Item 1. Business.
The Company, incorporated in Delaware in January 1969, and its subsidiaries provide computer-based information systems and associated services to the health industry in North America and Europe.
The Company's services and systems are offered to integrated health networks, multientity health corporations, community health information networks, acute- care hospitals, physician groups, managed services organizations, and other health providers. These services and systems include a full range of clinical, financial, patient management, managed care, imaging, management decision, and electronic data interchange services that use diverse computing and networking technologies, ranging from remote processing (i.e., at the Company's Information Services Center), to distributed processing systems, to onsite systems. The Company also provides professional services related to its information systems business.
In the United States, which has historically been the Company's most significant market, the Company currently has contracts with health organizations in 48 states, the District of Columbia, and Puerto Rico. The Company markets its information systems and provides installation services and ongoing technical and educational support with a field staff working from branch offices. At its Corporate Headquarters and Information Services Center, the Company has a 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 processing services and systems.
On February 28, 1997, the Company completed a merger with American Healthware Systems (AHS), a provider of financial information systems and facilities management services to health organizations in New York State. Under the terms of the merger agreement, the Company issued 1,255,325 shares of the Company's common stock in exchange for all outstanding shares of AHS. This transaction will be accounted for as a pooling of interests.
In 1981, the Company entered the health information processing services and systems market in Europe. In Europe, the Company markets, installs, and supports its products through local offices in ten countries. Currently, the Company has customer contracts in Belgium, the Czech Republic, Denmark, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Malta, the Netherlands, Poland, the Slovak Republic, Spain, and the United Kingdom.
For financial information by geographic area, refer to page 34 of the Company's 1996 Annual Report to Stockholders, Notes to Consolidated Financial Statements, Business Segment Information (Note 11), which is incorporated herein by reference.
Despite a gradual decline in the number of stand-alone acute-care hospital beds in recent years, the needs and requirements of the health industry have continued to grow as business of providing information services
and systems has become more complex. Health industry consolidation and changes in the way health organizations are structured and reimbursed, combined with pressures to control costs, improve quality, and increase market share continue to create new and increased demands for the Company's services and systems.
Services and Systems Offered ----------------------------
The Company's health information systems and related services are delivered on computers that range from personal computers, to minicomputers, to mainframes, which can operate at the customer's site, at the Company's Information Services Center (i.e., remotely), or as part of a distributed network. Distributed network systems enable customers to process any combination of the Company's information systems either at the Company's Information Services Center, or at the customer's site. These systems are also offered with networking features that enable multientity health organizations to process information for affiliated hospitals, physician groups, and clinics.
The principal health information systems and related services offered by the Company are:
Health Information Systems - - ----------------------------
. Clinical Systems, which provide clinicians with point-of-care data entry and access to clinical information. These systems automate many labor-intensive tasks performed in the nursing, radiology, laboratory, pharmacy, and other departments within health organizations, while facilitating communications among them.
. Financial Systems, which consist of a full range of financial functions that include provider accounting for both hospitals and physicians (including billing and receivables), personnel, payroll, materials management, and property.
. Patient Management Systems, which assist in the administration of patient care through specialized programs for various health organization support functions, such as admissions, outpatient visits, utilization review, medical records, and physician encounters.
. Ambulatory Care Systems, which provide integrated systems that facilitate the sharing of clinical and financial information between health providers in non- acute care settings.
. Management Decision Systems, which provide health executives and managers with access to a range of strategic information collected from the clinical, financial, and patient management systems to set performance standards, identify variances, and analyze results.
. Physician Information Systems, which provide information processing and administrative support to physician groups, clinics, and medical schools with features such as scheduling, electronic claims processing, automated billing and rebilling, and online collections.
. Integrated Health Network Systems, which connect all points of care through patient indices that identify patients anywhere within the network, schedule network-wide resources, and retain cumulative electronic patient records. These systems also include software that address managed care, and enhance communications among all elements within an integrated health network. Integrated health networks are generally comprised of a variety of health delivery organizations, such as acute-care hospitals, skilled nursing facilities, home health agencies, rehabilitation facilities, clinics, physician practices, and others.
Electronic Data Interchange Services - these services facilitate the sharing ------------------------------------ and standardization of information such as eligibility verifications, and claims and remittance transmissions between health providers and payers.
Professional Services - these services consist of a variety of activities --------------------- related to the Company's health information processing systems. These professional services include system installation and support, and customer education. In addition, the Company provides specialized consulting services for the design and integration of software and networks, business office consulting, facilities management, information systems planning and integration, and system-related process reengineering.
Service and system fees earned by the Company for the years ended December 31, 1996, 1995, and 1994 were $686,655,000, $592,509,000, and $504,386,000, respectively. Hardware at customer sites associated with these services and systems may be provided by the Company under sales or lease agreements. Revenues for hardware leased to customers by the Company are included in service and system fees revenues. Hardware sales revenues for the years ended December 31, 1996, 1995, and 1994 were $80,695,000, $58,132,000, and $46,383,000, respectively.
Customers ---------
The Company's services and systems are provided to customers under long-term service contracts and perpetual license agreements. Long-term service contracts range from one to ten years, and generally allow price increases annually, limited to the increase in the Consumer Price Index. Revenues under long-term service agreements are recognized as they are earned over the life of the contract. Software fees for perpetual license agreements are recognized over the installation period. Support fees related to long-term service contracts or perpetual license agreements are recognized over the term of the support agreement. Management estimates that the total amount of future revenues under contract as of December 31, 1996 are in excess of $1.8 billion. In 1996, 1995, and 1994, no single customer accounted for 10% or more of consolidated revenues.
Revenues from individual customers will 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 customer under a long-term service contract would have the effect of reducing 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.
Competition -----------
The Company experiences intense competition from a number of firms in the health information services and systems market. Virtually all health organizations use some form of computer-based information processing. The Company's competitors vary in size, in geographical coverage, and in scope and breadth of products and services offered.
The Company considers itself to be a major supplier of information processing services and systems to health organizations. Competition among those providing information processing services and systems to health organizations, physician groups, and other health providers is based upon the breadth and reliability of the services and systems provided and, to the extent that the services are comparable, upon price.
Research and Development ------------------------
The Company is continually investigating the feasibility of enhancing existing systems and developing new systems to meet the information processing needs of health organizations. Profitability of newly developed services and systems depends upon attainment of sufficient sales volumes and continuing improvement and efficiency of the systems.
The Company expenses all research and non-capitalized development costs, which generally consist of costs incurred to establish the technological feasibility of internally produced computer software. These expenses, which are primarily for salaries of personnel and computer costs, were $54,665,000 in 1996, $45,385,000 in 1995, and $39,226,000 in 1994.
The Company capitalizes the cost of certain internally produced computer software and purchased software. Capitalization for internally produced software begins when a project reaches technological feasibility and ceases when the software is available for general release to customers. The Company amortizes computer software using the straight-line method over its expected useful life, which is generally five years. Capitalized internally produced computer software costs, net of accumulated amortization, were $36,042,000 and $32,785,000 as of December 31, 1996 and 1995, respectively. Amortization related to capitalized internally produced software was $7,993,000 in 1996, $7,722,000 in 1995, $6,290,000 in 1994. Purchased software, net of accumulated amortization, was $15,289,000 and $10,170,000 as of December 31, 1996 and 1995, respectively.
Personnel ---------
As of December 31, 1996, the Company had a total of 5,420 full-time employees.
Item 2.

Item 2. Properties.
The Company owns 116 acres of land in Chester County, Pennsylvania. The Company has constructed three buildings on this site; an information services center (81,000 square feet), which was put into service in 1979, and two office buildings with an aggregate of 431,000 square feet, the first of which was placed in service in 1981 and the second of which was placed in service in 1983. These office buildings serve as the Company's corporate headquarters. The unused portion of this land can be used for future expansion. In addition, the Company leases office space near the Company's corporate headquarters, which is utilized by certain corporate-based operations. The Company also leases office space in most major metropolitan areas in the United States for marketing, installation and support personnel. In Europe the Company owns office buildings in Spain and the United Kingdom and leases office space in various locations to support its operations. These properties are adequate for existing operations.
The Company also owns 241 acres of land in Chester County, Pennsylvania for possible future expansion.
As of December 31, 1996, the Company's Information Services Center, which is used primarily to process customer information and to support the Company's internal software development activity, contains one IBM 9672/RY4 CMOS processor, three IBM 9672/RX4 CMOS processors, and two 9021-982 IBM processors, all of which were obtained under operating leases. The Company's Information Services Center also includes related mainframe peripherals and network communications equipment that has been purchased or leased. These leases are generally contracted on a month-to-month basis or under long-term agreements with terms that range from one to five years.
Item 3.

Item 3. Legal Proceedings.
None.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
None.
Executive Officers of the Registrant
Listed below are the name, age as of December 31, 1996, position(s) with the Company and principal occupation(s) for the past five years of each of the current executive officers of the Company.
- --------------------------------------------------------------------------------
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 average bid and asked prices of the stock as of February 28, 1997.
Part II
The following information contained in the Company's Annual Report to Stockholders for the year ended December 31, 1996 is incorporated herein by reference:
Item 5.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Page 23, Section titled Market Price and Dividends Declared Per Share - "1996" and "1995" columns and related footnote
Item 6.

Item 6. Selected Financial Data.
Page 23, Section titled Summary of Consolidated Operations - "Revenues," "Net Income," and "Net Income Per Share" 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.

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 8.

Item 8. Financial Statements and Supplementary Data.
Pages 24 through 34
Page 35, Report of Independent Public Accountants
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Part III
The following information contained in the Company's definitive Proxy Statement to be mailed to stockholders on or about April 4, 1997 is incorporated herein by reference:
Item 10.

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 7 and 8 hereof, section titled "Executive Officers of the Registrant")
Item 11.

Item 11. Executive Compensation.
Section titled "Election of Directors": subsection titled "Compensation of Directors"
Section titled "Executive Compensation": subsections titled "Compensation Committee Interlocks and Insider Participation" and "Compensation Summaries"
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
Section titled "Security Ownership"
Item 13.

Item 13. Certain Relationships and Related Transactions.
Section titled "Executive Compensation": subsection titled "Compensation Committee Interlocks and Insider Participation"
Part IV
Item 14.

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 34 in the Company's Annual Report to Stockholders for the year ended December 31, 1996 are included in this report.
. Consolidated Balance Sheet as of December 31, 1996 and 1995 (page 24)
. Consolidated Statement of Income for the years ended December 31, 1996, 1995, and 1994 (page 25)
. Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995, and 1994 (page 26)
. Consolidated Statement of Stockholders' Investment for the years ended December 31, 1996, 1995, and 1994 (page 27)
. Notes to Consolidated Financial Statements for the years ended December 31, 1996, 1995, and 1994 (pages 28 through 34)
. Report of Independent Public Accountants (page 35)
. Selected Quarterly Financial Data (Unaudited) for the years ended December 31, 1996 and 1995 as reported in Note 9 to Consolidated Financial Statements (page 33)
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
. 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
3. The following exhibits are included in this report:
No. Description ---- -----------------------------------------------------------------
(3) Articles of Incorporation and By-Laws -
Certificate of Amendment of Certificate of Incorporation dated June 19, 1992 (filed as Exhibit (4) to the Company's Form 10-Q Report for the quarter ended June 30, 1992)*, 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
(10) Material Contracts -
Deferred compensation agreements:**
R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)*
James C. Kelly (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)*
Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended September 30, 1995)*
Performance bonus plans - 1996:**
R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1996)*
Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1996)*
Form of performance bonus plan (filed as Exhibit (10.4) to the Company's Form 10-Q Report for the quarter ended September 30, 1996)*:
Terrence W. Kyle
Francis W. Lavelle
*Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or compensatory arrangement.
No. Description - ---- ----------------------------------------------------------------
David F. Perri
Guillermo N. Ramas, Sr.
Matthew B. Townley
Performance bonus plans - 1995:**
R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)*
Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)*
Francis W. Lavelle (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended September 30, 1995)*
David F. Perri (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)*
Matthew B. Townley (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)*
Insurance agreement:**
R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)*
Employment agreements:**
Marvin S. Cadwell
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.
Matthew B. Townley
*Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or compensatory arrangement.
No. Description ---- ------------------------------------------------------------
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
Stock Option Plan:**
1987 Non-Qualified Stock Option Plan for Non-Employee Directors (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1993)*
(13) Annual Report to Stockholders for the year ended December 31, 1996***
(21) 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, 1996.
*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, 1996 is not to be deemed "filed" as part of this Form 10-K.
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 28, 1997 ----------------------------------------- ---------------- 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 28, 1997 ----------------------------------------- ---------------- R. James Macaleer - Chairman of the Board
By: /S/ Marvin S. Cadwell Date: March 28, 1997 ----------------------------------------- ---------------- Marvin S. Cadwell - Director, President, and Chief Executive Officer
By: /S/ Raymond K. Denworth, Jr. Date: March 28, 1997 ----------------------------------------- ---------------- Raymond K. Denworth, Jr. - Director
By: /S/ Frederick W. DeTurk Date: March 28, 1997 ----------------------------------------- ---------------- Frederick W. DeTurk - Director
By: /S/ Josh S. Weston Date: March 28, 1997 ----------------------------------------- ---------------- Josh S. Weston - Director
By: /S/ Jeffrey S. Rubin Date: March 28, 1997 ----------------------------------------- ---------------- Jeffrey S. Rubin - Director
By: /S/ Gail R. Wilensky Date: March 28, 1997 ----------------------------------------- ---------------- Gail R. Wilensky - Director
By: /S/ Terrence W. Kyle Date: March 28, 1997 ----------------------------------------- ---------------- Terrence W. Kyle - Senior Vice President, Treasurer, and Assistant Secretary
By: /S/ Edward J. Grady Date: March 28, 1997 ----------------------------------------- ---------------- Edward J. Grady - Vice President, Controller, and Assistant Treasurer
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 1996 Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 10, 1997 (except with respect to the matter discussed in Note 10, as to which the date is February 28, 1997). 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 10, 1997
SCHEDULE II
(1)Write-offs of uncollectible accounts
(2)Write-offs of uncollectible accounts offset by additions resulting from the Company's acquisition of GTE Health Systems Incorporated on September 30, 1995.
Exhibit Index
No. Description - ---- -------------------------------------------------------------------- (3) Articles of Incorporation and By-Laws -
Certificate of Amendment of Certificate of Incorporation dated June 19, 1992 (filed as Exhibit (4) to the Company's Form 10-Q Report for the quarter ended June 30, 1992)*, 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
(10) Material Contracts -
Deferred compensation agreements:**
R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)*
James C. Kelly (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)*
Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended September 30, 1995)*
Performance bonus plans - 1996:**
R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1996)*
Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended June 30, 1996)*
Form of performance bonus plan (filed as Exhibit (10.4) to the Company's Form 10-Q Report for the quarter ended September 30, 1996)*:
Terrence W. Kyle
Francis W. Lavelle
David F. Perri
*Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or compensatory arrangement.
Exhibit Index
No. Description - ---- --------------------------------------------------------------------
Guillermo N. Ramas, Sr.
Matthew B. Townley
Performance bonus plans - 1995:**
R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)*
Marvin S. Cadwell (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1994)*
Francis W. Lavelle (filed as Exhibit (10) to the Company's Form 10-Q Report for the quarter ended September 30, 1995)*
David F. Perri (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)*
Matthew B. Townley (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)*
Insurance agreement:**
R. James Macaleer (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1995)*
Employment agreements:**
Marvin S. Cadwell
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.
Matthew B. Townley
*Previously filed as indicated and incorporated herein by reference. **May be deemed a management contract or compensatory arrangement.
Exhibit Index
No. Description - ---- --------------------------------------------------------------------
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
Stock Option Plan:**
1987 Non-Qualified Stock Option Plan for Non-Employee Directors (filed as Exhibit (10) to the Company's Form 10-K Report for the year ended December 31, 1993)*
(13) Annual Report to Stockholders for the year ended December 31, 1996***
(21) 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, 1996 is not to be deemed "filed" as part of this Form 10-K.