<PAGE>
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, 1996
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:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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 28, 1997, was $1,303,795,000.
See page 8 herein for assumptions on which this calculation is based.
On February 28, 1997, there were 24,862,447 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, 1996 are incorporated by reference into Part I and Part II of
this Form 10-K. Certain portions of the Company's definitive Proxy Statement to
be mailed to stockholders on or about April 4, 1997, are incorporated by
reference into Part III of this Form 10-K.
<PAGE>
2
Part I
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
<PAGE>
3
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.
<PAGE>
4
. 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
<PAGE>
5
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.
<PAGE>
6
Personnel
---------
As of December 31, 1996, the Company had a total of 5,420 full-time employees.
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. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE>
7
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.
<TABLE>
<CAPTION>
Positions with Company and Principal
Name Age Occupation(s) - Past Five Years
- -------------------------- --- ---------------------------------------------
<S> <C> <C>
R. James Macaleer 62 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 53 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; Senior
Vice President, Managing Director, and Chief
Operating Officer of SMS Europe, March 1992 -
October 1993; and Vice President, Managing
Director, and Chief Operating Officer of SMS
Europe, September 1986 - March 1992. Mr.
Cadwell originally joined the Company in 1975.
Michael B. Costello 53 Vice President of Administration and Corporate
Communications since January 1991. Mr. Costello
originally joined the Company in 1979.
Edward J. Grady 44 Vice President, Controller, and Assistant
Treasurer since September 1996. Prior to this,
Mr. Grady served as Controller and Assistant
Treasurer, February 1993 - September 1996; and
Controller, May 1985 - February 1993. Mr. Grady
originally joined the Company in 1980.
James C. Kelly 57 Secretary since June 1990. Mr. Kelly originally
joined the Company in 1972.
Terrence W. Kyle 46 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.
</TABLE>
<PAGE>
8
<TABLE>
<CAPTION>
Positions with Company and Principal
Name Age Occupation(s) - Past Five Years
- -------------------------- --- -----------------------------------------------
<S> <C> <C>
Francis W. Lavelle 47 Senior Vice President of U.S. Customer
Operations since December 1993. Prior to this,
Mr. Lavelle served as Vice President of New
Business Development, January 1991 - December
1993. Mr. Lavelle originally joined the Company
in 1988.
David F. Perri 47 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. 51 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; and General
Manager of Southern Europe, January 1992 -
October 1993. Mr. Ramas originally joined the
Company in 1987.
Bonnie L. Shuman 48 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.
Matthew B. Townley 40 Senior Vice President since August 1996. Prior
to this, Mr. Townley served as Vice President of
Health Solutions, March 1995 - August 1996;
General Manager of the Company's Healthcare Data
Exchange and Physician Services Divisions,
February 1994 - March 1995; General Manager of
the Company's Physicians Services Division,
September 1992 - February 1994; and Regional
Manager of the Company's Northwest Region,
February 1991 - September 1992. Mr. Townley
originally joined the Company in 1982.
</TABLE>
- --------------------------------------------------------------------------------
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.
<PAGE>
9
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. 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. 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. 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. 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>
10
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. 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. 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. Security Ownership of Certain Beneficial Owners and Management.
Section titled "Security Ownership"
Item 13. Certain Relationships and Related Transactions.
Section titled "Executive Compensation": subsection titled "Compensation
Committee Interlocks and Insider Participation"
<PAGE>
11
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 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
<PAGE>
12
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.
<PAGE>
13
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.
<PAGE>
14
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.
<PAGE>
15
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
<PAGE>
16
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
<PAGE>
17
SCHEDULE II
<TABLE>
<CAPTION>
SHARED MEDICAL SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
-----------------------------------------------------
Balance Balance
Beginning of Charges to Additions/ End of
Year Expenses (Deductions) Year
------------ ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Reserve for Doubtful Accounts:
December 31, 1996 $ 4,847,000 $1,900,000 $ (153,000)(1) $ 6,594,000
============ ============ ============== ============
December 31, 1995 $ 5,317,000 $ 820,000 $ (1,290,000)(1) $ 4,847,000
============ ============ ============== ============
December 31, 1994 $ 4,279,000 $ 818,000 $ 220,000 (2) $ 5,317,000
============ ============ ============== ============
</TABLE>
(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.
<PAGE>
18
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.
<PAGE>
19
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.
<PAGE>
20
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.
<PAGE>
Exhibit (4)
Rights Agreement,
dated as of May 1, 1991, between
Shared Medical Systems Corporation
and
Pittsburgh National Bank
<PAGE>
RIGHTS AGREEMENT
dated as of May 1, 1991
between
SHARED MEDICAL SYSTEMS CORPORATION
and
PITTSBURGH NATIONAL BANK
as
Rights Agent
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
1. Certain Definitions..................................... 1
2. Appointment of Rights Agent............................. 7
3. Issue of Rights Certificates............................ 7
4. Form of Rights Certificates............................. 9
5. Countersignature and Registration....................... 11
6. Transfer, Split Up, Combination and
Exchange of Rights Certificates;
Mutilated, Destroyed, Lost or Stolen
Rights Certificates..................................... 12
7. Exercise of Rights; Purchase Price;
Expiration Date of Rights............................... 13
8. Cancellation and Destruction of
Rights Certificates..................................... 15
9. Reservation and Availability of
Capital Stock........................................... 16
10. Preferred Stock Record Date............................. 18
11. Adjustment of Purchase Price,
Number and Kind of Shares or
Number of Rights........................................ 18
12. Certificate of Adjusted Purchase
Price or Number of Shares............................... 30
13. Consolidation, Merger or Sale or
Transfer of Assets or Earning Power..................... 30
14. Fractional Rights and Fractional
Shares.................................................. 33
15. Rights of Action........................................ 35
16. Agreement of Rights Holders............................. 36
17. Rights Certificate Holder Not Deemed
a Stockholder........................................... 36
18. Concerning the Rights Agent............................. 37
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
19. Merger or Consolidation or
Change of Name of Rights Agent.......................... 37
20. Duties of Rights Agent.................................. 38
21. Change of Rights Agent.................................. 40
22. Issuance of New Rights Certificates..................... 41
23. Redemption and Termination.............................. 42
24. Notice of Certain Events................................ 46
25. Notices................................................. 47
26. Supplements and Amendments.............................. 47
27. Successors.............................................. 48
28. Determinations and Actions by
the Board of Directors, Etc............................. 49
29. Benefits of this Agreement.............................. 49
30. Severability............................................ 49
31. Governing Law........................................... 50
32. Counterparts............................................ 50
33. Table of Contents; Descriptive
Headings................................................ 50
</TABLE>
Exhibit A -- Designation of Powers, Preferences, Rights
Qualifications of Preferred Stock
Exhibit B -- Form of Summary of Rights and Rights Agreement
Exhibit C -- Form of Rights Certificate
ii
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of May 1, 1991 (the "Agreement"), between
SHARED MEDICAL SYSTEMS CORPORATION, a Delaware corporation (the "Company"), and
Pittsburgh National Bank, a national banking association (the "Rights Agent").
W I T N E S S E T H
-
WHEREAS, on May 1, 1991 (the "Rights Dividend Declaration Date"), the
Board of Directors of the Company authorized and declared a dividend
distribution of one Right for each share of common stock, $.01 par value, (the
"Common Stock") of the Company outstanding at the close of business on May 10,
1991 (the "Record Date"), and has authorized the issuance of one Right (as such
number may hereinafter be adjusted pursuant to the provisions of Section 11(p)
hereof) for each share of Common Stock of the Company issued between the Record
Date (whether originally issued or delivered from the Company's treasury) and
the Distribution Date, each Right initially representing the right to purchase,
upon the terms and subject to the conditions hereinafter set forth, one one-
thousandth of a share of Series A Junior Participating Preferred Stock of the
Company having the rights, powers and preferences set forth in the Designation
of Powers, Preferences Rights and Qualifications attached hereto as Exhibit A
(the "Rights");
------
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, and intending to be legally bound, the parties
hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
-------------------
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of 15% or more of the shares of Common Stock then outstanding; provided that any
-------- ----
of the following Persons who without reference to this proviso would otherwise
be an Acquiring Person shall not be an Acquiring Person for purposes of this
definition:
(i) the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the
Company now or hereafter existing, and any Person or entity
organized, appointed or established by the Company for or
pursuant to the terms of any such plan; or
(ii) any Person who or which shall have executed a written
agreement with the Company (approved by at least a majority
of the members of the
<PAGE>
Company's Board of Directors who are not representatives,
nominees, Affiliates or Associates of such Person) prior to
the date on which such Person (together with its Affiliates
and Associates) became the Beneficial Owner of 15% or more
of the shares of Common Stock then outstanding and which
agreement imposes one or more thresholds on the amount of
such Person's Beneficial Ownership of shares of Common
Stock, if, and so long as the thresholds continue to be
binding on such Person and such Person is in substantial
compliance (as determined by at least a majority of the
members of the Company's Board of Directors who are not
representatives, nominees, Affiliates or Associates of such
Person, in their discretion) with the terms of such written
agreement or of any amendment thereto, which amendment is
approved by at least a majority of the members of the
Company's Board of Directors who are not representatives,
nominees, Affiliates or Associates of such Person; provided,
--------
however, that no amendment of any such agreement shall cure
-------
any prior breach of such agreement or any amendment thereto.
(b) "Act" shall mean the Securities Act of 1933, as amended.
(c) "Adverse Person" shall have the meaning set forth in Section
11(a)(ii)(B) hereof.
(d) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act, as amended and in effect on the date of this Agreement.
(e) "Agreement" shall mean this Rights Agreement as originally
executed, as the same may be amended or supplemented from time to time pursuant
to the applicable provisions hereof.
(f) A person shall be deemed the "Beneficial Owner" of, and shall be
deemed to "beneficially own", any securities:
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such
right is exercisable immediately or only after the passage of time or the
fulfillment of one or more conditions or both) pursuant to any agreement,
arrangement or understanding (whether or not in
2
<PAGE>
writing) or upon the exercise of conversion rights, exchange right, other
rights, warrants or options, or otherwise; provided, however, that a Person
-------- -------
shall not be deemed the "Beneficial Owner" of, or to "beneficially own,"
(A) securities tendered pursuant to a tender or exchange offer made by such
Person or any of such Person's Affiliates or Associates until such tendered
securities are accepted for purchase or exchange, or (B) securities
issuable upon exercise of Rights at any time prior to the occurrence of a
Triggering Event, or (C) securities issuable upon exercise of Rights from
and after the occurrence of a Triggering Event which Rights were acquired
by such Person or any of such Person's Affiliates or Associates prior to
the Distribution Date or pursuant to Section 3(a) or Section 22 hereof (the
"Original Rights") or pursuant to Section 11(i) hereof in connection with
an adjustment with respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or
has "beneficial ownership" of (as determined pursuant to Rule 13d-3 of the
General Rules and Regulations under the Exchange Act as in effect on the
date of this Agreement), including pursuant to any agreement, arrangement
or understanding (whether or not in writing), provided, however, that a
-------- -------
Person shall not be deemed the "Beneficial Owner" of, or to "beneficially
own," any security under this subparagraph (ii) as a result of an
agreement, arrangement or understanding to vote such security if such
agreement, arrangement or understanding: (A) arises solely from a
revocable proxy given in response to a public proxy or consent solicitation
made pursuant to, and in accordance with, the applicable provisions of the
General Rules and Regulations under the Exchange Act, and (B) is not also
then reportable by such Person on Schedule 13D under the Exchange Act (or
any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such
Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (whether or not in writing), for
the purpose of acquiring, holding, voting (except pursuant to a revocable
proxy as described in the proviso to subparagraph (ii) of this subsection
(f)) or disposing of any voting securities of the Company;
provided, however, that nothing in this subsection (f) shall cause a
-------- -------
person engaged in business as an underwriter of securities to be the
"Beneficial Owner" of, or to "beneficially own," any securities acquired
through such person's participation in good faith in a firm commitment
underwriting until the expiration of forty days after the date
3
<PAGE>
of such acquisition; and provided further that in no event shall an officer
-------- -------
or director of the Company be deemed the Beneficial Owner of, or to
"beneficially own," any securities beneficially owned by another officer or
director of the Company solely by reason of actions undertaken by such
persons in their capacity as officers or directors of the Company.
(g) "Business Day" shall mean any day other than a Saturday, Sunday
or a day on which banking institutions in the Commonwealth of Pennsylvania or
the State of New York are authorized or obligated by law or executive order to
close.
(h) "Close of Business" on any given date shall mean 5:00 P.M.,
Eastern time, on such date; provided, however, that if such date is not a
-------- -------
Business Day it shall mean 5:00 P.M., Eastern time, on the next succeeding
Business Day.
(i) "Common Stock" shall mean the Common Stock, $.01 par value, of
the Company, except that "Common Stock" when used with reference to any Person
other than the Company shall mean the capital stock of such Person with the
greatest aggregate voting power, or the equity securities or other equity
interest having power to control or direct the management of such Person.
(j) "Common Stock Equivalents" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(k) "Continuing Director" shall mean (i) any member of the Board of
Directors of the Company, while such Person is a member of the Board, who is not
an Acquiring Person, an Adverse Person or an Affiliate or Associate of an
Acquiring Person or an Adverse Person, or a representative of an Acquiring
Person, an Adverse Person or of any such Affiliate or Associate, and was a
member of the Board prior to the date of this Agreement, or (ii) any Person who
subsequently becomes a member of the Board, while such Person is a member of the
Board, who is not an Acquiring Person, an Adverse Person or an Affiliate or
Associate of an Acquiring Person or an Adverse Person, or a representative of an
Acquiring Person, an Adverse Person or of any such Affiliate or Associate, if
such Person's nomination for election or election to the Board was recommended
or approved by a majority of the Continuing Directors.
(l) "Current Market Price" shall have the meaning set forth in
Section 11(d) hereof.
(m) "Current Value" shall have the meaning set forth in Section
11(a)(iii) hereof.
(n) "Distribution Date" shall have the meaning set forth in Section
3(a) hereof.
4
<PAGE>
(o) "Equivalent Preferred Stock" shall have the meaning set forth in
Section 11(b) hereof.
(p) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(q) "Exchange Share" and "Exchange Value" shall have the meanings set
forth in Section 23(d) hereof.
(r) "Expiration Date" shall have the meaning set forth in Section
7(a) hereof.
(s) "Final Expiration Date" shall mean the close of business on
December 31, 2001.
(t) "NASDAQ" shall have the meaning set forth in Section 4(a) hereof.
(u) "Original Rights" shall have the meaning set forth in Section
l(f)(i) hereof.
(v) "Ownership Limitation" shall have the meaning set forth in
Section 11(a)(ii)(B) hereof.
(w) "Person" shall mean any individual, firm, joint venture,
association, trust, estate, corporation, partnership or other entity.
(x) "Preferred Stock" shall mean shares of Series A Junior
Participating Preferred Stock, $0.10 par value, of the Company, and, to the
extent that there are not a sufficient number of shares of Series A Junior
Participating Preferred Shares authorized to permit the full exercise of the
Rights, any other series of Preferred Stock, par value $.10, of the Company
designated for such purpose containing terms substantially similar to the terms
of the Series A Junior Participating Preferred Shares.
(y) "Principal Party" shall have the meaning set forth in Section
13(b) hereof.
(z) "Purchase Price" shall have the meaning set forth in Section 4(a)
hereof.
(aa) "Record Date" shall mean May 10, 1991.
(bb) "Redemption Price" shall have the meaning set forth in Section
23(a) hereof.
(cc) "Rights" shall have the meaning set forth in the WHEREAS clause
at the beginning of this Agreement.
5
<PAGE>
(dd) "Rights Certificates" shall have the meaning set forth in Section
4(a) hereof.
(ee) "Rights Dividend Declaration Date" shall mean May 1, 1991.
(ff) "Section 11(a)(ii) Event" shall mean any event described in
Section 11(a)(ii)(A) or (B).
(gg) "Section (11)(a)(ii) Trigger Date" shall have the meaning set
forth in Section 11(a)(iii) hereof.
(hh) "Section 13 Event" shall mean any event described in clauses
(x), (y) or (z) of Section 13(a) hereof.
(ii) "Spread" shall have the meaning set forth in Section 11(a)(iii)
hereof.
(jj) "Stock Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such.
(kk) "Subsidiary" shall mean, with reference to any Person, any
corporation of which an amount of voting securities sufficient to elect at least
a majority of the directors of such corporation is beneficially owned, directly
or indirectly, by such Person, or otherwise controlled by such Person.
(ll) "Substitution Period" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(mm) "Summary of Rights" shall have the meaning set forth in Section
3(b) hereof.
(nn) "Trading Day" shall have the meaning set forth in Section
11(d)(i) hereof.
(oo) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
---------------------------
Rights Agent to act as agent for the Company and the holders of the Rights in
accordance with the terms and conditions hereof, and the Rights Agent hereby
accepts such appointment. The Company may from time to time appoint such Co-
Rights Agents as it may deem necessary or desirable and, under such
circumstances, the respective duties of the Rights Agent and any Co-Rights
Agents shall be as the Company shall determine.
6
<PAGE>
Section 3. Issue of Rights Certificates.
----------------------------
(a) Until the date that is the earliest of:
(i) the close of business on the tenth Business Day after the
Stock Acquisition Date (or, if the tenth Business Day after the Stock
Acquisition Date occurs before the Record Date, the Close of Business on
the Record Date);
(ii) the Close of Business on the tenth Business Day after the
date that a tender or exchange offer by any Person (other than the Company,
any Subsidiary of the Company, any employee benefit plan of the Company or
of any Subsidiary of the Company, or any Person organized, appointed or
established by the Company for or pursuant to the terms of any such plan)
is first published or sent or given within the meaning of Rule 14d-2(a) of
the General Rules and Regulations under the Exchange Act as in effect on
the date hereof, if upon purchase of all securities sought thereby, such
Person would be the Beneficial Owner of 15% or more of the shares of Common
Stock then outstanding, unless the tender offer or exchange offer is for
all outstanding shares of Common Stock at a price and on terms determined
(as set forth in Section 11(a)(ii)(A)) by at least a majority of the
members of the Board of Directors who are not officers of the Company and
who are not representatives, nominees, Affiliates or Associates of an
Acquiring Person, after receiving advice from one or more investment
banking firms, to be (1) fair to stockholders (taking into account all
factors which such members of the Board, in their discretion, deem
relevant) and (2) otherwise in the best interests of the Company and its
stockholders, or
(iii) the close of business on the tenth day after a person
becomes an Adverse Person pursuant to the criteria set forth in
11(a)(ii)(B).
or, with respect to (i) and (ii) above, such later date or dates as the Board of
Directors may designate, which designation following the first occurrence of an
event set forth in clause (x) or (y) of the second proviso to Section 23(a)
hereof, shall be effective only if there are Continuing Directors, a majority of
whom shall have approved such later date; provided, however, that if such later
-------- -------
date or dates are designated, such designations shall be made on or prior to the
date which would otherwise have been controlling, (the earliest of (i), (ii)
(subject to any such delay of (i) or (ii) or (iii) being herein referred to as
the "Distribution Date"),
then, (x) subject to the provisions of paragraph (b) of this Section
3, the Rights will be evidenced by the certificates for the Common Stock
registered in the names of the holders of
7
<PAGE>
the Common Stock (which certificates for Common Stock shall be deemed also to be
certificates for Rights) and not by separate certificates, and (y) the Rights
will be transferable only in connection with the transfer of the underlying
shares of Common Stock (including a transfer to the Company).
As soon as practicable after the Distribution Date, the Rights Agent
will send by first-class, insured, postage prepaid mail, to each record holder
of the Common Stock as of the close of business on the Distribution Date, at the
address of such holder shown on the records of the Company, one or more Rights
Certificates, evidencing one Right for each share of Common Stock so held,
subject to adjustment as provided herein. In the event that an adjustment in
the number of Rights per share of Common Stock has been made pursuant to Section
11(p) hereof, at the time of distribution of the Rights Certificates, the
Company shall, unless prohibited by the terms of any agreement to which the
Company is a party on the date of this Rights Agreement (or, if a majority of
the then Continuing Directors so agree, after the date of this Agreement), make
the necessary and appropriate rounding adjustments (in accordance with Section
14(a) hereof) so that Rights Certificates representing only whole numbers of
Rights are distributed and cash is paid in lieu of any fractional Rights, except
that if the Company is prohibited from paying cash in lieu of fractional Rights,
then the Company shall round the fractional Rights to the next highest number of
whole Rights so that Rights Certificates represent only whole numbers of Rights.
As of and after the Distribution Date, the Rights will be evidenced solely by
such Rights Certificates.
(b) As soon as practicable following the Record Date, the Company
will send a copy of the Summary of Rights and Rights Agreement, in substantially
the form attached hereto as Exhibit B (the "Summary of Rights"), by first-class,
postage prepaid mail, to each record holder of Common Stock as of the close of
business on the Record Date, at the address of such holder shown on the records
of the Company. Until the earlier of the Distribution Date or the Expiration
Date, the transfer of any certificates representing shares of Common Stock in
respect of which Rights have been issued shall also constitute the transfer of
the Rights associated with such shares of Common Stock.
(c) Rights shall be issued in respect of all shares of Common Stock
which are issued (whether originally issued or from the Company's treasury)
after the Record Date but prior to the earlier of the Distribution Date or the
Expiration Date. Certificates representing such shares of Common Stock shall
also be deemed to be certificates for Rights and shall bear substantially the
following legend:
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in the
8
<PAGE>
Rights Agreement between Shared Medical Systems Corporation (the
"Company") and Pittsburgh National Bank (the "Rights Agent") dated as
of May 1, 1991, as the same may be amended (the "Rights Agreement"),
the terms of which are hereby incorporated herein by reference and a
copy of which is on file at the principal offices of the Company.
Under certain circumstances, as set forth in the Rights Agreement,
such Rights will be evidenced by separate certificates and will no
longer be evidenced by this certificate. The Company will mail to the
holder of this certificate a copy of the Rights Agreement, as in
effect on the date of mailing, without charge promptly after receipt
of a written request therefor. Under certain circumstances set forth
in the Rights Agreement, Rights issued to, or held by, any Person who
is, was or becomes an Acquiring Person or Adverse Person or any
Affiliate or Associate thereof (as such terms are defined in the
Rights Agreement), whether currently held by or on behalf of such
Person or any subsequent holder, will become null and void. Rights
are subject to redemption, at the option of the Company, at $.001 per
Right on the terms set forth in the Rights Agreement.
With respect to such certificates bearing the foregoing legend, until the
earlier of the Distribution Date or the Expiration Date, the Rights associated
with the Common Stock represented by such certificates shall be evidenced by
such certificates alone, and registered holders of Common Stock shall also be
the registered holders of the associated Rights, and the transfer of any of such
certificates shall also constitute the transfer of the Rights associated with
the Common Stock represented by such certificates.
Section 4. Form of Rights Certificates.
---------------------------
(a) The Rights Certificates (the "Rights Certificates"), and the
forms of election to purchase and of assignment to be printed on the reverse
thereof, shall be substantially in the form set forth in Exhibit C hereto and
may have such marks of identification or designation and such legends, summaries
or endorsements printed thereon as the Company may deem appropriate and as are
not inconsistent with the provisions of this Agreement, or as may required to
comply with any applicable law or any rule or regulation made pursuant thereto
or with any rule or regulation of any stock exchange, or the regulations of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"), on which the Rights may from time to time be listed or quoted, or to
conform to usage. Subject to the provisions of Section 11 and Section 22
hereof, the Rights Certificates, whenever distributed, shall be dated as of the
9
<PAGE>
Record Date and on their face shall entitle the holders thereof to purchase such
number of one one-thousandths of a share of Preferred Stock as shall be set
forth therein at the price set forth therein (such exercise price per one one-
thousandth of a share of Preferred Stock being hereinafter referred to as the
"Purchase Price"). The amount and type of securities purchasable upon the
exercise of each Right and the Purchase Price thereof shall be subject to
adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights beneficially owned by: (i) an Acquiring
Person, an Adverse Person or any Associate or Affiliate of an Acquiring Person
or Adverse Person, (ii) a transferee of an Acquiring Person or Adverse Person
(or of any Associate or Affiliate of an Acquiring Person or Adverse Person) who
becomes a transferee after the Acquiring Person or Adverse Person becomes such,
or (iii) a transferee of an Acquiring Person or Adverse Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person or Adverse Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person or Adverse Person (or from any such Associate or Affiliate) to
holders of equity interests in such Acquiring Person or Adverse Person (or in
any such Associate or Affiliate) or to any Person with whom such Acquiring
Person or Adverse Person (or any such Associate or Affiliate) has any continuing
agreement, arrangement or understanding regarding the transferred Rights or (B)
a transfer which at least a majority of the members of the Board of Directors of
the Company who are not officers of the Company and who are not representatives,
nominees, Affiliates or Associates of an Acquiring Person or an Adverse Person
has determined (whether before or after such transfer) is part of a plan,
arrangement or understanding which has as a primary purpose or effect avoidance
of Section 7(e) hereof, and any Rights Certificate issued pursuant to Section 6,
Section 11 or Section 22 hereof upon transfer, exchange, replacement or
adjustment of any other Rights Certificate referred to in this sentence, shall
contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person
or Adverse Person or an Affiliate or Associate of an Acquiring Person
or Adverse Person (as such terms are defined in the Rights Agreement
between Shared Medical Systems Corporation and Pittsburgh National
Bank dated as of May 1, 1991, as the same may be amended).
Accordingly, this Rights Certificate and the Rights represented hereby
may become null and void in the circumstances specified in Section
7(e) of such Agreement.
10
<PAGE>
The provisions of Section 7(e) of this Rights Agreement shall apply to Rights
beneficially owned by any and all such Persons regardless of whether the
foregoing legend is contained on such Rights Certificates.
Section 5. Countersignature and Registration.
---------------------------------
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President or any Vice President,
either manually or by facsimile signature, and shall have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. The Rights Certificates shall be manually countersigned by the
Rights Agent and shall not be valid for any purpose unless so countersigned. In
case any officer of the Company who shall have signed any of the Rights
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates may nevertheless be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as though
the person who signed such Rights Certificates had not ceased to be such officer
of the Company; and any Rights Certificates may be signed on behalf of the
Company by any person who, at the actual date of the execution of such Rights
Certificate, shall be a proper officer of the Company to sign such Rights
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise or
transfer, books for registration and transfer of the Rights Certificates issued
hereunder. Such books shall show the names and addresses of the respective
holders of the Rights Certificates, the number of Rights evidenced on its face
by each of the Rights Certificates and the certificate number and the date of
each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
------------------------------------------------------
Certificates; Mutilated, Destroyed Lost or Stolen Rights Certificates.
- ---------------------------------------------------------------------
(a) Subject to the provisions of Section 4(b),Section 7(e) and
Section 14 hereof, at any time after the close of business on the Distribution
Date, and at or prior to the close of business on the Expiration Date, any
Rights Certificate or Certificates may be transferred, split up, combined or
exchanged for another Rights Certificate or Certificates, entitling the
registered holder to purchase a like number of one
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<PAGE>
one-thousandths of a share of the Company's Preferred Stock (or following a
Triggering Event, Common Stock, other securities, cash or other assets, as the
case may be) as the Rights Certificate or Certificates surrendered then entitled
such holder (or former holder in the case of a transfer) to purchase. Any
registered holder desiring to transfer, split up, combine or exchange any Rights
Certificate or Certificates shall make such request in writing delivered to the
Rights Agent, and shall surrender the Rights Certificate or Certificates to be
transferred, split up, combined or exchanged at the principal office or offices
of the Rights Agent designated for such purpose. Neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Rights Certificate until the registered holder
shall have completed and signed the certificate contained in the form of
assignment on the reverse side of such Rights Certificate and shall have
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) and the Affiliates and Associates thereof as the
Company shall reasonably request. Thereupon the Rights Agent shall, subject to
Section 4(b), Section 7(e) and Section 14 hereof, countersign and deliver to the
Person entitled thereto a Rights Certificate or Rights Certificates, as the case
may be, as so requested. The Company may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and reimbursement to the Company
and the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Right Certificate if
mutilated, the Company will execute and deliver a new Rights Certificate of like
tenor to the Rights Agent for countersignature and delivery to the registered
owner in lieu of the Rights Certificates so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.
-------------------------------------------------------------
(a) Subject to Section 7(e) hereof, the registered holder of any
Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly
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<PAGE>
executed, to the Rights Agent at the principal office or offices of the Rights
Agent designated for such purpose, together with payment of the aggregate
purchase Price with respect to the total number of one one-thousandths of a
share of Preferred Stock (or Common Stock or other securities, cash or other
assets, as the case may be) as to which such surrendered Rights are then
exercisable, at or prior to the earliest of (i) the Final Expiration Date, (ii)
any expiration of the Rights pursuant to Section 13(d), or (iii) the time at
which the Rights are redeemed as provided in Section 23 hereof (the earliest of
(i), (ii) and (iii) being herein referred to as the "Expiration Date").
(b) The Purchase Price for each one one-thousandth of a share of
Preferred Stock pursuant to the exercise of a Right shall initially be $80 and
shall be subject to adjustment from time to time as provided in Sections 11 and
13(a) hereof and shall be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase and the certificate duly executed,
accompanied by payment, with respect to each Right so exercised, of the Purchase
Price per one one-thousandth of a share of Preferred Stock (or other Common
Stock or other securities, cash or other assets, as the case may be) to be
purchased as set forth below and an amount equal to any applicable transfer tax,
the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i)
(A) requisition from any transfer agent of the shares of Preferred Stock (or
make available, if the Rights Agent is the transfer agent for such shares)
certificates for the total number of one one-thousandths of a share of Preferred
Stock to be purchased, and the Company hereby irrevocably authorizes its
transfer agent to comply with all such requests, or (B) if the Company shall
have elected to deposit the total number of shares of Preferred Stock issuable
upon exercise of the Rights hereunder with a depositary agent, requisition from
the depositary agent depositary receipts representing such number of one one-
thousandths of a share of Preferred Stock as are to be purchased (in which case
certificates for the shares of Preferred Stock represented by such receipts
shall be deposited by the transfer agent with the depositary agent) and the
Company will direct the depositary agent to comply with such request, (ii)
requisition from the Company the amount of cash, if any, to be paid in lieu of
fractional shares in accordance with Section 14 hereof, (iii) after receipt of
such certificates or depositary receipts, cause the same to be delivered to or
upon the order of the registered holder of such Rights Certificate, registered
in such name or names as may be designed by such holder, and (iv) after receipt
thereof, deliver such cash, if any, to or upon the order of the registered
holder of such Rights Certificate. The payment of the Purchase Price (as such
amount may be reduced pursuant to Section 11(a)(iii) hereof) shall be made (x)
in cash or by certified bank
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<PAGE>
check or bank draft payable to the order of the Company or (y) if authorized by
a majority of the then Continuing Directors, by delivery of a certificate or
certificates (with appropriate stock powers executed in blank attached thereto)
evidencing a number of whole shares of Common Stock equal to the integer
obtained by dividing the then Purchase Price by the then Current Market Price
(as determined pursuant to Section 11(d)) per share of Common Stock on the date
of such exercise, plus a certified bank check or bank draft payable to the order
of the Company in an amount equal to the difference between the then Current
Market Price (as determined pursuant to Section 11(d)) of such whole shares and
the aggregate Purchase Price. In the event that the Company is obligated
hereunder to issue other securities of the Company (including, without
limitation, Common Stock), pay cash and/or distribute other property pursuant to
Section 11(a) hereof, the Company will make all arrangements necessary so that
such other securities, cash and/or other property are available for distribution
by the Right Agent, if and when appropriate. Prior to the occurrence of a
Triggering Event, the Company reserves the right to require that, upon any
exercise of Rights, a number of Rights be exercised so that only whole shares of
Preferred Stock would be issued.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent and delivered to, or upon the order of, the registered
holder of such Rights Certificate, registered in such name or names as may be
designated by such holder, subject to the provisions of Sections 6 and 14
hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Section 11(a)(ii) Event, any Rights
beneficially owned by (i) an Acquiring Person or Adverse Person, or an Associate
or Affiliate of an Acquiring Person or Adverse Person, (ii) a transferee of an
Acquiring Person or Adverse Person (or of any such Associate or Affiliate) who
becomes a transferee after the Acquiring Person or Adverse Person becomes such,
or (iii) a transferee of an Acquiring Person or Adverse Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person or Adverse Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person or Adverse Person (or from any such Associate or Affiliate) to
holders of equity interests in such Acquiring Person or Adverse Person (or in
any such Associate or Affiliate) or to any Person with whom such Acquiring
Person or Adverse Person (or any such Affiliate or Associate) has any continuing
agreement, arrangement or understanding regarding the transferred Rights or (B)
a transfer which at least a majority of the members of the Board of
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<PAGE>
Directors of the Company who are not officers of the Company and who are not
representatives, nominees, Affiliates or Associates of an Acquiring Person or an
Adverse Person has determined (whether before or after such transfer) is part of
a plan, arrangement or understanding which has as a primary purpose or effect
the avoidance of this Section 7(e), shall become null and void without any
further action, and no holder of such Rights shall have any rights whatsoever
with respect to such Rights, whether under any provision of this Agreement or
otherwise. The Company shall use all reasonable efforts to insure that the
provisions of this Section 7(e) and Section 4(b) hereof are complied with, but
shall have no liability to any holder of Rights Certificates or other Person as
a result of its failure to make any determinations with respect to an Acquiring
Person or Adverse Person or their respective Affiliates, Associates or
transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall have
(i) completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise, and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) and the Affiliates and Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates.
---------------------------------------------------
All Rights Certificates surrendered for the purpose of exercise,
transfer, split up, combination or exchange shall, if surrendered to the Company
or any of its agents, be delivered to the Rights Agent for cancellation or in
cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by
it, and no Rights Certificates shall be issued in lieu thereof except as
expressly permitted by the provisions of this Agreement. The Company shall
deliver to the Rights Agent for cancellation and retirement, and the Rights
Agent shall so cancel and retire, any other Rights Certificate purchased or
acquired by the Company otherwise than upon the exercise thereof. The Rights
Agent shall deliver all cancelled Rights Certificates to the Company, or shall,
at the written request of the Company, destroy such cancelled Rights
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Company.
Section 9. Reservation and Availability of CaPital Stock.
---------------------------------------------
(a) Subject to the provisions of this Agreement (including, without
limitation, Section 11(a)(iii) hereof), the Company covenants and agrees that it
will cause to be reserved and kept available out of its authorized and unissued
shares of
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<PAGE>
Preferred Stock (and, following the occurrence of a Triggering Event, out of its
authorized and unissued shares of Common Stock and/or other securities or out of
its authorized and issued shares held in its treasury), the number of shares of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock and/or other securities) that will be sufficient to permit the exercise in
full of all outstanding Rights pursuant to the terms of this Agreement.
(b) So long as the shares of Preferred Stock (and, following the
occurrence of a Triggering Event, Common Stock and/or other securities) issuable
and deliverable upon the exercise of the Rights may be listed on any national
securities exchange or quoted on NASDAQ, the Company shall use its best efforts
to cause, from and after such time as the Rights become exercisable, all shares
reserved for such issuance to be listed on such exchange or quoted on NASDAQ
upon official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a Section
11(a)(ii) Event in which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, or, if earlier, as soon as is required by law following the Distribution
Date, a registration statement under the Act, with respect to the securities
purchasable upon exercise of the Rights on an appropriate form, (ii) cause such
registration statement to become effective as soon as practicable after such
filing, and (iii) cause such registration statement to remain effective (with a
prospectus at all times meeting the requirements of the Act) until the earlier
of (A) the date as of which the Rights are no longer exercisable for such
securities, and (B) the date of the expiration of the Rights. The Company will
also take such action as may be appropriate under, or to ensure compliance with,
the securities or "blue sky" laws of the various states in connection with the
exercisability of the Rights. The Company may temporarily suspend, for a period
of time not to exceed ninety (90) days after the date set forth in clause (i) of
the first sentence of this Section 9(c), the exercisability of the Rights in
order to prepare and file such registration statement and permit it to become
effective. Upon any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the suspension is no
longer in effect. In addition, if the Company shall determine that a
registration statement is required following the Distribution Date, the Company
may temporarily suspend the exercisability of the Rights until such time as a
registration statement has been declared effective. Notwithstanding any
provision of this Agreement to the contrary, the Rights shall not be exercisable
in any jurisdiction if the
16
<PAGE>
requisite qualification in such jurisdiction shall not have been obtained, the
exercise thereof shall not be permitted under applicable law or a registration
statement shall not have been declared effective.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all securities delivered upon exercise
of Rights shall, at the time of delivery of the certificates for such securities
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and fully paid and nonassessable.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges which
may be payable in respect of the issuance or delivery of the Rights
Certificates. The Company shall not be required to pay any transfer tax which
may become payable in respect of the issuance, delivery or transfer of any
certificates for a number of one one-thousandths of a share of Preferred Stock
(or Common Stock and/or other securities, as the case may be) upon the exercise
of Rights, or to issue or deliver any certificates for a number of one one-
thousandths of a share of Preferred Stock (or Common Stock and/or other
securities, as the case may be) in a name other than that of the registered
holder upon the exercise of any Rights until such tax shall have been paid (any
such tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
Section 10. Preferred Stock Record Date. Each person in whose name any
---------------------------
certificate for a number of one one-thousandths of a share of Preferred Stock
(or Common Stock and/or other securities, as the case may be) is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder of
record of such fractional shares of Preferred Stock (or Common Stock and/or
other securities, as the case may be) represented thereby as of the close of
business on, and such certificate shall be dated, the date upon which the Rights
Certificate evidencing such Rights was duly surrendered and payment of the
Purchase Price (and all applicable transfer taxes) was made; provided, however,
-------- -------
that if the date of such surrender and payment is a date upon which the
Preferred Stock (or Common Stock and/or other securities, as the case may be)
transfer books of the Company are closed, such Person shall be deemed to have
become the record holder of such shares (fractional or otherwise) on, and such
certificate shall be dated, the next succeeding Business Day on which the
Preferred Stock (or Common Stock and/or other securities, as the case may be)
transfer books of the Company are open.
17
<PAGE>
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or
----------------------------------------------------------
Number of Rights. The Purchase Price, the number and kind of shares covered by
- ----------------
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Stock payable in
shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock,
(C) combine the outstanding Preferred Stock into a smaller number of
shares, or (D) issue any shares of its capital stock in a reclassification
of the Preferred Stock (including any such reclassification in connection
with a consolidation or merger in which the Company is the continuing or
surviving corporation), except as otherwise provided in this Section 11(a)
and Section 7(e) hereof, the Purchase Price in effect at the time of the
record date for such dividend or of the effective date of such sub-
division, combination or reclassification, and the number and kind of
shares of Preferred Stock or other capital stock, as the case may be,
issuable on such date, shall be proportionately adjusted so that the holder
of any Right exercised after such time shall be entitled to receive, upon
payment of the Purchase Price then in effect, the aggregate number and kind
of shares of Preferred Stock or other capital stock, as the case may be,
which, if such Right had been exercised immediately prior to such date and
at a time when the Preferred Stock transfer books of the Company were open,
he would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination or reclassification. If
an event occurs which would require an adjustment under both this Section
11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided for in this
Section 11(a)(i) shall be in addition to, and shall be made prior to, any
adjustment required pursuant to Section 11(a)(ii) hereof.
(ii) In the event that:
(A) any Person, shall, at any time after the Rights Dividend
Declaration Date, be or become an Acquiring Person, unless the event
causing such Person to have become an Acquiring Person is a transaction set
forth in Section 13(a) hereof, or is an acquisition of shares of Common
Stock pursuant to a tender offer or an exchange offer for all outstanding
shares of Common Stock at a price and on terms determined by at least a
majority of the members of the Board of Directors who are not officers of
the Company and who are not representatives, nominees, Affiliates or
Associates of an Acquiring Person, after receiving advice from one or more
investment banking firms, to be (x) fair to stockholders (taking into
account all factors which such
18
<PAGE>
members of the Board deem relevant) and (y) otherwise in the best interests
of the Company and its stockholders, or
(B)(1) at least a majority of the members of the Board of
Directors who are not officers of the Company and who are not
representatives, nominees, Affiliates or Associates of a specified Person,
after reasonable inquiry and investigation, including consultation with
such persons as such directors shall have deemed appropriate, shall
determine that (x) Beneficial Ownership by such Person of an amount of
Common Stock exceeding the Ownership Limitation (as hereinafter defined)
is, or would likely be, intended to cause the Company to repurchase the
Common Stock beneficially owned by such Person or to cause pressure on the
Company to take action or enter into a transaction or series of
transactions intended to provide such Person with short-term financial gain
under circumstances where a majority of such disinterested directors has
determined that the best long-term interests of the Company and its
stockholders would not be served by taking such action or entering into
such transactions or series of transactions at that time or (y) Beneficial
Ownership by such Person of an amount of Common Stock exceeding the
Ownership Limitation is causing or reasonably likely to cause a material
adverse impact (including, but not limited to, impairment of relationships
with customers, suppliers or creditors, or impairment of the Company's
ability to maintain its competitive position) on the business or prospects
of the Company (provided, however, no such determination as provided in (x)
-------- -------
or (y) above shall be made with respect to any Person who or which shall
have executed a written agreement with the Company (approved by at least a
majority of the members of the Company's Board of Directors who are not
representatives, nominees, Affiliates or Associates of such Person) which
imposes one or more thresholds on the amount of such Person's Beneficial
Ownership of shares of Common Stock, if, and so long as the thresholds
continue to be binding on such Person and such Person is in substantial
compliance (as determined by at least a majority of the members of the
Company's Board of Directors who are not representatives, nominees,
Affiliates or Associates of such Person, in their discretion) with the
terms of such written agreement or of any amendment thereto, which
amendment is approved by at least a majority of the members of the
Company's Board of Directors who are not representatives, nominees,
Affiliates or Associates of such Person (provided, however, that no
-------- -------
amendment of any such agreement shall cure any prior breach of such
agreement or any amendment thereto,)); (2) a majority of the Board of
Directors who are not officers of the Company and who are not
representatives, nominees, Affiliates or Associates of such specified
Person shall designate a specific limitation on the amount of
19
<PAGE>
Common Stock which such specified Person may beneficially own, which amount
(the "Ownership Limitation") may be less than, equal to, or more than the
amount of shares of Common Stock then owned by such Person, but shall in no
event be less than 10% of the Common Stock then outstanding; and (3) such
specified Person, together with his or its Affiliates and Associates, shall
(before or after the occurrence of (1) and (2) above) beneficially own a
number of shares of Common Stock that exceeds the Ownership Limitation (a
specified Person meeting the requirements of clauses (1), (2) and (3) of
this Section 11(a)(ii)(B) being referred to as an "Adverse Person"),
then, promptly following the first occurrence of any Section 11(a)(ii)
Event, each holder of a Right (except as provided below and in Section 7(e)
hereof) shall thereafter have the right to receive, upon exercise thereof
at the then current Purchase Price in accordance with the terms of this
Agreement, in lieu of a number of one one-thousandths of a share of
Preferred Stock, such number of shares of Common Stock of the Company as
shall equal the result obtained by (x) multiplying the then current
Purchase Price by the then number of one one-thousandths of a share of
Preferred Stock for which one Right was exercisable immediately prior to
the first occurrence of a Section 11(a)(ii) Event, and (y) dividing that
product (which, following such first occurrence, shall thereafter be
referred to as the "Purchase Price" for each Right and for all purposes of
this Agreement) by 50% of the Current Market Price (as determined pursuant
to Section 11(d) hereof) per share of Common Stock on the date of such
first occurrence (such number of shares issuable upon the exercise of a
Right being referred to herein as the "Adjustment Shares").
(iii) Unless at least a majority of the members of the Company's Board
of Directors who are not officers of the Company and who are not
representatives, nominees, Affiliates or Associates of an Acquiring Person
or an Adverse Person determine that the following is not permitted by the
terms of any agreement or instrument to which the Company is a party on the
date of this Agreement (or, if a majority of the then Continuing Directors
so agree, after the date of this Agreement), then in the event that the
number of shares of Common Stock which are authorized by the Company's
articles or certificate of incorporation but not outstanding or reserved
for issuance for purposes other than upon exercise of the Rights are not
sufficient to permit the exercise in full of the Rights in accordance with
the foregoing subparagraph (ii) of this Section 11(a), the Company shall:
(A) determine the excess of (1) the value of the Adjustment Shares issuable
upon the exercise of a Right (the "Current Value") over (2) the Purchase
Price (such
20
<PAGE>
excess being referred to herein as the "Spread"), and (B) with respect to
each Right, make adequate provision to substitute for the Adjustment
Shares, upon payment of the applicable Purchase Price, (1) cash, (2) a
reduction in the Purchase Price, (3) Common Stock or other equity
securities of the Company (including, without limitation, shares, or units
of shares, of preferred stock which the Board of Directors of the Company
has deemed to have substantially the same value as shares of Common Stock
(such shares of preferred stock being referred to herein as "common stock
equivalents")), (4) debt securities of the Company, (5) other assets, or
(6) any combination of the foregoing having an aggregate value equal to the
Current Value, where such aggregate value has been determined by the Board
of Directors of the Company based upon the advice of a nationally
recognized investment banking firm selected by the Board of Directors of
the Company; provided, however, if the Company shall not have made adequate
-------- -------
provision to deliver value pursuant to clause (B) above within thirty (30)
days following the later of (x) the first occurrence of a Section 11(a)(ii)
Event and (y) the date on which the Company's right of redemption pursuant
to Section 23(a) expires (the later of (x) and (y) being referred to herein
as the "Section 11(a)(ii) Trigger Date"), then the Company shall be
obligated to deliver, upon the surrender for exercise of a Right and
without requiring payment of the Purchase Price, shares of Common Stock (to
the extent available) and then, if necessary, cash, which shares and/or
cash have an aggregate value equal to the Spread. If the Board of
Directors of the Company shall determine in good faith that it is likely
that sufficient additional shares of Common Stock could be authorized for
issuance upon exercise in full of the Rights, the thirty (30) day period
set forth above may be extended to the extent necessary, but not more than
ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that
the Company may seek stockholder approval for the authorization of such
additional shares (such period, as it may be extended, the "Substitution
Period"); provided, however, that there shall be no obligation on the part
-----------------
of the Company so to seek authorization of such additional shares. To the
extent that the Company determines that some action need be (and may be)
taken pursuant to the first and/or second sentences of this Section
11(a)(iii), the Company (x) shall provide, subject to Section 7(e) hereof,
that such action shall apply uniformly to all outstanding Rights, and (y)
may suspend the exercisability of the Rights until the expiration of the
Substitution Period in order to seek any authorization of additional shares
and/or to decide the appropriate form of distribution to be made pursuant
to such first sentence and to determine the value thereof. In the event of
any such suspension, the Company shall issue a public announcement
21
<PAGE>
stating that the exercisability of the Rights has been temporarily
suspended, as well as a public announcement at such time as the suspension
is no longer in effect. For purposes of this Section 11(a)(iii), the value
of a share of Common Stock shall be the Current Market Price (as determined
pursuant to Section 11(d) hereof) per share of the Common Stock on the
Section 11(a)(ii) Trigger Date and the value of any "common stock
equivalent" shall be deemed to have the same value as the Common Stock on
such date.
(b) In case the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Stock entitling them to
subscribe for or purchase (for a period expiring within forty-five (45) calendar
days after such record date) Preferred Stock (or shares having the same rights,
privileges and preferences as the shares of Preferred Stock ("equivalent
preferred stock")) or securities convertible into Preferred Stock or equivalent
preferred stock at a price per share of Preferred Stock or per share of
equivalent preferred stock (or having a conversion price per share, if a
security convertible into Preferred Stock or equivalent preferred stock) less
than the Current Market Price (as determined pursuant to Section 11(d) hereof)
per share of Preferred Stock on such record date, the Purchase Price to be in
effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the number of shares of Preferred Stock outstanding
on such record date, plus the number of shares of Preferred Stock which the
aggregate offering price of the total number of shares of Preferred Stock and/or
equivalent preferred stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such Current Market Price, and the denominator of which shall be the number
of shares of Preferred Stock outstanding on such record date, plus the number of
additional shares of Preferred Stock and/or equivalent preferred stock to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible). In case such subscription price
may paid by delivery of consideration part or all of which may be in a form
other than cash, the value of such consideration shall be as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be binding on the
Rights Agent and the holders of the Rights. Shares of Preferred Stock owned by
or held for the account of the Company shall not be deemed outstanding for the
purpose of any such computation. Such adjustment shall be made successively
whenever such a record date is fixed, and in the event that such rights or
warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been
fixed.
22
<PAGE>
(c) In case the Company shall fix a record date for a distribution to
all holders of Preferred Stock (including any such distribution made in
connection with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness, cash (other than a regular quarterly
cash dividend out of the earnings or retained earnings of the Company), assets
(other than a dividend payable in Preferred Stock, but including any dividend
payable in stock other than Preferred Stock) or subscription rights or warrants
(excluding those referred to in Section 11(b) hereof), the Purchase Price to be
in effect after such record date shall be determined by multiplying the Purchase
Price in effect immediately prior to such record date by a fraction, the
numerator of which shall be the Current Market Price (as determined pursuant to
Section 11(d) hereof) per share of Preferred Stock on such record date, less the
fair market value (as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed with the
Rights Agent and shall be binding on the Rights Agent and the holders of the
Rights) of the portion of the cash, assets or evidences of indebtedness so to be
distributed or of such subscription rights or warrants applicable to a share of
Preferred Stock, and the denominator of which shall be such Current Market Price
(as determined pursuant to Section 11(d) hereof) per share of Preferred Stock.
Such adjustments shall be made successively whenever such a record date is
fixed, and in the event that such distribution is not so made, the Purchase
price shall be adjusted to be the Purchase Price which would have been in effect
if such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iii) hereof, the "Current
Market Price" per share of Common Stock on any date shall be deemed to be
the average of the daily closing prices per share of such Common Stock for
the thirty (30) consecutive Trading Days (as such term is hereinafter
defined) immediately prior to such date, and for purposes of computations
made pursuant to Section 11(a)(iii) hereof, the "Current Market Price" per
share of Common Stock on any date shall be deemed to be the average of the
daily closing prices per share of such Common Stock for the ten (10)
consecutive Trading Days immediately following such date; provided however,
-------- -------
that in the event that the Current Market Price per share of the Common
Stock is determined during a period following the announcement by the
issuer of such Common Stock of (A) a dividend or distribution on Common
Stock payable in shares of Common Stock or securities convertible into
shares of Common Stock (other than the Rights), or (B) any subdivision,
combination or reclassification of such Common Stock, and prior to the
expiration of the requisite thirty (30) Trading Day or ten (10) Trading Day
period, as set forth above, after the ex-dividend date for such dividend or
23
<PAGE>
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the "Current Market Price"
shall be properly adjusted to take into account ex-dividend trading. The
closing price for each day shall be the last sale price, regular way, or,
in case no such sale takes place on such day, the average of the closing
bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange or,
if the shares of Common Stock are not listed or admitted to trading on the
New York Stock Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the
principal national securities exchange on which the shares of Common Stock
are listed or admitted to trading or, if the shares of Common Stock are not
listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by NASDAQ or such
other system then in use, or, if on any such date, the shares of Common
Stock are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a
market in the Common Stock selected by the Board of Directors of the
Company. If on any such date the Common Stock is not so listed, traded or
quoted, and no market maker is then making a market in the Common Stock,
the "Current Market Price" per share of Common Stock on such date shall
mean the fair value per share on such date as determined in good faith by
the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be
conclusive for all purposes. The term "Trading Day" shall mean a day on
which the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading is open for the transaction
of business or, if the shares of Common Stock are not listed or admitted to
trading on any national securities exchange, a Business Day.
(ii) For the purpose of any computation hereunder, the "Current
Market Price" per share of Preferred Stock shall be determined in the same
manner as set forth above for the Common Stock in clause (i) of this
Section 11(d) (other than the penultimate sentence thereof). If the
Current Market Price per share of Preferred Stock cannot be determined in
the manner provided above or if the Preferred Stock is not publicly held or
listed or traded in a manner described in clause (i) of this Section 11(d),
the "Current Market Price" per share of Preferred Stock shall be
conclusively deemed to be an amount equal to 1000 (as
24
<PAGE>
such number may be appropriately adjusted for such events as stock splits,
stock dividends and recapitalizations with respect to the Preferred Stock
or Common Stock occurring after the date of this Agreement) multiplied by
the Current Market Price per share of the Common Stock of the Company. If
neither the Common Stock of the Company nor the Preferred Stock is publicly
held or so listed or traded, "Current Market Price" per share of the
Preferred Stock shall mean the fair value per share as determined in good
faith by the Board of Directors of the Company, whose determination shall
be described in a statement filed with the Rights Agent and shall be
conclusive for all purposes. For all purposes of this Agreement, the
"Current Market Price" of one one-thousandth of a share of Preferred Stock
shall be equal to the "Current Market Price" of one share of Preferred
Stock divided by 1000.
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least one percent (1%) in the Purchase Price;
provided, however, that any adjustments which by reason of this Section 11(e)
- -------- -------
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 11 shall be made
to the nearest cent or to the nearest ten-thousandth of a share of Common Stock
or other share or one-millionth of a share of Preferred Stock, as the case may
be. Notwithstanding the first sentence of this Section 11(e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
(3) years from the date of the transaction which mandates such adjustment, or
(ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section
11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised
shall become entitled to receive any shares of capital stock other than
Preferred Stock, thereafter the number of such other shares so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the
provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred
Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-thousandths of a
share of
25
<PAGE>
Preferred Stock purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-thousandths of
a share of Preferred Stock (calculated to the nearest one-millionth) obtained by
(i) multiplying (x) the number of one one-thousandths of a share purchasable
with respect to a Right immediately prior to this adjustment, by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price, and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights, in lieu of any adjustment in
the number of one one-thousandths of a share of Preferred Stock purchasable upon
the exercise of a Right. In such event, each of the Rights outstanding after
the adjustment in the number of Rights shall be exercisable for the number of
one one-thousandths of a share of Preferred Stock for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest one ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Rights Certificates have been issued, shall be at least ten (10)
days later than the date of the public announcement. If Rights Certificates
have been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company shall, as promptly as practicable, cause to be
distributed to holders of record of Rights Certificates on such record date
Rights Certificates evidencing, subject to Section 14 hereof, the additional
Rights to which such holders shall be entitled as a result of such adjustment,
or, at the option of the Company, shall cause to be distributed to such holders
of record in substitution and replacement for the Rights Certificates held by
such holders prior to the date of adjustment, and upon surrender thereof, if
required by the Company, new Rights Certificates evidencing all the Rights to
which such holders shall be
26
<PAGE>
entitled after such adjustment. Rights Certificates so to be distributed shall
be issued, executed and countersigned in the manner provided for herein (and may
bear, at the option of the Company, the adjusted Purchase Price) and shall be
registered in the names of the holders of record of Rights Certificates on the
record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-thousandths of a share of Preferred Stock issuable upon
the exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per one one-thousandth of a
share of Preferred Stock and the number of one one-thousandths of a share of
Preferred Stock which were expressed in the initial Rights Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below the then stated value, if any, of the number of one
one-thousandths of a share of Preferred Stock issuable upon exercise of the
Rights, the Company shall take any corporate action which may be necessary in
order that the Company may validly and legally issue fully paid and
nonassessable such number of one one-thousandths of a share of Preferred Stock
at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of one one-thousandths of a share of Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
over and above the number of one one-thousandths of a share of Preferred Stock
and other capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Purchase Price in effect prior to such adjustment;
provided, however, that the Company shall deliver to such holder a due bill or
- -------- -------
other appropriate instrument evidencing such holder's right to receive such
additional shares (fractional or otherwise) or securities upon the occurrence of
the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in their good faith judgment the Board of Directors of the
Company shall determine to be advisable in order that any (i) consolidation or
subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares
of Preferred Stock at less than the Current Market Price, (iii) issuance wholly
for cash of shares of Preferred Stock or securities which by their
27
<PAGE>
terms are convertible into or exchangeable for shares of Preferred Stock, (iv)
stock dividends or (v) issuance of rights, options or warrants referred to in
this Section 11, hereafter made by the Company to holders of its Preferred Stock
shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any time
after the Distribution Date, (i) consolidate with any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), (ii) merge with or into any other Person (other than a Subsidiary of
the Company in a transaction which complies with Section 11(o) hereof), or (iii)
sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger or sale there are any rights, warrants or other
instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger or sale, the shareholders of the Person who
constitutes, or would constitute, the "Principal Party" for purposes of Section
13(a) hereof shall have received a distribution of Rights previously owned by
such Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by Section 23 or Section 26 hereof, take
(or permit any Subsidiary to take) any action if at the time such action is
taken it is reasonably foreseeable that such action will diminish substantially
or otherwise eliminate the benefits intended to be afforded by the Rights.
(p) Anything in this Agreement to the contrary notwithstanding, in
the event that the Company shall at any time after the Rights Dividend
Declaration Date and prior to the Distribution Date (i) declare a dividend on
the outstanding shares of Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, the number
of Rights associated with each share of Common Stock then outstanding, or issued
or delivered thereafter but prior to the Distribution Date, shall automatically
be proportionately adjusted so that the number of Rights thereafter associated
with each share of Common Stock
28
<PAGE>
following any such event shall equal the result obtained by multiplying the
number of Rights associated with each share of Common Stock issued and
outstanding immediately prior to such event by a fraction the numerator of which
shall be the total number of shares of Common Stock issued and outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of shares of Common Stock issued and outstanding
immediately following the occurrence of such event.
(q) The failure by the directors, pursuant to Section 11(a)(ii)(B)
hereof, to determine a Person to be an Adverse Person following such Person's
(alone or together with the Affiliates and Associates of such Person) becoming
the Beneficial Owner of 10% or more of the Common Stock then outstanding shall
not limit the directors' right at any time in the future to declare such Person
or, subject to Section 11(a)(ii)(B) hereof, any other Person to be an Adverse
Person. Further, nothing contained in this Agreement shall preclude a majority
of the directors who are not officers of the Company and who are not
representatives, nominees, Affiliates or Associates of a Person determined to be
an "Adverse Person" from determining to terminate such Person's status as an
"Adverse Person", but no such determination to terminate a Person's status as an
"Adverse Person" shall affect any Section 11(a)(ii) Event which shall have
occurred.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
----------------------------------------------------------
Whenever an adjustment is made as provided in Section 11 and Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Stock and the Common Stock, a copy of such certificate, and (c) mail a
brief summary thereof to each holder of a Rights Certificate (or, if prior to
the Distribution Date, to each holder of a certificate representing shares of
Common Stock) in accordance with Section 25 hereof. The Rights Agent shall be
fully protected in relying on any such certificate and on any adjustment therein
contained.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
--------------------------------------------------------------
Power.
- -----
(a) In the event that, following the Stock Acquisition Date, directly
or indirectly, (x) the Company shall consolidate with, or merge with and into,
any other Person (other than a Subsidiary of the Company in a transaction which
complies with Section 11(o) hereof), and the Company shall not be the continuing
or surviving corporation of such consolidation or merger, (y) any Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o)
29
<PAGE>
hereof) shall consolidate with, or merge with or into, the Company, and the
Company shall be the continuing or surviving corporation of such consolidation
or merger and, in connection with such consolidation or merger, all or part of
the outstanding shares of Common Stock shall be changed into or exchanged for
stock or other securities of any other Person or cash or any other property, or
(z) the Company shall sell or otherwise transfer (or one or more of its
Subsidiaries shall sell or otherwise transfer), in one transaction or a series
of related transactions, assets or earning power aggregating more than 50% of
the assets or earning power of the Company and its Subsidiaries (taken as a
whole) to any Person or Persons (other than the Company or any Subsidiary of the
Company in one or more transactions each of which complies with Section 11(o)
hereof), then, and in each such case (except as may be contemplated by Section
13(d) hereof), proper provision shall be made so that: (i) each holder of a
Right, except as provided in Section 7(e) hereof, shall thereafter have the
right to receive, upon the exercise thereof at the then current Purchase Price
in accordance with the terms of this Agreement, such number of validly
authorized and issued, fully paid, nonassessable and freely tradeable shares of
Common Stock of the Principal Party (as such term is hereinafter defined), free
and clear of any and all liens, encumbrances, rights of first refusal or other
adverse claims, as shall be equal to the result obtained by (1) multiplying the
then current Purchase Price by the number of one one-thousandths of a share of
Preferred Stock for which a Right is exercisable immediately prior to the first
occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event has occurred
prior to the first occurrence of a Section 13 Event, multiplying the number of
such one one-thousandths of a share of Preferred Stock for which a Right was
exercisable immediately prior to the first occurrence of a Section 11(a)(ii)
Event by the Purchase Price in effect immediately prior to such first
occurrence), and dividing that product (which, following the first occurrence of
a Section 13 Event, shall be referred to as the "Purchase Price" for each Right
and for all purposes of this Agreement) by (2) 50% of the Current Market Price
determined pursuant to Section 11(d)(i) hereof) per share of the Common Stock of
such Principal Party on the date of consummation of such Section 13 Event; (ii)
such Principal Party shall thereafter be liable for, and shall assume, by virtue
of such Section 13 Event, all the obligations and duties of the Company pursuant
to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer
to such Principal Party, it being specifically intended that the provisions of
Section 11 hereof shall apply only to such Principal Party following the first
occurrence of a Section 13 Event; (iv) such Principal Party shall take such
steps (including, but not limited to, the reservation of a sufficient number of
shares of its Common Stock) in connection with the consummation of any such
transaction as may be necessary to assure that the provisions hereof shall
thereafter be
30
<PAGE>
applicable, as nearly as reasonably may be, in relation to its shares of Common
Stock thereafter deliverable upon the exercise of the Rights; and (v) the
provisions of Section 11(a)(ii) hereof shall be of no effect following the first
occurrence of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x) or
(y) of the first sentence of Section 13(a), the Person that is the issuer
of any securities into which shares of Common Stock of the Company are
converted in such merger or consolidation, and if no securities are so
issued, the Person that is the other party to such merger or consolidation;
and
(ii) in the case of any transaction described in clause (z) of
the first sentence of Section 13(a), the Person that is the party receiving
the greatest portion of the assets or earning power transferred pursuant to
such transaction or transactions;
provided, however, that in any such case, (1) if the Common Stock of such
-------- -------
Person is not at such time and has not been continuously over the preceding
twelve (12) month period registered under Section 12 of the Exchange Act,
and such Person is a direct or indirect Subsidiary of another Person the
Common Stock of which is and has been so registered, "Principal Party"
shall refer to such other Person; (2) in case such Person is a Subsidiary,
directly or indirectly, of more than one Person, the Common Stocks of two
or more of which are and have been so registered, "Principal Party" shall
refer to whichever of such Persons is the issuer of the Common Stock having
the greatest aggregate market value, and (3) in case such Person is owned,
directly or indirectly, by a joint venture formed by two or more Persons
that are not owned, directly or indirectly, by the same Person, the rules
set forth in (1) and (2) above shall apply to each of the Persons having an
interest in such joint venture as if such joint venture were a "Subsidiary"
of both or all of such joint venturers.
(c) The Company shall not consummate any such consolidation, merger,
sale or transfer unless the Principal Party shall have a sufficient number of
authorized shares of its Common Stock which have not been issued or reserved for
issuance to permit the exercise in full of the Rights in accordance with this
Section 13 and unless prior thereto the Company and such Principal Party shall
have executed and delivered to the Right Agent a supplemental agreement
providing for the terms set forth in paragraphs (a) and (b) of this Section 13
and further providing that, as soon as practicable after the date of any
31
<PAGE>
consolidation, merger or sale of assets mentioned in paragraph (a) of this
Section 13, the Principal Party will
(i) prepare and file a registration statement under the Act,
with respect to the Rights and the securities purchasable upon exercise of
the Rights on an appropriate form, and will use its best efforts to cause
such registration statement to (A) become effective as soon as practicable
after such filing and (B) remain effective (with a prospectus at all times
meeting the requirements of the Act) until the Expiration Date; and
(ii) use its best efforts to qualify or register the Rights and
the securities purchasable upon exercise of the Rights under all applicable
"blue sky" or state securities laws; and
(iii) will deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which comply
in all respects with the requirements for registration on Form 10 under the
Exchange Act.
The provisions of this Section 13 shall similarly apply to successive
mergers or consolidations or sales or other transfers. In the event that a
Section 13 Event shall occur at any time after the occurrence of a Section
11(a)(ii) Event, the Rights which have not theretofore been exercised shall
thereafter become exercisable in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the contrary,
Section 13 shall not be applicable to a transaction described in subparagraphs
(x) and (y) of Section 13(a) if (i) such transaction is consummated with a
Person or Persons who acquired shares of Common Stock pursuant to a tender offer
or exchange offer for all outstanding shares of Common Stock which complies with
the provisions of Section 11(a)(ii)(A) hereof (or a wholly owned subsidiary of
any such Person or Persons), (ii) the price per share of Common Stock offered in
such transaction is not less than the price per share of Common Stock paid to
all holders of shares of Common Stock whose shares were purchased pursuant to
such tender offer or exchange offer and (iii) the form of consideration being
offered to the remaining holders of shares of Common Stock pursuant to such
transaction is the same as the form of consideration paid pursuant to such
tender offer or exchange offer. Upon consummation of any such transaction
contemplated by this Section 13(d), all Rights hereunder shall expire.
32
<PAGE>
Section 14. Fractional Rights and Fractional Shares.
---------------------------------------
(a) The Company may but shall not be required to issue fractions of
Rights, except prior to the Distribution Date as provided in Section 11(p)
hereof, or to distribute Rights Certificates which evidence fractional Rights.
If the Company shall determine not to issue fractional rights, then in lieu of
such fractional Rights, unless prohibited by the terms of any agreement to which
the Company is a party on the date of this Agreement (or, if a majority of the
then Continuing Directors so agree, after the date of this Agreement), there
shall be paid to the registered holders of the Rights Certificates with regard
to which such fractional Rights would otherwise be issuable, an amount in cash
equal to the same fraction of the current market value of a whole Right, and if
the Company is prohibited from paying cash in lieu of fractional Rights then the
Company shall round up the fractional Rights to the next highest number of whole
Rights so that Rights Certificates represent only whole numbers of Rights. For
purposes of this Section 14(a), the current market value of a whole Right shall
be the closing price of such Right for the Trading Day immediately prior to the
date on which such fractional Rights would have been otherwise issuable. The
closing price of the Rights for any day shall be the last sale price, regular
way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the Rights
are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
Rights are listed or admitted to trading, or if the Rights are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by NASDAQ or such other system then in use
or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Rights selected by the Board of Directors of
the Company. If on any such date the Rights are not so listed, traded or
quoted, and no such market maker is then making a market in the Rights, the
current market value of a Right on such date shall mean the fair value of the
Right on such date as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed with the
Rights Agent and shall be conclusive for all purposes.
(b) The Company shall, unless a majority of the then Continuing
Directors otherwise agree, issue fractions of shares
33
<PAGE>
of Preferred Stock upon exercise of the Rights or distribute certificates which
evidence fractional shares of Preferred Stock. In the event the Company, with
the concurrence of a majority of the then Continuing Directors, determines not
to issue fractional shares of Preferred Stock, the Company shall pay to the
registered holders of Rights Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of a share of Preferred Stock, or if the Company is prohibited from
paying cash in lieu of fractional shares, then such fractional shares shall be
aggregated and distributed to the Rights Agent to be sold in the open market and
the proceeds thereof distributed to the appropriate holders of Rights. For
purposes of this Section 14(b), the current market value of Preferred Stock
shall be the closing price of a share of Preferred Stock (as determined pursuant
to Section 11(d)(ii) hereof) for the Trading Day immediately prior to the date
of such exercise.
(c) Following the occurrence of a Triggering Event, the Company
shall, unless a majority of the then Continuing Directors otherwise agree, issue
fractions of shares of Common Stock upon exercise of the Rights or distribute
certificates which evidence fractional shares of Common Stock (or other capital
stock, if applicable). In the event the Company, with the concurrence of a
majority of the then Continuing Directors, determines not to issue fractional
shares of Common Stock (or other capital stock, if applicable), the Company
shall pay to the registered holders of Rights Certificates at the time such
Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of a share of Common Stock (or other
capital stock, if applicable), or if the Company is prohibited from paying cash
in lieu of fractional shares, then such fractional shares shall be aggregated
and distributed to the Rights Agent to be sold in the open market and the
proceeds thereof distributed to the appropriate holders of Rights. For purposes
of this Section 14(c), the current market value of Common Stock (or other
capital stock, if applicable) shall be the closing price of a share of Common
Stock (or other capital stock, if applicable) (as determined pursuant to Section
11(d)(ii) hereof) for the Trading Day immediately prior to the date of such
exercise.
(d) The holder of a Right by the acceptance of the Rights expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
----------------
Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Rights Certificate (or, prior
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<PAGE>
to the Distribution Date, of the Common Stock), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Stock), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and shall be entitled to specific performance
of the obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
Holders of Rights shall be entitled to recover the reasonable costs and
expenses, including attorneys' fees, incurred by them in any action to enforce
the provisions of this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a Right by
---------------------------
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the Company and
the Rights Agent may deem and treat the person in whose name a Rights
Certificate (or, prior to the Distribution Date, the associated Common Stock
certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Stock certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or other Person as a
35
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result of its inability to perform any of its obligations under this Agreement
by reason of any preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission, or any statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority, prohibiting or otherwise restraining performance of such obligation;
provided, however, the Company shall use its best efforts to have any such
- -------- -------
order, decree or ruling lifted or otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Stockholder.
--------------------------------------------------
No holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of one one-
thousandths of a share of Preferred Stock or any other securities of the Company
which may at any time be issuable on the exercise of the Rights represented
thereby, nor shall anything contained herein or in any Rights Certificate be
construed to confer upon the holder of any Rights Certificate, as such, any of
the rights of a stockholder of the Company or any right to vote for the election
of directors or upon any matter submitted to stockholders at any meeting
thereof, or to give or withhold consent to any corporate action, or to receive
notice of meetings or other actions affecting stockholders (except as provided
in Section 24 hereof), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by such Rights Certificate shall
have been exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
---------------------------
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement, including the costs and expenses of
defending against any claim of liability in the premises.
(b) The Rights Agent shall be protected and shall incur no liability for
or in respect of any action taken, suffered or omitted by it in connection with
its administration of this Agreement in reliance upon any Rights Certificate or
certificate for Preferred Stock, Common Stock or for other securities of the
36
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Company, instrument or assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it to be genuine and to be signed, executed and,
where necessary, verified or acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
---------------------------------------------------------
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any Successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; provided, however, that such corporation would be eligible for
-------- -------
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at that
time any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
or in its changed name; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
----------------------
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
37
<PAGE>
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "Current Market Price") be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof is herein specifically prescribed) may be
deemed to be conclusively proved and established by a certificate signed by the
Chairman of the Board, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith and willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Rights
Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall it
be responsible for any adjustment required under the provisions of Section 11 or
Section 13 hereof or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Rights Certificates after actual notice of any such adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock or Preferred Stock to
be issued pursuant to this Agreement or any Rights Certificate or as to whether
any shares of Common Stock or Preferred Stock
38
<PAGE>
will, when so issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties. and it shall not be liable for any action taken or suffered to be taken
by it in good faith in accordance with instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct; provided, however, reasonable care was exercised in the
selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been
39
<PAGE>
completed or indicates an affirmative response to clause 1 and/or 2 thereof, the
Rights Agent shall not take any further action with respect to such requested
exercise of transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
----------------------
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company and to each
transfer agent of the Common Stock and Preferred Stock, by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent
upon thirty (30) days' notice in writing mailed to the Rights Agent or successor
Rights Agent, as the case may be, and to each transfer agent of the Common Stock
and Preferred Stock, by registered or certified mail, and to the holders of the
Rights Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after giving notice of such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Rights Certificate (who shall, with such notice, submit his Rights Certificate
for inspection by the Company), then any registered holder of any Rights
Certificate may apply to any court of competent jurisdiction for the appointment
of a new Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be a corporation organized and doing business
under the laws of the United States or of any state of the United States so long
as such corporation has an office in the city of New York, New York, is in good
standing, and is qualified to act as a transfer agent for equity securities
registered on the New York Stock Exchange or other securities exchange on which
equity securities of the Company are then registered. After appointment, the
successor Rights Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Rights Agent without
further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment of a
successor Rights Agent, the Company shall file notice thereof in writing with
the predecessor Rights Agent and each transfer agent of the Common Stock and the
Preferred Stock, and shall mail a notice thereof in writing to the registered
holders of the Rights Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or
40
<PAGE>
removal of the Rights Agent or the appointment of the successor Rights Agent, as
the case may be.
Section 22. Issuance of New Rights Certificates. Notwithstanding any of
-----------------------------------
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price or the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale by the Company of shares of Common Stock following the
Distribution Date and prior to the redemption or expiration of the Rights, the
Company (a) shall, with respect to shares of Common Stock so issued or sold
pursuant to the exercise of stock options or under any employee plan or
arrangement, granted or awarded as of the Distribution Date, or upon the
exercise, conversion or exchange of securities hereafter issued by the Company,
and (b) may, in any other case, if deemed necessary or appropriate by the Board
of Directors of the Company, issue Rights Certificates representing the
appropriate number of Rights in connection with such issuance or sale; provided,
--------
however, that (i) no such Rights Certificate shall be issued if, and to the
- -------
extent that, the Company shall be advised by counsel that such issuance would
create a significant risk of material adverse tax consequences to the Company or
the Person to whom such Rights Certificate would be issued, and (ii) no such
Rights Certificate shall be issued if, and to the extent that, appropriate
adjustment shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption and Termination.
--------------------------
(a) The Board of Directors of the Company may, at its option, redeem
all but not less than all the then outstanding Rights at a redemption price of
$.001 per Right, as such amount may be appropriately adjusted to reflect any
stock split, stock dividend or similar transaction occurring after the date
hereof (such redemption price being hereinafter referred to as the "Redemption
Price"), at any time on or before the earlier of (i) the close of business on
the tenth business day following the Stock Acquisition Date (or, if the Stock
Acquisition Date shall have occurred prior to the Record Date, the close of
business on the tenth business day following the Record Date) or such later date
or dates as the Board of Directors, or any duly authorized committee thereof,
may designate; provided, however, that if such later date or dates are
-------- -------
designated, such designation shall be made on or prior to the date prior to
which redemption would otherwise be required, or (ii) the Final Expiration Date;
provided, however, if the Board of Directors of the Company authorizes
- -------- -------
redemption of the Rights or designates an extension
41
<PAGE>
of the redemption period pursuant to clause (i) above in either of the
circumstances set forth in clauses (x) and (y) below, then there must be
Continuing Directors then in office and such authorization shall require the
concurrence of a majority of such Continuing Directors: such authorization or
designation occurs (x) on or after the time a Person becomes an Acquiring
Person, or (y) on or after the date of a change (resulting from a proxy or
consent solicitation) in a majority of the directors in office at the
commencement of such solicitation if any Person who is a participant in such
solicitation has stated (or, if upon the commencement of such solicitation, a
majority of the Continuing Directors has determined in good faith) that such
Person (or any of its Affiliates or Associates) intends to take, or may consider
taking, any action which would result in such Person becoming an Acquiring
Person or an Adverse Person or which would cause the occurrence of a Triggering
Event. Notwithstanding the foregoing, the Board of Directors of the Company may
not redeem any Rights while any Person continues to retain the status of an
Adverse Person pursuant to Section 11(a)(ii)(B). The Company may, at its option,
pay the Redemption Price in cash, shares of Common Stock (based on the "Current
Market Price", as defined in Section 11(d)(i) hereof, of the Common Stock at the
time of redemption) or any other form of consideration deemed appropriate by the
Board of Directors and which does not violate the terms of any agreement to
which the Company is a party on the date of this Rights Agreement (or, if a
majority of the then Continuing Directors so agree, after the date of this
Agreement). Furthermore, if the Company shall determine to pay the redemption
price in Common Stock it may but shall not be required to issue fractional
shares and may aggregate fractional shares of Common Stock that would otherwise
be due to holders of Rights and distribute these shares to the Rights Agent to
be sold in the open market and the proceeds thereof shall be distributed to the
appropriate holders of Rights.
(b) Notwithstanding anything contained in this Agreement to the
contrary, the Rights shall not be exercisable after the first occurrence of a
Section 11(a)(ii) Event or Section 13 Event until such time as the Company's
right of redemption hereunder, as extended (if applicable), has expired.
(c) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, evidence of which shall have been
filed with the Rights Agent, and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for
each Right so held. Promptly after the action of the Board of Directors
ordering the redemption of the Rights, the Company shall give notice of such
redemption to the Rights Agent and the holders of the then outstanding Rights by
42
<PAGE>
mailing such notice to all such holders at each holder's last address as it
appears upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the Transfer Agent for the Common
Stock. Such notice shall state the method by which the payment of the
Redemption Price will be effected.
(d)(i) Subject to the limitations of applicable law and to any
restrictions set forth in any agreements to which the Company is a
party on the date of this Rights Agreement (or, if a majority of the
then Continuing Directors so agree, after the date of this Agreement),
the Board of Directors (but only if there are Continuing Directors and
with the concurrence of a majority of such Continuing Directors) of
the Company may, at its option, at any time after the occurrence of a
Section 11(a)(ii) Event, exchange all or part of the then outstanding
and exercisable Rights (which shall not include Rights that have
become void pursuant to the provisions of Section 7(e) hereof) at an
exchange ratio of (1) one share of Common Stock of the Company for
each Right so exchanged, adjusted as appropriate to reflect any stock
split, stock combination, stock dividend or similar transaction
occurring after the date hereof (such share of Common Stock issuable
in exchange for one Right being referred to herein as an "Exchange
Share"), or (2) Substitute Consideration, as that term is defined
below. The Board of Directors may determine (with the consent of a
majority of the Continuing Directors) whether to deliver Exchange
Shares or Substitute Consideration. Notwithstanding the foregoing,
the Board of Directors shall not be empowered to effect such exchange
at any time after any Acquiring Person or Adverse Person (together
with all Affiliates and Associates of such Acquiring Person or Adverse
Person) becomes the Beneficial Owner of shares of Common Stock
entitled to cast 50% or more of the aggregate number of votes entitled
to be cast by all shares of Common Stock then outstanding.
In the event that the Board of Directors shall determine to deliver
Substitute Consideration in exchange for Rights, the Company shall (l)
determine the value of the Exchange Shares (the "Exchange Value"), and
(2) with respect to each Right to be exchanged, make adequate
provision to substitute for the Exchange Share the following (the
"Substitute Consideration" (v) cash, (w) common stock equivalents (as
that term is defined in Section 11(a)(iii) hereof), (x) debt
securities of the Company, (y) other assets, or (z) any combination of
the foregoing,
43
<PAGE>
having an aggregate value equal to the Exchange Value, where such
aggregate value has been determined by the Board of Directors (with
the concurrence of a majority of the Continuing Directors) of the
Company based upon the advice of a nationally recognized investment
banking firm selected by the Board of Directors of the Company (with
the concurrence of a majority of the Continuing Directors). For
purposes of this Section 23(d), the value of a share of Common Stock
shall be the Current Market Price (as determined pursuant to Section
11(d) hereof) per share of Common Stock on the Section 11(a)(ii)
Trigger Date; and the value of any common stock equivalent shall be
deemed to have the same value as the Common Stock on such date.
(ii) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to this Section
23(d) and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter
of a holder of such Rights shall be to receive the Exchange Share or
Substitute Consideration for each Right exchanged by such holder.
Promptly after the action of the Board of Directors of the Company
authorizing any such exchange, the Company shall give notice of such
exchange to the Rights Agent and to the holders of the Rights by
mailing such notice to all such holders at each holder's last address
as it appears upon the registry books of the Rights Agent or, prior to
the Distribution Date, on the registry books of the Transfer Agent for
the Common Stock; provided, however, that the failure to give, or any
-------- -------
defect in, such notice shall not affect the validity of such exchange.
Each such notice of exchange will state the method by which the
exchange for Rights will be effected and, in the event of any partial
exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights
(other than Rights which have become void pursuant to the provisions
of Section 7(e) hereof) held by each holder of Rights.
(iii) In the event that there shall not be sufficient shares of
Common Stock or common stock equivalents issued but not outstanding or
authorized but unissued to permit any exchange of Rights as
contemplated by the Board of Directors in accordance with this Section
23(d), the Company may take all such action as may be necessary or
appropriate to authorize additional shares of Common Stock or common
stock equivalents for issuance upon exchange of the Rights.
44
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(iv) Unless a majority of the then Continuing Directors
otherwise agree, Company shall be required to issue fractions of
shares of Common Stock or to distribute certificates which evidence
fractional shares of Common Stock. In lieu of such fractional shares
of Common Stock, the Company shall, with the concurrence of a majority
of the then Continuing Directors, pay to the registered holders of the
Right Certificates with regard to which such fractional shares of
Common Stock would otherwise be issuable an amount in cash equal to
the same fraction of the current market value of a whole share of
Common Stock.
Section 24. Notice of Certain Events.
------------------------
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Stock or to make any other distribution to the holders of
Preferred Stock (other than a regular quarterly cash dividend out of earnings or
retained earnings of the Company), or (ii) to offer to the holders of Preferred
Stock rights or warrants to subscribe for or to purchase any additional shares
of Preferred Stock or shares of stock of any class or any other securities,
rights or options, or (iii) to effect any reclassification of its Preferred
Stock (other than a reclassification involving only the subdivision of
outstanding shares of Preferred Stock), or (iv) to effect any consolidation or
merger into or with any other Person (other than a Subsidiary of the Company in
a transaction which complies with Section 11(o) hereof), or to effect any sale
or other transfer (or to permit one or more of its Subsidiaries to effect any
sale or other transfer), in one transaction or a series of related transactions,
of more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section (o) hereof), or (v) to effect the liquidation, dissolution
or winding up of the Company, then, in each such case, the Company shall give to
each holder of a Rights Certificate, to the extent feasible and in accordance
with Section 25 hereof, a notice of such proposed action, which shall specify
the record date for the purposes of such stock dividend, distribution of rights
or warrants, or the date on which such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution, or winding up is to take place and the
date of participation therein by the holders of the shares of Preferred Stock,
if any such date is to be fixed, and such notice shall be so given in the case
of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the shares of Preferred
Stock for purposes of such action, and in the case of any such other action, at
least
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<PAGE>
twenty (20) days prior to the date of the taking of such proposed action or the
date of participation therein by the holders of the shares of Preferred Stock
whichever shall be the earlier.
(b) In case any Section 11(a)(ii) Event hereof shall occur, then (i)
the Company shall as soon as practicable thereafter give to each holder of a
Rights Certificate, to the extent feasible and in accordance with Section 25
hereof, a notice of the occurrence of such event, which shall specify the event
and the consequences of the event to holders of Rights under Section 11(a)(ii)
hereof, and (ii) all references in the preceding paragraph to Preferred Stock
shall be deemed thereafter to refer to Common Stock and/or, if appropriate,
other securities.
Section 25. Notices. Notices or demands authorized by this Agreement to
-------
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if delivered by hand or
by messenger services, or if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Rights Agent), as
follows:
Shared Medical Systems Corporation
51 Valley Stream Parkway
Malvern, Pennsylvania 19355
Attention: Secretary
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or made
if delivered by hand or by messenger service, or if sent by first-class mail,
postage prepaid, addressed (until another address is filed in writing with the
Company) as follows:
Pittsburgh National Bank
1500 Penn Avenue
Pittsburgh, Pennsylvania 15222
Attention: Stock Transfer Department
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if delivered by hand
or by messenger service, or if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company. Any notice which is given to the holder of any Rights
Certificate (or, if prior to the Distribution Date, to the holder of
certificates
46
<PAGE>
representing shares of Common Stock) pursuant to this Agreement in the manner
provided for such notice shall be deemed given, whether or not such notice is
actually received.
Section 26. Supplements and Amendments. Prior to the Distribution Date
--------------------------
and subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend any provision
of this Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the Distribution Date and
subject to the penultimate sentence of this Section 26, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without the approval of any holders of Rights Certificates in order
(i) to cure any ambiguity, (ii) to correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
(iii) to shorten or lengthen any time period hereunder (which lengthening or
shortening, following the first occurrence of an event set forth in clause (x)
or (y) of the second proviso to Section 23(a) hereof, shall be effective only if
there are Continuing Directors and shall require the concurrence of a majority
of such Continuing Directors) or (iv) to change or supplement the provisions
hereunder in any manner which the Company may deem necessary or desirable and
which shall not adversely affect the interests of the holders of Rights
Certificates (other than an Acquiring Person, an Adverse Person, or an Affiliate
or Associate of an Acquiring Person or Adverse Person); provided, however, this
-------- -------
Agreement may not be supplemented or amended to lengthen, pursuant to clause
(iii) of this sentence, (A) a time period relating to when the Rights may be
redeemed at such time as the Rights already have ceased to be redeemable, or (B)
any other time period unless such lengthening is for the purpose of protecting,
enhancing or clarifying the rights of, and/or the benefits to, the holders of
Rights (other than an Acquiring Person, an Adverse Person or an Affiliate or
Associate of an Acquiring Person or Adverse Person). Without limiting, but
subject to, the foregoing, the Company may at any time before any Person has
become an Acquiring Person amend this Agreement to change the threshold or the
method for determining whether a Person is or has become an Acquiring Person.
Upon the delivery of a certificate from an appropriate officer of the Company
which states that the proposed supplement or amendment is in compliance with the
terms of this Section 26, the Rights Agent shall execute such supplement or
amendment. Notwithstanding anything contained in this Agreement to the
contrary, no supplement or amendment shall be made which changes the Redemption
Price, the Final Expiration Date, the Purchase Price or the number of one one-
thousandths of a share of Preferred Stock for which a Right is exercisable.
Prior to the
47
<PAGE>
Distribution Date, the interests of the holders of Rights shall be deemed
coincident with the interests of the holders of common stock.
Section 27. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder
including, without limitation, any corporation or other entity into which the
Company may be merged.
Section 28. Determinations and Actions by the Board of Directors, Etc.
---------------------------------------------------------
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations
under the Exchange Act as in effect on the date hereof. The Board of Directors
of the Company (with, where specifically provided for herein, the concurrence of
the Continuing or disinterested Directors) shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to the Board (with, where specifically provided for herein,
the concurrence of the Continuing or disinterested Directors) or to the Company,
or as may be necessary or advisable in the administration of this Agreement,
including without limitation, the right and power to (i) interpret the
provisions of this Agreement, and (ii) make all determinations deemed necessary
or advisable for the administration of this Agreement (including, without
limitation, a determination to redeem or not redeem the Rights or to amend the
Agreement). All such actions, calculations, interpretations and determinations
(including, for purposes of clause (y) below, all omissions with respect to the
foregoing) which are done or made by the Board (with, where specifically
provided for herein, the concurrence of the Continuing or disinterested
Directors) in good faith, shall (x) be final, conclusive and binding on the
Company, the Rights Agent, the holders of the Rights and all other parties, and
(y) not subject the Board of Directors or the Continuing or disinterested
Directors to any liability to the holders of the Rights. Further, nothing
contained in this Agreement shall be deemed to impose on the Board of Directors
or the Company any obligation to approve a tender offer, merger, acquisition or
other similar proposal by or from a Person even though the terms of such
proposal may be fair to stockholders of the Company.
Section 29. Benefits of this Agreement. Nothing in this Agreement shall
--------------------------
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date,
48
<PAGE>
registered holders of the Common Stock) any legal or equitable right, remedy or
claim under this Agreement; but this Agreement shall be for the sole and
exclusive benefit of the Company, the Rights Agent and the registered holders of
the Rights Certificates (and, prior to the Distribution Date, registered holders
of the Common Stock).
Section 30. SeverabilitY. If any term, provision, covenant or restriction
------------
of this Agreement is held by a court or other authority of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
- -------- -------
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be extended, or if expired shall be reinstated, and shall not expire until
the close of business on the tenth day following the date of such determination
by the Board of Directors. Without limiting the foregoing, if any provision
requiring that a determination be made by less than the entire Board of
Directors (or at a time or with the concurrence of a group of directors
consisting of less than the entire Board) is held by a court or other authority
of competent jurisdiction to be invalid, void or unenforceable, such
determination shall then be made by the Board in good faith in accordance with
applicable law and the Company's certificate or articles of incorporation and
by-laws.
Section 31. Governing Law. This Agreement, each Right and each Rights
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the jurisdiction of incorporation of the Company, as the same may change
from time to time, and for all purposes shall be governed by and construed in
accordance with the laws of such jurisdiction applicable to contracts made and
to be performed entirely within such jurisdiction.
Section 32. CounterParts. This Agreement may be executed in any number of
------------
counterparts, and each of such counterparts shall, for all purposes, be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 33. Table of Contents; Descriptive Headings. The Table of
---------------------------------------
Contents and the descriptive headings of the several Sections of this Agreement
are inserted for convenience only and
49
<PAGE>
shall not control or affect the meaning or construction of any of the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their duly authorized officers as of the day and year first
above written.
Attest: SHARED MEDICAL SYSTEMS CORPORATION
By /s/ Bonnie L. Shuman By /s/ Terence W. Kyle
---------------------- --------------------------------
Name: Bonnie L. Shuman Name: Terence W. Kyle
Title: Assistant Secretary Title: Vice President of Finance
Attest: PITTSBURGH NATIONAL BANK
By /s/ Marcia Marshall By /s/ Raymond Werkmeister
---------------------- ---------------------------------
Name: Marcia Marshall Name: Raymond Werkmeister
Title: Account Manager Title: Assistant Vice President
50
<PAGE>
Exhibit (10)
EMPLOYMENT AGREEMENT
This is an agreement between Marvin S. Cadwell and SMS that we are entering
into this first day of February, 1992.
SMS is a provider of information systems and services to the healthcare
industry. SMS invests substantial resources in developing its employees and
business, and you recognize that this Agreement is necessary to protect this
investment and its customer goodwill. You are employed by SMS as a Vice
President. In consideration of the mutual promises in this Agreement, you and
SMS agree as follows:
EMPLOYMENT. During your employment, you will devote your full energies and
abilities to your employment with SMS, and you may not pursue other employment
or business ventures without SMS' prior written consent. These commitments to
SMS do not conflict with obligations you have to others, such as a previous
employer. Either you or SMS may terminate your employment at any time for any
reason.
If, for other than "Cause" (i.e., actions which are illegal, fraudulent, or
----
unethical, or actions which involve a "dereliction of duty" with respect to your
obligations to SMS, such as failure to show up for work, missed appointments,
etc.), (i) SMS notifies you that your employment with SMS is to terminate, or
(ii) you notify SMS of your intent to resign because, within the previous thirty
(30) days, (a) your annual salary was reduced without your agreement, or (b)
your annual salary plus incentive pay at 100% of attainment of objectives was
reduced below $275,000 per year, or (c) there was a significant reduction in
your responsibilities, or (d) your title was changed without your agreement,
e.g., your vice-president title was removed, or you were demoted from senior
vice-president to vice-president (each of (i), (ii)(a), (ii)(b), (ii)(c) and
(ii)(d) being an "Event"), and provided you then sign an agreement to release
SMS from all claims relating to your prior employment, then you shall be
designated as an "employee on special assignment" until the earlier of your
subsequent employment (full or part-time) or twelve (12) months from the date of
such Event. As an employee on special assignment you will receive $20,000 per
month compensation; you will continue to be eligible for the following benefits:
medical and dental coverage, disability coverage, and the life insurance
coverage in force at the time of the Event; and you will be eligible to receive
any restricted stock and stock options that vest while you are in this status.
Upon termination of your status as an employee on special assignment your
employment with SMS shall terminate, and any of the restricted stock that you
were awarded in 1990 that has not vested, shall vest immediately.
CONFIDENTIALITY. SMS will provide to you, or you will learn, trade secrets and
other proprietary information of SMS and third parties which are not generally
available to the public. Examples of this information include computer programs,
marketing and development plans, proprietary product and service offerings data
about SMS, customer and prospect lists and requirements, employee lists,
salaries, and benefits, and financial information. During your employment and at
all times afterward, you will not
<PAGE>
disclose such information to any person or entity or make any use of this
information, except as required in the performance of your employment
responsibilities. When you leave SMS' employment, you will immediately return to
SMS all materials containing such information. You agree to keep the terms of
this Agreement confidential, except as required by law.
COMPETITION. For one year after the earlier of your leaving SMS' employment or
becoming an employee on special assignment, you will not without SMS' prior
written consent (i) compete in any way with SMS' business activities or accept
employment with an SMS competitor, or (ii) solicit any customer or prospect of
SMS that you or your subordinates solicited or serviced for SMS, or (iii)
solicit other individuals who were SMS employees on the date you left SMS to
also leave SMS. This provision will apply if your responsibilities after you
leave SMS would be substantially similar to those you had with SMS, or if you
would be required to use or disclose the proprietary information described
above. If your responsibilities for SMS have a geographic territory, this
provision will apply only within the geographic territory for which you had
responsibility during the year before you left SMS; otherwise, it will apply
where SMS does or has plans to do business.
CREATIVE WORKS. All ideas, computer programs, and other creative works related
to SMS' business conceived or made by you during your SMS employment and within
six (6) months after that will be SMS' sole property, and all such works which
are copyrightable will be deemed works for hire. You will promptly disclose to
SMS all such works and will, at SMS' request and expense, assist SMS in
obtaining a copyright or patent on any such works, including signing necessary
documents.
GENERAL. "SMS" means Shared Medical Systems Corporation and its subsidiaries.
This Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania. If any provisions are not allowed by state law, the rest of this
Agreement stands. This Agreement contains the entire agreement relating to these
employment issues and supersedes all prior discussions and commitments between
you and SMS with respect to such issues. You and SMS intend to be legally bound
by this Agreement, and it can only be amended in a document signed by both you
and SMS.
EMPLOYEE SMS
/s/ Marvin S. Cadwell /s/ R. James Macaleer
- --------------------------------- ----------------------------------
Marvin S. Cadwell
<PAGE>
[SMS LOGO APPEARS HERE]
Exhibit (13)
[ART WORK APPEARS HERE]
ANNUAL REPORT 1996
<PAGE>
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, cost-effective solutions based on information
systems and services.
Our Beliefs: Focus on people as our most important asset. Exceed the
expectations of our customers. Strive for excellence in all that we do.
(C)Copyright 1997 SMS
Shared Medical Systems Corporation
<PAGE>
[ART WORK OF THE EARTH APPEARS HERE]
SOLUTIONS FOR THE HEALTH INDUSTRY WORLDWIDE
SMS' vision is to be the information solutions company of choice for the
global health industry. We are well positioned to achieve that vision from many
perspectives...the depth and breadth of our offerings...more than 28 years of
experience...our dedication to customers...the expertise of our people...long-
term growth and financial stability...our global presence, with customers in 19
countries and territories...alliances with world-class partners...and our
ability to manage information across networks throughout the continuum of care.
It is through these strengths that SMS provides innovative solutions for
the health industry and its professionals - working together to improve health
worldwide.
<PAGE>
Company Profile
For more than 28 years, we at SMS have made it our business to understand the
continuously evolving health industry; anticipate change; and develop, deliver,
and support information solutions that help our customers meet their changing
and varied requirements.
SMS has become the worldwide leader in providing health information solutions
to customers in 19 countries and territories across North America and Europe.
Our customers include integrated health networks, multientity health
corporations, community health information networks, hospitals, physician
groups, and managed services organizations.
We partner with our customers to provide comprehensive solutions that include
processes, applications, technology, and services to help them meet their
desired objectives. Based on customer need, our solutions can include any
combination of clinical, financial, and administrative applications; enabling
technologies; and integration and support services to deliver results.
[ART WORK OF THE EARTH APPEARS ALONG THE RIGHT HAND COLUMN OF THE PAGE]
<PAGE>
[SMS LOGO APPEARS HERE]
- --------------------------------------------------------------------------------
Annual Report 1996
<TABLE>
<CAPTION>
Financial Highlights
(Amounts in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Operating Results: 1996 1995 % Increase
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $767,350 $650,641 17.9%
- --------------------------------------------------------------------------------
Income Before Income Taxes $76,360 $65,220 17.1%
- --------------------------------------------------------------------------------
Net Income $47,038 $39,783 18.2%
- --------------------------------------------------------------------------------
Net Income Per Share $1.95 $1.68 16.1%
- --------------------------------------------------------------------------------
Cash Dividends Declared Per Share $.84 $.84 -
- --------------------------------------------------------------------------------
Weighted Average Common Shares 24,128 23,697 1.8%
- --------------------------------------------------------------------------------
Year End Position:
- --------------------------------------------------------------------------------
Total Assets $499,431 $434,973 14.8%
- --------------------------------------------------------------------------------
Retained Earnings $292,304 $265,010 10.3%
- --------------------------------------------------------------------------------
Total Stockholders' Investment $281,277 $248,820 13.0%
- --------------------------------------------------------------------------------
Current Ratio 1.6 1.7
- --------------------------------------------------------------------------------
Common Stock Outstanding 23,545 23,261
- --------------------------------------------------------------------------------
Number of Stockholders of Record 5,955 6,124
- --------------------------------------------------------------------------------
</TABLE>
[BAR GRAPHS OF 5-YEAR HISTORY FOR TOTAL REVENUES, NET INCOME,
AND NET INCOME PER SHARE APPEAR HERE]
3
<PAGE>
[PICTURE OF MARVIN S. CADWELL, DIRECTOR, PRESIDENT, AND CHIEF EXECUTIVE
OFFICER APPEARS HERE]
TO OUR SHAREHOLDERS
The last year continued to be one of growth, change, and progress for SMS. As
the industry continued to evolve in 1996, we partnered with customers worldwide
to understand their needs, deliver systems and services to address them, and
help customers quickly achieve and sustain value from our solutions. From our
positive financial results to our new solution offerings and ongoing expansion
of our business, SMS continues to lead the global health information systems
industry into the 21st Century.
From a financial standpoint, 1996 was an excellent year for SMS. Our 1996
consolidated gross sales were in excess of $1 billion, which was the highest in
the Company's history. Our 1996 total revenues were $767 million, an increase
of 18 percent compared to 1995. More important, service and system fee revenues,
which excluded hardware sales, increased to $687 million, representing an
increase of 16 percent over 1995. Net income for 1996 increased 18 percent over
1995 to $47 million, and net income per share increased 16 percent over 1995 to
$1.95 per share. Going into 1997, revenues under contract to be recognized in
the future exceed $1.8 billion, which also is the highest in the Company's
history.
Contributing to this strong financial performance was our outstanding level of
customer satisfaction. Customer loyalty and satisfaction led to a customer
retention rate in excess of 99 percent and enabled us to continue to gain market
share worldwide.
SMS extended its reach this year with several exciting advancements. To name a
few, we were
4
<PAGE>
pleased to expand our European operations to customers in Denmark and the island
state of Malta. We also assisted several new customers with advanced outsourcing
agreements in the areas of information technology management and business office
operations.
New SMS solution offerings generated interest in 1996 for customers and
prospects worldwide. We began with the announcement of NOVIUS/TM/, a new family
of client/server solutions, the first of which - Novius.ihn/TM/ -- was
delivered in first quarter 1997 to customer sites. We also introduced new
management solutions that allow health executives to set performance standards,
identify variances, and analyze results online. We announced new client/server
General Financial Systems that have been enthusiastically received by customers.
We also implemented an optical archive storage component to our image management
system that allows for long-term storage of digitized images, such as X rays,
CAT scans, MRIs, and ultrasound images.
We made significant progress this year on a key area for all information
system providers, "century date" compliance. While many of our product lines
already comply with requirements for the new century, SMS is on target with our
plan to make the rest of our products century date compliant to ensure
continuity of service and value for our customers.
In 1996, SMS remained centered on continuous internal improvement and
organizational alignment to mirror the changing needs of the industry. We made
investments to further strengthen our infrastructure, align organization
functions, and revise our incentive structures to better reflect our goals and
objectives.
Our alliances with world-class providers of technology and applications, such
as Microsoft, AT&T, PeopleSoft, Digital, IBM, and others, also enabled SMS to
most effectively meet the needs of our customers. Our relationships with these
leaders enable us to make the best and most cost-effective use of emerging
technologies while bridging current and future solutions for our customers.
In the third quarter, we welcomed Gail R. Wilensky, Ph.D., to the SMS Board of
Directors. Dr. Wilensky's credentials are extensive and include service as the
former Administrator of the Health Care Financing Administration (HCFA). We are
very pleased to have her on our Board.
Our solutions focus continues to reward our shareholders with meaningful
earnings growth; our customers with measurable outcomes; and our employees with
continued opportunity. We view 1997 with optimism and a heightened sense of
purpose - to continue providing solutions that enable us to work with our
customers to improve health worldwide and to increase SMS' value for
shareholders, customers, and employees.
/s/Marvin S. Cadwell
President and
Chief Executive Officer
5
<PAGE>
S O L U
The Solutions Approach
A major public teaching hospital in Ireland. One of the largest national
health "chains" in America. A not-for-profit health services delivery system. An
enterprise linking public hospitals and health centers across the islands of
Malta. A new "health city" in Florida. A major state-wide IHN. These are but a
few examples of customers who looked to SMS for solutions in 1996.
Whether we are working with a small acute care hospital, a home health agency,
a physician network, or a major integrated delivery system, SMS solutions are
all conceived in partnership. Our philosophy is simple: Team with customers from
the start, understand the problems they need to solve, and establish common
goals.
SMS solutions extend far beyond our comprehensive menu of products and
applications. Our solutions are a blend of processes, applications, technology,
and services, synthesized based upon customer need. Our primary interest is to
understand our customers' desired outcomes and partner with them to achieve and
improve results.
A large part of our success can be attributed to our people. SMS employees are
seasoned professionals, many of whom have experience working in the very
environments they now serve. Our employees include former leaders -- CEOs, CIOs,
and CFOs -- of provider organizations; physicians and nurses; other certified
health professionals in areas such as laboratory, radiology, pharmacy, and
medical records; and others who know first-hand the challenges our customers
face.
Our people also understand the need for systems that are user friendly, easy
to access, and intuitive. We are experts at managing technology so customers
can focus their energies on providing care; details such as interfaces, varying
technology platforms, and even disparate systems, become transparent to the
user.
The ability to serve our customers at the point of need has long been
important to us. In addition to our corporate
[CUSTOMER CALL-OUT QUOTE]
"Throughout our 25-year partnership with SMS, many challenges have arisen that
required tremendous teamwork. In August, we decided that incorporating our
ambulatory care facilities into our newly formed Central Business Office was key
to retaining our competitive edge. We challenged SMS to install their ambulatory
care solution in our 27 physician practices and ambulatory care clinics by
December 31. SMS met the challenge. By year-end, every clinic - and our central
operation - was realizing the benefits of a single solution from SMS. This only
shows that through teamwork and true partnership, anything can be accomplished."
Patty Mahaney
Chief Financial Officer
North Broward Hospital District
Ft. Lauderdale, Florida, USA
6
<PAGE>
[PICTORIAL-COLLAGE ART WORK APPEARS HERE]
T I O N S
headquarters, we continue to operate from 28 field locations in the United
States and 17 regional offices in Europe. Our field-based employees are equipped
with "mobile office" technology, which enables them to maximize the time spent
with customers, minimize nonproductive time, and balance both their personal
and professional lives.
Just as we are focused on our customers' outcomes, we are focused on our own
performance as well. Specialized "care plans" ensure we maintain the proper
focus on our customers. Plans are individualized for customers and include
performance objectives and specific activity checkpoints that are defined by
both SMS and the customer. We monitor ourselves against the plan and obtain
additional feedback through regular customer satisfaction surveys and event-
based surveys that give us up-to-the-minute feedback on how we're performing.
This year, we also introduced a new online customer support feature called SMS
Customer Links/TM/ to give customers more advanced support tools. The program
provides customers with the ability to identify and resolve issues, communicate
with others via the Internet, and manage their own service requests online.
SMS' unique blend of processes, applications, technology, and services create
solutions that help health providers throughout the continuum of care from
the clinic to the emergency room, the business office to the bedside, the
physician's office to the home.
7
<PAGE>
S O L U
[CUSTOMER CALL-OUT QUOTE]
"Az SMS partnersege hozzasegit, hogy gyorsabban valaszolhassunk az egeszsegugyi
reform kihivasaira, es elosegiti, hogy a legoptimalisabb megoldasokkal
nezhessunk szembe a jelen es jovobeni feladatokkal."
"With SMS as our partner, we are prepared to react rapidly on health reforms and
are in a position to optimally deal with present and future demands."
Gyorgy Berecz, M.D.
Medical Director
Kenezy Gyula Hospital
Debrecen, Hungary
A Full Spectrum of Solutions
Linking providers and payers through electronic data interchange. Ensuring
clinicians have the tools to simplify work processes and information tracking.
Managing complex networks to ensure a seamless flow of information. Giving
health executives the capability to analyze and track business metrics. Helping
customers manage Internet access and web sites. Reengineering customer business
processes. Every day, SMS provides access to information when and where our
customers need it, thereby helping them manage the business of health.
From every vantage point, SMS delivers innovative offerings that address the
changing needs of the health industry. Our strength lies in our ability to work
with customers to establish desired outcomes and provide a full complement of
processes, applications, technology, and services that will most appropriately
meet their needs.
We provide everything from the performance assessment of existing systems,
networks, and business issues, to applications, installation services, ongoing
support, consulting, and user education. Our applications address broad
requirements: clinical results and orders, diagnostic and therapeutic support,
nursing, critical care, patient registration, medical and document imaging,
scheduling, home health, managed care administration, general financial systems,
human resources and payroll, ambulatory care, management decision systems,
outcomes management, and electronic data interchange - an extensive, but not
exhaustive, list.
[PICTORIAL-COLLAGE ART WORK APPEARS HERE]
8
<PAGE>
T I O N S
Through comprehensive consulting services, we help customers achieve complex
objectives, including process reengineering; facilities management; network
planning, design, installation, and monitoring; systems integration; custom
programming; and Internet/Intranet management.
We also recognize that customers may sometimes require a highly specialized
offering not already provided by SMS. Our Allied Partners Program - which now
includes more than 15 niche solution providers - helps us bring a complete range
of leading solutions to our customers to ensure their needs are met.
Through separate business ventures, SMS meets the diverse business needs of
our customers. SMS subsidiary Healthcare Data Exchange (HDX) provides electronic
data interchange services critical to the managed care environment. Through HDX
services such as Integrated Eligibility and Electronic Remittance, providers and
payers can exchange patient billing information electronically, speeding
processing time and ensuring accuracy. Most important, these services can reduce
risk and save thousands of dollars in the process. In 1996 alone, more than 250
providers and over 100 payers representing more than 110 million covered lives
used the HDX network to process 40 million transactions across multiple managed
care networks in the US.
In another venture, we provide home health solutions through our partnership
in Delta Health Systems. For many of the largest home health agencies in the
country, Delta provides solutions that effectively position home health
providers to compete in a managed care environment. Delta equips clinicians with
notebook computing capabilities that improve the coordination of care among
multiple care-givers, increase productivity, and minimize paperwork for the
agencies.
Customers recognize SMS' expertise in health information solutions, and many
are turning to us for complete outsourcing services in areas such as information
technology (IT) and business office outsourcing. This
[PICTORIAL-COLLAGE ART WORK APPEARS ALONG THE LEFT HAND COLUMN OF THE PAGE]
9
<PAGE>
S O L U T
remains a growing business area for us as more and more customers look for
ways to concentrate their focus on providing care and improving health. In
outsourcing situations, SMS assumes responsibility for the IT function or
business office function at a customer site, managing the staff and handling the
processes, technologies, and workload. In this way, our customers can
concentrate on their primary business of improving health.
With that in mind, our broad range of ongoing support and education services
ensures customers realize the full potential of their SMS investments. In the
interest of serving customers at the point of need, we have five regional
training centers to bring education closer to our customers and minimize cost.
System Optimization Seminars, held regionally throughout the US, provide
targeted training on specific application components. Computer - based training
modules enable customers to purchase training once and use it wherever and
whenever they need it. We also employ video conferencing technology to bring
education to our customers.
[PICTORIAL-COLLAGE ART WORK APPEARS ALONG THE RIGHT-HAND COLUMN OF THE PAGE]
10
<PAGE>
[ART WORK APPEARS HERE]
I O N S
[CUSTOMER CALL-OUT QUOTE]
"Zusammen mit SMS, haben wir die elektronnische patientenakte zur optimierung
unserer patientenprozesse eingefurt. Diese losung hilft uns, unsere
marktposition zu starken und profitabel zu arbeiten."
"Together with SMS, we implemented the electronic patient record in order to
optimize our patient processes. With this solution, we are able to strengthen
our market position and work more profitably."
Friedrich Albes
Chief Executive Officer
Kreiskrankenhauser Sonneberg und Neuhaus GmbH
Sonneberg, Germany
Technology:
A Solutions Enabler
The only certainty with technology is its constant state of change. In the
lifetime of our business, we have seen technologies come and go, and SMS has
mastered the art of managing and harnessing the power of technology as an
enabler for our solutions.
We understand the environments in which technologies are being used and
emphasize design from the perspective of our users. Our customers want a means
to achieve their business objectives without necessarily managing the complex
underpinnings of their networks and systems. They want solutions that offer
seamlessness, integration, and ease-of-use.
SMS is an expert at maximizing the strengths of a variety of technologies to
streamline access for customers. We deliver our solutions via remote, in-house,
or distributed computing networks that employ a combination of client/server,
mainframe, and network technology. In this way, we can leverage the efficiency
and performance of mainframe technology, while taking advantage of the data
presentation and graphical user interface capabilities of client/server
technologies. Ultimately our customers' unique needs define the manner in which
we deliver solutions, and we are committed to providing the appropriate
solutions and technologies to effectively meet their needs.
Varying technologies often coexist and can be used to benefit each other.
Solutions are now being developed independent of technology platform, so SMS
and our customers can continue to take advantage of both past and future
technology investments. Our master people index and clinical repository
capabilities, for instance, are being developed to operate on client/server and
mainframe technologies.
Our network and data management expertise - and our ability to provide
secure, reliable, uninterrupted service - are well
11
<PAGE>
S O L U
known worldwide. SMS supports, with 99.98+% availability, a growing network of
now more than 160,000 wide area network connection points representing a
combination of single and multiple device connections, including servers and
workstations. We process more than 25 million transactions daily, handling over
20 billion characters of information across the largest private health provider
network in North America-designed, managed, and operated by SMS. We operate
similar networks in Europe as well.
Our processors control over 9.2 trillion characters of online disk storage,
the largest online, commercial, real-time health information database in the
world. Continuous investments in our computing and network infrastructure -
including the addition of CMOS processors, fault tolerant networks, and
multiple-level backup systems-ensure continuous operations for our customers.
Internet technology provides "any time, anywhere" user access. Our efforts in
Internet development are now yielding meaningful results, as the Internet
attracts more and more interest from customers. SMS now assists customers in
implementing and managing Internet access. We provide services such as
policy/procedure development, gateway creation, firewall deployment, service
provider setup, and other consulting services. Customers can either choose an
Internet service provider of their choice or can link through our Information
Services Center, a choice that substantially reduces the cost and provides a
fully secure environment in which to access the Internet.
In addition to proficiency in platforms and operating systems, our technology
and networking expertise is undisputed. Our 210 SMS network consultants offer
network assessment, planning, and design; project management; and implementation
and integration services. Through the Network Partners Program, SMS helps our
customers manage and support their private networks, adopt new technologies more
quickly, and handle third-party support for hardware and software. SMS also
provides remote network monitoring services to help
[CUSTOMER CALL-OUT QUOTE]
"SMS is proving to be the leader in providing practical, integrated healthcare
network solutions for today's managed care and quality improvement challenges.
SMS is providing the right solutions at the right time."
Jim Miller
Executive Vice President and
Chief Financial Officer
Washoe Health System
Reno, Nevada, USA
"Our organization's investment in information technology is the single largest
strategic initiative we have before our Board. SMS has been a key partner in
helping Carle decide our future of digitized information transfer."
Robert Parker, M.D.
Chief Executive Officer
Carle Clinic Association
Champagne-Urbana, Illinois, USA
12
<PAGE>
T I O N S
[PICTORIAL-COLLAGE ART WORK APPEARS HERE]
customers reduce staffing costs and the complications associated with network
operations.
An important part of our technology solutions are our partnerships with other
global leaders in technology. We team with such world-class corporations as
Microsoft, AT&T, IBM, Digital, CISCO, and many others to bring superior
technology solutions to our customers.
It is SMS' ability to work with ease on multiple technologies that allows us
to maintain focus on customers' goals and deliver superior, cost-effective
information solutions based on a variety of technologies.
Investment in Our Future
SMS shares a vision with our customers-to work together to improve health
worldwide. As proof positive, we invest significant time and money in giving
back to the industry so that best practices can be shared among our customers.
What's the value? Our record of success shows that what is good for the customer
is good for SMS. Understanding the important issues and providing appropriate
solutions for our customers lead to higher levels of customer satisfaction,
retention, and sales.
A clear indication of our continued investment in the industry is our long-
standing commitment to research and development. SMS makes significant
investments in researching new technologies, developing uses for technological
[ART WORK APPEARS HERE]
13
<PAGE>
[ART WORK APPEARS HERE]
S O L U
advancements, building and improving information infrastructures, and enhancing
information networks through high-speed, state-of-the-art technologies.
We continue to investigate a variety of emerging technologies, many of which
are already in use or testing at SMS customer sites. SMS already provides, for
example, wireless network solutions to numerous customers in the US. These
networks allow mobile access to information, thereby enhancing the ability to
interact with information. In addition, we are exploring biometric identifi-
cation technologies, such as fingerprint and signature recognition, which will
help increase safety and security for both providers and patients.
SMS also makes a significant investment in industry standards development. We
participate on nearly 80 standards boards that span the globe, actively leading
the effort to establish standards for the health industry worldwide. These
groups are critical as we experience the integration and "globalization" of
health. They set standards for how we communicate across different cultures,
technologies, and languages, and help maximize the opportunities to improve all
aspects of health worldwide.
One key example of our participation is our leadership on a committee that is
advancing standards for clinical knowledge bases and rules engines-the Health
Knowledge Representation (Arden Syntax) subcommittee of the American Society for
Testing and Materials (ASTM).
We invest in our customers and their success through a number of health
industry management and user groups. SMS customers worldwide have increased
participation in these groups, recognizing the importance of
[CUSTOMER CALL-OUT QUOTE APPEARS HERE]
"The hospital's policy of utilizing information technology to provide optimum
patient care has been significantly enhanced and supported by our working
partnership with SMS to develop, implement, and provide systems that reflect the
real needs of clinical nursing, paramedical, and administrative staff in the
acute hospital environment."
Joe Ennis, M.D., FRCPI, SRCP
Professor of Radiology
Mater Misericordiae Hospital
Dublin, Ireland
14
<PAGE>
T I O N S
sharing best practices industry wide. We also conduct industry conferences to
provide customers with opportunities to exchange ideas. Through several
executive forums throughout the year, SMS brings together the leaders of our
customer organizations along with health industry experts to focus on emerging
management, economic, and delivery issues facing the health industry today.
Through continued investment in research and development, exploration of
emerging technologies, participation and leadership on standards boards, and
ongoing investment in our customers' interests, SMS demonstrates its commitment
to our vision of improving health worldwide.
[PICTORIAL-COLLAGE ART WORK APPEARS ALONG THE LEFT SIDE OF THE PAGE]
15
<PAGE>
[CUSTOMER CALL-OUT QUOTE]
"To do something better for our communities-that's what the partnership
between SMS and WJHS is all about. We have a shared vision of creating
excellence, building a healthier community, forging long-term relationships,
and focusing on customers."
Richard Miller
President and Chief Executive Officer
West Jersey Health System
Camden, New Jersey, USA
Value Over Time
Whether we are serving customers in Italy, Ireland, France, the USA, Hungary,
or beyond, our goals remain the same: to partner with our customers to
understand their business issues and provide effective solutions focused on
desired outcomes.
As the global health industry evolves, integrated information solutions will
play an increasingly important role in terms of controlling costs, measuring
outcomes, and improving health. In the US, the managed care movement is shaping
health industry direction, and integrated delivery systems and health chains
will continue to experience rapid growth. Furthermore, information solutions
will be in even greater demand as decisions are made regarding the future of
Medicare and Medicaid. The health industry in Europe and beyond is also
experiencing change, and we are seeing increased interest and movement toward
managed health.
Globally, the health industry urgently needs performance-focused information
solutions, and SMS is best positioned to provide them. We are already the
dominant solutions provider internationally, providing solutions to more
customers in more countries than any single organization, and we expect that
position to serve us well as new opportunities unfold. In fact, we believe we
have only just begun to see the many possibilities that await us
internationally, and we look forward to exploring future prospects.
SMS remains focused on achieving consistent and sustainable growth resulting
from our emphasis on providing solutions to achieve customer outcomes. Our
well-charted course, combined with the depth and breadth of our offerings, the
experience and dedication of our people, the attention to customers and their
needs, and our overall focus on excellence have led to SMS' leadership in the
global health information systems industry.
We remain enthusiastic and confident about our continued opportunity to be the
company of choice for the health industry and its professionals worldwide,
improving value for our shareholders, our customers, and our employees.
[ART WORK APPEARS HERE]
16
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Financial Statements
<TABLE>
<CAPTION>
Index
- --------------------------------------------------------------------------------
<S> <C>
Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
- --------------------------------------------------------------------------------
Cautionary Note Regarding Forward-Looking Statements 22
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Results of Operations - Overview
The Company's only line of business is providing information service and
system solutions to health organizations, such as integrated health networks,
multientity health corporations, community health information networks,
hospitals, physician groups, and other health providers in North America and
Europe.
The Company's revenues are derived from service and system fees for computer-
based information systems, and related professional services. Professional
services consist of a variety of activities related to the Company's information
processing systems, such as system installation and support, software and
network customization, information system planning and integration, business
office consulting, facilities management, and customer education. The remainder
of the Company's revenues are primarily generated from sales of computer
hardware. 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 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. Depending on the
type of system or service selected, equipment utilized by the customer can be
provided by the Company under long-term lease or sales agreements.
As the information processing requirements of the health industry have
continued to grow, the business of providing information solutions has become
more complex. Additionally, changes in the way health organizations are
structured and reimbursed, combined with pressures to control costs, improve
quality, and grow market share have created new and increased demands for the
Company's services and systems.
The majority of the Company's business is focused on providing services to
customers through long-term service contracts. These 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. The Company has increased
some of its prices under these contract provisions. Revenues under long-term
service agreements are recognized as they are earned over the life of the
contract.
A substantial portion of service revenues under long-term contracts are
recognized after installation is complete, as contrasted to perpetual license
arrangements where revenue recognition generally ends upon completion of the
installation. This is an important distinction when comparing the Company's
reported revenues with companies that provide software to their customers
primarily under perpetual licenses. Such companies generally recognize revenues
for software licenses and related installation activity, if any, during the
course of the customer's installation. These revenues, excluding support fees,
are mostly non-recurring.
The Company has maintained a significant amount of revenues that will be
realized in the future as installation work is completed and processing services
are performed. Management estimates the total amount of future revenues under
contract at December 31, 1996 is in excess of $1.8 billion.
Results of Operations for 1996 Compared to 1995
In 1996, revenues grew 17.9%, to $767,350,000, compared to 1995. Net income
and net income per share for the year ended December 31, 1996 were $47,038,000
and $1.95, respectively, an increase of 18.2% and 16.1%, respectively, compared
to 1995.
. Service and system fees revenues were $686,655,000, an increase of 15.9% in
1996 compared to 1995. This increase was primarily due to higher levels of
professional services, system processing fees, and system fees.
The higher level of professional services was generally attributable to
system installations, support, and facilities management fees. The increase
in system processing fees was primarily due to the higher level of customer
applications processed at the Company's Information Services Center. The
increase in system fees was due to the installation of systems to existing
customers already under contract and the sale of new and add-on systems
during the current year.
18
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Analysis of Changes in Consolidated Cost and Expenses
(Amounts in thousands)
- --------------------------------------------------------------------------------
Change Change
from from
1996 Prior Year 1995 Prior Year 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating and development.. $328,475 $45,712 $282,763 $47,788 $234,975
Percentage of service and
system fees revenues..... 47.8% 47.7% 46.6%
Marketing and installation. 230,368 30,177 200,191 29,250 170,941
Percentage of service and
system fees revenues..... 33.6% 33.8% 33.9%
General and administrative. 60,065 8,446 51,619 4,111 47,508
Percentage of service and
system fees revenues..... 8.8% 8.7% 9.4%
Interest................... 3,589 613 2,976 1,533 1,443
Percentage of service and
system fees revenues..... 0.5% 0.5% 0.3%
---------------------------------------------------
Total.................... $622,497 $84,948 $537,549 $82,682 $454,867
===================================================
Percentage of service
and system fees
revenues............... 90.7% 90.7% 90.2%
===================================================
- --------------------------------------------------------------------------------
Cost of hardware sales..... $68,493 $20,621 $47,872 $9,510 $38,362
===================================================
Percentage of hardware
sales revenues........... 84.9% 82.4% 82.7%
===================================================
- --------------------------------------------------------------------------------
</TABLE>
. Hardware sales revenues increased to $80,695,000 in 1996 from $8,132,000 in
1995, primarily due to the installation of IBM mainframe systems to new and
existing customers that process the Company's INVISION(R) product at their
sites, and changes in the timing and product mix of systems installed.
. Operating and development expenses increased to 47.8% of service and system
fees revenues in 1996 from 47.7% in 1995. This change was primarily due to
increases in certain customer-related expenses, partially offset by
efficiencies gained through decreased computer hardware and associated costs
at the Company's Information Services Center.
. Marketing and installation expenses decreased to 33.6% of service and system
fees revenues in 1996 from 33.8% in 1995, primarily due to a slower rate of
growth for personnel and related costs as compared to the growth in service
and system fees revenues, partially offset by increased costs for certain
customer-related expenses caused by higher levels of system installations and
support services provided to customers.
. General and administrative expenses, as a percentage of service and system
fees revenues, increased to 8.8% in 1996 from 8.7% in 1995. This change was
primarily attributable to increased personnel and related costs to support
the business.
. Interest expense was $3,589,000 in 1996 compared to $2,976,000 in 1995. This
change was primarily due to a higher level of outstanding borrowings in 1996
compared to 1995, which was partially attributable to funds used to acquire
businesses in June and September 1995.
. Cost of hardware sales increased to 84.9% of hardware sales revenues in 1996
from 82.4% in 1995. This change was primarily due to the different product
mixes of systems installed in each year.
. Income taxes increased $3,885,000 in 1996 when compared to 1995. This change
was primarily due to an increase of $11,140,000 in income before income
taxes. The Company's effective rate for federal, state, and foreign income
taxes was 38.4% in 1996 and 39.0% in 1995. The change in the effective tax
rate was primarily due to a decrease in the Company's effective state income
tax rate.
19
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
- --------------------------------------------------------------------------------
Results of Operations for 1995 Compared to 1994
In 1995, revenues grew 18.1%, to $650,641,000, compared to 1994. Net income
was $39,783,000 and net income per share was $1.68 for the year ended December
31, 1995, which represented increases of 13.3% and 11.3%, respectively, compared
to 1994.
. Service and system fees revenues were $592,509,000, an increase of 17.5% in
1995 compared to 1994. This increase was primarily due to higher levels of
professional services, system processing fees, and system fees. Also
affecting the change were revenues associated with the Company's MedSeries4
Division, which was acquired and recorded as a purchase on September 30,
1994; the acquisitions of two businesses in Europe during 1995, both of which
were recorded as a purchase; and a weaker US dollar relative to certain
European exchange rates in 1995 compared to 1994.
The higher level of professional services was generally attributable to
system support, installations, and consulting fees. The increase in system
processing fees was primarily due to the higher level of customer
applications processed at the Company's Information Services Center.
. Hardware sales revenues increased to $58,132,000 in 1995 from $46,383,000 in
1994, primarily due to the change in the timing and product mix of systems
installed.
. Operating and development expenses increased to 47.7% of service and system
fees revenues in 1995 from 46.6% in 1994. This increase was primarily due to
increased computer hardware and associated costs related to the higher levels
of system processing services provided to customers by the Company's
Information Services Center, and the addition of new operations in Europe.
. Marketing and installation expenses decreased to 33.8% of service and system
fees revenues in 1995 from 33.9% in 1994, primarily due to improved
efficiency in providing installations and support services to customers, and
the Company's ongoing efforts to control certain marketing and installation
costs.
. General and administrative expenses, as a percentage of service and system
fees revenues, decreased to 8.7% in 1995 from 9.4% in 1994, primarily due to
the Company's ongoing efforts to control administrative costs.
. Interest expense was $2,976,000 in 1995 compared to $1,443,000 in 1994. This
change was primarily due to a higher level of outstanding short-term
borrowings, which was partially attributable to funds used to acquire
businesses in 1995 and 1994.
. Cost of hardware sales decreased to 82.4% of hardware sales revenues in 1995
from 82.7% in 1994. This change was primarily due to the different product
mixes of systems installed in each year.
. Income taxes increased $2,996,000 in 1995 when compared to 1994. This change
was due to an increase of $7,680,000 in income before income taxes. The
Company's effective tax rate for federal, state, and foreign income taxes was
39.0% in 1995 and 1994.
Inflation
Significant portions of the Company's expenses are inflation sensitive. Rising
costs for the years ended December 31, 1996, 1995, and 1994 have been partially
offset by increased employee and computer productivity.
20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
The Company's financial position remained strong in 1996. Total assets
increased from $380,065,000 at January 1, 1995 to $499,431,000 at December 31,
1996. Stockholders' investment increased from $219,196,000 to $281,227,000 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 with short-term and long-term borrowings. The
major uses of funds during this period were for investments in computer
equipment and software, the payment of quarterly dividends, and the acquisition
of businesses. At December 31, 1996, cash and short-term investments were
$36,570,000 compared to $21,249,000 at January 1, 1995.
Net cash flows from operating activities increased to $72,828,000 in 1996
compared to $38,294,000 in 1995. This change in cash flows was primarily due to
the growth of deferred revenues of $22,698,000, reductions in prepaid expenses
and other current assets of $9,324,000, and the increase in net income, adjusted
for non-cash expenses such as depreciation and amortization, of $8,876,000. The
growth in deferred revenues was primarily due to an increase in payments
received in advance of services performed by the Company. The change in prepaid
expenses and other current assets was primarily caused by a reduction in cash
requirements for deferred equipment expenses associated with customer
installations. Deferred equipment expenses can vary due to differences in the
timing of system installations. These increases in cash flows were partially
offset by accounts receivable growth of $5,426,000, which was caused by higher
business levels and greater amounts of revenues recognized that are
contractually billable in future periods.
Net cash flows from operating activities decreased to $38,294,000 in 1995
compared to $46,932,000 in 1994. This change was primarily due to an increase in
the growth of accounts receivable of $12,719,000 and prepaid expenses and other
current assets of $7,327,000. The growth in accounts receivable was caused by
higher business levels and greater amounts of revenues recognized which are
contractually billable in future periods. The increase in prepaid expenses and
other current assets was primarily related to deferred equipment expenses
associated with upcoming customer installations. These reductions in cash flows
were partially offset by the increase in net income, adjusted for non-cash
expenses such as depreciation and amortization, of $9,329,000.
The Company's investing activities were $46,425,000, $44,248,000, and
$49,664,000 in 1996, 1995, and 1994, respectively. During this period, the
Company's investments were primarily for equipment, computer software, and
business acquisitions.
The following summarizes the Company's significant investments in computer
software and equipment for the three-year period ended December 31, 1996:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
(Amounts in thousands) 1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
In-house computer and network
communications equipment...... $17,205 $11,514 $14,093
Capitalized internally
produced software............. 11,250 8,850 8,725
Purchased software............. 7,552 4,984 4,349
- ----------------------------------------------------------
</TABLE>
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. Capitalized internally produced software and purchased
software expenditures can fluctuate based on business decisions regarding the
scope and timing of internal development projects and third-party agreements.
21
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
- --------------------------------------------------------------------------------
Additionally, the Company invested in the following during the three-year
period ended December 31, 1996:
. In 1995, the Company purchased Professional Datacare (PDC), a provider of
processing services to health organizations in the United Kingdom, for
$8,497,000, and the health division of Atlas Datensysteme GmbH (ADS), a
provider of patient management and financial systems in Germany, for
$3,611,000. These acquisitions were financed primarily through long-term
borrowings.
. In 1994, the Company acquired all of the outstanding capital stock of GTE
Health Systems Incorporated, which became the Company's MedSeries4 Division,
a provider of information systems to the US health industry, for $17,287,000.
The most significant use of cash for financing activities for each of the
three years in the period ended December 31, 1996 was for the payment of common
stock dividends, which were $19,685,000 in 1996, $19,404,000 in 1995, and
$19,192,000 in 1994. The most significant source of cash provided by financing
activities was from the exercise of stock options, which were $8,676,000 in
1996, $7,199,000 in 1995, and $3,538,000 in 1994; and short-term and long-term
borrowings of $23,715,000 and $6,553,000 in 1995 and 1994, 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 - During 1997, the Company anticipates that capital expenditures
for equipment will be in line with expenditures in recent years. Factors such
as business activity levels, buy versus lease decisions, and vendor pricing
will continue to affect capital equipment expenditures.
. Dividends - During each of the three years in the period ended December 31,
1996, 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 $21,000,000 in dividends
in 1997.
. Stock repurchase - The Company's Board of Directors has authorized the
repurchase of up to 5,000,000 shares of the Company's common stock. As of
December 31, 1996, 2,873,500 shares, at a cumulative cost of $54,325,000,
have been repurchased. No shares were repurchased under this plan during the
three-year period ended December 31, 1996.
The Company expects to finance most of its capital requirements with
internally generated funds, supplemented from time to time with short-term
borrowings. Currently, the Company has lines of credit with banks, primarily at
their prime interest rates, of approximately $72,500,000. At December 31, 1996,
approximately $50,500,000 of these lines of credit were unused.
- --------------------------------------------------------------------------------
Cautionary Note Regarding Forward-Looking Statements
- --------------------------------------------------------------------------------
This Annual Report contains forward-looking statements. 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 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 or bugs 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; inability to successfully integrate acquired
business operations; changes in economic, political, and regulatory conditions
in the health industry; regulation of additional products as medical devices by
the federal Food and Drug Administration; and fluctuations in foreign
currencies, interest rates, and taxes.
22
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Selected Financial Data
(Amounts in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
Summary of Consolidated Operations
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues..................................................... $767,350 $650,641 $350,769 $501,283 $469,624
Cost and Expenses............................................ $690,990 $585,421 $493,229 $449,605 $424,578
Income Before Income Taxes................................... $ 76,360 $ 65,220 $ 57,540 $ 51,678 $ 45,046
Income Taxes................................................. $ 29,322 $ 25,437 $ 22,441 $ 20,665 $ 16,667
Net Income................................................... $ 47,038 $ 39,783 $ 35,099 $ 31,013 $ 28,379
Net Income Per Share......................................... $ 1.95 $ 1.68 $ 1.51 $ 1.35 $ 1.24
Weighted Average Common Shares............................... 24.128 23.697 23.280 23.046 22.880
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Summary of Consolidated Financial Position
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current Assets............................................... $271,033 $220,605 $177,478 $165,536 $156,428
Total Assets................................................. $499,431 $434,973 $380,065 $341,442 $305,604
Current Liabilities.......................................... $167,741 $132,699 $116,847 $ 92,840 $ 87,944
Long-Term Debt and Capital Leases............................ $ 15,361 $ 16,960 $ 4,974 $ 6,395 $ 2,291
Total Liabilities............................................ $218,204 $186,153 $160,869 $143,236 $119,008
Stockholders' Investment..................................... $281,227 $248,820 $219,196 $198,206 $186,596
Common Shares Outstanding.................................... 23.545 23.261 22.943 22.753 22.566
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Operating Ratios and Other Selected Financial Data
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Margin............................................. 9.3% 9.3% 9.8% 9.2% 8.2%
Hardware Margin.............................................. 15.1% 17.6% 17.3% 20.4% 21.9%
Pretax Margin................................................ 10.0% 10.0% 10.4% 10.3% 9.6%
Net Margin................................................... 6.1% 6.1% 6.4% 6.2% 6.0%
Effective Tax Rate........................................... 38.4% 39.0% 39.0% 40.0% 37.0%
Return on Average Investment................................. 17.7% 17.0% 16.8% 16.1% 15.6%
Working Capital.............................................. $103,292 $ 87,906 $ 60,631 $ 72,696 $ 68,484
Current Ratio................................................ 1.62:1 1.66:1 1.52:1 1.78:1 1.78:1
Stockholders' Investment Per Share........................... $ 11.94 $ 10.70 $ 9.55 $ 8.71 $ 8.27
Cash Dividends Declared Compared to Prior Year's Net Income.. 49.6% 55.5% 62.0% 67.0% 74.8%
Cash Dividends Declared Per Share............................ $ .84 $ .84 $ .84 $ .84 $ .84
Depreciation and Amortization................................ $ 38,388 $ 36,767 $ 32,122 $ 30,815 $ 29,617
Research and Development..................................... $ 54,665 $ 45,385 $ 39,226 $ 37,087 $ 33,703
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Market Price and Dividends Declared Per Share *
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Quarter
High...................................................... $ 62 7/8 $ 37 7/8 $ 29 3/8 $ 24 3/8 $ 24 3/8
Low....................................................... $ 47 7/8 $ 30 7/8 $ 23 5/8 $ 20 3/4 $ 19 1/4
Dividends Declared........................................ $ .21 $ .21 $ .21 $ .21 $ .21
Second Quarter
High...................................................... $ 72 1/8 $ 41 1/2 $ 28 1/4 $ 23 7/8 $ 20 5/8
Low....................................................... $ 59 1/4 $ 32 $ 22 1/8 $ 19 1/2 $ 16 7/8
Dividends Declared........................................ $ .21 $ .21 $ .21 $ .21 $ .21
Third Quarter
High...................................................... $ 66 3/4 $ 42 3/4 $ 28 1/2 $ 24 1/2 $ 22 3/8
Low....................................................... $ 43 3/4 $ 35 5/8 $ 22 3/4 $ 17 1/2 $ 17 3/4
Dividends Declared........................................ $ .21 $ .21 $ .21 $ .21 $ .21
Fourth Quarter
High...................................................... $ 58 3/4 $ 57 5/8 $ 34 1/2 $ 26 $ 22 3/4
Low....................................................... $ 42 1/4 $ 37 3/8 $ 25 3/8 $ 21 1/2 $ 19 7/8
Dividends Declared........................................ $ .21 $ .21 $ .21 $ .21 $ .21
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* As of December 31, 1996, there were 5,955 stockholders of record and
approximately 10,900 beneficial holders of the Company's common stock. The
Company's common stock trades on The Nasdaq Stock Market under the symbol SMED.
The prices shown in the table above are the high and low transaction prices as
quoted in the Nasdaq National Market.
23
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Consolidated Balance Sheet
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and short-term investments....................... $ 36,570 $ 23,310
Accounts receivable, net.............................. 209,512 171,320
Prepaid expenses and other current assets............. 24,951 25,975
--------------------
Total Current Assets................................. 271,033 220,605
Property and Equipment, net............................ 102,532 101,164
Computer Software, net................................. 51,331 42,955
Other Assets........................................... 74,535 70,249
--------------------
$499,431 $434,973
====================
Liabilities and Stockholders' Investment
Current Liabilities:
Notes payable......................................... $ 21,941 $ 20,920
Current portion of long-term debt and capital leases.. 3,166 4,654
Dividends payable..................................... 4,944 4,885
Accounts payable...................................... 27,039 28,301
Accrued expenses...................................... 54,092 39,469
Current deferred revenues............................. 41,697 23,557
Accrued and current deferred income taxes............. 14,862 10,913
--------------------
Total Current Liabilities............................ 167,741 132,699
--------------------
Deferred Revenues...................................... 9,048 13,209
--------------------
Long-Term Debt and Capital Leases...................... 15,361 16,960
--------------------
Deferred Income Taxes.................................. 26,054 23,285
--------------------
Commitments
Stockholders' Investment:
Preferred stock, par value $.10; authorized 1,000,000
shares; none issued.................................. - -
Common stock, par value $.01; authorized 60,000,000
shares; 27,580,008 shares
issued in 1996 and 27,288,942 in 1995................ 276 273
Paid-in capital....................................... 48,234 39,561
Retained earnings..................................... 292,304 265,010
Common stock in treasury, at cost, 4,035,101 shares
in 1996 and 4,027,815 in 1995........................ (55,782) (55,286)
Cumulative translation adjustment..................... (3,805) (738)
---------------------
Total Stockholders' Investment....................... 281,227 248,820
---------------------
$499,431 $434,973
=====================
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Consolidated Statement of Income
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Service and system fees....................... $686,655 $592,509 $504,386
Hardware sales................................ 80,695 58,132 46,383
------------------------------
767,350 650,641 550,769
------------------------------
Cost and Expenses:
Operating and development..................... 328,475 282,763 234,975
Marketing and installation.................... 230,368 200,191 170,941
General and administrative.................... 60,065 51,619 47,508
Cost of hardware sales........................ 68,493 47,872 38,362
Interest...................................... 3,589 2,976 1,443
------------------------------
690,990 585,421 493,229
------------------------------
Income Before Income Taxes..................... 76,360 65,220 57,540
Provision for Income Taxes..................... 29,322 25,437 22,441
------------------------------
Net Income..................................... $ 47,038 $ 39,783 $ 35,099
==============================
Net Income Per Common Share.................... $1.95 $1.68 $1.51
==============================
Number of shares used to compute per share
amounts....................................... 24,128 23,697 23,280
==============================
- --------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Consolidated Statement of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.................................... $ 47,038 $ 39,783 $ 35,099
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization............... 38,388 36,767 32,122
Asset (increase) decrease -
Accounts receivable....................... (38,192) (32,766) (20,047)
Prepaid expenses and other current assets 1,024 (8,300) (973)
Other assets.............................. (6,290) (1,960) (5,321)
Liability increase (decrease) -
Accounts payable and accrued expenses..... 13,361 5,948 11,585
Accrued and current deferred income taxes. 3,949 4,322 (788)
Deferred revenues......................... 13,979 (8,719) (4,977)
Deferred income taxes..................... 2,769 1,589 (686)
Other....................................... (3,198) 1,630 918
-------------------------------
Net cash provided by operating
activities............................... 72,828 38,294 46,932
-------------------------------
Cash Flows from Investing Activities:
Property and equipment additions.............. (28,232) (18,764) (20,328)
Investment in computer software............... (18,802) (13,834) (13,074)
Dispositions of equipment..................... 609 458 1,025
Acquisition of businesses..................... - (12,108) (17,287)
-------------------------------
Net cash used for investing activities.... (46,425) (44,248) (49,664)
-------------------------------
Cash Flows from Financing Activities:
Dividends paid................................ (19,685) (19,404) (19,192)
Exercise of stock options..................... 8,676 7,199 3,538
Increase in notes payable..................... 1,021 8,537 6,553
Proceeds from long-term debt.................. - 15,178 -
Payments of long-term debt and capital lease
obligations.................................. (2,659) (3,325) (2,576)
Change in treasury stock...................... (496) (170) (168)
-------------------------------
Net cash (used for) provided by
financing activities.................... (13,143) 8,015 (11,845)
-------------------------------
Net Increase (Decrease) in Cash and
Short-Term Investments....................... 13,260 2,061 (14,577)
Cash and Short-Term Investments, Beginning of
Year......................................... 23,310 21,249 35,826
-------------------------------
Cash and Short-Term Investments, End of Year $ 36,570 $ 23,310 $ 21,249
===============================
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Consolidated Statement of Stockholders' Investment
For the Years Ended December 31, 1996, 1995, and 1994 (Amounts in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Cumulative
Common Stock Paid-in Retained Treasury Translation
-----------------
Shares Par Value Capital Earnings Stock Adjustment
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 26,771 $268 $28,829 $228,831 $(54,948) $(4,774)
Common stock transactions -
Exercise of stock options and grant
of restricted shares................ 194 2 2,622 (132)
Employee stock purchase plan......... (36)
Tax benefit from the exercise of
non-qualified stock options and
vesting of restricted shares........ 914
Dividends on common stock
($.84 per share)..................... (19,232)
Net income............................ 35,099
Translation adjustment................ 1,753
-------------------------------------------------------------
Balance, December 31, 1994............. 26,965 270 32,365 244,698 (55,116) (3,021)
Common stock transactions -
Exercise of stock options and grant
of restricted shares................ 324 3 4,544 (126)
Employee stock purchase plan......... (44)
Tax benefit from the exercise of
non-qualified stock options and
vesting of restricted shares........ 2,652
Dividends on common stock
($.84 per share)..................... (19,471)
Net income............................ 39,783
Translation adjustment................ 2,283
-------------------------------------------------------------
Balance, December 31, 1995............. 27,289 273 39,561 265,010 (55,286) (738)
Common stock transactions -
Exercise of stock options and grant
of restricted shares................ 291 3 4,354 (507)
Employee stock purchase plan......... 11
Tax benefit from the exercise of
non-qualified stock options and
vesting of restricted shares........ 4,319
Dividends on common stock
($.84 per share)..................... (19,744)
Net income............................ 47,038
Translation adjustment................ (3,067)
-------------------------------------------------------------
Balance, December 31, 1996............. 27,580 $276 $48,234 $292,304 $(55,782) $(3,805)
=============================================================
- ------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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. The Company's
investment in Delta Health Systems, a 50%-owned affiliate, is 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 those
estimates.
Recognition of Revenues - The Company's services and systems are provided
based upon contractual agreements. Service revenues, which include processing
and professional service fees, are recorded in the period in which the services
are performed. Service contracts have terms that range from one to ten years.
System fees consisting of software applications provided under perpetual
licensing agreements are recognized, when collection is deemed probable,
primarily over the system's installation period in order to properly match
revenues with expenses incurred. All service and system fees are billable
according to the terms in each customer contract. Hardware sales are recognized
and invoiced generally upon installation of the equipment at the customer site.
Current and noncurrent deferred revenues totaling $50,745,000 at December 31,
1996 and $36,766,000 at December 31, 1995, 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 $215,000
in 1996, $319,000 in 1995, and $484,000 in 1994.
Accounts Receivable - Accounts receivable consists primarily of unsecured
amounts due from the Company's customers. Included in accounts receivable at
December 31, 1996 and 1995 were unbilled revenues recognized under certain long-
term software license, installation, and hardware contracts of $89,480,000 and
$64,068,000, 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 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, 1996 and 1995,
the allowance for doubtful accounts was $6,594,000 and $4,847,000, respectively.
The Company has provided long-term financing arrangements for systems and
hardware to some of its customers. Some of these long-term financing
arrangements are partially collateralized by customer equipment. The long-term
portion of these financing arrangements, which are included in other assets,
have terms ranging from three to ten years and bear 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 $28,452,000 and
$24,262,000 at December 31, 1996 and 1995, respectively. Interest income earned
on long-term financing arrangements was $2,364,000, $2,184,000, and $2,018,000
in 1996, 1995, and 1994, 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 $9,113,000 at December 31, 1996 and
$10,745,000 at December 31, 1995, representing the cost of equipment that will
be expensed when the related hardware revenues are earned.
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 being depreciated using a 45-
year life. The major classes of property and equipment at December 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------
(Amounts in thousands) 1996 1995
- -----------------------------------------------------
<S> <C> <C>
Land and land improvement........ $ 11,630 $ 10,719
Buildings........................ 61,993 60,597
Equipment........................ 181,786 172,335
------------------
255,409 243,651
Less: accumulated depreciation
and amortization............... 152,877 142,487
------------------
$102,532 $101,164
==================
- -----------------------------------------------------
</TABLE>
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 produced computer
software. These expenses, which were 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.
Computer Software - 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 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, and $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. The accumulated amortization for
computer software at December 31, 1996 and 1995 was $55,016,000 and $45,317,000,
respectively.
Acquisition of Businesses - On June 1, 1995, the Company acquired the assets
and business of Professional Datacare (PDC), a provider of financial processing
services, from the National Health Service's North West Regional Health
Authority in the United Kingdom for $8,497,000. On September 1, 1995, the
Company acquired the assets and business of Atlas Datensysteme GmbH (ADS), a
provider of patient management and financial systems in Germany, for $3,611,000.
These acquisitions were accounted for using the purchase method. PDC's and ADS'
results of operations have been included in the Company's consolidated results
of operations since their respective dates of acquisition.
On September 30, 1994, the Company acquired all of the outstanding capital
stock of GTE Health Systems Incorporated, a provider of information systems to
the domestic health industry, from GTE Directories Corporation for $17,287,000.
This acquisition was accounted for using the purchase method.
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. Goodwill is amortized using the straight-line method over 20
years. Goodwill included in other assets, net of accumulated amortization, was
$28,358,000 and $30,346,000 as of December 31, 1996 and 1995, respectively.
Accrued Expenses - Included in accrued expenses are incentive compensation
plan accruals of $21,653,000 at December 31, 1996 and $17,485,000 at December
31, 1995. Incentive compensation plan payments are primarily based on sales and
revenues generated from the signing of new and renewal contracts. Accrual
balances for incentive compensation plans can vary based on the timing of
revenues recognized, draws, and related settlements.
29
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
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 depreciation and the cost of capitalized internally
produced computer software) for tax and financial reporting purposes.
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. There were no material gains or
losses arising from foreign currency transactions during 1996, 1995, and 1994.
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, 1996 and 1995, the carrying
amount of cash and short-term investments approximates fair value. The Company
paid income taxes, net of refunds, of $17,984,000 in 1996, $16,397,000 in 1995,
and $23,018,000 in 1994. During the same periods, interest payments were
$3,131,000, $2,853,000, and $1,404,000, respectively. Capital lease obligations
of $1,917,000, and $1,822,000 were added by the Company in 1995 and 1994,
respectively.
2. Net Income Per Common Share:
For each of the three years in the period ended December 31, 1996, net income
per common share was computed using the weighted average number of shares of
common stock and common stock equivalents outstanding. Common stock equivalents
result from the assumed exercise of stock options. Primary income per share and
fully diluted income per share were the same in each period.
3. Income Taxes:
The provision for income taxes consisted of:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(Amounts in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current........................................ $20,492 $17,900 $17,131
Current deferred............................... 3,111 3,277 3,495
Noncurrent deferred............................ 2,425 1,438 (578)
-------------------------
26,028 22,615 20,048
-------------------------
State and foreign:
Current........................................ 2,587 2,288 2,226
Current deferred............................... 362 383 275
Noncurrent deferred............................ 345 151 (108)
-------------------------
3,294 2,822 2,393
-------------------------
Provision for
income taxes................................... $29,322 $25,437 $22,441
=========================
- --------------------------------------------------------------------------------
</TABLE>
The provision for income taxes resulted in effective tax rates for the years
ended December 31, 1996, 1995, and 1994, which differ from the statutory federal
income tax rate as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Percentage of Income
------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate.................. 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit........................ 2.3 2.6 2.7
Other.............................................. 1.1 1.4 1.3
-----------------------
38.4% 39.0% 39.0%
=======================
- --------------------------------------------------------------------------------
</TABLE>
The significant components of the combined current and noncurrent net deferred
tax liability for the years ended December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(Amounts in thousands) 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Capitalized internally produced software........... $13,153 $11,999
Depreciation and amortization...................... 10,228 10,432
Accrued and deferred revenues, net................. 9,464 5,675
Other temporary differences........................ 4,748 3,244
-----------------
$37,593 $31,350
=================
- ------------------------------------------------------------------------
</TABLE>
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At December 31, 1996 the Company had foreign net operating loss carryforwards
of approximately $8,400,000, most of which can be carried forward indefinitely.
The Company also has approximately $9,800,000 of tax basis in excess of book
value, which may be utilized to offset taxable income in the future. Due to
their contingent nature, the related 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
$16,136,000 at December 31, 1996.
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 certain portion of
employee contributions under the plan. The Company's matching contributions
charged to expenses in 1996, 1995, and 1994 were $3,300,000, $3,025,000, and
$2,096,000, 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.
During 1987 and 1988, the Board adopted resolutions authorizing, but not
requiring, the Company to repurchase up to a total of 5,000,000 shares of its
common stock from time to time. As of December 31, 1996, 2,873,500 shares had
been acquired, at a cumulative cost of $54,325,000. During 1996, 1995, and 1994
no additional shares were repurchased under these resolutions.
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, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
6. Stock Options:
The Company has issued stock options to key employees and non-employee
directors under various non-qualified 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 are exercisable at prices equal to the fair market value of the
Company's common stock on the date of grant.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" and related
interpretations to account for its stock options. Accordingly, no compensation
expense has been recorded in 1996, 1995, and 1994. The following pro forma
amounts, in accordance with the disclosure requirements of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (FAS 123), were
determined as if the Company had accounted for its stock options using the fair
value method as described in that statement:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(Amounts in thousands, except per share amounts) 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported...................................... $47,038 $39,783
Pro forma........................................ $46,165 $39,573
Net income per common share:
As reported...................................... $1.95 $1.68
Pro forma........................................ $1.91 $1.67
- ---------------------------------------------------------------------
</TABLE>
Because the method of accounting under FAS 123 has not been 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 $12.28 per option and $8.92 per
option in 1996 and 1995, 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 1996 and 1995, respectively: risk free interest rates of
6.3% and 6.3%; dividend yields of 2.6% and 3.7%; volatility factors of 31.6% and
26.9%; and expected lives of four and six years.
The following table summarizes the activity of all stock option plans during
the three years ended December 31, 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Stock Options
--------------------------
Average Price
Shares Per Share
- ---------------------------------------------------------------------------
<S> <C> <C>
Outstanding - January 1, 1994.................. 1,606,722 $14.87
Granted....................................... 524,815 $25.19
Exercised..................................... (176,642) $13.47
Canceled...................................... (60,440) $13.95
---------
Outstanding - December 31, 1994................ 1,894,505 $17.89
Granted....................................... 489,400 $36.95
Exercised..................................... (297,445) $14.01
Canceled...................................... (51,335) $22.75
---------
Outstanding - December 31, 1995................ 2,035,125 $22.88
Granted....................................... 484,000 $47.30
Exercised..................................... (265,066) $14.86
Canceled...................................... (75,480) $20.42
---------
Outstanding - December 31, 1996................ 2,178,579 $29.35
=========
- ----------------------------------------------------------------------------
</TABLE>
Exercisable stock options during the three years ended December 31, 1996 were
as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Stock options.......................... 448,721 381,607 335,274
Average option
price per share....................... $15.09 $14.78 $14.12
- ---------------------------------------------------------------------------
</TABLE>
At December 31, 1996, exercise prices for stock options outstanding ranged
from $12.50 to $68.00 per option and the average term to expiration was seven
years.
As of December 31, 1996, a maximum of 1,454,748 of additional stock options
may be granted under the Company's stock option plans. The outstanding stock
options expire on various dates through 2015.
The Company may also grant restricted shares of its common stock under two of
these plans. Restricted stock grants are recorded as compensation expense during
the vesting terms, which currently range from one to six years. As of
December 31, 1996, there were 24,732 restricted shares outstanding.
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. Long-Term Debt and Lines of Credit:
In 1995 the Company entered into long-term borrowing agreements with a bank
which are repayable through 2002 and, under certain conditions, are callable in
1998. These loans were used to partially finance acquisitions of businesses and
for operations. Long-term debt consisted of the following at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
- --------------------------------------------------
(Amounts in thousands) 1996 1995
- --------------------------------------------------
<S> <C> <C>
Payable in foreign currency:
7.87% Pound Sterling note due
through 2002................... $ 9,129 $ 8,479
6.75% Deustche Mark note due
through 2002................... 3,224 3,699
Payable in US dollars:
5.47% note due through 2002.... 2,656 3,000
----------------
15,009 15,178
Less current portion.......... 1,130 874
----------------
$13,879 $14,304
================
- --------------------------------------------------
</TABLE>
Aggregate maturities of long-term debt are: 1997 - $1,129,000, 1998 -
$1,326,000, 1999 - $1,654,000, 2000 - $1,901,000, 2001 - $2,157,000, 2002 -
$6,841,000. At December 31, 1996, the carrying amount of long-term debt
approximates fair value.
At December 31, 1996, the Company had lines of credit with banks totaling
$72,474,000, generally at their prime interest rates, of which $50,533,000 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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Operating Capital
(Amounts in thousands) Leases Leases
- ------------------------------------------------------------------
<S> <C> <C>
1997............................. $26,842 $2,244
1998............................. 17,956 667
1999............................. 15,111 499
2000............................. 7,784 499
2001............................. 1,086 -
-------------------------
$68,779 3,909
=======
<CAPTION>
<S> <C>
Less interest........................................ 391
------
Present value of future capital lease obligations... $3,518
======
- ------------------------------------------------------------------
</TABLE>
Rental expenses for the operating leases described above were $29,694,000 in
1996, $29,031,000 in 1995, and $20,124,000 in 1994.
Operating lease obligations for office space, primarily branch offices,
expiring at various dates through 2001 require minimum aggregate annual rentals
of: 1997 - $11,838,000, 1998 - $10,530,000, 1999 - $7,468,000, 2000 -
$6,203,000, 2001 - $4,880,000. Rental expenses for these facilities amounted to
$10,327,000 in 1996, $9,760,000 in 1995, and $9,078,000 in 1994.
In 1995 the Company entered into a resale agreement with a supplier of
client/server software applications. This agreement, which is renewable, expires
in 2005. The minimum payments due under this agreement are: 1997 - $2,600,000,
1998 - $3,100,000, 1999 - $2,600,000.
9. Selected Quarterly Financial Data (Unaudited):
The following table summarizes quarterly financial data for 1996 and 1995:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(Amounts in thousands, except per share amounts)
Income
Before Net
Income Net Income
Quarter Revenues Taxes Income Per Share
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995:
First.......... $145,339 $15,722 $9,591 $.41
Second......... 155,279 15,871 9,681 .41
Third.......... 169,213 16,391 9,998 .42
Fourth......... 180,810 17,236 10,513 .44
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
1996:
First.......... $170,352 $17,537 $10,803 $.45
Second......... 190,966 18,479 11,383 .47
Third.......... 186,857 18,739 11,543 .48
Fourth......... 219,175 21,605 13,309 .55
- --------------------------------------------------------------------------
</TABLE>
10. Subsequent Event:
On February 28, 1997, the Company completed a merger with American Healthware
Systems (AHS). Under the terms of this merger, 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. Pro forma
information has not been provided due to immateriality.
33
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
11. Business Segment Information:
The Company's only line of business is providing information service and
system solutions to health organizations in North America and Europe. Revenues
and operating profits for the three years ended December 31, 1996, and
identifiable assets at the end of each of those years, classified by geographic
area, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
North
(Amounts in thousands) America Europe Consolidated
- -----------------------------------------------------------------
<S> <C> <C> <C>
1996:
Revenues..................... $655,443 $111,907 $767,350
================================
Operating profit............. $ 73,808 $ 6,141 $ 79,949
==================
Interest expense............. 3,589
--------
Income before income taxes.. $ 76,360
========
Identifiable assets.......... $364,926 $ 97,935 $462,861
==================
Corporate assets............. 36,570
--------
Total assets................ $499,431
========
- -----------------------------------------------------------------
1995:
Revenues..................... $557,877 $ 92,764 $650,641
================================
Operating profit............. $ 60,663 $ 7,533 $ 68,196
==================
Interest expense............. 2,976
--------
Income before income taxes.. $ 65,220
========
Identifiable assets.......... $329,555 $ 82,108 $411,663
==================
Corporate assets............. 23,310
--------
Total assets................ $434,973
========
- -----------------------------------------------------------------
1994:
Revenues..................... $480,076 $ 70,693 $550,769
================================
Operating profit............. $ 52,904 $ 6,079 $ 58,983
==================
Interest expense............. 1,443
--------
Income before income taxes.. $ 57,540
========
Identifiable assets.......... $304,131 $ 54,685 $358,816
==================
Corporate assets............. 21,249
--------
Total assets................ $380,065
========
- -----------------------------------------------------------------
</TABLE>
Operating profit equals total revenues less operating expenses and cost of
hardware sales. In computing operating profit, interest expense is excluded.
Identifiable assets are those assets of the Company that are associated with the
operations in each geographic area. Corporate assets are cash and short-term
investments. In 1996, 1995, and 1994, no single customer accounted for 10% or
more of consolidated revenues.
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,
1996 and 1995, and the related consolidated statements of income, stockholders'
investment and cash flows for each of the three years in the period ended
December 31, 1996. 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Philadelphia, PA Arthur Andersen LLP
February 10, 1997 (except with respect to the matter discussed in Note 10, as to
which the date is February 28, 1997)
- --------------------------------------------------------------------------------
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
August 1995.
Raymond K. Denworth, Jr., Director
Mr. Denworth has been a Director since 1976. He is a partner of Drinker Biddle &
Reath, attorneys and counsel to the Company.
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 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 Vice Chairman of Vanstar
Corporation, a technology services company.
Marvin S. Cadwell, Director, President and Chief Executive Officer
Mr. Cadwell has been a Director since May 1995. He has served as President and
Chief Executive Officer since August 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 was appointed as a Director in August 1996. She is a Senior Fellow
at Project Hope, an international health foundation.
Executive Officers
R. James Macaleer, Chairman of the Board
Marvin S. Cadwell, President and Chief Executive Officer
Michael B. Costello, Vice President, Administration and Corporate Communications
Edward J. Grady, Vice President, Controller, and Assistant Treasurer
James C. Kelly, Secretary
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
Bonnie L. Shuman, Vice President, General Counsel, and Assistant Secretary
Matthew B. Townley, Senior Vice President
35
<PAGE>
Shared Medical Systems Corporation
- --------------------------------------------------------------------------------
SMS Office Locations
- --------------------------------------------------------------------------------
Corporate Headquarters International Administration
SMS SMS International
51 Valley Stream Parkway Key House
Malvern, PA 19355 Sarum Hill
610-219-6300 Basingstoke, Hants
http://www.smed.com/ Hampshire RG21 8SR
England
011-44-1256-467556
US Offices International Offices
Atlanta, GA Belgium
770-993-2490 Zaventem
011-32-2-725-0407
Boston, MA
617-224-0817 Czech Republic
Brno
Charlotte, NC 011-420-5-4124-1852
704-362-4802
France
Chicago, IL Montpellier
847-806-0666 011-3346-704-1143
Cleveland, OH Germany
216-524-0313 Berlin
011-49-30-66-32034
Columbus, OH
614-885-0198 Frankfurt
011-49-6196-924-0
Dallas, TX
972-783-6737 Essen
011-49-201-8921-0
Detroit, MI
810-449-2500 Hungary
Budapest
Ft. Lauderdale, FL 011-36-1252-7345
954-771-4880
Ireland
Herndon, VA Dublin
703-713-3490 011-353-1-806-0800
Indianapolis, IN Italy
317-464-5273 Rome
011-39-6-439-3350
Kansas City, KS
913-384-4811 Spain
Barcelona
Los Angeles, CA 011-34-3-201-6811
562-596-4554
Madrid
Nashville, TN 011-34-1-807-7500
615-377-1244
The Netherlands
New Orleans, LA Nieuwegein
504-835-3894 011-31-30-60-52852
New York, NY United Kingdom
212-563-2380 Basingstoke
011-44-1256-57100
Oakland, CA
510-444-3434 Belfast
011-44-1232-664941
Philadelphia, PA
610-640-4490 Huntingdon
011-44-1480-456155
Phoenix, AZ
602-266-8680 Warrington
011-44-1925-851171
Pittsburgh, PA
412-921-6400 Manchester
011-44-161-773-9211
Salt Lake City, UT
800-243-8483
San Francisco, CA
510-463-9750
San Juan, PR
787-756-6700
Santa Barbara, CA
805-964-5561
Seattle, WA
206-827-4455
Somerset, NJ
908-906-8900
St. Louis, MO
314-542-0100
Wilmington, DE
302-478-3242
36
<PAGE>
Annual Stockholders Meeting
The Annual Stockholders Meeting will be held on Friday, May 9, 1997, at the
Union League of Philadelphia, 140 South Broad Street, Philadelphia, Pennsylvania
at 11:30 a.m. You are cordially invited to attend.
Common Stock
SMS common stock trades on The Nasdaq Stock Market under the symbol SMED.
Transfer Agent
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
800-851-9677
Counsel
Drinker Biddle & Reath
Philadelphia, PA
Independent Public Accountants
Arthur Andersen LLP
Philadelphia, PA
Member [LOGO] American Business Conference
SMS is an Equal Employment
Opportunity/Affirmative
Action Employer.
[RECYCLE LOGO] This annual report is printed on recycled paper.
<PAGE>
[SMS LOGO APPEARS HERE]
Shared Medical Systems Corporation
51 Valley Stream Parkway
Malvern, PA 19355
610-219-6300
http://www.smed.com/
<PAGE>
Exhibit (21)
Subsidiaries of the Registrant
------------------------------
SMS Enterprises, Incorporated (a Delaware 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 10, 1997 (except with respect to the matter discussed in
Note 10, as to which the date is February 28, 1997) included (or incorporated by
reference) in Shared Medical Systems Corporation's 10-K for the year ended
December 31, 1996, 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,
33-25009, 33-25010, 33-34089, 33-34410, 33-37742, 33-47572, 33-61967) and S-3
(File No.333-23683).
/S/ Arthur Andersen LLP
Philadelphia, PA
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 36,570
<SECURITIES> 0
<RECEIVABLES> 216,106
<ALLOWANCES> 6,594
<INVENTORY> 0
<CURRENT-ASSETS> 271,033
<PP&E> 255,409
<DEPRECIATION> 152,877
<TOTAL-ASSETS> 499,431
<CURRENT-LIABILITIES> 167,741
<BONDS> 15,361
0
0
<COMMON> 276
<OTHER-SE> 280,951
<TOTAL-LIABILITY-AND-EQUITY> 499,431
<SALES> 80,695
<TOTAL-REVENUES> 767,350
<CGS> 68,493
<TOTAL-COSTS> 558,843
<OTHER-EXPENSES> 60,065
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,589
<INCOME-PRETAX> 76,360
<INCOME-TAX> 29,322
<INCOME-CONTINUING> 47,038
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,038
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 1.95
</TABLE>
