and current deferred income taxes.. 2,216 2,468 Deferred revenues.......................... 2,639 (5,345) Deferred income taxes...................... 4,500 3,000 Other........................................ (2,672) (4,331) --------- -------- Net cash provided by (used for) operating activities................................ 46,246 (24,596) --------- -------- Cash Flows from Investing Activities: Property and equipment additions................ (34,799) (34,214) Computer software additions..................... (21,482) (16,378) Equipment dispositions.......................... 53 417 Businesses acquired............................. - (35,913) --------- -------- Net cash used for investing activities..... (56,228) (86,088) --------- -------- Cash Flows from Financing Activities: Dividends paid.................................. (16,787) (16,358) Exercise of stock options....................... 5,971 6,889 (Decrease) increase in notes payable............ (114,664) 127,897 Proceeds from long-term debt.................... 175,000 - Payments of long-term debt and capital lease obligations.............................. (13,934) (2,017) Other........................................... (116) 67 --------- -------- Net cash provided by financing activities.. 35,470 116,478 --------- -------- Net Increase in Cash and Short-Term Investments.. 25,488 5,794 Cash and Short-Term Investments, Beginning of Period....................................... 40,070 30,692 --------- -------- Cash and Short-Term Investments, End of Period... $ 65,558 $ 36,486 ========= ========
The accompanying notes are an integral part of this statement. 4 SHARED MEDICAL SYSTEMS CORPORATION ---------------------------------- Notes to Consolidated Financial Statements - September 30, 1999 (unaudited): 1. Basis of Presentation: The information furnished in this Form 10-Q reflects all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the financial statements contained herein. 2. Accounts Receivable: At September 30, 1999 and December 31, 1998, the Company's trade accounts receivable were reduced by allowances for doubtful accounts of $13,307,000 and $13,369,000, respectively. 3. Property and Equipment: The major classes of property and equipment at September 30, 1999 and December 31, 1998 were as follows (amounts in thousands):
September 30 December 31 1999 1998 ------------ ----------- (unaudited) Land and land improvements.............. $ 11,563 $ 11,616 Buildings............................... 102,830 92,193 Equipment............................... 223,069 212,481 ------------ ----------- 337,462 316,290 Less accumulated depreciation and amortization.................... 188,482 178,769 ------------ ----------- $148,980 $137,521 ============ ===========
4. Computer Software: The accumulated amortization for capitalized internally produced computer software and purchased software at September 30, 1999 and December 31, 1998 was $92,496,000 and $80,357,000, respectively. 5. Long-Term Debt and Lines of Credit: On April 29, 1999, the Company completed a private placement of $175,000,000 of long-term unsecured notes to reduce current notes payable, fund the cost to complete a corporate office building addition, and supplement working capital requirements. These notes consisted of the following as of September 30, 1999 (amounts in thousands):
September 30 1999 ------------ (unaudited) 6.58% Series A Senior Notes Due 2006.............................. $ 15,000 6.58% Series B Senior Notes Due in installments through 2009...... 74,000 6.75% Series C Senior Notes Due 2009.............................. 61,000 6.75% Series D Senior Notes Due in installments through 2011...... 25,000 ------------ $175,000 ============
These senior notes contain limitations on the Company's ability to incur additional indebtedness and liens, to merge or consolidate with any other company, and to dispose of assets or ownership in a subsidiary. Covenants also require the Company to maintain a fixed charge coverage ratio, as defined, of not less than 1.75 to 1.00 and a minimum level of consolidated net worth. 5 SHARED MEDICAL SYSTEMS CORPORATION ---------------------------------- At September 30, 1999, the Company had $119,178,000 of lines of credit with banks, which are primarily based on LIBOR, of which $75,034,000 of these lines were unused. 6. Comprehensive Income: The Company's comprehensive income for the quarter and nine months ended September 30 was (amounts in thousands):
Quarter Ended Nine Months Ended September 30 September 30 ------------------- -------------------- 1999 1998 1999 1998 ------- ------- ------- ------- (unaudited) (unaudited) Net income................................... $21,846 $16,205 $59,724 $52,127 Other comprehensive income: Foreign translation adjustments................................ (876) (2,188) (4,636) (4,247) ------- ------- ------- ------- Comprehensive income......................... $20,970 $14,017 $55,088 $47,880 ======= ======= ======= =======
7. Business Segment Information: Business segment information for the Company for the quarter and nine months ended September 30 was as follows (amounts in thousands):
Quarter Ended Nine Months Ended September 30 September 30 ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- (unaudited) (unaudited) Revenues: North America............................... $265,453 $253,508 $777,862 $705,233 International............................... 39,903 30,125 119,002 90,858 -------- -------- -------- -------- $305,356 $283,633 $896,864 $796,091 ======== ======== ======== ======== Pretax income/(loss): North America............................... $36,746 $33,864 $101,123 $ 95,764 International............................... (1,513) (7,728) (4,794) (11,682) -------- -------- -------- -------- $35,233 $26,136 $ 96,329 $ 84,082 ======== ======== ======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company's financial condition and results of operations remained strong through September 30, 1999. However, at the end of the third quarter, the Company began to experience the first significant impact of Year 2000 as some of its customers began to lockdown their information technology environments for the transition to Year 2000. The Company now expects that the health industry's accelerating Year 2000 related focus will cause reductions in spending for new systems and services in the fourth quarter of 1999 and in the first quarter of 2000. Accordingly, the Company expects that it will experience Year 2000 related postponements in sales of software and related services, professional services, and hardware. 6 SHARED MEDICAL SYSTEMS CORPORATION ---------------------------------- Material Changes in Financial Condition - --------------------------------------- The Company's financial condition remained strong through September 30, 1999. The most significant requirements for funds now anticipated are for purchases of equipment and payment of cash dividends. The Company plans to fund its anticipated expenditures primarily from operations, supplemented from time to time by short-term bank borrowings. At September 30, 1999, the Company had $119.1 million of lines of credit with banks, which are primarily based on LIBOR, of which approximately $75.0 million of these lines were unused. Material Changes in Results of Operations - ----------------------------------------- Three Months Ended September 30, 1999 Compared to the Three Months Ended September 30, 1998. Revenues -------- Service and system fees revenues were $275.5 million, an increase of 14.1% compared to the third quarter of 1998. North American revenues increased primarily due to higher levels of consulting and facilities management fees, and growth in support and service revenues from new and existing customer installations. International revenues increased primarily due to higher levels of professional services and software fees, which were attributable to sales and installations to new and existing customers. Hardware revenues decreased to $29.9 million for the third quarter of 1999 from $42.1 million in the third quarter of 1998, primarily due to changes in the timing and product mix of systems installed. Contributing to this decrease were lower levels of mainframe system upgrades to customers that process the Company's INVISION (R) product at their sites. Cost and Expenses ----------------- Operating and development expenses decreased to 46.7% of service and system fees revenues in the third quarter of 1999 from 49.5% for the third quarter of 1998. This change was principally due to a lower rate of growth, as compared to the growth in service and system fees revenues, for personnel and related costs, and computer hardware and associated costs at the Company's Information Services Center, partially offset by a higher rate of growth for third-party software costs. Marketing and installation expenses increased to 33.9% of service and system fees revenues in the third quarter of 1999 from 33.8% in the third quarter of 1998, 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 and related costs. General and administrative expenses, as a percentage of service and systems fees revenues, decreased to 7.2% in the third quarter of 1999 from 8.5% in the third quarter of 1998, primarily due to the Company's continuing efforts to leverage administrative costs over an increasing revenue base and a lower rate of growth for personnel and related costs. 7 SHARED MEDICAL SYSTEMS CORPORATION ---------------------------------- Cost of hardware sales increased to 83.1% of hardware sales revenues in the third quarter of 1999 from 78.8% in the third quarter of 1998. This change was primarily due to the different product mixes of systems installed in each quarter. Interest expense was $3.5 million in the quarter ended September 30, 1999 compared to $2.5 million in the same period in 1998. This change was generally attributable to a higher level of average outstanding borrowings during the current period. Provision for Income Taxes -------------------------- Income taxes increased $3.5 million in the quarter ended September 30, 1999 when compared to the same period in 1998. This change was primarily due to an increase of $9.1 million in income before income taxes. The Company's effective tax rate for federal, state, and foreign income taxes was 38.0% in the third quarter of 1999 and 1998. Net Income ---------- Net income was $21.8 million in the quarter ended September 30, 1999 compared to $16.2 million in the quarter ended September 30, 1998 for the reasons discussed above. Nine Months Ended September 30, 1999 Compared to the Nine Months Ended September 30, 1998. Revenues -------- Service and system fees revenues were $806.5 million, an increase of 19.3% compared to the same period in 1998. North American revenues increased primarily due to higher levels of consulting, system installation and facilities management fees, and growth in support and service revenues from new and existing customer installations. International revenues increased primarily due to the effect of companies acquired in 1998, higher levels of professional services, and software and related fees, which were attributable to sales and installations to new and existing customers. Hardware revenues decreased to $90.4 million for the nine months ended September 30, 1999 from $120.2 million for the same period in 1998, primarily due to changes in the timing and product mix of systems installed. Contributing to this decrease were lower levels of mainframe system upgrades to customers that process the Company's INVISION (R) product at their sites. Cost and Expenses ----------------- Operating and development expenses decreased to 46.8% of service and system fees revenues for the nine months ended September 30, 1999 from 48.4% in the comparable period of 1998. This change was principally due to a lower rate of growth, as compared to the growth in service and system fees revenues, for personnel and related costs, and computer hardware and associated costs at the Company's Information Services Center, partially offset by a higher rate of growth for third-party software costs. 8 SHARED MEDICAL SYSTEMS CORPORATION ---------------------------------- Marketing and installation expenses increased to 35.0% of service and system fees revenues for the nine months ended September 30, 1999 from 33.2% in the comparable period of 1998, 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 and related costs. General and administrative expenses, as a percentage of service and system fees revenues, decreased to 7.3% for the nine months ended September 30, 1999 from 8.5% in the comparable period of 1998, primarily 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. Cost of hardware sales increased to 81.4% of hardware sales revenues for the nine months ended September 30, 1999 from 81.3% in the comparable period of 1998. This change was primarily due to the different product mixes of systems installed between periods. Interest expense was $8.7 million for the nine months ended September 30, 1999 compared to $6.0 million in the same period in 1998. This change was generally attributable to a higher level of average outstanding borrowings during the current period. Provision for Income Taxes -------------------------- Income taxes increased $4.7 million in the first three quarters of 1999 when compared to the same period in 1998. This change was primarily due to an increase of $12.2 million in income before income taxes. The Company's effective tax rate for federal, state, and foreign income taxes was 38.0% for the nine months ended September 30, 1999 and 1998. Net Income ---------- Net income was $59.7 million in the first three quarters of 1999 compared to $52.1 million in the first three quarters of 1998 for the reasons discussed above. Year 2000 - --------- Computer systems that 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 substantially all of its applications. 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. 9 SHARED MEDICAL SYSTEMS CORPORATION ---------------------------------- The Company believes that approximately 95% of the required upgrades of Company products in the North American customer base, and 85% of the required upgrades of Company products in the International customer base, have been completed. The ability of the Company to assist the remaining 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. Customer efforts to update their current systems, and potential constraints on available resources, could cause delays in the installation of the Company's products. The Company is continually assessing and informing customers of the Year 2000 compliance status of third-party products that customers use in connection with their 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. Changes in third-party vendor Year 2000 requirements or assessments may cause delays in customers' attainment of Year 2000 compliance. 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 most of its critical internal systems are now Year 2000 compliant. The Company is currently pursuing the remediation or replacement of its remaining non-compliant internal systems. 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. 10 SHARED MEDICAL SYSTEMS CORPORATION ---------------------------------- The Company continues to develop contingency plans to deal with issues that may arise later in 1999 and in 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. The Company expects that this contingency planning process will continue through the remainder of 1999. 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 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. As discussed above, at the end of the third quarter, the Company began to experience the first significant impact of Year 2000 as some of its customers began to lockdown their information technology environments for the transition to Year 2000. The Company now expects that the health industry's accelerating Year 2000 related focus will cause reductions in spending for new systems and services in the fourth quarter of 1999 and in the first quarter of 2000. Accordingly, the Company expects that it will experience Year 2000 related postponements in sales of software and related services, professional services, and hardware. Euro Conversion - --------------- On January 1, 2002, the participating countries of the European Union (EU) 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 Company's European businesses have historically been conducted directly in each European country in which the Company has customers and there are currently no significant cross border transactions among the Company's various European operating entities. Accordingly, the Company does not anticipate that the euro conversion will have a material impact on its business operations. The Company continues to assess the need to modify or replace 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 Form 10-Q contains forward-looking statements. Such statements 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. 11 SHARED MEDICAL SYSTEMS CORPORATION ---------------------------------- PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are included in this report: No. Description --- ---------------------------------------------------------------- (10) Material Contracts - Deferred compensaton agreement: R. James Macaleer Form of performance bonus plans - 1999: V. Brewster Jones Terrence W. Kyle Francis W. Lavelle David F. Perri Guillermo N. Ramas, Sr. (27) Financial Data Schedule For the Nine Months Ended September 30, 1999 (b) No reports on Form 8-K were filed during the three-month period ended September 30, 1999. 12 SHARED MEDICAL SYSTEMS CORPORATION ---------------------------------- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SHARED MEDICAL SYSTEMS CORPORATION ---------------------------------- Registrant November 15, 1999 /S/Terrence W. Kyle - ----------------- ---------------------------------- Date Terrence W. Kyle Senior Vice President, Treasurer, and Assistant Secretary, Principal Financial Officer and Duly Authorized Officer 13 SHARED MEDICAL SYSTEMS CORPORATION ---------------------------------- Exhibit Index No. Description --- ----------------------------------------------- (10) Material Contracts - Deferred compensation agreement: R. James Macaleer Form of performance bonus plans - 1999: V. Brewster Jones Terrence W. Kyle Francis W. Lavelle David F. Perri Guillermo N. Ramas, Sr. (27) Financial Data Schedule For the Nine Months Ended September 30, 1999 14 EX-10 2 DEFERRED COMPENSATION AGREEMENT Exhibit (10) AMENDED AND RESTATED DEFERRED COMPENSATION AGREEMENT AMENDED AND RESTATED DEFERRED COMPENSATION AGREEMENT made as of the 13th day of May, 1999 by and between SHARED MEDICAL SYSTEMS CORPORATION, a Delaware corporation ("SMS") and R. James Macaleer ("Employee"). WHEREAS, since the founding of SMS Employee has rendered valuable services to SMS; WHEREAS, in further consideration for such services the parties hereto entered into a Deferred Compensation Agreement dated January 1, 1977 (the "1977 Agreement") to provide for certain deferred benefits for Employee pursuant to an arrangement that also provides certain advantages to SMS; WHEREAS, the Management and Compensation Committee of the Board of Directors of SMS has approved a new deferred compensation agreement for Employee to replace the 1977 Agreement and directed the appropriate officers of SMS to prepare such new agreement; WHEREAS, this Amended and Restated Deferred Compensation Agreement has been prepared to amend and restate the 1977 Agreement in its entirety in accordance with the directions of the Management and Compensation Committee; NOW, THEREFORE, in consideration of Employee's past services and of the mutual promises herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. SMS agrees to pay to Employee, subsequent to the termination of Employee's employment with SMS for any reason (other than for conduct deemed by the Board of Directors of SMS to have been fraudulent against SMS) a monthly payment of $4,500, payable on the first day of each month, for a period of 240 months (resulting in a total payment of $1,080,000). Should Employee die while he is receiving such payments, and before the last payment to him by SMS hereunder, the payments shall be continued in their entirety to Employee's beneficiary, as designated as Exhibit A (the "Beneficiary"). (Employee shall have the right from time to time to change the Beneficiary by appropriate written notice to SMS). Employee shall give the SMS Board of Directors (the "Board") at least three months' prior notice in writing of the termination of his employment, through normal retirement or otherwise. Should Employee give SMS less than three months' prior notice, Employee shall forfeit to SMS an amount, from the first payments to be made hereunder, equal to one month's payment times the difference between three months and the number of full months' notice actually given. The first month's payment under this paragraph shall be made on the first day of the month following the month in which employment terminated; provided however that the first payment shall not be payable prior to the expiration of a three-month period following the date of Employee's notice of the termination of his employment. 2. Should Employee die (while employed by SMS or otherwise), prior to the beginning of payments under paragraph 1, above, to which he would otherwise have been entitled, then such monthly payments shall be made to Employee's Beneficiary, starting on the first day of the month following the month in which the Employee's death occurred. 3. Employee agrees that he will not enter into competition with SMS at any time from the date hereof through a period of two years after the completion of the payments listed in Exhibit A. Employee shall be deemed to be in competition if he directly or indirectly, whether as consultant, agent, officer, director, holder of at least 1% of a class of equity security, employee or otherwise enters into an association with another business enterprise which then is one of the competitors of SMS respecting one or more of SMS' business activities. The parties agree that one of the essential considerations for the deferred compensation provided Employee hereunder is to protect and preserve the good will of SMS and its respective enterprises, and that said good will would be substantially diminished in value if Employee were to enter into competition with SMS while this Agreement is in effect or for two years thereafter. As SMS' business activities are national in scope, the prohibition against competition relates to any competitor wherever it may be located within the United States. In the event Employee is deemed to be in competition contrary to the provisions of this paragraph, thereupon he shall forfeit all rights to any unmade payments of deferred compensation under this Agreement. 4. The benefits payable under this Agreement shall be independent of, and in addition to, any other agreement relating to Employee's employment that may exist from time to time between the parties hereto, or any other compensation payable by SMS to Employee, whether salary, bonus or otherwise. This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof, except as expressly stated, restrict the right of SMS to discharge Employee or restrict the right of Employee to terminate his employment. 5. This Agreement shall be binding upon SMS, it successors and assigns. Employee may not assign this Agreement or any of his rights hereunder, except that he may designate a beneficiary to receive payments in the event of his death as provided herein. 6. SMS in its discretion may apply for and procure as owner and for its benefit insurance on the life of Employee, in such amounts and in such forms as SMS may choose. Employee shall have no interest whatsoever in any such policy or policies, but at the request of SMS he shall submit to medical examinations and supply such information and executes such documents as may be required by the insurance company or companies to whom SMS has applied for insurance. The rights of Employee, or his beneficiary, or estate, to benefits under this Agreement shall be solely those of an unsecured creditor of SMS. Any insurance policy or other assets acquired or held by SMS in connection with the liabilities assumed by it pursuant to this Agreement shall not be deemed to be held under any trust for the benefit of Employee, a beneficiary of his estate, or to be security for the performance of the obligations of SMS. This Agreement may be cancelled by SMS if insurance procured by SMS under this paragraph is cancelled by the insurance company because of misrepresentation by Employee. 7. This Agreement shall be governed by the laws of Pennsylvania. /S/ Judith A. Petry /S/ R. James Macaleer - ---------------------------------- -------------------------------------- WITNESS EMPLOYEE SHARED MEDICAL SYSTEMS CORPORATION By:/S/ Terrence W. Kyle ----------------------------------- Name: Title: EX-10.1 3 FORM OF PERFORMANCE BONUS PLANS Exhibit 10 [GRAPHIC OMITTED] 1999 Leadership Team INCENTIVE COMPENSATION PLAN Plan Year: January 1, 1999 - December 31, 1999 ----------------------------------- Approved by: ________________________ CEO, Marv Cadwell Accepted by: ________________________ I. COMPENSATION GUIDELINES ----------------------- The compensation paid to Participants under this Plan, if any, is only one portion of a Participant's overall compensation. This plan and the associated targets/quotas may be adjusted, changed, or terminated at any time, to compensate for changes in sales, support or overall business conditions as well as any other revisions management deems appropriate. A Participant's earnings under this plan will be determined based on both the Participant's individual performance and SMS' final 1999 consolidated Earnings per Share (EPS) performance. The Participant's individual performance is measured using Points accumulated from achievement against the Plan's metrics. The value of each Point will be a function of SMS' final 1999 EPS, as itemized on the EPS Points Table on Attachment C. Any portion of this Incentive Compensation plan is subject to adjustment by the Chief Executive Officer (CEO), based on the non-fulfillment of job duties by the Participant. Any such adjustment will be incorporated in the 1999 settlement statements presented to the Participant. Each Participant will receive an Attachment A and B that will outline and summarize all criteria for quotas, rates, bonuses, etc. specific to the Participant's job title and responsibilities. All adjustments to quotas must be registered with Sales Analysis and ICP Support by the appropriate managers. II. ICP COMPONENTS -------------- A. PERFORMANCE INDICATORS ---------------------- Incentive compensation paid under this plan will be based on the achievement of the targets for three (3) Performance Indicators, namely Sales, Revenue/Pretax Income Margin %, and Accounts Receivable Days. These indicators may apply to SMS' Consolidated and Domestic operations, and/or to the Participant's more customized Focus Area. The actual bonus payments related to these Performance Indicators will be determined using the tables on Attachment B (by first computing actual performance against each Performance Indicator target in order to determine the payout factor; then multiplying each payout factor by the relevant Bonus Potential amount specified ). B. GENERAL MANAGEMENT CHALLENGES ----------------------------- A bonus will be paid for performance against General Management challenges that are assigned by the Participant's immediate manager. Specific General Management Challenges are identified in Attachment A. Performance against these General Management Challenges, and the determination of the corresponding bonus payments, will be determined by the Participant's immediate manager. III. ICP PAYMENT POLICIES -------------------- A. VESTING ------- Except where specifically stated, this Plan does not provide for vesting of any Plan component prior to the end of the Plan Year. Further, no bonus will be paid under this Plan to a participant who terminates employment on, or before, the date on which payment under the Plan is made. B. TIMING OF BONUS PAYMENTS ------------------------ Incentive compensation earned under this Plan shall be paid by March 31, 2000. The Participant must be an active SMS employee on March 31, 2000 to be eligible for payment under this plan. C. DRAW POLICY ----------- There are no draws under this plan. D. MAXIMUM BONUS ------------- The maximum bonus under this plan for Consolidated Objectives is three (3) times the Bonus Potential for each Performance Indicator, two (2) times the Bonus Potential for Focus Area Objectives and 100% for the General Management Challenges Bonus. E. RESTRICTED STOCK ---------------- At the discretion of the CEO, a portion of the earned bonuses under this compensation plan may be paid to the participant in SMS restricted stock. IV. DEFINITIONS OF ICP TERMS ------------------------ A. SALES ----- The present value of new SMS solutions (including software, support, professional services, and hardware) , net of direct costs, sold by SMS organizations during 1999, as reported in the monthly Sales Report produced by Sales Analysis and ICP Support (labeled SOLUTIONS GROWTH SALES). This does not include the renewals, extensions, or conversions of existing revenue streams. To be included in the Sales Report, the contract must be signed and dated by both the customer and SMS and received by SMS by December 31, 1999. B. REVENUE ------- Net revenue (i.e. gross revenue less cost of hardware sales), as reported by Customer Accounting. These targets are subject to increases/decreases during the year, for any material changes to SMS' financial plan. C. PRETAX INCOME ------------- Revenue, as defined above, less direct expenses (including all bonus costs of this plan) and overhead expenses, as reported by Customer Accounting. These targets are subject to increases/decreases during the year, for any material changes to SMS' financial plan. D. PRETAX INCOME MARGIN % ---------------------- The result of dividing Pretax Income by Revenues, both as defined above. E. EARNINGS PER SHARE ------------------ The result of dividing Pretax Income by the number of shares outstanding. F. ACCOUNTS RECEIVABLE DAYS ------------------------ The 12 Month Average A/R Days, as determined by Accounting, using each month's A/R Days for all receivables (including billed, unbilled, and accrued receivables, less the relevant bad debt reserves). Each month's A/R Days are calculated using the month-end accounts receivable balance divided by the average monthly revenues for the three most recent months. Schedule to Exhibit (10) An SMS Senior Management Incentive Compensation Plan for the plan year ended December 31, 1999 in the form presented in the preceding pages was implemented for each of the following executive officers of the Company during the reporting period. Under each plan, 90% of the base bonus value is based upon performance against corporate and focus area (consisting of certain segments of business operations) sales, revenue, pre-tax income margin, and accounts receivable days. The relative weighting and combination of these performance factors vary for each individual, with an emphasis on the individual's particular area of business operations. The remaining 10% of the base bonus value is tied to subjective considerations of managerial performance against certain pre-defined goals. V. Brewster Jones Terrence W. Kyle Francis W. Lavelle David F. Perri Guillermo N. Ramas, Sr. EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 65,558 0 374,593 13,307 0 466,359 337,462 188,482 882,793 230,422 178,052 0 0 308 443,139 882,793 90,400 896,864 73,565 659,820 58,497 0 8,653 96,329 36,605 59,724 0 0 0 59,724 2.24 2.20
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