<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 March 31, 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 Identification No.)
of incorporation or organization)
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 April 30, 1999, there were 26,651,573 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>
March 31 December 31
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments.................... $ 39,553 $ 40,070
Accounts receivable, net........................... 334,898 337,669
Prepaid expenses and other current assets.......... 32,172 33,466
---------- -----------
Total Current Assets............................. 406,623 411,205
Property and Equipment, net......................... 141,043 137,521
Computer Software, net.............................. 81,126 75,709
Other Assets........................................ 180,163 184,013
---------- -----------
$808,955 $808,448
========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Notes payable...................................... $173,496 $158,808
Current portion of long-term debt and
capital leases.................................... 3,559 3,437
Dividends payable.................................. 5,593 5,589
Accounts payable................................... 32,646 42,029
Accrued expenses................................... 61,535 86,499
Current deferred revenues.......................... 41,014 40,206
Accrued and current deferred income taxes.......... 37,827 30,390
---------- -----------
Total Current Liabilities........................ 355,670 366,958
---------- -----------
Deferred Revenues................................... 6,161 6,908
---------- -----------
Long-Term Debt and Capital Leases................... 13,521 14,386
---------- -----------
Deferred Income Taxes............................... 22,346 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; 30,665,609 shares issued in
1999 and 30,635,512 in 1998...................... 307 306
Paid-in capital................................... 81,032 79,773
Retained earnings................................. 398,121 385,401
Common stock in treasury, at cost, 4,029,950
shares in 1999 and 4,029,773 in 1998............. (55,497) (55,497)
Cumulative translation adjustment................. (12,706) (10,633)
---------- -----------
Total Stockholders' Investment................... 411,257 399,350
---------- -----------
$808,955 $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
March 31
--------------------------
1999 1998
---------- --------
(unaudited)
<S> <C> <C>
Revenues:
Service and system fees............................. $259,809 $213,731
Hardware sales...................................... 27,260 41,735
---------- --------
287,069 255,466
---------- --------
Cost and Expenses:
Operating and development........................... 121,487 103,368
Marketing and installation.......................... 92,876 67,015
General and administrative.......................... 20,103 19,515
Cost of hardware sales.............................. 21,018 35,413
Interest............................................ 2,049 1,412
---------- --------
257,533 226,723
---------- --------
Income Before Income Taxes........................... 29,536 28,743
Provision for Income Taxes........................... 11,223 10,922
---------- --------
Net Income........................................... $ 18,313 $ 17,821
========== ========
Net Income Per Share:
Basic.............................................. $.69 $.68
========== ========
Diluted............................................ $.68 $.66
========== ========
Number of shares used to compute per share amounts:
Basic.............................................. 26,575 26,200
========== ========
Diluted............................................ 27,034 26,967
========== ========
Dividends Declared Per Common Share.................. $ .21 $.21
========== ========
</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>
Three Months Ended
March 31
----------------------
1999 1998
-------- --------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income...................................... $ 18,313 $ 17,821
Adjustments to reconcile net income to net
cash used for operating activities -
Depreciation and amortization................ 11,691 9,837
Asset (increase) decrease -
Accounts receivable........................ 2,771 (20,914)
Prepaid expenses and other current assets.. 1,547 1,747
Other assets............................... 2,743 (8,607)
Liability increase (decrease) -
Accounts payable and accrued expenses...... (34,347) (28,369)
Accrued and current deferred income taxes.. 7,437 4,688
Deferred revenues.......................... 61 (4,387)
Deferred income taxes...................... 1,500 1,000
Other........................................ (1,433) (4,372)
-------- --------
Net cash provided by (used for) operating
activities................................ 10,283 (31,556)
-------- --------
Cash Flows from Investing Activities:
Property and equipment additions................ (11,090) (6,025)
Computer software additions..................... (8,888) (6,070)
Businesses acquired............................. - (25,101)
Equipment dispositions.......................... - 35
-------- --------
Net cash used for investing activities..... (19,978) (37,161)
-------- --------
Cash Flows from Financing Activities:
Dividends paid.................................. (5,588) (5,268)
Exercise of stock options....................... 1,260 3,674
Increase in notes payable....................... 14,688 65,875
Payments of long-term debt and capital
lease obligations.............................. (1,182) (678)
Change in treasury stock........................ - (546)
-------- --------
Net cash provided by financing activities.. 9,178 63,057
-------- --------
Net Decrease in Cash and Short-Term Investments.. (517) (5,660)
Cash and Short-Term Investments, Beginning
of Period....................................... 40,070 30,692
-------- --------
Cash and Short-Term Investments, End of Period... $ 39,553 $ 25,032
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Notes to Consolidated Financial Statements - March 31, 1999 (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.
2. Accounts Receivable:
At March 31, 1999 and December 31, 1998, the Company's trade accounts
receivable were reduced by allowances for doubtful accounts of $13,573,000
and $13,369,000, respectively.
3. Property and Equipment:
The major classes of property and equipment at March 31, 1999 and
December 31, 1998 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
March 31 December 31
1999 1998
----------- -----------
(unaudited)
<S> <C> <C>
Land and land improvements............... $ 11,568 $ 11,616
Buildings, including construction
in progress.......................... 96,760 92,193
Equipment................................ 215,544 212,481
----------- -----------
323,872 316,290
Less accumulated depreciation
and amortization..................... 182,829 178,769
----------- -----------
$141,043 $137,521
=========== ===========
</TABLE>
4. Computer Software:
The accumulated amortization for capitalized internally produced
computer software and purchased software at March 31, 1999 and
December 31, 1998 was $85,500,000 and $80,357,000, respectively.
5. Comprehensive Income:
The Company's comprehensive income for the three months ended
March 31, 1999 was (amounts in thousands):
<TABLE>
<CAPTION>
Quarter Ended
March 31
-----------------------
1999 1998
------- -------
(unaudited)
<S> <C> <C>
Net Income...............................$18,313 $17,821
Other Comprehensive Income:
Foreign currency translation
adjustments............................ (2,073) (2,928)
------- -------
Comprehensive Income.....................$16,240 $14,893
======= =======
</TABLE>
5
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
6. Business Segment Information:
Business segment information for the Company for the three months ended
March 31, 1999 and 1998 was as follows (amounts in thousands):
<TABLE>
<CAPTION>
Quarter Ended
March 31
----------------------------
1999 1998
----------------------------
<S> <C> <C>
(unaudited)
Revenues:
North America................$247,091 $223,985
International................ 39,978 31,481
----------------------------
$287,069 $255,466
============================
Pretax Income/(Loss):
North America................$ 31,706 $ 30,285
International................ (2,170) (1,542)
----------------------------
$ 29,536 $ 28,743
============================
</TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Material Changes in Financial Condition
- ---------------------------------------
The Company's financial condition has remained strong throughout the three
months ended March 31, 1999. Management is not aware of any potential material
impairments to the Company's current financial position.
The most significant requirements for funds now anticipated are for the
completion of construction of an office building addition at the Company's
corporate headquarters, purchases of equipment, and payment of cash dividends.
The Company plans to fund its anticipated expenditures primarily from operations
and from short-term and long-term borrowings.
At March 31, 1999, the Company had lines of credit with banks, primarily based
on LIBOR, of approximately $268.3 million. At March 31, 1999, approximately
$94.8 million of these lines of credit were unused.
On April 29, 1999, the Company completed a private placement of $175.0 million
of long-term unsecured notes to reduce current notes payable, fund the cost to
complete the corporate office building addition, and fund working capital
requirements.
Material Changes in Results of Operations
- -----------------------------------------
Three Months Ended March 31, 1999 Compared to the Three Months Ended
March 31, 1998.
Revenues
--------
Service and system fees revenues were $259.8 million, an increase of 21.6%
compared to the first quarter of 1998. North American revenues increased
primarily due to higher levels of professional services and software and
related services. The higher level of professional services was generally
attributable to system installations, consulting, and facilities management
fees. The increase in software and related services was primarily due to
higher levels of sales and installations to new and existing customers and
support fees.
6
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
International revenues increased primarily due to the effect of companies
acquired in 1998, and higher levels of professional services.
Hardware sales revenues decreased to $27.3 million for the first quarter of
1999 from $41.7 million in the first quarter of 1998, primarily due to
changes in the timing and product mix of systems installed. Contributing to
this decrease were lower levels of installations of mainframe systems to
new and existing customers that process the Company's INVISION(R) product
at their sites, partially offset by increased sales of networking
equipment.
Cost and Expenses
-----------------
Operating and development expenses decreased to 46.8% of service and system
fees revenues in the first quarter of 1999 from 48.4% for the first 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, partially offset by a higher rate of growth for third-
party software costs.
Marketing and installation expenses increased to 35.7% of service and
system fees revenues in the first quarter of 1999 from 31.4% in the first
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 system
fees revenues, decreased to 7.7% in the first quarter of 1999 from 9.1% in
the first quarter of 1998, primarily due to the Company's continuing
efforts to leverage administrative costs over an increasing revenue base.
Cost of hardware sales decreased to 77.1% of hardware sales revenues in the
first quarter of 1999 from 84.9% in the first quarter of 1998. This change
was primarily due to the different product mixes of systems installed in
each quarter.
Interest expense was $2.0 million in the quarter ended March 31, 1999
compared to $1.4 million in the same period in 1998. This change was
generally attributable to a higher level of average outstanding short-term
borrowings during the current period.
Provision for Income Taxes
--------------------------
Income taxes increased $.3 million in the quarter ended March 31, 1999 when
compared to the same period in 1998. This change was primarily due to an
increase of $.8 million in income before income taxes. The Company's
effective tax rate for federal, state, and foreign income taxes was 38.0%
in the first quarter of 1999 and 1998.
Net Income
----------
Net income was $18.3 million in the quarter ended March 31, 1999 compared
to $17.8 million in the quarter ended March 31, 1998 for the reasons
discussed above.
7
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
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.
The Company believes that approximately 75% of the required upgrades of Company
products in the North American customer base have been completed, and that most
of the remaining upgrades in the North American customer base and most of the
required upgrades in the Company's International customer base will be completed
by mid-1999. The ability of the Company to assist its customers in installing
Year 2000 compliant versions of its products will be dependent on the
availability of Company and external resources, and the readiness and ability of
customers to participate in such installations.
The Company is continually assessing and informing customers of the Year 2000
compliance status of third-party products that customers use in connection with
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.
While the Company expects a continued demand for its services, it is possible
that the Year 2000 issue may cause a delay in the introduction of new products,
and or a decline in decisions to purchase new products by healthcare providers
as they focus instead on efforts to update their current systems. Customer
efforts to update their current systems, and potential constraints on available
resources, could also cause delays in installation of the Company's products.
Although the Company believes that it has taken adequate protective steps, it is
possible that claims will be made against the Company should its customers
experience Year 2000 problems. Among other matters such claims could relate to
(i) malfunctions in Company products, which have not been upgraded, whether
because an enhancement has not been provided by the Company or because the
Company-provided enhancement has not been installed by the customer, (ii)
difficulties resulting from Year 2000 problems in third-party hardware or
software used in connection with the operation of Company products, or (iii)
consulting services provided by the Company to its customers concerning Year
2000 issues. The Company anticipates that claims may be made even in cases
where the Company is not ultimately responsible.
8
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Costs incurred modifying products sold to customers have been recorded in
accordance with the Company's policies for internally produced software. The
majority of the Company's Year 2000 software development work has been
integrated into the Company's operations in the normal course of business. The
costs for such work have not been separately tracked and are therefore not
practicably estimable.
The Company continues to assess, test (where possible) and or seek assurance
from third-party vendors regarding Year 2000 compliance of the Company's
critical internal information technology and non-information technology systems
such as utilities, including telecommunications used internally and at the
Company's Information Services Center. Based on these efforts, the Company
believes that a majority of such systems are now Year 2000 compliant. The
Company is currently pursuing the remediation or replacement of its remaining
non-compliant internal systems and expects that all of its critical internal
systems will be compliant by mid-1999. Any failure in a critical internal
system relating to Year 2000 problems, whether in a system maintained by the
Company or by a third-party vendor, could have a material adverse effect on the
Company's business operations. The costs to the Company of addressing the Year
2000 issue with respect to its internal systems have not been material and have
been expensed as incurred. The Company does not expect the remaining costs of
remediation with respect to such systems to be material.
The Company is currently in the process of developing contingency plans to deal
with issues which may arise in 1999 and 2000, such as expected increases in
customer upgrade and support activities, problems caused by customer delays in
implementing Company or third-party upgrades, and possible disruptions in the
Company's external support systems and internal systems. In addition to the
alternate power and fuel source contingency systems already in place for the
Company's Information Services Center, these plans include supplementing the
organization with additional technical resources from other areas of the Company
during the critical period from Friday, December 31, 1999 through Monday,
January 3, 2000, and forming auxiliary support centers in the Company's field
organization. The Company expects that this contingency planning process will
continue through 1999.
Euro Conversion
- ---------------
On January 1, 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 the euro
conversion will have a material impact on its business operations.
9
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are included in this report:
No. Description
---- -----------------------------------------------------------
(27) Financial Data Schedule
(b) No reports on Form 8-K were filed during the three-month
period ended March 31, 1999.
10
<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
May 17, 1999 /S/Terrence W. Kyle
- ------------ -----------------------------------
Date Terrence W. Kyle
Senior Vice President, Treasurer,
and Assistant Secretary,
Principal Financial Officer and
Duly Authorized Officer
11
<PAGE>
SHARED MEDICAL SYSTEMS CORPORATION
----------------------------------
Exhibit Index
No. Description
--- ------------------------------------------------------------
(27) Financial Data Schedule
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 39,553
<SECURITIES> 0
<RECEIVABLES> 348,471
<ALLOWANCES> 13,573
<INVENTORY> 0
<CURRENT-ASSETS> 406,623
<PP&E> 323,872
<DEPRECIATION> 182,829
<TOTAL-ASSETS> 808,955
<CURRENT-LIABILITIES> 355,670
<BONDS> 13,521
0
0
<COMMON> 307
<OTHER-SE> 410,950
<TOTAL-LIABILITY-AND-EQUITY> 808,955
<SALES> 27,260
<TOTAL-REVENUES> 287,069
<CGS> 21,018
<TOTAL-COSTS> 214,363
<OTHER-EXPENSES> 20,103
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,049
<INCOME-PRETAX> 29,536
<INCOME-TAX> 11,223
<INCOME-CONTINUING> 18,313
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,313
<EPS-PRIMARY> .69
<EPS-DILUTED> .68
</TABLE>
