-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C/WybDKhzNq5gMG6UuzuK+ifX9NjZ4HkNgnF4+JX0rrSnpzZwf98DJ/A4YXJwV2C fEiIRm1V3bpIfLpVRFc5vg== 0001036050-97-000033.txt : 19970329 0001036050-97-000033.hdr.sgml : 19970329 ACCESSION NUMBER: 0001036050-97-000033 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHARED MEDICAL SYSTEMS CORP CENTRAL INDEX KEY: 0000089415 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 231704148 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-07416 FILM NUMBER: 97568040 BUSINESS ADDRESS: STREET 1: 51 VALLEY STREAM PKWY CITY: MALVERN STATE: PA ZIP: 19355 BUSINESS PHONE: 6102196300 MAIL ADDRESS: STREET 1: 51 VALLEY STREAM PKWY CITY: MALVERN STATE: PA ZIP: 19355 10-K405 1 FORM 10-K405 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. 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 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. 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 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. 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. 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.
Positions with Company and Principal Name Age Occupation(s) - Past Five Years - -------------------------- --- --------------------------------------------- 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.
8
Positions with Company and Principal Name Age Occupation(s) - Past Five Years - -------------------------- --- ----------------------------------------------- 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.
- -------------------------------------------------------------------------------- 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. 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. 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" 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 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. 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. 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. 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 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 17 SCHEDULE II
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 ------------ ------------ ------------------ ------------ 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 ============ ============ ============== ============
(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. 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. 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. 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. EX-4 2 INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS Exhibit (4) Rights Agreement, dated as of May 1, 1991, between Shared Medical Systems Corporation and Pittsburgh National Bank RIGHTS AGREEMENT dated as of May 1, 1991 between SHARED MEDICAL SYSTEMS CORPORATION and PITTSBURGH NATIONAL BANK as Rights Agent Table of Contents -----------------
Section Page - ------- ---- 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
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Section Page - ------- ---- 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
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 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 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 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 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 (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 (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 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 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 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 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 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 11 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 12 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 13 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 14 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 15 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 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 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 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 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 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 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 (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 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 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 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 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 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 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 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 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 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 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 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 34 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 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 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 (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 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 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 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 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 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 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 (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 45 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 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 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 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 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 EX-10 3 EMPLOYMENT AGREEMENT 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 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 EX-13 4 1996 ANNUAL REPORT [SMS LOGO APPEARS HERE] Exhibit (13) [ART WORK APPEARS HERE] ANNUAL REPORT 1996 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 [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. 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] [SMS LOGO APPEARS HERE] - -------------------------------------------------------------------------------- Annual Report 1996
Financial Highlights (Amounts in thousands, except per share amounts) - -------------------------------------------------------------------------------- Operating Results: 1996 1995 % Increase - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
[BAR GRAPHS OF 5-YEAR HISTORY FOR TOTAL REVENUES, NET INCOME, AND NET INCOME PER SHARE APPEAR HERE] 3 [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 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 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 [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 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 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 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 [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 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 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 [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 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 [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 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Financial Statements
Index - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
17 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 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Analysis of Changes in Consolidated Cost and Expenses (Amounts in thousands) - -------------------------------------------------------------------------------- Change Change from from 1996 Prior Year 1995 Prior Year 1994 - -------------------------------------------------------------------------------- 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% =================================================== - --------------------------------------------------------------------------------
. 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 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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:
- ---------------------------------------------------------- (Amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------- 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 - ----------------------------------------------------------
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 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
- ------------------------------------------------------------------------------------------------------------------- Selected Financial Data (Amounts in thousands, except per share amounts) - ------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------- Summary of Consolidated Operations - ------------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Summary of Consolidated Financial Position - ------------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Operating Ratios and Other Selected Financial Data - -------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Market Price and Dividends Declared Per Share * - -------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------
* 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 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Consolidated Balance Sheet (Amounts in thousands)
December 31 - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- 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 =====================
The accompanying notes are an integral part of these statements. 24 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Consolidated Statement of Income (Amounts in thousands, except per share amounts)
Year Ended December 31 - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- 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 ============================== - --------------------------------------------------------------------------------
25 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Consolidated Statement of Cash Flows (Amounts in thousands)
Year Ended December 31 - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- 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 =============================== - -------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 26 Shared Medical Systems Corporation - -------------------------------------------------------------------------------- Consolidated Statement of Stockholders' Investment For the Years Ended December 31, 1996, 1995, and 1994 (Amounts in thousands)
- ------------------------------------------------------------------------------------------------------ Cumulative Common Stock Paid-in Retained Treasury Translation ----------------- Shares Par Value Capital Earnings Stock Adjustment - ------------------------------------------------------------------------------------------------------ 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) ============================================================= - ------------------------------------------------------------------------------------------------------
27 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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:
- ----------------------------------------------------- (Amounts in thousands) 1996 1995 - ----------------------------------------------------- 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 ================== - -----------------------------------------------------
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 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:
- -------------------------------------------------------------------------------- (Amounts in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- 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 ========================= - --------------------------------------------------------------------------------
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:
- -------------------------------------------------------------------------------- Percentage of Income ------------------------ 1996 1995 1994 - -------------------------------------------------------------------------------- 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% ======================= - --------------------------------------------------------------------------------
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:
- ------------------------------------------------------------------------ (Amounts in thousands) 1996 1995 - ------------------------------------------------------------------------ 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 ================= - ------------------------------------------------------------------------
30 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 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:
- --------------------------------------------------------------------- (Amounts in thousands, except per share amounts) 1996 1995 - --------------------------------------------------------------------- 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 - ---------------------------------------------------------------------
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:
- --------------------------------------------------------------------------- Stock Options -------------------------- Average Price Shares Per Share - --------------------------------------------------------------------------- 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 ========= - ----------------------------------------------------------------------------
Exercisable stock options during the three years ended December 31, 1996 were as follows:
- --------------------------------------------------------------------------- 1996 1995 1994 - --------------------------------------------------------------------------- Stock options.......................... 448,721 381,607 335,274 Average option price per share....................... $15.09 $14.78 $14.12 - ---------------------------------------------------------------------------
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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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:
- -------------------------------------------------- (Amounts in thousands) 1996 1995 - -------------------------------------------------- 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 ================ - --------------------------------------------------
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:
- ------------------------------------------------------------------ Operating Capital (Amounts in thousands) Leases Leases - ------------------------------------------------------------------ 1997............................. $26,842 $2,244 1998............................. 17,956 667 1999............................. 15,111 499 2000............................. 7,784 499 2001............................. 1,086 - ------------------------- $68,779 3,909 ======= Less interest........................................ 391 ------ Present value of future capital lease obligations... $3,518 ====== - ------------------------------------------------------------------
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:
- -------------------------------------------------------------------------- (Amounts in thousands, except per share amounts) Income Before Net Income Net Income Quarter Revenues Taxes Income Per Share - -------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------
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 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:
- ----------------------------------------------------------------- North (Amounts in thousands) America Europe Consolidated - ----------------------------------------------------------------- 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 ======== - -----------------------------------------------------------------
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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 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 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. [SMS LOGO APPEARS HERE] Shared Medical Systems Corporation 51 Valley Stream Parkway Malvern, PA 19355 610-219-6300 http://www.smed.com/ EX-21 5 SUBSIDIARIES OF THE REGISTRANT Exhibit (21) Subsidiaries of the Registrant ------------------------------ SMS Enterprises, Incorporated (a Delaware corporation) EX-23 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 36,570 0 216,106 6,594 0 271,033 255,409 152,877 499,431 167,741 15,361 0 0 276 280,951 499,431 80,695 767,350 68,493 558,843 60,065 0 3,589 76,360 29,322 47,038 0 0 0 47,038 1.95 1.95
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