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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 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 of (I.R.S. Employer Identification Number)
incorporation or organization)
51 Valley Stream Parkway
Malvern, Pennsylvania 19355
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 219-6300
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share New York Stock Exchange
(Title of class) (Name of each exchange
on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of the voting stock (Common Stock) held by
non-affiliates of the registrant as of February 29, 2000, was $1,018,729,000.
See page 16 herein for assumptions on which this calculation is based.
On February 29, 2000, there were 26,912,304 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Certain portions of the Company's Annual Report to Stockholders for the year
ended December 31, 1999 are incorporated by reference into Parts I and II of
this Form 10-K. Certain portions of the Company's definitive Proxy Statement
expected to be mailed to stockholders on or about April 17, 2000, are
incorporated by reference into Part III of this Form 10-K.
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2
Part I
Item 1. Business.
General
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The Company, incorporated in Delaware in 1969, is a leading supplier of
information solutions to the health industry in over 20 countries and
territories in North America, Europe, and New Zealand. The Company's customers
include hospitals and public health institutions; physician groups, clinics, and
diagnostic and treatment centers; home health, assisted living, and hospice care
providers; rehabilitation, behavioral, and long-term care facilities; and health
enterprises, which are comprehensive networks composed of multiple health
providers.
The Company develops and delivers a wide range of comprehensive solutions to
meet the information technology needs of its customers. These solutions consist
of software and related services, professional services, and computer hardware.
Software and related services include clinical, financial and administrative,
enterprise management, and decision support systems; and related application
processing, electronic data interchange, enterprise systems management, managed
Internet, and support services. The Company also offers a variety of
complementary professional services including implementation; networking;
customer education; specialized clinical, financial and technology consulting;
and information technology, managed care administration and business office
outsourcing. The Company's information systems operate on hardware platforms
that range from personal computers, to client/server networks, minicomputers,
and mainframes, which can be remotely hosted at the Company's Information
Services Center (ISC) via the SMS Health Information Network or operated at the
customer's site, depending on the type of solution chosen and the operational
needs of the customer.
The Company has two geographic segments, North America and International.
Financial information by business segment and geographic area can be found on
page 34 of the Company's 1999 Annual Report to Stockholders, Notes to
Consolidated Financial Statements, Business Segment Information (Note 9), which
is incorporated herein by reference.
North America has historically been the Company's largest market, accounting for
86% of 1999 revenues. The Company currently has contracts with health providers
in 47 states, the District of Columbia, Puerto Rico, Bermuda, and Canada. The
Company markets its information systems and provides implementation services and
ongoing technical, consulting and educational support with a field staff working
from branch offices. At its Corporate Headquarters and ISC, the Company has
customer service staff, applications specialists, and communications and
computer operations personnel who assist customers in their day-to-day use of
the Company's systems, and system designers and programmers who work to improve
existing software applications and develop additional information systems.
The Company's international operations accounted for 14% of 1999 revenues. The
Company entered the health information market in Europe in 1981 and New Zealand
in 1997. The Company's international information systems and related services
are provided to customers in 14 European countries and New Zealand primarily
through twelve international branch offices.
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Industry Overview
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The health industry continues to experience significant changes. In order to
control costs, the industry has moved from a traditional fee-for-service
reimbursement model to alternative payment models, which shift the financial
risk from the payer to the health provider. The resulting pressures to control
costs have caused the health industry to focus on providing quality care in the
most efficient and cost-effective manner. The health industry also continues to
experience significant consolidation among health providers including the
formation of large health enterprises, which are designed to better manage risk
and create continuity of quality patient care.
Health industry consolidation and changes in the way health providers are
structured and reimbursed, combined with pressures to control costs, improve
quality, and increase market share continue to create demand for information
solutions. The growth of health enterprises in particular has resulted in demand
for information systems that can gather financial and clinical information from
diverse and dispersed sources, which is consistent and easily accessible
throughout the enterprise.
Services and Systems
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Service and system fees earned by the Company for the years ended December 31,
1999, 1998, and 1997 were $1,083 million, $946 million, and $803 million,
respectively. Service and system fees are derived primarily from software and
related services and professional services.
Software and Related Services
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The Company offers software systems and related application processing,
electronic data interchange, and support services, which are proprietary to
the Company or offered as part of strategic alliances with other vendors.
These systems are designed to meet the information needs of health
enterprises and public health institutions, hospitals, physicians, extended
and residential-care providers, and consumers, and include clinical,
financial and administrative, enterprise management, and decision support
applications.
Clinical applications provide clinicians with point-of-care data entry and
access to clinical information. These systems automate many labor-intensive
tasks performed in the admissions, nursing, radiology, laboratory, pharmacy,
and other departments within health organizations, while facilitating
communications among them.
Financial and administrative applications include provider accounting
(including billing and receivables), human resources, payroll, materials
management, general ledger, and property.
Enterprise management systems are designed to meet the clinical and
financial information needs of consolidating health provider networks. The
Company's NOVIUS product line is specifically designed to meet the clinical
and financial information needs of these health enterprises by offering a
single-platform, fully integrated solution. Enterprise management systems
connect all points of care in the enterprise to assist in the administration
of patient care through patient indices that identify patients anywhere
within the health enterprise network, schedule network-wide
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4
resources, and retain cumulative electronic patient records for various
support functions. As part of its enterprise management solutions the
Company offers decision support and electronic data interchange (EDI)
systems. Decision support systems enable health executives and managers to
set performance standards, identify variances, and analyze results by
providing access to a range of strategic information collected from
clinical, financial and administrative, and other enterprise management
systems. EDI facilitates the sharing and standardization of information,
such as eligibility verifications, and claims and remittance transmissions
between health providers and payers.
The Company's principal systems are as follows:
BASE:
INVISION(R) A clinical, financial and administrative
system operating on an IBM mainframe
platform.
MedSeries4(R) Integrated clinical and financial
applications operating on the IBM AS/400
platform.
UNITY(R) A clinical and financial system offered
with in-house processing of clinical
information and remote application
processing of financial information.
ALLEGRA(R) Clinical, financial and administrative
applications operating on a Compaq-based
platform.
Eagle 2000(R) A financial management system designed
primarily for health providers in the
State of New York.
CLINICOM* A clinical, financial and administrative
system sold in Europe.
Medico A clinical, financial and administrative
system for European providers.
AMBULATORY CARE:
SIGNATURE(R) A financial and administrative system
for large group physician practices.
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5
NOVIUS(R) Practice Manager Financial and administrative
applications to support physician
practices.
NOVIUS(R) Clinical Manager A computer-based patient record
for the physician enterprise that
provides for easy data collection
and access to integrated
information.
Physician Connect A Web browser-based electronic
medical record for physician
practices that includes a suite
of workflow-based applications.
CONTINUING CARE:
NOVIUS Home Care(R) A clinical and financial system for home
health providers.
Long-Term Care System Information systems for skilled nursing
providers.
CONSUMER RESOURCES & EDUCATION:
Alliance with drkoop.com** Internet/Intranet applications to
address the healthcare information needs
of consumers, patients and health
professionals.
CLINICAL:
Common Vocabulary Engine Provides a single information source of
terms and concepts that comprise the
medical vocabulary used in the patient
care process. The Common Vocabulary
Engine defines the relationships between
healthcare terms providing a single,
central source of terminology for all
SMS clinical applications.
Clinical Documentation/ Supports the clinical process by
Orders Charting addressing the ongoing cycle of
assessments and care planning, charting
treatments and medications, and
evaluating outcomes.
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6
Clinical Observations and Provides a single repository for the
Results collection of active clinical data -
observations, progress notes, and
results on each patient's medical
condition.
Order Processing Provides for order communications among
all departments in acute care,
outpatient and remote settings.
Patient Management Provides online, interactive admissions,
discharges, transfers (ADT),
registration, re-registration, bed
reservation/control, pre-admission
planning, care provider census inquiry,
and reporting for both inpatients and
outpatients.
NOVIUS Rules Engine(R) Provides a rule-based system of clinical
alerts and reminders using the Arden
Syntax (an industry standard).
Protocols Provides tools needed to organize and
implement treatment guidelines,
associated variance management, and
outcomes measurement across the
continuum of care.
Medical Imaging Provides an image repository that
Management System efficiently stores and provides access
to medical film or medical images for
review.
NOVIUS Radiology(R) Provides for systematic control of the
flow of orders, charges, and results in
the radiology department.
NOVIUS Lab(R) Supports laboratory operations,
including Microbiology, Blood Bank,
Anatomic Pathology, and outreach
services.
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Pharmacy System Supports pharmacy operations including
routine dispensing operations,
medication and IV admixture processing,
automatic clinical screening, outpatient
pharmacy processing and drug evaluation.
FINANCIAL & ADMINISTRATIVE:
General Financials Provides general accounting and
financial applications, which include
general ledger, accounts payable,
materials management and property for
hospitals.
Patient Accounting Provides applications that support the
management of patient billing and
receivables for hospitals.
Human Resources Management Provides human resource and payroll
System applications for hospitals.
Document Imaging Provides electronic imaging of documents
and records for the business office.
ENTERPRISE MANAGEMENT:
Enterprise Access Provides a single point of entry into
Directory(R) the demographic and key clinical
information maintained within the
enterprise.
Lifetime Clinical Record(R) Provides an integrated lifetime view of
a patient's significant clinical data
collected from throughout the healthcare
enterprise. The system also supports
analyses across selected patient
populations.
Enterprise Registration Provides integrated healthcare
enterprise management of patient
registration.
NOVIUS(R) Data Warehouse Provides a centralized source of
management information for decision
support.
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NOVIUS(R) Scheduling Enables scheduling of provider services
throughout the enterprise.
NOVIUS(R) Quality Advisor Allows organizations to identify and
monitor performance throughout the
enterprise using key quality indicators.
NOVIUS(R) General Financials Provides general accounting and
financial applications for the health
enterprise, which include
general ledger and accounts payable.
NOVIUS(R) Human Resources Provides an integrated healthcare
enterprise management system for human
resources and payroll.
NOVIUS(R) Healthcare Provides an integrated healthcare
Procurement enterprise management system for
materials management processes.
NOVIUS(R) Cost Accounting Provides cost information for the health
enterprise that enables users to develop
fully allocated costs at the department,
charge time, and patient levels.
NOVIUS(R) Flexible Budgeting Generates and monitors both fixed and
flexible budgets for the health
enterprise.
NOVIUS Imaging(R) Provides document and medical imaging
applications to support clinical and
business office operations.
Contract Management Provides operational tools for
administration, assessment and analysis
of managed care agreements for the
provider.
Managed Care Administration Supports administrative and financial
management for health plans operated by
providers.
SMS OPENLink(R) Provides a tool for application
integration.
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9
ELECTRONIC DATA INTERCHANGE
SERVICES:
Integrated Eligibility Checks patient/member eligibility online
Service at the registration desk to
receive copays and support
reimbursement.
Patient ID Services Verifies patient addresses and social
security numbers online to support
reimbursement and minimize return mail.
Integrated Notifications, Real-time services to electronically
Authorizations, and Referrals automate patient referral or pre-
certification, notifications of
admissions or referral, and to request
authorization.
Electronic Remittance Service Automates same-day posting of payments
and other remittance data.
Integrated Claims Service Enables customers to electronically edit
and submit UB-92, HCFA1500, and specific
state forms.
Pharmacy Claims Enables customers to submit pharmacy
claims and receive online adjudication.
Remote Statement Services Enables customers to process statements
quickly and cost-effectively.
GROUPWARE:
Policies and Procedures Applications that act as a repository of
policies and procedures.
Enterprise Vendor Contract Enables management and distribution of
Tracking vendor contracts by type, department,
expiration date, and value.
Enterprise Project Tracking Provides an integrated workflow
environment for managing projects and
tasks.
Enterprise Applicant Tracking Supports storage, management and
distribution of employment applications
processed by the Human Resources
Department.
The product names marked with a (R) are registered trademarks of the
Company or its subsidiaries.
*CLINICOM is a registered trademark of the Company or its subsidiaries in
Germany, Ireland, Switzerland and the United Kingdom.
**drkoop.com is a trademark of drkoop.com, Inc.
Application Service Provider
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The Company acts as an Application Service Provider to its customers, which
involves processing a customer's applications using the Company's equipment
and personnel at the ISC. This service frees the Company's customers from
having to maintain the facilities, equipment and technical staff required
for systems processing. The Company processes applications for over 1,000
customer facilities.
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Enterprise Systems Management
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The Company offers services for managing health providers' information systems
environment, including workstations, servers, networks, and the Internet.
Managed Internet Services
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The Company offers its customers Internet Security Service geared for
applications running in the ISC and managed Internet service for customers
with a routed wide area network connection to the ISC, contains components of
Internet access and mail, firewalls and mail servers/relay management within
the ISC.
Support Services
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The Company offers its customers support services to assist them in
maintaining the operation of its information systems in accordance with the
corresponding documentation.
Professional Services
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The Company offers a wide variety of professional services that complement the
Company's information systems. These services include system implementation,
networking, customer education, specialized clinical, financial and technology
consulting, and information technology, business office and managed care
administration outsourcing.
Implementation Services
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The Company offers services to facilitate the implementation of its
information systems and technology offerings to health providers using a well-
defined implementation methodology.
Networking Services
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The Company offers networking services consisting of systems integration and
network assessment, planning, design and management.
Consulting Services
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The Company offers clinical, financial and technology consulting services.
Clinical consulting services help customers analyze their clinical performance
and develop critical pathways, case management processes, and outcome
management programs. Financial consulting services assist customers by
analyzing current operational and technical processes and automating processes
to improve cash flows. Technology consulting services include strategic
planning, systems integration, and process re-engineering services designed to
assist the Company's customers in synchronizing both systems and processes
throughout their organizations.
Outsourcing Services
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The Company offers information technology, business office, and managed care
administration outsourcing services. Information technology outsourcing
encompasses a range of engagements, from interim management arrangements and
help desk outsourcing to full facilities management partnerships, where all
datacenter and other information technology responsibilities are performed by
the Company. In business office outsourcing engagements, the Company assumes
administrative responsibility for the business and operational aspects of a
customer's billing, collections, cash management, and related functions.
Managed care administration outsourcing provides customers with the
information technology and managed care administrative methodology to assist
with the management and administrative aspects of customers' risk-bearing
contracts with managed care payers.
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Education Services
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The Company provides education and training services to support users of the
Company's applications and related technologies. Services are provided at the
Company's education and training sites, at customer sites, or through
computer-based training.
Hardware Sales
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In connection with sales of its software systems, the Company may also sell to
its customers third-party hardware ranging from personal computers, to
client/server networks, minicomputers, and mainframes. Hardware sales revenues
for the years ended December 31, 1999, 1998, and 1997 were $134 million, $189
million, and $119 million, respectively.
Customers
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The Company's customers include health providers, such as health enterprises and
public health institutions, hospitals, as well as other health providers along
the continuum of care, including physician groups, clinics, and diagnostic and
treatment centers; home health, assisted living, and hospice care providers; and
rehabilitation, behavioral, and long-term care facilities.
The Company's services and systems are provided to customers under long-term
service contracts and perpetual license agreements. Revenues from individual
customers vary depending on the number and type of the Company's services and
systems that are used. Because of the high fixed costs of the Company's
operations, the loss of any single customer under a long-term service contract
would reduce the Company's net income by a greater percentage than the
percentage of total revenues lost. Presently, no more than one quarter of the
Company's long-term service contracts expire in any future year. Although the
Company strives to retain its customers, not all of the Company's past contracts
have been renewed, and there can be no assurance that existing customers will
either renew their contracts or convert to another type of system offered by the
Company upon the expiration of their current contract.
In 1999, 1998, and 1997, no single customer accounted for 10% or more of
consolidated revenues. At December 31, 1999, total future revenues under
contract exceeded $2.4 billion.
Competition
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The health information system (HIS) market is intensely competitive. Competition
among HIS vendors is based on a combination of breadth of product offerings,
service, and price. In the United States, the Company's principal competitors
are other national vendors focused on the health market, including McKesson
HBOC, Inc., IDX Systems Corporation, Medical Information Technology, Inc.
(Meditech), Cerner Corporation, and Eclipsys Corporation. In each sector of the
HIS market, however, the Company also competes with niche vendors serving only
that sector. In addition, some hospitals have developed their own proprietary
systems. The Company competes for consulting, planning, re-engineering,
integration and management engagements with regional, national and international
consulting firms. In its international business, the Company competes with one
or more regional or local providers in each country.
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Research and Development
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The Company continually enhances existing services and systems and develops new
services and systems to meet the information processing needs of the health
industry. Profitability of newly-developed services and systems depends upon
attainment of sufficient sales volumes and continued improvement and efficiency
of the services and systems.
The Company expenses all research and non-capitalized development costs, which
generally consist of costs incurred to establish the technological feasibility
of internally developed computer software. These expenses, which are primarily
for salaries of personnel and computer costs, were $81.5 million in 1999, $80.1
million in 1998, and $65.9 million in 1997.
The Company capitalizes costs of internally developed computer software intended
to be licensed to customers. Capitalization for internally developed computer
software begins when a project reaches technological feasibility and ends when
the software is available for general release to customers. Technological
feasibility for internally developed computer software is established when
detailed program designs, which substantiate that the software product can be
produced to meet its design specifications, including applicable program
functions, features and technical performance requirements, are completed. The
Company amortizes internally developed computer software on a product-by-product
basis using the greater of the amount computed by the straight-line method over
the estimated useful life of the product, or the ratio of current revenues
compared to total estimated revenues. Capitalized internally developed computer
software costs intended to be licensed to customers, net of accumulated
amortization, were $61.9 million and $49.7 million as of December 31, 1999 and
1998, respectively. Amortization related to capitalized internally developed
computer software intended to be licensed to customers was $10.4 million in
1999, $9.9 million in 1998, and $7.9 million in 1997.
Intellectual Property
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The Company depends upon a combination of trade secret, copyright and trademark
laws; license agreements; employee education; and nondisclosure, noncompetition
and other contractual provisions to protect its proprietary rights and products.
The Company attempts to protect its trade secrets and other proprietary
information through agreements with its customers, employees, and consultants.
Personnel
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As of December 31, 1999, the Company had 7,634 full-time employees.
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Item 2. Properties.
The Company owns 116 acres of land in Chester County, Pennsylvania and has
constructed four buildings on this site: an information services center (81,000
square feet), which was put into service in 1979, and three office buildings
with an aggregate of 661,000 square feet, the first of which was placed in
service in 1981, the second of which was placed in service in 1983, and the
third of which was placed in service in 1999. These office buildings serve as
the Company's corporate headquarters. The Company also leases office space in
most major metropolitan areas in the United States for marketing, implementation
and support personnel. The Company also owns office buildings in Spain and the
United Kingdom and leases office space in various locations to support its
international operations. These properties are adequate for existing operations.
The Company also owns a separate tract of 241 acres of land in Chester County,
Pennsylvania for possible future expansion.
The Company's ISC, which is used primarily to process customer information and
to support the Company's internal systems operations, contains IBM CMOS
processors obtained under operating leases. The Company's ISC also contains IBM
AS/400 minicomputers, various types of servers, as well as related mainframe
peripherals and network communications equipment that have been purchased or
leased. These leases are generally contracted with terms that range from one to
five years.
Item 3. Legal Proceedings.
In early March 2000, the Company announced that it had received an unsolicited
proposal from Eclipsys Corporation ("Eclipsys") regarding a proposed merger
with the Company and a notice of Eclipsys' intent to nominate a majority of the
Company's Board of Directors. The Board has announced that it is uninterested in
a combination of the two companies, and it has determined to explore strategic
alternatives that may be available to the Company.
On March 3, 2000, three separate purported class action lawsuits were filed
against the Company and its Directors in the Delaware Court of Chancery. Weckel
v. Macaleer, No. 17844NC (Del. Ch.); Sherman v. Shared Medical Systems
Corporation, No. 17841NC (Del.Ch.); Weisz v. Macaleer, No. 17840NC (Del. Ch.).
A fourth such action was filed on March 7, 2000, Cavanagh v. Macaleer, No.
17868NC (Del. Ch.), and a fifth and sixth on March 10, 2000. Kass v. Macaleer,
No. 17880NC (Del. Ch.); Goldberg v. Macaleer, No. 17881NC (Del. Ch.). The
class actions are purportedly brought on behalf of a class consisting of all of
the Company's shareholders. In general, the class actions allege that the
Company and its Directors breached their fiduciary duties to the Company's
shareholders in responding to the Eclipsys proposal, and seek damages in
unspecified amounts and injunctive relief requiring the Directors to take
certain specified actions in response to the Eclipsys proposal.
On March 6, 2000, Eclipsys filed a lawsuit in the Delaware Court of Chancery
against the Company and its Directors. Eclipsys Corporation v. Shared Medical
Systems Corporation, No. 17851NC (Del. Ch.). In the Eclipsys lawsuit, Eclipsys
seeks an order compelling the Company's Board to render the Company's
Shareholders Rights Plan (the "Rights Plan") inapplicable to Eclipsys' offer,
and seeks a declaration that certain provisions of the Rights Plan are invalid
under Delaware law. Eclipsys alleges that the Company's Directors' failure to
redeem the Rights Plan or otherwise render it inapplicable to the Eclipsys
proposal constitutes a breach of the Directors' fiduciary duties. The Company
has amended the Rights Plan to remove certain provisions challenged by Eclipsys
that had been rendered invalid by developments in Delaware law after the
adoption of the Company's Rights Plan. On March 30, 2000, Eclipsys Corporation
announced that it was withdrawing its suit against the Company and its
nomination of directors.
The Company believes that these lawsuits are without merit, and intends to
defend the actions vigorously.
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The Company has discussed with federal authorities a civil investigation of
billing and accounting practices at Straub Clinic & Hospital, a former Company
customer. In September 1998, Straub paid federal and state authorities $2.4
million to settle allegations of wrongdoing, including Straub's improper
retention of funds from government reimbursement programs. The investigation did
not focus on the operation of the Company's billing software used at Straub, and
the government does not allege any improper receipt or retention of federal
funds by the Company or any of its employees. Rather, the investigation
concerned the role of a single Company employee in this situation. The Company
believes that its employee's actions were appropriate and lawful, and does not
believe that the outcome of this matter will have a material adverse effect on
the Company's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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15
Executive Officers of the Registrant
Listed below are the name, age as of December 31, 1999, and position(s) with the
Company and principal occupation(s) for the past five years of each of the
current executive officers of the Company.
Positions with Company and Principal
Name Age Occupation(s) - Past Five Years
- --------------------------------------------------------------------------------
R. James Macaleer 65 Chairman of the Board since August 1995. Prior
to this, Mr. Macaleer served as Chairman of the
Board and Chief Executive Officer since the
Company's founding in 1969.
Marvin S. Cadwell 56 Director, President, and Chief Executive Officer
since August 1995. Prior to this, Mr. Cadwell
served as Director, President, and Chief
Operating Officer, May 1995 - August 1995;
President and Chief Operating Officer, March
1995 - May 1995; Executive Vice President and
Chief Operating Officer of SMS Europe, October
1993 - March 1995. Mr. Cadwell originally joined
the Company in 1975.
James C. Kelly 60 Secretary since June 1990. Mr. Kelly originally
joined the Company in 1972.
V. Brewster Jones 55 Senior Vice President since May 1997. Prior to
this, Mr. Jones served in a variety of executive
positions for Multimedia Medical Systems, Inc.,
an information technology provider for the
health industry, September 1995 - May 1997; and
President and Chief Executive Officer of
Pharmakinetics Laboratories, Inc., a
pharmaceutical research company, October 1990 -
July 1995.
Terrence W. Kyle 49 Senior Vice President, Treasurer, and Assistant
Secretary since August 1996. Prior to this, Mr.
Kyle served as Vice President of Finance,
Treasurer, and Assistant Secretary, June 1990 -
August 1996. Mr. Kyle originally joined the
Company in 1976.
Francis W. Lavelle 50 Senior Vice President of U.S. Customer
Operations since December 1993. Mr. Lavelle
originally joined the Company in 1988.
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16
Positions with Company and Principal
Name Age Occupation(s) - Past Five Years
- --------------------------------------------------------------------------------
David F. Perri 50 Senior Vice President since August 1996. Prior
to this, Mr. Perri served as Vice President of
Technology Solutions, March 1995 - August 1996;
and Vice President of Technical Affairs, June
1990 - March 1995. Mr. Perri originally joined
the Company in 1980.
Guillermo N. Ramas, Sr. 54 Senior Vice President and President of SMS
International since August 1996. Prior to this,
Mr. Ramas served as Managing Director of SMS
Europe, October 1993 - August 1996. Mr. Ramas
originally joined the Company in 1987.
Michael B. Costello 56 Vice President of Administration and Corporate
Communications since January 1991. Mr. Costello
originally joined the Company in 1979.
Edward J. Grady 47 Vice President, Controller, and Assistant
Treasurer since September 1996. Prior to this,
Mr. Grady served as Controller and Assistant
Treasurer, February 1993 - September 1996. Mr.
Grady originally joined the Company in 1980.
Bonnie L. Shuman 51 Vice President, General Counsel, and Assistant
Secretary since September 1996. Prior to this,
Ms. Shuman served as General Counsel and
Assistant Secretary, June 1990 - September 1996.
Ms. Shuman originally joined the Company in
1983.
- --------------------------------------------------------------------------------
In calculating the aggregate market value of voting stock held by non-affiliates
as shown on the cover page of this Form 10-K Report, the Company has included
all of its directors, and only its directors, as affiliates of the Company. This
is not an admission by the Company that any or all of its directors are in fact
affiliates. The aggregate market value of voting stock held by non-affiliates
was computed by using the high and low prices of the Company's stock as of
February 29, 2000.
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17
Part II
The following information contained in the Company's Annual Report to
Stockholders for the year ended December 31, 1999 is incorporated herein by
reference:
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Page 23, Section titled Market Price and Dividends Declared Per Share *- "1999"
and "1998" columns and the related footnote
Effective November 16, 1999, the Company issued 7,000 shares of its Common Stock
to a rabbi trust to be held for the benefit of an officer of the Company in
connection with a deferred compensation arrangement for such officer. The
issuance of such shares either did not constitute an offer or sale of such
shares within the meaning of the Securities Act of 1933 (the "Act"), or was
exempt from registration under Section 4(2) of the Act.
Item 6. Selected Financial Data.
Page 23, Section titled Summary of Consolidated Operations - "Revenues," "Net
Income," "Net Income Per Share - Basic," and "Net Income Per Share - Diluted"
line items
Page 23, Section titled Summary of Consolidated Financial Position - "Total
Assets" and "Long-Term Debt and Capital Leases" line items
Page 23, Section titled Operating Ratios and Other Selected Financial Data -
"Cash Dividends Declared Per Share" line item
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Pages 18 through 22, Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
Pages 24 through 34
Page 35, Report of Independent Public Accountants
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
18
Part III
The following information contained in the Company's definitive Proxy Statement
expected to be mailed to stockholders on or about April 17, 2000 is incorporated
herein by reference:
Item 10. Directors and Executive Officers of the Registrant.
Section titled "Security Ownership": subsection titled "Directors and
Management": columns "Name of Beneficial Owner" and "Director Since" for the
portion of the table titled "Directors"
(For information concerning the Company's Executive Officers see pages 14 and 15
hereof, section titled "Executive Officers of the Registrant")
Item 11. Executive Compensation.
Section titled "Election of Directors": subsection titled "Compensation of
Directors"
Section titled "Executive Compensation": subsection titled "Compensation
Summaries"
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Section titled "Security Ownership"
Item 13. Certain Relationships and Related Transactions.
None.
<PAGE>
19
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements - the following consolidated financial
statements included on pages 24 through 35 in the Company's Annual
Report to Stockholders for the year ended December 31, 1999 are
included in this report.
. Consolidated Balance Sheet as of December 31, 1999 and 1998
(page 24)
. Consolidated Statement of Income for the years ended
December 31, 1999, 1998, and 1997 (page 25)
. Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998, and 1997 (page 26)
. Consolidated Statement of Stockholders' Investment for the
years ended December 31, 1999, 1998, and 1997 (page 27)
. Notes to Consolidated Financial Statements for the years
ended December 31, 1999, 1998, and 1997 (pages 28 through
34)
. Selected Quarterly Financial Data (Unaudited) for the years
ended December 31, 1999 and 1998 as reported in Note 10 to
Consolidated Financial Statements (page 34)
. Report of Independent Public Accountants (page 35)
2. Financial Statement Schedules - the following Financial
Statement Schedules required by Article 5 of Regulation S-X are
included in this report:
. Report of Independent Public Accountants on Schedule
. Schedule II - Valuation and Qualifying Accounts
. Schedules omitted - the following schedules are omitted
since they are not required, or not applicable: I, III, IV,
and V
<PAGE>
20
3. The following exhibits are included in this report:
No. Description
---- -----------------------------------------------------------
(3) Articles of Incorporation and By-laws -
Certificate of Amendment of Restated Certificate of
Incorporation dated May 21, 1997 (filed as Exhibit (3) to
the Company's Form 10-Q Report for the quarter ended June
30, 1997)*
Restated Certificate of Incorporation dated May 14, 1992
(filed as Exhibit (3) to the Company's Form 10-Q Report for
the quarter ended June 30, 1997)*, By-laws as amended
through August 10, 1995 (filed as Exhibit (3) to the
Company's Form 10-Q Report for the quarter ended September
30, 1995)*
(4) Instruments defining the rights of security holders,
including indentures -
Rights Agreement dated as of May 1, 1991, between the
Registrant and Pittsburgh National Bank, as Rights Agent
(filed as Exhibit (4) to Company's Form 10-K Report for the
year ended December 31, 1996)*
(10) Material Contracts -
Note Purchase Agreement (filed as Exhibit (10) to the
Company's Form 10-Q Report for the quarter ended June 30,
1999)*
Deferred compensation agreements:**
R. James Macaleer (filed as Exhibit (10) to the
Company's Form 10-Q Report for the quarter ended
September 30, 1999)*
James C. Kelly (filed as Exhibit (10) to the
Company's Form 10-K Report for the year ended
December 31, 1995)*
Form of deferred compensation agreement (filed as
Exhibit (10) to the Company's Form 10-K Report for
the year ended December 31, 1998)*:
Marvin S. Cadwell
V. Brewster Jones
Terrence W. Kyle
Francis W. Lavelle
* Previously filed as indicated and incorporated herein by reference.
** May be deemed a management contract or compensatory arrangement.
<PAGE>
21
No. Description
---- -----------------------------------------------------------
David F. Perri
Guillermo N. Ramas, Sr. (filed as Exhibit (10) to
the Company's Form 10-K Report for the year ended
December 31, 1997)*
Performance bonus plans - 1999:**
Marvin S. Cadwell (filed as Exhibit (10) to the
Company's Form 10-Q Report for the quarter ended
June 30, 1999)*
Form of performance bonus plan (filed as Exhibit (10) to
the Company's Form 10-Q Report for the quarter ended
September 30, 1999)*:
V. Brewster Jones
Terrence W. Kyle
Francis W. Lavelle
David F. Perri
Guillermo N. Ramas, Sr.
Performance bonus plans - 1998:**
Marvin S. Cadwell (filed as Exhibit (10) to the
Company's Form 10-Q Report for the quarter ended
June 30, 1998)*
Form of performance bonus plan (filed as Exhibit
(10) to the Company's Form 10-Q Report for the
quarter ended June 30, 1998)*:
V. Brewster Jones
Terrence W. Kyle
Francis W. Lavelle
David F. Perri
Guillermo N. Ramas, Sr.
Insurance agreement:**
R. James Macaleer (filed as Exhibit (10) to the
Company's Form 10-K Report for the year ended
December 31, 1995)*
* Previously filed as indicated and incorporated herein by reference.
** May be deemed a management contract or compensatory arrangement.
<PAGE>
22
No. Description
---- -----------------------------------------------------------
Employment agreements:**
Marvin S. Cadwell (filed as Exhibit (10) to the
Company's Form 10-K Report for the year ended
December 31, 1996)*
V. Brewster Jones (filed as Exhibit (10) to the
Company's Form 10-Q Report for the quarter ended
June 30, 1997)*
Form of executive employment agreement (filed as
Exhibit (10.2) to the Company's Form 10-Q Report for
the quarter ended September 30, 1996)*:
Terrence W. Kyle
Francis W. Lavelle
David F. Perri
Guillermo N. Ramas, Sr.
Form of senior management employment agreement
(filed as Exhibit (10.3) to the Company's Form 10-Q
Report for the quarter ended September 30, 1996)*:
Michael B. Costello
Edward J. Grady
Bonnie L. Shuman
(13) Annual Report to Stockholders for the year ended
December 31, 1999***
(21) Significant Subsidiaries of the Registrant
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule
(b) No reports on Form 8-K were filed during the three-month period ended
December 31, 1999.
* Previously filed as indicated and incorporated herein by reference.
** May be deemed a management contract or compensatory arrangement.
***With the exception of the material specifically incorporated by reference in
Part I and Part II of this Form 10-K, the Annual Report to Stockholders for the
year ended December 31, 1999 is not to be deemed "filed" as part of this Form
10-K.
<PAGE>
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /S/ R. James Macaleer Date: March 30, 2000
----------------------------------------- -------------------
R. James Macaleer - Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /S/ R. James Macaleer Date: March 30, 2000
----------------------------------------- -------------------
R. James Macaleer - Chairman of the Board
By: /S/ Marvin S. Cadwell Date: March 30, 2000
----------------------------------------- -------------------
Marvin S. Cadwell - Director,
President, and Chief Executive Officer
By: /S/ Frederick W. DeTurk Date: March 30, 2000
----------------------------------------- -------------------
Frederick W. DeTurk - Director
By: /S/ Josh S. Weston Date: March 30, 2000
----------------------------------------- -------------------
Josh S. Weston - Director
By: /S/ Jeffrey S. Rubin Date: March 30, 2000
----------------------------------------- -------------------
Jeffrey S. Rubin - Director
By: /S/ Gail R. Wilensky Date: March 30, 2000
----------------------------------------- -------------------
Gail R. Wilensky - Director
By: /S/ Terrence W. Kyle Date: March 30, 2000
----------------------------------------- -------------------
Terrence W. Kyle - Senior Vice President,
Treasurer, and Assistant Secretary
By: /S/ Edward J. Grady Date: March 30, 2000
----------------------------------------- -------------------
Edward J. Grady - Vice President,
Controller, and Assistant Treasurer
<PAGE>
24
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Shared Medical Systems Corporation:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Shared Medical Systems Corporation's 1999
Annual Report to Stockholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 8, 2000. Our audit was made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed in Item 14 is the responsibility of the Company's management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/S/ Arthur Andersen LLP
Philadelphia, PA
February 8, 2000
<PAGE>
25
SCHEDULE II
<TABLE>
<CAPTION>
SHARED MEDICAL SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
-----------------------------------------------------
Balance Balance
Beginning of Charges to Additions/ End of
Year Expenses (Deductions) Year
------------ ---------- ------------- -----------
<S> <C> <C> <C> <C>
Reserve for Doubtful Accounts:
December 31, 1999 $13,369,000 $6,244,000 $(3,471,000) (1) $16,142,000
=========== ========== =========== ===========
December 31, 1998 $10,828,000 $5,237,000 $(2,696,000) (1) $13,369,000
=========== ========== =========== ===========
December 31, 1997 $ 9,389,000 $5,339,000 $(3,900,000) (1) $10,828,000
=========== ========== =========== ===========
</TABLE>
(1)Write-offs of uncollectible accounts
<PAGE>
26
Exhibit Index
No. Description
---- -----------------------------------------------------------
(3) Articles of Incorporation and By-laws -
Certificate of Amendment of Restated Certificate of
Incorporation dated May 21, 1997 (filed as Exhibit (3) to
the Company's Form 10-Q Report for the quarter ended June
30, 1997)*
Restated Certificate of Incorporation dated May 14, 1992
(filed as Exhibit (3) to the Company's Form 10-Q Report for
the quarter ended June 30, 1997)*, By-laws as amended
through August 10, 1995 (filed as Exhibit (3) to the
Company's Form 10-Q Report for the quarter ended September
30, 1995)*
(4) Instruments defining the rights of security holders,
including indentures -
Rights Agreement dated as of May 1, 1991, between the
Registrant and Pittsburgh National Bank, as Rights Agent
(filed as Exhibit (4) to Company's Form 10-K Report for the
year ended December 31, 1996)*
(10) Material Contracts -
Note Purchase Agreement (filed as Exhibit (10) to the
Company's Form 10-Q Report for the quarter ended June 30,
1999)*
Deferred compensation agreements:**
R. James Macaleer (filed as Exhibit (10) to the
Company's Form 10-Q Report for the year ended September
30, 1999)*
James C. Kelly (filed as Exhibit (10) to the Company's
Form 10-K Report for the year ended December 31, 1995)*
Form of deferred compensation agreement (filed as
Exhibit (10) to the Company's Form 10-K Report for the
year ended December 31, 1998)*:
Marvin S. Cadwell
V. Brewster Jones
Terrence W. Kyle
Francis W. Lavelle
* Previously filed as indicated and incorporated herein by reference.
** May be deemed a management contract or compensatory arrangement.
<PAGE>
27
No. Description
---- -----------------------------------------------------------
David F. Perri
Guillermo N. Ramas, Sr. (filed as Exhibit (10) to
the Company's Form 10-K Report for the quarter ended
December 31, 1997)*
Performance bonus plans - 1999:**
Marvin S. Cadwell (filed as Exhibit (10) to the
Company's Form 10-Q Report for the quarter ended
June 30, 1999)*
Form of performance bonus plan (filed as Exhibit
(10) to the Company's Form 10-Q Report for the
quarter ended September 30, 1999)*:
V. Brewster Jones
Terrence W. Kyle
Francis W. Lavelle
David F. Perri
Guillermo N. Ramas, Sr.
Performance bonus plans - 1998:**
Marvin S. Cadwell (filed as Exhibit (10) to the
Company's Form 10-Q Report for the quarter ended June
30, 1998)*
Form of performance bonus plan (filed as Exhibit (10) to
the Company's Form 10-Q Report for the quarter ended
June 30, 1998):*
V. Brewster Jones
Terrence W. Kyle
Francis W. Lavelle
David F. Perri
Guillermo N. Ramas, Sr.
Insurance agreement:**
R. James Macaleer (filed as Exhibit (10) to the
Company's Form 10-K Report for the year ended December
31, 1995)*
* Previously filed as indicated and incorporated herein by reference.
** May be deemed a management contract or compensatory arrangement.
<PAGE>
28
No. Description
---- -----------------------------------------------------------
Employment agreements:**
Marvin S. Cadwell (filed as Exhibit (10) to the
Company's Form 10-K Report for the year ended December
31, 1996)*
V. Brewster Jones (filed as Exhibit (10) to the
Company's Form 10-Q Report for the quarter ended June
30, 1997)*
Form of executive employment agreement (filed as Exhibit
(10.2) to the Company's Form 10-Q Report for the quarter
ended September 30, 1996)*:
Terrence W. Kyle
Francis W. Lavelle
David F. Perri
Guillermo N. Ramas, Sr.
Form of senior management employment agreement (filed as
Exhibit (10.3) to the Company's Form 10-Q Report for the
quarter ended September 30, 1996)*:
Michael B. Costello
Edward J. Grady
Bonnie L. Shuman
(13) Annual Report to Stockholders for the year ended
December 31, 1999***
(21) Significant Subsidiaries of the Registrant
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule
* Previously filed as indicated and incorporated herein by reference.
** May be deemed a management contract or compensatory arrangement.
***With the exception of the material specifically incorporated by reference in
Part I and Part II of this Form 10-K, the Annual Report to Stockholders for the
year ended December 31, 1999 is not to be deemed "filed" as part of this Form
10-K.
<PAGE>
Exhibit (13)
HEALTHCARE INFORMATION
[ART WORK APPEARS HERE]
WHEN AND WHERE IT'S NEEDED
[ART WORK APPEARS HERE]
ANNUAL REPORT 1999
[SMS LOGO APPEARS HERE]
<PAGE>
ABOUT SMS
As a current or future investor, customer, or employee, you seek a company that
is a leader in its field. A company that has a solid financial record and steady
growth. High-quality, innovative products and services. Strong customer
relationships. Solid leadership and effective decision-making. Energetic,
hardworking, creative employees. And a clear vision for the future. You'll find
all of this at SMS.
Over the course of more than 30 years, SMS has become known for its expertise at
providing healthcare information when it's needed, where it's needed. The
Company provides clinical, financial, and administrative information solutions
to over 5,000 healthcare provider organizations in 20 countries. Our high
customer loyalty is evidenced by our 99 percent customer retention rate. Our
customers stay because we provide the right information at the point of need. We
help them achieve measurable results today and show them a clear path to the
future.
Worldwide, we employ more than 7,500 professionals who understand the complex
information needs of the healthcare environment. And we operate the SMS Health
Information Network - created and managed by SMS for application hosting,
e-business, enterprise systems management, and managed Internet services.
Keep reading to learn more. And check our Web site for more comprehensive
information:
WWW.SMED.COM
END-TO-END SOLUTIONS
FOR HEALTHCARE:
CLINICAL APPLICATIONS . FINANCIAL APPLICATIONS
. MANAGEMENT APPLICATIONS . E-SOLUTIONS
. EDI . APPLICATION HOSTING . NETWORKING
. CONSULTING . OUTSOURCING . INSTALLATION
. SUPPORT
CONTENTS
INTRODUCTION .............................................................. 1
LETTER TO SHAREHOLDERS .................................................... 2
FINANCIAL HIGHLIGHTS ...................................................... 5
THE RIGHT INFORMATION ..................................................... 6
AT THE POINT OF NEED ...................................................... 8
ACHIEVING RESULTS ......................................................... 10
ILLUMINATING THE FUTURE ................................................... 12
SMS AT A GLANCE ........................................................... 15
FINANCIAL REVIEW .......................................................... 17
BOARD OF DIRECTORS ........................................................ 35
OFFICE LOCATIONS .......................................................... 36
[SMS LOGO APPEARS HERE]
<PAGE>
HEALTHCARE INFORMATION WHEN AND WHERE IT'S NEEDED
1
[ART WORK APPEARS HERE]
Sound simple? Consider that mergers and acquisitions have spawned today's vast
healthcare enterprises, which include thousands of people who require access to
different information depending upon their needs and roles. These organizations
encompass many different locations and entities - hospitals, clinics, physician
offices, outpatient centers, home health agencies, long-term care centers, and
others - and often several different networks and brands of information systems.
Changing government regulations add further complexity to the challenge. So does
rapid technology change.
That said, getting "anytime, anywhere" access to information suddenly sounds
anything but easy. Yet SMS makes it possible every day, providing vital
information at the point of need to thousands of healthcare professionals around
the world.
How do we do it? First, by creating clinical, financial, and management software
applications that address the information needs of those we serve. Second, by
enabling the smooth transmission of information across a variety of networks -
private networks, the SMS Health Information Network, or the public Internet.
And third, by providing a full range of services and support to help our
customers optimize their use of information to improve quality, financial
performance, and the satisfaction of their constituents.
We provide the right information when and where it's needed to achieve
measurable results. For clinicians. Physicians. Executives. Administrators. And
the people they interact with in the business of providing healthcare.
OUR VISION:
To be the information solutions company of choice for the health industry and
its professionals - working together to improve health worldwide.
OUR MISSION:
Through long-term partnerships in the health industry, we help our customers
improve their quality of care, financial performance, and strategic position by
providing superior, integrated, results- oriented solutions based on information
systems and services.
OUR BELIEFS:
Focus on People as our most important asset. Satisfy our Customers and exceed
their expectations. Strive for Excellence in everything we do.
<PAGE>
[PICTURE OF MARVIN S. CADWELL, DIRECTOR, PRESIDENT, AND CHIEF EXECUTIVE OFFICER
APPEARS HERE]
TO OUR SHAREHOLDERS
Healthcare information. When and where it's needed. SMS has been dedicated to
that service since the Company's inception in 1969. Our foresight, innovation,
and vision are enabling us to lead the industry into the next century.
Without question, our 31st year was filled with challenges associated with the
anticipation of the year 2000. The uncertainty that spanned the world prior to
December 31 was felt far and wide as businesses restricted information
technology (IT) spending and activity.
SMS felt the Y2K impact on sales and certain services in the latter half of
1999. Healthcare organizations postponed larger investments, delayed
installations, and virtually locked down their internal IT environments through
the transition period into this year. Even so, the transition into 2000 was
successful for SMS and our customers as a result of SMS' thorough preparations
and contingency plans.
Our US customers have also felt the impact of the Balanced Budget Act of 1997,
which is significantly reducing their reimbursements and creating cost pressures
and budgetary concerns. Nonetheless, health providers must invest in information
solutions to survive in this very difficult environment. Quite simply, health
providers need SMS' information solutions to operate more efficiently and
control costs while improving quality of care.
The year 2000 will continue to be challenging for SMS. We are certain the market
has great growth opportunities and will improve, but the timing is uncertain.
SMS is clearly positioned to continue its leadership during this exciting period
of change and opportunity. We are fortunate to have employees with the expertise
and creativity to not only deliver superior solutions, but also continue to grow
professional services and advance the Company's mission and goals. We are
diligent in our efforts to balance our responsibilities and grow value for
shareholders and customers as well as our people, many of whom are shareholders
themselves. Our people, experience, and supporting infrastructure will enable us
to continue to improve results as we capitalize on forthcoming opportunities.
1999 RESULTS
The fundamentals of our business continue to be very strong. Revenues, net
income, and earnings per share all increased compared with 1998. Cash flow from
operations grew dramatically, and the results of our International operations
improved. We also continued to increase our market share, expand sales
opportunities, and introduce new systems and services. Consolidated sales
exceeded $1.5 billion for the year, despite the Y2K lockdown, which negatively
impacted sales in the third and fourth quarters. The Company entered 2000 with a
backlog of contracted revenues exceeding $2.4 billion.
2
<PAGE>
3
Internationally, we made substantial improvements in our operations and
significantly reduced our European operating losses. International service and
system fee revenues increased more than 18 percent over 1998. Economic
conditions are improving in Europe, and we have restructured our European
operations, consolidated development, and reduced expenses. Further, we are
developing relationships with business partners that can provide a more cost-
effective means for us to pursue new opportunities in International markets.
As expected, professional services were significant drivers of growth,
reflecting a larger trend of increasing demand for IT services. Healthcare
organizations are clearly seeking more comprehensive services to manage IT
operations in this difficult, competitive environment. Outsourcing continues to
be a growth area for SMS, with a number of new agreements signed in 1999.
Additionally, several current outsourcing customers extended their contracts to
include additional facilities and services. Demand for Enterprise Systems
Management services also grew in 1999 as customers sought to outsource the
management of their server and network environments as well as Internet security
services.
DIRECTION FOR 2000
Looking ahead, we are taking assertive measures to further our long-term
financial performance and strategic objectives. SMS already leads the industry
as the premier Application Service Provider (ASP) for healthcare. This new
industry term indicates a capability to deliver applications to multiple
locations over networks, something SMS has been doing for more than 30 years.
Industry analysts expect healthcare ASP services will grow dramatically in the
next few years. Application hosting is our expertise, and we are aggressively
pursuing new opportunities in the ASP arena. We are investing in infrastructure
and additional capacity to accommodate anticipated growth and are expanding the
solutions we can deliver as an ASP.
Competition, cost pressures, and impending US legislation are intensifying
customer interest in e-business. Healthcare organizations are turning to SMS to
e-enable their enterprises and manage their need for increased connectivity to
physicians, payers, consumers, suppliers, and others.
SMS innovations are shaping the use of the Internet in health by providing added
value to mission-critical applications through Internet connectivity. SMS
already serves a variety of customers with managed Internet services for secure
Web access and presence, including Web site hosting. As part of a strategy to
expand current systems, SMS is enabling customers to access applications,
particularly clinical systems, over the Internet via secure network connections.
This capability enables physicians to check patient results from home, office,
or on the road - truly anytime, anywhere. Further, SMS is creating roles-based
"dashboards" or portals that will provide easy, Web-based access to needed
information from SMS systems and other systems. Our alliance with drkoop.com(TM)
will extend our reach to link SMS customers with the leading consumer health
site on the Internet.
Achievements of Note
Advanced efforts to create the completely connected health community of
consumers, physicians, health enterprises, trading partners, and others who
impact the business of healthcare.
Enhanced clinical solutions capability with new product introductions and
development initiatives.
Demonstrated leadership in e-health solutions, advanced key e-business
initiatives, and established SMS as the leading Application Service Provider
(ASP) in health.
Pioneered an industry-wide effort to further define and recommend security
guidelines and development standards to support the regulatory requirements of
the Health Insurance Portability and Accountability Act (HIPAA).
Received industry recognition for excellence in remote server management,
network management, systems integration, and ASP capability.
<PAGE>
We are also responding proactively to the growing demand for clinical
information for health enterprises, physician groups, and other health
providers. SMS solutions today help health enterprises as well as physician
practices establish computerized patient records so information can be accessed
securely at any time, from any place. SMS clinical solutions are among the most
widely installed and operational in the industry today. Our solutions provide
secure access to comprehensive patient information and enable care providers to
improve quality of care as well as reduce costs, eliminate paperwork, and
optimize their time.
We are currently on the doorstep of the next major piece of legislation that
will challenge and change healthcare in the US. The Health Insurance Portability
and Accountability Act (HIPAA) seeks to simplify healthcare administration and
ease paper flow by mandating, among other things, the secure electronic transfer
of patient data. SMS has taken the lead in convening other industry leaders to
define specific recommendations for implementing appropriate security procedures
in line with legislative guidelines. HIPAA legislation is already creating
increased demand for the Company's professional services. Our industry
leadership and capabilities uniquely position us to benefit from HIPAA.
In closing, no one is better positioned than SMS to take advantage of the
changes occurring in the healthcare information technology industry. This is a
unique time for our industry, and for SMS as well. We continue to anticipate
change, accept new challenges, and pursue the opportunities before us to deliver
the vision of providing healthcare information when and where it's needed to
improve health worldwide.
Sincerely,
/S/ Marvin S. Cadwell
Marvin S. Cadwell
President and CEO
In Memoriam
We were saddened by the loss in 1999 of Raymond K. Denworth, Jr., a long-time
member of the SMS Board of Directors. As a corporate lawyer, Mr. Denworth helped
set SMS in business at the start of 1969 and became a board member in 1976. Mr.
Denworth was most generous with his time and support of SMS. He was a counselor,
confidant, and a great supporter of the Company and our vision. He is sorely
missed, both as director and as a loyal friend to SMS.
Achievements of Note (continued)
Initiated organization improvements to streamline operations, converge like
functions, and centralize global development efforts.
Expanded service offerings - including e-business consulting, specialty
healthcare consulting, and outsourcing - to meet growing customer demand.
Cultivated strategic relationships with key business partners to enhance SMS
solution offerings for customers.
Successfully transitioned SMS customers to the year 2000 thanks to years of
thorough preparation and contingency planning.
4
<PAGE>
FINANCIAL HIGHLIGHTS ANNUAL REPORT 1999
5
(Amounts in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Operating Results: 1999 1998 % Increase
- --------------------------------------------------------------------------------
Revenues $1,217,145 $1,135,393 7.2%
- --------------------------------------------------------------------------------
Income Before Income Taxes $122,535 $114,199 7.3%
- --------------------------------------------------------------------------------
Net Income $75,972 $70,803 7.3%
- --------------------------------------------------------------------------------
Net Income Per Share - Diluted $2.80 $2.62 6.9%
- --------------------------------------------------------------------------------
Cash Dividends Declared Per Share $.84 $.84 -
- --------------------------------------------------------------------------------
Weighted Average Common Shares - Diluted 27,138 27,043 0.4%
- --------------------------------------------------------------------------------
Year End Position:
- --------------------------------------------------------------------------------
Total Assets $915,744 $808,448 13.3%
- --------------------------------------------------------------------------------
Retained Earnings $438,876 $385,401 13.9%
- --------------------------------------------------------------------------------
Total Stockholders' Investment $457,134 $399,350 14.5%
- --------------------------------------------------------------------------------
Common Stock Outstanding 26,911 26,606
- --------------------------------------------------------------------------------
Number of Stockholders of Record 6,293 7,332
- --------------------------------------------------------------------------------
[BAR GRAPHS OF 5-YEAR HISTORY FOR TOTAL REVENUES, NET INCOME, AND NET INCOME PER
SHARE-DILUTED APPEAR HERE]
[SMS LOGO APPEARS HERE]
<PAGE>
THE RIGHT INFORMATION
SMS understands that different users need different information depending upon
their roles in an organization. SMS is pioneering the way to providing easily
accessible, comprehensive healthcare information tailored to the people using
it.
As an example, we are creating personalized, Web-based access to needed
information from SMS and other systems as well as accredited health information
sources. These browser-type "dashboards" will be simple and intuitive to use.
Most important, they will provide user-specific online access to multiple
functions and resources anytime, anywhere they are needed. In addition to e-mail
and appointment schedules, physicians will be able to access clinical records
and trusted medical references. Executives will be able to access real-time
measurements of cost, quality, and productivity. And consumers will be able to
access a trusted, Internet-based global library of health information augmented
with relevant information sponsored by local and regional provider
organizations. They'll also be able to track and share personalized health
information with their healthcare providers and communicate between office
visits to accommodate needs such as prescription refills or appointment
requests.
SMS solutions support the complex clinical, financial, management, and
administrative needs of today's
. . . OVER 5,000 HEALTH PROVIDER ORGANIZATIONS SUPPORTED WORLDWIDE . . .
[ART WORK APPEARS HERE]
SMS' new alliance with drkoop.com(TM) will give consumers a reliable channel to
access credible, trusted, and personally relevant health information as well as
participate in personalized e-health opportunities through their local health
providers. drkoop.com CEO Donald Hackett explained, "This is an important
milestone for the healthcare industry as we are creating a worldwide network
where consumers, physicians, and organizations can all interact within a single,
trusted environment."
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<PAGE>
7
health organizations by facilitating
. intake and access to the healthcare organization (e.g., registration,
scheduling, insurance verification, billing, and reimbursement);
. health and care management (e.g., clinical data repository, disease
management, community health, medication management, wellness, and consumer
education);
. physician and provider support (e.g., clinical, diagnostic, and therapeutic
support systems); and
. management support (e.g., enterprise resource planning, service line
monitoring, cost and quality monitoring, contract management, and
regulatory compliance).
Our three decades of experience with the healthcare environment, our active
commitment to customer involvement, and our team of healthcare and information
technology experts enable us to provide comprehensive information in support of
our users' day-to-day needs, making their jobs more productive and more
efficient.
. . .7,500 EMPLOYEES IN OVER 60 OFFICES SUPPORT CUSTOMERS AROUND THE GLOBE. . .
[CUSTOMER CALL-OUT QUOTE APPEARS HERE]
The Ohio State University Medical Center o Columbus, Ohio For nurses in the
Abdominal Transplant Unit of The OSU Medical Center, time is of utmost
importance in managing the health and care of patients. "In this era of doing
more with less, the medical community must be more efficient. We have to spend
our labor dollars at the bedside, not shuffling papers. Why would you ask a
nurse - particularly with the salary dollars involved - to spend such an
enormous amount of time transcribing forms? You want your nurses at the bedside,
not doing paper transcription," said Nurse Manager Elaine Thomas Horton. "Having
the information online increases efficiency, reduces medical errors, and enables
better, more accurate tracking of what has gone on with the patient, right at
the bedside."
[ART WORK APPEARS HERE]
Voice recognition technology enables physicians to speak directly to the system,
recording observations as assessments are made.
<PAGE>
AT THE POINT OF NEED
Timely access to information is paramount to delivering high quality care.
SMS works around the clock, every day of every year, to ensure information
is available when and where it's needed. What's more, we provide the
foundation for reliable, secure access: integration, connectivity, and
performance.
Integration Integration provides the connections and standards that enable
disparate systems to communicate and provide complete information where
it's needed. As the recognized leader in healthcare IT integration, SMS is
designing applications to be integrated right from the start, not as an
afterthought. We operate a powerful "integration engine," a central hub
that helps integrate diverse systems. We also lead and participate on
industry standards committees that establish cross-industry norms for
content and communication.
Connectivity SMS is expert at establishing, managing, and using secure
networks to connect users to the information they need. Internet and
wireless networks extend the reach of our systems to serve today's health
information networks. We continue to "Web-enable" our applications so they
can be accessed via the Internet, even over devices such as cell phones and
personal digital assistants. SMS also connects users beyond their health
enterprises to trading partners and suppliers, consumers, and others who
are key to their businesses.
. . . OVER 26 TRILLION BYTES OF HEALTH INFORMATION STORED VIA THE SMS
INFORMATION SERVICES CENTER . . .
[ART WORK APPEARS HERE]
At the point of care, clinicians can access complete electronic patient records,
which include everything from visit histories and today's results to patient
medications, allergies, and even wellness reminders about immunizations or
needed tests.
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<PAGE>
9
Performance As the premier Application Service Provider (ASP) in healthcare,
SMS is focused on continuously improving system performance. SMS offers a
complete range of ASP services - from remote application hosting to network
management services, integration services, and application support services -
for both SMS and complementary non-SMS applications. Through SMS application
hosting services, customers can minimize risks and reduce expenses associated
with onsite systems management. Today, through a premier ASP offering, SMS
processes a staggering 80 million transactions a day, with superior availability
and performance statistics.
The bottom line? SMS understands the information needs unique to the healthcare
environment and is providing the integration, connectivity, and performance to
ensure information is available when and where it's needed.
. . . 75 MILLION PEOPLE TRACKED ON SMS MASTER PATIENT INDEX . . .
[CUSTOMER CALL-OUT QUOTE APPEARS HERE]
University of California, Davis Medical Center o Sacramento, CA To UC Davis
Medical Center, which logs over 62,000 emergency visits and 800,000 outpatient
visits annually, SMS electronic data interchange services are key to
streamlining patient intake and access. "In the past, we either had to rely on
the accuracy of the patient's insurance card, if the card was available, or
spend time calling each carrier to seek the information we needed," explained
Ann Frankel, Assistant Director of Finance. "Having a system and process to
access multiple payers is a big plus. Now we can accurately determine
eligibility before ever seeing a patient. That's a big step toward securing
payment. Integration is the biggest benefit. The system is integrated with our
registration screens and actually populates our internal screens, so eligibility
checking is part of the registration process for every patient seeking care. It
saves us time and phone calls and eliminates the delay for patients."
[ART WORK APPEARS HERE]
Clinical information from support systems such as laboratory, radiology, and
pharmacy provides caregivers with immediate access to patient, procedure, and
diagnostic information. Information is delivered where and when the caregiver
needs it, via printer, fax, pager, or e-mail.
<PAGE>
ACHIEVING RESULTS
As a strategic partner, we recognize the value of beginning with the end in mind
- - that is, understanding our customers' objectives before determining how we can
best help them achieve their goals. Some are seeking better clinical outcomes or
operational improvements. Others want improved productivity, reduced cost, and
greater returns on investment. Most want all of the above. As a solutions
provider, SMS has proved its ability to help healthcare providers worldwide
improve quality, financial performance, and the satisfaction of those they
serve.
To cite a few examples, our solutions have helped customers
. eliminate errors, enhance patient care, and speed the registration process
with a common repository for all patient demographic, insurance, and visit
information across a health enterprise.
. establish a computer-based patient record system by providing a way to store
and track patient clinical histories from multiple sources and create
integrated views at the point of care. The system has already been shown to
improve care, save time, and minimize redundancy.
. improve financial performance by providing a means to understand activity
across the health enterprise, analyze service utilization and costs, and
improve reimbursement.
When used to their fullest, our applications can help improve efficiency and
streamline workflow. Through value-added services, SMS solutions help customers
achieve even more ambitious outcomes. SMS services help customers with every
operational detail, from becoming better users of their systems to undertaking a
major initiative, such as the outsourcing of their entire IT operation.
. . . 80 MILLION TRANSACTIONS PROCESSED DAILY VIA SMS NETWORK . . .
[ART WORK APPEARS HERE]
Healthcare executives can now monitor organizational performance by receiving
e-mail alerts of critical performance indicators, such as patient readmission
rates after surgery and institution-wide census reports.
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11
SMS' comprehensive services include education; business, IT, and clinical
consulting; and technology services, including database administration, network
services, and IT and business office outsourcing. We also provide a full range
of e-business services including Internet services for access, presence, and
secure use; electronic data interchange services for online connections to
payers, suppliers, and other trading partners; and e-consulting for real-time,
online assistance.
By pairing applications and technologies with value-added services, SMS - and
its worldwide team of experts - help health providers use information to achieve
real, measurable results.
. . . 130 MILLION PEOPLE REPRESENTED BY HEALTH PAYER ORGANIZATION CONNECTIONS
VIA SMS EDI SERVICES . . .
[CUSTOMER CALL-OUT QUOTE APPEARS HERE]
Denver Health o Denver, CO Denver Health was the only public institution to rank
among the top five hospitals in the US in 1999*. CEO Patty Gabow, MD, who led
Denver out of a $39 million cash deficit in `92, said information has everything
to do with their success. "SMS and Denver have worked very collaboratively, and
it's a great model of how a vendor-customer relationship should be. Years ago
we managed by best guess and intuition; now we've got great data. Unsponsored
care represents 40 percent of our gross revenue, versus 5 or 6 percent for our
competition, so the burden is on us to manage more effectively to survive.
Interestingly, we may have been the only hospital in Denver to operate in the
black in `99," said Dr. Gabow. "I told the mayor the last decade was about
getting DHH healthy and the next decade is about making Denver the healthiest
community in the US. Our relationship with SMS has been integral to the
turnaround for us and will be integral to our goals for the future."
[ART WORK APPEARS HERE]
At patient registration, representatives can check insurance eligibility and
verify coverage levels and copay requirements with direct online links to
insurance/payer organizations.
*"The 1999 Performance Review - A Guide to US Hospitals" by The Center for
HealthCare Industry Performance Studies
<PAGE>
ILLUMINATING THE FUTURE
We've seen it coming. Change, that is. Yesterday, it was DRGs, managed care,
integrated delivery systems, and Y2K. Today, it's HIPAA, the Internet,
e-business, health enterprises, and ASPs. Tomorrow, we envision "connected
health communities," global wireless networks, and new "information appliances."
Whatever change is currently revolutionizing the way we live, work, and
communicate, you can bet SMS is already assessing its relevance and application
to healthcare. We not only respond to change, but anticipate it, illuminating
the future for thousands of healthcare providers worldwide.
Clear examples of SMS' leadership aren't hard to find. More than five years ago,
we anticipated the global Y2K issue and established comprehensive plans to
smoothly transition customers to the year 2000. Now there are more questions
than answers when it comes to the Health Insurance Portability and
Accountability Act (HIPAA), which aims to simplify healthcare administration by
mandating secure EDI for specified transactions. SMS has provided healthcare EDI
services for over 10 years. We are now leading a cross-industry effort to
further define HIPAA guidelines and industry standards to protect the
confidentiality and security of patient information captured, stored, and
transmitted electronically.
SMS is also leading the way with e-business services for healthcare. Our EDI
services connect healthcare organizations to payers to verify insurance
eligibility and coverage levels. SMS continues to
. . . OVER $1.2 BILLION IN REVENUES REPORTED FOR 1999 . . .
[ART WORK APPEARS HERE]
SMS systems are being "Internet-enabled" so they can be accessed by any
Internet-ready device, including palm-type devices and cell phones.
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13
introduce new services and trading partners and now connects customers to banks,
hospital supply companies, office supply companies, and pharmaceutical
suppliers. And we add tremendous value by using the extended reach of the
Internet to enhance meaningful applications specific to our users' workflow.
Most recently, the term Application Service Provider has taken hold in our
industry. SMS' business was founded on the ASP model - that is, providing
software-based services from a centralized data center over networks - long
before the term or the model was popularized. We already provide ASP services
for well over 1,000 different entities from our Information Services Center. We
were proud to be the first ASP across all industries to be certified by Cisco
Systems. As more healthcare enterprises face challenges such as serious
shortages in qualified IT personnel, the increasingly rapid pace of technology
change, and the need to control IT expenditures, we expect the interest in SMS'
suite of ASP services to grow and provide more opportunity for the Company.
. . . 99 PERCENT CUSTOMER RETENTION RATE . . .
[CUSTOMER CALL-OUT QUOTE APPEARS HERE]
Hospitals at Muhlenkreis o Lubbecke, Germany In 1999 the hospitals Minden,
LYbbecke, and Rahden merged to become the Hospitals at MYhlenkreis, a 1700-bed
health enterprise that serves the region of Hanover in Germany. Two of the
hospitals were already SMS customers, so after the merger, the enterprise
partnered with SMS to install common clinical and financial information systems
at the third and largest of the hospitals, with the goal of being operational by
2000. Gerald Oestreich, General Manager, said the implementation was extremely
smooth: "Because of SMS' product quality, we were able to go live on an in-house
solution in just three months at the 1073-bed Hospital Minden, on January 1,
2000, without any Y2K problems. With this success, we believe we can reach our
next goal, the communication among our three hospitals. We also hope to solve
the change to a DRG-based reimbursement system for the German hospitals with the
knowledge and leadership of SMS."
[ART WORK APPEARS HERE]
Physicians can access needed information - test results, patient visit
information, clinical research, and more - anytime, anywhere, through SMS'
secure network and Internet connections.
<PAGE>
Healthcare information when and where it's needed is not just a vision for SMS.
It's a reality. And we continue to do it better, faster, and more cost
effectively with our innovative use of emerging technologies. Our customers stay
with SMS because we focus on what's most important to them: healthcare
information when it's needed, where it's needed to achieve measurable results,
and ultimately, to improve the health of our communities worldwide.
. . . SMS IS THE PREMIER APPLICATION SERVICE PROVIDER IN HEALTHCARE . . .
[CUSTOMER CALL-OUT QUOTE APPEARS HERE]
Susquehanna Health System o Williamsport, PA SHS is a large integrated health
network that provides the full spectrum of care to a widespread community in
north central Pennsylvania. SHS' 300 physicians are implementing SMS solutions
to support business office needs. Angie Haas, M.D., Asst. Director, Family
Practice Residency Program, said measurable results are already apparent. "I
haven't used a paper chart in three months. The electronic patient record has
already eliminated the chart search that most offices do; the `chart' is always
accessible by everyone in the office. I have also eliminated all transcription,
which is a huge cost savings," she said. "I'm seeing a huge benefit to the way I
practice. I can take care of my patients no matter where I am, as long as I have
my computer." Dr. Haas also said SMS' proactive involvement of physicians is key
to developing meaningful solutions. "SMS wants to know what I want to do and how
I want to do it. They spend time with me to understand my needs and goals, and I
feel my opinion is valued."
[ART WORK APPEARS HERE]
Wireless computing devices are becoming widely used in healthcare; settings such
as emergency departments are expediting patient care by eliminating traditional
registration processes and collecting patient data at the bedside, after
treatment is under way.
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<PAGE>
SMS AT A GLANCE
15
Headquarters:
SMS
51 Valley Stream Parkway
Malvern, PA 19355
610-219-6300
Worldwide Stats:
Employees: more than 7,500
Customers: more than 5,000
1999 Revenues: over $1.2 Billion
1999 Consolidated Sales: over $1.5 Billion
Future Revenues under Contract: over $2.4 Billion
More Information:
General Inquiries:
www.smed.com
Investor Inquiries:
[email protected]
Company Profile
Shared Medical Systems (SMS), founded in 1969, provides information systems and
professional services to health providers in North America, Europe, and New
Zealand. The Company offers a full range of clinical, financial, and management
software applications to support the continuum of care. As a solution provider,
SMS also offers a wide range of complementary services, including outsourcing,
consulting, and implementation services.
A leader in the healthcare information technology industry, SMS has more than 30
years of network computing experience, operating the industry's largest
Information Services Center (ISC) and Health Information Network for application
hosting, e-business, enterprise systems management, and managed Internet
services. As the premier Application Service Provider (ASP) in healthcare, SMS
operates healthcare applications remotely for over 1,000 health providers with
connections to over 350,000 user devices and processes 80 million transactions a
day.
SMS is headquartered on a 116-acre campus in Malvern, Pennsylvania, and has an
International administration office in Madrid, Spain. The Company has branch
offices throughout North America, Europe, and New Zealand and employs more than
7,500 professionals worldwide. The SMS team includes physicians, clinicians, and
other healthcare professionals as well as information technology experts who are
adept at understanding and supporting our customers' varied needs.
For 1999, SMS reported revenues in excess of $1.2 billion. Further information
about SMS' solutions is available at www.smed.com.
Customers
SMS serves over 5,000 health provider customers in North America, Europe, and
New Zealand. Our customers include large health enterprises and public health
institutions as well as standalone hospitals, physician groups, and other
providers that serve the continuum of care:
. Consumer (wellness centers, Internet resources, physician/patient
communication)
. Ambulatory Care (physician groups, clinics, diagnostic & treatment centers)
. Acute (hospitals, urgent care)
. Extended Care (rehab, behavioral health, long-term care)
. Residential (home health, assisted living, and hospice care)
[ART WORK APPEARS HERE]
<PAGE>
Solutions
SMS offers information solutions comprising clinical, financial, and management
software applications as well as technologies and services that support the
delivery of healthcare. SMS solutions are outcomes-driven, helping healthcare
providers improve their financial performance, quality of care, and satisfaction
of those they serve.
Software and Related Services
. Clinical applications create electronic patient records and automate many
labor-intensive tasks performed in admissions, nursing, radiology,
laboratory, pharmacy, and other departments within health organizations,
while facilitating communications among them.
. Financial and administrative applications include provider accounting
(including billing and receivables), human resources, payroll, materials
management, general ledger, and property.
. Enterprise management systems connect all points of care in a health
enterprise and ease the administration of patient care. These systems allow
providers to identify patients anywhere within the network, schedule
network-wide resources, and retain cumulative electronic patient records for
various health organization support functions.
. Decision support systems enable health executives and managers to set
performance standards, identify variances, and analyze results by providing
access to a range of strategic information collected from clinical,
financial, and other enterprise management systems.
. Electronic Data Interchange systems and services facilitate sharing and
standardization of information, such as eligibility verifications, and claims
and remittance transmissions between health providers and payers.
As the leading ASP in healthcare, SMS manages applications remotely from the SMS
Information Services Center via the SMS Health Information Network. Customers
can opt for varying levels of service depending upon their operational needs. We
also offer managed Internet services, which include secure Web access, Web site
hosting and firewall/security setup, and more.
Professional Services
SMS offers professional services that complement our applications and provide
added value. We offer system implementation services; networking services
(systems integration, network assessment, planning, design, and management);
customer education on applications and technology; specialized clinical,
financial, and technology consulting to analyze current performance, processes,
and infrastructure; and information technology, business office, and managed
care administration outsourcing. SMS also provides specialty services at
customer request.
Hardware
In addition to the Company's information solutions, SMS resells third-party
hardware ranging from personal computers to client/server networks,
minicomputers, and mainframes.
Strategic Relationships
SMS expands its solutions through a number of strategic business relationships
with industry leaders including AT&T, Cisco Systems, Inc., drkoop.com, IBM,
Lawson Software, and Microsoft. Further, we maintain marketing agreements with
20 Allied Partners who provide specialized software products to the health
industry.
16
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ................................................... 18
SELECTED FINANCIAL DATA .................................................... 23
CONSOLIDATED BALANCE SHEET ................................................. 24
CONSOLIDATED STATEMENT OF INCOME ........................................... 25
CONSOLIDATED STATEMENT OF CASH FLOWS ....................................... 26
CONSOLIDATED STATEMENT OF STOCKHOLDERS' INVESTMENT ......................... 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................. 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................................... 35
BOARD OF DIRECTORS ......................................................... 35
17
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS - OVERVIEW
The Company provides information solutions to the health industry,
specifically large health enterprises and public health institutions,
hospitals, physician groups, and other health providers.
The Company's revenues are composed of service and system fees and the sale
of computer hardware. Service and system fees are derived primarily from
software and related services and professional services. Software and related
services revenues are generated from term or perpetual software licenses and
associated application processing services, electronic data interchange
services, and support. The Company also offers a variety of related professional
services. These include system implementation; networking; education;
specialized clinical, financial and technology consulting; and outsourcing of
information technology, business office, and managed care administration.
The Company's information systems can be remotely hosted at the Company's
Information Services Center via the SMS Health Information Network or operated
at the customer's site, depending on the type of solution chosen and the
operational needs of the customer.
The Company's information systems operate on hardware platforms that range
from personal computers, to client/server networks, minicomputers, and
mainframes. Equipment utilized by the customer can be provided by the Company
under fixed-period lease or sales agreements. Revenues recognized from the sale
of computer hardware can fluctuate due to variations in the mix of products sold
and the timing of sales and installations.
The majority of the Company's business is provided to customers through
long-term contracts. These long-term contracts range from one to ten years and
generally allow price increases annually based on external measures of
inflation. The Company has increased some of its prices under these contract
provisions. Revenues under long-term contracts are recognized as they are earned
over the life of the contract.
The Company has a significant amount of revenues that will be realized in
the future as installation work is completed and services are performed.
Management estimates the total amount of future revenues under contract at
December 31, 1999 was in excess of $2.4 billion.
As the information processing requirements of the health industry have
continued to grow, the business of providing information solutions has become
more complex. Changes in the way health enterprises are structured, regulated
and reimbursed, combined with pressures to control costs, improve quality and
grow market share have created demand for the Company's services and systems.
However, in the fourth quarter of 1999 the Company's results were negatively
impacted by Year 2000-related sales and installation delays. During the Year
2000 transition period and into the new year, the Company's customers locked
down their information technology environments, delaying installations and
postponing purchase decisions. The Company also believes that customers'
difficulty in managing cost pressures and their uncertainty about the
requirements of the Health Insurance Portability and Accountability Act of 1996
(described below) are continuing to cause them to delay significant purchase
decisions. These market conditions and the decline in fourth quarter 1999 sales
when compared to fourth quarter 1998 will have a negative impact on the
Company's results in the first half of 2000. However, the Company expects that
these same issues, and the need to integrate the new opportunities created by
e-business, will continue to drive increased demand for its systems and
services.
RESULTS OF OPERATIONS FOR 1999 COMPARED TO 1998
In 1999, revenues grew 7.2%, to $1.2 billion, compared to 1998. Income
before income taxes and net income for the year ended December 31, 1999 were
$122.5 million, an increase of 7.3%, and $76.0 million, an increase of 7.3%,
respectively, compared to 1998.
. Service and system fees revenues were $1.1 billion, an increase of 14.4% in
1999 compared to 1998. North American revenues increased primarily due to
higher levels of consulting, facilities management, and system installation
fees and growth in support and service revenues from new and existing
customer installations. International revenues increased primarily due to
the effect of businesses acquired during 1998 and higher levels of
professional services and software and related fees, which were generally
attributable to sales and installations to new and existing customers.
These increases were partially reduced by approximately $2.7 million due to
the stronger US dollar relative to certain foreign currencies in 1999
compared to the prior year.
. Hardware sales revenues decreased to $134.4 million in 1999 from $189.2
million in 1998, primarily due to lower levels of mainframe system upgrades
to existing customers that process the Company's INVISION(R) product at
their sites.
18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------
Analysis of Changes in Consolidated Cost and Expenses
1999 1998
- --------------------------------------------------------------------------
Expenses as a percentage of
service and system fees revenues:
Operating and development ................ 47.2% 47.3%
Marketing and installation ............... 35.3% 35.0%
General and administrative ............... 7.3% 8.1%
Interest ................................. 1.1% 0.9%
Cost as a percentage of hardware
sales revenues:
Cost of hardware sales ................... 81.3% 82.3%
- --------------------------------------------------------------------------
. Operating and development expenses decreased to 47.2% of service and system
fees revenues in 1999 from 47.3% in 1998. This change was largely 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 costs at the Company's
Information Services Center, partially offset by an increase in third-party
software costs.
. Marketing and installation expenses increased to 35.3% of service and system
fees revenues in 1999 from 35.0% in 1998. This increase was 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% in 1999 from 8.1% in 1998. This change was
principally due to a lower rate of growth for office space and personnel and
related costs as part of the Company's continuing efforts to leverage
administrative costs over an increasing revenue base.
. Interest expense was $12.2 million in 1999 compared to $8.8 million in 1998.
This change was attributable to a higher level of average outstanding
borrowings in 1999 compared to 1998.
. Cost of hardware sales decreased to 81.3% of hardware sales revenues in 1999
from 82.3% in 1998. This change was primarily due to the different product
mixes of systems installed during 1999 when compared to 1998.
. Income taxes increased $3.2 million in 1999 when compared to 1998. This
change was due to an increase of $8.3 million in income before income taxes.
The Company's effective rate for federal, state, and foreign income taxes was
38.0% in 1999 and 1998.
RESULTS OF OPERATIONS FOR 1998 COMPARED TO 1997
In 1998, revenues grew 23.2%, to $1.1 billion, compared to 1997. Income
before income taxes and net income for the year ended December 31, 1998 were
$114.2 million, an increase of 15.9%, and $70.8 million, an increase of 15.9%,
respectively, compared to 1997.
. Service and system fees revenues were $946.2 million, an increase of 17.9% in
1998 compared to 1997. 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 due to higher levels of sales
and installations to new and existing customers and support fees.
International revenues grew due to increased sales and installations in
certain countries and the effect of businesses acquired during 1998. These
increases were partially offset by the adverse impact of weak demand and
difficult economic conditions in various European countries, due in part to
governmental spending restrictions caused by the economic requirements of
the European Monetary Union. International revenues were also reduced by
approximately $3.3 million due to the stronger US dollar relative to
certain foreign currencies in 1998 compared to the prior year.
. Hardware sales revenues increased to $189.2 million in 1998 from $118.8
million in 1997, primarily due to higher installations of mainframe systems
to new and existing customers that process the Company's INVISION(R) product
at their sites, and networking equipment, and changes in the timing and
product mix of systems installed.
19
<PAGE>
Shared Medical Systems Corporation
- -------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Analysis of Changes in Consolidated Cost and Expenses
1998 1997
- -------------------------------------------------------------------------------
Expenses as a percentage of
service and system fees revenues:
Operating and development ..................... 47.3% 47.2%
Marketing and installation .................... 35.0% 33.6%
General and administrative .................... 8.1% 9.1%
Interest ...................................... 0.9% 0.5%
Cost as a percentage of hardware
sales revenues:
Cost of hardware sales ........................ 82.3% 82.4%
- -------------------------------------------------------------------------------
. Operating and development expenses increased to 47.3% of service and system
fees revenues in 1998 from 47.2% in 1997. This change was largely due to a
higher rate of growth, as compared to the growth in service and system fees
revenues, for personnel and related costs associated with support and
consulting services provided to customers; and certain customer-related
expenses, partially offset by a lower rate of growth for computer hardware
and associated costs at the Company's Information Services Center.
. Marketing and installation expenses increased to 35.0% of service and system
fees revenues in 1998 from 33.6% in 1997. This increase was 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 expenses.
. General and administrative expenses, as a percentage of service and system
fees revenues, decreased to 8.1% in 1998 from 9.1% in 1997. This change was
principally 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.
. Interest expense was $8.8 million in 1998 compared to $4.0 million in 1997.
This change was attributable to a higher level of average outstanding short-
term borrowings in 1998 compared to 1997. The increase in average outstanding
short-term borrowings was partially due to funds used for businesses and
investments acquired in 1998 and the fourth quarter of 1997.
. Cost of hardware sales decreased to 82.3% of hardware sales revenues in 1998
from 82.4% in 1997. This change was primarily due to the different product
mixes of systems installed during 1998 when compared to 1997.
. Income taxes increased $5.9 million in 1998 when compared to 1997. This
change was due to an increase of $15.7 million in income before income taxes.
The Company's effective rate for federal, state, and foreign income taxes was
38.0% in 1998 and 1997.
INFLATION
Significant portions of the Company's expenses are inflation sensitive.
Rising costs for the years ended December 31, 1999, 1998, and 1997 have been
partially offset by increased employee and computer productivity.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong through 1999. Total assets
increased from $614.0 million at January 1, 1998 to $915.7 million, at December
31, 1999. Stockholders' investment increased from $329.9 million to $457.1
million over the same period. This growth resulted primarily from operations.
Most of the Company's capital expenditures and working capital requirements were
financed from operations supplemented by long-term and short-term borrowings.
The major uses of funds during this period were for investments in property,
equipment, computer software, acquisition of businesses, and the payment of
quarterly dividends. At December 31, 1999, cash and short-term investments were
$104.7 million compared to $30.7 million at January 1, 1998.
Net cash flows from operating activities generated $111.4 million in 1999
compared to $38.0 million in 1998. Cash flows from operating activities in 1999
were primarily attributable to net income, adjusted for non-cash expenses such
as depreciation and amortization, of $126.3 million. These cash flows were
partially offset by a decrease of $8.2 million in accounts payable and accrued
expenses, primarily caused by differences in timing of payments between years.
Net cash flows from operating activities generated $38.0 million in 1998
compared to $36.5 million in 1997. Cash flows from operating activities in 1998
were primarily attributable to net income, adjusted for non-cash expenses such
as depreciation and amortization, of $116.5 million, partially offset by a $67.5
million increase in accounts receivable, principally due to higher business
levels, and a $29.2 million increase in other assets, primarily due to the
growth of long-term financing arrangements with customers.
The Company's investing activities were $83.3 million, $119.6 million, and
$57.6 million in 1999, 1998, and 1997, respectively. During this period, the
Company's investments were primarily for equipment, computer software,
construction of a corporate office building addition, and business acquisitions.
20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following summarizes the Company's significant investments in property,
equipment, and computer software for the three-year period ended December 31,
1999:
- --------------------------------------------------------------------------------
(Amounts in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
In-house computer and network
communications equipment ..................... $22,369 $18,556 $14,373
Software internally developed
for customers ................................ $22,603 $18,687 $12,737
Corporate office building
addition ..................................... $11,957 $24,592 $2,324
- --------------------------------------------------------------------------------
In-house computer and network communications equipment is used to process,
store, and retrieve customer information at the Company's Information Services
Center and to service and support customers from the Company's corporate
headquarters and branch offices. Capital expenditures for in-house computer
equipment can vary depending upon whether the equipment is purchased or obtained
under operating leases. Expenditures for internally developed software can
fluctuate based on business decisions regarding the scope and timing of
development projects. The Company expended $12.0 million during 1999, $24.6
million in 1998, and $2.3 million in 1997, as part of the cost to construct an
office building addition at its corporate headquarters.
In 1998, the Company increased its ownership in Delta Health Systems, a
provider of information systems and services to home health organizations, from
50% to 100%, by purchasing the remaining equity for $21.2 million, and acquired
Pyrenees Informatique, SA, a provider of healthcare information systems in
France, for $10.8 million. In 1997, the Company invested $10.3 million for a 15%
share in the equity of Avio International Corporation (formerly Visteon
Corporation), a provider of physician practice management software.
The most significant sources of cash provided by financing activities were
a long-term unsecured borrowing of $175.0 million in 1999 and short-term
borrowings of $108.0 million and $26.6 million in 1998 and 1997, respectively.
These sources of cash were supplemented by the exercise of stock options of $8.9
million in 1999, $6.2 million in 1998, and $8.9 million in 1997. The most
significant uses of cash for financing activities were the repayment of short-
term borrowings of $110.1 million in 1999 and the payment of common stock
dividends of $22.4 million, $21.9 million, and $20.7 million in 1999, 1998, and
1997, respectively.
Management is not aware of any potential material impairments to the
Company's financial position. The most significant requirements for funds now
anticipated are as follows:
. Equipment and software - During 2000, the Company anticipates that capital
expenditures for equipment and software will be in line with expenditures in
recent year. Factors such as business activity levels and market conditions,
decisions to buy versus lease equipment, and vendor pricing will continue to
affect capital equipment and software expenditures.
. Dividends - During each of the past three years ended December 31, 1999, cash
dividends declared were $.84 per share. All dividends were declared in the
last month of each calendar quarter and paid the following month. The Company
anticipates paying approximately $23.0 million in dividends in 2000.
The Company expects to finance most of its capital requirements from
operations, supplemented from time to time by short-term borrowings. Currently,
the Company has lines of credit with banks, primarily based on LIBOR or EURIBOR,
of $118.8 million. At December 31, 1999, $70.0 million of these lines of credit
were unused.
YEAR 2000
Over the last five years the Company conducted an extensive program to deal
with the potential effects of the "Year 2000 issue" on the Company's products
(including third-party systems used in connection with Company products) and
internal systems. The Company believes that these efforts were successful. The
transition to the year 2000 did not have a material impact on the operation of
the Company's products or its internal systems. As discussed above, the Year
2000 issue has caused delays in customer spending and product installations,
which will impact the Company's results during 2000.
21
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Continued)
- --------------------------------------------------------------------------------
EURO CONVERSION
On January 1, 1999, the participating countries of the European Union
established fixed conversion rates between their existing currencies (legacy
currencies) and the euro. Legacy currencies will remain legal tender in the
participating countries as denominations of the euro through January 1, 2002. At
that point, the participating countries of the European Union 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 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.
While the Company believes that the measures it has taken with respect to
its internal and customer systems in preparation for the euro conversion are
adequate, certain risk factors could have a material adverse impact on the
Company's European operations including more intense competition in certain
countries as a result of the new common currency and malfunctions in critical
information systems.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT
The Administrative Simplification portion of the Health Insurance
Portability and Accountability Act (HIPAA) of 1996 requires the adoption of
national uniform standards for certain administrative and financial electronic
health information transactions. All of the standards have not yet been
proposed, and only some of the standards that have been proposed have been
approved in their final form. The standards proposed thus far would establish
national provider and employer identifiers, transactional and medical code sets,
and define rules for the security and privacy of healthcare information while
being stored or transmitted. Compliance with the final rules is currently
expected to be required beginning in August 2002.
The Company has been working closely with governmental agencies, leading
healthcare providers, and other vendors to clearly define the requirements of
the HIPAA rules, to establish guidelines and best practices for compliance, and
to educate healthcare professionals on the implications of the legislation. The
Company is offering readiness assessment and education services to its customers
to assist them in preparing for HIPAA compliance, and is working to modify its
services and systems to support customer compliance with the legislation. The
Company is also assessing its procedures regarding data access and storage to
prepare for HIPAA compliance.
The Company believes that the adoption of the HIPAA standards could
ultimately lead to increased demand for the Company's systems along with its
outsourcing, consulting, remote processing, and electronic data interchange
services. However, it is possible that the standards as finally adopted,
including the standards yet to be proposed, could increase the cost and time to
market of new or existing systems and services.
OTHER
In early March 2000 the Company announced that it had received an
unsolicited proposal from Eclipsys Corporation regarding a proposed merger and a
notice of their intent to nominate a majority of the Company's Board of
Directors. The Board has announced that it is uninterested in a combination of
the two companies and that its has determined to explore strategic alternatives
that may be available to the Company. On March 30, 2000, Eclipsys Corporation
announced that it was withdrawing its nomination of directors.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements including those
regarding the Company's expected performance in 2000. Such statements, and any
other forward-looking statements made by, or on behalf of the Company, 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 continuation of the current decision-making delay in the healthcare
information technology market for longer than expected; 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; continuing 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, including but not
limited to HIPAA; 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.
22
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Financial Data
(Amounts in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Consolidated Operations
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues ................................................... $1,217,145 $1,135,393 $921,341 $806,950 $689,978
Cost and Expenses .......................................... $1,094,610 $1,021,194 $822,790 $728,854 $622,706
Income Before Income Taxes ................................. $122,535 $114,199 $98,551 $78,096 $67,272
Income Taxes ............................................... $46,563 $43,396 $37,449 $29,322 $25,437
Net Income ................................................. $75,972 $70,803 $61,102 $48,774 $41,835
Net Income Per Share - Basic ............................... $2.85 $2.68 $2.34 $1.89 $1.64
Net Income Per Share - Diluted ............................. $2.80 $2.62 $2.30 $1.84 $1.60
Weighted Average Common Shares - Basic ..................... 26,645 26,391 26,063 25,850 25,527
Weighted Average Common Shares - Diluted ................... 27,138 27,043 26,608 26,523 26,093
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Consolidated Financial Position
- ------------------------------------------------------------------------------------------------------------------------------------
Current Assets ............................................. $479,542 $411,205 $319,260 $290,243 $239,894
Total Assets ............................................... $915,744 $808,448 $613,976 $522,592 $459,075
Current Liabilities ........................................ $246,609 $366,958 $229,584 $185,331 $150,554
Long-Term Debt and Capital Leases .......................... $178,217 $14,386 $16,291 $15,361 $17,939
Total Liabilities .......................................... $458,610 $409,098 $284,119 $236,494 $204,987
Stockholders' Investment ................................... $457,134 $399,350 $329,857 $286,098 $254,088
Common Shares Outstanding .................................. 26,911 26,606 26,206 25,920 25,636
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Ratios and Other Selected Financial Data
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Margin ........................................... 9.0% 8.5% 9.7% 9.0% 8.4%
Hardware Margin ............................................ 18.7% 17.7% 17.6% 14.9% 21.6%
Pretax Margin .............................................. 10.1% 10.1% 10.7% 9.7% 9.7%
Net Margin ................................................. 6.2% 6.2% 6.6% 6.0% 6.1%
Effective Tax Rate ......................................... 38.0% 38.0% 38.0% 37.5% 37.8%
Return on Average Investment ............................... 17.7% 19.4% 19.8% 18.1% 17.5%
Working Capital ............................................ $232,933 $44,247 $89,676 $104,912 $89,340
Current Ratio .............................................. 1.94 :1 1.12 :1 1.39 :1 1.57 :1 1.59 :1
Stockholders' Investment Per Share ......................... $16.99 $15.01 $12.59 $11.04 $9.91
Cash Dividends Declared Compared to Prior Year's Net Income. 31.8% 36.4% 43.0% 52.7% 55.6%
Cash Dividends Declared Per Share .......................... $.84 $.84 $.84 $.84 $.84
Research and Development ................................... $81,485 $80,141 $65,919 $56,402 $46,846
- ------------------------------------------------------------------------------------------------------------------------------------
Market Price and Dividends Declared Per Share *
- ------------------------------------------------------------------------------------------------------------------------------------
First Quarter
High .................................................... $59 7/8 $79 3/8 $58 3/8 $62 7/8 $37 7/8
Low ..................................................... $42 3/4 $59 7/16 $44 3/4 $47 7/8 $30 7/8
Dividends Declared ...................................... $.21 $.21 $.21 $.21 $.21
Second Quarter
High .................................................... $73 1/2 $82 11/16 $55 1/2 $72 1/8 $41 1/2
Low ..................................................... $53 $67 $36 3/4 $59 1/4 $32
Dividends Declared ...................................... $.21 $.21 $.21 $.21 $.21
Third Quarter
High .................................................... $65 3/8 $86 1/2 $61 3/4 $66 3/4 $42 3/4
Low ..................................................... $44 $52 $47 1/2 $43 3/4 $35 5/8
Dividends Declared ...................................... $.21 $.21 $.21 $.21 $.21
Fourth Quarter
High .................................................... $55 1/8 $56 5/8 $66 13/16 $58 3/4 $57 5/8
Low ..................................................... $35 1/2 $40 1/16 $52 $42 1/4 $37 3/8
Dividends Declared ...................................... $.21 $.21 $.21 $.21 $.21
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*As of December 31, 1999, there were 6,293 stockholders of record and
approximately 11,700 beneficial holders of the Company's common stock. The
Company's common stock began trading on the New York Stock Exchange, Inc.
(NYSE) under the symbol SMS on September 18, 1997. Prior to being listed on
the NYSE, the Company's common stock was traded on the Nasdaq Stock Market
under the symbol SMED. The prices shown in the table above are the high and
low transaction prices for the last five years on the NYSE and the Nasdaq
National Market, as applicable.
23
<PAGE>
<TABLE>
<CAPTION>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet
(Amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
December 31
1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and short-term investments ....................................................... $104,700 $ 40,070
Accounts receivable, net .............................................................. 343,399 337,669
Prepaid expenses and other current assets ............................................. 31,443 33,466
-------------------------------
Total Current Assets ................................................................ 479,542 411,205
Property and Equipment, net .............................................................. 153,288 137,521
Computer Software, net ................................................................... 109,375 75,709
Other Assets ............................................................................. 173,539 184,013
-------------------------------
$915,744 $808,448
===============================
Liabilities and Stockholders' Investment
Current Liabilities:
Notes payable ......................................................................... $ 48,758 $158,808
Current portion of long-term debt and capital leases .................................. 2,255 3,437
Dividends payable ..................................................................... 5,651 5,589
Accounts payable ...................................................................... 30,934 42,029
Accrued expenses ...................................................................... 89,399 86,499
Current deferred revenues ............................................................. 41,465 40,206
Accrued and current deferred income taxes ............................................. 28,147 30,390
-------------------------------
Total Current Liabilities ........................................................... 246,609 366,958
-------------------------------
Deferred Revenues ........................................................................ 6,938 6,908
-------------------------------
Long-Term Debt and Capital Leases ........................................................ 178,217 14,386
-------------------------------
Deferred Income Taxes .................................................................... 26,846 20,846
-------------------------------
Commitments and Contingencies
Stockholders' Investment:
Preferred stock, par value $.10; authorized 1,000,000 shares; none issued ............. - -
Common stock, par value $.01; authorized 120,000,000 shares; 30,791,605
shares issued in 1999 and 30,635,512 in 1998 ........................................ 308 306
Paid-in capital ....................................................................... 85,723 79,773
Retained earnings ..................................................................... 438,876 385,401
Common stock in treasury, at cost, 3,880,320 shares in 1999 and
4,029,773 in 1998 ................................................................... (53,233) (55,497)
Cumulative translation adjustment ..................................................... (14,540) (10,633)
-------------------------------
Total Stockholders' Investment ...................................................... 457,134 399,350
-------------------------------
$915,744 $808,448
===============================
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
<TABLE>
<CAPTION>
Shared Medical Systems Corporation
- -------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Income
(Amounts in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- -------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Service and system fees .................................................. $1,082,740 $ 946,212 $802,528
Hardware sales ........................................................... 134,405 189,181 118,813
---------------------------------------------
1,217,145 1,135,393 921,341
---------------------------------------------
Cost and Expenses:
Operating and development ................................................ 511,289 447,961 378,512
Marketing and installation ............................................... 382,359 331,627 269,719
General and administrative ............................................... 79,534 77,082 72,700
Cost of hardware sales ................................................... 109,258 155,716 97,872
Interest ................................................................. 12,170 8,808 3,987
---------------------------------------------
1,094,610 1,021,194 822,790
---------------------------------------------
Income Before Income Taxes .................................................. 122,535 114,199 98,551
Provision for Income Taxes .................................................. 46,563 43,396 37,449
---------------------------------------------
Net Income .................................................................. $ 75,972 $ 70,803 $ 61,102
=============================================
Net Income Per Share:
Basic .................................................................... $2.85 $2.68 $2.34
=============================================
Diluted .................................................................. $2.80 $2.62 $2.30
=============================================
Number of shares used to compute per share amounts:
Basic .................................................................... 26,645 26,391 26,063
=============================================
Diluted .................................................................. 27,138 27,043 26,608
=============================================
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
(Amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income........................................................... $ 75,972 $ 70,803 $ 61,102
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization.................................... 50,312 45,683 39,449
Asset (increase) decrease -
Accounts receivable........................................... (5,730) (67,457) (37,437)
Prepaid expenses and other current assets..................... 2,023 2,564 (3,013)
Other assets.................................................. (6,121) (29,173) (41,817)
Liability increase (decrease) -
Accounts payable and accrued expenses......................... (8,195) 9,222 17,908
Accrued and current deferred income taxes..................... (2,243) 4,481 11,180
Deferred revenues............................................. 1,289 869 (11,929)
Deferred income taxes......................................... 6,000 2,900 4,092
Other............................................................ (1,906) (1,901) (3,056)
-------------------------------------------------
Net cash provided by operating activities..................... 111,401 37,991 36,479
-------------------------------------------------
Cash Flows from Investing Activities:
Property and equipment additions..................................... (46,737) (56,251) (27,255)
Computer software additions.......................................... (36,785) (27,881) (20,356)
Businesses and investments acquired.................................. - (35,913) (11,180)
Equipment dispositions............................................... 216 417 1,232
-------------------------------------------------
Net cash used for investing activities........................ (83,306) (119,628) (57,559)
-------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from long-term debt......................................... 175,000 - -
Notes payable (decrease) increase.................................... (110,050) 107,954 26,594
Dividends paid....................................................... (22,435) (21,943) (20,647)
Long-term debt and capital lease obligation payments................. (14,197) (1,138) (5,560)
Stock options exercised.............................................. 8,872 6,246 8,903
Other................................................................ (655) (104) 358
-------------------------------------------------
Net cash provided by financing activities..................... 36,535 91,015 9,648
-------------------------------------------------
Net Increase (Decrease) in Cash and Short-Term Investments.............. 64,630 9,378 (11,432)
Cash and Short-Term Investments, Beginning of Year...................... 40,070 30,692 42,124
-------------------------------------------------
Cash and Short-Term Investments, End of Year............................ $ 104,700 $ 40,070 $ 30,692
=================================================
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
<TABLE>
<CAPTION>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------------------------------------------------------
Consolidated Statement of Stockholders' Investment
For the Years Ended December 31, 1999, 1998, and 1997 (Amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------ Cumulative
Par Paid-in Retained Treasury Translation Comprehensive
Shares Value Capital Earnings Stock Adjustment Income
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997............................... 29,955 $299 $50,401 $294,850 $(55,782) $ (3,670)
Common stock transactions -
Exercise of stock options, grant of
restricted shares and issuance of stock......... 312 4 5,785 (236)
Employee stock purchase plan...................... (3)
Tax benefit from the exercise of non-qualified
stock options and vesting of restricted shares.. 3,711
Dividends on common stock ($.84 per share).......... (20,971)
Net income.......................................... 61,102 $61,102
Translation adjustment.............................. (5,633) (5,633)
------------------------------------------------------------------------
Balance, December 31, 1997............................. 30,267 303 59,897 334,981 (56,021) (9,303) $55,469
=======
Common stock transactions -
Exercise of stock options and grant of
restricted shares............................... 181 1 3,655 521
Employee stock purchase plan...................... 3
Tax benefit from the exercise of non-qualified
stock options and vesting of restricted shares.. 3,062
Merger and acquisition transactions............... 188 2 13,159 1,881
Dividends on common stock ($.84 per share).......... (22,264)
Net income.......................................... 70,803 $70,803
Translation adjustment.............................. (1,330) (1,330)
------------------------------------------------------------------------
Balance, December 31, 1998............................. 30,636 306 79,773 385,401 (55,497) (10,633) $69,473
=======
Common stock transactions -
Exercise of stock options and grant of
restricted shares............................... 156 2 4,452 2,264
Tax benefit from the exercise of non-qualified
stock options and vesting of restricted shares.. 1,498
Dividends on common stock ($.84 per share).......... (22,497)
Net income.......................................... 75,972 $75,972
Translation adjustment.............................. (3,907) (3,907)
------------------------------------------------------------------------
Balance, December 31, 1999............................. 30,792 $308 $85,723 $438,876 $(53,233) $(14,540) $72,065
========================================================================
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiaries. The financial statements of
the Company's foreign branches and subsidiaries are included in the accompanying
consolidated financial statements on the basis of their fiscal year ends, all of
which are within three months of the calendar year end. All significant
intercompany transactions and accounts have been eliminated. Ownership
investments in affiliates between 20% - 50% are accounted for under the equity
method.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities, and the reported
amounts of revenues and expenses. Actual results could differ from these
estimates.
Recognition of Revenues - The Company provides services, systems, and
hardware based upon contractual agreements. Software, processing, support, and
professional services, which are provided under term agreements, are recognized
as services are performed over the life of the agreement. These agreements have
terms that range from one to ten years. Software applications provided under
perpetual licensing agreements and installation fees are recognized, when
collection is deemed probable, primarily over the system's installation period.
Hardware sales are recognized upon installation of the equipment at the customer
site. The Company's fees are billable according to the terms in each customer
contract.
Current and noncurrent deferred revenues totaling $48.4 million at December
31, 1999 and $47.1 million at December 31, 1998, represent funds received by the
Company in advance of the performance of services or installation of systems,
which are deferred and recognized as revenues when earned.
Interest income from short-term investments included in revenues was $1.7
million in 1999, $.4 million in 1998, and $.4 million in 1997.
Accounts Receivable - Accounts receivable consists primarily of unsecured
amounts due from the Company's customers. Included in accounts receivable at
December 31, 1999 and 1998, were unbilled revenues recognized under certain
long-term software license, installation, and hardware contracts of $107.1
million and $128.9 million, respectively. Such unbilled receivables arise from
the consistent application of the Company's revenue recognition policies.
Invoicing of unbilled receivables, which generally occurs within six months of
the recognition of the related revenues, is based upon the terms of the
individual customer contracts.
The Company's credit risk with respect to accounts receivable is
concentrated in the health industry, which is highly influenced by health
insurance reimbursement trends and governmental regulations. This concentration
of credit risk is limited due to the number and types of entities comprising the
Company's customer base and their geographic distribution. The Company routinely
monitors its exposure to credit losses and maintains an allowance for
anticipated losses. At December 31, 1999 and 1998, the allowance for doubtful
accounts was $16.1 million and $13.4 million, respectively.
The Company has provided long-term financing arrangements for services,
systems, and hardware to some of its customers. The long-term portion of these
financing arrangements, which are included in other assets, have terms ranging
from three to ten years and interest rates, which may be stated or imputed,
ranging from 5% to 12%. The long-term portion of these financing arrangements,
which approximate fair value, was $81.8 million and $76.5 million at December
31, 1999 and 1998, respectively. Interest income earned on long-term financing
arrangements was $6.7 million, $6.9 million, and $2.5 million in 1999, 1998, and
1997, respectively. The Company has had no material negative collection
experience associated with these long-term financing arrangements.
Prepaid Expenses and Other Current Assets - Included in prepaid expenses
and other current assets are deferred charges of $12.5 million at December 31,
1999 and $10.1 million at December 31, 1998, representing the cost of computer
equipment, which will be expensed when the related hardware revenues are earned.
Property and Equipment, net - Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives, which range from two to fifteen years. The Company's
buildings, not including equipment therein, are depreciated using a 45-year
life. The major classes of property and equipment at December 31, 1999 and 1998
were as follows:
- --------------------------------------------------------------------------------
(Amounts in thousands) 1999 1998
- --------------------------------------------------------------------------------
Land and land improvements ......................... $ 11,576 $ 11,616
Buildings .......................................... 105,418 92,193
Equipment .......................................... 232,063 212,481
-----------------------
349,057 316,290
Less: accumulated depreciation
and amortization ............................. 195,769 178,769
-----------------------
$153,288 $137,521
=======================
- --------------------------------------------------------------------------------
28
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Research and Development - The Company expenses all research and
non-capitalized development costs, which generally consist of costs incurred to
establish the technological feasibility of internally developed computer
software. These expenses, which were primarily for salaries of personnel and
computer costs, were $81.5 million in 1999, $80.1 million in 1998, and $65.9
million in 1997.
Computer Software - Included in computer software are capitalized costs of
internally developed computer software and deferred third-party software costs
for customer use, and capitalized costs of third party and internally developed
computer software for internal use.
Capitalization of costs incurred for internally developed computer software
intended to be licensed to customers begins when a project reaches technological
feasibility and ends when the software is available for general release to
customers. Technological feasibility for internally developed computer software
is established when detailed program designs, which substantiate that the
software product can be developed to meet its design specifications, including
applicable program functions, features and technical performance requirements,
are completed. The Company amortizes computer software on a product-by-product
basis using the greater of the amount computed by the straight-line method over
the estimated useful life of the product, or the ratio of current revenues
compared to total estimated revenues. Capitalized internally developed computer
software costs intended to be licensed to customers, net of accumulated
amortization, were $61.9 million and $49.7 million as of December 31, 1999 and
1998, respectively. Amortization related to capitalized internally developed
computer software intended to be licensed to customers was $10.4 million in
1999, $9.9 million in 1998, and $7.9 million in 1997.
During 1999, the Company acquired rights to certain application source code
for customer use from Avio International Corporation for $14.8 million.
At December 31, 1999 and 1998, capitalized and deferred costs of
third-party software arrangements for customer and internal use, net of
accumulated amortization, were $47.5 million and $26.0 million, respectively.
Accumulated amortization for computer software at December 31, 1999 and
1998 was $96.7 million and $80.4 million, respectively.
Businesses and Investments Acquired - On January 28, 1998, the Company
acquired Data-Plan Software GmbH (Data-Plan), 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 common stock.
This acquisition was treated as a pooling of interests.
On July 16, 1998, the Company acquired Pyrenees Informatique, SA, a
provider of healthcare information systems in France, for $10.8 million. This
acquisition was accounted for as a purchase.
On June 30, 1998, the Company acquired D.P. Informatica, Srl, a provider of
healthcare information systems and services in Italy, for 130,081 shares of
common stock. This acquisition was accounted for as a pooling of interests.
Prior periods were not restated due to immateriality.
On May 29, 1998, the Company acquired JJO Enterprises, a provider of
decision support applications, for 57,593 shares of common stock. This
acquisition was accounted for as a pooling of interests. Prior periods were not
restated due to immateriality.
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 $21.2 million.
On February 28, 1997, the Company completed a merger with American
Healthware Systems, Inc. (AHS), a provider of financial information systems and
outsourcing services. Under the terms of the merger, the Company issued
1,255,325 shares of common stock in exchange for all outstanding shares of AHS.
This acquisition was treated as a pooling of interests.
Goodwill - Included in other assets are amounts for goodwill, which
represent the excess of the purchase price of acquisitions over the fair value
of the net assets acquired. The Company periodically assesses the recoverability
of goodwill for potential impairment. Goodwill is amortized using the
straight-line method over twenty years. Goodwill, net of accumulated
amortization, was $55.1 million and $58.0 million as of December 31, 1999 and
1998, respectively.
Accrued Expenses - Included in accrued expenses are incentive compensation
plan accruals of $24.4 million at December 31, 1999 and $21.1 million at
December 31, 1998. Accruals for these plans are primarily based on sales of new
and renewal contracts, revenues, and timing of related draws and settlements.
Income Taxes - The Company uses the liability method of accounting for
income taxes. Under this method, deferred income tax assets and liabilities are
recorded based upon temporary differences in the recognition of revenues and
expenses (principally accrued and deferred revenues, the cost of capitalized
internally developed computer software, and depreciation and amortization) for
tax and financial reporting purposes.
29
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
Translation of Foreign Currencies - Assets and liabilities of foreign
branches and subsidiaries are translated at current exchange rates, and the
effects of these translation adjustments are reported as a separate component of
stockholders' investment. Revenues and expenses of foreign branches and
subsidiaries are translated at the average exchange rates that prevailed over
the applicable year.
Foreign Currency Transactions - Transactions of the Company and its foreign
branches and subsidiaries are periodically made in currencies other than their
own and are included in income as they occur. The Company periodically hedges
these foreign currency transactions in order to minimize exposure to potential
fluctuations. There were no material gains or losses arising from foreign
currency transactions during 1999, 1998, and 1997.
Statement of Cash Flows - The Company's short-term investments have
original maturities of less than 91 days and are deemed to be cash equivalents
for purposes of reporting cash flows. At December 31, 1999 and 1998, the
carrying amount of cash and short-term investments approximates fair value. The
Company paid income taxes, net of refunds, of $41.3 million in 1999, $33.6
million in 1998, and $19.2 million in 1997; and interest of $10.5 million in
1999, $8.7 million in 1998, and $4.4 million in 1997. Capital lease obligations
of $1.8 million, $1.4 million, and $5.0 million were added by the Company in
1999, 1998, and 1997, respectively.
2. NET INCOME PER SHARE:
For each of the three years in the period ended December 31, 1999, the
reconciliation of basic and diluted net income per share was as follows:
- --------------------------------------------------------------------------------
(Amounts in thousands,
except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------
Net income .................................. $75,972 $70,803 $61,102
=================================
Average shares outstanding:
Basic ................................... 26,645 26,391 26,063
Dilutive securities:
Stock options ........................... 493 652 545
---------------------------------
Average shares outstanding:
Diluted ................................. 27,138 27,043 26,608
=================================
Net income per share - basic ................ $ 2.85 $ 2.68 $ 2.34
=================================
Net income per share - diluted .............. $ 2.80 $ 2.62 $ 2.30
=================================
- --------------------------------------------------------------------------------
3. INCOME TAXES:
The provision for income taxes consisted of:
- --------------------------------------------------------------------------------
(Amounts in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
Federal:
Current .............................. $36,541 $34,813 $18,259
Current deferred ..................... (810) 1,713 11,302
Noncurrent deferred .................. 5,504 2,610 3,692
---------------------------------
41,235 39,136 33,253
---------------------------------
State and foreign:
Current .............................. 5,011 3,777 2,098
Current deferred ..................... (179) 193 1,283
Noncurrent deferred .................. 496 290 815
---------------------------------
5,328 4,260 4,196
---------------------------------
Provision for income taxes .............. $46,563 $43,396 $37,449
=================================
- --------------------------------------------------------------------------------
The provision for income taxes resulted in effective tax rates for the
years ended December 31, 1999, 1998, and 1997, which differ from the statutory
federal income tax rate as follows:
- -------------------------------------------------------------------------------
Percentage of Income
-----------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Statutory federal income tax rate.................... 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit........................ 2.6 2.6 2.3
Other 0.4 0.4 0.7
----------------------
38.0% 38.0% 38.0%
======================
- --------------------------------------------------------------------------------
The significant components of the combined current and noncurrent net
deferred tax liability for the years ended December 31, 1999 and 1998 were as
follows:
- -------------------------------------------------------------------------------
(Amounts in thousands) 1999 1998
- -------------------------------------------------------------------------------
Accrued and deferred revenues, net......................... $23,188 $22,869
Capitalized internally developed software.................. 22,495 18,010
Depreciation and amortization ............................. 14,584 12,111
Other temporary differences................................ (9,018) (5,730)
------------------
$51,249 $47,260
==================
- -------------------------------------------------------------------------------
30
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At December 31, 1999, the Company had foreign net operating loss
carryforwards of $10.1 million, of which $8.9 million can be carried forward
indefinitely while the remainder will expire over the next seven years. The
Company also has approximately $9.8 million of tax basis in excess of book
value, which may be utilized to offset taxable income in the future. Due to
their contingent nature, these deferred tax assets have been fully offset by a
valuation allowance.
The Company does not provide for US income and foreign withholding taxes on
the unremitted earnings of its foreign subsidiaries, which the Company considers
to be permanently invested. Cumulative unremitted foreign earnings were $17.6
million at December 31, 1999.
4. EMPLOYEE BENEFIT PLAN:
The Company has a Section 401(k) retirement savings plan. As part of this
plan, employees may contribute a portion of their earnings, which are then
invested, as specified by the employees, in the common stock of the Company or
in any of nine mutual investment funds. The Company matches a portion of
employee contributions under the plan. The Company's matching contributions
charged to expenses in 1999, 1998, and 1997 were $4.9 million, $4.5 million, and
$3.8 million, respectively.
5. CAPITAL STOCK:
The Board of Directors may authorize the issuance of one or more series of
preferred stock with dividend rates, redemption prices, conversion privileges,
and sinking fund requirements as determined by the Board.
In 1991, the Board of Directors adopted a stockholder rights plan and
declared a dividend of one preferred stock purchase right for each outstanding
share of common stock. In general, such rights only become exercisable, or
transferable apart from the common stock, after a person or group (Acquiring
Person) acquires beneficial ownership of, or commences a tender or exchange
offer for, 15% or more of the Company's common stock. Each right then may be
exercised to acquire one one-thousandth of a share of a newly created Series A
Junior Participating Preferred Stock at an exercise price of $80. Alternatively,
upon the occurrence of certain events (for example, if the Company is the
surviving corporation in a merger with an Acquiring Person), the rights entitle
holders other than the Acquiring Person to acquire common stock having a value
of twice the exercise price of the rights, or, upon the occurrence of certain
other events (for example, if the Company is acquired in a merger or other
business combination transaction in which the Company is not the surviving
corporation), to acquire common stock of the Acquiring Person having a value
twice the exercise price of the rights. In general, the rights may be redeemed
by the Company at $.001 per right at any time until the tenth day following
public announcement that a 15% position has been acquired. The rights will
expire on December 31, 2001.
31
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
- --------------------------------------------------------------------------------
6. STOCK OPTIONS:
The Company has issued non-qualified stock options to employees and non-
employee directors under various stock option plans. Stock options granted under
these plans may have terms ranging up to 20 years and may be exercisable at
prices no less than 75% of the fair market value of the Company's common stock
as determined on the date of the grant. All stock options granted under these
plans have exercise prices equal to the fair market value of the Company's
common stock on the date of grant.
The Company accounts for stock options under the intrinsic value method
and, accordingly, no compensation expense was recorded in 1999, 1998, and 1997.
The following pro forma amounts show the effect as if the Company had accounted
for its stock options using the fair value method.
- --------------------------------------------------------------------------------
(Amounts in thousands,
except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------
Net income:
As reported ................................... $75,972 $70,803 $61,102
Pro forma ..................................... $70,714 $65,760 $58,639
Net income per share:
As reported:
Basic ....................................... $2.85 $2.68 $2.34
Diluted ..................................... $2.80 $2.62 $2.30
Pro forma:
Basic ....................................... $2.65 $2.49 $2.25
Diluted ..................................... $2.61 $2.43 $2.20
- --------------------------------------------------------------------------------
Because the fair value method was not applied to stock options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of compensation cost to be disclosed in future years.
The fair value of stock options granted was $13.61 per option, $18.02 per
option, and $13.85 per option in 1999, 1998, and 1997, respectively. The fair
value was estimated at the date of grant using the Black-Scholes stock option
pricing model with the following average assumptions for 1999, 1998, and 1997,
respectively: risk free interest rates of 5.8%, 5.0%, and 6.1%; dividend yields
of 1.7%, 1.8%, and 2.4%; volatility factors of 35.9%, 33.6%, and 33.3%; and
expected lives of four, five, and four years.
The following table summarizes the activity of the Company's stock option
plans during the three-year period ended December 31, 1999:
- -------------------------------------------------------------------------------
Stock Options
------------------------
Average
Price
Shares Per Share
- --------------------------------------------------------------------------------
Outstanding - January 1, 1997 ...................... 2,178,579 $29.35
Granted ........................................ 615,300 $48.06
Exercised ...................................... (279,451) $18.11
Canceled ....................................... (178,763) $33.03
---------
Outstanding - December 31, 1997 .................... 2,335,665 $35.39
Granted ........................................ 1,121,350 $61.53
Exercised ...................................... (172,264) $23.74
Canceled ....................................... (494,250) $73.23
---------
Outstanding - December 31, 1998 .................... 2,790,501 $39.91
Granted ........................................ 652,500 $41.63
Exercised ...................................... (153,793) $30.90
Canceled ....................................... (128,125) $50.46
---------
Outstanding - December 31, 1999 .................... 3,161,083 $40.28
=========
- --------------------------------------------------------------------------------
Exercisable stock options during the three-year period ended December 31,
1999, were as follows:
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Stock options .................................... 981,519 780,913 547,213
Average option price per share ................... $32.48 $28.76 $21.71
- --------------------------------------------------------------------------------
At December 31, 1999, exercise prices for stock options outstanding ranged
from $12.50 to $74.50 per share and the average term to expiration was seven
years. As of December 31, 1999 and 1998, a maximum of 1,363,821 and 2,049,192,
respectively, of additional stock options were available for grant under the
Company's stock option plans. The outstanding stock options expire on various
dates through 2015.
In November 1998, the Company offered certain employees, excluding its six
highest ranking executive officers, the opportunity to exchange options granted
earlier in 1998 for options with an exercise price equal to the then current
market price of the Company's common stock. The new options contained delayed
vesting terms, and original grants in excess of 6,000 options were reduced by
20% of such excess. 467,525 options were cancelled and 457,925 new options were
granted under this offer.
The Company may also grant restricted shares of its common stock under some
of these plans. Restricted stock grants are recorded as compensation expense
during the vesting terms, which currently range from three to six years. As of
December 31, 1999, there were 187,877 restricted shares outstanding.
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT AND LINES OF CREDIT:
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 a corporate office building addition, pay off existing
long-term debt and supplement working capital requirements. These notes contain
limitations on the Company's ability to incur additional indebtedness, to merge
or consolidate with another company, and to dispose of assets or ownership in a
subsidiary. The Company is also required 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. Long-term debt consisted of the following at December
31, 1999 and 1998:
- --------------------------------------------------------------------------------
(Amounts in thousands) 1999 1998
- --------------------------------------------------------------------------------
Payable in U.S. dollars:
6.58% Series A notes - due 2006 ......................... $ 15,000 $ -
6.58% Series B notes - due 2003-2009 .................... 74,000 -
6.75% Series C notes - due 2009 ......................... 61,000 -
6.75% Series D notes - due 2007-2011 .................... 25,000 -
6.75% note due through 2002 ............................. - 1,892
Payable in foreign currency:
7.87% British Pound Sterling note
due through 2002 ..................................... - 7,939
4.64% German Mark note
due through 2002 ..................................... - 2,204
-----------------
175,000 12,035
Less current portion ................................. - 1,606
-----------------
$175,000 $10,429
=================
- --------------------------------------------------------------------------------
Aggregate maturities of long-term debt over the next five years are as
follows: 2003 - $10.6 million, and 2004 - $10.6 million. At December 31, 1999,
the carrying amount of long-term debt approximates fair value.
At December 31, 1999, the Company had lines of credit with banks totaling
$118.8 million, which are primarily based on LIBOR or EURIBOR, of which $70.0
million of these lines of credit were unused.
8. LONG-TERM LEASES AND COMMITMENTS:
The Company leases equipment, which is primarily used at the Company's
Information Services Center, for periods ranging up to 60 months. Obligations
for this type of equipment for the next five years are as follows:
- --------------------------------------------------------------------------------
Operating Capital
(Amounts in thousands) Leases Leases
- --------------------------------------------------------------------------------
2000 ................................................... $20,493 $2,596
2001 ................................................... 16,168 2,061
2002 ................................................... 9,576 804
2003 ................................................... 3,408 442
2004 ................................................... 6 208
---------------------
$49,651 6,111
=======
Less interest ..................................................... 639
------
Present value of future capital
lease obligations............................................... $5,472
======
- --------------------------------------------------------------------------------
Rental expenses for the operating leases described above were $29.2 million
in 1999, $28.3 million in 1998, and $28.0 million in 1997.
The Company leases office space to support its operations. These leases
expire at various dates and require minimum aggregate annual rentals as follows:
2000 - $16.1 million, 2001 - $15.3 million, 2002 - $13.6 million, 2003 - $11.7
million, 2004 - $8.9 million, and $23.7 million thereafter. Rental expenses for
these facilities amounted to $17.0 million in 1999, $15.2 million in 1998, and
$12.9 million in 1997.
33
<PAGE>
Shared Medical Systems Corporation
- -------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
- -------------------------------------------------------------------------------
9. BUSINESS SEGMENT INFORMATION:
The Company has two geographic segments - North America and International.
The Company manages its operations geographically due to differences in the way
healthcare enterprises are organized and funded between these two segments. The
following table summarizes certain financial information by geographic segment:
- -------------------------------------------------------------------------------
(Amounts in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------
Revenues from customers:
North America ............................ $1,052,511 $1,000,993 $802,712
International ............................ 164,634 134,400 118,629
---------------------------------
Consolidated .......................... $1,217,145 $1,135,393 $921,341
=================================
Interest expense:
North America ............................ $ 9,054 $5,156 $1,252
International ............................ 3,116 3,652 2,735
---------------------------------
Consolidated .......................... $12,170 $8,808 $3,987
=================================
Depreciation and amortization:
North America ............................ $42,778 $37,560 $34,207
International ............................ 7,534 8,123 5,242
---------------------------------
Consolidated .......................... $50,312 $45,683 $39,449
=================================
Income before income taxes:
North America ............................ $126,471 $129,803 $106,864
International ............................ (3,936) (15,604) (8,313)
---------------------------------
Consolidated .......................... $122,535 $114,199 $ 98,551
=================================
Total assets:
North America ............................ $759,556 $663,165 $499,387
International ............................ 156,188 145,283 114,589
---------------------------------
Consolidated .......................... $915,744 $808,448 $613,976
=================================
Long-lived assets:
North America ............................ $134,603 $117,645 $ 88,068
International ............................ 18,685 19,876 18,237
---------------------------------
Consolidated .......................... $153,288 $137,521 $106,305
- -------------------------------------------------------------------------------
The Company's revenues are primarily derived from software and related
services, professional services, and the sale of hardware. For the three years
ended December 31, 1999, 1998, and 1997, revenues derived from software and
related services were $642.8 million, $595.7 million, and $534.6 million;
professional services were $373.0 million, $300.9 million, and $222.5 million;
and hardware sales were $134.4 million, $189.2 million, and $118.8 million,
respectively.
In 1999, 1998, and 1997, no single customer accounted for 10% or more of
consolidated revenues.
10. SELECTED QUARTERLY FINANCIAL DATA (Unaudited):
The following table summarizes quarterly financial data for 1999 and 1998:
- --------------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Income Net
Before Income
Income Net Per Share
Quarter Revenues Taxes Income Diluted
- --------------------------------------------------------------------------------
1998:
First ............................ $255,466 $28,743 $17,821 $.66
Second ........................... 256,992 29,203 18,101 .67
Third ............................ 283,633 26,136 16,205 .60
Fourth ........................... 339,302 30,117 18,676 .69
- --------------------------------------------------------------------------------
1999:
First ............................ $287,069 $29,536 $18,313 $.68
Second ........................... 304,439 31,560 19,565 .72
Third ............................ 305,356 35,233 21,846 .80
Fourth ........................... 320,281 26,206 16,248 .60
- --------------------------------------------------------------------------------
34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors, Shared Medical Systems Corporation:
We have audited the accompanying consolidated balance sheet of Shared
Medical Systems Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of income,
stockholders' investment and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shared Medical Systems
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
Philadelphia, PA /S/ Arthur Andersen LLP
February 8, 2000
- --------------------------------------------------------------------------------
DIRECTORS
R. James Macaleer, Chairman of the Board
Mr. Macaleer has been Chairman since the Company's founding in 1969. He also
served as Chief Executive Officer from the Company's founding in 1969 until
1995.
Frederick W. DeTurk, Director
Mr. DeTurk has been a Director since 1981. He is President of DeTurk
Enterprises, Inc., a management consulting firm.
Josh S. Weston, Director
Mr. Weston has been a Director since 1987. He is Honorary Chairman of Automatic
Data Processing, Inc., an information processing services company.
Jeffrey S. Rubin, Director
Mr. Rubin has been a Director since 1993. He is a partner of Boles Knop and
Company LLC, an investment banking company.
Marvin S. Cadwell, Director, President and Chief Executive Officer
Mr. Cadwell has been a Director since 1995. He has served as President and Chief
Executive Officer since 1995. Mr. Cadwell previously served in a variety of
executive positions since joining the Company in 1975.
Gail R. Wilensky, Ph.D., Director
Dr. Wilensky has been a Director since 1996. She is a Senior Fellow at Project
HOPE, an international health education foundation.
EXECUTIVE OFFICERS
R. James Macaleer, Chairman of the Board
Marvin S. Cadwell, President and Chief Executive Officer
James C. Kelly, Secretary
V. Brewster Jones, Senior Vice President
Terrence W. Kyle, Senior Vice President, Treasurer, and
Assistant Secretary
Francis W. Lavelle, Senior Vice President
David F. Perri, Senior Vice President
Guillermo N. Ramas, Sr., Senior Vice President and
President of SMS International
Michael B. Costello, Vice President, Administration and Corporate Communications
Edward J. Grady, Vice President, Controller, and Assistant Treasurer
Bonnie L. Shuman, Vice President, General Counsel, and
Assistant Secretary
35
<PAGE>
SMS OFFICE LOCATIONS
Corporate Headquarters International Administration
SMS SMS Corp y Cia SRC
51 Valley Stream Parkway Edificio Lariza
Malvern, PA 19355 Avenida de los Encuartes, 21
610-219-6300 28760 Tres Cantos
www.smed.com Madrid, Spain
011-34-9180-77500
<TABLE>
<CAPTION>
Primary US Offices Primary International Offices
<S> <C> <C> <C>
Altoona, PA Los Angeles, CA Belgium Spain
814-944-1651 562-596-4554 Zaventem Barcelona
011-32-2725-0407 011-34-9336-32360
Atlanta, GA Nashville, TN
770-993-2490 615-902-9292 Czech Republic United Kingdom
Brno Basingstoke
Boston, MA New Orleans, LA 011-420-5-4121-9179 011-44-1256-357100
781-224-0817 504-835-3894
France
Brooklyn, NY New York, NY Montpellier
718-435-6300 212-563-2380 011-33-4670-41143
Buffalo, NY Oakland, CA Germany
716-626-3470 510-444-0171 Eschborn
011-49-6196-9240
Charlotte, NC Philadelphia, PA
704-423-9992 610-640-4490 Hungary
Budapest
Chicago, IL Phoenix, AZ 011-36-1461-9000
847-806-0666 602-248-0328
Ireland
Cleveland, OH Pittsburgh, PA Dublin
216-524-0313 412-921-6400 011-35-3180-60800
Columbus, OH Salt Lake City, UT Italy
614-885-0198 801-539-4919 Rome
011-39-0643-93350
Dallas, TX San Francisco, CA
972-407-6047 925-846-9490 Netherlands
Nieuwegein
Detroit, MI San Juan, PR 011-31-3060-52852
248-449-2500 787-756-6700
New Zealand
Edison, NJ Santa Barbara, CA Wellington
732-906-8900 805-964-5561 011-64-4471-1793
Ft. Lauderdale, FL Seattle, WA Slovak Republic
954-771-4880 425-827-4455 Bratislava
011-421-7-5341-8073
Indianapolis, IN St. Louis, MO
317-453-0200 314-542-0100
Kansas City, KS Washington, DC
913-384-4811 703-261-1000
</TABLE>
36
<PAGE>
WHY INVEST IN SMS?
. Great People. Our team of 7,500 employees worldwide includes technology
experts, healthcare professionals, development gurus, and others who are
committed to the SMS vision of working together to improve health
worldwide.
. Outstanding Opportunity. The most established company in the industry, SMS
is actively taking advantage of new opportunities in healthcare information
technology, from e-business to new technologies and new modes of software
and service delivery. SMS is not only ready but is delivering results as
others strive to compete. Our reach is vast, with over 5,000 customers in
more than 20 countries and territories worldwide.
. Superior Solutions. SMS solutions deliver real results every day. Among our
products is the best-selling health information system in history. Our
clinical applications are among the most successful in the industry, with
more applications installed and operational than any other company. In
fact, SMS has the largest base of installed clinical data repositories in
the United States.
. Top-notch Service. SMS has always been focused first on service: on
understanding the complex needs of our healthcare customers and delivering
information solutions to help them manage their day-to-day business and
healthcare needs. Our people worldwide are united toward the SMS vision of
working together with our customers to improve health worldwide.
. The Right Focus. We're focused on the right things: sustainable value for
shareholders, for customers, and for our employees.
Annual Stockholders Meeting
The Annual SMS Stockholders Meeting will be held on Friday, June 9, at 11:30
a.m. in the Du Barry Room at the Hotel duPont, Wilmington, Delaware. You are
cordially invited to attend.
Common Stock
SMS common stock trades on the New York Stock Exchange under the symbol SMS.
Transfer Agent
ChaseMellon Shareholder Services, LLC
Overpeck Center
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 851-9677
www.chasemellon.com
Counsel
Drinker Biddle & Reath LLP
Philadelphia, PA
Independent Public Accountants
Arthur Andersen LLP
Philadelphia, PA
Shareholder Inquiries
(610) 219-6528
[email protected]
SMS LISTED NYSE
THE NEW YORK STOCK EXCHANGE(R)
SMS is an Equal Opportunity/
Affirmative Action Employer.
Copyright(C)2000 SMS
Shared Medical Systems Corporation
[RECYCLE LOGO] Printed on recycled paper. Design by Warkulwiz Design Associates.
Photography by Peter Olson and H. Mark Weidman. Onsite photography by Peter
Olson at Lankenau Hospital/Jefferson Health System in Wynnewood, PA. Printing by
CRW Graphics.
<PAGE>
51 Valley Stream Parkway, Malvern, PA 19355 610-219-6300 www.smed.com
<PAGE>
Exhibit (21)
Significant Subsidiaries of the Registrant
------------------------------------------
SMS Enterprises, Inc. (a Delaware corporation)
SMS Holdings GmbH (a German corporation)
<PAGE>
Exhibit (23)
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Shared Medical Systems Corporation:
As independent public accountants, we hereby consent to the incorporation of our
report dated February 8, 2000 included (or incorporated by reference) in Shared
Medical Systems Corporation's 10-K for the year ended December 31, 1999, into
the Company's previously filed Registration Statements on Form S-8 (File Nos.
2-83465, 2-85345, 2-85346, 2-96224, 2-96225, 33-18161, 33-25010, 33-34089,
33-34410, 33-37742, 33-47572, 33-61967, 333-73315 and 333-87405).
/S/ Arthur Andersen LLP
Philadelphia, PA
March 30, 2000
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