<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 June 30, 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 (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 July 31, 1998, there were 26,546,310 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>
June 30 December 31
1998 1997*
--------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments................. $ 23,495 $ 30,692
Accounts receivable, net........................ 282,518 254,801
Prepaid expenses and other current assets....... 36,014 33,767
--------- -----------
Total Current Assets.......................... 342,027 319,260
Property and Equipment, net...................... 113,850 106,305
Computer Software, net........................... 68,051 60,921
Other Assets..................................... 166,835 127,490
--------- -----------
$690,763 $613,976
========= ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Notes payable................................... $132,551 $ 49,692
Current portion of long-term debt and
capital leases................................. 2,792 2,670
Dividends payable............................... 5,569 5,268
Accounts payable................................ 21,125 33,562
Accrued expenses................................ 49,999 75,370
Current deferred revenues....................... 32,027 36,677
Accrued and current deferred income taxes....... 32,785 26,345
--------- -----------
Total Current Liabilities..................... 276,848 229,584
--------- -----------
Deferred Revenues................................ 6,607 7,398
--------- -----------
Long-Term Debt and Capital Leases................ 14,819 16,291
--------- -----------
Deferred Income Taxes............................ 18,846 30,846
--------- -----------
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; 30,579,333 shares issued
in 1998 and 30,266,512 in 1997............... 306 303
Paid-in capital................................ 78,999 59,897
Retained earnings.............................. 361,723 334,981
Common stock in treasury, at cost, 4,060,608
shares in 1998 and 4,060,785 in 1997.......... (56,023) (56,021)
Cumulative translation adjustment.............. (11,362) (9,303)
--------- -----------
Total Stockholders' Investment................ 373,643 329,857
--------- -----------
$690,763 $613,976
========= ===========
</TABLE>
* Restated to reflect the acquisition of Data-Plan Software GmbH in January
1998, 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 Six Months Ended
June 30 June 30
-------------------- --------------------
1998 1997* 1998 1997*
-------------------- --------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Service and system fees.................. $220,665 $188,917 $434,396 $377,206
Hardware sales........................... 36,327 28,450 78,062 57,505
-------------------- --------------------
256,992 217,367 512,458 434,711
-------------------- --------------------
Cost and Expenses:
Operating and development................ 104,018 90,159 207,386 180,947
Marketing and installation............... 75,368 62,384 142,383 123,247
General and administrative............... 17,126 16,411 36,641 34,716
Cost of hardware sales................... 29,165 24,441 64,578 48,633
Interest................................. 2,112 1,108 3,524 1,810
-------------------- --------------------
227,789 194,503 454,512 389,353
-------------------- --------------------
Income Before Income Taxes................ 29,203 22,864 57,946 45,358
Provision for Income Taxes................ 11,102 8,687 22,024 17,236
-------------------- --------------------
Net Income................................ $ 18,101 $ 14,177 $ 35,922 $ 28,122
==================== ====================
Net Income Per Common Share:
Basic................................... $.69 $.54 $1.37 $1.08
==================== ====================
Diluted................................. $.67 $.53 $1.33 $1.06
==================== ====================
Number of shares used to
compute per share amounts:
Basic................................... 26,314 26,015 26,257 25,990
==================== ====================
Diluted................................. 27,107 26,503 27,037 26,512
==================== ====================
Dividends Declared
Per Common Share......................... $.21 $.21 $.42 $.42
==================== ====================
</TABLE>
* Restated to reflect the acquisition of Data-Plan Software GmbH in January
1998, 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>
Six Months Ended
June 30
----------------------
1998 1997*
-------- --------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income...................................... $ 35,922 $ 28,122
Adjustments to reconcile net income to net
cash used for operating activities -
Depreciation and amortization................ 21,336 19,566
Asset (increase) decrease -
Accounts receivable........................ (17,285) (13,922)
Prepaid expenses and other current assets.. (639) 1,774
Other assets............................... (19,658) (10,751)
Liability increase (decrease) -
Accounts payable and accrued expenses...... (42,341) (27,453)
Accrued and current deferred income taxes.. 5,776 6,533
Deferred revenues.......................... (6,983) (11,059)
Deferred income taxes...................... 2,000 1,971
Other........................................ (3,809) (2,061)
-------- ---------
Net cash used for operating activities..... (25,681) (7,280)
-------- ---------
Cash Flows from Investing Activities:
Property and equipment additions................ (18,616) (10,243)
Computer software additions..................... (12,561) (10,014)
Businesses acquired............................. (25,101) -
Equipment dispositions.......................... 363 1,098
-------- ---------
Net cash used for investing activities..... (55,915) (19,159)
-------- ---------
Cash Flows from Financing Activities:
Dividends paid.................................. (10,789) (10,168)
Exercise of stock options....................... 4,844 4,775
Increase in notes payable....................... 81,697 23,268
Payments of long-term debt and capital
lease obligations.............................. (1,351) (3,509)
Change in treasury stock........................ (2) (9)
-------- ---------
Net cash provided by financing activities.. 74,399 14,357
-------- ---------
Net Decrease in Cash and Short-Term Investments.. (7,197) (12,082)
Cash and Short-Term Investments, Beginning
of Period....................................... 30,692 42,124
-------- ---------
Cash and Short-Term Investments, End of Period... $ 23,495 $ 30,042
======== ========
</TABLE>
* Restated to reflect the acquisition of Data-Plan Software GmbH in January
1998, 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 - June 30, 1998 (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.
All periods prior to January 1, 1998 have been restated to reflect the
Company's business combination with Data-Plan Software GmbH (Data-Plan),
which was completed on January 28, 1998 and accounted for as a pooling of
interests.
2. Businesses Acquired:
On January 28, 1998, the Company acquired Data-Plan Software GmbH, 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 the Company's common stock. This transaction was
accounted for as a pooling of interests.
Separate operating results for Shared Medical Systems Corporation (SMS) and
Data-Plan for the quarter and six months ended June 30, 1997 were as follows
(amounts in thousands):
Three Months Six Months
Ended Ended
June 30, 1997 June 30, 1997
----------------- -----------------
(unaudited) (unaudited)
Revenues:
SMS............... $213,394 $423,273
Data-Plan......... 3,973 11,438
----------------- -----------------
$217,367 $434,711
================= =================
Net Income:
SMS............... $14,521 $28,617
Data-Plan......... (344) (495)
----------------- -----------------
$14,177 $28,122
================= =================
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.
During May and June 1998, the Company acquired two companies for 187,674
shares of the Company's common stock. These acquisitions were accounted for
as poolings of interests. Prior periods have not been restated due to
immateriality.
3. Accounts Receivable:
At June 30, 1998 and December 31, 1997, the Company's trade accounts
receivable were reduced by allowances for doubtful accounts of $10,242,000
and $10,828,000, respectively.
5
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
4. Property and Equipment:
The major classes of property and equipment at June 30, 1998 and
December 31, 1997 were as follows (amounts in thousands):
June 30 December 31
1998 1997
-------- -----------
(unaudited)
Land and land improvements....... $ 11,598 $ 11,615
Buildings........................ 73,153 64,559
Equipment........................ 196,594 188,563
-------- -----------
281,345 264,737
Less accumulated depreciation
and amortization.............. 167,495 158,432
-------- -----------
$113,850 $106,305
======== ===========
5. Computer Software:
The accumulated amortization for capitalized internally produced
computer software and purchased software at June 30, 1998 and
December 31, 1997 was $73,066,000 and $66,549,000, respectively.
6. Goodwill:
Goodwill included in other assets, net of accumulated amortization, was
$50,090,000 and $26,639,000 as of June 30, 1998 and December 31, 1997,
respectively. The increase in goodwill from December 31, 1997 was primarily
the result of the Company increasing its ownership interest in Delta Health
Systems as further described in Note 2.
7. Comprehensive Income:
In June 1997, the Financial Accounting Standards Board issued Statement 130,
Reporting Comprehensive Income, which established standards for reporting of
comprehensive income and its components. The Company's only component of
other comprehensive income at June 30, 1998 was foreign currency translation
adjustments. The adoption of this statement had no impact on the Company's
net income or stockholders' equity. The Company's comprehensive income for
the quarter and six months ended June 30 was:
Quarter Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1998 1997 1998 1997
--------- -------- -------- --------
(unaudited) (unaudited)
Net Income.................... $18,101 $14,177 $35,922 $28,122
Other Comprehensive Income:
Foreign currency
translation adjustments..... 869 (418) (2,059) (4,406)
--------- -------- -------- --------
Comprehensive Income.......... $18,970 $13,759 $33,863 $23,716
========= ======== ======== ========
6
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Material Changes in Financial Condition
- ---------------------------------------
The Company's financial condition remained strong through June 30, 1998.
Management is not aware of any potential material impairments to, or material
changes in, the Company's current financial position.
The most significant requirements for funds now anticipated are for construction
of an office building at the Company's corporate headquarters, purchases of
equipment and payment of cash dividends. The Company plans to fund construction
of the office building principally through external financing. All other
anticipated expenditures will be funded primarily through internally generated
funds supplemented from time to time by bank borrowings.
At June 30, 1998, the Company had lines of credit with banks of approximately
$174,570,000, generally at their prime interest rates. At June 30, 1998,
approximately $42,019,000 of these lines of credit were unused.
Material Changes in Results of Operations
- -----------------------------------------
Three Months Ended June 30, 1998 Compared to the Three Months Ended
June 30, 1997.
Revenues
--------
Service and system fees revenues were $220,665,000, an increase of 16.8%
compared to the second quarter of 1997. This increase was primarily due to
higher levels of professional services and system fees in the U.S. The
higher level of professional services was generally attributable to system
installations, support, and consulting fees. The increase in system fees
was due to higher levels of sales and installations to new and existing
customers. European revenues continue to be adversely impacted by
restrictions in government spending and the strengthening of the U.S.
dollar against certain European currencies.
Hardware sales revenues increased to $36,327,000 for the second quarter of
1998 from $28,450,000 in the second quarter of 1997, primarily due to the
installation of IBM mainframe systems to new and existing customers that
process the Company's INVISION product at their sites, and changes in the
timing and mix of other installed systems. Historical hardware sales
revenues are not necessarily indicative of future trends, and no assurance
can be given that the recent rate of growth will continue.
Cost and Expenses
-----------------
Operating and development expenses decreased to 47.1% of service and system
fees revenues in the second quarter of 1998 from 47.7% for the second
quarter 1997. This change was principally 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 growth for personnel and related costs
associated with facilities management, consulting, and support services
provided to customers, and certain customer related expenses.
7
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Marketing and installation expenses increased to 34.2% of service and
system fees revenues in the second quarter of 1998 from 33.0% in the second
quarter of 1997, 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 systems
fees revenues, decreased to 7.8% in the second quarter of 1998 from 8.7% in
the second quarter of 1997. This change was 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 decreased to 80.3% of hardware sales revenues in the
second quarter of 1998 from 85.9% in the second quarter of 1997. This
change was primarily due to the different product mixes of systems
installed between periods.
Interest expense was $2,112,000 in the quarter ended June 30, 1998 compared
to $1,108,000 in the same period in 1997. This change was generally
attributable to a higher level of average outstanding short-term borrowings
during the current period. The increase in average outstanding short-term
borrowings was partially attributable to funds used for businesses and
investments acquired in the first quarter of 1998 and fourth quarter of
1997.
Provision for Income Taxes
--------------------------
Income taxes increased $2,415,000 in the quarter ended June 30, 1998 when
compared to the same period in 1997. This change was primarily due to an
increase of $6,339,000 in income before income taxes. The Company's
effective tax rate for federal, state and foreign income taxes was 38.0% in
the second quarter of 1998 and 1997.
Net Income
----------
Net income was $18,101,000 in the quarter ended June 30, 1998 compared to
$14,177,000 in the quarter ended June 30, 1997 for the reasons discussed
above.
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997.
Revenues
--------
Service and system fees revenues were $434,396,000, an increase of 15.2%
compared to the same period in 1997. This increase was primarily due to
higher levels of professional services and system fees in the U.S. The
higher level of professional services was generally attributable to system
installations, support, and consulting fees. The increase in system fees
was due to higher levels of sales and installations to new and existing
customers. European revenues continue to be adversely impacted by
restrictions in government spending and the strengthening of the U.S.
dollar against certain European currencies.
Hardware sales revenues increased to $78,062,000 for the six months ended
June 30, 1998 from $57,505,000 for the same period in 1997, primarily due
to the installation of IBM mainframe systems to new and existing customers
that process the Company's INVISION product at their sites, and changes in
the timing and mix of other installed systems. Historical hardware sales
revenues are not necessarily indicative of future trends, and no assurance
can be given that the recent rate of growth will continue.
8
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Cost and Expenses
-----------------
Operating and development expenses decreased to 47.7% of service and system
fees revenues for the six months ended June 30, 1998 from 48.0% in the
comparable period of 1997. This change was principally 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 growth for personnel
and related costs associated with facilities management, consulting, and
support services provided to customers, and certain customer related
expenses.
Marketing and installation expenses increased to 32.8% of service and system
fees revenues for the six months ended June 30, 1998 from 32.7% in the
comparable period of 1997, 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 8.4% for the six months ended June 30, 1998 from
9.2% in the comparable period of 1997. This change was 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 decreased to 82.7% of hardware sales revenues for the
six months ended June 30, 1998 from 84.6% in the comparable period of 1997.
This change was primarily due to the different product mixes of systems
installed between periods.
Interest expense was $3,524,000 for the six months ended June 30, 1998
compared to $1,810,000 in the same period in 1997. This change was generally
attributable to a higher level of average outstanding short-term borrowings
during the current period. The increase in average outstanding short-term
borrowings was partially attributable to funds used for businesses and
investments acquired during the first quarter of 1998 and fourth quarter of
1997.
Provision for Income Taxes
--------------------------
Income taxes increased $4,788,000 in the first two quarters of 1998 when
compared to the same period in 1997. This change was primarily due to an
increase of $12,588,000 in income before income taxes. The Company's
effective tax rate for federal, state and foreign income taxes was 38.0% for
the six months ended June 30, 1998 and 1997.
Net Income
----------
Net income was $35,922,000 in the first two quarters of 1998 compared to
$28,122,000 in the first two quarters of 1997 for the reasons discussed
above.
9
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Year 2000
- ---------
In 1995, the Company established a task force to deal with Year 2000 compliance
and began to modify both its products and its internal computer systems. The
Company believes that its new products and releases are Year 2000 compliant.
The Company has developed enhancements to make certain earlier releases
compliant and has conducted customer education, training and communications
programs to provide information to customers using non-compliant releases. The
Company is currently in the process of developing additional enhancements and
programs to assist its customers in becoming Year 2000 compliant. Costs incurred
modifying products sold to customers have been recorded in accordance with the
Company's policy for internally produced software.
While the Company believes that the measures that it has taken are adequate to
protect it and that all of its current products will be Year 2000 compliant by
early 1999, it is possible that claims will be made against the Company should
its customers experience Year 2000 problems. Such claims could relate to (i)
malfunctions in Company products and releases, 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 related to third-party software
included as components of Company solutions, or third-party applications to
which the Company's products interface, or (iii) consulting services provided by
the Company to its customers concerning Year 2000 issues.
The majority of the Company's internal systems are Year 2000 compliant. The
Company is currently in the process of developing solutions for its few
remaining non-compliant internal systems and expects these systems to be
compliant on a timely basis. All expenses related to modifying internal computer
systems have been expensed as incurred.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The arbitration with PeopleSoft, Inc. (PeopleSoft) described in the Company's
report on Form 10-Q for the quarter ended March 31, 1998 has been concluded and
the underlying distribution agreement remains in effect.
Item 2. Changes in Securities.
On May 29, 1998 the Company issued 57,593 shares of its Common Stock to the five
former shareholders of JJO Enterprises, Inc. (JJO) in exchange for all of the
outstanding shares of JJO, in a transaction exempt under Section 4(2) and
Regulation D of the Securities Act of 1933, as amended. On June 29, 1998 the
Company filed a registration statement on Form S-3 registering for resale the
shares of its Common Stock issued in connection with the business combination
with JJO. Such registration statement was declared effective by the Securities
and Exchange Commission on July 30, 1998.
10
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders of the Company was held on May 15, 1998. At
the meeting, the Company's stockholders were requested to elect seven directors
for one-year terms. The following is a summary of the votes for elected
directors:
- --------------------------------------------------------------------------------
Votes Broker
Nominee Votes For Withheld Non-Votes
- --------------------------------------------------------------------------------
R. James Macaleer................... 23,972,127 61,758 0
Raymond K. Denworth, Jr............. 23,904,503 129,382 0
Frederick W. DeTurk................. 23,961,579 72,306 0
Josh S. Weston...................... 23,954,158 79,727 0
Jeffrey S. Rubin.................... 23,964,537 69,348 0
Marvin S. Cadwell................... 23,963,754 70,131 0
Gail R. Wilensky, Ph.D.............. 23,956,279 77,606 0
- --------------------------------------------------------------------------------
There are no other persons whose terms as director continued after the annual
stockholders meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included in this report:
No. Description
--- -------------------------------------------
(10) Material Contracts -
Performance bonus plans - 1998:
Marvin S. Cadwell
Form of performance bonus plan:
V. Brewster Jones
Terrence W. Kyle
Francis W. Lavelle
David F. Perri
Guillermo N. Ramas, Sr.
(27) Financial Data Schedules
For the Six Months Ended June 30, 1998
Amended for the Year Ended December 31, 1995
(b) On July 14, 1998, the Company filed a Form 8-K dated June 30, 1998,
in connection with the issuance of 130,081 shares of its Common Stock to
the shareholders of DP Informatica, Srl, (DPI), an Italian
corporation, as consideration for the Company's acquisition of DPI. This
transaction was accounted for as a pooling of interests. Prior periods
have not been restated due to immateriality. An exemption from the
registration requirements of the Securities Act of 1933, as amended, was
claimed under Regulation S.
11
<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
August 13, 1998 /S/Terrence W. Kyle
- --------------- -----------------------------------
Date Terrence W. Kyle
Senior Vice President, Treasurer,
and Assistant Secretary,
Principal Financial Officer and
Duly Authorized Officer
12
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Exhibit Index
No. Description
--- ------------------------------------------------------------
(10) Material Contracts -
Performance bonus plans - 1998:
Marvin S. Cadwell
Form of performance bonus plan:
V. Brewster Jones
Terrence W. Kyle
Francis W. Lavelle
David F. Perri
Guillermo N. Ramas, Sr.
(27) Financial Data Schedules
For the Six Months Ended June 30, 1998
Amended for the Year Ended December 31, 1995
<PAGE>
Exhibit (10)
1998 INCENTIVE COMPENSATION PLAN FOR MARVIN S. CADWELL
------------------------------------------------------
The incentive compensation plan for Mr. Cadwell for 1998 is not set forth in a
formal document. In summary, Mr. Cadwell's calculated bonus amount will be
computed using a targeted bonus, which will be adjusted based on the Company's
performance against targeted earnings per share. The calculated bonus may range
from 0% to 125% of the targeted bonus. The calculated bonus is subject to
further adjustment based on sales attainment versus target. Such adjustment may
range from 60% to 120% of the calculated bonus. The result from the preceding
sentence is subject to a final adjustment, which may range from 90% and 115%,
based on improvement in accounts receivable days outstanding versus target.
<PAGE>
Exhibit (10)
1998 SMS Senior Management
Incentive Compensation Plan for:
________________________________
Plan Year: 1/1/98 - 12/31/98
-----------------
Approved by:_________________________________
Marvin S. Cadwell, CEO
Date: ___________________________
Accepted by:_________________________________
Date: ___________________________
<PAGE>
I. Compensation Components
-----------------------
Incentive 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 marketing
emphasis.
II. Summary of ICP Components & Targets
-----------------------------------
The objective of this Incentive Compensation Plan (ICP) is to compensate
the plan Participant in proportion to his/her contributions to SMS'
achievement of its sales, revenue, pretax income margin, and accounts
receivable/cash flow objectives, and to the achievement of certain
general management challenges. The definitions of these Performance
Indicators are contained in Section V below. Specific ICP components are
identified in Attachment A.
III. Specific Measurement of ICP Components
--------------------------------------
A) Performance Indicators - The incentive compensation 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 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
in the table in Section II above).
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.
IV. ICP Payment Policies
--------------------
A) 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 commission or 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) None of the above listed bonuses will be considered earned unless
the participant is an employee on March 31, 1999, or at the time of
payment, if prior to that date.
C) Incentive compensation earned under this plan will be paid by March
31, 1999 or as soon as practical thereafter.
D) Participants who enter the plan during the year or after the plan
year starts will receive prorated payments based on the percentage
of months the Participant was in the plan during the year.
E) There are no draws under this plan.
<PAGE>
F) The maximum bonus payout under this plan is three (3) times the
Bonus Potential for each Performance Indicator, plus 100% of the
General Management Challenges Bonus. If performance exceeds the
thresholds at which the Performance Indicator maximums are set, a
Senior Management review will occur to determine whether any
additional bonuses will be paid.
G) This plan and the associated targets/quotas may be adjusted,
changed, or terminated at any time, to compensate for changes in
sales, support or marketing emphasis.
H) At management's discretion, up to 20% of the earned bonus may be
paid in restricted stock.
V. Definitions of ICP Terms
------------------------
A) Sales - The present value of the new SMS solutions (includes
-----
software, support, professional services, and hardware) , net of
direct costs, sold by SMS organizations during 1998, 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.
B) Revenues - Net revenue (i.e. gross revenue less cost of hardware
--------
sales), as reported by Accounting. These targets are subject to
increases during the year, for any material changes to SMS'
financial plan.
C) Pretax Income - Revenues, as defined above, less direct expenses
-------------
(including all bonus costs of this plan) and overhead expenses, as
reported by Accounting. These targets are subject to increases
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) 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.
<PAGE>
ATTACHMENT A
1998 SMS Senior Management ICP
A. ICP Components and Potential
<TABLE>
<CAPTION>
Focus Area (A) CONSOLIDATED Total Bonus
(Potential @ 100% (Potential @ 100% (Potential @ 100%
Achievement) Achievement) Achievement)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Performance Indicators:
- ----------------------------------------------------------------------------------------------------------
Sales
- ----------------------------------------------------------------------------------------------------------
Revenue/Pretax Income Margin %
- ----------------------------------------------------------------------------------------------------------
Accounts Receivable Days
- ----------------------------------------------------------------------------------------------------------
Subtotal - Perf. Indicators Bonus
- ----------------------------------------------------------------------------------------------------------
General Mgmt Challenge Bonus
- ----------------------------------------------------------------------------------------------------------
Total Bonus
- ----------------------------------------------------------------------------------------------------------
</TABLE>
A) Focus Area is defined as
B. General Management Challenges
<PAGE>
<TABLE>
<CAPTION>
ATTACHMENT B
1998 SENIOR MANAGEMENT ICP - BONUS SCALES
-----------------------------------------
1. SALES -
- -----------------------------------------
% ATTAINED % BONUS
vs. TARGET EARNED
- -----------------------------------------
<S> <C>
= or (less than) 90 0%
91% 35%
92% 45%
93% 55%
94% 65%
95% 75%
96% 80%
97% 85%
98% 90%
99% 95%
100% 100%
(A) (A)
- -----------------------------------------
</TABLE>
(A) For each % of Sales Attainment over 100%, the
Sales-related bonus % will increase by an additional 2%, up
to a maximum payout of 300% of the Sales Bonus Potential
(@ 200% Attainment).
2. REVENUE/PRETAX INCOME MARGIN % - CONSOLIDATED
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Net Revenue Attainment 1998 Pretax Income Margin Percentage - CONSOLIDATED RESULTS
vs. Target = or >
= or > (less than) 11.9% 12.0% 12.1% 12.2% 12.3% 12.4% 12.5% 12.6% 12.7%
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
110% 180% 185% 190% 200% 220% 250% 275% 300% 300%
109% 110% 170% 175% 180% 190% 205% 230% 255% 300% 300%
108% 109% 160% 165% 170% 180% 190% 215% 240% 275% 300%
107% 108% 150% 155% 160% 170% 175% 200% 225% 250% 275%
106% 107% 140% 145% 150% 160% 165% 185% 210% 230% 250%
105% 106% 130% 135% 140% 150% 155% 170% 195% 215% 225%
104% 105% 120% 125% 130% 140% 145% 160% 180% 200% 210%
103% 104% 110% 115% 120% 130% 135% 150% 165% 185% 195%
102% 103% 100% 105% 110% 120% 125% 140% 150% 170% 180%
101% 102% 85% 100% 100% 110% 115% 130% 140% 155% 165%
100% 101% 65% 80% 85% 100% 110% 120% 130% 140% 150%
99% 100% 40% 60% 65% 90% 100% 110% 120% 120% 130%
98% 99% 10% 35% 40% 80% 90% 100% 110% 110% 120%
97% 98% 0% 5% 10% 70% 80% 90% 100% 100% 110%
96% 97% 0% 0% 0% 60% 70% 80% 90% 90% 100%
95% 96% 0% 0% 0% 35% 60% 70% 80% 85% 90%
95% 0% 0% 0% 10% 35% 60% 70% 80% 80%
- ---------------------------------------------------------------------------------------------------------------------------------
BONUS PAYOUT % IS DETERMINED BY INTERSECTING REVENUE ATTAINMENT ROW & PRETAX % COLUMN.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ATTACHMENT B
3. REVENUE/PRETAX INCOME MARGIN % - DOMESTIC (AS APPLICABLE)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Revenue Attainment 1998 Pretax Income Margin Percentage - DOMESTIC RESULTS
vs. Target = or >
= or > (less than) (0.9%) (0.6%) (0.3%) 0.0% 0.3% 0.6% 0.9% 1.2% 1.5%
- --------------------------
= or > (less than) 12.0% 12.3% 12.6% 12.9% 13.2% 13.5% 13.8% 14.1% 14.4%
- -----------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
110% 103% 105% 140% 150% 160% 170% 180% 190% 200%
109% 110% 102% 104% 135% 145% 155% 165% 175% 185% 195%
108% 109% 101% 103% 130% 140% 150% 160% 170% 180% 190%
107% 108% 100% 102% 125% 135% 145% 155% 165% 175% 185%
106% 107% 95% 101% 120% 130% 140% 150% 160% 170% 180%
105% 106% 85% 100% 115% 125% 135% 145% 155% 165% 175%
104% 105% 75% 95% 110% 120% 130% 140% 150% 160% 170%
103% 104% 65% 85% 105% 115% 125% 135% 145% 155% 165%
102% 103% 40% 75% 100% 110% 120% 130% 140% 150% 160%
101% 102% 15% 65% 95% 105% 115% 125% 135% 145% 155%
100% 101% 0% 40% 85% 100% 110% 120% 130% 140% 150%
99% 100% 0% 15% 75% 90% 105% 115% 125% 135% 145%
98% 99% 0% 0% 65% 80% 100% 110% 120% 130% 140%
97% 98% 0% 0% 40% 70% 95% 105% 115% 125% 135%
96% 97% 0% 0% 15% 60% 85% 100% 110% 120% 130%
95% 96% 0% 0% 0% 35% 75% 95% 105% 115% 125%
95% 0% 0% 0% 10% 65% 85% 100% 110% 120%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
BONUS PAYOUT % IS DETERMINED BY INTERSECTING REVENUE ATTAINMENT ROW & PRETAX % COLUMN.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3. REVENUE/PRETAX INCOME MARGIN % - INTERNATIONAL (AS APPLICABLE)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Net Revenue Attainment 1998 Pretax Income Margin Percentage - INTERNATIONAL RESULTS
vs. Target = or >
= or > (less than) 5.2% 6.2% 7.2% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7%
- --------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
120% 0% 18% 65% 104% 140% 155% 165% 175% 185% 200%
118% 120% 15% 60% 103% 136% 151% 161% 171% 181% 196%
116% 118% 12% 55% 102% 132% 147% 157% 167% 177% 192%
114% 116% 9% 50% 101% 128% 143% 153% 163% 173% 188%
112% 114% 6% 45% 100% 124% 139% 149% 159% 169% 184%
110% 112% 3% 40% 90% 120% 135% 145% 155% 165% 180%
108% 110% 0% 35% 80% 116% 131% 141% 151% 161% 176%
106% 108% 0% 30% 70% 112% 127% 137% 147% 157% 172%
104% 106% 0% 25% 60% 108% 123% 133% 143% 153% 168%
102% 104% 0% 20% 50% 104% 119% 129% 139% 149% 164%
100% 102% 0% 15% 40% 100% 115% 125% 135% 145% 160%
95% 100% 0% 10% 30% 90% 110% 120% 130% 135% 150%
90% 95% 0% 0% 20% 80% 100% 110% 120% 130% 140%
85% 90% 0% 0% 10% 70% 80% 100% 110% 120% 130%
80% 85% 0% 0% 0% 45% 70% 80% 100% 110% 120%
75% 80% 0% 0% 0% 20% 60% 70% 80% 100% 110%
75% 0% 0% 0% 10% 50% 60% 70% 80% 100%
- --------------------------------------------------------------------------------------------------------------------------------
BONUS PAYOUT % IS DETERMINED BY INTERSECTING REVENUE ATTAINMENT ROW & PRETAX % COLUMN.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ATTACHMENT B
4. A/R DAYS - CONSOLIDATED
- -----------------------------------------
DAYS ATTAINED
vs. TARGET % BONUS
- -----------------------
(less than) or = EARNED
- -----------------------------------------
(B) (B)
93 100%
94 80%
95 60%
96 40%
97 20%
98 0%
- -----------------------------------------
(B) For each day under the Target, the bonus %
will increase by an additional 10%, up to a maximum
payout of 300% of the A/R Days Bonus Potential
5. A/R DAYS - DOMESTIC (AS APPLICABLE)
- -----------------------------------------
DAYS ATTAINED
vs. TARGET % BONUS
- -----------------------
(less than) or = EARNED
- -----------------------------------------
(B) (B)
82 100%
83 80%
84 60%
85 40%
86 20%
87 0%
- -----------------------------------------
(B) For each day under the Target, the bonus %
will increase by an additional 10%, up to a maximum
payout of 300% of the A/R Days Bonus Potential
5. A/R DAYS - INTERNATIONAL (AS APPLICABLE)
- -----------------------------------------
DAYS ATTAINED
vs. TARGET % BONUS
- -----------------------
(less than) or = EARNED
- -----------------------------------------
(B) (B)
135 100%
133 80%
131 60%
129 40%
127 20%
125 0%
- -----------------------------------------
(B) For each day under the Target, the bonus %
will increase by an additional 10%, up to a maximum
payout of 300% of the A/R Days Bonus Potential
<PAGE>
Schedule to Exhibit (10)
An SMS Senior Management Incentive Compensation Plan for the plan year ended
December 31, 1998 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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 23,495
<SECURITIES> 0
<RECEIVABLES> 292,760
<ALLOWANCES> 10,242
<INVENTORY> 0
<CURRENT-ASSETS> 342,027
<PP&E> 281,345
<DEPRECIATION> 167,495
<TOTAL-ASSETS> 690,763
<CURRENT-LIABILITIES> 276,848
<BONDS> 14,819
0
0
<COMMON> 306
<OTHER-SE> 373,337
<TOTAL-LIABILITY-AND-EQUITY> 690,763
<SALES> 78,062
<TOTAL-REVENUES> 512,458
<CGS> 64,578
<TOTAL-COSTS> 349,769
<OTHER-EXPENSES> 36,641
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,524
<INCOME-PRETAX> 57,946
<INCOME-TAX> 22,024
<INCOME-CONTINUING> 35,922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,922
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.33
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 25,512
<SECURITIES> 0
<RECEIVABLES> 188,726
<ALLOWANCES> 6,767
<INVENTORY> 0
<CURRENT-ASSETS> 239,894
<PP&E> 246,054
<DEPRECIATION> 143,493
<TOTAL-ASSETS> 459,075
<CURRENT-LIABILITIES> 150,554
<BONDS> 17,939
0
0
<COMMON> 296
<OTHER-SE> 253,792
<TOTAL-LIABILITY-AND-EQUITY> 459,075
<SALES> 69,829
<TOTAL-REVENUES> 689,978
<CGS> 54,734
<TOTAL-COSTS> 505,391
<OTHER-EXPENSES> 59,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,256
<INCOME-PRETAX> 67,272
<INCOME-TAX> 25,437
<INCOME-CONTINUING> 41,835
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,835
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.60
</TABLE>
