<PAGE>
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, 1997
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 31, 1997, there were 25,018,265 shares of Common Stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
SHARED MEDICAL SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEET
------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996*
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments................. $ 24,355 $ 40,286
Accounts receivable, net........................ 239,377 212,061
Prepaid expenses and other current assets....... 31,860 24,980
------------ -----------
Total Current Assets.......................... 295,592 277,327
Property and Equipment, net...................... 102,090 102,532
Computer Software, net........................... 57,555 51,331
Other Assets..................................... 95,909 76,288
------------ -----------
$551,146 $507,478
============ ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Notes payable................................... $ 40,146 $ 21,941
Current portion of long-term debt and
capital leases................................. 3,060 4,144
Dividends payable............................... 5,249 4,944
Accounts payable................................ 16,778 27,042
Accrued expenses................................ 59,305 56,323
Current deferred revenues....................... 33,039 42,422
Accrued and current deferred income taxes....... 27,043 14,862
------------ -----------
Total Current Liabilities..................... 184,620 171,678
------------ -----------
Deferred Revenues................................ 9,686 9,048
------------ -----------
Long-Term Debt and Capital Leases................ 16,550 15,361
------------ -----------
Deferred Income Taxes............................ 29,041 26,054
------------ -----------
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 in 1997 and 60,000,000 in
1996; 29,056,054 shares issued in 1997 and
28,835,333 in 1996............................ 291 288
Paid-in capital................................ 54,587 48,721
Retained earnings.............................. 323,810 295,915
Common stock in treasury, at cost, 4,061,800
shares in 1997 and 4,035,101 in 1996.......... (56,191) (55,782)
Cumulative translation adjustment.............. (11,248) (3,805)
------------ -----------
Total Stockholders' Investment................ 311,249 285,337
------------ -----------
$551,146 $507,478
============ ===========
</TABLE>
* Restated to reflect the acquisition of American Healthware Systems, Inc. in
February 1997, which was accounted for as a pooling of interests.
The accompanying notes are an integral part of this statement.
2
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
----------------------------------
(Amounts in thousands except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------- -----------------------------------
1997 1996* 1997 1996*
----------------------------------- -----------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Service and system fees.................. $198,153 $175,342 $567,505 $504,866
Hardware sales........................... 26,579 14,298 80,500 51,590
----------------------------------- -----------------------------------
224,732 189,640 648,005 556,456
----------------------------------- -----------------------------------
Cost and Expenses:
Operating and development................ 94,065 84,139 270,059 241,679
Marketing and installation............... 65,886 57,679 186,056 166,220
General and administrative............... 16,757 15,769 49,393 45,871
Cost of hardware sales................... 22,856 11,827 69,391 43,922
Interest................................. 994 956 2,776 2,667
----------------------------------- -----------------------------------
200,558 170,370 577,675 500,359
----------------------------------- -----------------------------------
Income Before Income Taxes................ 24,174 19,270 70,330 56,097
Provision for Income Taxes................ 9,187 7,196 26,726 21,026
----------------------------------- -----------------------------------
Net Income................................ $ 14,987 $ 12,074 $ 43,604 $ 35,071
=================================== ===================================
Net Income Per Common Share............... $.59 $.48 $1.72 $1.38
=================================== ===================================
Number of shares used to
compute per share amounts................ 25,475 25,392 25,395 25,399
=================================== ===================================
Dividends Declared
Per Common Share......................... $.21 $.21 $.63 $.63
=================================== ===================================
</TABLE>
* Restated to reflect the acquisition of American Healthware Systems, Inc. in
February 1997, which was accounted for as a pooling of interests.
The accompanying notes are an integral part of this statement.
3
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
----------------------
1997 1996*
-------- --------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income...................................... $ 43,604 $ 35,071
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization................ 28,183 28,486
Asset (increase) decrease -
Accounts receivable........................ (27,316) (22,674)
Prepaid expenses and other current assets.. (6,880) (1,454)
Other assets............................... (21,541) (3,847)
Liability increase (decrease) -
Accounts payable and accrued expenses...... (7,282) (15,279)
Accrued and current deferred income taxes.. 12,181 (1,088)
Deferred revenues.......................... (8,745) (1,806)
Deferred income taxes...................... 2,987 2,031
Other........................................ (4,421) (1,171)
-------- --------
Net cash provided by operating activities.. 10,770 18,269
-------- --------
Cash Flows from Investing Activities:
Property and equipment additions................ (16,856) (20,123)
Investment in computer software................. (14,300) (13,749)
Dispositions of equipment....................... 1,107 223
-------- --------
Net cash used for investing activities..... (30,049) (33,649)
-------- --------
Cash Flows from Financing Activities:
Dividends paid.................................. (15,404) (16,267)
Exercise of stock options....................... 5,869 7,896
Increase in notes payable....................... 18,205 22,799
Payments of long-term debt and capital
lease obligations.............................. (4,913) (3,256)
Change in treasury stock........................ (409) (413)
-------- --------
Net cash provided by financing activities.. 3,348 10,759
-------- --------
Net Decrease in Cash and Short-Term Investments.. (15,931) (4,621)
Cash and Short-Term Investments, Beginning
of Period....................................... 40,286 25,473
-------- --------
Cash and Short-Term Investments, End of Period... $ 24,355 $ 20,852
======== ========
</TABLE>
* Restated to reflect the acquisition of American Healthware Systems, Inc. in
February 1997, which was accounted for as a pooling of interests.
The accompanying notes are an integral part of this statement.
4
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Notes to Consolidated Financial Statements - September 30, 1997 (unaudited):
1. Basis of Presentation:
The information furnished in this Form 10-Q reflects all normal and
recurring adjustments which are, in the opinion of management, necessary for
a fair presentation of the financial statements contained herein.
Prior period financial statements have been restated to reflect the
Company's business combination with American Healthware Systems, Inc. (AHS),
which was completed on February 28, 1997 and accounted for as a pooling of
interests.
2. Business Combination:
On February 28, 1997, the Company completed a merger with AHS, a provider of
financial information systems and facilities management services to health
organizations in New York State. Under the terms of the merger agreement,
the Company issued 1,255,325 shares of the Company's common stock in
exchange for all outstanding shares of AHS. This transaction was accounted
for as a pooling of interests. AHS is currently operating as a wholly-owned
subsidiary of the Company.
Separate operating results for Shared Medical Systems Corporation (SMS) and
AHS for the quarter and nine months ended September 30, 1996 were as follows
(amounts in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1996 September 30, 1996
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
SMS........................ $186,857 $548,175
AHS........................ 2,783 8,281
------------------ ------------------
$189,640 $556,456
================== ==================
Net Income:
SMS........................ $ 11,543 $ 33,729
AHS........................ 531 1,342
------------------ ------------------
$ 12,074 $ 35,071
================== ==================
</TABLE>
3. Accounts Receivable:
At September 30, 1997 and December 31, 1996, the Company's trade accounts
receivable were reduced by allowances for doubtful accounts of $8,197,000
and $8,094,000, respectively.
4. Property and Equipment
The major classes of property and equipment at September 30, 1997 and
December 31, 1996 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ -----------
<S> <C> <C>
Land and land improvements............... $ 11,580 $ 11,630
Buildings................................ 62,951 61,993
Equipment................................ 181,340 181,786
------------ -----------
255,871 255,409
Less accumulated depreciation
and amortization..................... 153,781 152,877
------------ -----------
$102,090 $102,532
============ ===========
</TABLE>
5
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SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
5. Computer Software:
The accumulated amortization for capitalized internally produced
computer software and purchased software at September 30, 1997 and
December 31, 1996 was $63,576,000 and $55,016,000, respectively.
6. Net Income Per Common Share:
In February 1997, the Financial Accounting Standards Board issued Statement
128 (FAS 128), Earnings Per Share (EPS). This statement is effective for
both interim and annual financial statements for periods ending after
December 15, 1997. FAS 128 replaces primary and fully diluted EPS as
required by Accounting Principles Opinion No. 15 (APB 15) with basic and
diluted EPS, respectively. Under the terms of FAS 128 for the applicable
period, basic EPS is calculated using the weighted average shares of common
stock outstanding, and diluted EPS is calculated using the weighted average
shares of common stock outstanding and the effects of any potentially
dilutive securities such as stock options. The Company expects that basic
EPS will be approximately 2-3% greater than EPS as previously reported and
that diluted EPS will be equal to EPS as previously reported by the Company
under APB 15.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Material Changes in Financial Condition
- ---------------------------------------
The Company's financial condition has remained strong throughout the nine months
ended September 30, 1997. Management is not aware of any potential material
impairments to, or material changes in, the Company's current financial
position.
The Company plans to initiate construction of a 230,000 square foot office
building at its Malvern corporate headquarters in order to consolidate
corporate-based personnel currently located in leased space. The approximate
cost of this project is $38,000,000. This facility, which is scheduled to be
completed in 1999, will be funded primarily through external financing.
The other significant requirements for funds now anticipated are for purchases
of equipment and payment of cash dividends. The Company plans to fund these
anticipated expenditures primarily through internally generated funds
supplemented from time to time by bank borrowings.
At September 30, 1997, the Company had lines of credit with banks of
approximately $76,691,000, generally at their prime interest rates. At
September 30, 1997, approximately $36,545,000 of these lines of credit were
unused.
Material Changes in Results of Operations
- -----------------------------------------
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996.
Revenues
- --------
Service and system fees revenues were $198,153,000, an increase of 13.0%
compared to the third quarter of 1996. This increase was primarily due to
higher levels of system fees and professional services. The higher level
6
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SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
of system fees was due to sales and installations of systems to new and
existing customers during the current quarter. The higher level of
professional services was generally attributable to system installations,
facilities management, support, and consulting fees.
Hardware sales revenues increased to $26,579,000 for the third quarter of
1997 from $14,298,000 in the third quarter of 1996, primarily due to the
installation of IBM mainframe systems to new and existing customers that
process the Company's INVISION product at their site.
Cost and Expenses
-----------------
Operating and development expenses decreased to 47.5% of service and system
fees revenues in the third quarter of 1997 from 48.0% for the third quarter
1996. This change was primarily 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, and
certain customer related expenses, partially offset by a higher rate of
personnel and related costs to support professional services provided to
customers.
Marketing and installation expenses increased to 33.3% of service and
system fees revenues in the third quarter of 1997 from 32.9% in the third
quarter of 1996, primarily due to a higher level of growth, as compared to
the growth in service and system fee revenues, for certain customer-related
expenses associated with system installations provided to customers.
General and administrative expenses, as a percentage of service and systems
fees revenues, decreased to 8.5% in the third quarter of 1997 from 9.0% in
the third quarter of 1996, primarily due to the Company's continuing
efforts to leverage administrative costs over an increasing revenue base.
Cost of hardware sales increased to 86.0% of hardware sales revenues in the
third quarter of 1997 from 82.7% in the third quarter of 1996. This change
was primarily due to the different product mixes of systems installed in
each quarter.
Interest expense was $994,000 for the quarter ended September 30, 1997 and
did not change significantly compared to the same period in 1996.
Provision for Income Taxes
--------------------------
Income taxes increased $1,991,000 in the quarter ended September 30, 1997
when compared to the same period in 1996. This change was primarily due to
an increase of $4,904,000 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 1997, which was in line with the third quarter of
1996.
Net Income
----------
Net income was $14,987,000 in the quarter ended September 30, 1997 compared
to $12,074,000 in the quarter ended September 30, 1996 for the reasons
discussed above.
7
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996.
Revenues
--------
Service and system fees revenues were $567,505,000, an increase of 12.4%
compared to the same period in 1996. This increase was primarily due to
higher levels of system fees, professional services and system processing
fees. The higher level of system fees was due to sales and installations
of systems to new and existing customers in the first three quarters of
1997. The higher level of professional services was generally attributable
to facilities management, support, and consulting fees. The increase in
system processing fees was primarily due to the higher level of customer
applications processed at the Company's Information Services Center.
Hardware sales revenues increased to $80,500,000 for the nine months ended
September 30, 1997 from $51,590,000 for the same period in 1996, primarily
due to the installation of IBM mainframe systems to new and existing
customers that process the Company's INVISION product at their site.
Cost and Expenses
-----------------
Operating and development expenses decreased to 47.6% of service and system
fees revenues in the first three quarters of 1997 from 47.9% in the first
three quarters of 1996. This change was primarily due to a lower rate of
growth, as compared to the growth in service and system fees revenues, for
certain customer related expenses and computer hardware and associated
costs at the Company's Information Services Center, partially offset by a
higher rate of personnel and related costs to support professional services
provided to customers.
Marketing and installation expenses decreased to 32.8% of service and
system fees revenues in the first three quarters of 1997 from 32.9% in the
first three quarters of 1996, primarily due to a lower rate of growth, as
compared to the growth in service and system fees revenues, for personnel
and related costs. These changes were partially offset by an increased rate
of growth for certain customer related expenses.
General and administrative expenses, as a percentage of service and system
fees revenues, decreased to 8.7% in the first three quarters of 1997 from
9.1% in the first three quarters of 1996, primarily due to the Company's
continuing efforts to leverage administrative costs over an increasing
revenue base, partially offset by costs associated with the Company's
business combination with American Healthware Systems, Inc., in the first
quarter of 1997.
Cost of hardware sales increased to 86.2% of hardware sales revenues in the
first three quarters of 1997 from 85.1% in the first three quarters of
1996. This change was primarily due to the different product mixes of
systems installed in each period.
Interest expense was $2,776,000 for the nine months ended
September 30, 1997 and did not change significantly compared to the same
period in 1996.
8
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Provision for Income Taxes
--------------------------
Income taxes increased $5,700,000 in the first three quarters of 1997 when
compared to the same period in 1996. This change was primarily due to an
increase of $14,233,000 in income before income taxes. The Company's
effective tax rate for federal, state, and foreign income taxes was 38.0%
for the first three quarters of 1997, which was in line with the first
three quarters of 1996.
Net Income
----------
Net income was $43,604,000 in the first three quarters of 1997 compared to
$35,071,000 in the first three quarters of 1996 for the reasons discussed
above.
Cautionary Note Regarding Forward-Looking Statements
- ----------------------------------------------------
This Form 10-Q contains forward-looking statements which 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 project proprietary software; delays in
product development; undetected errors or bugs in software products;
customer reductions caused by health industry consolidation; difficulty in
product installation; dependence on suppliers; interruption of availability
of resources necessary to provide products and services; inability to
successfully integrate acquired business operations; changes in economic,
political, and regulatory conditions in the health industry; regulation of
additional products as medical devices by the Food and Drug Administration;
and fluctuations in foreign currencies, interest rates, and taxes.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included in this report:
No. Description
---- ----------------------------------------------------------------
(27) Financial Data Schedule
(b) No reports on Form 8-K were filed during the three-month
period ended September 30, 1997.
9
<PAGE>
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 14, 1997 /S/Terrence W. Kyle
- ----------------- -----------------------------------
Date Terrence W. Kyle
Senior Vice President, Treasurer,
and Assistant Secretary,
Principal Financial Officer and
Duly Authorized Officer
10
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SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Exhibit Index
No. Description
--- ------------------------------------------------------------
(27) Financial Data Schedule
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 24,355
<SECURITIES> 0
<RECEIVABLES> 247,574
<ALLOWANCES> 8,197
<INVENTORY> 0
<CURRENT-ASSETS> 295,592
<PP&E> 255,871
<DEPRECIATION> 153,781
<TOTAL-ASSETS> 551,146
<CURRENT-LIABILITIES> 184,620
<BONDS> 16,550
0
0
<COMMON> 291
<OTHER-SE> 310,958
<TOTAL-LIABILITY-AND-EQUITY> 551,146
<SALES> 80,500
<TOTAL-REVENUES> 648,005
<CGS> 69,391
<TOTAL-COSTS> 456,115
<OTHER-EXPENSES> 49,393
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,776
<INCOME-PRETAX> 70,330
<INCOME-TAX> 26,726
<INCOME-CONTINUING> 43,604
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,604
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.72
</TABLE>
