<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, 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.
<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
1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
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
============ ===========
</TABLE>
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
-------------------------- --------------------------
1999 1998 1999 1998
-------------------------- --------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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
--------------------
1999 1998
--------- --------
(unaudited)
<S> <C> <C>
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
========= ========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
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):
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
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
============ ===========
</TABLE>
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):
<TABLE>
<CAPTION>
September 30
1999
------------
(unaudited)
<S> <C>
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
============
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30 September 30
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<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 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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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:
<PAGE>
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: ________________________
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 65,558
<SECURITIES> 0
<RECEIVABLES> 374,593
<ALLOWANCES> 13,307
<INVENTORY> 0
<CURRENT-ASSETS> 466,359
<PP&E> 337,462
<DEPRECIATION> 188,482
<TOTAL-ASSETS> 882,793
<CURRENT-LIABILITIES> 230,422
<BONDS> 178,052
0
0
<COMMON> 308
<OTHER-SE> 443,139
<TOTAL-LIABILITY-AND-EQUITY> 882,793
<SALES> 90,400
<TOTAL-REVENUES> 896,864
<CGS> 73,565
<TOTAL-COSTS> 659,820
<OTHER-EXPENSES> 58,497
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,653
<INCOME-PRETAX> 96,329
<INCOME-TAX> 36,605
<INCOME-CONTINUING> 59,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,724
<EPS-BASIC> 2.24
<EPS-DILUTED> 2.20
</TABLE>
