Registration No. 33-
As filed with the Securities and Exchange Commission on September 13, 1995
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________
ELI LILLY AND COMPANY INTEGRATED MEDICAL
SYSTEMS, INC.
(Exact names of registrants as specified in their charters)
INDIANA COLORADO
(State of Incorporation)
2834 8099
(Primary Standard Industrial Classification Code Number)
35-0470950 84-0970775
(IRS Employer Identification No.)
LILLY CORPORATE CENTER 15000 WEST 6TH AVENUE
INDIANAPOLIS, INDIANA 46285 SUITE 400
317-276-2000 GOLDEN, COLORADO 80401
303-279-6116
(Address, including zip code, and telephone number,
including area code, of registrants' principal executive offices)
____________________
REBECCA O. GOSS KEVIN R. GREEN
VICE PRESIDENT AND PRESIDENT AND CHIEF
GENERAL COUNSEL EXECUTIVE OFFICER
ELI LILLY AND COMPANY INTEGRATED MEDICAL SYSTEMS, INC.
LILLY CORPORATE CENTER 15000 WEST 6TH AVENUE
INDIANAPOLIS, INDIANA 46283 SUITE 400
317-276-2000 GOLDEN, COLORADO 80401
303-279-6116
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
BERNARD E. KURY WILLIAM A. GROLL ALAN W. PERYAM
Dewey Ballantine Cleary, Gottlieb, Hopper and Kanouff, P.C.
1301 Avenue of the Americas Steen & Hamilton 1610 Wynkoop Street
New York, New York 10019 One Liberty Plaza Suite 200
New York, New York 10006 Denver, Colorado 80202
____________________
Approximate date of commencement of proposed sale of the securities to
the public: Upon consummation of the Merger described herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
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CALCULATION OF REGISTRATION FEE
Title of each class of Proposed maximum
securities to be Amount to be offering price per Proposed maximum Amount of registration
registered registered(1) unit aggregate offering price fee
Series D Preferred Stock, 10,792,695
par value $0.01 per
share, of IMS
Series B Preferred Stock, 2,000,000
par value $1.00 per
share, of IMS
Warrants to Purchase 655,103 (2) $1,250,504(2) $432(2)
Series D Preferred Stock
of IMS
Options to Purchase Series 2,380,457
D Preferred Stock of IMS
Options to Purchase 292,979
Lilly Common Stock
Lilly Common Stock(3) 292,979
Put Rights for Series 10,792,695
D Preferred Stock
(1) Based on the maximum number of shares of Series D Preferred Stock, Series B
Preferred Stock, Warrants to Purchase Series D Preferred Stock, Options to
Purchase Series D Preferred Stock, Options to Purchase Lilly Common Stock,
Lilly Common Stock, and Put Rights for Series D Preferred Stock that may be
issued in the Merger or upon the exercise of options or warrants following
the Merger.
(2) Calculated pursuant to Rule 457(f)(2) under Securities Act of 1933 based
on the book value of IMS as of June 30, 1995.
(3) Includes all Preferred Stock Purchase Rights of Lilly issuable in
conjunction with the shares of Lilly Common Stock pursuant to the Rights
Agreement, dated July 18, 1988, between Lilly and Bank One, Indianapolis,
N.A.
-----------------------
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
INTEGRATED MEDICAL SYSTEMS, INC.
ELI LILLY AND COMPANY
CROSS-REFERENCE SHEET BETWEEN ITEMS IN
FORM S-4 AND PROSPECTUS PURSUANT TO
ITEM 501(B) OF REGULATION S-K
ITEM NO. FORM S-4 CAPTION HEADING IN PROSPECTUS
-------- ---------------- ---------------------
Item 1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus.... Cover Page
Item 2. Inside Front and Outside
Back Cover Pages of
Prospectus.................. Available Information; Incorporation
of Documents by Reference; Table of
Contents
Item 3. Risk Factors, Ratio of
Earnings to Fixed Charges
and Other Information....... Summary; Special Factors to be
Considered
Item 4. Terms of the Transaction...... Special Factors to be Considered;
The Merger Agreement; Put/Call
Agreements; Amendment to the
Articles of Incorporation of IMS;
Comparison of Shareholder Rights;
Description of Capital Stock of
IMS; Rights of Dissenting
Shareholders; Certain Federal
Income Tax Consequences of the
Merger
Item 5. Pro Forma Financial
Information................. Summary; Capitalization of IMS
Following the Merger
Item 6. Material Contacts with the
Company Being Acquired...... Special Factors to be Considered;
The Merger Agreement; Put/Call
Agreements
Item 7. Additional Information
Required for Reoffering by
Persons and Parties Deemed
to be Underwriters.......... *
Item 8. Interests of Named Experts
and Counsel................. Experts
Item 9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................. *
Item 10. Information With Respect to
S-3 Registrants............. Incorporation of
Documents by Reference
ITEM NO. FORM S-4 CAPTION HEADING IN PROSPECTUS
-------- ---------------- ---------------------
Item 11. Incorporation of Certain
Information by Reference...... Incorporation of Documents by
Reference
Item 12. Information With Respect to
S-2 or S-3 Registrants...... *
Item 13. Incorporation of Certain
Information by Reference.... *
Item 14. Information With Respect to
Registrants Other Than S-2
or S-3 Registrants.......... Business of IMS; Management's
Discussion and Analysis of Financial
Condition and Results of Operations
of IMS; Management of IMS;
Consolidated Financial Statements of
IMS
Item 15. Information With Respect
to S-3 Companies............ *
Item 16. Information With Respect
to S-2 or S-3 Companies..... *
Item 17. Information With Respect to
Companies Other Than S-2
or S-3 Companies............ Business of IMS; Management's
Discussion and Analysis of Financial
Condition and Results of Operations
of IMS; Management of IMS;
Description of Capital Stock of IMS;
Consolidated Financial Statements of
IMS
Item 18. Information if Proxies,
Consents or Authorizations
are to be Solicited......... Summary; The Special Meeting;
Special Factors to be Considered;
The Merger Agreement; Rights of
Dissenting Shareholders; Business of
IMS; Ownership of IMS; Management of
IMS
Item 19. Information if Proxies,
Consents or Authorizations
are not to be Solicited or
in an Exchange Offer........ *
_______________________
* Omitted because inapplicable or answer is in the negative.
INTEGRATED MEDICAL SYSTEMS, INC.
15000 West 6th Avenue
Suite 400
Golden, Colorado 80401
_______________, 1995
Dear Shareholder of Integrated Medical Systems, Inc.:
You are cordially invited to attend a Special Meeting of
Shareholders of Integrated Medical Systems, Inc., a Colorado
corporation (the "Company"), which will be held on ______, _____, 1995,
at ______________, commencing at ___m. local time. At this meeting
you will be asked to consider and vote upon the approval and adoption
of an Agreement and Plan of Merger dated August 2, 1995 (the "Merger
Agreement"), providing for the merger (the "Merger") of a wholly-owned
subsidiary of Eli Lilly and Company, an Indiana corporation ("Lilly"),
with and into the Company. As a result of the Merger, the Company will
become a subsidiary of Lilly, and Company shareholders will receive
cash or other securities as described below. The enclosed Proxy
Statement-Prospectus describes the proposed Merger in detail and should
be read carefully in its entirety.
The Merger is required to be approved by the affirmative vote
of the holders of at least two-thirds of the outstanding shares of
common stock, Series B Preferred Stock ("Series B Stock") and Series C
Preferred Stock ("Series C Stock"), voting together as a single class,
and the affirmative vote of at least two-thirds of the outstanding
shares of each of the Series B Stock and the Series C Stock, each
voting separately as a class. As of ___________, 1995, the directors
of the Company and their affiliates (other than Lilly or any wholly-
owned subsidiary of Lilly) owned an aggregate of 3,337,795 shares of
Company common stock representing 51% of the Company common stock
entitled to vote on the Merger and 1,581,562 shares of Series B Stock
representing 79% of the Series B Stock entitled to vote on the Merger.
All of these shareholders have agreed with Lilly to vote the shares of
Company common stock or Series B Stock owned by them (or acquired in
the future) in favor of the Merger. In addition, Lilly, through its
wholly-owned subsidiaries, owns 160,200 shares of Company common stock
and all of the Series C Stock entitled to vote on the Merger and
intends to vote all of such shares in favor of the Merger. The shares
of Company common stock, Series B Stock and Series C Stock collectively
owned by these shareholders and Lilly represent approximately 70% of
the Company common stock, Series B Stock and Series C Stock entitled to
vote as a class on the Merger. Thus, upon the vote of these
shareholders in accordance with such agreements, shareholder approval
of the Merger is assured.
As a result of the Merger,
(a) each issued and outstanding share of common stock of the
Company (other than dissenting shares or shares owned by
Lilly or a subsidiary of Lilly) will be converted into the
right to receive, at the holder's election, either $8.00 in
cash, without interest, or one share of Series D Preferred
Stock ("Series D Stock"), a newly created class of preferred
stock of the Company which will have the preferences,
limitations and relative rights described in the enclosed
Proxy Statement-Prospectus and in the Articles of Merger of
the surviving corporation, and
(b) each issued and outstanding share of Series B Stock of the
Company (other than dissenting shares) will, at the holder's
election, (i) convert into the right to receive either (A)
$5.33 per share in cash, without interest, plus an amount, in
cash, without interest, equal to the amount of all accrued
and unpaid dividends on such a share of Series B Stock
to the effective date of the Merger, or (B) two-thirds of a
share of Series D Stock plus an amount, in cash, without
interest, equal to the amount of all accrued and unpaid
dividends on such a share of Series B Stock to the effective
date of the Merger, or (ii) will remain outstanding (with the
amended preferences, limitations and relative rights
described in the Articles of Incorporation of the surviving
corporation), and
(c) each issued and outstanding share of Series C Stock of the
Company (other than dissenting shares) will be converted into
one share of common stock of the surviving corporation.
Company shareholders have dissenters' rights with respect to
their shares and must closely follow the procedures set forth in the
Proxy Statement-Prospectus in order to properly perfect such rights.
The Board of Directors has received the opinion of the
investment banking firm of Smith Barney Inc. to the effect that, based
on the matters described therein, the consideration to be offered in
the Merger to IMS shareholders (other than Lilly and its subsidiaries)
is fair to such shareholders from a financial point of view. The
opinion is attached as Appendix C to the Proxy Statement-Prospectus.
Based on certain factors described in the Proxy Statement-
Prospectus, the Board of Directors of the Company has determined that
the Merger is fair and in the best interests of the Company and its
shareholders. Accordingly, the Board of Directors has approved the
Merger Agreement and the Merger and recommends that the shareholders
vote for adoption and approval of the Merger Agreement and the Merger.
Each of the Directors has agreed with Lilly to so vote shares held by
the director and, in certain cases, members of his immediate family.
In addition, approval of the Merger by the Company's
shareholders also includes approval of an amendment to the Company's
1994 Stock Option Plan (the "Plan") in order to increase the number of
shares of common stock authorized to be issued under the Plan from
400,000 shares to 838,600 shares, which equals the total number of
shares subject to options previously granted under the Plan. Approval
of the Merger also includes approval of an amendment to the Company's
articles of incorporation, effective upon consummation of the Merger,
which will, among other things, eliminate the voting rights of the
Series B Stock other than as required by Colorado law and make the
Series B Stock parity stock with the Series D Stock upon liquidation,
dissolution or winding-up of IMS.
Please complete, sign and mail promptly the enclosed Proxy,
whether or not you intend to be present in person at the Special
Meeting. If you attend the Special Meeting, you may vote your shares
in person even if you have previously submitted a Proxy.
DO NOT SEND IN YOUR SHARE CERTIFICATES WITH YOUR PROXY.
Respectfully,
------------------------------
Kevin R. Green,
President and Director
------------------------------
Charles I. Brown,
Executive Vice President
and Director
2
INTEGRATED MEDICAL SYSTEMS, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ________, 1995
To the Shareholders of Integrated Medical Systems, Inc.:
A special meeting of shareholders of Integrated Medical
Systems, Inc. (the "Company") will be held on ________, 1995 at
__________________________________ for the following purposes:
1. To consider and vote upon a proposal to approve and adopt
an Agreement and Plan of Merger (the "Merger Agreement"), dated
August 2, 1995, among the Company, Eli Lilly and Company ("Lilly")
and Trans-IMS Corporation, a Colorado corporation which is a
wholly-owned subsidiary of Lilly ("Subsidiary"), which provides
for the merger of Subsidiary into the Company (the "Merger").
Pursuant to the Merger, (i) each outstanding share of Common
Stock, without par value, of the Company (the "Company Common
Stock") (other than dissenting shares or shares owned by Lilly or
a subsidiary of Lilly) will be converted into, at the holder's
election, either (a) $8.00 in cash, without interest, or (b) one
share of Series D Preferred Stock, $0.01 par value, of the Company
(the "Series D Preferred Stock"), (ii) each outstanding share of
Series B Preferred Stock, par value $1.00 per share, of the
Company (the "Series B Preferred Stock") (other than dissenting
shares) will either (a) be converted into, at such holder's
election, either (1) $5.33 in cash, without interest, plus an
amount, in cash, without interest, equal to the amount of all
accrued and unpaid dividends on such share of Series B Preferred
Stock to the effective date of the Merger or (2) two-thirds of a
share of Series D Preferred Stock plus an amount, in cash, without
interest, equal to the amount of all accrued and unpaid dividends
on such share of Series B Preferred Stock to the effective date of
the Merger or (b) remain outstanding (with the amended
preferences, limitations and relative rights described in the
Articles of Incorporation of the surviving corporation), and (iii)
each outstanding share of Series C Preferred Stock, par value
$1.00 per share, of the Company will be converted into one share
of common stock of the surviving corporation. In addition, each
holder of Company Common Stock, Series B Preferred Stock, or
options or warrants to purchase Company Common Stock will be
offered the right to enter into a put/call agreement with Lilly
with respect to any or all of the shares of Series D Preferred
Stock that such holder may acquire. Approval of the Merger by IMS
shareholders will include approval of an amendment to the
Integrated Medical Systems, Inc. 1994 Employee Stock Option Plan
(the "Plan") to increase the number of shares available under such
plan from 400,000 shares of Company Common Stock to 838,600 shares
of Company Common Stock, which equals the total number of shares
subject to options previously granted under the Plan. Approval of
the Merger by IMS shareholders will also include approval of an
amendment to the Articles of Incorporation of IMS, effective upon
consummation of the Merger, which will, among other things,
eliminate the voting rights of the Series B Preferred Stock other
than as required by Colorado law and make the Series B Preferred
Stock parity stock with the Series D Preferred Stock upon the
liquidation, dissolution or winding-up of IMS.
2. To consider and transact such other business as may
properly come before the meeting and adjournments or postponements
thereof.
Shareholders of record at the close of business on _________,
1995 are entitled to receive notice of, and to vote at, the special
meeting and any adjournment thereof.
It is important that your shares be represented at the
meeting. Whether or not you plan to attend the meeting, please sign,
date and promptly mail the enclosed proxy in the envelope provided.
By Order of the
Board of Directors
------------------------------
James A. Larson
Secretary
Golden, Colorado
_____________, 1995
THIS PROXY STATEMENT ALSO CONSTITUTES A PROSPECTUS RELATING TO THE
SECURITIES OF THE COMPANY AND OF ELI LILLY AND COMPANY TO BE ISSUED IN
CONNECTION WITH THE PROPOSED MERGER.
2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION -- DATED SEPTEMBER 13, 1995
INTEGRATED MEDICAL SYSTEMS, INC.
PROXY STATEMENT
-------------
INTEGRATED MEDICAL SYSTEMS, INC.
ELI LILLY AND COMPANY
PROSPECTUS
-------------
This Proxy Statement-Prospectus and the accompanying proxy are
furnished in connection with the solicitation by the Board of Directors of
Integrated Medical Systems, Inc., a Colorado corporation ("IMS" or the
"Company"), of proxies to be voted at the Special Meeting of Shareholders (the
"Special Meeting") to be held on _________ at _____ A.M. local time, at
_____________________________ and at any adjournment thereof. The purpose of
the Special Meeting is to consider and vote upon the proposed merger (the
"Merger") of Trans-IMS Corporation, a Colorado corporation ("Subsidiary") which
is a wholly-owned subsidiary of Eli Lilly and Company ("Lilly"), into IMS,
pursuant to the Agreement and Plan of Merger, dated August 2, 1995, among IMS,
Lilly and Subsidiary (the "Merger Agreement").
Pursuant to the Merger, (i) each outstanding share of Common Stock,
without par value, of the Company (the "Company Common Stock") (other than
shares held by IMS as treasury shares, shares owned by Lilly or any subsidiary
of Lilly, or shares as to which dissenters' rights have been perfected under
Colorado law) will be converted into, at the holder's election, either (a) $8.00
in cash, without interest, or (b) one share of Series D Preferred Stock, $0.01
par value, of the Company (the "Series D Preferred Stock"), (ii) each
outstanding share of Series B Preferred Stock, par value $1.00 per share, of the
Company (the "Series B Preferred Stock") (other than shares as to which
dissenters' rights have been perfected under Colorado law) will either (a) be
converted into, at such holder's election, either (1) $5.33 in cash, without
interest, plus an amount, in cash, without interest, equal to the amount of all
accrued and unpaid dividends on such share of Series B Preferred Stock to the
effective date of the Merger or (2) two-thirds of a share of Series D Preferred
Stock plus an amount, in cash, without interest, equal to the amount of all
accrued and unpaid dividends on such share of Series B Preferred Stock to the
effective date of the Merger or (b) remain outstanding (with the amended
preferences, limitations and relative rights set forth in the Articles of
Incorporation of the surviving corporation), and (iii) each outstanding share of
Series C Preferred Stock, par value $1.00 per share, of the Company (the "Series
C Preferred Stock") will be converted into one share of common stock of the
surviving corporation. In addition, each holder of Company Common Stock, Series
B Preferred Stock, or options or warrants to purchase Company Common Stock will
be offered the right to enter into a put/call agreement with Lilly with respect
to any or all of the shares of Series D Preferred Stock that such holder may
acquire.
Approval of the Merger by IMS shareholders will include approval of an
amendment to the Integrated Medical Systems, Inc. 1994 Employee Stock Option
Plan to increase the number of shares available under such plan from 400,000
shares of Company Common Stock to 838,600 shares of Company Common Stock, which
equals the total number of shares subject to options previously granted under
the Plan.
Approval of the Merger by IMS shareholders will also include approval
of an amendment to the Articles of Incorporation of IMS, effective upon
consummation of the Merger, which will, among other things, eliminate the voting
rights of the Series B Preferred Stock other than as required by Colorado law
and make the Series B Preferred Stock parity stock with the Series D Preferred
Stock upon the liquidation, dissolution or winding-up of IMS.
THE BOARD OF DIRECTORS OF IMS (WITH ONE DIRECTOR ABSENT) HAS
UNANIMOUSLY DETERMINED THAT THE PROPOSED MERGER IS FAIR AND REASONABLE AND IN
THE BEST INTERESTS OF IMS AND ITS SHAREHOLDERS (OTHER THAN LILLY AND ITS
SUBSIDIARIES), AND RECOMMENDS APPROVAL AND ADOPTION OF THE MERGER AGREEMENT BY
IMS SHAREHOLDERS (EXCEPT THAT THE TWO DIRECTORS WHO ARE AFFILIATED WITH LILLY
ABSTAINED FROM THE BOARD'S DELIBERATIONS AND VOTE).
SEE "SPECIAL FACTORS TO BE CONSIDERED" FOR A DESCRIPTION OF CERTAIN
CONSIDERATIONS RELATED TO THE MERGER.
This Proxy Statement also constitutes a Prospectus of IMS with respect
to Series D Preferred Stock to be issued and Series B Preferred Stock that will
be amended in connection with the transactions described herein, and with
respect to warrants and options to purchase Series D Preferred Stock that will
be outstanding after the Merger. In addition, this Proxy Statement constitutes a
Prospectus of Lilly with respect to the put rights to be issued pursuant to the
Put/Call Agreements and the Lilly stock options that may be substituted for IMS
employee stock options and the common stock of Lilly issuable upon the exercise
of such options as more fully described herein.
This Proxy Statement-Prospectus and the enclosed form of proxy are
being mailed to IMS shareholders on or about ___________, 1995.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement-Prospectus is __________, 1995.
2
AVAILABLE INFORMATION
Lilly is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by Lilly with the Commission can
be inspected and copied at the public reference facilities maintained
by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at 7 World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material
can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Lilly and IMS have filed with the Commission a Registration
Statement on Form S-4 (together with any amendments thereto, the
"Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the securities to be issued
pursuant to the proposed Merger. This Proxy Statement-Prospectus does
not contain all the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by
the rules and regulations of the Commission. Such additional
information may be obtained from the Commission's principal office in
Washington, D.C. Statements contained in this Proxy Statement-
Prospectus or in any document incorporated in this Proxy Statement-
Prospectus by reference as to the contents of any contract of other
document referred to herein or therein are not necessarily complete,
and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement or
such other document, each such statement being qualified in all
respects by such reference.
The common stock of Lilly is listed and traded on the New
York Stock Exchange, Inc. Reports, proxy statements and other
information concerning Lilly can be inspected at the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. Certain Lilly
securities are also traded on the American Stock Exchange, and the
foregoing Lilly documents can also be inspected at the American Stock
Exchange, 86 Trinity Place, New York, New York 10006.
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS ARE AVAILABLE UPON REQUEST FROM ELI LILLY AND COMPANY,
SHAREHOLDER SERVICES DEPARTMENT, LILLY CORPORATE CENTER, INDIANAPOLIS,
INDIANA 46285, TELEPHONE NUMBER (317) 276-2000. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE NO LATER
THAN [5 BUSINESS DAYS PRIOR TO SPECIAL MEETING], 1995.
No person is authorized to give any information or to make
any representation other than those contained in this Proxy Statement-
Prospectus and, if given or made, such information or representation
must not be relied upon as having been authorized by IMS, Lilly or
Subsidiary. Neither the delivery of this Proxy Statement-Prospectus
nor any distribution of securities registered hereunder shall, under
any circumstances, create any implication that there has been no change
in the affairs of IMS, Lilly or Subsidiary since the date hereof. The
information contained in this Proxy Statement-Prospectus relating to
IMS has been furnished by IMS for inclusion herein. The information
contained in this Proxy Statement-Prospectus relating to Lilly and
Subsidiary has been furnished by Lilly for inclusion herein.
TABLE OF CONTENTS
Page
SUMMARY............................................... 1
THE SPECIAL MEETING................................... 10
Time, Date and Place............................. 10
Purpose of the Meeting........................... 10
Record Date and Outstanding Shares............... 10
Required Vote.................................... 10
Revocability of Proxies.......................... 11
Solicitation of Proxies.......................... 11
SPECIAL FACTORS TO BE CONSIDERED...................... 12
Risk Factors Applicable to IMS................... 12
Background to the Merger......................... 14
Lilly's Purpose of the Merger.................... 17
Recommendation of the IMS Board of Directors;
Fairness of the Merger.......................... 18
Opinion of Financial Advisor..................... 18
Prior Agreements/Relationships of the Parties.... 22
Accounting Treatment of the Merger............... 25
Interests of Certain Persons in the Merger....... 25
No Stock Exchange or NASDAQ Listing; Resales of
Series D Preferred Stock and Series
B Preferred Stock............................... 25
Governmental and Regulatory Approvals............ 26
Market Prices.................................... 27
THE MERGER AGREEMENT.................................. 28
The Merger....................................... 28
Description of Election Procedures............... 29
Procedures for Exchange of Certificates.......... 29
Effect of the Merger on Company Options and
Company Warrants................................ 31
Representations and Warranties................... 32
Certain Understandings and Agreements............ 33
Conditions to the Merger......................... 35
Amendment and Modification....................... 36
Termination...................................... 36
Liability of the Parties Upon Termination........ 37
Expenses......................................... 37
Indemnification of Officers and Directors........ 37
PUT/CALL AGREEMENTS................................... 38
General.......................................... 38
Put Right........................................ 38
Call Right....................................... 38
Escrow........................................... 38
Transfers of Subject Shares...................... 39
No Restrictions on Lilly......................... 39
Submission to Jurisdiction....................... 39
AMENDMENT TO THE ARTICLES OF INCORPORATION OF IMS..... 40
Capitalization................................... 40
Voting Rights.................................... 40
Liquidation Rights............................... 40
Conversion Rights................................ 40
i
Page
COMPARISON OF SHAREHOLDER RIGHTS...................... 41
Voting Rights.................................... 41
Notice of Shareholder Meetings................... 41
Conflicting Interest Transactions................ 41
Vote Required for Extraordinary Matters.......... 41
Indemnification.................................. 42
Holders of Series B Preferred Stock.............. 42
DESCRIPTION OF CAPITAL STOCK OF IMS................... 43
Authorized Capital Stock......................... 43
Common Stock..................................... 43
Series D Preferred Stock......................... 44
Series B Preferred Stock......................... 47
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. 50
RIGHTS OF DISSENTING SHAREHOLDERS..................... 55
SELECTED CONSOLIDATED FINANCIAL DATA OF LILLY......... 57
CAPITALIZATION OF IMS FOLLOWING THE MERGER............ 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF IMS....... 60
Overview......................................... 60
Results of Operations............................ 61
Liquidity and Capital Resources.................. 64
BUSINESS.............................................. 65
Industry Background.............................. 65
Strategy......................................... 67
Health Care Industry Information Needs........... 68
IMS MEDACOM/(R)/ Network......................... 68
Co-Ventures...................................... 73
Product Development.............................. 73
Sales and Marketing.............................. 74
Competition...................................... 75
Employees........................................ 75
Properties....................................... 75
OWNERSHIP OF IMS...................................... 76
MANAGEMENT OF IMS..................................... 78
Executive Officers and Directors................. 78
Executive Compensation........................... 81
Compensation of Directors........................ 83
Limitations on Liability of Officers and
Directors....................................... 83
Certain Transactions............................. 83
AMENDMENT TO THE IMS 1994 EMPLOYEE STOCK OPTION PLAN.. 84
EXPERTS............................................... 85
LEGAL OPINIONS........................................ 85
ii
INCORPORATION OF DOCUMENTS BY REFERENCE............... 86
Appendices
----------
Appendix A - Articles of Merger
Appendix B - Form of Put/Call Agreement
Appendix C - Opinion of Smith Barney Inc.
Appendix D - Article 113 of the Colorado Business Corporation Act
iii
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement-Prospectus. This summary is qualified in
its entirety by the more detailed information contained in this Proxy
Statement-Prospectus, in its Appendices and in the documents referred to
herein, to which reference is made for a more complete statement of the
matters discussed below.
THE COMPANIES
Integrated Medical Systems, Inc.
Integrated Medical Systems, Inc. ("IMS" or the "Company") was founded
in 1985. IMS develops and operates computerized medical communications
networks that link participants in the healthcare delivery and payment
systems enabling such participants to convert routine and specialized
messages from manual to automated media and to provide a practical means
for providers and payers to integrate the services they provide.
Healthcare, and especially the individual physician's practice of medicine,
generates prolific requirements for multi-location, multi-system clinical,
financial and administrative communication and information transfer and
management. IMS believes that it is the nation's leading provider of
physician-focused, multi-participant, multi-media, bi-directional automated
healthcare communications through a common user interface, in terms of
total number of transactions, variety of transactions, number of
physicians, number and variety of interfaced host healthcare information
systems, number of institutions (hospitals, managed care plans, clinical
laboratories, ancillary care providers and healthcare information and
administrative services) and number of operational networks and markets
served.
The mailing address and telephone number of IMS's principal executive
offices are 15000 West 6th Avenue, Suite 400, Golden, Colorado 80401, (303)
279-6116. See "BUSINESS OF IMS."
Eli Lilly and Company
Eli Lilly and Company ("Lilly") was incorporated in 1901 under the
laws of the state of Indiana to succeed to the drug manufacturing business
founded in Indianapolis, Indiana, in 1876 by Colonel Eli Lilly. Lilly is
engaged in the discovery, development, manufacture, and sale of products
and the provision of services in one industry segment--Life Sciences.
Lilly's principal products are human pharmaceuticals and animal health
products. Products are manufactured or distributed through owned or leased
facilities in the United States, Puerto Rico, and 26 other countries, in 19
of which Lilly owns or has an interest in manufacturing facilities. Its
products are sold in approximately 117 countries. Through its PCS Health
Systems, Inc. subsidiary ("PCS"), Lilly also provides pharmacy benefit
management services in the United States.
Most of Lilly's products were discovered or developed through Lilly's
research and development activities, and the success of Lilly's business
depends to a great extent on the introduction of new products resulting
from these research and development activities. Research efforts are
primarily directed toward the discovery of products to diagnose and treat
diseases in human beings and animals and to increase the efficiency of
animal food production.
Trans-IMS Corporation, a Colorado corporation and a wholly-owned
subsidiary of Lilly ("Subsidiary"), is a corporation recently organized in
connection with the Merger and has not conducted any other business.
The principal executive offices of Lilly and Subsidiary are located
at Lilly Corporate Center, Indianapolis, Indiana 46285, and their telephone
number at that location is (317) 276-2000.
THE SPECIAL MEETING
Time, Date and Place
The special meeting of IMS shareholders (the "Special Meeting") will
be held on ________, 1995, at _____ A.M. local time, at
__________________________________.
Purpose of the Meeting
At the Special Meeting, the IMS shareholders will be asked to
consider and vote upon the proposed merger (the "Merger") of Subsidiary
into IMS. The Merger will result in IMS becoming a subsidiary of Lilly,
with all of IMS's outstanding voting stock being owned by Lilly and all of
IMS's other shareholders owning non-voting Series D Preferred Stock and
Series B Preferred Stock.
Record Date and Outstanding Shares
Holders of record (the "Record Holders") of shares of (i) common
stock, without par value, of IMS (the "Company Common Stock"), (ii) Series
B Preferred Stock, par value $1.00 per share, of IMS (the "Series B
Preferred Stock") and (iii) Series C Preferred Stock, par value $1.00 per
share, of IMS (the "Series C Preferred Stock") at the close of business on
________, 1995 (the "Record Date"), will be entitled to notice of and to
vote at the Special Meeting. Each issued and outstanding share of Company
Common Stock, Series B Preferred Stock and Series C Preferred Stock is
entitled to one vote per share with respect to the Merger. On the Record
Date, there were 6,584,002 shares of Company Common Stock issued and
outstanding held by approximately 197 holders, 2,000,000 shares of Series B
Preferred Stock issued and outstanding held by approximately 23 holders and
3,000,000 shares of Series C Preferred Stock issued and outstanding all of
which were held by wholly-owned subsidiaries of Lilly.
Required Vote
Under Colorado law and the Articles of Incorporation of IMS, the
affirmative vote of two-thirds of the outstanding shares of Company Common
Stock, Series B Preferred Stock and Series C Preferred Stock, voting
together as a single class, and the affirmative vote of two-thirds of the
outstanding shares of each of the Series B Preferred Stock and the Series C
Preferred Stock, each voting separately as a class, are required to approve
the Merger. In addition, pursuant to the Merger Agreement, it is a
condition to the consummation of the Merger that the Merger be approved by
the affirmative vote of shares representing at least a majority of the
voting power of the outstanding shares of Company Common Stock and Series B
Preferred Stock that are not owned by Lilly or its subsidiaries.
As of the Record Date, the directors of IMS and their affiliates
(other than Lilly or any subsidiary of Lilly) owned an aggregate of
3,337,795 shares of Company Common Stock, representing approximately 51% of
the Company Common Stock entitled to vote on the Merger, and 1,581,562
shares of Series B Preferred Stock, representing 79% of the Series B
Preferred Stock entitled to vote on the Merger. All of these shareholders
have agreed with Lilly to vote their shares in favor of the Merger. In
addition, Lilly, through its wholly-owned subsidiaries, owns 160,200 shares
of Company Common Stock and all of the Series C Preferred Stock and will
vote those shares in favor of the Merger. The shares of Company Common
Stock, Series B Preferred Stock and Series C Preferred Stock collectively
owned by these shareholders and Lilly represent approximately 70% of the
Company Common Stock, Series B Preferred Stock and Series C Preferred Stock
entitled to vote as a class on the Merger. Thus, upon the vote of these
shareholders in accordance with such agreements, shareholder approval of
the Merger is assured.
2
THE MERGER
Conversion of Shares of Company Common Stock, Series B Preferred Stock
and Series C Preferred Stock
Pursuant to the Merger, (i) each outstanding share of Company Common
Stock (other than shares held by IMS as treasury shares, shares owned by
Lilly or any subsidiary of Lilly, or shares as to which dissenters' rights
have been perfected under Colorado law) will be converted into, at the
holder's election, either (a) $8.00 in cash, without interest, or (b) one
share of Series D Preferred Stock, (ii) each outstanding share of Series B
Preferred Stock (other than shares as to which dissenters' rights have been
perfected under Colorado law) will either (a) be converted into, at the
holder's election, either (1) $5.33 in cash, without interest, plus an
amount, in cash, without interest, equal to the amount of all accrued and
unpaid dividends on such share of Series B Preferred Stock to the effective
date of the Merger or (2) two-thirds of a share of Series D Preferred Stock
plus an amount, in cash, without interest, equal to the amount of all
accrued and unpaid dividends on such share of Series B Preferred Stock to
the effective date of the Merger or (b) remain outstanding (with the
amended preferences, limitations and rights set forth in the Articles of
Incorporation of the surviving corporation) and (iii) each outstanding
share of Series C Preferred Stock of the Company will be converted into one
share of common stock of the surviving corporation. The cash and Series D
Preferred Stock to be issued in connection with the Merger is referred to
as the "Merger Consideration".
No fractional shares of Series D Preferred Stock will be issued, but,
in lieu thereof, cash payments will be made to each holder of Series B
Preferred Stock in respect of any fractional share that would otherwise be
issuable to such holder (after aggregating all of the shares of Series D
Preferred Stock to be issued to such holder) in an amount equal to such
fractional part of a share of Series D Preferred Stock multiplied by $8.00.
No such holder shall be entitled to dividends, voting rights or any other
shareholder right in respect of any fractional share.
Election; Form of Election Procedures
Subject to the election procedures set forth below, each record
holder immediately prior to the Effective Date of the Merger of shares of
Company Common Stock or Series B Preferred Stock (other than Lilly or any
subsidiary of Lilly) will be entitled (i) to elect to receive cash for any
or all of such shares (a "Cash Election"), or (ii) to elect to receive
Series D Preferred Stock for any or all of such shares (a "Stock
Election"). In addition, each record holder immediately prior to the
Effective Date of shares of Series B Preferred Stock will be entitled to
elect to retain those shares of Series B Preferred Stock, as amended by the
Articles of Merger (an "Election to Retain Series B Preferred Stock"). ALL
SUCH ELECTIONS SHALL BE MADE ON A FORM OF ELECTION (A "FORM OF ELECTION")
THAT WILL BE MAILED SEPARATELY TO SHAREHOLDERS OF RECORD ON THE EFFECTIVE
DATE FOLLOWING THE MERGER. To be effective, a Form of Election must be
properly completed, signed and submitted to Citibank, N.A., as exchange
agent (the "Exchange Agent"), and (except if an Election to Retain Series B
Preferred Stock is made or deemed to have been made) accompanied by the
certificates representing the shares of Company Common Stock or Series B
Preferred Stock as to which the election is being made (or by an
appropriate guarantee of delivery of such certificates by a commercial bank
or trust company in the United States or a member of a registered national
securities exchange or the National Association of Securities Dealers,
Inc.). All duly completed Forms of Election must be received by the
Exchange Agent no later than 5:00 p.m., New York City Time, on
__________________ (the "Election Deadline"). A HOLDER OF COMPANY COMMON
STOCK OR SERIES B PREFERRED STOCK WHO DOES NOT SUBMIT A PROPERLY COMPLETED
AND SIGNED FORM OF ELECTION WHICH IS RECEIVED BY THE EXCHANGE AGENT PRIOR
TO THE ELECTION DEADLINE SHALL BE DEEMED TO HAVE MADE A CASH ELECTION, IN
THE CASE OF A HOLDER OF COMPANY COMMON STOCK, AND AN ELECTION TO RETAIN
SERIES B PREFERRED STOCK, IN THE CASE OF A HOLDER OF SERIES B PREFERRED
STOCK. An election may be revoked, but
3
only by written notice received by the Exchange Agent prior to the Election
Deadline. See "THE MERGER AGREEMENT - Form of Election Procedures."
SHAREHOLDERS SHOULD NOT SEND IN ANY SHARE CERTIFICATES WITH THEIR
PROXY CARDS.
Effect of the Merger on Company Options and Company Warrants
Each holder of outstanding options to purchase Company Common Stock
(the "Company Options") on the Effective Date will have the right,
immediately following the Merger, to elect to have such Company Options
converted, in whole or in part, into (i) the right to receive $8.00 in
cash, without interest, for each share of Company Common Stock for which
such Company Option was exercisable as of the Effective Date (except that
in lieu of paying the exercise price of such Company Option, the holder
thereof may elect to net the amount of the exercise price against and to
that extent reduce the $8.00 otherwise receivable), or (ii) the right to
purchase, for the same exercise price, one share of Series D Preferred
Stock for each share of Company Common Stock for which such Company Option
was exercisable as of the Effective Date or (iii) fully vested options to
acquire shares of Common Stock of Lilly ("Lilly Common Stock") under the
1994 Lilly Stock Plan registered on Form S-8 ("Lilly Options"). Any
election pursuant to clause (ii) above must be for a whole number of shares
of Series D Preferred Stock.
Each holder of outstanding warrants to purchase Company Common Stock
(the "Company Warrants") on the Effective Date (other than any warrants
owned by Lilly or any of its subsidiaries) will have the right to elect to
have such Company Warrants converted into (i) the right to receive $8.00 in
cash, without interest, for each share of Company Common Stock for which
such Company Warrant was exercisable as of the Effective Date (except that
in lieu of paying the exercise price of such Company Warrant, the holder
thereof may elect to net the amount of the exercise price against and to
that extent reduce the $8.00 otherwise receivable) or (ii) the right to
purchase, for the same exercise price, one share of Series D Preferred
Stock for each share of Company Common Stock for which such Company Warrant
was exercisable as of the Effective Date. Each warrant to purchase Series
C Preferred Stock owned by Lilly or any of its subsidiaries will, on the
Effective Date, be converted into the right to purchase one share of common
stock of the surviving corporation for each share for which such warrant
was exercisable as of the Effective Date.
A Form of Election for use by holders of Company Options and Company
Warrants will be mailed separately to the holders thereof following the
consummation of the Merger. To be effective, a Form of Election must be
properly completed, signed and received by the Exchange Agent by the
Election Deadline. HOLDERS OF COMPANY OPTIONS OR COMPANY WARRANTS WHO DO
NOT PROPERLY COMPLETE AND RETURN A FORM OF ELECTION BY THE ELECTION
DEADLINE WILL BE DEEMED TO HAVE ELECTED TO RECEIVE THE LILLY OPTIONS, IN
THE CASE OF A COMPANY OPTION, OR THE RIGHT TO PURCHASE SHARES OF SERIES D
PREFERRED STOCK, IN THE CASE OF COMPANY WARRANTS. See "THE MERGER
AGREEMENT - Effect of the Merger on Company Options and Company Warrants."
Recommendation of IMS's Board of Directors
THE BOARD OF DIRECTORS OF IMS (WITH ONE DIRECTOR ABSENT) HAS
UNANIMOUSLY DETERMINED THAT THE PROPOSED MERGER IS FAIR AND REASONABLE AND
IN THE BEST INTERESTS OF IMS AND ITS SHAREHOLDERS (OTHER THAN LILLY AND ITS
SUBSIDIARIES) AND RECOMMENDS APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
BY IMS SHAREHOLDERS (EXCEPT THAT THE TWO DIRECTORS WHO ARE AFFILIATED WITH
LILLY ABSTAINED FROM THE BOARD'S DELIBERATIONS AND VOTE). For a discussion
of the factors considered by IMS's Board of Directors in approving the
Merger, see
4
"SPECIAL FACTORS TO BE CONSIDERED - Recommendation of the IMS Board of
Directors; Fairness of the Merger."
Opinion of Financial Advisor
Smith Barney Inc. ("Smith Barney") has delivered its written opinion
dated August 2, 1995 to the effect that the consideration to be offered to
IMS's shareholders (other than Lilly and its subsidiaries) in the Merger
was fair from a financial point of view as of the date of such opinion. A
copy of Smith Barney's opinion, which sets forth the assumptions made,
procedures followed, matters considered, limitations on and the scope of
the review by Smith Barney in rendering its opinion, is attached to this
Proxy Statement-Prospectus as Appendix C and should be read carefully in
its entirety. See "SPECIAL FACTORS TO BE CONSIDERED - Opinion of Financial
Advisor."
Prior Relationship/Agreements of the Parties
Lilly, through PCS, has been a shareholder of IMS since November
1994, when Lilly acquired the PCS pharmacy benefit management services
business of McKesson Corporation ("McKesson"). As a result of that
acquisition, Lilly, through PCS, has owned, or had the right to acquire,
about 28% of the Company Common Stock on a fully-diluted basis.
By acquiring PCS, Lilly also acquired various contract rights that
are described below. In some instances, IMS has disputed whether those
rights continue to exist and, if so, the extent of those rights. Under the
McKesson Sponsorship Agreement, PCS has claimed various rights to utilize
IMS Networks to send and receive information between IMS Network Sites and
PCS clients, and to link IMS Networks to PCS's transaction processing and
data base management infrastructure to send and receive information in
support of a variety of services. In addition, under this Agreement, IMS
has agreed that it will not introduce "Prescription Benefit Management
Services" without the approval and except on terms acceptable to PCS. See
"SPECIAL FACTORS TO BE CONSIDERED - Prior Agreements/Relationship of the
Parties-McKesson Sponsorship Agreement."
Under the McKesson Stockholder's Rights Agreement, PCS has claimed
various rights, including the right to elect two directors of IMS, rights
of access for "McKesson Products Lines" to the physicians who are
"Subscribers" to IMS Networks, and rights of approval over agreements for
the operation of an IMS Network with any entity engaged in a business
defined as a "McKesson Product Line."
In addition, under this Agreement, PCS has claimed a right of first
offer to purchase any "New Securities" that IMS proposes to sell, subject
to certain exceptions, and a right to approve any prospective purchasers of
"New Securities" who are engaged in any of the businesses defined as
"McKesson Product Lines." See "SPECIAL FACTORS TO BE CONSIDERED - Prior
Agreements/Relationship of the Parties-McKesson Stockholder's Rights
Agreement."
Lilly has also loaned to IMS an aggregate of $5 million and has
agreed to continue to loan to IMS from time to time at IMS's request
additional funds as required to fund the then current cash requirements of
IMS but not to exceed $1.5 million per month. Each loan is due and payable
upon the earlier of any breach of the Merger Agreement by IMS (subject to
certain rights of IMS to cure such breach) or July 1, 1996 with interest at
the annual rate of 10%. Each loan is subordinated to all IMS indebtedness
outstanding on the date of such loan and is secured by a pledge of most of
the assets of IMS, including shares of subsidiaries.
5
Put/Call Agreements
Lilly will offer each holder of Company Common Stock, Series B
Preferred Stock, Company Options or Company Warrants (a "Holder") the
opportunity to enter into a Put/Call Agreement that would apply to any or
all of the Holder's shares of Series D Preferred Stock as the Holder may
elect (the "Subject Shares").
Under a Put/Call Agreement, a Holder will have the right to require
Lilly to purchase any or all of the Holder's Subject Shares during each of
two Put Periods at a price of $8.00 per share, plus any unpaid dividends
accrued to the purchase date (the "Purchase Price"). The initial Put
Period shall be a period of at least 10 business days beginning on the
first anniversary of the Merger; the second Put Period shall be a period of
at least 10 business days beginning approximately 30 months after the
Merger.
Under a Put/Call Agreement, Lilly will have the right to require a
Holder to sell any or all of the Holder's Subject Shares to Lilly at the
Purchase Price in whole at any time or in part from time to time after the
third anniversary of the Merger.
The stock certificates representing the Subject Shares will bear a
restrictive legend and must be deposited into an escrow accompanied by an
undated stock power endorsed in blank relating to the Subject Shares. The
Holder will have the right to sell, assign, donate, pledge or otherwise
transfer or encumber any or all of the Subject Shares and any related
rights and obligations under the Put/Call Agreement only with Lilly's prior
written consent, which will be granted under certain specified conditions.
See "PUT/CALL AGREEMENTS."
Amendment to Employee Stock Option Plan
Approval of the Merger by IMS shareholders will include approval of
an amendment to the Integrated Medical Systems, Inc. 1994 Employee Stock
Option Plan (the "1994 Employee Stock Option Plan") to increase the number
of shares available under such plan from 400,000 shares of Company Common
Stock to 838,600 shares of Company Common Stock, which equals the total
number of shares subject to options previously granted under the Plan. See
"AMENDMENT TO THE IMS 1994 EMPLOYEE STOCK OPTION PLAN."
Amendment to Articles of Incorporation
Approval of the Merger by IMS shareholders will also include approval
of an amendment to the Articles of Incorporation of IMS, effective upon
consummation of the Merger, which will, among other things, eliminate the
voting rights of the Series B Preferred Stock other than as required by
Colorado law and make the Series B Preferred Stock parity stock with Series
D Preferred Stock upon the liquidation, dissolution or winding-up of IMS.
See "AMENDMENT TO THE ARTICLES OF INCORPORATION OF IMS." For a description
of the amended preferences, limitations and relative rights of the Series B
Preferred Stock following the Merger, see "DESCRIPTION OF CAPITAL STOCK OF
IMS - Series B Preferred Stock."
Conditions to the Merger
The obligations of Lilly, Subsidiary and IMS to consummate the Merger
are subject to the satisfaction of certain conditions, including approval
of the Merger by IMS's shareholders at the Special Meeting. Other
conditions to each party's obligations to consummate the Merger may be
waived by such party, subject to applicable law and certain limitations
imposed by the Merger Agreement. Neither Lilly
6
nor IMS presently intends to waive any such conditions although each of
them reserves the right to do so. See "THE MERGER AGREEMENT - Conditions
to the Merger."
Governmental and Regulatory Approvals
In connection with prior exercises of Warrants to purchase Series C
Preferred Stock, Lilly filed a Notification with the Federal Trade
Commission and the Department of Justice pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") on February
27, 1995, seeking clearance to acquire 50% or more of the voting stock of
IMS. No second request for additional information was received and the
mandatory waiting period expired on March 29, 1995. As a result, no
further action is required under the HSR Act in connection with the Merger
provided that the Merger is completed by March 29, 1996. See "SPECIAL
FACTORS TO BE CONSIDERED - Governmental and Regulatory Approvals."
Effective Date
The Merger will become effective at such time as the Articles of
Merger setting forth the principal terms of the Merger provided for in the
Merger Agreement is duly filed with the Colorado Secretary of State in
accordance with Colorado law (the "Effective Date"). Under the Merger
Agreement, the required filing is expected to be made as soon as
practicable after the satisfaction or waiver of all conditions to the
Merger, including the approval of the Merger by IMS shareholders at the
Special Meeting. It is anticipated that if the Merger is approved at the
Special Meeting and all other conditions to the Merger have been fulfilled
or waived, the Effective Date will occur on the date of the Special Meeting
or as soon as practicable thereafter. See "THE MERGER AGREEMENT - The
Merger."
Termination
The Merger Agreement may be terminated at any time prior to the
Effective Date: (i) by mutual consent of Lilly, Subsidiary and IMS; (ii)
by Lilly and Subsidiary, or by IMS, respectively, if, at or before the
Effective Date, any condition set forth in the Merger Agreement for the
benefit of Lilly and Subsidiary or IMS, respectively, will not have been
timely met and such failure will not have been cured or eliminated, or by
its nature cannot be cured or eliminated; (iii) by Lilly and Subsidiary or
by IMS if the closing of the Merger (the "Closing") will not have occurred
on or before December 31, 1995, or such later date as may have been agreed
upon by the parties or as is provided for in the Merger Agreement in
connection with Lilly's right to delay or suspend the effectiveness of the
Registration Statement; or (iv) by Lilly and Subsidiary or by IMS in
certain other specific circumstances. Upon the termination of the Merger
Agreement under certain specific circumstances, IMS or Lilly may be
required to pay the other a $4 million termination fee. See "THE MERGER
AGREEMENT - Termination" and "- Liability of the Parties Upon Termination."
Dissenters' Rights
Record Holders who object to the Merger may, under certain
circumstances and by following prescribed statutory procedures, receive
cash for their shares of Company Common Stock or Series B Preferred Stock
in lieu of the consideration described above. The failure of a dissenting
shareholder to follow such procedures, which are described more fully
elsewhere in this Proxy Statement-Prospectus, may result in termination or
waiver of such shareholder's rights as a dissenter. See "RIGHTS OF
DISSENTING SHAREHOLDERS."
7
Accounting Treatment
It is expected that the Merger will be treated as a "purchase" for
financial accounting purposes in accordance with generally accepted
accounting principles ("GAAP"). See "SPECIAL FACTORS TO BE CONSIDERED -
Accounting Treatment of the Merger."
Certain Federal Income Tax Consequences of the Merger
A holder of Company Common Stock or Series B Preferred Stock (or
Company Warrants) who elects to receive cash in exchange for all or a
portion of his or her IMS stock (or warrants) will recognize taxable gain
or loss for federal income tax purposes with respect to those shares (or
warrants) in an amount equal to the difference between (a) the amount of
the cash received by such holder and (b) the holder's adjusted tax basis in
the shares of IMS stock (or warrants) surrendered in exchange therefor.
A holder of Company Common Stock or Series B Preferred Stock who
elects to exchange such stock for Series D Preferred Stock and does not
enter into a Put/Call Agreement with respect to such stock should not
recognize taxable gain or loss for federal income tax purposes with respect
to such stock (except with respect to any cash received in lieu of
fractional shares).
The treatment of a holder of Company Common Stock or Series B
Preferred Stock who elects to exchange such stock for Series D Preferred
Stock and enters into a Put/Call Agreement with respect to such stock is
uncertain, and is discussed in greater detail below under "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER - Receipt of Series D Preferred Stock
Subject to Put and Call Rights." Any such holder should consult his or her
own tax advisor regarding the consequences of the transaction.
Each holder of Company Common Stock, Series B Preferred Stock,
Company Warrants or Company Options is urged to read the summary of
principal federal income tax consequences of the Merger set forth below
under "CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER," and to
consult with his or her own tax advisor as to the specific tax consequences
of the Merger to that holder.
8
COMPARATIVE PER SHARE DATA (UNAUDITED)
The following table presents historical and pro forma per share data for
Lilly and historical per share data for IMS. The pro forma per share data for
Lilly reflects the impact of the Merger and certain other transactions described
in Note 1 below.
LILLY HISTORICAL LILLY PRO FORMA/(1)/ IMS HISTORICAL
YEAR ENDED DECEMBER 31, 1994
Cash dividends declared $ 2.52 $ 2.52 $ 0
Income (loss) from continuing
operations 4.10 3.59 (0.70)
SIX MONTHS ENDED JUNE 30, 1995
Book value $20.47 $20.08 $(2.42)
Cash dividends declared 1.29 1.29 0
Income (loss) from continuing
operations 2.37 2.48 (0.98)
(1) The unaudited consolidated pro forma per share data for the year ended
December 31, 1994 and for the six months ended June 30, 1995 are based on
Lilly's historical results from continuing operations adjusted to reflect
the impact of the Merger as if it had occurred on January 1, 1994 and
January 1, 1995, respectively. The consolidated pro forma per share data
also assumes the number of shares of Lilly common stock outstanding and the
weighted average number of shares of Lilly common stock outstanding used in
the earnings per share calculations are reduced for the effect of the
disposition of Guidant Corporation ("Guidant"). In addition, the unaudited
pro forma consolidated earnings per share from continuing operations for the
year ended December 31, 1994 assumes the acquisition of PCS was consummated
on January 1, 1994.
The unaudited consolidated pro forma book value per share at June 30, 1995
reflects the impact of (i) the Merger; (ii) exclusion of the respective
Guidant balances including elimination of the minority interest in Guidant;
(iii) the effect of the tender of shares of Lilly common stock from the
Guidant exchange offer on treasury stock; and (iv) recognition of the
estimated net gain from the disposition of discontinued operations.
The unaudited pro forma per share data is not necessarily indicative of
Lilly's consolidated per share data had the Merger, Guidant transaction, or
acquisition of PCS reflected therein actually been consummated at the
assumed dates, nor is it necessarily indicative of Lilly's consolidated per
share data for any future period. The unaudited pro forma consolidated per
share data should be read in conjunction with Lilly's consolidated financial
statements and notes thereto incorporated by reference in this Proxy
Statement-Prospectus.
Additional pro forma financial information, balance sheet and income
statement are not presented since IMS does not fall within the definition of
a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X.
9
THE SPECIAL MEETING
TIME, DATE AND PLACE
The Special Meeting will be held on ________, 1995, at _____ A.M.
local time, at ________________________.
PURPOSE OF THE MEETING
At the Special Meeting, the IMS shareholders will be asked to consider
and vote upon the proposed merger of Subsidiary into IMS. The Merger will
result in IMS becoming a subsidiary of Lilly, with all of IMS's outstanding
voting stock being owned by Lilly and all of IMS's other shareholders owning
non-voting Series D Preferred Stock and Series B Preferred Stock.
RECORD DATE AND OUTSTANDING SHARES
Record Holders of shares of Company Common Stock, Series B Preferred
Stock and Series C Preferred Stock at the close of business on the Record Date
will be entitled to notice of and to vote at the Special Meeting. Each issued
and outstanding share of Company Common Stock, Series B Preferred Stock and
Series C Preferred Stock is entitled to one vote per share with respect to the
Merger. On the Record Date, there were 6,584,002 shares of Company Common Stock
issued and outstanding held by approximately 197 holders, 2,000,000 shares of
Series B Preferred Stock issued and outstanding held by approximately 23 holders
and 3,000,000 shares of Series C Preferred Stock issued and outstanding all of
which were held by wholly-owned subsidiaries of Lilly.
REQUIRED VOTE
Under Colorado law and the Articles of Incorporation of IMS, the
affirmative vote of two-thirds of the outstanding shares of Company Common
Stock, Series B Preferred Stock and Series C Preferred Stock, voting together as
a single class, and the affirmative vote of two-thirds of the outstanding shares
of each of the Series B Preferred Stock and the Series C Preferred Stock, each
voting separately as a class, are required to approve the Merger. In addition,
pursuant to the Merger Agreement, it is a condition to the consummation of the
Merger that the Merger be approved by the affirmative vote of shares
representing at least a majority of the voting power of the outstanding shares
of Company Common Stock and Series B Preferred Stock that are not owned by Lilly
or its subsidiaries.
As of the Record Date, the directors of IMS and their affiliates
(other than Lilly or any subsidiary of Lilly) owned an aggregate of 3,337,795
shares of Company Common Stock, representing approximately 51% of the Company
Common Stock entitled to vote on the Merger, and 1,581,562 shares of Series B
Preferred Stock, representing 79% of the Series B Preferred Stock entitled to
vote on the Merger. All of these shareholders have agreed with Lilly to vote
their shares in favor of the Merger. In addition, Lilly, through its wholly-
owned subsidiaries, owns 160,200 shares of Company Common Stock and all of the
Series C Preferred Stock and will vote those shares in favor of the Merger. The
shares of Company Common Stock, Series B Preferred Stock and Series C Preferred
Stock collectively owned by these shareholders and Lilly represent approximately
70% of the Company Common Stock, Series B Preferred Stock and Series C Preferred
Stock entitled to vote as a class on the Merger. Thus, upon the vote of these
shareholders in accordance with such agreements, shareholder approval of the
Merger is assured.
The Board of Directors of IMS (with one director absent) has
unanimously approved the proposed Merger and recommends approval and adoption of
the Merger Agreement by IMS shareholders (except that Dr. Hunt and Mr. Moley, as
Lilly's representatives on the Board, abstained from the Board's deliberations
and vote). Each of the Boards of Directors of Lilly and Subsidiary, and Lilly,
as the sole
10
shareholder of Subsidiary, have approved the proposed Merger. Lilly shareholder
approval is not required for the consummation of the Merger.
REVOCABILITY OF PROXIES
Shares of Company Common Stock, Series B Preferred Stock and Series C
Preferred Stock represented by a properly executed proxy received by IMS will,
unless such proxy is properly revoked prior to the Special Meeting, be voted at
the Special Meeting in accordance with the instructions thereon. Shares
represented by properly executed proxies that do not contain instructions to the
contrary will be voted FOR approval of the proposed Merger and in the discretion
of the proxy holder as to any other matter that may properly come before the
Special Meeting or any adjournment or postponement thereof. Abstention from
voting on the Merger will have the practical effect of voting against the Merger
since it is one less vote for approval. The Board of Directors of IMS knows of
no other business that will be presented for consideration at the Special
Meeting other than the proposal to approve the Merger Agreement and the related
matters described in this Proxy Statement-Prospectus. Proxies are being
solicited hereby on behalf of the Board of Directors of IMS.
Any shareholder may revoke his or her proxy at any time before it is
voted by executing and delivering to IMS a proxy bearing a later date, by
delivering a written notice to the Secretary of IMS stating that the proxy is
revoked, or by voting in person at the Special Meeting.
SOLICITATION OF PROXIES
The cost of the solicitation of proxies, including expenses incurred
by brokerage houses, nominees and fiduciaries in forwarding proxy materials to
beneficial owners, will be paid by IMS. In addition to solicitation by mail,
officers, directors and regular employees of IMS may solicit proxies by
telephone, telegram or by personal interview. Such persons will receive no
additional compensation for such services.
11
SPECIAL FACTORS TO BE CONSIDERED
RISK FACTORS APPLICABLE TO IMS
In addition to the other information contained elsewhere herein,
shareholders of IMS, and particularly those who, if the Merger is approved,
choose to receive Series D Preferred Stock, or options or warrants to
acquire Series D Preferred Stock, or to hold their shares of Series B
Preferred Stock, should carefully consider the risks of holding IMS equity
securities, including the following:
Possible Inability to Pay Dividends or Redeem Preferred Stock.
The financial condition of IMS resulting from the factors described below
may preclude it under state corporate law from paying dividends on Series B
Preferred Stock or Series D Preferred Stock or from redeeming Series D
Preferred Stock in accordance with the terms of such securities. Lilly is
not obligated to provide additional financing to IMS to permit IMS to pay
dividends on preferred stock or to redeem Series D Preferred Stock in the
future. Accordingly there can be no assurance that IMS will pay future
dividends as they accrue or redeem outstanding Series D Preferred Stock in
a timely manner, if ever. However, holders of Series D Preferred Stock who
elect to enter into Put/Call Agreements will have the right to require
Lilly to purchase such shares as provided in those agreements. See
"PUT/CALL AGREEMENTS."
Controlling Shareholder. Upon completion of the Merger, Lilly
and/or its affiliates will own 100% of the Company's outstanding voting
stock and will be the controlling shareholder of the Company. Accordingly,
Lilly will be able to control virtually every aspect of the Company's
affairs.
Historical Operating Losses and Negative Cash Flow From
Operations. As a result of its rapid growth, the investment required to
establish its operating networks and the time required for networks to
generate positive cash flow, the Company has incurred significant operating
and net losses and negative cash flow since its inception. At June 30,
1995, IMS had an accumulated deficit of approximately $29.9 million. The
Company had net losses of approximately $3.7 million, $5.9 million and $4.3
million for the fiscal years ended December 31, 1992, 1993 and 1994,
respectively, and $6.5 million for the six month period ended June 30,
1995. The Company expects to continue to generate negative cash flow from
operating activities while it emphasizes development and expansion of its
IMS MEDACOM/(R)/ networks and until its operating networks have established
a sponsor base generating sufficient recurring revenue to cover direct
network operating expenses and the costs of corporate support and overhead.
There can be no assurance that the Company will achieve or sustain
profitability in the future.
Long Sales Cycle; Dependence on Licensing Revenue. The Company's
long term recurring cash flow is dependent upon the Company being able to
establish a substantial number of sponsors for its various networks and
increasing the number of physicians with which the networks have
connectivity. The Company normally anticipates that it will take from 12
to 36 months before a new network will generate a positive cash flow.
During this period, the Company will expend substantial time, efforts and
funds to obtain sponsors for a network, to market to physician subscribers
and to increase network usage. If the Company is unable to establish
networks with a sufficient number of sponsors to provide positive cash
flow, the Company will continue to incur losses in the future. Moreover,
pending the establishment of additional recurring revenue from fees paid by
sponsors of networks, the Company will rely on fees from the periodic sales
of network licenses and fees from existing sponsors. There are no
assurances that the Company will be able to generate sufficient cash flow
therefrom to meet the Company's cash requirements.
Competition. The market for healthcare information systems is
intensely competitive. Computerized medical office management and data
communication systems are offered to physicians, hospitals, payors and
other potential network sponsors by a wide range of vendors, including
manufacturers of computer equipment, software vendors, hospital information
systems companies and systems integrators. In addition, certain claims
processing organizations, hospitals, third party administrators, insurers
and/or other organizations provide direct computer communication links
between the physician and the
12
organization. These business firms have financial and other resources more
extensive than those of the Company.
The Company relies on copyrights, trademarks and service marks,
nondisclosure and noncompetition agreements and technical measures to
protect its proprietary rights pertaining to its software products and
network technology. Such protection may not preclude competitors from
developing networks and software with features similar to those developed
by the Company. The Company's business and anticipated future success
depend on its technology, expertise and experience, all of which could be
duplicated by competitors. There can be no assurance that future
competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the network services industry in general is impacted
by evolving standards and technology. The Company's ability to anticipate
or guide these standards in the health care sector and to continue to apply
advances in computer and telecommunications technology in the operation of
its networks will be significant factors in the Company's success. Many of
the Company's competitors have significantly greater financial, technical,
product development and marketing resources than the Company, and there is
no assurance that the Company will remain competitive.
Consolidation of the Healthcare Industry. The rapid emergence of
managed care plans and especially the movement toward risk sharing or
capitated provider payment methodologies is resulting in dramatic changes
in the healthcare industry. The Company's market is being complicated by
the formation of new multi-provider integrated delivery systems in which
the goals of payors, provider institutions and hospitals become aligned.
Many healthcare providers are consolidating to create larger healthcare
delivery enterprises with greater regional market power. As a result, the
number of potential sponsors for the Company's networks could be reduced,
thereby shrinking the Company's total market.
Dependence on Key Management and Personnel. The Company depends
to a significant extent on certain executive officers and technical
personnel. The Company's growth and future success will depend in large
part on its ability to attract, motivate and retain highly qualified
personnel, in particular, trained and experienced professionals capable of
developing, selling and installing healthcare information networks.
Competition for such personnel is intense and there can be no assurance
that the Company will be successful in hiring, motivating, training or
retraining such qualified personnel. The loss of key personnel or the
inability to hire or retain qualified personnel could have a material
adverse effect on the Company's business, financial condition and results
of operations. The Company does not currently maintain any key man life
insurance policies on any of its management personnel or employees and does
not have employment agreements with most of them.
Limited Experience in Expanding Networks. Because most of the
Company's networks have become operational in the last two years, usage of
many of these networks to date has been limited. The Company will depend
upon the growth of recurring revenue from these networks as they mature,
without which the Company's future results may be adversely affected. The
Company's marketing strategy relies heavily on its ability to recruit local
and national sponsors willing to pay fees to the Company to communicate
with physicians and others using the networks. There is no assurance that
this marketing approach will be successful. The Company's marketing
efforts have been focused upon convincing hospitals, clinical laboratories,
pharmacies, imaging centers and other medical payers and providers to
convert from a traditional proprietary communications system approach of
paper and phone based communications with physicians to the Company's
nonproprietary and open architecture automated network solution. There can
be no assurance that these conversions will occur or that the Company's
network services will be the method of communication employed by such
users.
13
BACKGROUND TO THE MERGER
Lilly, through its subsidiary, PCS, has been a shareholder of IMS
since November 1994, when Lilly acquired the PCS pharmacy benefits
management services business of McKesson. At that time McKesson owned
160,200 shares of Company Common Stock, 2,625,000 shares of Series C
Preferred Stock and Warrants to buy an aggregate of 875,000 shares of
Series C Preferred Stock at prices of $5 to $7 per share. (See "- Prior
Agreements/Relationship of the Parties - Stock Purchases by McKesson"
below.) Each share of Series C Preferred Stock is convertible into one
share of Company Common Stock. At the time McKesson also held various
agreements with IMS that are described below under "- Prior
Agreements/Relationship of the Parties - McKesson Sponsorship Agreement"
and "- Prior Agreements/Relationship of the Parties - McKesson
Stockholder's Rights Agreement." By acquiring PCS, Lilly acquired
McKesson's IMS shares and Warrants and contract rights. In January 1995,
PCS exercised a Warrant to purchase 375,000 shares of Series C Preferred
Stock at a price of $5 per share. As a result of the foregoing, since
November 1994, Lilly, through PCS, has owned, or had the right to acquire,
about 28% of the Company Common Stock on a fully-diluted basis and has been
entitled to have two representatives on the IMS Board of Directors. Mr.
Kevin Moley, an employee of PCS, has served as a Lilly representative on
the IMS Board since November 1994. Mr. Moley served as a McKesson
representative on the IMS Board since January 1994 and also served as
interim Chief Executive Officer of IMS for the period from July 1994 to
December 1994. Dr. Michael Hunt has served as a Lilly representative on
the IMS Board since December 1994.
In December 1994, Lilly indicated to IMS that it was considering
the possibility of proposing a transaction in which Lilly would acquire
some or all of the shares of Company Common Stock that it did not already
own. At a meeting held on December 20, 1994, the IMS Board established a
special committee (the "Special Committee") to consider and explore any
proposal received from Lilly for such a transaction, as well as to consider
and explore alternative transactions. The Special Committee consisted of
Messrs. Charles I. Brown, Alan S. Danson, John W. Hanes, Jr., David R.
Holbrooke, James A. Larson and John A. McChesney, none of whom is an
officer, employee or affiliate of Lilly and only one of whom, Mr. Brown, is
an executive officer of IMS. The Special Committee was authorized to
retain a financial advisor and legal counsel. At the request of the
Special Committee, IMS retained special legal counsel to work with IMS's
regular outside counsel and the investment banking firm of Smith Barney to
serve as financial advisor in connection with any proposal from Lilly or
other similar alternative transaction.
On January 16, 1995, representatives of Smith Barney and IMS's
legal counsel met with representatives of Lehman Brothers ("Lehman"),
Lilly's financial advisors. At that meeting, Lehman indicated that Lilly
was aware of IMS's need for working capital. Lehman stated that Lilly
would be prepared to make a proposal to acquire the remainder of the shares
of IMS it did not own in a cash transaction valued in the $5.50 to $6.50
per share range if IMS were interested in receiving such a proposal. Over
the course of the next several weeks, the Special Committee met several
times by telephone with its legal and financial advisors to review that
possible proposal and to discuss the alternatives that were available to
IMS in light of the contract rights that may be held by Lilly as a result
of its acquisition of PCS. The alternatives considered by the Special
Committee included a merger or other strategic transaction with Lilly or
with other possible parties, an initial public offering, a private
placement of securities with new or existing investors and the
establishment of additional sponsor arrangements. The Special Committee,
with the advice of Smith Barney, determined that this value range was
inadequate and that a proposal in that range would not warrant further
exploration. In mid-February, following these meetings, Smith Barney
advised Lehman that IMS did not want to pursue a transaction in that value
range although it might be willing to consider a proposal for a transaction
at a higher value. Lehman also was advised that IMS would begin to explore
alternative transactions to raise needed working capital, such as an
initial public offering of shares of Company Common Stock.
In the course of further discussions to see if Lilly would
consider proposing a higher value, IMS provided Lilly with certain
information about IMS that was not available publicly and that had not
14
previously been made available to IMS shareholders. This information
included business plans prepared by IMS's senior management which included
forecasts and projections of the future financial performance of IMS. The
financial forecasts furnished to Lilly by IMS included annual revenue
estimates for 1995 through 1999 of approximately $32 million, $53 million,
$82 million, $115 million and $140 million, respectively, and operating
profits (before minority interest and provision for income taxes) for the
same years at approximately $1 million, $10 million, $22 million, $37
million and $48 million, respectively. Numbers of physicians connected to
IMS networks for the same years were forecast to be approximately 33,000,
53,000, 76,000, 98,000 and 114,000, respectively. All of the estimates
assumed that at least $27.7 million in additional working capital during
the five years would be required. These estimates were prepared by senior
management concerning the anticipated future performance of IMS as a stand-
alone entity, without giving effect to any offer from Lilly, including the
Merger.
IMS does not as a matter of course make public, or disclose
generally to its shareholders, any projections as to future performance or
earnings, and the projections set forth above are included in this Proxy
Statement-Prospectus only because the information was made available to
Lilly by IMS. IMS has informed Lilly that the projections were not
prepared with a view to public disclosure or compliance with the published
guidelines of the Commission or the guidelines established by the American
Institute of Certified Public Accountants regarding projections or
forecasts. IMS also has informed Lilly that its financial forecasts are,
in general, prepared solely for internal use and capital budgeting and
other management decision-making purposes and are subjective in many
respects and thus susceptible to various interpretations and periodic
revision based on actual experience and business developments. Projected
information of this type is based on estimates and assumptions that are
inherently subject to significant economic and competitive uncertainties
and contingencies, all of which are difficult to predict and many of which
are beyond the control of IMS or Lilly and their respective financial
advisors. Many of the assumptions upon which the projections were based
are dependent upon economic forecasting (both general and specific to IMS's
business), which is inherently uncertain and subjective. Accordingly,
actual results may vary materially from such projections, and none of IMS
or Lilly or their respective financial advisors assumes any responsibility
for the accuracy or validity of any of the projections. The inclusion of
the foregoing projections should not be regarded as an indication that IMS
or Lilly considers such projections an accurate prediction of future
events, and Lilly has not relied on them as such.
During March and April of 1995, IMS undertook to explore several
alternative transactions aimed at raising working capital. During this
period the Special Committee met frequently by telephone with IMS's legal
counsel and Smith Barney. Two additional current directors who are members
of IMS's senior management, Messrs. Kevin R. Green and James T. Murphy, who
were not then directors, participated in many of these meetings by
invitation of the Special Committee. Substantial progress was made
preparing IMS for an initial public offering that might be effected with
Smith Barney serving as lead underwriter. IMS also had discussions with
third parties about possible minority investments by such third parties in
IMS. At a meeting of the IMS Board on April 21, 1995, the Board heard a
presentation from Smith Barney concerning the viability of an initial
public offering of IMS stock at that time. Dr. Hunt, one of the members of
the IMS Board employed by Lilly, stated that Lilly would prefer to have IMS
suspend efforts toward an initial public offering or placement of shares
with minority investors and instead explore a transaction in which Lilly
would acquire IMS. The Board determined that the working capital needs of
IMS would not permit IMS to suspend these financing efforts and authorized
management to proceed with preparations for an initial public offering to
be consummated as soon as possible and to continue discussions with Lilly
or potential minority investors to bridge IMS's working capital needs until
the public offering could be completed. Shortly after this meeting, Lilly
advised IMS that it believed the contract rights obtained from McKesson
provided Lilly a right of prior approval of any sale of stock to one such
potential investor, although not over certain other sales or an initial
public offering.
On May 1, 1995, Lilly sent a letter to IMS outlining the terms of
a proposed transaction Lilly was prepared to discuss with IMS. Under this
proposal, Lilly would obtain control of IMS through a series of purchases
of Company Common Stock. The proposed transaction contemplated purchases
by
15
Lilly from the IMS shareholders at a price of $7.00 per share of Company
Common Stock (subject to adjustment) and purchases by Lilly from IMS of
newly issued shares ranging in price from $5.25 to $6.00 per share of
Company Common Stock (subject to adjustment). Lilly would also commit to
make an offer to any remaining holders of Company Common Stock three years
after acquisition of control at a price of $8.29 per share of Company
Common Stock (calculated based on a $7.00 per share price, plus interest on
such amount in the amount of 6% per annum).
The Special Committee met with IMS's legal counsel and Smith
Barney to discuss this proposed transaction on May 2, 1995. Smith Barney
advised the Special Committee that, while the proposed transaction would
provide needed working capital to IMS and liquidity to IMS shareholders,
the offer appeared to be low and did not include any premium for either
control or strategic value. Smith Barney believed that IMS could sell
shares in the contemplated initial public offering in the same $7.00 per
share range. The Special Committee and its advisors discussed the fact
that a transaction with Lilly would eliminate the uncertainty caused by the
differing interpretations of Lilly's contract rights and also would
eliminate the risk that a financing could not be completed if the business
did not achieve projected results in the near term.
Following this meeting, representatives of IMS and its legal
counsel and Smith Barney had further conversations with representatives of
Lilly about the proposed transaction. Lilly was advised that the proposed
transaction did not provide enough value for the IMS shareholders and that
a structure that would result in a tax-free transaction for IMS
shareholders was preferred. On May 9, 1995, members of the Special
Committee, Messrs. Green and Murphy, IMS's legal counsel and Smith Barney
met with representatives of Lilly, Lehman and Lilly's counsel to continue
negotiations concerning a possible transaction. Lilly indicated that if
the parties could agree on the parameters of a proposed transaction, Lilly
would offer to provide interim financing to IMS and thus would ask that IMS
suspend efforts toward an initial public offering or other financing. At
this meeting the parties agreed to negotiate a non-binding term sheet
providing for a transaction that would provide $8.00 per share of Company
Common Stock with an opportunity for tax deferral to IMS shareholders and
would provide Lilly with control of IMS. Lilly indicated that, as part of
any such transaction, it would require that the members of the Board, in
their individual capacity as shareholders, enter into appropriate support
arrangements aimed at ensuring that the transaction would be consummated.
Over the next several weeks the parties negotiated successive drafts of the
non-binding term sheet.
On June 12, 1995, Lilly and IMS executed a "Non-Binding Term
Sheet" (the "Term Sheet") pursuant to which they agreed to discuss a
definitive agreement under which Lilly or an affiliated entity would
acquire IMS on terms outlined in the Term Sheet. Those terms with some
modifications are reflected in the Merger Agreement.
The Term Sheet did not create any legal obligations, except that
(1) IMS agreed that until such time as IMS reasonably determined and
notified Lilly that the parties could not reach a definitive agreement, IMS
would conduct its business in the ordinary course and any extraordinary
transaction material to its business would be discussed with and approved
by Lilly; (2) IMS agreed that it would immediately suspend all efforts to
finance its business through a public offering or private placement of its
shares or otherwise, or to sell IMS or any of its business or assets, until
such time as IMS reasonably determined and notified Lilly that the parties
could not reach a definitive agreement; and (3) IMS and Lilly agreed that
they would keep the proposed transaction strictly confidential. In
addition, Lilly agreed to loan IMS $3 million upon execution of the Term
Sheet, and IMS agreed to amend the Warrant held by PCS to defer the
increase in exercise price of $6 to $7 per share scheduled for July 12,
1995 until 30 days after the earlier of the termination of the definitive
agreement and such time as IMS or Lilly reasonably determined and notified
the other party that the parties could not reach a definitive agreement.
Upon execution of the Term Sheet, Lilly loaned IMS $3 millon to
be repaid on July 1, 1996 with interest at the annual rate of 10%. The
loan is subordinated to the indebtedness outstanding on
16
June 12, 1995 and is secured by a pledge of most of the assets of IMS,
including shares of subsidiaries. The loan becomes immediately due and
payable if IMS breaches the Merger Agreement, subject to certain rights of
IMS to cure such breach. On July 27, 1995, Lilly loaned IMS an additional
$1 million on the same terms as applied to the June 12 loan.
Following the execution of the Term Sheet, Lilly engaged in a due
diligence review of the business and operations of IMS. While this review
was ongoing, the parties negotiated the terms of the Merger Agreement.
During the course of the extensive negotiations and discussions concerning
the Merger Agreement, the Special Committee met frequently by telephone
with IMS's legal counsel and Smith Barney and also received periodic
updates from Mr. Brown, who participated actively in such negotiations and
discussions as a member of the Special Committee and of senior management
of IMS.
On August 2, 1995, a meeting of the IMS Board was held at which
five members of the Special Committee and Messrs. Green and Murphy were in
attendance. One member of the Special Committee was unable to attend and
Dr. Hunt and Mr. Moley, as Lilly's representatives on the Board, did not
attend except for a brief period during which they were in attendance at
the invitation and request of the other members in attendance. Smith
Barney and legal counsel reviewed with the Board the terms of the Merger
and the Merger Agreement. Smith Barney orally advised the Board that, in
its opinion, as of the date of such opinion, the consideration to be
received by IMS shareholders (other than Lilly and its subsidiaries) in the
Merger was fair to such shareholders from a financial point of view. The
Board discussed at length the conditions to the parties' obligations to
consummate the Merger and the risk that one or more of those conditions
would not be satisfied. In that connection, the Board invited Dr. Hunt and
Mr. Moley to join the meeting to discuss with the Board Lilly's
expectations and intentions with respect to IMS's employees and its
business plans. Dr. Hunt and Mr. Moley assured the Board that Lilly
intended to continue to operate the business as an open architecture
utility model. Lilly also stated that it did not anticipate any
significant personnel changes at that time.
At Lilly's request, each of the IMS directors, other than Dr.
Hunt and Mr. Moley, agreed to enter into support agreements concurrently
with the execution of the Merger Agreement. Pursuant to the support
agreements, each such person, in his capacity as an IMS shareholder, agreed
that until the Merger is consummated or the Merger Agreement is terminated
he will not transfer his IMS shares (subject to certain exceptions), will
vote his IMS shares in favor of the Merger and will refrain from soliciting
or supporting other proposals for the merger or sale of IMS. Each such
person also agreed to exchange any shares of Series B Preferred Stock that
he owns for cash and/or Series D Preferred Stock as he may elect pursuant
to Merger Agreement, and to waive any rights that he may have to register
IMS securities under the Securities Act or to require IMS to provide
information to facilitate public resales of such securities.
Based on its review and consideration of the proposed Merger and
the Merger Agreement, the Board determined that the proposed Merger was
fair and reasonable and in the best interests of the Company and its
shareholders (other than Lilly and its subsidiaries) and approved the
Merger and the Merger Agreement. The Merger Agreement was executed on
August 2, 1995.
LILLY'S PURPOSE OF THE MERGER
For Lilly, the Merger will provide an opportunity to forge closer
ties with health care providers and payers, allowing it to deliver
information quickly to people who provide care and make health care
decisions. For Lilly, the primary purpose for the Merger is to expand
Lilly's pharmaceutical management services by connecting to the existing
25,000 physicians connected to IMS Networks. Lilly intends to utilize the
connectivity to provide disease management utilization tools to the
existing base and future IMS subscribers. Lilly's desire is to expand its
technological intervention capabilities and connectivity to not only
physicians but to all disparate sources of the health care community. IMS
is expected to play an integral role in the creation and expansion of this
health care network.
17
RECOMMENDATION OF THE IMS BOARD OF DIRECTORS; FAIRNESS OF THE MERGER
The Board of Directors of IMS (with one director absent) has
approved the Merger, determined that the proposed Merger is fair and
reasonable and in the best interests of the Company and its shareholders
(other than Lilly and its subsidiaries) and recommended that such
shareholders approve and adopt the Merger Agreement (except that Dr. Hunt
and Mr. Moley, as Lilly's representatives on the Board, abstained from the
Board's deliberations and vote). The Board based its recommendation on a
number of factors, including the following:
(a) Information with respect to the financial condition, results
of operations, business and prospects of the Company, and, in particular,
the failure of the Company to meet its budgeted results for the year to
date and the need for substantial amounts of working capital in the near
term.
(b) The oral opinion of Smith Barney, delivered to the Board on
August 2, 1995 and subsequently confirmed in writing, that the
consideration to be received by IMS's shareholders (other than Lilly)
pursuant to the Merger was fair to such shareholders from a financial point
of view as of the date of such opinion and its subsidiaries.
(c) Possible alternatives to the Merger (including continuing to
operate as an independent entity, engaging in another strategic transaction
or selling stock publicly or privately), the range of possible values to
the Company's shareholders of such alternatives, and the timing and
likelihood of actually accomplishing those alternatives.
(d) The fact that Lilly has reported that it has available
liquid assets sufficient to promptly consummate the Merger.
(e) The terms and conditions of the Merger Agreement, including
the amount and form of the consideration to be received thereunder, and the
fact that the terms of the Merger Agreement and the consideration paid to
shareholders were determined through arm's-length negotiations with the
Special Committee and that members of the Special Committee voted
unanimously (with one member absent) for approval of the Merger and the
Merger Agreement.
(f) The uncertainty that exists as to the rights Lilly has under
the McKesson contracts obtained as part of its acquisition of PCS and the
likelihood that such uncertainty would limit the alternatives to the Merger
available to IMS and affect the cost and timing of pursuing any such
alternative.
(g) The impact of the Merger on the Company's employees and its
business plans.
(h) The willingness of each member of the Board, in his
individual capacity as shareholder, to support the Merger and to enter into
the support agreements required by Lilly in connection with the proposed
Merger Agreement.
In view of the wide variety of factors considered in connection
with its evaluation of the Merger, the IMS Board found it impracticable to,
and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching their decisions.
OPINION OF FINANCIAL ADVISOR
IMS retained Smith Barney as its financial advisor in connection
with the Merger. In connection with such engagement, IMS requested that
Smith Barney evaluate the fairness, from a financial point of view, to the
IMS shareholders (other than Lilly and its affiliates) of the Cash Election
and the Stock Election (collectively, the "Elections") to be offered to
such shareholders in the Merger. Smith Barney rendered an oral opinion to
the IMS Board on August 2, 1995, which was subsequently confirmed in
writing, in each case to the effect that, as of the date of such
18
opinion, the Elections to be offered to the IMS shareholders (other than
Lilly and its subsidiaries) in the Merger was fair, from a financial point
of view, to such shareholders.
The full text of the written opinion of Smith Barney, dated
August 2, 1995, which sets forth the assumptions made, procedures followed,
matters considered, limitations on and the scope of the review by Smith
Barney in rendering its opinion, is attached as Appendix C to this Proxy
Statement-Prospectus. SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS
ENTIRETY.
In connection with rendering its oral opinion and preparing its
written and oral presentations to the IMS Board, Smith Barney performed a
variety of financial analyses, including those summarized below. The
summary set forth below does not purport to be a complete description of
the analyses performed by Smith Barney in this regard. Smith Barney's
opinion is directed only to the fairness, from a financial point of view,
to the IMS shareholders of the consideration to be received by such
shareholders in the Merger, does not address the relative merits of the
Merger as compared to any alternative business strategies that might exist
for IMS or the effect of any other transaction in which IMS may engage nor
does it address any other aspect of the Merger. Smith Barney's opinion does
not constitute a recommendation to any IMS shareholder as to how such
shareholder should vote with respect to the Merger. In addition, Smith
Barney was not asked to, and did not, express any opinion as to the
relative merits of receiving the cash consideration or the stock
consideration in the Merger and, accordingly, Smith Barney's opinion does
not constitute a recommendation to any IMS shareholder as to whether to
make a Cash Election and receive the cash consideration or not to make a
Cash Election and receive the stock consideration. Smith Barney was not
asked to, and did not, express any opinion as to (a) what the value of the
Series D Preferred Stock actually will be when issued to IMS shareholders
pursuant to the Merger or the price at which the Series D Preferred Stock
will trade, if at all, subsequent to the Merger, (b) any Election to
Retain Series B Preferred Stock or (c) the relative fairness of the Merger
to the holders of the Company Common Stock and the holders of the Series B
Preferred Stock. The summary of Smith Barney's opinion set forth below is
qualified in its entirety by reference to the full text of such opinion
attached as Appendix C.
In arriving at its opinion, Smith Barney reviewed the Merger
Agreement and held discussions with certain senior officers, directors and
other representatives and advisors of IMS concerning the business,
operations and prospects of IMS. Smith Barney examined certain business
and financial information relating to IMS as well as certain financial
forecasts and other data for IMS which were provided to Smith Barney by the
management of IMS. Smith Barney reviewed the financial terms of the Merger
as set forth in the Merger Agreement in relation to, among other things:
IMS's historical and projected earnings and the capitalization and
financial condition of IMS. Smith Barney considered, to the extent
publicly available, the financial terms of certain other transactions that
Smith Barney considered comparable to the Merger and analyzed certain
financial and other publicly available information relating to the
businesses of other companies whose operations Smith Barney considered
comparable to those of IMS. Smith Barney also conducted such other
analyses and examinations and considered such other financial, economic and
market criteria as Smith Barney deemed necessary to arrive at its opinion.
In rendering its opinion, Smith Barney assumed and relied,
without independent verification, upon the accuracy and completeness of all
financial and other information publicly available or furnished to or
otherwise reviewed by or discussed with Smith Barney. Except as described
herein, Smith Barney did not conduct any review or investigation of IMS or
Lilly. With respect to financial forecasts and other information provided
to or otherwise reviewed by or discussed with Smith Barney, Smith Barney
assumed that such forecasts and other information were reasonably prepared
on bases that reflected the best currently available estimates and
judgments of IMS's management as to the expected future financial
performance of IMS. In addition, Smith Barney did not make, nor was it
provided with, an independent evaluation or appraisal of the assets,
liabilities (contingent or otherwise) or reserves of IMS nor did Smith
Barney make any physical inspection of the properties or assets of IMS. No
limitations were imposed on Smith Barney with respect to the investigations
made or procedures followed by Smith Barney in rendering its opinion.
Smith Barney's opinion necessarily is based on financial, stock market and
other conditions and circumstances existing and disclosed to Smith Barney
as of the date of its opinion.
In preparing its opinion to the Board of Directors of IMS, Smith
Barney performed a variety of financial and comparative analyses, including
those described below. The summary of such analyses does not purport to be
a complete description of the analyses underlying Smith Barney's opinion or
of its presentations to the IMS Board. The preparation of a fairness
opinion is a complex analytical
19
process involving various determinations as to the most appropriate and
relevant methods of financial analyses and application of those methods to
the particular circumstances and, therefore, such opinion is not readily
susceptible to summary description. In arriving at its opinion, Smith
Barney did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the
significance of each analysis and factor. Accordingly, Smith Barney
believes that its analyses must be considered as a whole and that selecting
portions of its analyses or the factors considered by it, without
considering all analyses and factors, could create a misleading or
incomplete view of the processes underlying such analyses and its opinion.
In its analyses, Smith Barney made numerous assumptions with respect to
IMS, industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of IMS.
The estimates contained in such analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do
not purport to be appraisals or to reflect the prices at which businesses
or securities may actually be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.
Comparable Company Analysis. Using publicly available
information, Smith Barney analyzed, among other things, the closing stock
prices and market values of the following health care information
technology companies: Cerner Corp.; CliniCom, Inc.; CyCare Systems, Inc.;
GMIS Inc.; HBO & Company ("HBO"); HCIA, Inc.; Health Management Systems,
Inc.; Medaphis Corp.; Medic Computer Systems, Inc.; Medicus Systems Corp.;
Phamis, Inc.; and Shared Medical Systems Corp. (collectively, the
"Comparable Companies"). Smith Barney compared the results of IMS to the
results of the Comparable Companies.
Smith Barney compared market values as multiples of historical
and estimated net income. The high, low and mean multiples of net income
of the Comparable Companies for the latest twelve months ("LTM") were 63.3,
19.0 and 40.6. The high, low and mean multiples of estimated 1996 net
income of the Comparable Companies were 35.6, 15.8 and 26.1, respectively.
Smith Barney also compared the total enterprise values (equity market value
plus total debt and the book value of preferred stock, minus cash and cash
equivalents) to historical earnings before interest and taxes ("EBIT") and
to historical earnings before interest, taxes, depreciation and
amortization ("EBITDA") and the total enterprise values plus capitalized
leases to historical revenues and to historical earnings before interest,
taxes, depreciation, amortization and rent ("EBITDAR"). The high, low and
mean multiples of LTM EBIT of the Comparable Companies were 35.3, 11.1 and
24.5, respectively; of EBITDA of the Comparable Companies, 28.4, 8.6 and
17.9, respectively. The high, low and mean multiples of LTM revenues of
the Comparable Companies were 6.5, 1.5 and 3.9, respectively; of EBITDAR of
the Comparable Companies, 24.7, 8.5 and 16.6, respectively.
Using a range of representative multiples derived from these
calculations of total enterprise value plus capitalized leases to LTM
revenues, Smith Barney derived a range of implied equity value of IMS of
approximately $67.7 million to $90.6 million, which reflected a range of
implied value per share of Company Common Stock (or equivalent) of $4.68
to $6.26. Using a range of representative multiples derived from these
calculations of market value to estimated 1996 net income, Smith Barney
derived a range of implied equity value of IMS of approximately $69.0
million to $93.4 million, which reflected a range of implied value per
share of Company Common Stock (or equivalent) of $4.77 to $6.46.
Selected Merger and Acquisition Transactions Analysis. Using
publicly available information, Smith Barney analyzed the purchase prices
and transaction values in the following selected merger and acquisition
transactions involving health care information services companies:
HBO/CliniCom; HBO/First Data Health System Group; Medaphis Corp./Automation
Atwork; Thomson Corp./MEDSTAT Group; HBO/Serving Software; and Inforum
Inc./MEDSTAT Systems Inc. (collectively, the "Comparable Transactions").
20
Smith Barney compared the purchase prices as multiples of
historical net income and book value. The high, low and mean multiples of
LTM net income were 66.2, 12.0 and 38.6, respectively; of book value, 7.5,
2.5 and 4.5, respectively. Smith Barney also compared transaction values
as a multiple of historical revenues and EBIT. The high, low and mean
multiples of LTM revenues were 7.9, 1.4 and 4.8, respectively; of LTM EBIT,
49.4, 6.4 and 30.7, respectively.
Using a range of representative multiples derived from these
calculations of transaction value to LTM revenues, Smith Barney derived a
range of implied equity value of IMS of approximately $82.6 million to
$110.7 million, which reflected a range of implied value per share of
Company Common Stock (or equivalent) of $5.71 to $7.66.
No company, transaction or business used in the comparable
company and selected merger and acquisition transactions analyses is
identical to IMS or the Merger. Accordingly, an analysis of the results of
the foregoing is not entirely mathematical; rather it involves complex
considerations and judgments concerning differences in financial and
operating characteristics and other factors that could affect the
acquisition or public trading value of the comparable companies or the
business segment or company to which they are being compared.
Discounted Cash Flow Analysis. Smith Barney performed a
discounted cash flow analysis of the projected free cash flow of IMS for
the fiscal years ended December 31, 1996 through December 31, 1998,
assuming, among other things, discount rates of 30%, 35% and 40% and
terminal multiples of 1998 EBITDA of 5.0, 6.0, 7.0 and 8.0. Utilizing
these assumptions, Smith Barney arrived at a range of implied equity value
of IMS of approximately $90.6 million to $118.7 million, which reflected a
range of implied value per share of Company Common Stock (or equivalent) of
$6.26 to $8.21.
Initial Public Offering Analysis. Smith Barney also analyzed the
continued viability and attractiveness of an initial public offering of
shares of Company Common Stock. However, Smith Barney concluded that an
initial public offering was not viable and was therefore irrelevant in
their analysis of the fairness of the consideration to be received by
shareholders of IMS in the Merger.
Smith Barney is a nationally recognized investment banking firm
and as part of its investment banking business, Smith Barney is regularly
engaged in the valuation of businesses and their securities in connection
with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. The Special Committee
selected Smith Barney because of Smith Barney's experience in transactions
similar to the Merger as well as Smith Barney's knowledge of the health
care information services industry generally.
As compensation for Smith Barney's services as financial advisor
to IMS in connection with the Merger, IMS has agreed to pay Smith Barney:
(i) a retainer fee of $100,000; (ii) an opinion fee of $500,000, which was
payable upon delivery by Smith Barney of its opinion; and (iii) a
transaction fee of approximately $______, payable upon consummation of the
Merger, against which the retainer fee and the opinion fee will be
credited. IMS has also agreed to reimburse Smith Barney for certain
expenses incurred in connection with its engagement and to indemnify Smith
Barney and its affiliates against certain liabilities, including certain
liabilities under the Federal securities laws relating to, arising out of
or in connection with its engagement. In the ordinary course of its
business, Smith Barney may trade the securities of Lilly for its own
account and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities.
21
PRIOR AGREEMENTS/RELATIONSHIPS OF THE PARTIES
In June, 1993, McKesson made its initial investment in IMS by
purchasing 50,000 shares of Company Common Stock at $5 per share, and in
September 1993 by purchasing a note in the principal amount of $500,000
convertible into Company Common Stock. Pursuant to a Stock Purchase
Agreement, dated January 6, 1994, McKesson purchased 1,250,000 shares of
Series C Preferred Stock at a price of $4 per share in January 1994 payable
in part by cancellation of the $500,000 convertible note, and purchased
1,000,000 shares at a price of $5 per share in July 1994. Also pursuant to
that Agreement, McKesson acquired Warrants to purchase an aggregate of
1,250,000 shares of Series C Preferred Stock at initial exercise prices of
$5 to $6 per share. McKesson purchased from an IMS shareholder an
additional 110,200 shares of Company Common Stock at $5 per share in April,
1994. PCS exercised a Warrant in November 1994 for 375,000 shares of
Series C Preferred Stock at $5 per share. On November 21, 1994, Lilly
acquired the PCS pharmacy benefits management services business of
McKesson, together with McKesson's IMS shares, Warrants and contract
rights. In January 1995, PCS exercised a Warrant for 375,000 additional
shares of Series C Preferred Stock, at a price of $5 per share. PCS
continues to hold a Warrant to purchase 500,000 shares of Series C
Preferred Stock at a price of $6 or $7 per share, depending on the date of
exercise, exercisable until July 1996.
McKesson Sponsorship Agreement
McKesson and IMS entered into a Network Sponsorship and
Participation Agreement, dated November 17, 1993 (the "McKesson Sponsorship
Agreement"), under which McKesson was granted various rights to utilize IMS
Networks to send and receive information between IMS Network sites and
McKesson's clients, and to link IMS Networks to McKesson's transaction
processing and data base management infrastructure to send and receive
information in support of a variety of services. Under the Agreement,
McKesson paid a sponsorship fee of $1 million which was subsequently
credited against the purchase of shares of Series C Preferred Stock in July
1994 described above. All of McKesson's rights under this Agreement are
now held by PCS as a result of Lilly's acquisition of PCS in November 1994.
Term. The McKesson Sponsorship Agreement will continue until
----
December 1998 and will be renewed automatically for successive one-year
terms unless McKesson cancels the Agreement or fails to make certain
minimum payments to IMS.
Network Services. IMS is obligated to provide certain services
----------------
to McKesson, including:
(a) With respect to existing IMS Networks located in the top
fifty U.S. markets, IMS will provide, or in some cases will use its
best efforts to provide, access for McKesson Product Lines to all
Subscribers designated by McKesson.
(b) IMS will provide access for the McKesson Product Lines to all
Subscribers designated by McKesson in all new IMS Networks established
in the top fifty U.S. markets, and McKesson will have the right to
become the initial Sponsor for such new IMS Networks.
(c) IMS will provide access for the McKesson Product Lines to all
current subscribers designated by McKesson in IMS Networks in
secondary markets. IMS and McKesson will negotiate in good faith the
terms on which access would be made available to McKesson to new
Subscribers in such Networks.
(d) IMS will provide and maintain for each IMS Network the
ComCenter System, related personnel and services needed to support
current and future IMS Networks.
(e) IMS will assist McKesson to develop and implement a plan to
recruit prospective subscribers specified by McKesson for access to
the McKesson Product Lines.
22
(f) IMS will develop and execute a technical implementation plan
for each IMS Network, including meetings with appropriate personnel of
McKesson and McKesson's clients.
(g) IMS will be responsible for installation of licensed software
and for providing training, support, IMS Network administration and
updates and enhancements of licensed software to subscribers sponsored
by McKesson.
Fees. In exchange for the services described above, McKesson is
----
obligated to pay IMS certain message volume fees related to the volume of
messages for each subscriber site sponsored by McKesson, plus annual
minimum sponsor fees, plus certain installation and training fees. To
date, no fees have become payable under the McKesson Sponsorship Agreement
and the first $1 million of fees under the Agreement was prepaid by
McKesson and is unused as of the date hereof.
Approval Rights. IMS will not introduce Prescription Benefit
---------------
Management Services throughout the term of the McKesson Sponsorship
Agreement without the approval and except on terms acceptable to McKesson.
Database/Information Services. McKesson may elect to use IMS
-----------------------------
Networks to provide physicians and other health care entities with access
to McKesson proprietary data base/information services. Subject to certain
limitations, McKesson has the right to capture and compile data transmitted
across IMS Networks in connection with McKesson Product Lines and to
generate, use and sell compilations, analyses and reports based on such
data.
Obligations of McKesson. McKesson will provide reasonable and
-----------------------
appropriate cooperation with IMS's efforts to recruit potential
Subscribers, and will provide IMS Network participants with access to the
data center of PCS consistent with access customarily provided to PCS
clients.
Certain Definitions in McKesson Sponsorship Agreement.
-----------------------------------------------------
ComCenter Hardware. "ComCenter Hardware shall mean the message
------------------
switching computer(s), owned by an IMS Network, on which the ComCenter
Software runs."
ComCenter Software. "ComCenter Software shall mean that portion
------------------
of the IMS-NET Software that resides on the ComCenter Hardware."
ComCenter System. "ComCenter System shall mean the ComCenter
----------------
Software and ComCenter Hardware together."
IMS Network. "An IMS Network shall mean the ComCenter Hardware,
-----------
ComCenter Software, IMS-Net Software, Synergy Series Software, Network
Interfaces Software, the facility and staff required to provide IMS
communications services in a specific market area, and the Sponsors,
Subscribers and other participants from and to whom IMS communication
services are transmitted in such market area."
McKesson Product Lines. "Each of the following shall be a
----------------------
McKesson Product Line (collectively, the "McKesson Product Lines"): (i)
the Prescription Benefit Management Services transmitted through the IMS
Networks; (ii) financial services products offered by McKesson or its
direct or indirect subsidiaries; and (iii) other groups of products
mutually agreed upon by the parties."
Prescription Benefit Management Services. "Prescription Benefit
----------------------------------------
Management Services shall mean the following services provided by McKesson
or its direct or indirect subsidiaries: transaction and medical
information services related to prescription drugs. Prescription Benefit
Management Services include, but are not limited to, the following:
formulary management; quality of care alerts involving drug interactions
with other drugs, medical diagnosis, and other health care information;
patient
23
drug histories; patient instructions for drug use; electronic prescriptions
and refill authorization; clinical information and educational sources
related to drugs; information on drug distribution and pricing; clinical
trial information; and drug sample management."
Sponsor. "Sponsor shall mean any participant on any IMS Network
-------
that pays a fee to IMS (or its subsidiaries) in order to allow
communications with a Subscriber. Sponsors include, but are not limited
to, hospitals, clinical laboratories, managed care organizations, drug
companies, and other payors and providers."
McKesson Stockholder's Rights Agreement
In connection with McKesson's initial purchase of Series C
Preferred Stock, IMS and McKesson executed a Stockholder's Rights
Agreement, dated January 6, 1994 (the "McKesson Stockholder's Rights
Agreement"). Under that Agreement, McKesson was granted (1) certain
information and inspection rights, and rights to register shares of Company
Common Stock under the Securities Act; (2) the right to elect two directors
of IMS if the Board of Directors consisted of eight directors, or at least
20% of the directors if the Board of Directors consisted of more than eight
directors; (3) the right to designate one member of the IMS Operating
Company Advisory Board and one member of the IMS Business Development Group
Advisory Board; (4) during the period the McKesson Sponsorship Agreement
remains in effect, the right to have IMS ensure that any joint venture
agreements, or other agreements for the operation of the IMS Networks,
provide McKesson access for the McKesson Product Lines to all Subscribers
designated by McKesson, and for such access to have the benefit of certain
preferred pricing provisions under the McKesson Sponsorship Agreement; (5)
the right to cause IMS to spend up to a total of $500,000 for regional or
technical development efforts as directed by McKesson; (6) during the
period that the McKesson Sponsorship Agreement is in effect, the right to
approve the introduction by IMS of any Prescription Benefit Management
Services and the terms thereof; and (7) during the period that the McKesson
Sponsorship Agreement is in effect, the right to approve, subject to
certain exceptions, any joint venture agreement, or other agreement, for
the operation of an IMS Network with any entity engaged in a business
defined as a McKesson Product Line.
Under the McKesson Stockholder's Rights Agreement, McKesson was
granted a right of first offer to purchase all or a portion of "New
Securities" which IMS may, from time to time, propose to sell. For this
purpose, "New Securities" includes, subject to certain exceptions, any
capital stock and rights, options or warrants to purchase capital stock and
securities convertible into capital stock. The right of first offer does
not apply to: (i) sales to persons who were directors, officers, employees
or shareholders as of January 6, 1994; (ii) sales of up to 15% of New
Securities per investor to accredited individual investors; (iii) sales of
up to 15% of New Securities per investor to institutional investors; (iv)
any sales of up to 5% per investor of New Securities to significant IMS
customers, which means customers generating at least 5% of IMS's annual
revenues; or (v) any sales of up to 15% per investor of New Securities to
potential investors which the IMS Board of Directors identifies as
potential strategic partners of IMS.
However, the exceptions set forth in clauses (i) through (v) do
not apply to potential investors which are engaged to any degree, and for
clauses (ii) and (iii) have invested to any degree, in any of the
Businesses defined as McKesson Product Lines (as defined in the McKesson
Sponsorship Agreement). In addition, if IMS sells New Securities to a
purchaser pursuant to clauses (i) through (v), McKesson has the right to
purchase capital stock on the same terms as those offered to such purchaser
in such amounts as will preserve McKesson's percentage of equity ownership
in IMS. Furthermore, McKesson has approval rights for prospective
purchasers of New Securities to the extent that they are engaged in any of
the businesses defined as McKesson Product Lines.
Nothing in the right of first offer is to constrain IMS's ability,
at the sole discretion of its Board of Directors, to effect a public
offering of stock. The right of first offer expires upon, and shall not be
applicable to, the first sale of Company Common Stock to the public
pursuant to a registration
24
statement filed under the Securities Act involving at least 15% of IMS's
aggregate outstanding shares after giving effect to the public offering and
resulting in gross proceeds of at least $15 million.
McKesson's right of first offer and approval rights described
above are now claimed by Lilly's subsidiary, PCS. IMS has asserted (and
PCS has disagreed) that certain of McKesson's rights under the McKesson
Stockholder's Rights Agreement could be asserted only by McKesson and that
such rights would not be enforceable by Lilly or PCS. If the Merger is
effected, this potential dispute will be avoided.
Lilly Loans to IMS
In accordance with the Term Sheet and Merger Agreement, on July
12, 1995, July 27, 1995 and August 28, 1995, Lilly loaned IMS $3 million,
$1 million and $1 million, respectively. Each loan is due and payable upon
the earlier of any breach of the Merger Agreement by IMS (subject to
certain rights of IMS to cure such breach) or July 1, 1996 with interest at
the annual rate of 10%. Each loan is subordinated to the indebtedness
outstanding on the date of such loan and is secured by a pledge of most of
the assets of IMS, including shares of subsidiaries.
Pursuant to the Merger Agreement, Lilly has agreed to continue to
advance to IMS from time to time (subject to certain exceptions), at IMS's
request, funds, as required to fund the then current cash requirements of
IMS but not to exceed $1.5 million per month. Each such advance will be on
terms and conditions that are substantially similar to those contained in
the earlier loans. IMS and Lilly currently anticipate that the aggregate
amount of such loans will be approximately $_______________ by the date of
the Special Meeting.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a purchase in accordance with
GAAP. Accordingly, a determination of the fair market value of IMS's
assets and liabilities will be made in order to allocate the purchase price
of the assets acquired and the liabilities assumed. From and after the
Effective Date, IMS's results of operations will be included in Lilly's
consolidated results of operation.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Under the Merger Agreement, at the Effective Date, nine senior
executives of IMS will each be offered severance agreements with Lilly
pursuant to which Lilly will agree not to reduce such executive's rates of
compensation or benefits payable to such persons for one year from the
Effective Date and will pay an amount equal to one year's base salary if
during the one year period such person's employment is terminated by action
of IMS for any reason other than for cause or if such person resigns
because he is required by IMS to relocate to any office not within
reasonable commuting distance from his place of residence. See "THE MERGER
AGREEMENT - Certain Understandings and Agreements."
Certain provisions of the employment arrangement of Kevin R. Green
with IMS require IMS to pay to Mr. Green an amount equal to two years'
salary under certain circumstances in the event of a change of control of
IMS, such as the Merger. See "MANAGEMENT OF IMS - Certain Transactions."
Directors and officers of IMS will be afforded certain future rights to
indemnification for liabilities which may arise from service as an officer
or director of IMS prior to the Merger.
NO STOCK EXCHANGE OR NASDAQ LISTING; RESALES OF SERIES D PREFERRED STOCK
AND SERIES B PREFERRED STOCK
The shares of Series D Preferred Stock will not be listed on any
stock exchange or traded on the National Association of Securities Dealers
Automated Quotations ("NASDAQ") National Market System. In addition, it is
likely that there will be fewer than 300 holders of Series D Preferred
Stock and therefore that IMS will not be subject to the reporting
requirements of Section 12(g) or 15(d) of the
25
Exchange Act once it has filed its first annual report on Form 10-K in
March 1996. Also, any shares that the holders elect to make subject to
Put/Call Agreements will be subject to contractual restrictions on
transfer, as described below under "PUT/CALL AGREEMENTS." Accordingly, it
is not expected that any trading market will develop for shares of Series D
Preferred Stock.
Subject to the foregoing, the shares of Series D Preferred Stock
to be issued in the Merger to persons who elect to receive such shares, and
any shares that are subsequently issued upon conversion of Series B
Preferred Stock, will be freely transferable, except for any shares
received by "affiliates" of IMS, as that term is defined in Rule 405 under
the Securities Act at the time of the Merger.
IMS affiliates may resell such shares of Series D Preferred Stock
only in compliance with the resale provisions of Rule 145 under the
Securities Act or as otherwise permitted by the Securities Act. Under Rule
145, during the first two years following the Merger, such shares could be
sold publicly by an IMS affiliate only if IMS is then making publicly
available adequate current information pursuant to Rule 144(c), and if the
number of shares to be sold, together with the number of shares sold by
such affiliate within the three months preceding such sale, does not exceed
one percent of the outstanding shares of Series D Preferred Stock. After
such two years, such shares could be sold publicly without compliance with
the volume limitations if at the time of sale the seller is not an
affiliate of IMS provided that IMS continues to make available the
information required by Rule 144(c). It is not expected that IMS will be
making such information publicly available except during the limited period
that it will be subject to the reporting requirements of Section 15(d) of
the Exchange Act. After a period of three years following the Merger, such
shares could be sold publicly without compliance with the volume and
current public information requirements noted above if at the time of sale
the seller is not, and has not been for at least three months, an affiliate
of IMS. Currently, the only persons expected to be "affiliates" of IMS at
the time of the Merger are the officers and directors of IMS, certain
members of their families, and certain affiliated entities. Persons who
continue to be affiliates of IMS after the Merger would remain subject to
the requirement to make public resales in accordance with all of the
provisions of Rule 144 while they retain that status.
Shares of Series D Preferred Stock that are issued subsequent to
the Merger upon the conversion of Company Options or Company Warrants may
be subject to transfer restrictions under the securities laws, depending on
whether the sale of those shares to the holder was registered under the
Securities Act, whether such holder is then an affiliate of IMS and whether
IMS is then making publicly available adequate current information.
Any shares of Series B Preferred Stock that remain outstanding
following the Merger will be subject to the same limitations on transfer
described above that apply to Series D Preferred Stock. In addition, the
Series B Preferred Stock is currently held by only 23 persons and IMS
anticipates that a substantial number of these holders will elect to
exchange their shares of Series B Preferred Stock for the Merger
Consideration. Seven IMS directors who collectively own more than a
majority of the shares of Series B Preferred Stock have already committed
to do so. Accordingly, IMS does not expect that any trading market for the
shares of Series B Preferred Stock will develop.
GOVERNMENTAL AND REGULATORY APPROVALS
In connection with exercises of Warrants, Lilly filed a
Notification with the Federal Trade Commission and the Department of
Justice pursuant to the HSR Act on February 27, 1995, seeking clearance to
acquire 50% or more of the voting stock of IMS. No second request for
additional information was received and the mandatory waiting period
expired on March 29, 1995. As a result, no further action is required
under the HSR Act in connection with the Merger provided that the Merger is
completed by March 29, 1996.
26
MARKET PRICES
IMS. No public market exists for the Company Common Stock or the
Series B Preferred Stock and, accordingly, market price information is not
available for such stock.
Lilly. The shares of Lilly Common Stock are listed and
principally traded on the New York Stock Exchange, Inc. (the "NYSE"). On
August 2, 1995, the last full trading day prior to the first public
announcement of the Merger, the reported closing price per share of Lilly
Common Stock on the NYSE Composite Tape was $77. On ________, 1995, the
reported closing price per share of Lilly Common Stock on the NYSE
Composite Tape was $______.
27
THE MERGER AGREEMENT
The following is a brief summary of the Merger Agreement, a copy
of which is included as an exhibit to the Registration Statement of which
this Proxy Statement-Prospectus is a part and is incorporated herein by
reference. Such summary is qualified in its entirety by reference to the
Merger Agreement.
THE MERGER
The Merger Agreement provides that, upon the terms and subject to
the satisfaction or waiver of certain conditions set forth therein,
Subsidiary will be merged into IMS, the separate corporate existence of
Subsidiary will cease and IMS will continue as the surviving corporation.
The Merger will become effective on the Effective Date upon the filing with
the Secretary of State of the State of Colorado of duly executed Articles
of Merger in accordance with Section 7-111-105 of the Colorado Business
Corporation Act.
Pursuant to the Merger, (i) each outstanding share of Company
Common Stock (other than shares held by IMS as treasury shares, shares
owned by Lilly or any subsidiary of Lilly, or shares as to which
dissenters' rights have been perfected under Colorado law) will be
converted into, at the holder's election, either (a) $8.00 in cash, without
interest, or (b) one share of Series D Preferred Stock, (ii) each
outstanding share of Series B Preferred Stock (other than shares as to
which dissenters' rights have been perfected under Colorado law) will
either (a) be converted into, at the holder's election, either (1) $5.33 in
cash, without interest, plus an amount, in cash, without interest, equal to
the amount of all accrued and unpaid dividends on such share of Series B
Preferred Stock to the Effective Date or (2) two-thirds of a share of
Series D Preferred Stock plus an amount, in cash, without interest, equal
to the amount of all accrued and unpaid dividends on such share of Series B
Preferred Stock to the Effective Date or (b) remain outstanding (with the
amended preferences, limitations and rights set forth in the Articles of
Incorporation of the surviving corporation), (iii) each outstanding share
of Series C Preferred Stock of the Company will be converted into one share
of common stock of the surviving corporation and (iv) each share of common
stock of Subsidiary then issued and outstanding will be converted into and
become 120,000 shares of common stock of the surviving corporation.
No fractional shares of Series D Preferred Stock will be issued
but in lieu thereof cash payments will be made to each holder of Series B
Preferred Stock in respect of any fractional share that would otherwise be
issuable to such holder (after aggregating all of the shares of Series D
Preferred Stock to be issued to such holder) in an amount equal to such
fractional part of a share of Series D Preferred Stock multiplied by $8.00.
No such holder shall be entitled to dividends, voting rights or any other
shareholder right in respect of any fractional share.
In addition, each holder of Company Common Stock, Series B
Preferred Stock, Company Options or Company Warrants will be offered the
right to enter into a Put/Call Agreement with Lilly with respect to any or
all of the shares of Series D Preferred Stock that such holder may acquire.
See "PUT/CALL AGREEMENTS."
If the Merger is adopted by the requisite vote of the shareholders
of IMS and certain other conditions to the Merger are satisfied or waived,
the Closing will be held promptly thereafter, or if later, on the day three
business days following the date on which the last of the required
conditions to the Closing has been fulfilled or waived, or at such other
time as is agreed upon by Lilly and IMS.
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DESCRIPTION OF ELECTION PROCEDURES
Subject to the election procedures set forth below, each record
holder immediately prior to the Effective Date of shares of Company Common
Stock or Series B Preferred Stock (other than Lilly or any subsidiary of
Lilly) will be entitled (i) to make a Cash Election for any or all of such
shares, or (ii) to make a Stock Election for any or all of such shares. In
addition, each record holder immediately prior to the Effective Date of
shares of Series B Preferred Stock will be entitled to make an Election to
Retain Series B Preferred Stock.
Elections must be made by mailing to the Exchange Agent a duly
completed Form of Election. To be effective, a Form of Election must be
properly completed, signed and submitted to the Exchange Agent and (except
if an Election to Retain Series B Stock is made or deemed to have been
made), accompanied by the certificates representing the shares of Company
Common Stock or Series B Preferred Stock as to which the election is being
made (or by an appropriate guarantee of delivery of such certificates by a
commercial bank or trust company in the United States or a member of a
registered national securities exchange or the National Association of
Securities Dealers, Inc.). All duly completed Forms of Election must be
received by the Exchange Agent by the Election Deadline. Lilly will have
the discretion, which it may delegate in whole or in part to the Exchange
Agent, to determine whether Forms of Election have been properly completed,
signed and submitted or revoked and to disregard immaterial defects in
Forms of Election. The decision of Lilly (or the Exchange Agent) in such
matters will be conclusive and binding. Neither Lilly nor the Exchange
Agent will be under any obligation to notify any person of any defect in a
Form of Election submitted to the Exchange Agent.
A HOLDER OF COMPANY COMMON STOCK OR SERIES B PREFERRED STOCK WHO
DOES NOT SUBMIT A PROPERLY COMPLETED AND SIGNED FORM OF ELECTION WHICH IS
RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE ELECTION DEADLINE WILL BE
DEEMED TO HAVE MADE A CASH ELECTION, IN THE CASE OF A HOLDER OF COMPANY
COMMON STOCK, AND AN ELECTION TO RETAIN SERIES B PREFERRED STOCK, IN THE
CASE OF A HOLDER OF SERIES B PREFERRED STOCK. If Lilly or the Exchange
Agent determines that any purported Cash Election, Stock Election or
Election to Retain Series B Preferred Stock was not properly made, the
shareholder making such purported Election will be deemed to have made a
Cash Election, in the case of a holder of Company Common Stock, and an
Election to Retain Series B Preferred Stock, in the case of Series B
Preferred Stock.
An election may be revoked, but only by written notice received by
the Exchange Agent prior to the Election Deadline. Upon any such
revocation, unless a duly completed Form of Election is thereafter
submitted in accordance with the procedures described herein, such shares
will be deemed to be Cash Election shares, in the case of Company Common
Stock, and Election to Retain Series B Preferred Stock shares, in the case
of Series B Preferred Stock.
PROCEDURES FOR EXCHANGE OF CERTIFICATES
IMS SHAREHOLDERS THAT WISH TO SUBMIT A FORM OF ELECTION SHOULD
DELIVER THEIR STOCK CERTIFICATES TOGETHER WITH SUCH FORM OF ELECTION OR
PROVIDE FOR, AND COMPLY WITH THE REQUIREMENTS OF, GUARANTEED DELIVERY.
As soon as reasonably practicable after the Effective Date (unless
the Company, prior to the Effective Date, agrees to an earlier mailing),
Lilly will instruct the Exchange Agent to mail to each holder of record
(other than (x) holders of dissenting shares or (y) Lilly or any subsidiary
of Lilly) of a certificate or certificates which immediately prior to the
Effective Date evidenced outstanding shares of Company Common Stock or
Series B Preferred Stock (the "Certificates"), (i) a letter of transmittal,
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates evidencing shares of Series D Preferred Stock or
cash and (iii) a Form of Election. With respect to a holder of a
Certificate, other than a Certificate representing Series B Preferred Stock
for which a valid Election to
29
Retain Series B Preferred Stock, or a deemed Election to Retain Series B
Preferred Stock, has been made, upon surrender of a Certificate for
cancellation to the Exchange Agent together with such letter of
transmittal, duly executed and such other customary documents as may be
required pursuant to such instructions, the holder of such Certificate will
be entitled to receive in exchange therefor (A) certificates evidencing
that number of shares of Series D Preferred Stock which such holder has the
right to receive in respect of the shares of Company Common Stock or Series
B Preferred Stock formerly evidenced by such Certificate, (B) cash which
such holder is entitled to receive, (C) cash in lieu of a fractional share
of Series D Preferred Stock which such holder is entitled to receive and
(D) any dividends or other distributions to which such holder is entitled,
and the Certificate so surrendered will be cancelled; provided, however,
-------- -------
that as to any holder who executed a Put/Call Agreement with respect to any
shares of Series D Preferred Stock, the certificates evidencing such shares
will be delivered to the Escrow Agent under the Escrow Agreement
contemplated by the Put/Call Agreements. In the event of a transfer of
ownership of shares which is not registered in the transfer records of the
Company, for transferees who elect to receive the Merger Consideration, a
certificate evidencing the proper number of shares of Series D Preferred
Stock and/or cash may be issued and/or paid to that transferee if the
Certificate evidencing such transferred shares is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered, each Certificate, other than a Certificate
representing shares of Series B Preferred Stock for which a valid Election
to Retain Series B Preferred Stock, or a deemed Election to Retain Series B
Stock, has been made, will be deemed at any time after the Effective Date
to evidence only the right to receive upon such surrender the appropriate
Merger Consideration.
No dividends or other distributions declared or made with respect
to Series D Preferred Stock will be paid to the holder of any unsurrendered
Certificate with respect to the shares of Series D Preferred Stock
evidenced thereby, and no other part of the Merger Consideration will be
paid to any such holder until the holder of such Certificate surrenders
such Certificate. No interest will accrue or be paid on the Merger
Consideration.
All shares of Series D Preferred Stock issued and cash paid upon
conversion of the shares of Company Common Stock or Series B Preferred
Stock in accordance with the terms of the Merger Agreement will be deemed
to have been issued or paid in full satisfaction of all rights pertaining
to such shares of Company Common Stock or Series B Preferred Stock. On the
Effective Date, each holder of a certificate or certificates up to that
time representing shares of Company Common Stock or Series B Preferred
Stock, other than a holder of a certificate or certificates representing
Series B Preferred Stock for which a valid Election to Retain Series B
Preferred Stock, or a deemed Election to Retain Series B Preferred Stock,
has been made, will cease to have any rights as a shareholder of the
Company and will not be deemed to be a shareholder of, or be entitled to
any rights of a shareholder with respect to, the surviving corporation but
thereafter will have only the rights described herein.
Neither Lilly nor IMS will be liable to any shareholder for any
shares or cash in respect of shares delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law. In the event
any Certificate has been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such certificate to be lost,
stolen or destroyed and, if required by the Company, the posting by such
person of a bond in a form and an amount specified by Lilly and reasonably
acceptable to the Company as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue
in exchange for such lost, stolen or destroyed Certificate the Merger
Consideration, without any interest or dividends or other payments thereon,
upon due surrender of and deliverable in respect of such Certificate
pursuant to the Merger Agreement.
IMS will be entitled to deduct and withhold from the consideration
otherwise payable pursuant to the Merger Agreement such amounts as IMS is
required to deduct and withhold with respect to the making of such payment
under the Internal Revenue Code (the "Code"), or any provision of state,
local or foreign tax law.
30
After the Effective Date, there will be no transfers on the stock
transfer books of the Company of any shares of Company Common Stock, other
than any shares of Company Common Stock held by Lilly or any subsidiary of
Lilly, or any shares of Series B Preferred Stock which were outstanding
immediately prior to the Effective Date other than shares of Series B
Preferred Stock for which a valid Election to Retain Series B Stock, or a
deemed Election to Retain Series B Stock, has been made. If, after the
Effective Date, Certificates formerly representing shares of Company Common
Stock which were outstanding immediately prior to the Effective Date, other
than any shares of Company Common Stock held by Lilly or any subsidiary of
Lilly, or shares of Series B Preferred Stock which were outstanding
immediately prior to the Effective Date (for which a valid Election to
Retain Series B Stock has not been made or deemed to be made) are presented
to the Company or the Exchange Agent, they will be cancelled and (subject
to applicable abandoned property, escheat and similar laws and, in the case
of Dissenting Shares, subject to applicable law) exchanged for Merger
Consideration.
SHAREHOLDERS SHOULD NOT SEND IN ANY CERTIFICATES WITH THEIR
PROXY CARDS
EFFECT OF THE MERGER ON COMPANY OPTIONS AND COMPANY WARRANTS
Each holder of outstanding Company Options on the Effective Date
will have the right immediately following the Merger to elect to have such
Company Options converted, in whole or in part, into (i) the right to
receive $8.00 in cash, without interest, for each share of Company Common
Stock for which such Company Option was exercisable as of the Effective
Date (except that in lieu of paying the exercise price of such Company
Option, the holder thereof may elect to net the amount of the exercise
price against and to that extent reduce the $8.00 otherwise receivable), or
(ii) the right to purchase for the same exercise price one share of Series
D Preferred Stock for each share of Company Common Stock for which such
Company Option was exercisable as of the Effective Date, or (iii) fully
vested Lilly Options to acquire shares of Lilly Common Stock under the 1994
Lilly Stock Plan. Any election pursuant to clause (ii) above must be for a
whole number of shares of Series D Preferred Stock.
Each Company Option for which an election to convert into Lilly
Options is duly made will be converted as follows: each such Company
Option will become a Lilly Option with an exercise price that bears the
same relationship to the fair market value of Lilly Common Stock on the
Effective Date (as such value is determined under the 1994 Lilly Stock
Plan) as the exercise price of the Company Option bears to $8.00, and the
number of shares subject to the Lilly Option will be the number that
results in the Lilly Option having the same aggregate "spread" as existed
on the Company Option. (For this purpose, the aggregate "spread" on the
Company Option shall be (x) the difference between $8.00 and the exercise
price of the Company Option multiplied by (y) the number of shares subject
to the Company Option; and the aggregate "spread" on the Lilly Option shall
be (x) the difference between the exercise price of the Lilly Option and
the fair market value of Lilly Common Stock on the Effective Date
multiplied by (y) the number of shares subject to the Lilly Option.) By
way of illustration, if a holder owns a Company Option on 100 shares of
Company Common Stock at an exercise price of $2.00 per share, then the
aggregate "spread" is $600, i.e., ($8.00 - $2.00) x 100. If the fair
market value of Lilly Common Stock on the Effective Date is $80 per share,
the exercise price of the Lilly Option will be $20, i.e., 2/8 = 20/80, and
the number of Lilly shares subject to the Lilly Option will be 10, i.e.,
the aggregate "spread" of $600 divided by the per share "spread" of $60
under the Lilly Option. The other terms and conditions of the Lilly Option
will, to the extent practicable and permitted under the 1994 Lilly Stock
Plan, be substantially the same as the Company Option for which the Lilly
Option is substituted. Notwithstanding the foregoing, no Lilly Option to
purchase a fractional share of Lilly Common Stock will be issued to a
holder of a Company Option. In lieu thereof, a cash payment will be made
in respect of any such Lilly Option that would otherwise be issuable to
such holder (after aggregating all of the Lilly Options to be issued to
such holder) in an amount equal to such fractional part of a Lilly Option
multiplied by the "spread" on a Lilly Option for one share of Lilly Common
Stock.
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Each holder of outstanding Company Warrants on the Effective Date
(other than warrants owned by Lilly or any of its subsidiaries) will have
the right to elect to have such Company Warrants converted into (i) the
right to receive $8.00 in cash, without interest, for each share of Company
Common Stock for which such Company Warrant was exercisable as of the
Effective Date (except that in lieu of paying the exercise price of such
Company Warrant, the holder thereof may elect to net the amount of the
exercise price against and to that extent reduce the $8.00 otherwise
receivable) or (ii) the right to purchase for the same exercise price one
share of Series D Preferred Stock for each share of Company Common Stock
for which such Company Warrant was exercisable as of the Effective Date.
Each warrant to purchase Series C Preferred Stock owned by Lilly or any of
its subsidiaries will, on the Effective Date, be converted into the right
to purchase one share of common stock of the surviving corporation for each
share for which such warrant was exercisable as of the Effective Date.
A Form of Election for use by holders of Company Options and
Company Warrants will be mailed separately to holders thereof following the
Merger. To be effective, a Form of Election must be properly completed,
signed and received by the Exchange Agent by the Election Deadline.
HOLDERS OF COMPANY OPTIONS OR COMPANY WARRANTS WHO DO NOT PROPERLY COMPLETE
AND RETURN THE FORM OF ELECTION BY THE ELECTION DEADLINE WILL BE DEEMED TO
HAVE ELECTED TO RECEIVE THE LILLY OPTIONS, IN THE CASE OF A COMPANY OPTION,
OR THE RIGHT TO PURCHASE SHARES OF SERIES D PREFERRED STOCK, IN THE CASE OF
COMPANY WARRANTS.
In addition, each holder of a Company Option or a Company Warrant
will be offered the right to enter into a Put/Call Agreement with Lilly
with respect to any and all of the shares of Series D Preferred Stock that
such holder may acquire. See "PUT/CALL AGREEMENTS."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and
warranties of IMS as to, among other things: (i) the due organization,
valid existence and good standing of IMS and its subsidiaries; (ii) the
capitalization of IMS; (iii) the minute books and stock books of IMS and
certain of its subsidiaries; (iv) the authorization, execution and delivery
of the Merger Agreement and certain ancillary agreements, the validity and
enforceability thereof against IMS, the noncontravention thereby of the
articles or certificate of incorporation or by-laws (or other
organizational documents) of IMS or any subsidiary or affiliated entity, or
the Company Options or Company Warrants, or any note, bond, mortgage,
indenture, deed of trust, license, partnership agreement, joint venture
agreement, collaborative arrangement or relationship or any contract,
commitment or agreement or other instrument or obligation or with any
order, writ, injunction, decree, statute, rule or regulation and the
absence of requirements for any consents, approvals, notices or
registrations to be obtained or filed in connection with the Merger; (v)
possession of licenses, permits and authorizations and compliance with
applicable laws; (vi) the preparation of, and presentation of certain
information in, the financial statements of IMS and its subsidiaries; (vii)
the absence of undisclosed liabilities; (vii) the absence of certain
changes or events since May 31, 1995; (viii) tax matters; (ix) the
ownership or lease of properties and assets; (x) accounts receivable; (xi)
the number of physicians connected to IMS networks; (xii) the existence and
enforceability of certain contracts; (xiii) intellectual property matters;
(xiv) pending or threatened litigation; (xv) insurance; (xvi) accuracy of
information provided to Lilly; (xvii) employee benefit plans; (xviii)
personnel and labor matters; (xix) environmental matters; (xx) transactions
involving affiliates of IMS; (xxi) the opinion of financial advisor; (xxii)
fees owed to brokers or finders; and (xxiii) powers of attorney and
suretyships of IMS or any subsidiary.
The Merger Agreement also contains representations and warranties
of each of Lilly and Subsidiary as to, among other things: (i) their due
organization, valid existence and good standing; and (ii) their
authorization, execution and delivery of the Merger Agreement and certain
ancillary agreements, the validity and enforceability thereof against Lilly
and Subsidiary and the noncontravention thereby of the Articles of
Incorporation or By-Laws of Lilly or Subsidiary, or of any order, writ,
injunction, decree,
32
statute, rule or regulation and the absence of requirements for any
consents, approvals, notices or registrations to be obtained or filed in
connection with the Merger.
The Merger Agreement also contains representations and warranties
of Lilly as to, among other things: (i) the accuracy and completeness of
information provided by Lilly; (ii) fees owed to brokers or finders; and
(iii) the absence of any intention to engage in certain restricted
transactions.
CERTAIN UNDERSTANDINGS AND AGREEMENTS
Conduct of the IMS Business Prior to Effective Time
IMS has agreed that, except as set forth on the Disclosure
Schedule to the Merger Agreement or as expressly contemplated by the Merger
Agreement, during the period from the date of the Merger Agreement to the
Effective Date, the business of IMS and its Controlled Subsidiaries and
Controlled Affiliated Entities (each as defined in the Merger Agreement)
will be conducted only in the ordinary and usual course consistent with
past practices, that IMS will use and will cause each of its Controlled
Subsidiaries, and any Controlled Affiliated Entities, to use best efforts
to maintain and preserve and, as appropriate in the ordinary course of
business, further their respective business relationships and business
prospects, and to keep available the services of its directors, officers
and employees, and that neither IMS nor any Controlled Subsidiary, nor any
Controlled Affiliated Entity, will take any of the following actions or
permit to occur any of the following events without the prior written
consent of Lilly: (i) except pursuant to Company Options and Company
Warrants, issue or sell, agree to issue or sell or authorize the issuance
or sale of any shares of its capital stock or the capital stock of any
subsidiary or other securities exchangeable for or convertible into shares
of capital stock of the Company or any subsidiary or grant any options or
rights to acquire any shares of capital stock of the Company or any
subsidiary or amend any currently outstanding Company Options or Company
Warrants or other rights or securities of IMS or any subsidiary; (ii)
purchase or otherwise acquire, directly or indirectly, any shares of
capital stock of the Company or any subsidiary or any securities
exchangeable for or convertible into shares of capital stock of the Company
or any subsidiary; (iii) declare or pay any dividends on capital stock of
the Company or any subsidiary not wholly-owned by IMS, except that IMS may
declare immediately prior to the Effective Date a cash dividend on the
Series B Preferred Stock in an amount equal to all accrued and unpaid
dividends to the time of declaration; (iv) enter into any material
transaction relating to IMS or any subsidiary or affiliated entity,
including, without limitation, any material joint venture, partnership,
sponsorship or network licensing arrangements or relationships, or modify
or effect material changes to any existing material joint venture,
partnership, sponsorship or network licensing arrangements or
relationships; (v) merge or consolidate with, purchase substantially all of
the assets of, or otherwise acquire any business or any proprietorship,
firm, association, corporation or other business organization or division
thereof; (vi) make any change in the respective banking or safety deposit
box arrangements of IMS and its Controlled Subsidiaries; (vii) grant any
powers of attorney, except in connection with patent and trademark
applications and prosecutions, and in the ordinary course of business;
(viii) increase or decrease the rates of direct compensation payable or to
become payable to their respective officers, employees, agents or
consultants, other than routine increases or decreases made in the ordinary
course of business, or grant, make or agree to any bonus, service award or
other like benefit for any such officer, employee, agent or consultant, or
make or agree to any welfare, pension, retirement or similar payment or
arrangement, except payments made pursuant to the existing agreements or
plans described in the Disclosure Schedule to the Merger Agreement and
except payments or arrangements agreed to in the ordinary course of
business and consistent with past practice or as required by law; (ix)
amend or change the articles or certificate of incorporation or by-laws (or
other organizational documents) of IMS or certain of its subsidiaries or
affiliated entities; (x) issue or sell any promissory notes, bonds or other
corporate debt securities of IMS or certain of its subsidiaries or
affiliated entities or otherwise incur any indebtedness for borrowed money
except (a) in the ordinary course of business, (b) under their existing
lines of credit as of the date of the Merger Agreement or (c) pursuant to
Section 7.15 of the Merger Agreement (relating to funds to be advanced by
Lilly to fund the current cash requirements of IMS); (xi) discharge or
satisfy any lien, charge or encumbrance or pay any obligation or liability,
33
absolute or contingent, other than current liabilities and the current
portion of bank debt as shown on the balance sheet of the Company at May
31, 1995 and current liabilities incurred since that date in the ordinary
course of business; (xii) mortgage, pledge or subject to lien, charge or
any other encumbrance, any of their respective assets, tangible or
intangible, except pursuant to existing lines of credit or Section 7.15 of
the Merger Agreement (relating to funds to be advanced by Lilly to fund the
current cash requirements of IMS); (xiii) lend any money of IMS or any
certain of its subsidiaries or affiliated entities or otherwise pledge the
credit of IMS or certain of its subsidiaries or affiliated entities, or
sell, assign or transfer any of the tangible assets or cancel any debts or
claims of IMS or certain of its subsidiaries or affiliated entities, except
in each case in the ordinary course of business; (xiv) cancel, amend,
terminate, waive, or sell, assign or transfer any material intellectual
property; (xv) waive any rights of substantial value, whether or not in the
ordinary course of business; (xvi) settle or otherwise compromise any
material litigation against IMS or certain of its subsidiaries or
affiliated entities; (xvii) reclassify any shares of its capital stock;
(xviii) enter into any collective bargaining agreement; (xix) make
expenditures for items deemed to be capital items under generally accepted
accounting principles, of more than $25,000 in any one case or $125,000 in
the aggregate; (xx) change its method of accounting or accounting practice;
(xxi) enter into any contract, agreement, or understanding to cause or
allow any of the foregoing; or (xxii) cause any other event or condition of
any character which in any one case or in the aggregate would reasonably be
expected to have a material adverse effect.
IMS has further agreed that, prior to the Effective Date, it will
and will cause certain of its subsidiaries or affiliated entities to: (i)
use its best efforts to duly comply with all laws applicable to them and to
the conduct of their businesses in all material respects and all laws
applicable to the transactions contemplated by the Merger Agreement; (ii)
use its best efforts to maintain in full force and effect its insurance
policies (or policies providing substantially the same coverage); (iii) use
its best efforts to take such action as may reasonably be necessary to
preserve its properties wherever located, including, but not limited to,
all steps reasonably necessary to maintain its material intellectual
property and any pending applications therefor, and any other intangible
assets which are material to their businesses; (iv) maintain its books and
records in accordance with generally accepted accounting principles and in
the usual, regular and ordinary manner; and (v) promptly advise Lilly in
writing of any occurrence or event, including, without limitation, the
commencement or threat of any litigation, which individually or in the
aggregate has had or might reasonably be expected to have a material
adverse effect.
Certain Other Agreements
Pursuant to the Merger Agreement, IMS has agreed to take all
action necessary in accordance with applicable law and its Articles of
Incorporation and By-Laws to convene the Special Meeting as promptly as
practicable to consider and vote upon the approval and adoption of the
Merger Agreement and to consider and vote upon such other matters as may be
necessary to effectuate the transactions provided for therein. The Board
of Directors of IMS has resolved to recommend, and except as the Board of
Directors determines in good faith, based on the advice of outside counsel
to IMS, is required to satisfy its fiduciary duties, IMS has agreed that
the Board of Directors will continue to recommend, and will take all lawful
action to solicit proxies for and otherwise obtain, such approval and
adoption. Lilly has agreed to vote, or cause its subsidiaries to vote, any
shares of capital stock of the Company held by Lilly or such subsidiaries
and entitled to vote in favor of the approval and adoption of the Merger
Agreement and the transactions contemplated thereby.
IMS has agreed that neither it nor any of its subsidiaries or
Controlled Affiliated Entities or any of their respective employees, agents
or representatives (including, without limitation, its investment bankers)
will, directly or indirectly, solicit or enter into any agreement or
understanding with, or otherwise encourage inquiries or proposals from, or
furnish any non-public information concerning IMS or any subsidiary or
affiliated entity to, any person or entity other than Lilly or a
representative thereof with respect to the acquisition (by purchase, merger
or otherwise) of any or all of the capital stock of IMS or any subsidiary
or affiliated entity or any or all of the assets of IMS or any of its
subsidiaries or affiliated entities
34
or any other material corporate transactions relating to IMS or its
subsidiaries or affiliated entities; provided, however, that IMS may engage
-------- -------
in discussions or negotiations with a third party who, unsolicited, seeks
to initiate such discussions or negotiations and may pursuant to
confidentiality agreements furnish such party information concerning IMS
and its business, properties and assets, provided that the Board of
Directors of IMS will conclude in good faith on the basis of the advice of
IMS's outside counsel that such action is necessary to satisfy the
fiduciary duties of the Board of Directors. Should IMS receive an
unsolicited offer for such a transaction, or obtain information that such
an offer is likely to be made, IMS has agreed to provide Lilly with prompt
notice thereof, including the identity of the prospective offeror and the
terms and conditions of such offer.
Lilly, Subsidiary and the Company have agreed to use, and the
Company has agreed to cause its Controlled Subsidiaries and Controlled
Affiliated Entities to use, their best efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the Merger, including, without limitation, using their
best efforts to satisfy the conditions to the Merger described under
" -Conditions to the Merger" below.
Lilly has agreed to advance to the Company from time to time,
subject to certain conditions, at the Company's request, funds, as required
to fund the then current cash requirements of the Company but not to exceed
$1.5 million per month. See "SPECIAL FACTORS TO BE CONSIDERED -Prior
Agreements/Relationships of the Parties - Lilly Loans to IMS."
In addition, Lilly has agreed to offer to enter into agreements at
or prior to the Closing with specified members of IMS's management under
which the Company would agree not to reduce such person's respective rates
of compensation and benefits for the one year period beginning on the
Effective Date and Lilly would pay, or cause the Company to pay, such
person an amount equal to one year's base salary if during the one-year
period beginning on the Effective Date such person's employment is
terminated by action of the Company for any reason other than for cause or
such person resigns because he is required by the Company to relocate to
any office not within reasonable commuting distance of his or her
residence. Such agreement will also contain a non-compete provision for
the period during which such person is receiving such severance payments.
See "SPECIAL FACTORS TO BE CONSIDERED - Interests of Certain Persons in the
Merger."
Lilly has agreed that it will not, prior to the third anniversary
of the Closing, engage in or cause, or otherwise permit to occur, a merger
(other than the Merger) or other extraordinary transaction that would
result in the holders of the Series D Preferred Stock being deemed for
Federal income tax purposes to have sold their shares of Series D Preferred
Stock in such merger or other extraordinary transaction.
CONDITIONS TO THE MERGER
The respective obligations of each of Lilly, Subsidiary and IMS to
effect the Merger are subject to the fulfillment or waiver, at or prior to
the Effective Date, of certain conditions, including: (i) the approval of
the Merger by IMS shareholders; (ii) the receipt of all consents,
authorizations, orders and approvals of, and filings and registrations
with, any federal or state governmental authority that are required for the
consummation by each of Lilly, Subsidiary and IMS of the transactions
provided for in the Merger Agreement; the effectiveness of the Registration
Statement under the Securities Act and the absence of any stop orders in
effect or proceedings commenced seeking such a stop order; (iii) the
absence of any claim, action, suit, order or other proceeding, pending or
threatened by any public authority or private person before any court,
agency or governmental or administrative body or other entity of competent
jurisdiction which, in the reasonable opinion of Lilly or IMS, creates any
substantial likelihood that the consummation of the Merger will be
restrained, enjoined or otherwise prevented or that any material damages
will be recovered or other material relief obtained as a result of the
Merger or as a result of any agreement entered
35
into in connection with, or as a condition precedent to, the consummation
of the Merger; (iv) the receipt at the Special Meeting of the affirmative
vote of shares representing at least a majority of the voting power of the
outstanding shares of the Company Common Stock and Series B Preferred Stock
that are not owned by Lilly or its subsidiaries for the Merger Agreement
and the Merger.
The obligations of Lilly and Subsidiary to effect the Merger are
further subject to the fulfillment or waiver, at or prior to the Effective
Date, of certain additional conditions, including: (i) the accuracy of the
representations and warranties of IMS in all material respects on the
Effective Date; (ii) the performance in all material respects of each of
the obligations of IMS on the Effective Date; (iii) the taking of all
action required to be taken by, or on the part of, IMS to authorize the
execution, delivery and performance of the Merger Agreement and the
consummation of the transactions contemplated thereby; (iv) the receipt of
certain opinions of counsel; (v) the exercise by the holders of not more
than 10% of the total number of shares of Company Common Stock or Series B
Preferred Stock of dissenters' rights; (vi) the absence of litigation,
except with respect to the matters disclosed in the Disclosure Schedule to
the Merger Agreement, which in the reasonable opinion of Lilly creates any
reasonable possibility of material interference with the ability of Lilly,
through representatives designated by it, to manage following the Effective
Date the business theretofore conducted by IMS and its subsidiaries; (vii)
the receipt by Lilly on or prior to the Effective Date of a statement
pursuant to Section 1445(b)(2) of the Code and Treasury Regulations Section
1.1445-2(c)(3) thereunder, certifying that the shares of capital stock of
the Company do not constitute a "U.S. real property interest" for purposes
of Sections 897 and 1445 of the Code and the Treasury Regulations
thereunder; and (vii) the requirements of the Letter Agreement having been
met to Lilly's reasonable satisfaction.
The obligation of IMS to effect the Merger is further subject to
the fulfillment, at or prior to the Effective Date, of certain additional
conditions, including: (i) the accuracy of the representations and
warranties of Lilly and Subsidiary in all material respects on the
Effective Date; (ii) the performance in all material respects of each of
the obligations of Lilly and Subsidiary on; (iii) the taking of all action
required to be taken by, or on the part of, Lilly and Subsidiary to
authorize the execution, delivery and performance of the Merger Agreement
and the consummation of the transactions contemplated thereby; (iv) the
receipt of certain opinions of counsel; and (v) the execution by Lilly of
Put/Call Agreements with each holder of shares of capital stock the
Company, Company Options or Company Warrants who will have elected to enter
into such Agreements.
AMENDMENT AND MODIFICATION
The provisions of the Merger Agreement may be amended or
supplemented by written agreement of Lilly, Subsidiary and IMS at any time
prior to the Effective Date; provided, however, that after adoption of the
-------- -------
Merger Agreement by the shareholders of IMS, no material amendment or
supplement may be made unless such amendment or supplement is also adopted
by the shareholders of IMS.
TERMINATION
The Merger Agreement may be terminated at any time prior to the
Effective Date: (i) by mutual consent of Lilly, Subsidiary and IMS; (ii)
by Lilly and Subsidiary, or by IMS, respectively, if, at or before the
Effective Date, any condition set forth in the Merger Agreement for the
benefit of Lilly and Subsidiary or IMS, respectively, will not have been
timely met and such failure will not have been cured or eliminated, or by
its nature cannot be cured or eliminated; (iii) by Lilly and Subsidiary, or
by IMS if the Closing will not have occurred on or before December 31,
1995, or such later date as may have been agreed upon by Lilly, Subsidiary
and IMS or as is provided for in the Merger Agreement in connection with
Lilly's right to delay or suspend the effectiveness of the Registration
Statement; (iv) by Lilly and Subsidiary, or by IMS, respectively, if any
representation or warranty made in the Merger Agreement for the benefit of
Lilly and Subsidiary or IMS, respectively, or in any certificate, schedule
or document furnished to Lilly and Subsidiary or IMS, respectively,
pursuant to the Merger Agreement, if qualified as to materiality, is untrue
36
in any respect, or, if not so qualified, is untrue in any material respect,
or IMS or Lilly and Subsidiary, respectively, have defaulted in any
material respect in the performance of any obligation under the Merger
Agreement; (v) by Lilly and Subsidiary if the IMS Board fails to recommend
that the IMS shareholders approve the Merger or fails to submit the Merger
to the shareholders for their approval; or (vi) by Lilly and Subsidiary if
the shareholders of IMS have voted upon and not approved the Merger.
LIABILITY OF THE PARTIES UPON TERMINATION
In the event that the Merger Agreement is terminated pursuant to
one of the items set forth above under "- Termination," the Merger
Agreement will terminate and there will be no other liability on the part
of Lilly and Subsidiary or IMS to each other (except liability relating to
a breach of confidentiality, liability of each party to pay its own
expenses and liability for the termination fee).
In the event of a termination by Lilly and Subsidiary pursuant to
clause (iv), (v) or (vi) above under "- Termination," or a termination by
IMS pursuant to clause (iv) above under "- Termination," the terminating
party will be paid by wire transfer in immediately available funds a fee of
$4 million (subject to any credit against such amount payable by Lilly of
the principal and interest amounts payable by IMS to Lilly pursuant to the
loans made by Lilly).
EXPENSES
All costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby will be paid by the
party incurring such expenses.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Pursuant to the Merger Agreement, from and after the Effective
Date, IMS will indemnify and hold harmless each director and officer of IMS
(and each such person's personal representative, estate, heirs, testator or
intestate successors) against any costs or expenses (including reasonable
attorney's fees), judgments, fines, losses, claims, damages, liabilities
and amounts paid in settlement in connection with any actual or threatened
claim, action, suit, proceeding or investigation arising out of matters
existing or occurring on or prior to the Effective Date (including without
limitation any which arise out of or relate to the transactions
contemplated by the Merger Agreement), whether asserted or claimed prior
to, or on or after, the Effective Date, in accordance with the
indemnification provisions of the Articles of Incorporation and the By-Laws
of IMS immediately following the Merger in the same manner and to the same
extent as if such person were a director or officer of IMS following the
Merger.
37
PUT/CALL AGREEMENTS
The following is a brief summary of the terms of the form of
Put/Call Agreement, a copy of which is attached as Appendix B to this Proxy
Statement-Prospectus and is incorporated herein by reference. Such summary
is qualified in its entirety by reference to the Put/Call Agreement.
GENERAL
Lilly will offer each holder of Company Common Stock, Series B
Preferred Stock, Company Options or Company Warrants (a "Holder") the
opportunity to enter into a Put/Call Agreement that would apply to any or
all of the Holder's shares of Series D Preferred Stock as the Holder may
elect (the "Subject Shares").
PUT RIGHT
Under a Put/Call Agreement, a Holder will have the right to
require Lilly to purchase any or all of the Holder's Subject Shares during
each of two Put Periods at a price of $8.00 per share, plus any unpaid
dividends accrued to the purchase date (the "Purchase Price").
The initial Put Period shall be a period of at least 10 business
days beginning on the first anniversary of the Merger; the second Put
Period shall be a period of at least 10 business days beginning
approximately 30 months after the Merger. However, Lilly will have the
right to defer commencement of a Put Period, or to suspend a Put Period
that has commenced, or to defer the making of purchases pursuant to the
exercise of a Put in order to permit compliance with all applicable laws;
provided, however, that Lilly will use its commercially reasonable efforts
-------- -------
to cause such compliance so as to avoid or minimize any such deferral or
suspension, except that if commencement or continuation of a Put Period, or
the making of purchases pursuant to the exercise of a Put, would require
the disclosure to the Holder of information about IMS or Lilly that, in
Lilly's reasonable judgment, it is not then in the best interests of IMS or
Lilly to disclose, Lilly may, in its discretion, defer the commencement of,
or may suspend, the Put Period or defer such purchases, for up to 90 days.
CALL RIGHT
Under a Put/Call Agreement, Lilly will have the right to require a
Holder to sell any or all of the Holder's Subject Shares to Lilly at the
Purchase Price in whole at any time or in part from time to time after the
third anniversary of the Merger.
ESCROW
The stock certificates representing the Subject Shares will bear a
restrictive legend and must be deposited into an escrow accompanied by an
undated stock power endorsed in blank relating to the Subject Shares. To
that end, the Exchange Agent will, following the Merger, deliver directly
to the Escrow Agent the certificates for any Subject Shares issued in the
Merger. The escrowed certificates will be held in the escrow pending
possible purchase by Lilly pursuant to the put/call rights, but if for any
reason the Escrow Agreement has not been terminated by December 31, 2001,
the Escrow Agent shall promptly release the escrowed shares to the Holders.
38
TRANSFERS OF SUBJECT SHARES
The Holder will have the right to sell, assign, donate, pledge or
otherwise transfer or encumber any or all of the Subject Shares and any
related rights and obligations under the Put/Call Agreement only with
Lilly's prior written consent. Lilly will grant such consent provided
that:
(i) the transferee shall have executed and delivered an agreement
reasonably satisfactory to Lilly confirming that the Subject Shares
being transferred will remain subject to the Put/Call Agreement;
(ii) the certificates for the Subject Shares being transferred
remain deposited in the escrow and the transferee shall have executed
and delivered to the Escrow Agent an undated stock power for those
Subject Shares (subject to certain exceptions where the transfer is a
bona fide pledge);
(iii) Lilly is reasonably satisfied that the transfer will comply
with all applicable securities laws and other legal requirements and
will not result in the outstanding Series D Preferred Stock being held
of record by 500 or more persons within the meaning of Section 12(g)
of the Exchange Act, as amended, and the rules and regulations
thereunder.
NO RESTRICTIONS ON LILLY
The existence of any Put/Call Agreement will not impair or
restrict in any way Lilly's right, following the Merger, to transfer all or
any of its interest in IMS or to cause IMS to merge, sell its assets or
engage in other extraordinary transactions, including, without limitation,
transactions that would result in the cashing out of Series D Preferred
Stock or the exchange of Series D Preferred Stock for other securities,
except that prior to the third anniversary of the Merger Lilly will not
cause IMS to engage in a merger or other extraordinary transaction that
would result in a Holder's being deemed for Federal income tax purposes to
have sold Subject Shares in such merger or other extraordinary transaction.
Lilly will represent that, as of the date of the Put/Call Agreement, it has
no present intention to cause IMS to engage in such a merger or other
extraordinary transaction prior to the fifth anniversary of the Merger.
If pursuant to a merger, consolidation, recapitalization,
reorganization, sale of substantially all of the assets or other such
transaction involving IMS, the outstanding shares of Series D Preferred
Stock are converted into or exchanged for cash, property or securities of
IMS or any other issuer, then the put and call rights shall apply to such
cash, property or securities and the Purchase Price and other terms of the
Put/Call Agreement shall be subject to appropriate adjustment, so as to
preserve unchanged to the fullest extent possible the rights and
obligations of the parties to the Put/Call Agreement.
SUBMISSION TO JURISDICTION
Any action or proceeding arising out of a Put/Call Agreement may
be heard and determined by any state or federal court sitting in the State
of Colorado.
39
AMENDMENT TO THE ARTICLES OF INCORPORATION OF IMS
Approval of the Merger by IMS shareholders will include approval
of an amendment to the Articles of Incorporation of IMS (as amended, the
"New Charter") set forth in the Articles of Merger, effective upon
consummation of the Merger, as described below. The following is a summary
of such amendments, and is qualified in its entirety by reference to the
Articles of Merger which are attached hereto as Appendix A to this Proxy
Statement-Prospectus. For a more complete description of the preferences,
limitations and relative rights of the capital stock of IMS following the
Merger, see "DESCRIPTION OF CAPITAL STOCK OF IMS."
CAPITALIZATION
The New Charter changes the total authorized capital of IMS from
25,000,000 shares of common stock, without par value, and 7,000,000 shares
of preferred stock, $0.01 par value, to 20,000,000 shares of common stock,
without par value, 2,000,000 shares of Series B Preferred Stock, $1.00 par
value and 12,000,000 shares of Series D Preferred Stock, $0.01 par value.
The New Charter will also establish the Series D Preferred Stock
with the preferences, limitations and relative rights as described under
"DESCRIPTION OF IMS CAPITAL STOCK - Series D Preferred Stock." Inasmuch
as, pursuant to terms of the Merger, the Series C Preferred Stock will be
converted into shares of common stock of IMS, references to the Series C
Preferred Stock have been eliminated from the New Charter.
VOTING RIGHTS
Under the New Charter, following the Merger, holders of Series B
Preferred Stock and Series D Preferred Stock will have no voting rights
other than those voting rights required by the Colorado Business
Corporation Act and other than, in the case of Series D Preferred Stock,
rights to elect directors following certain failures in the payment of
dividends and the redemption of the Series D Preferred Stock. Prior to the
Merger, holders of the Series B Preferred Stock have voting rights
identical and equal to the voting rights of the Company Common Stock.
In addition, the New Charter explicitly reduces the vote required
for any matter that pursuant to the Colorado Corporation Code (as in effect
immediately prior to July 1, 1994) required a two-thirds vote of all of the
outstanding shares of the corporation entitled to vote or all of the
outstanding shares of each class where class voting was required to only a
majority of all the votes entitled to be cast on the matter by each voting
group entitled to vote separately on the matter.
LIQUIDATION RIGHTS
Under the New Charter, following the Merger, the Series B
Preferred Stock and the Series D Preferred Stock will be parity stock in
respect of the rights to payments upon the liquidation, dissolution or
winding-up of IMS. Prior to the Merger, the rights of the holders of
Series B Preferred Stock upon the liquidation, dissolution and winding-up
of IMS are superior to similar rights for all other classes of IMS capital
stock.
CONVERSION RIGHTS
The Articles of Incorporation of IMS prior to the Merger provide
that the Series B Preferred Stock is convertible into Company Common Stock.
However, they also provide that, upon a merger of IMS with another entity,
the shares of Series B Preferred Stock shall, after such merger, be
convertible into the kind and number of shares of stock or other securities
or property to which such holder would have been entitled if, immediately
prior to such merger, such holder had converted his shares of
40
Series B Preferred Stock into Company Common Stock. Accordingly, following
the Merger, shares of Series B Preferred Stock will be convertible into, at
the holder's option, either $5.33 in cash, without interest, or two-thirds
of a share of Series D Preferred Stock.
COMPARISON OF SHAREHOLDER RIGHTS
The following is a summary of the material differences between the
rights of IMS shareholders prior to the Merger and following the Merger.
As IMS is the surviving corporation in the Merger with Subsidiary, the
differences arise from the New Charter set forth in the Articles of Merger,
to be effective upon consummation of the Merger (a copy of which is
attached hereto as Appendix A to this Proxy Statement-Prospectus), as well
as from the new By-Laws ("New By-Laws") to be adopted by IMS following the
Merger. This summary does not purport to be a complete statement of the
rights of holders of Company Common Stock and Series B Preferred Stock
following the Merger under, and is qualified in its entirety by reference
to, Colorado law, as well as the Articles of Merger and the By-Laws in
effect prior to and following the Merger. For a description of the rights
preferences, limitations and relative rights of the capital stock of IMS
following the Merger, see "DESCRIPTION OF CAPITAL STOCK OF IMS."
VOTING RIGHTS
The New Charter explicitly reduces the vote required for any
matter that pursuant to the Colorado Corporation Code (as in effect
immediately prior to July 1, 1994) required a two-thirds vote of all of the
outstanding shares of the corporation entitled to vote or all of the
outstanding shares of each class where class voting was required to only a
majority of all the votes entitled to be cast on the matter by each voting
group entitled to vote separately on the matter.
NOTICE OF SHAREHOLDER MEETINGS
In the By-Laws of IMS in effect prior to the Merger, written
notice of each meeting of the shareholders was required to be given to each
shareholder of record not less than 10 nor more than 50 days before the
date of the meeting. The New By-Laws have changed the notice requirement
to not less than 10 nor more than 60 days before the date of the meeting.
In addition, the New By-Laws add a provision that at least 20 days notice
be given if a sale, lease, exchange or other disposition of all or
substantially all of the property and assets of the Company not in the
usual and regular course of business is to be voted on.
CONFLICTING INTEREST TRANSACTIONS
The Colorado law and the New By-Laws contain provisions relating
to certain conflicting interest transactions and the approval of such
transactions by the Board of Directors. The Board of Directors or a
committee thereof cannot authorize a loan by the Company to a director of
the Company or to an entity in which a director of the Company is a
director or officer or has a financial interest, or a guaranty by the
Company of an obligation of a director of the Company or of an obligation
of an entity in which a director of the Company is a director or officer or
has a financial interest, until at least 10 days after written notice of
the proposed authorization of the loan or guaranty has been given to the
shareholders who would be entitled to vote thereon if the issue of the loan
or guaranty were submitted to a vote of shareholders.
VOTE REQUIRED FOR EXTRAORDINARY MATTERS
Generally, only the common stock is entitled to vote on matters
submitted to a shareholder vote. However, the New By-Laws provide that if
a voting group is entitled to vote separately on a particular proposal,
then such a proposal must be approved by a majority of all the votes
entitled to be cast by such voting group. Under Colorado law, holders of
the shares of a particular class are entitled to vote
41
as a separate voting group on an amendment to the articles of incorporation
or on a merger which (a) increases or decreases the aggregate number of
authorized shares of that class, (b) effects an exchange or
reclassification of all or part of the shares of the class into shares of
another class, (c) effects an exchange or reclassification, or create the
right of exchange, of all or part of the shares of another class into
shares of the class, (d) changes the designation, preferences, limitations
or relative rights of all or part of the shares of the class, (e) changes
the shares of all or part of the class into a different number of shares of
the same class, (f) creates a new class of shares having rights or
preferences with respect to distributions or dissolutions that are prior,
superior or substantially equal to the shares of the class, (g) increases
the rights, preferences, or number of authorized shares of any class that,
after giving effect to the amendment, have rights or preferences with
respect to distributions or to dissolution that are prior, superior or
substantially equal to the shares of the class, (h) limits or denies an
existing preemptive right of all or a part of the shares of the class, and
(i) cancels or otherwise affects rights to distributions or dividends that
have accumulated but have not yet been declared on all or part of the
shares of the class.
INDEMNIFICATION
The Articles of Incorporation in effect prior to the Merger state
that the Company possesses and may exercise all powers of indemnification
of directors, officers, employees, agents and other persons, and all powers
and authority incidental thereto without regard to whether or not such
powers and authority are provided for by Colorado law. Although the New
Charter does not provide for indemnification, the New By-Laws provide that
the Company will indemnify any person who was, is or is threatened to be
made a named defendant or respondent in a proceeding because the person is
or was a director against specified liabilities incurred in, related to, or
as a result of, the proceeding to the fullest extent permitted by law,
including without limitation in circumstances in which, in the absence of a
provision to the contrary in the by-laws, indemnification would be
discretionary under the Colorado Business Corporation Act, if (a) the
person conducted himself or herself in good faith; (b) the person
reasonably believed: (i) in the case of conduct in an official capacity
with the Company, that his or her conduct was in the Company's best
interests; and (ii) in all other cases, that his or her conduct was at
least not opposed to the Company's best interests; and (c) in the case of
any criminal proceeding, the person had no reasonable cause to believe his
or her conduct was unlawful.
In accordance with Colorado law, the New By-Laws provide that the
Company will not indemnify a director under the provisions described above
in connection with a proceeding by or in the right of the Company in which
the director was adjudged liable to the Company or in connection with any
other proceeding charging that the director derived an improper personal
benefit, whether or not involving action in an official capacity, in which
proceeding the director was adjudged liable on the basis that he or she
derived an improper personal benefit.
In addition to the foregoing, the New By-Laws provide that the
Company will indemnify a person who was wholly successful, on the merits or
otherwise, in the defense of any proceeding to which the person was a party
because the person is or was a director, against reasonable expenses
incurred by him or her in connection with the proceeding.
In addition, the New By-Laws provide that the Company will
indemnify an officer, employee, fiduciary or agent of the Company to the
same extent as to a director.
HOLDERS OF SERIES B PREFERRED STOCK
Voting Rights
Under the New Charter, following the Merger, holders of Series B
Preferred Stock and Series D Preferred Stock will have no voting rights
other than those voting rights required by the Colorado Business
Corporation Act and other than, in the case of the Series D Preferred
Stock, rights to elect
42
directors following certain failures in the payment of dividends and the
redemption of the Series D Preferred Stock. Prior to the Merger, holders
of the Series B Preferred Stock have voting rights identical and equal to
the voting rights of the Company Common Stock.
Liquidation Rights
Under the New Charter, following the Merger, the Series B
Preferred Stock and the Series D Preferred Stock will be parity stock in
respect of the rights to payments upon the liquidation, dissolution or
winding-up of IMS. Prior to the Merger, the rights of the holders of
Series B Preferred Stock upon the liquidation, dissolution and winding-up
of IMS are superior to similar rights for all other classes of IMS capital
stock.
Conversion Rights
The Articles of Incorporation of IMS prior to the Merger provide
that the Series B Preferred Stock is convertible into Company Common Stock.
However, they also provide that, upon a merger of IMS with another entity,
the shares of Series B Preferred Stock shall, after such merger, be
convertible into the kind and number of shares of stock or other securities
or property to which such holder would have been entitled if, immediately
prior to such merger, such holder had converted his shares of Series B
Preferred Stock into Company Common Stock. Accordingly, following the
Merger, shares of Series B Preferred Stock will be convertible into, at the
holder's option, either $5.33 in cash, without interest, or two-thirds of a
share of Series D Preferred Stock.
DESCRIPTION OF CAPITAL STOCK OF IMS
The following are summaries of the terms of the capital stock of
IMS following the consummation of the Merger, including the amendment to
the Articles of Incorporation described in "AMENDMENT TO THE ARTICLES OF
INCORPORATION OF IMS." Such summaries are qualified in their entirety by
reference to the provisions of the Articles of Incorporation of IMS to be
in effect following the Merger, which can be found in the Articles of
Merger, which is attached as Exhibit A to the Merger Agreement which is
attached as Appendix A to this Proxy Statement-Prospectus.
AUTHORIZED CAPITAL STOCK
Following the Merger, the aggregate number of shares that IMS
shall have authority to issue is 20,000,000 shares of common stock, without
par value, 12,000,000 shares of Series D Preferred Stock, $0.01 par value,
and 2,000,000 shares of Series B Preferred Stock, $1.00 par value.
COMMON STOCK
Following the Merger, each shareholder of record of common stock
entitled to vote will have one vote for each share of such stock standing
in his name on the books of the corporation, except that in the election of
directors such holder will have the right to vote such number of shares for
as many persons as there are directors to be elected. Cumulative voting
will not be allowed in the election of directors or for any other purpose.
Pursuant to the Merger Agreement, immediately following the Merger, all the
common stock of IMS will be held by Lilly.
43
SERIES D PREFERRED STOCK
Rank
Shares of Series D Preferred Stock will have a preference over
shares of IMS's common stock upon liquidation, dissolution or winding-up of
IMS.
Dividends
Holders of Series D Preferred Stock will be entitled to receive,
if, as and when declared by the Board of Directors out of funds legally
available therefor, cumulative cash dividends at an annual rate of $0.62
per share, in preference to and in priority over any dividends with respect
to the common stock of IMS. Dividends will begin to accrue and be
cumulative (regardless of whether such dividends have been declared by the
Board of Directors) beginning on the date of issuance, and will be payable
annually in arrears each December 31 until and unless redeemed by IMS.
Voting Rights
Outstanding shares of Series D Preferred Stock will have no voting
rights other than voting rights required by the Colorado Business
Corporation Act or as otherwise provided below.
Whenever, at any time or times, dividends payable on any share or
shares of Series D Preferred Stock are in arrears in an amount equal to at
least two full annual dividends (whether or not declared and whether or not
consecutive and whether or not funds are legally available for such
dividends), the holders of record of the outstanding Series D Preferred
Stock will have the exclusive right, voting separately as a single class,
to elect one director of IMS at a special meeting of shareholders of IMS or
at IMS's next annual meeting of shareholders, and at each subsequent annual
meeting of shareholders. At elections for such director, the holders of
shares of Series D Preferred Stock will be entitled to cast one vote for
each share held.
Upon a failure by IMS to redeem any shares of Series D Preferred
Stock pursuant to any demand duly made pursuant to a holder's redemption
right discussed in "- Redemption - At the Option of Holders" below (whether
or not such failure results from IMS's failure to have sufficient funds
legally available for such redemption), then the holders of record of the
Series D Preferred Stock will have, as their sole remedy in respect of such
failure, the exclusive right, voting separately as a single class, to elect
the smallest number of directors of IMS that will constitute a majority of
the authorized number of members of the Board of Directors (including new
directorships created) at a special meeting of shareholders of IMS or at
IMS's next annual meeting of shareholders, and at each subsequent annual
meeting of shareholders. At elections for such directors, the holders of
shares of Series D Preferred Stock will be entitled to cast one vote for
each share held. If such holders exercise such right to elect a majority
of the directors, then following the election of such directors and during
the period in which a majority of the directors are persons elected by such
holders (or the successors of such directors), IMS will be required to
redeem all of the shares of Series D Preferred Stock for which redemption
was duly demanded as soon as practicable if and to the extent that funds
are legally available therefor.
Upon the vesting of a right of the holders of the Series D
Preferred Stock to elect any directors, the maximum authorized number of
members of the Board will be automatically increased, (i) in case of a
right because of a failure to pay dividends, by one and, (ii) in the case
of a right because of a failure to redeem, by the maximum number of members
of the Board of Directors immediately up to that time authorized (but
excluding from such maximum number the member, if any, authorized because
of a failure to pay dividends), plus one, and the vacancy or vacancies so
created will be filled by vote of the holders of the outstanding Series D
Preferred Stock as set forth below. A special meeting of the shareholders
of IMS then entitled to vote will be called by the Chairman of the Board of
Directors or the
44
President or the Secretary of IMS, if requested in writing by the holders
of record of not less than 25% of the Series D Preferred Stock then
outstanding. At such special meeting, or, if such special meeting will not
have been called, then at the next annual meeting of shareholders of IMS,
the holders of the Series D Preferred Stock will elect, voting as above
provided, a director or directors to fill such vacancy or vacancies created
by the automatic increase in the number of members of the Board of
Directors. At any and all such meetings for such election, the holders of
a majority of the outstanding shares of the Series D Preferred Stock will
be necessary to constitute a quorum for such election, whether present in
person or by proxy, and such director or directors will be elected by the
vote of at least a plurality of shares held by such shareholders present or
represented at the meeting. Any director elected by holders of the Series
D Preferred Stock pursuant to this Section may be removed at any annual or
special meeting, by vote of a majority of the outstanding shares of the
Series D Preferred Stock, with or without cause. In case a director so
elected will vacate such position, such vacancy may be filled by unanimous
agreement of the remaining directors so elected, or their successors then
in office, if any, or may be filled in the same manner as is provided above
for the initial election of a director by the holders of the Series D
Preferred Stock.
The right of the holders of the Series D Preferred Stock, voting
separately as a class, to elect one director of the Board because of a
failure to pay dividends will continue until, and only until, such time as
all arrears in dividends (whether or not declared) on the Series D
Preferred Stock will have been paid or declared and set apart for payment,
at which time such right will terminate, except as expressly provided by
law, subject to revesting in the event of each and every subsequent failure
of the character above-mentioned. The right of such holders, voting
separately as a class, to elect directors because of a failure to redeem
will continue until, and only until, such time as IMS has redeemed all of
the shares of Series D Preferred Stock for which redemption was duly
demanded at which time such right will terminate, except as expressly
provided by law. Upon any termination of the right of the holders of the
Series D Preferred Stock as a class to vote for a director or directors as
herein provided, the term of office of any such director or directors then
in office will terminate immediately.
Redemption
At the Option of Holders. During the period of 30 days beginning
------------------------
on the fifth anniversary of the Effective Date, any one or more holders of
shares of Series D Preferred Stock, at the option of such holders, may
demand that IMS redeem any or all of their shares of Series D Preferred
Stock at a redemption price of $8.00 per share, plus an amount equal to all
accrued and unpaid dividends thereon (whether or not declared) to and
including the date of redemption. Such demand will be made by delivering
to IMS at its principal executive offices a written demand during the 30-
day period. Such demand must specify the number of shares to be redeemed
and will be irrevocable, except with the consent of IMS. Following receipt
of any such demand, IMS may, at its option, choose to redeem, or not to
redeem, shares in accordance with such demand and the provisions described
herein. If shares are to be so redeemed, IMS will fix a redemption date
that will be not later than 90 days after such fifth anniversary. IMS will
give notice of redemption by first class mail, postage prepaid, mailed not
less than 20 days prior to the date fixed for redemption to the holders
whose shares are to be redeemed at their respective addresses appearing on
the stock books of IMS. Notice so mailed will be conclusively presumed to
have been duly given whether or not actually received. Such notice must
state: (i) the date fixed for redemption; (ii) the redemption price; (iii)
the number of shares of Series D Preferred Stock to be redeemed and if less
than all the shares held by such holder are to be redeemed, the number of
shares to be so redeemed from such holder; (iv) the place where
certificates for such shares are to be surrendered for payment of the
redemption price; and (v) that after the close of business on such date
fixed for redemption the shares to be so redeemed will not accrue
dividends. If IMS does not redeem all of the shares of Series D Preferred
Stock for which redemption has been duly demanded, the sole remedy of the
holders of such shares in respect of such failure to redeem will be the
exercise of the voting rights described under "- Voting Rights" above. For
these purposes, IMS will be considered to have redeemed any shares for
which redemption has been duly demanded if such shares are thereafter
purchased by IMS or any person or entity that then owns, directly or
indirectly, at least 50% of IMS's then outstanding common stock.
45
At the Option of IMS. On and after the fifth anniversary of the
--------------------
Effective Date, IMS, at its option, may redeem any or all shares of Series
D Preferred Stock at a redemption price of $8.00 per share, plus an amount
equal to all accrued and unpaid dividends thereon (whether or not declared)
to and including the date of redemption.
Redemption Procedures. If IMS redeems less than all of the shares
---------------------
for which demands for redemption were duly made, or if less than all of the
outstanding shares of Series D Preferred Stock are to be redeemed at the
option of IMS, the shares to be redeemed will be selected pro rata (subject
to rounding to avoid fractional shares) as nearly as practicable or by lot,
or by such other method as IMS's Board may determine to be equitable;
provided, however, that if IMS is proposing to redeem shares at its option
-------- -------
and any shares for which demands for redemption were duly made have not
been redeemed, then priority will be given to the redemption of such shares
for which such demands were duly made.
Notice of any redemption at the option of IMS will be given by
first class mail, postage prepaid, mailed not less than 30 nor more than 60
days prior to the date fixed for redemption to the holders of record of the
Series D Preferred Stock to be redeemed at their respective addresses
appearing on the stock books of IMS. The IMS Board will fix a record date
for determining holders of record who are entitled to receive notice of any
redemption, not more than 10 days prior to the mailing of such notice.
Notice so mailed will be conclusively presumed to have been duly given
whether or not actually received. Such notice will state: (i) the date
fixed for redemption; (ii) the redemption price; (iii) the number of shares
of Series D Preferred Stock to be redeemed and if less than all the shares
held by such holder are to be redeemed, the number of shares to be so
redeemed from such holder; (iv) the place where certificates for such
shares are to be surrendered for payment of the redemption price; and (v)
that after the close of business on such date fixed for redemption the
shares to be so redeemed will not accrue dividends.
Upon surrender in accordance with the notice of redemption, the
certificate for any shares of Series D Preferred Stock so redeemed (duly
endorsed or accompanied by appropriate instruments of transfer, if so
required by IMS in such notice), the holders of record of such shares will
be entitled to receive the redemption price, without interest. In case
fewer than all the shares represented by any such certificate are redeemed,
a new certificate will be issued representing the unredeemed shares without
cost to the holder thereof.
Notice of redemption having been mailed as provided above, from
and after the redemption date (unless default will be made by IMS in
providing money for the payment of the redemption price) dividends on the
shares of the Series D Preferred Stock called for redemption will cease to
accrue, and said shares will no longer be deemed to be outstanding, and all
rights of the holders thereof as shareholders of IMS (except the right to
receive from IMS the redemption price) will cease.
Preemptive Rights
No holder of Series D Preferred Stock will, because of such
holder's ownership of such stock, have a preemptive right to purchase,
subscribe for or take any part of any capital stock of IMS nor will any
such holder have a preemptive right to purchase, subscribe for or take any
part of notes, debentures, bonds or any other securities of IMS, including,
but not limited to, securities convertible into or carrying options or
warrants to purchase capital stock of IMS.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or
winding-up of IMS, the holders of the Series D Preferred Stock will be
entitled to receive out of the assets of IMS available for distribution to
shareholders, before any distribution of assets is made to the holders of
shares of common stock, an amount in cash equal to $8.00 per share, plus an
amount equal to all accumulated and unpaid dividends on such shares of
Series D Preferred Stock to and including the date of such liquidation,
46
dissolution or winding-up. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of IMS, the amounts payable with
respect to the Series D Preferred Stock and any parity stock are not paid
in full, the holders of the Series D Preferred Stock and such parity stock
will share ratably in any such distribution of assets of IMS in proportion
to the full respective preferential amounts (including accumulated and
unpaid dividends) to which they are entitled. After payment to the holders
of the Series D Preferred Stock (including accumulated and unpaid
dividends) described in this paragraph, the holders of Series D Preferred
Stock will be entitled to no further participation in any distribution of
assets of IMS.
Conversion Rights
Holders of the Series D Preferred Stock will have no rights to
convert the Series D Preferred Stock into any other class of capital stock
of IMS.
Cancellation of Redeemed Shares
All shares of Series D Preferred Stock redeemed as described in "-
Redemption" above will be cancelled and will not be issuable by IMS.
No Other Rights
The shares of Series D Preferred Stock will not have any
preferences, voting powers or relative, participating or other special
rights except as set forth above and in the Articles of Incorporation or as
otherwise required by applicable law.
SERIES B PREFERRED STOCK
Dividends
The Series B Preferred Stock will earn cumulative dividends at a
rate of 10% of the Liquidation Value (i.e., $.10 per share annually), which
will be payable quarterly each September 30, December 31, March 31 and June
30 until and unless converted as provided under "- Conversion" below. All
payments of dividends on the Series B Preferred Stock and the outstanding
Series D Preferred Stock will be made in pari passu among the holders of
-- ---- -----
the Series D Preferred Stock and the holders of the Series B Preferred
Stock and no holder of Series D Preferred Stock or holder of Series B
Preferred Stock will be preferred over the other. See "- Series D
Preferred Stock" above.
Voting Rights
Outstanding shares of Series B Preferred Stock will have no voting
rights other than such voting rights as will be required by the Colorado
Business Corporation Act.
Preemptive or Purchase Rights
Holders of Series B Preferred Stock will not have preemptive
rights to purchase, subscribe for or take any part of any capital stock of
IMS nor will any such holders have preemptive rights to purchase, subscribe
for or take any part of notes, debentures, bonds or any other securities of
IMS, including, but not limited to, securities convertible into or carrying
options or warrants to purchase capital stock of IMS.
47
Rights on Liquidation, Dissolution and Winding-up of IMS
Upon any liquidation, dissolution or winding-up of IMS, the
holders of the Series B Preferred Stock will be entitled to be paid, before
any distribution or payment is made to the holders of the outstanding
common stock, an amount in cash equal to $1.00 per share plus accrued and
unpaid dividends (the "Series B Liquidation Value"), and the holders of the
Series B Preferred Stock will not be entitled to any further or additional
payment. The Series B Preferred Stock and the Series D Preferred Stock
will be parity stock in respect of rights to payment upon liquidation,
dissolution or winding-up.
Conversion
The holders of the Series B Preferred Stock will have conversion
rights as follows (the "Series B Conversion Rights"):
Right to Convert. Each share of Series B Preferred Stock will be
----------------
convertible, at the option of the holder thereof, at any time, into either
(i) the Series B Liquidation Value, payable in cash, of the Series B
Preferred Stock on the date of conversion, without interest, or (ii) two-
thirds of a share of the Series D Preferred Stock.
Mechanics of Conversion. Before any holders of Series B Preferred
-----------------------
Stock will be entitled to convert their shares into cash or shares of
Series D Preferred Stock, such holder must surrender the certificate or
certificates therefor, duly endorsed, and must give written notice to IMS
that such holder elects to convert the shares into cash or Series D
Preferred Stock. IMS will, as soon as practicable thereafter, either pay
the required cash to the holder of Series B Preferred Stock or issue and
deliver to such holder of Series B Preferred Stock a certificate or
certificates for the number of shares of Series D Preferred Stock to which
such holder will be entitled. Such shares of Series D Preferred Stock will
be subject to redemption by the Company as described above in "- Series D
Preferred Stock - Redemption."
Fractional Shares. No fractional shares of Series D Preferred
-----------------
Stock will be issued upon conversion of the Series B Preferred Stock.
Fractional shares will not be issued; and, in lieu of fractional shares to
which the holder would otherwise be entitled, IMS will pay cash equal to
said fraction multiplied by 150% of the Series B Liquidation Value of a
share of the Series B Preferred Stock.
Changes in Series D Preferred Stock. IMS will not issue any
-----------------------------------
shares of Series D Preferred Stock other than those shares issued in
connection with the Merger or any shares subsequently issued upon
conversion of Series B Preferred Stock as provided above or upon exercise
of the Company Options and the Company Warrants contemplated by the
Articles of Merger.
The number of shares of Series D Preferred Stock outstanding at
any time after the Effective Date may not be increased by a stock dividend
payable in shares of Series D Preferred Stock or by a subdivision or split-
up of shares of Series D Preferred Stock.
The number of shares of Series D Preferred Stock outstanding at
any time after the Effective Date may not be decreased by a combination of
the outstanding shares of Series D Preferred Stock.
If at any time after the Effective Date there occurs any capital
reorganization, or any reclassification of the capital stock of IMS (other
than a change in par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or the consolidation or
merger of IMS with or into another person (other than a consolidation or
merger in which IMS is the continuing entity and which does not result in
any change in the Series D Preferred Stock), or the sale or other
disposition of all or substantially all of the properties and assets of IMS
as an entity to any other person, the shares of Series B Preferred Stock
will, after such reorganization, reclassification, consolidation, merger,
sale or other
48
disposition, be convertible into the kind and number of shares of stock or
other securities or property of IMS or of the entity resulting from such
consolidation or surviving such merger or to which such properties and
assets will have been sold or otherwise disposed to which such holder would
have been entitled if, immediately prior to such reorganization,
reclassification, consolidation, merger, sale or other disposition, such
holder had converted his shares of Series B Preferred Stock into Series D
Preferred Stock. The provisions of this paragraph similarly apply to
successive reorganizations, reclassifications, consolidations, mergers,
sales or other dispositions.
Notices of Record Date
In the event of any taking by IMS of a record of the holders of
any class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend (other than a cash dividend) or
other distribution, IMS will mail to each holder of Series B Preferred
Stock, at least 20 days prior to the specified date, a notice specifying
the date on which any such record is to be taken for the purpose of such
dividend or distribution.
Reservation of Stock Issuable Upon Conversion
IMS will at all times reserve and keep available out of its
authorized but unissued shares of Series D Preferred Stock solely for the
purpose of effecting the conversion of the shares of Series B Preferred
Stock such number of its shares of Series D Preferred Stock as will from
time to time be sufficient to effect the conversion of all outstanding
shares of the Series B Preferred Stock.
Protective Provisions
For as long as any of the Series B Preferred Stock is outstanding,
IMS will not, without first obtaining the approval (by vote or written
consent, as provided by law) of the holders of at least 51% of the
outstanding shares of Series B Preferred Stock, alter or change the rights,
preferences or privileges of the Series B Preferred Stock.
No Reissuance of Preferred Stock
No share or shares of Series B Preferred Stock acquired by IMS by
reason of redemption, purchase, conversion or otherwise will be reissued,
and all such shares will be cancelled, retired and eliminated from the
shares that IMS will be authorized to issue.
Amendment and Waiver
Amendments, modifications or waivers of any of the above terms of
the Series B Preferred Stock will be binding and effective if the prior
written consent of holders of at least 51% of the Series B Preferred Stock
outstanding at the time such action is taken is obtained; provided that no
such action will change (a) the rate at which or the manner in which
dividends on the Series B Preferred Stock accrue or the times at which such
dividends become payable, unless the prior written consent of the holders
of at least 91% of the Series B Preferred Stock then outstanding is
obtained, (b) the Series B Conversion Rights or the number of shares or
class of stock into which the Series B Preferred Stock is convertible,
unless the prior written consent of the holders of at least 91% of the
Series B Preferred Stock then outstanding is obtained or (c) the percentage
required to approve any change described in clauses (a) and (b) above,
unless the prior written consent of the holders of at least 91% of the
Series B Preferred Stock then outstanding is obtained.
49
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a summary of the principal federal
income tax consequences of the Merger to holders of IMS stock, warrants
and options. The discussion is applicable to persons who hold their stock
(or warrants) as capital assets and to persons who received their options
in consideration for personal services rendered to IMS. The discussion
assumes that the IMS stock is not, and the Series D Preferred Stock will
not be, traded on an established securities market or an over-the-counter
market or quoted in an interdealer quotation system. The discussion is
based on laws, regulations, rulings and decisions currently in effect, all
of which are subject to change (which change could apply retroactively).
Certain of the consequences described below are based on provisions of the
Code that have not yet been the subject of final regulations or other
definitive guidance by the Internal Revenue Service. The discussion does
not take account of rules that are applicable to persons that are subject
to special treatment under the Code, including without limitation, foreign
persons. The discussion also does not address state, local or foreign tax
consequences of the Merger. No rulings have been or will be requested from
the Internal Revenue Service with respect to the tax consequences of the
Merger. Each holder of IMS stock should consult his or her own tax advisor
as to the specific tax consequences of the Merger to that holder.
Receipt of Cash. A holder of Company Common Stock or Series B
Preferred Stock (or Company Warrants) who elects to receive cash in
exchange for all or a portion of his or her IMS stock (or Company Warrants)
will recognize taxable gain or loss for federal income tax purposes with
respect to those shares (or Company Warrants) in an amount equal to the
difference between (a) the amount of the cash received by such holder and
(b) the holder's adjusted tax basis in the shares of IMS stock (or Company
Warrants) surrendered in exchange therefor. Such gain or loss will be
long-term capital gain or loss if such IMS stock (or Company Warrants) are
considered to have been held for more than one year.
Receipt of Series D Preferred Stock Without Entering Into Put/Call
Agreement. The exchange of all or a portion of a holder's Company Common
Stock or Series B Preferred Stock for Series D Preferred Stock by a holder
who elects not to have such stock subject to a Put/Call Agreement should be
treated as part of a tax-free reorganization under Section 368(a)(1)(E) of
the Code. Accordingly, such holder should not recognize taxable gain or
loss for federal income tax purposes with respect to those shares of IMS
stock exchanged for Series D Preferred Stock, and the aggregate tax basis
of the Series D Preferred Stock received in the exchange should be equal to
the basis of the IMS stock exchanged therefor.
Receipt of Series D Preferred Stock Subject to Put/Call Agreement.
The federal income tax treatment of the exchange of all or a portion of a
holder's IMS stock for Series D Preferred Stock by a holder who elects to
have such stock subject to a Put/Call Agreement is uncertain. The
transaction could be treated generally as a nontaxable exchange of stock
for stock pursuant to a tax-free reorganization of IMS, or it could be
treated as a taxable exchange of IMS stock for a deferred payment
obligation issued by Lilly. Based on the relevant facts and circumstances,
however, the better view is that the transaction should be treated
generally as a nontaxable exchange of stock for stock pursuant to a
reorganization described in Section 368(a)(1)(E) of the Code. Consistent
with that view, Lilly and IMS intend to treat the transaction in accordance
with its form and the Series D Preferred Stock that is subject to a
Put/Call Agreement as constituting stock of IMS that is owned by the holder
of the Series D Preferred Stock, and neither Lilly nor IMS will claim an
interest deduction with respect thereto. (The tax consequences of the
possible treatment as a taxable deferred payment sale are described below
under "Alternative Characterization".) In addition, while the
characterization of the put and call rights with Lilly under the Put/Call
Agreement is not free from doubt, they should be viewed as a property right
that is separate from the Series D Preferred Stock.
If the transaction is treated generally as a nontaxable exchange,
the consequences to such a holder should be similar to those described
under "Receipt of Series D Preferred Stock Without Entering Into Put/Call
Agreement" above, except that such a holder should recognize taxable gain
(but possibly not loss) for federal income tax purposes in respect of the
net fair market value (if any) to the holder of the put and call rights
with Lilly. Any such gain or loss should be long-term capital gain or loss
if such IMS stock
50
is considered to have been held for more than one year. The aggregate tax
basis of the Series D Preferred Stock received in the exchange should
generally be equal to the basis of the IMS stock exchanged therefor,
subject to possible adjustment in respect of the put and call rights with
Lilly. The holder's tax basis in the put rights should be equal to their
fair market value.
Holders of IMS stock who receive Series D Preferred Stock that is
subject to a Put/Call Agreement will be treated for federal income tax
purposes as entering into a "conversion transaction" as defined in Section
1258(c) of the Code. As a result, in the absence of regulations or other
guidance to the contrary, any amount that otherwise would be treated as
capital gain arising from the disposition of the Series D Preferred Stock
(or from the expiration or termination of the call options with Lilly) will
be treated instead as ordinary income to the extent that the gain does not
exceed the amount of interest income that would have accrued on the
holder's net investment in the conversion transaction. For this purpose,
the net investment is equal to the fair market value of the Series D
Preferred Stock plus the net fair market value of the put and call rights
(if any) at the time of the Merger, and the interest on such net investment
is computed by utilizing a rate equal to 120 percent of the applicable
Federal rate (which is based on prevailing market interest rates on U.S.
Government debt instruments having a maturity comparable to that of the
conversion transaction). Under regulations that have not yet been issued,
the amount of gain that is recharacterized as ordinary income should be
reduced to reflect ordinary income received in respect of the conversion
transaction, including dividend income.
Discount Preferred Stock. If and to the extent that the fair
market value of the Series D Preferred Stock received in the Merger (as
determined without taking account of any put and call options with Lilly)
is less than $8.00 per share (i.e., the Series D Preferred Stock's
----
redemption price at maturity), the Series D Preferred Stock will have an
issue price that is less than its redemption price at maturity. Under
Section 305(c) of the Code, in general (subject to regulations that have
not yet been issued in final form), a holder of such stock will be deemed
to receive distributions from IMS, equal in the aggregate to the difference
between the issue price and the redemption price at maturity of such Series
D Preferred Stock, on a constant yield basis over the life of the Series D
Preferred Stock. Such a deemed distribution will be taxable to a holder of
the Series D Preferred Stock as ordinary dividend income to the extent of
the current and accumulated earnings and profits of IMS in the year of the
deemed distribution. A holder's adjusted tax basis in the Series D
Preferred Stock will be increased by the amount of such dividend income
recognized by the holder. To the extent that the amount of the deemed
distributions is greater than the current and accumulated earnings and
profits of IMS, the deemed distributions will be treated as a non-taxable
return of capital (to the extent of the holder's basis in the Series D
Preferred Stock) and there should be no net effect on a holder's tax basis
in those shares as a result of such deemed distributions. If and to the
extent such deemed distributions exceed the holder's tax basis in the
Series D Preferred Stock, they will be treated as taxable gain.
Alternative Characterization. The Internal Revenue Service may
take the position that the exchange of IMS stock for Series D Preferred
Stock by a holder who elects to have such stock subject to a Put/Call
Agreement should be treated as a taxable purchase of IMS stock by Lilly in
exchange for its deferred payment obligation rather than as a nontaxable
exchange pursuant to a tax-free reorganization. In that case, a holder of
IMS stock will recognize taxable gain or loss equal to the difference
between (a) the amount realized (in general, $8.00 per share of Series D
Preferred Stock) and (b) the holder's adjusted tax basis in the shares of
IMS stock exchanged therefor. Such gain or loss will be long-term capital
gain or loss if such IMS stock is considered to have been held for more
than one year.
Under the foregoing characterization, unless a holder elects to
recognize gain in the taxable year of the Merger, the exchange of IMS stock
for a deferred payment obligation (i.e., the Series D Preferred Stock
----
subject to the Put/Call Agreement) issued by Lilly should be eligible for
installment sale treatment under Section 453 of the Code. In general, such
installment sale gain would be recognized proportionally as proceeds are
received by the holder upon a redemption or other disposition of the
deferred payment obligation or upon a pledge of the deferred payment
obligation to secure a loan. Under Section 453A
51
of the Code, a holder who reports such gain on the installment method
generally would be required to pay to the Internal Revenue Service interest
on the deferred tax liability if the sales price of the IMS stock by such
holder exceeds $150,000 and the face amount of all installment obligations
held by the taxpayer which arose during, and are outstanding as of the
close of, the taxable year exceeds $5 million.
Election to Retain Series B Preferred Stock. A holder of Series B
Preferred Stock who elects to retain such stock will not recognize any
taxable gain or loss in respect of such stock at the time of the Merger.
Upon a subsequent redemption of such stock for cash or a conversion of such
stock into Series D Preferred Stock, the tax consequences to the holder
generally will be as described under "Receipt of Cash", "Receipt of Series
D Preferred Stock Without Entering Into Put/Call Agreement", "Receipt of
Preferred Stock Subject to Put/Call Agreement" and "Accrued Dividend on
Series B Preferred", as the case may be, except that (x) payments in
respect of accrued dividends will be taxable as ordinary dividend income to
the extent of the current and accumulated earnings and profits of IMS for
the taxable year and (y) in the case of a conversion of the Series B
Preferred Stock into Series D Preferred Stock, the risk that such
conversion will be treated as described in "Alternative Characterization"
is probably greater than the risk of such treatment to a holder who
acquires such stock at the time of the Merger.
Accrued Dividend on Series B Preferred. IMS believes that it
will have no accumulated or current earnings and profits for the taxable
year in which the Merger takes place. Accordingly, any accrued dividend
on the Series B Preferred Stock that is paid at the time of the Merger
should be treated as a non-taxable return of capital that reduces the
holder's tax basis in the Series B Preferred Stock (to the extent thereof)
and, to the extent such accrued dividend exceeds such tax basis, it will be
treated as taxable gain. Such gain will be long-term capital gain if the
Series B Preferred Stock is considered to have been held for more than one
year.
Cash in Lieu of Fractional Shares. In the event that a holder of
IMS stock receives, in the Merger, cash in lieu of a fractional share of
IMS stock, such holder will recognize taxable gain or loss in an amount
equal to the difference between (a) the amount of such cash and (b) the
portion of the holder's adjusted tax basis in the IMS stock that is
allocable to such fractional share. Such gain loss will be long-term
capital gain or loss if such IMS stock is considered to have been held for
more than one year.
Exercise of Warrants. A holder of Company Warrants who exercises
his or her warrants so as to receive (or be deemed to receive) Company
Common Stock and elects to receive Series D Preferred Stock pursuant to the
Merger generally should be subject to the same federal income tax
consequences as described above, except that (i) the holder's initial tax
basis in the Company Common Stock received (or deemed to be received) upon
exercise of the warrants generally will equal the exercise price plus the
holder's tax basis in the warrants, and (ii) the holder's holding period in
the Company Common Stock will begin on the exercise date of the warrants.
Exchange of Warrants. A holder of Company Warrants who elects to
exchange all or a portion of his or her warrants for warrants in respect of
Series D Preferred Stock should recognize taxable gain or loss for federal
income tax purposes in an amount equal to the difference between (a) the
fair market value of the warrants in respect of Series D Preferred Stock
received by such holder and (b) the adjusted basis of the Company Warrants
surrendered in exchange therefor. Such gain or loss will be long-term
capital gain or loss if the Company Warrants are considered to have been
held for more than one year. The holding period of warrants in respect of
Series D Preferred Stock received in the exchange will begin the day after
the exchange.
Treatment of Series D Preferred Stock. Assuming the Series D
Preferred Stock is respected as stock of IMS for federal income tax
purposes (see "Receipt of Series D Preferred Stock Subject to Put/Call
Agreement" and "Alternative Characterization" above), distributions in
respect of such stock will be taxable as ordinary dividend income to the
extent of the current and accumulated earnings and profits of IMS for the
taxable year. To the extent that the amount of such distributions is
greater than the current
52
and accumulated earnings and profits of IMS, the distributions will be
treated as a non-taxable return of capital that reduces the holder's tax
basis in such stock (to the extent thereof), and to the extent the
distributions exceed such tax basis they will be treated as taxable gain.
See also "Discount Preferred Stock" above. In general, a corporate holder
of Series D Preferred Stock that is subject to a Put/Call Agreement will
not be eligible for the dividends received deduction.
Subject to the preceding discussion (including the discussion of
conversion transactions under Section 1258 of the Code), gain or loss on
the sale, exchange, or redemption of the Series D Preferred Stock generally
will be capital gain or loss. Such gain or loss will be long-term capital
gain or loss if the Series D Preferred Stock is considered to have been
held for more than one year. The holding period of the Series D Preferred
Stock received by a holder of Company Common Stock or Series B Preferred
Stock generally will include the period during which the shares of Company
Common Stock or Series B Preferred Stock, respectively, surrendered in
exchange therefor were held, assuming the exchange is treated as part of a
tax-free reorganization under Section 368(a)(1)(E) of the Code. See
"Exercise of Warrants" above for a discussion of the holding period of a
holder of warrants who receives stock upon the exercise of those warrants.
Treatment of Stock Options -- Cash Out of Option. Each holder of
a Company Option who received the option in connection with his or her
performance of personal services for IMS (an "Optionee") and who elects to
receive cash in exchange for the option will be required to recognize
compensation taxable as ordinary income for federal income tax purposes in
an amount equal to the amount of cash received.
-- Conversion to Lilly Option. An Optionee who elects to have
his or her Company Option converted into a Lilly Option should not be
required to recognize income for federal income tax purposes as a result of
such conversion. Rather, the Optionee will generally be required to
recognize compensation taxable as ordinary income for federal income tax
purposes at the time of the exercise of the Lilly Option.
-- Conversion to Option to Purchase Series D Preferred Stock
Without Entering Into Put/Call Agreement. An Optionee who elects to have
his or her Company Option converted into an option to purchase Series D
Preferred Stock and who elects not to have the Put/Call Agreement apply to
such stock should not be required to recognize income for federal income
tax purposes with respect to the converted option prior to the exercise of
the option. At the time of the exercise of the option, the Optionee would
be required to recognize compensation taxable as ordinary income for
federal income tax purposes equal to the excess of the fair market value of
such stock at the time of exercise over the exercise price of the option
and the Optionee will have a basis in the stock equal to the sum of the
exercise price plus the amount of income required to be recognized. The
Optionee's holding period in the stock will begin on the exercise date of
the option. See "Discount Preferred Stock" and "Treatment of Series D
Preferred Stock" above with respect to the treatment of Series D Preferred
Stock received by an Optionee pursuant to the exercise of an option. In
the event that an option is redeemed for cash, the Optionee will be
required to recognize compensation taxable as ordinary income in an amount
equal to the amount of cash received upon redemption.
-- Conversion to Option to Purchase Series D Preferred Stock With
Put/Call Agreement. Although the federal income tax consequences from such
conversion are not free from doubt, an Optionee who elects to have his or
her Company Option converted into an option to purchase Series D Preferred
Stock and who elects to have the Put/Call Agreement apply to such stock
probably would not be required to recognize income for federal income tax
purposes with respect to the converted option prior to the exercise of the
option. At the time of the exercise of the option, the Optionee would be
required to recognize compensation taxable as ordinary income for federal
income tax purposes equal to the excess of the fair market value of such
stock at the time of exercise over the exercise price of the option and the
Optionee will have a basis in the stock equal to the sum of the exercise
price plus the amount of income
53
required to be recognized. The Optionee's holding period in the stock will
begin on the exercise date of the option. See "Discount Preferred Stock"
and "Treatment of Series D Preferred Stock" above with respect to the
treatment of Series D Preferred Stock received by an Optionee pursuant to
the exercise of an option. In the event that an option is redeemed for
cash, the Optionee will be required to recognize compensation taxable as
ordinary income in an amount equal to the amount of cash received upon
redemption.
It is possible that an Optionee who elects to have his or her
option converted into an option to purchase Series D Preferred Stock and
who elects to have a Put/Call Agreement apply to such stock would be
required to recognize income for federal income tax purposes at the time
that the Optionee's 12-month or 30-month put rights become exercisable. If
the alternative treatment described in this paragraph applies, the Optionee
would be required to recognize compensation taxable as ordinary income for
federal income tax purposes at the time that the applicable put right
becomes exercisable in an amount equal to the excess, if any, of (i) the
amount that could be received by the Optionee if the Optionee put the stock
to Lilly at such time over (ii) the sum of the exercise price of the Option
and, with respect to the 30-month put right, any amount previously
recognized by the Optionee as compensation with respect to the option. The
Optionee would also be required to recognize compensation taxable as
ordinary income at the time that he or she exercises the option equal to
the excess, if any, of (i) the fair market value at the time of exercise of
the stock subject to the option over (ii) the sum of the exercise price of
the option and any amount previously recognized by the Optionee as
compensation with respect to the option. If, at the time that the option
is exercised, the excess of the fair market value of the stock subject
thereto over the exercise price thereof is less than the amount of income
previously recognized by the Optionee with respect to the option, the
Optionee would not be entitled to a deduction for federal income tax
purposes with respect to such difference, but may be entitled to take a
capital loss with respect thereto, although the ability to take such loss
is not free from doubt.
-- Federal Employment Tax. In general, any amount required to be
recognized as compensation taxable as ordinary income with respect to an
option will also be treated as wages for purposes of the health insurance
portion of FICA withholding taxes, and for other federal employment tax
purposes.
54
RIGHTS OF DISSENTING SHAREHOLDERS
Pursuant to the terms of the Merger Agreement, if holders of
capital stock of IMS have exercised dissenters' rights in connection with
the Merger in accordance with the provisions of Article 113 of the Colorado
Business Corporation Act ("Article 113"), any Dissenting Shares (as defined
below) will not be converted into the Merger Consideration but will be
converted into the right to receive such consideration as may be determined
to be due with respect to such Dissenting Shares pursuant to the laws of
the State of Colorado.
The following summary of the provisions of Article 113 is not
intended to be a complete statement of such provisions and is qualified in
its entirety by reference to the full text of Article 113, a copy of which
is attached to this Proxy Statement-Prospectus as Appendix D and is
incorporated herein by reference.
If the Merger is approved by the required vote of IMS's
shareholders and is not abandoned or terminated, each holder of shares of
Company Common Stock or Series B Preferred Stock who does not vote in favor
of the Merger and who follows the procedures set forth in Article 113 will
be entitled to have his shares of Company Common Stock or Series B
Preferred Stock purchased by IMS for cash at their Fair Value (as defined
below). The "Fair Value" of shares of Company Common Stock or Series B
Preferred Stock will be determined as of the day before the first
announcement of the terms of the proposed Merger, excluding any
appreciation or depreciation in anticipation of the proposed Merger, except
to the extent that exclusion would be inequitable. The shares of Company
Common Stock or Series B Preferred Stock with respect to which holders have
perfected their purchase demand in accordance with Article 113 and have not
effectively withdrawn or lost such rights are referred to in this Proxy
Statement-Prospectus as the "Dissenting Shares."
Prior to the vote taken to approve the proposed Merger at the
Special Meeting, a shareholder who wishes to assert dissenters' rights must
(a) deliver written notice to IMS of his intent to demand payment for
shares if the proposed Merger is approved and (b) not vote any of his
shares in favor of the proposed Merger. Within 10 days after approval of
the Merger by IMS's shareholders, IMS must mail a notice of such approval
(the "Approval Notice") to all shareholders who are entitled to demand
payment for their shares under Article 113, together with a copy of Article
113 and a form for demanding payment. If a shareholder's shares are held
of record by a third party (for example, a broker), the record holder must
either assert the dissenters' rights or must consent to the beneficial
owner's assertion of dissenters' rights.
A shareholder of IMS electing to exercise dissenters' rights must,
within 30 days after the date on which the Approval Notice is mailed to
such shareholder, demand in writing from IMS the purchase of his or her
shares of Company capital stock and payment to the shareholder of their
Fair Value and must submit the certificate(s) representing the Dissenting
Shares to IMS in accordance with the terms of the Approval Notice. A
shareholder who does not demand payment and deposit share certificates as
required by the date set in the Approval Notice is not entitled to payment
for shares under Article 113. A holder who elects to exercise dissenters'
rights should mail or deliver his or her written demand for payment to IMS
at its principal offices directed to the attention of James A. Larson,
Secretary. The demand should specify the holder's name and mailing
address, the number of shares of Company Common Stock or Series B Preferred
Stock owned by such shareholder and state that such holder is demanding
purchase of his or her shares in payment of their Fair Value. Upon the
later of the Effective Time and receipt by IMS of each payment demand made
pursuant to Article 113, IMS must pay the amount IMS estimates to be the
Fair Value of the Dissenting Shares, plus interest at the rate of interest
then paid by IMS on its principal bank loans, to each dissenter who has
complied with the requirements of Article 113 and who has not yet received
payment, together with certain financial information of IMS, an explanation
of how interest was calculated and a copy of Article 113.
55
Any holder of Dissenting Shares who has not accepted an offer made
by IMS may, within 30 days after IMS first offered payment for his or her
shares, notify IMS in writing of his or her own estimate of the Fair Value
of his or her shares and demand payment of the estimated amount, plus
interest, less any payment made under Article 113, if (i) the holder of
Dissenting Shares believes that the amount offered or paid by IMS under
Article 113 is less than the Fair Value of the shares, or that the interest
due was incorrectly calculated, (ii) IMS fails to make payment within 60
days after the date set by IMS as the date by which it must receive the
payment demand, or (iii) IMS, having failed to consummate the proposed
Merger, does not return share certificates deposited by a holder as
required by Article 113. If IMS and the shareholder fail to agree upon the
Fair Value of the shares, then within 60 days after receiving the payment
demand IMS must petition the District Court of Jefferson County (the
"Court") to determine the Fair Value of such holder's shares of Company
capital stock. If IMS does not commence the proceeding within the 60-day
period, it must pay each holder of Dissenting Shares whose demand remains
unresolved the amount demanded. IMS must make all holders of Dissenting
Shares whose demands remain unresolved parties to the proceeding as an
action against their shares. The Court may appoint one or more persons as
appraisers to receive evidence and recommend a decision on the question of
Fair Value. Each holder of Dissenting Shares made a party to the
proceeding is entitled to judgment for the amount, if any, by which the
Court finds that the Fair Value of his or her shares, plus interest,
exceeds the amount paid by IMS.
If any holder of shares of Company Common Stock or Series B
Preferred Stock who demands the purchase of his or her shares under Article
113 fails to perfect, or effectively withdraws or loses his or her right
to, such purchase, the shares of such holder will be converted into the
right to receive the Merger Consideration, in the case of the Company
Common Stock, or be deemed to have made an Election to Retain Series B
Preferred Stock in the case of the Series B Preferred Stock, each in
accordance with the Merger Agreement.
56
SELECTED CONSOLIDATED FINANCIAL DATA OF LILLY
(IN MILLIONS, EXCEPT OTHER DATA AND PER SHARE AMOUNTS)
The following selected consolidated financial data for the five
years ended December 31, 1994 are derived from consolidated financial
statements of Lilly which have been audited by Ernst & Young LLP,
independent auditors. The financial data for the six months ended June 30,
1995 and June 30, 1994 are derived from unaudited consolidated financial
statements. The consolidated financial data for the six-month periods ended
June 30, 1995 and June 30, 1994 include all adjustments, consisting of
normal recurring accruals, which Lilly considers necessary for a fair
presentation of the consolidated financial position and consolidated
results of operations for these periods. Operating results for the six
months ended June 30, 1995 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1995. The
following data should be read in conjunction with the information
concerning Lilly incorporated by reference in this Proxy Statement-
Prospectus.
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- --------- --------- -------- -------- -------- --------
(UNAUDITED)
INCOME STATEMENT DATA:
Net Sales.................................. $3,332.1 $ 2,655.9 $ 5,711.6 $5,198.5 $4,963.1 $4,533.4 $4,179.0
Income from continuing operations before
income taxes and cumulative effect of
changes in accounting principles.......... 964.5 893.3 1,698.6 662.8 1,193.5 1,626.3 1,418.1
Income from continuing operations before
cumulative effect of changes in
accounting principles..................... 684.8 619.9 1,185.1 464.8 842.5 1,166.1 1,022.7
Discontinued operations, net of tax........ 35.5 57.4 101.0 26.3 (14.9) 148.6 104.6
Income before cumulative effect of changes
in accounting principles.................. 720.3 677.3 1,286.1 491.1 827.6 1,314.7 1,127.3
Cumulative effect of changes in accounting
principles, net of tax.................... -- -- -- (10.9) (118.9) -- --
Net income................................. 720.3 677.3 1,286.1 480.2 708.7 1,314.7 1,127.3
PER-SHARE DATA:
Income from continuing operations.......... $ 2.37 $ 2.14 $ 4.10 $ 1.58 $ 2.86 $ 3.99 $ 3.54
Income (loss) from discontinued operations. .12 .20 .35 .09 (.05) .51 .36
Cumulative effect of changes in accounting
principles................................ -- -- -- (.04) (.40) -- --
Net income................................. 2.49 2.34 4.45 1.63 2.41 4.50 3.90
Cash dividends declared.................... 1.29 1.25 2.52 2.44 2.255 2.05 1.73
Ratio of earnings to fixed charges(1)...... 7.0x 19.6x 14.0x 7.6x 11.7x 19.1x 15.7x
YEAR ENDED DECEMBER 31,
JUNE 30, -------------------------------------------------------------
1995 1994 1993 1992 1991 1990
----------- --------- -------- -------- -------- --------
(UNAUDITED)
BALANCE SHEET DATA:
Current assets............................. $ 4,410.3 $ 3,962.3 $3,697.1 $3,006.0 $2,939.3 $2,501.3
Other assets............................... 6,219.3 6,133.6 1,726.3 1,594.7 1,576.8 1,704.8
Property and equipment..................... 4,467.6 4,411.5 4,200.2 4,072.1 3,782.5 2,936.7
Total assets............................... 15,097.2 14,507.4 9,623.6 8,672.8 8,298.6 7,142.8
Short-term borrowings...................... 3,169.2 2,724.4 524.8 591.2 690.2 1,239.5
Other current liabilities.................. 2,484.0 2,945.1 2,403.2 1,807.4 1,581.8 1,578.1
Long-term debt............................. 2,102.1 2,125.8 835.2 582.3 395.5 277.0
Other noncurrent liabilities............... 1,368.1 1,356.5 1,291.6 799.8 665.0 580.7
Shareholders' equity....................... 5,973.8 5,355.6 4,568.8 4,892.1 4,966.1 3,467.5
Borrowings as a percentage of total
capitalization(2)........................ 46.9% 47.5% 22.9% 19.3% 17.9% 30.4%
Book value per share....................... $ 20.47 $ 18.35 $ 15.61 $ 16.72 $ 16.97 $ 12.98
______________________________
(1) The ratio of earnings to fixed charges is computed by dividing the sum of
income from continuing operations before income taxes and cumulative effect
of changes in accounting principles and fixed charges excluding capitalized
interest by fixed charges. Fixed charges represent interest on
indebtedness from continuing operations.
(2) This percentage is computed by dividing the sum of short-term borrowings
and long-term debt by total capitalization.
57
CAPITALIZATION OF IMS FOLLOWING THE MERGER
The following unaudited table sets forth the capitalization of the
Company as of June 30, 1995 and as adjusted to give effect to the Merger.
The table below assumes push-down accounting methodology will be utilized
and that holders of (i) 50% and (ii) 100%, respectively, of all outstanding
Company Common Stock (other than shares held by Lilly) and Series B
Preferred Stock elect to receive Series D Preferred Stock in accordance
with the conversion terms as described in the terms of the Merger.
June 30, 1995 (unaudited)
----------------------------------------------------------------
As Adjusted
-------------------------------------------------
Actual (50% converted) (100% converted)
------------- -------------------------- ---------------------
LONG-TERM DEBT $ 3,245,155 $ 3,245,155 $ 3,245,155
SERIES D REDEEMABLE PREFERRED STOCK,
$0.01 par value; 12,000,000 shares authorized;
5,398,268 and 10,796,535 shares to be outstanding as
adjusted, respectively - 37,107,690(1)(3)(5) 74,215,380(6)(7)(8)
STOCKHOLDERS' EQUITY (DEFICIT)
Series B Preferred Stock, $1 par value; 2,000,000
shares authorized, issued and outstanding before
the Merger; 2,000,000 shares authorized and zero
shares outstanding as adjusted 2,000,000 - (1) - (6)
Series C Preferred Stock, $1 par value; 5,000,000
shares authorized, 3,000,000 shares issued and
outstanding before the Merger; no Series C
Preferred Stock exists as adjusted 13,750,000 - (2) - (2)
Common stock, no par value; 25,000,000 shares
authorized, 6,577,162 shares issued and
outstanding before the Merger; 20,000,000 shares
authorized, 15,160,200 shares outstanding as
adjusted 8,947,591 53,058,690(1)(2) 15,951,000(2)(4)
(3)(4)(5) (6)(7)(8)
Capital contributions from joint ventures 6,508,230 - -
Accumulated deficit (29,905,317) - -
Less Stock subscriptions and joint venturers'
contributions receivable (50,000) - -
----------- ----------- -----------
Total stockholders' equity (deficit) 1,250,504 53,058,690 15,951,000
----------- ----------- -----------
Total capitalization $ 4,495,659 $93,411,535 $93,411,535
=========== ============ ===========
(1) Assumes that 50% of the outstanding shares of Series B Preferred
Stock are each converted to two-thirds of a share of Series D
Preferred Stock; assumes that accrued dividends of $1,400,000 are
paid at the Effective Date of the Merger by Lilly, which is treated
as a capital contribution to IMS; and assumes that the remaining
1,000,000 shares of Series B Preferred Stock are redeemed for cash
of $5,330,000 by Lilly. Assumes no holders of Series B Preferred
Stock elect to hold such shares following the Merger as the return
on Series D Preferred Stock would be substantially higher than the
return available by continuing to hold Series B Preferred Stock.
(2) All shares of Series C Preferred Stock are converted 1:1 to
3,000,000 shares of Common Stock.
(3) Assumes that 50% of shares of Company Common Stock outstanding as
of June 30, 1995, other than 160,200 shares of Company Common Stock
(at a cost of $801,000) held by Lilly, are converted on a 1:1 basis
to shares of Series D Preferred Stock. The remaining 50% of shares
of Company Common Stock is assumed to have been surrendered at the
Effective Date of the Merger for $8.00 per share in cash from Lilly
for total proceeds of $25,667,848.
(4) All outstanding Trans-IMS shares are converted 1:120,000 to
12,000,000 shares of Company Common Stock. Assumes that no capital
is attributed to shares issued upon conversion of Trans-IMS shares.
(5) Assumes that 50% of outstanding options and warrants are converted
to options to purchase an equivalent number of shares of Series D
Preferred Stock resulting in options and warrants for 1,523,120 new
shares of Series D Preferred Stock. The remaining 50% of
outstanding options and warrants are assumed to be surrendered at
the Effective Date of the Merger for $8.00 per option and warrant,
net of the exercise price, totaling $6,109,842.
58
(6) Assumes all shares of Series B Preferred Stock are converted to
two-thirds of a share of Series D Preferred Stock at $5.33 per share
or $10,660,000; additionally, assumes accrued dividends of $1,400,000
on Series B Preferred Stock are paid at the Effective Date of the
Merger by Lilly, which is treated as a capital contribution to IMS.
Assumes no holders of shares of Series B Preferred Stock elect to
hold such shares following the Merger as the return on Series D
Preferred Stock would be substantially higher than the return
available by continuing to hold Series B Preferred Stock.
(7) Assumes all shares of Company Common Stock outstanding as of June
30, 1995, other than 160,200 common shares held by Lilly (at a cost
of $801,000), are converted on a 1:1 basis to 6,416,962 shares of
Series D Preferred Stock at a $8.00 per share effective price for a
total of $51,335,696.
(8) Assumes all outstanding options and warrants are converted to
options to purchase an equivalent number of shares of Series D
Preferred Stock resulting in options and warrants for purchase
3,046,240 shares of Series D Preferred Stock at an effective price
of $8.00 per option and warrant net of the exercise price for a
total of $12,263,684. Assumes no option holders elect to receive
options to purchase Lilly shares in lieu of options to purchase
Series D Preferred Stock.
59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF IMS
OVERVIEW
The Company develops and operates computer based communication
networks that automate routine and specialized text, voice, data and image
exchanges from hospitals, managed care organizations, clinical
laboratories, pharmaceutical companies, pharmacy chains and other
healthcare providers to physicians. The networks, generally referred to as
IMS MEDACOM/(R)/ Networks, enable such healthcare entities ("sponsors") to
be linked with participating physician offices and physicians to be linked
to each other to facilitate the exchange of clinical, financial and
administrative information related to the delivery of healthcare services.
Sponsors pay various fees to utilize an IMS MEDACOM/(R)/ Network
to communicate with selected physicians or other network users in a given
market on a single network (a "local" sponsor) or on several networks (a
"national" sponsor). Physicians are not charged fees to participate on a
network for basic network communication services and generally are
designated for participation on a network, with the approval of the
physician, by a sponsor seeking to improve communication with certain
physicians. Generally, licenses to physicians for the proprietary IMS
software installed at the physician practice sites on devices owned by
physicians are directly maintained with IMS.
IMS markets its software and networks under three general
arrangements.
Large Markets
In 26 of the largest 50 metropolitan markets in the United States,
the Company operates, directly or under a contract with a local network
partner, IMS MEDACOM/(R)/ Networks in which all healthcare providers,
suppliers, payors and others in the market have an opportunity to utilize
the network for various aspects of medical communication needs. The "open
architecture" networks may be utilized by any sponsor which intends to
communicate with physicians or other sponsors in the market area under a
"network services agreement" ("NSA"). Under an NSA, local sponsors contract
with IMS or the network, for implementation of an individualized automated
communications plan utilizing the network for an annual fee determined by
either (a) the size of the sponsoring institution and scope of the network
design, or (b) the volume and characteristics of communications with
designated physician sites or other external sites (pharmacies, clinics,
ancillary treatment services, etc.). In addition to annual sponsor fees,
IMS may receive implementation fees, as well as incremental development and
deployment fees for custom software interfaces or workstation applications
as requested by the sponsor. The typical term for an NSA is five years,
though shorter participation commitments are available under significantly
higher fee structures. Most NSAs include general renewal upon expiration at
increased or renegotiated fees. NSA revenue is recognized as earned monthly
by prorating the fixed annual fee while certain custom development or
implementation fees are recognized upon project completion.
The Company intends to aggressively pursue the development of open
architecture IMS MEDACOM/(R)/ Networks in at least the 50 largest
metropolitan markets, measured by the number of practicing physicians in
the market.
Smaller Market Networks
In selected smaller markets (typically those with less than 1,500
practicing physicians), a local healthcare service provider or management
entity contracts with IMS to receive a license of IMS technology and to
implement a network under a network license agreement ("NLA"). Under an
NLA, the licensee generally receives a nonexclusive license to use the IMS
proprietary software for a fixed period, generally a five year term with
annual renewals thereafter. The licensee can operate a network on its own
or retain
60
IMS to manage the network. All physician site licenses under an NLA are
with the Company so the Company retains the right in most cases to permit
other local sponsors or licensees or national sponsors to communicate with
the NLA physicians. At the Company's option, the NLA licensee receives a
negotiated portion of local and national sponsorship fees in the
nonexclusive territory to implement the network service.
Typically, NLA licensees pay fees at approximately 50% of the
corresponding aggregate five-year fees under an NSA, and include a defined
obligation for the NLA licensee to staff, operate, market and support the
local network and attain physician participation.
The NLA license fee is recognized as revenue in the year in which
the NLA licensee receives the installation of the network software. Any
technology support and maintenance fees associated with the NLA are
recognized on a prorated monthly basis. In addition, the Company may
receive implementation fees that are recognized as earned. Other NLA
revenue sources include optional monthly management services fees for
services provided by the Company, generally at the election of the NLA
licensee, to provide network oversight and operation, and custom
development or new services implementation fees that are recognized upon
project completion.
Certain National Sponsors
National network sponsors enter into national sponsor agreements
("NSPA") pursuant to which the licensee is afforded the right to
communicate with designated physicians or other users in various networks.
Typically, the NSPA provides fees determined as an annual charge per
physician or other recipient of the communication or of the sites to which
the communication is directed, usually based upon the sponsor's
communication application and annualized communications volumes, with
annual minimum fees. As the number of national sponsors increase, the
Company expects that incremental recurring revenue will increase as will
profit margin as there is minimal additional expense incurred and most of
the significant operations/expenses related to network usage are covered by
fees paid by local sponsors. The Company recognizes the annual minimum fees
prorated monthly until actual network communication fees exceed the
minimum.
RESULTS OF OPERATIONS
The following discussion of the results of operations and
financial condition of the Company should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Proxy Statement-Prospectus. The table below sets forth
certain items of revenue and expenses reflected in the Company's income
statement and the percentages of total revenue represented by the items.
61
SIX MONTHS
YEAR ENDED DECEMBER 31 ENDED JUNE 30,
----------------------------------- -----------------------------------
1993 1994 1994 1995
---------------- ---------------- ---------------- ----------------
(UNAUDITED)
NET SALES AND FEE REVENUE
Network Service Agreement revenue..... $ 5,131 65.8% $ 7,457 41.7% $ 3,261 52.4% $ 5,436 68.5%
Network License Agreement revenue..... 2,550 32.7% 10,058 56.3% 2,893 46.5% 1,371 17.3%
Network License Service revenue....... 113 1.5% 366 2.0% 69 1.1% 1,123 14.2%
------- ------ ------- ------ ------- ------ ------- ------
Total revenue................. 7,794 100.0% 17,881 100.0% 6,223 100.0% 7,930 100.0%
COSTS AND EXPENSES:
Salaries, payroll taxes and benefits.. 7,205 92.4% 11,839 66.2% 4,689 75.3% 8,478 106.9%
Facilities............................ 1,679 21.5% 3,187 17.8% 1,364 21.9% 2,377 30.0%
Selling, general and administrative... 2,609 33.5% 5,848 32.7% 2,246 36.0% 3,419 43.1%
Costs of subsidiary litigation........ 1,659 21.3% 785 4.4% 714 11.5% 53 .7%
Reorganization costs.................. -- 0.0% 479 2.7% -- A 0% -- A 0%
------- ------ ------- ------ ------- ------ ------- ------
Total expenses................ 13,152 168.7% 22,138 123.8% 9,013 144.7% 14,327 180.7%
LOSS FROM OPERATIONS.................... (5,358) (68.7)% (4,258) (23.8)% (2,790) (44.7)% (6,397) (80.7)%
OTHER INCOME (EXPENSE):
Interest income....................... 24 .3% 343 1.9% 120 1.9% 103 1.3%
Interest expenses..................... (171) (2.2)% (119) (.7)% (33) (.5)% (85) (1.1)%
Loss on dissolution of partnership.... (214) (2.7)% -- A 0% -- A 0% -- A 0%
Other, net............................ (33) (.3)% (65) (.4)% (31) (.3)% -- A 0%
------- ------ ------- ------ ------- ------ ------- ------
Total other income (expense).. (394) (5.0)% 159 .9% 56 .9% 18 .2%
LOSS BEFORE MINORITY INTEREST IN
OPERATION OF SUBSIDIARIES............. (5,752) (73.8)% (4,098) (22.9)% (2,734) (43.8)% (6,379) (80.5)%
MINORITY INTEREST IN INCOME FROM
OPERATIONS OF SUBSIDIARIES............ (184) (2.4)% (153) (.9)% (57) (.9)% (85) (1.1)%
------- ------ ------- ------ ------- ------ ------- ------
NET LOSS................................ (5,936) (76.1)% (4,252) (23.8)% (2,791) (44.7)% (6,464) (81.4)%
======= ====== ======= ====== ======= ====== ======= ======
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30,
1994 (UNAUDITED)
NET SALES AND FEE REVENUE. Total revenue increased $1.7
million (27%) from $6.2 million in 1994 to $7.9 million for the first
half of 1995. Sponsor revenue under Network Service Agreements
increased 67%, however, from $3.3 million in the first half of 1994 to
$5.4 million in the first half of 1995, reflecting an increased number
of operating networks, a greater number of sponsors participating in
the networks and a substantial increase in the number of physicians
with which networks are connected. Sponsorship revenue under NSAs
increased in each quarter for the last 10 fiscal quarters, again
reflecting the growth of the Company's IMS MEDACOM/(R)/ networks. The
Company anticipates continued expansion of both the number of NSAs and
networks in operation and plans to emphasize such growth in the next
one to two years.
Revenue from Network License Agreements declined from $2.9
million in the first half of 1994 to $1.4 million in the first half of
1995. The 1994 first half was exceptionally strong, reflecting
recognition of substantial revenue from the sale of a network license
for Hawaii in the first half of 1994 and several other smaller
licenses. In the first half of 1995, the Company completed only two
license sale transactions which reflects the historical fluctuation in
this revenue as network licenses sold in smaller markets are
unpredictable in nature and generally require 12 to 18 months from the
time the licensee initially indicates interest in a network until the
sale is completed and the initial network installation is in place.
Network license service revenue increased from $69,000 in the
first half of 1994 to $1.1 million in the first half of 1995,
reflecting increased management service fees, implementation fees and
recognition of a portion of initial license fees sold in previous
periods. Service revenue tends to reflect services provided to
licensees and sponsors that became participants on networks in previous
periods and therefor should tend to increase as the number of licenses
for which IMS will provide network management increases and as the
number of sponsors under NSAs increase.
62
SALARIES AND BENEFITS. Salaries and benefits increased
approximately $3.8 million or 81% in the first half of 1995 compared to
the first half of 1994, and due to only slightly increased revenue in
the first half of 1995, salaries and benefits represented 107% of
revenue in the first half of 1995 compared to 75% of revenue in the
first half of 1994. The substantial increase reflects an increase in
the number of employees from 146 at the beginning of 1994 to 275 at the
beginning of 1995.
FACILITIES AND RELATED EXPENSES. Facilities and related
expenses are composed of rent, equipment, maintenance and depreciation,
telephone, utilities, insurance and taxes. Facilities expenses
increased $1.0 million over the first half of 1994 to $2.4 million for
the first half of 1995, or 74%. The Company incurred increases due to
opening of additional administrative offices in Denver in January 1995
and opening more field offices. Rent and related facilities expenses
in 1995 for the San Diego office closed at the end of 1994 were charged
to reorganization in 1994 and are not included in the first half 1995
facilities expenses, although such expenses were paid in 1995.
Telephone expenses increased 137% over the comparable period in 1994,
reflecting substantially increased network traffic.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative ("SG&A") expenses include travel and entertainment,
marketing, sales and promotion expenses and other uncategorized
expenses. SG&A expenses increased approximately $1.2 million, or 52%,
in the first half of 1995 compared to the first half of 1994. Travel
and related selling expenses increased due to the Company's transition
to a national sales force in late 1994 and other SG&A expenses
increased as the level of activities rose due to the Company's growth.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
NET SALES AND FEE REVENUE. Net sales and fee revenue
increased approximately $10.1 million or 128% from 1993 to 1994. The
growth in net sales and fee revenue is attributable to an increase in
the number of NSAs and to an increase in revenue per contract. The
number of hospital NSAs increased from 76 in 1993 to 109 in 1994, or
43%, and other NSAs increased from 38 at the end of 1993 to 66 in 1994,
or 74%. Revenue from hospital NSAs increased from $5.1 million in 1993
to $7.5 million in 1994, or 47%. Revenue from other sponsor NSAs and
from NLAs increased from $2.7 million in 1993 to $10.4 million in 1994,
or 285%.
SALARIES AND BENEFITS. Salaries and benefits increased $4.6
million or 64%, for fiscal 1994 compared to fiscal 1993. Salaries and
benefits as a percentage of revenue were 66% in 1994 compared to 92% in
1993 because revenue was substantially higher in 1994. The increase in
salaries and benefits was due to the addition of field, technical and
corporate employees required to support the increase in NSAs,
installation of NLAs and to enhance network software. The Company also
transitioned to a national sales force in late 1994, increasing the
selling staff from eight at the end of 1993 to 14 at the end of 1994.
FACILITIES AND RELATED EXPENSES. Facilities expenses
increased approximately $1.5 million to $3.2 million in 1994, or 90%.
These expenses increased principally from increased costs for rent,
depreciation and telephone expenses, new field offices and depreciation
from increased computer equipment purchases as a result of an increase
in the number of sponsor contracts. Telephone expenses, including long
distance charges, increased 114% due to the large increase in the
number of network messages transmitted over phone lines.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A were $5.8 million
or 33% of revenue for 1994 compared to $2.6 million or 34% of revenue
for 1993, representing an increase of $3.2 million, or 124%. The
increase included travel and related expenses which increased
approximately 100% to $1.65 million, marketing sales and promotions
which increased 58% to approximately $.8 million and executive training
services in 1994 for which there were no similar expenditures in the
prior year. Substantially all the increases were related generally to
the Company's increased business activity in 1994.
63
COST OF SUBSIDIARY LITIGATION. Litigation involving the
Company, two subsidiaries and certain directors was commenced in 1992.
The cost of this litigation was substantial and materially affected the
Company's cash flow and loss for 1992, 1993 and 1994. Costs of
litigation, representing professional fees and expenses and the cost of
indemnifying a director, were $1.7 million in 1993 and $785,000 in 1994
when the litigation was substantially concluded. The litigation
resulted in judgment in favor of the Company and the directors
following trials. The Company is not currently involved in any
material litigation.
REORGANIZATION COSTS. In 1994, the Company closed its San
Diego office and charged the costs to expenses for 1994. Approximately
$100,000 of the $479,000 of expenses relate to net leasehold expenses
which will be paid over the remaining term of the lease and
approximately $280,000 represents expenses and severance compensation
to be paid in 1995 to the former chairman and founder of the Company
who continued on as a director following the reorganization.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred and expects to continue to incur
significant operating and net losses and to continue to generate
negative cash flow from operating activities while it emphasizes
development and enhancement of networks and until the Company
establishes sufficient sponsor revenue for each network. In view of
the anticipated negative cash flow from operating activities and the
cash required for the continuing development of the Company's products
and services, the expansion of existing networks and the construction
and acquisition of new networks, the Company will require substantial
amounts of capital for the balance of fiscal 1995 and the foreseeable
future from outside sources.
IMS had working capital of $617,000 at December 31, 1994
compared to a working capital deficit of $612,000 at June 30, 1995. At
June 30, 1995, IMS had $1,318,000 cash and cash equivalents on hand
compared to $1,358,000 at December 31, 1994. This increase was
attributable to sale of receivables remaining under NLAs, and
borrowings from Lilly. IMS's contract receivables at December 31, 1994
was $6,803,000 compared to $3,103,000 at June 30, 1995, again because
of sales of contract receivables.
The Company had an accumulated deficit of approximately $23.4
million at December 31, 1994 and approximately $29.9 million at June
30, 1995. Since December 31, 1994, the Company has funded operations
primarily through $4 million in borrowings from Lilly and $1.9 million
from the exercise by Lilly of a warrant to purchase 375,000 shares of
Series C Preferred Stock (see "SPECIAL FACTORS TO BE CONSIDERED -
Background to the Merger"), and $4.3 million from the sale of
receivables under network license and service agreements to financial
institutions on a discounted cash flow basis. In addition, the Company
has used portions of a $1 million line of credit which is secured by
guarantees of certain directors and of which there was no amount
outstanding as of June 30, 1995.
The Company believes that the relationship with Lilly created
by the Merger will add financial credibility to the Company as well as
add direct financing from Lilly through either future debt or equity
capital infusions from Lilly. Consequently, the Company anticipates a
more rapid growth pattern than if the Merger were not consummated.
If the Merger is not consummated, which is not expected, IMS
would continue to fund its operations with revenue from operations,
sale of equity securities, sale of contract receivables and potential
debt financing. The failure to obtain sufficient amounts from such
future financing efforts would result in the delay or abandonment of
some or all of the Company's development and expansion plans which
could have a material adverse effect on the Company's business and
competitive position.
64
BUSINESS OF IMS
Founded in 1985, the Company develops and operates
computerized medical communication networks that link participants in
the healthcare delivery system to deliver routine and specialized
messages in automated format. The Company's networks provide a
practical means for healthcare providers and payers to develop
integrated information delivery management programs. Healthcare, and
especially the individual physician's practice of medicine, generates
prolific requirements for multi-location, multi-system clinical,
financial and administrative communications and information transfer.
The Company believes that it is a leading provider of physician-
focused, multi-participant, multi-media, bi-directional automated
healthcare communications through a common user connection based on
total number of communications delivered, variety of communications,
number of physician participants, number and variety of connected host
healthcare information systems, number of institutions (hospitals,
managed care plans, clinical laboratories, ancillary care providers and
healthcare information and administrative services) and number of
operational networks and markets served.
The first IMS medical communication network was deployed in
1988. Since that time, IMS has developed networks in more than 43
areas across the United States. IMS has pioneered the concept of
"open" architecture (available on a fee-for-use basis regardless of the
user's affiliation) medical communication networks (the "IMS
MEDACOM/(R)/ Networks").
IMS MEDACOM/(R)/ Networks connect healthcare information
systems and departmental workstations utilizing proprietary network
controller software and proprietary message handling software on
personal computers at the user's site. IMS MEDACOM/(R)/ networks
increase the timeliness and accuracy of clinical communications, ease
the burden of compliance with managed care and financial transaction
requirements and reduce the information management burden for
physicians, hospitals and other network users. Also, unlimited
communication between all physicians in a given network is available.
The Company estimates that over 30 million total messages were
delivered over IMS MEDACOM/(R)/ Networks in 1994.
The Company's core set of three software connectivity tools
are: RELAY/TM/, which provides a system integration of diverse formats;
ComCenter, the network switch which distributes messages among network
users; and PC-COM, the software on each workstation which enables the
user to access the network. These software components are installed as
a network in each healthcare market area in which the Company operates.
A local operations staff of IMS employees manages the connectivity of
the various communications software of network users, provides on-going
training and workstation support and works with network sponsors to
continually expand their services and applications provided to
physicians and other users over the network.
Physicians gain access to networks at no cost. Network
sponsors are healthcare institutions, organizations and services which
communicate regularly with physicians in the normal course of business.
Sponsors pay annual network communications or license fees that
typically relate to the number of physicians the sponsor chooses to
reach on the network. As more sponsors pay for network connectivity,
the Company receives additional license and implementation fees and
more physicians are connected. Growing numbers of sponsors and
physicians on networks lead to increased usage and acceptance and,
ultimately, revenue to the Company.
INDUSTRY BACKGROUND
Changes and cost containment pressures in the nation's
healthcare system are placing new demands on providers and payers. An
aging population, advances in technology and the rapid growth of
managed care have all resulted in increased demand for the timely and
cost-effective collection, analysis, management, sharing and
communication of information among healthcare providers and between
them and payers. This change has caused a reorientation of the role of
healthcare information systems from transaction
65
processing of episodic health service events to active decision support
and cumulative tracking and reporting of comprehensive, multi-point
courses of care. In response, an entirely new sub-industry has been
created-integrated healthcare communication networking.
The physician's office is now the focal point of hundreds of
monthly communication "transactions." Historically, the healthcare
industry focused on automation of provider claims submissions. In
fact, in medical practices, there are multiple communications, clinical
and administrative messages and information exchanges required to
fulfill the service that results in just one payment claim submission
to a payer. While there are estimated to be approximately 2.5 billion
claims that flow from providers to payers annually, the Company
believes that the total physician-focused medical communications volume
is eight to ten times as large.
Not only must physicians deal with increasing amounts of
information, they also must manage and synthesize inputs from, and
reply appropriately to, an ever more diverse group of other service
providers, payers and intermediaries. These institutions and referral
services recognize the need to improve communication with physicians,
the patients they serve and the employers who ultimately fund a
significant portion of the medical services. The driving force behind
this need is concern for the timely delivery of quality patient care.
In today's environment, healthcare depends upon efficient information
management and communication transactions.
The Company estimates that nationwide there are 570,000
private practicing physicians engaged in direct patient care within
approximately 200,000 medical practices. Approximately 50% of these
physicians practice in the largest 50 markets. Further, approximately
70% of the practices are somewhat automated with either an in-office
computer or a link into a computer service. Most of these computers
today can be characterized as medical practice management systems with
applications limited to various levels of sophistication in patient,
scheduling, billing and accounting processes.
While vitally important to the administrative operation of a
medical practice, billing and patient account management activities
address only a portion of a physician's practice automation and
communication requirements. Other automated systems and services
should directly support the provision of clinical care, before, during
and following the patient encounter. Most of these communications are
presently nonintegrated, nonautomated media: voice, printed text,
facsimile, clinical graphic printouts and handwritten notations with
the attendant problems of routing delays, filing mistakes, recipient
unavailability, transcription errors and other mechanical management
problems. The Company's IMS MEDACOM/(R)/ Networks improve the
physician's professional service environment by (i) simplifying
information access, (ii) eliminating delivery delays, (iii) integrating
diverse communications and data sources into a common and easy-to-use
format at the point-of-care, and (iv) providing automated access to the
full range of clinical referral and support services typically required
by the physician. Ultimately, communications with hospitals, other
service providers and payers, such as insurance companies or managed
care providers, are improved, thereby increasing efficiency and quality
of care and helping to hold costs down.
Other attempts to address these challenges usually result in
proprietary, single function automated communication between physicians
and other entities (such as a laboratory or a managed care provider),
with no ability or right to link with others. The technologies have
ranged from simplistic transaction telephone terminals, to dedicated
fax machines, smart modem printers, uni-directional communication
software protocols or the in-office installation of single purpose
mainframe terminals or personal computers. Because these efforts each
addressed only the specific needs of one entity in linking with the
physician and the applications were driven from the perspective of
large institutional information systems departments, they are often
characterized by difficulty of use and require that the physician's
office staff install and learn to operate a variety of incompatible
devices and communications protocols. The result has often been
limited deployment and minimal use.
66
With the rapid emergence of managed care and the movement
toward risk sharing or "capitated" provider payment methodologies,
integration of healthcare delivery will be accelerated. Essentially,
healthcare payers are forcing healthcare providers to assume the
economic risks of healthcare.
This change creates increased provider dependence upon
information and multi-point communications. There is now a demand for
new and more sophisticated information processing systems at the point
of care, accessible, as appropriate, by other providers and by payers.
Basic systems which served practice automation during the past decade
are of decreasing value in the evolving practice environment. To
participate fully in the managed care world, physician offices must be
able to record, store, analyze and distribute clinical information,
automate the processing and communication of third-party reimbursement
transactions, validate patient eligibility and comply with health plan
formulated treatment regimens, pharmaceutical therapies and
governmental regulation.
Medical practice is further complicated by the formation of
new multi-provider integrated delivery systems ("IDS") to address full
capitation of the medical treatment risk for entire patient
populations. IDS' create a new need for automated medical
communications to coordinate care across diverse and otherwise
unrelated providers. With integrated delivery, goals of payers,
provider institutions and hospitals become aligned with an emphasis on
coordination, cooperation, information sharing and mutual
accountability to achieve the organizational, operational and financial
goals of the participants.
Physician practices, and in particular primary care
practices, are positioned at the apex for implementing the IDS
strategies. The Company believes that these industry factors will
continue to position physicians as the focal point for constructing
true integrated healthcare delivery and cause hospitals, payers and
physician organizations to seek access to open architecture, automated
medical communication networks which fulfill the efficient
communication needs of all participants.
STRATEGY
The Company's objective is to be the leading provider of
physician-focused automated medical communication networks and services
which deliver decision-critical information to the healthcare industry.
IMS MEDACOM/(R)/ Network services are designed to improve healthcare
information technology to assist physicians, other healthcare providers
and payers to better manage all aspects of patient care through the
application of efficient, accurate and timely communication. The
Company's strategy includes the following key elements:
. Focus on Physician Office Requirements: The Company attracts
physician participation on networks by emphasizing ease of use,
minimal investment and immediate and relevant value to the
practice. There is no charge to physicians for the Company's
software, installation, training, on-going support or messages and
communications services. A physician can use an existing office
computer to serve as the IMS MEDACOM/(R)/ Network communications
workstation ("NCW") with the Company's PC-Com/TM/ software. The
Company believes that its physician focus creates an on-going
relationship and alliance that will accelerate the attraction of
network sponsors and generate new network uses and applications
with potential revenue sources for the Company.
. Establish IMS MEDACOM/(R)/ Networks in Additional Markets: The
Company is working to develop owned and operated IMS MEDACOM/(R)/
Networks in the largest 50 markets (based on numbers of practicing
physicians); and become the "utility" for computerized medical
communications across the entire spectrum of healthcare delivery
in the market area. In smaller markets, the Company licenses the
operation of its IMS MEDACOM/(R)/ Networks to one or more
qualified local operators.
. Add Additional Sponsors to Existing Networks: In the largest 50
markets in which the Company establishes IMS MEDACOM/(R)/
Networks, the addition of local sponsors generates both
significant financial leverage and attracts additional physician
participation which in turn increases the
67
importance of the network in the local market. The addition of
national sponsors which communicate with physicians across several
IMS MEDACOM/(R)/ Networks also add leveraged revenue for the
Company in both operated and licensed networks.
. Technology and Services Leadership: The Company has established a
single method of access for physicians and other users. This
method combines open architecture, ease of use and bi-directional
communications and employs a common look and feel for network
users. The system is simple, utilizes whatever computer operating
system is in place and is easily upgradable. The Company intends
to extend this presence and reputation for successful new service
integration into higher speed transmissions, more complex system
interfaces and an array of physician "desktop" information
management services.
HEALTH CARE INDUSTRY INFORMATION NEEDS
Today 60% of health care occurs outside the hospital and 80%
of health system patient encounters begin in the community
physician's office. Consequently, a great deal of patient care
information must be relayed in a timely manner between
geographically disparate locations. For example, primary care
physicians confer with specialists; pharmacists communicate with
physicians; managed care providers require pre-authorizations
before procedures are scheduled and referrals authorized; and
hospital staff consult with physicians, insurers, home care
agencies and other providers. The volume of information that must
be exchanged within a health care community is increasing
exponentially and the stakeholders in health care systems are
becoming more diverse.
As early as 1985, there were attempts to provide
communication links between physicians and hospitals. Most of
these early attempts failed for a variety of reasons:
. the systems were closed, requiring expensive investments in
proprietary equipment that was limited in use and cumbersome to
access;
. the networks appeared to be self-serving because they were
installed by hospitals or other entities for limited specialized
uses; and only provided for hospital-physician communication; and
. the information available over the network did not include
important clinical data such as test results or X-rays, and lacked
features such as physician-to-physician voice messaging,
electronic signature and continuing medical education programs.
IMS created IMS MEDACOM/(R)/ Networks to fulfill the need for
an effective, easy-to-use communication system available to all users
on all equipment. IMS's proprietary networks improve the efficiency
and effectiveness of medical communication and information management.
IMS MEDACOM/(R)/ NETWORK
Design
A network to support the electronic exchange of text, voice,
graphics and images in the health care industry must be highly reliable
and provide connectivity to any computer system in use by both
subscribers and sponsors. The Company provides this service through
proprietary software which can run on most hardware, and which is
delivered by a full range of field operational services, all of which
it has developed since 1985.
Each IMS MEDACOM/(R)/ Network has at its core the ComCenter,
a communications controller and switch which hosts proprietary IMS
software. The participants in a local healthcare delivery system can
be connected as a network through the ComCenter to automate routine and
specialized communications. The network converts transactions such as
clinical results reporting, referral notifications, admission forms,
medical transcriptions, consultant reports, clinical monitor tracings,
medical records,
68
calendars, prescriptions, third party claims and managed care encounter
protocols from mail, fax, phone or courier distribution to a common
computerized, bi-directional pathway. Physician offices (subscribers)
join the network at no cost for the service when the Company's
proprietary workstation software ("PC-COM") is installed on their
computer. Healthcare institutions, such as hospitals, pay annual
communications and license fees to become network sponsors with the
right to communicate electronically with their designated group of
physicians. The sponsors link into the local IMS MEDACOM/(R)/ Network
using both interfaces to their own proprietary automated systems with
the Company's RELAY/TM/ software and an unlimited site license for PC-
COM to enable in-house computers across their organization to become
network communication workstations ("NCWs"). Each institutional
department or function of the hospital can format standard automated
transactions for an unlimited range of routine communications to
physicians or other network participants using the Company's
proprietary computer protocols (Script) and imbedding the Scripts in
the subscriber NCWs under a multi-level directory-driven communications
module.
The ComCenter maintains the network directory of users,
message ordering system and transaction log. In the largest 50
markets, each ComCenter is installed in a centrally located office
leased by the Company that houses an IMS network staff which develops,
coordinates and supports the network. The network staff also provides
training with scheduled classes covering all aspects of network use and
benefits along with new sponsor and subscriber orientation and
specialty training covering new sponsor applications or network
enhancements.
The networks do not process data or provide and operate
value-added data management or storage applications. The IMS strategy
is focused on connectivity, message delivery, automated message
handling systems, facilitating functional systems integration
initiatives and enabling the practical implementation of multi-provider
organized delivery systems. During 1995 the Company deployed its
ComCenter NT software, based upon the MicroSoft Windows NT/(R)/ network
operating system, to enhance its core strategy, gain flexibility in
scaling ComCenters and to add communications options such as on-line
sessions, "near-time" automated response host inquires and single point
access for national sponsors communicating across multiple networks.
The IMS MEDACOM/(R)/ Network provides multi-platform
functionality. The RELAY/TM/ software enables the network to permit
sponsors to automate virtually any communication to any network user
from any host computer system that can generate a print stream.
Utilizing RELAY/TM/, the Company has connected networks with healthcare
information systems sold by all of the major computer or software
vendors. The majority of the NCWs on the Company's various networks
are IBM-compatible, DOS-based personal computers, either stand-alone
units or as participants on a local area network. The Company's
software can also be installed on computers operating under other
operating systems, such as UNIX, ZENIX and AIX. The Company has
designed a Microsoft Windows/(R)/ based operating system version for
its software which is scheduled for release to network users during the
first half of 1996.
A key feature of IMS MEDACOM/(R)/ Networks is that
communication for every NCW is bi-directional. As opposed to general
purpose E-mail systems, or special purpose EDI applications (such as
electronic claims submission), the IMS MEDACOM/(R)/ Network permits a
message to be launched to or from a designated NCW. In this way,
network participants are assured that their network messages have been
received at the destination and the receiver can process the message
instantly because it is resident as electronic media on the NCW.
The IMS MEDACOM/(R)/ Networks connect participants using
modems and basic phone lines, and because the highest volume message is
usually clinical results from a local source, the majority of
communication occurs within the telephone company's local area,
eliminating most long distance charges for network participants. Where
higher-speed bandwidth (such as fiber optic cable) is available and
desired by network participants, the entire suite of IMS MEDACOM/(R)/
Network software is compatible with other transmission media.
69
Using an IMS Network
A key design consideration for the IMS MEDACOM(R) Network is
simplicity of use. The use of menus, help facilities, graphic
highlights and consistent colors contributes to a high level of
acceptance and utilization by physicians, office staff and other
participants.
Using the Company's updated operating software, information
sent on a network is routed over dial-up telephone lines through a
network ComCenter computer which utilizes Microsoft Windows NT(C)
client-server technology and hosts IMS message switching software. The
updated network ComCenter allows for a wide variety of connection and
integration with the many information systems currently being used in
the health care industry and lends itself well to the open architecture
networks of IMS.
Each Network participant requires a computer workstation,
which is an IBM-PC or fully compatible DOS personal computer (or other
computer and operating system), running PC-Com/TM/, the IMS MEDACOM(R)
communications software. The network's multi-platform functionality
allows Network participants to use existing computer equipment as
Network workstations. These workstations communicate with the network
ComCenter through modems and phone lines.
To communicate using an IMS MEDACOM(R) Network, a sender
creates a message and sends it from his personal computer. Using IMS's
proprietary software, his computer then automatically dials the phone
number of the network ComCenter and sends the message. Once the
ComCenter has received a message, it checks its directory to ensure
that the message is being sent to the appropriate computer and then
dials the phone number of the recipient. When that computer answers,
the ComCenter automatically forwards the message to the recipient's
computer. Unless using one of the on-line options, the sender is not
directly linked to the recipient computer. This solves most of the
security issues associated with interactive electronic communications.
Messages are automatically delivered to the recipient's
computer hard disk drive 24 hours per day, without operator
intervention. The network ComCenter maintains a directory of all of
the Network sponsors and subscribers which can be easily updated. In
addition to the name, address and office telephone number of the
physician, directory space is provided to list the physician's practice
specialties and other profile information. Directory updates are
automatically distributed to all IMS MEDACOM(R) Network members.
Participants' workstation computers are not restricted to Network
functions. The network software operates "in the background" while the
computer may be used for other clinical, financial and administrative
applications. If an IMS MEDACOM(R) message is received while the
computer is in use, a waiting messages display appears in the upper
right-hand corner of the computer screen. The operator can quickly
read the new message without leaving the application he or she is in at
that time. In a similar fashion, after a message has been created, the
operator can continue with other work while the transmission to the
network ComCenter takes place in the background.
If the operator chooses to process waiting messages, a screen is
displayed that shows all of the new messages, who sent them, to whom
they are addressed and the date and time at which they were sent. The
subject of the message is also displayed.
Customizing the Network
One of the powerful features of the IMS MEDACOM(R) Network is
that it allows for network messages to contain attached data files,
such as voice messages, medical images or text from a word processor.
This permits the recipient to handle the appropriate disposition of the
transmitted material. Text files, such as those that might come from a
word processor, can be printed or copied to a disk for processing.
After the operator has printed the message and processed any attached
files, the system can
70
automatically send an acknowledgment to the message originator,
indicating that the message was received and processed. Message
forward and reply functions are also available.
Customized screens can be created for different types of
messages, such as hospital pre-admissions, patient referrals and
eligibility. In addition, a network sponsor can elect to broadcast a
message to all its participants on the network or to create a list of
people to whom a single message is to be sent. This latter facility
might be used, for example, by a hospital to send the next day's
surgery schedule to all surgeons.
Sources of Network Revenue
There are generally three levels of participation on IMS
MEDACOM(R) Networks: national sponsors, local sponsors and physician
subscribers. Sponsors pay various fixed and message related fees to
"communicate" with selected physician Subscribers or other network
users.
Local Sponsors. Local sponsors include local organizations
that desire to use a network to improve the quality of their services
to physicians, improve the efficiency of their operations and
strengthen relationships with physicians or other users. Such
organizations include hospitals, clinics, specialists, imaging centers,
home care agencies, independent pharmacies, transcription services,
etc. These entities enter into one to five year network services
agreements and pay annual fees and other charges for network use.
National Sponsors. National sponsors include healthcare
organizations or providers that desire to communicate with a wide range
of physicians or other network users in multiple markets. Such
organizations include pharmaceutical companies, clinical laboratories,
pharmacy chains, managed care/insurance companies, medical publishers,
etc., and usually are also sponsors of more than one, and generally
all, other IMS medical information networks located throughout the
United States.
Physician Subscribers. Each physician or medical practice is
a key influence or client for a wide range of local and national
sponsors. Physician subscribers create revenue by attracting local and
national sponsors which pay to use the network to communicate with
subscribers. Although some sponsors' fees are dependent upon the
number of physicians with which communication is sought, no network
revenue is provided by physicians.
Network Support
The Company provides extensive centralized network
monitoring, field and sponsor staff training, technical implementation
resources and real time support from its Golden, Colorado offices. The
network services division delivers: (a) network design services
including on-site sponsor requirement evaluations and RELAY/TM/
specification development; (b) RELAY/TM/ and other interface
programming, testing and installation; (c) call-in support with direct
technician interfaces who operate an automated problem logging,
tracking, resolution and follow-up system; and (d) a national training
center, housed in a separate, purpose-built facility with a curriculum
that covers a Company orientation, the industry, the Company's
technology and products, policies and procedures and a variety of
application and programming credentialing.
71
IMS MEDACOM Network Locations
IMS MEDACOM/(R)/ Networks are currently serving the following
market areas:
. Albany, New York(2) . Houston, Texas(1) . Orlando, Florida(1)(3)
. Birmingham, Alabama(3) . Indianapolis, Indiana(1)(3) . Pensacola, Florida(2)
. Boca Raton, Florida(2) . Jackson, Mississippi(2) . Philadelphia, Pennsylvania(1)
. Boise, Idaho(2) . Jacksonville, Florida(2) . Phoenix, Arizona(1)(3)
. Capitol Region, . Kansas City, Missouri(1) . Richmond, Virginia(1)
Washington D.C. area(1)
. Boynton Beach, Florida(1) . Knoxville, Tennessee(2) . Rockford, Illinois(3)
. Chicago, Illinois(1)(3) . Lexington, Kentucky(1) . Sacramento, California(1)
. Cincinnati, Ohio(1) . Lincoln, Nebraska(2) . San Antonio, Texas(1)
. Columbus, Ohio(1) . Little Rock, Arkansas(3) . San Diego, California(1)
. Colorado Springs, Colorado(1) . Los Angeles, California(1)(3) . San Jose, California(1)
. Dallas-Ft. Worth, Texas(1) . Louisville, Kentucky(1) . Savannah, Georgia(2)
. Davenport, Iowa(2) . Memphis, Tennessee(1) . St. Louis, Missouri(1)
. Denver, Colorado(1) . Miami/Fort Lauderdale, Florida(1) . Tampa, Florida(1)
. Flint, Michigan(2) . Minneapolis Minnesota(1)(3) . Tulsa, Oklahoma(2)
. Great Falls, Montana(2) . Monroe, Louisiana(2) . Wichita, Kansas(2)
. Honolulu, Hawaii(2)
(1) Network in one of the 50 largest markets.
(2) Network operated by licensee.
(3) Operated under a joint venture or similar arrangement.
See "Co-Ventures" below.
In markets where IMS MEDACOM/(R)/ Networks are in place, the
Company estimates that there are around 150,000 physicians in practice,
of which 18% are subscribers to an IMS network. Physician subscribers
connected to IMS MEDACOM/(R)/ Networks have grown from 845 at December
31, 1991 to 14,713 at December 31, 1994 and 27,433 at July 31, 1995.
At July 31, 1995, IMS and networks operated by IMS or
affiliates had sponsorship agreements with 102 sponsors, with remaining
terms of two to five years. Eighty-three of the sponsors were
hospitals or hospital systems, managed care providers or payers, six
were laboratories, and five other sponsors. In addition, IMS has
network license agreements with 20 licensee hospitals or healthcare
organizations, which authorize the licensee to use IMS network software
to set up and operate a proprietary network in smaller markets. IMS
and national sponsors are usually authorized to communicate with users
of the licensee's network. The licensee frequently retains IMS to
manage its network or to provide various ancillary services. Sponsors
and licensees each pay initial implementation fees, annual fees and
other charges for specialized or additional services for fixed contract
terms, generally five years, renewable thereafter for negotiated fees.
72
CO-VENTURES
In selected largest 50 markets, IMS has entered into various
joint venture or similar relationships with others to develop an IMS
MEDACOM/(R)/ Network. The joint venture participants' areas of
interest and ownership are summarized as follows:
CO-OWNER OR
VENTURER TYPE OF ENTITY
NAME OF VENTURE PERCENT OF (MANAGER OF (STATE OF
(CORPORATE NAME, IF APPLICABLE) INTEREST VENTURE) ORGANIZATION) NETWORK AREA
-------------------------------------------- ----------- ------------------- ---------------- ----------------------
Medical Communication Network, Inc.......... 49% UniHealth America JV Corporation Los Angeles, San
Corporation (California) Bernardino, River-
(UAV) side, Orange and
Ventura Counties
Illinois Medical Information Network, Inc... 68% HFN, Inc. (26%); JV Corporation Illinois, 2 Indiana
Swedish American (Illinois) counties, and portion
Hospital (5%); of Eastern Iowa
Alexian Brothers
Medical Ctr (1%)
(HFN)
IMS-NET of Alabama Joint Venture............ 51% Bretz Corporation JV Partnership Alabama and
(Bretz) (Colorado) Western Florida
Arkansas Medical Information Network 51% Baptist Medical JV Corporation Arkansas
(IMS-NET of Arkansas, Inc.)................ System (Baptist) (Arkansas)
IMS-NET of Arizona Joint Venture, Ltd....... 50% BC-BS of Arizona, JV Ltd. Arizona
Inc. (IMS-NET of Partner-
Arizona, Inc.) ship (Arizona)
IMS-NET of Central Florida, Inc............. 51% Adventist Health JV Corporation Orlando and central
System/Sunbelt (Colorado) Florida
Indiana Medical Communication Network 51% Methodist JV Limited Li- Indiana (except 2
LLC........................................ Hospital ability counties)
of Indiana, Inc. Company
(IMS) (Colorado)
Minnesota Medical Communication Network 90% Blue Cross and JV Limited Minnesota
LLC........................................ Blue Shield of Liability
Minnesota (IMS) Company (Col-
orado)
Pursuant to each venture arrangement, an open network is
established and operated as a separate business consistent with the
operation of other networks by IMS in other areas. Local sponsors
contract with the venture for network participation. IMS and the
venturer are generally reimbursed for services provided to the venture
and operating profits are shared according to ownership interest.
Revenue from national sponsors who contract with IMS is shared between
IMS and the venture entity. Financial information from these entities
is included with the consolidated financial information for IMS and its
subsidiaries.
PRODUCT DEVELOPMENT
The healthcare information systems industry, particularly
communications networking, is characterized by rapid change and a
continuing need for high level of development and improvement of
software and services. In order to maintain and improve new sponsor
participation on networks, increase physician participation and
accelerate the revenue per sponsor, the Company believes that its
networks must continue to be viewed as technologically competent,
functionally flexible and expandable, ubiquitous in
73
systems integration capability and powerful in terms both of
encompassing the full range of sponsor automation requirements and
adding increasing value at the physician's desktop.
The implementation of the ComCenter NT technology has opened
up a broad range of product development opportunities for the Company.
Most of these development activities are responses to requests or
suggestions from current network participants. These include data file
level host system integration; a Windows/TM/ version of the PC-Com
(NCW) software; enhanced UNIX functionality; broader LAN integration;
bridges to the most popular institutional E-Mail systems; real-time
remote display of clinical monitor activity (ICU, CPU, fetal, etc.);
enterprise wide master indexing of patient activity integrated from
outside the institution into the physician's office; a full set of
financial/claim EDI activities as well as practice management system
interfaces; and enhanced network access using single point connection
into multiple ComCenters of more than one network.
The Company also recognizes that technology and service
venture alliances with major corporations in the healthcare, technology
and communications fields can bring a valuable level of product
development expertise and opportunity to its networks. The Company has
been approached by national healthcare support service vendors which
desire to create enhanced value applications of their core activities
by adding a network communications capability. Arrangements have been
consummated for a technology and service relationship in claims
processing; for point-of-service material management; and for
automated physician/pharmacy communications.
As of August 31, 1995, approximately 215 computer programmers
and technical personnel of the Company and ventures with which the
Company is affiliated are involved at different times and in varying
degrees, in product development and enhancement and software support.
IMS MEDACOM/(R)/ is committed to identifying existing software
systems/programs and/or developing new programs that bring added value
to IMS MEDACOM/(R)/ Network participants. Many of IMS's network
applications were developed in cooperation with health care providers
and payers. The Company intends to continue this strategy of developing
services in cooperation with key customers in targeted sectors. No
assurance can be given that the Company will be able to develop such
services or products nor that they will have general acceptance in the
marketplace.
SALES AND MARKETING
The Company markets its services and software licenses
through a direct sales force consisting, as of July 31, 1995, of 15
direct field sales executives located throughout the United States,
regional sales vice presidents for both the eastern and western United
States, and a Vice President of Technical Sales Support. The Company's
sales offices are located in Arizona, California, Georgia, Illinois,
Massachusetts, Ohio, Pennsylvania, South Carolina and Texas. The sales
force is managed by a Senior Vice President who is also a member of the
Company's Management Committee. The sales executives are supported by
the field operations General Managers and the Director of Operations
resident at each IMS MEDACOM/(R)/ Network. Also, the sales staff
receives marketing and administrative support from the Company's
strategic development division which includes a director of marketing,
media relations manager and industry marketing specialists.
The Company generates sales through referrals from sponsors
and physicians, healthcare information systems consultants, industry
seminars and trade shows, news articles in the trade and general
business press, direct mail campaigns and advertisements in trade
journals. In addition, the Company's relatively large installed
physician base attracts direct inquiries from national or regional
healthcare service organizations that desire an automated
communications link with their affiliated physicians or other
providers. Also, as a result of consolidations and the restructuring
of local/regional healthcare delivery into integrated systems, the
Company's base of installed institutions provides leveraged
introductions to a number of new sales prospects.
74
The principal potential sponsors for the Company's services
include the largest health care providers and payers. The Company has
identified six target sponsor groups within the health care sector:
hospitals, clinical laboratories, pharmaceutical companies, pharmacies,
managed care providers, and other provider/payers.
No single customer accounted for more than 10% of the
Company's total revenues for the year ended December 31, 1993. One
customer, a hospital system licensee under an NLA, accounted for
approximately 19% of the Company's total revenue in its fiscal year
ending December 31, 1994.
COMPETITION
The health care communications industry is competitive. Many
hospitals, third party administrators, claims processing organizations,
hospital systems vendors, systems integrators, insurers, managed care
organizations, and a few small companies provide physicians with some
form of communications link to one or more specific organizations.
Major companies which have provided network systems to the health care
industry include Baxter International (through its IBAX subsidiary),
McDonnell Douglas, IBM through the IBM Information Network, Physicians
Computer Network, Healthworks Alliance, Inc. and AmeriTech's Health
Network Ventures. In addition, certain companies have expressed an
intention to provide communications solutions to the health care
industry, many of which have substantially greater resources than the
Company.
EMPLOYEES
As of August 31, 1995, the Company had 261 full-time
employees, of which 175 are technical and engaged in maintaining or
developing IMS products or services, 19 are marketing and sales, and 36
are involved in administration and finance and 31 provide non-technical
operation support in IMS business units which operate various networks.
In addition, the Company's network ventures employ an additional 51
people. None of the Company's employees is represented by a union.
The Company believes that its relationship with its employees is good.
PROPERTIES
The Company's corporate offices are located at 15000 West
Sixth Avenue, Golden, Colorado. These premises are leased pursuant to
a lease agreement which expires on January 31, 1998 and has a renewal
term of five years. The lease covers approximately 23,500 square feet
of office space for which the Company pays annual rent of $142,400.
The Company also leases approximately 42,500 square feet of additional
office space in 21 offices throughout the country where the network
provides service. These offices range in size from approximately 700
square feet to 3,000 square feet. The Company pays annual rent in the
aggregate amount of approximately $605,300 for this space.
The Company plans to lease space from time to time as it
establishes new networks. Other than such anticipated space, the
Company believes that its facilities are adequate for its present
operations.
75
OWNERSHIP OF IMS
The following table sets forth certain information regarding
beneficial stock ownership as of August 31, 1995 by: (i) each director
and certain executive officers of the Company, (ii) all directors and
executive officers as a group, and (iii) each shareholder known by the
Company to be the beneficial owner of more than 5% of each class of
voting securities. Except as otherwise indicated, each person or
entity listed below has sole voting and investment power with respect
to all shares shown to be beneficially owned by him or it except to the
extent such power is shared by a spouse under applicable law. The
address of each executive officer and director is listed in care of the
Company. As of August 31, 1995, the following securities were
outstanding: 6,584,002 shares of Company Common Stock; 2,000,000 shares
of Series B Preferred Stock; 3,000,000 shares of Series C Preferred
Stock; options to purchase 2,380,457 shares of Company Common Stock;
and warrants to purchase 655,103 shares of Company Common Stock and
500,000 shares of Series C Preferred Stock.
COMPANY PERCENT OF
COMMON STOCK COMPANY PERCENT OF
NAME OF BENEFICIALLY COMMON STOCK SERIES B SERIES B
BENEFICIAL OWNER OWNED** BENEFICIALLY OWNED PREFERRED STOCK*** PREFERRED STOCK
--------------------------- ---------------- ------------------ ---------------------- ---------------
Kevin R. Green............. 284,300(1) 4.2 9,375(2) *
Charles I. Brown........... 670,750(3) 9.6 150,000 7.5
James T. Murphy............ 212,200(4) 3.1 9,375 *
George R. Beauchamp........ 244,000(5) 3.6 0 0
William B. Hein, Sr........ 216,800(6) 3.2 0 0
Richard J. Smeltz.......... 83,785(7) 1.3 0 0
James A. Larson............ 674,296(8) 10.2 0 0
Alan S. Danson............. 521,917(9) 7.6 100,000 5.0
John W. Hanes, Jr.......... 321,333(10) 4.8 135,000(11) *
David R. Holbrooke......... 1,347,750(12) 18.4 1,072,500(13) 53.6
John A. McChesney.......... 1,694,301(14) 24.4 110,000(15) 5.5
Donald S. Chenoweth........ 161,900(16) 2.4 0 0
Joseph G. Ferguson, Sr..... 30,000(17) * 0 0
Edward B. Daniels.......... 70,000(18) 1.1 0 0
Charles S. Iobe, Sr........ 60,000(19) * 0 0
Michael S. Hunt(20)........ 0 0 0 0
Kevin E. Moley(20)......... 0 0 0 0
All Executive Officers
and Directors as a Group.. 6,506,397(21) 69.4 1,455,937 72.8
Eli Lilly and Company...... 3,660,200(22) 36.3 0 0
---------------
* Less than one percent.
** Assumes exercise of all options (vested or unvested) and warrants, and
conversion of all preferred stock. All warrants are immediately
exercisable. Certain options have not yet vested and all options will
vest upon the Effective Date of the Merger. All options (vested or
unvested) have been disclosed above.
*** Every three shares of Series B Preferred Stock are convertible into two
shares of Common Stock.
---------------
(1) Includes 1,250 shares of Company Common Stock held by the Kevin Green IRA
and 1,250 shares held by his minor children. Also includes 1,250 shares
underlying warrants, 226,800 shares underlying options and 6,250 shares
issuable upon conversion of Series B Preferred Stock.
(2) 4,687 shares are held by the Kevin Green IRA and 4,688 shares are held by
his minor children.
76
(3) Includes 200,000 shares held by Charles I. Brown Family Partnership,
Ltd., 50,000 shares held by the Charles I. Brown IRA, and 10,500 shares
held by the Charles I. Brown Profit Sharing Plan. Also includes 159,050
shares underlying warrants, 96,250 of which are held by Charles I. Brown
Family Partnership Ltd. and 2,000 of which are held by the Charles I.
Brown Profit Sharing Plan. Also includes 151,200 shares of Common Stock
underlying options and 100,000 shares issuable upon conversion of Series
B Preferred Stock.
(4) Includes 201,200 shares underlying options, 1,250 shares underlying
warrants and 6,250 shares issuable upon conversion of Series B Preferred
Stock.
(5) Includes 134,000 shares underlying options and 20,000 shares underlying
warrants held in an IRA account by Providence Trust, of which Dr.
Beauchamp is deemed a beneficial owner. Also includes 20,000 shares held
by George Beauchamp, M.D., IRA and 40,000 shares held by Providence
Trust.
(6) Includes 191,800 shares underlying options.
(7) Includes 79,785 shares underlying options and warrants.
(8) Includes 40,750 shares underlying warrants. Also includes 19,780 shares
held by JALCO Pension Fund and 24,606 shares held by JALCO Profit
Sharing Plan, of which Mr. Larson is deemed a beneficial owner. Also
includes 280,000 shares held by the James A. Larson Family Partnership,
Ltd., of which Mr. Larson is deemed a beneficial owner.
(9) Includes 38,750 shares underlying warrants, 200,000 shares
underlying options and 66,667 shares issuable upon conversion of Series
B Preferred Stock.
(10) Includes 2,000 shares underlying warrants and 229,333 shares held by the
Hanes Investors Limited Partnership, of which Mr. Hanes is the general
partner. Does not include 270,833 shares and 23,250 shares underlying
warrants held by the Hanes Trust u/a/d 8/5/88, 41,667 shares held by the
Estate of Hope Y. Hanes, 41,667 shares held by the Hope Y. Hanes
Revocable Trust, and 28,667 shares and 6,000 shares underlying warrants
held by the Elizabeth Hanes Trust, the beneficial ownership of which Mr.
Hanes disclaims. Includes 90,000 shares issuable upon conversion of
Series B Preferred Stock.
(11) Represents 67,500 shares held by the Lucy H. Masemer Trust u/a dated
10/23/86 and 67,500 held by the Lucy H. Masemer Trust No. 2 u/a dated
12/3/86, of which Mr. Hanes is trustee. Does not include 9,375 shares
held by the Hanes Trust u/a/d 8/5/88, the beneficial ownership of which
is disclaimed by Mr. Hanes.
(12) Includes 13,750 shares underlying warrants and 715,000 shares issuable
upon conversion of Series B Preferred Stock. Also includes 10,000
shares held by the David Holbrooke IRA.
(13) Includes 37,500 shares held by the David Holbrooke IRA.
(14) Includes 760,166 shares and 25,000 shares underlying options held in
joint tenancy with Mr. McChesney's wife. Also includes 37,500 shares
held by Mr. McChesney's minor son. Also includes 169,302 shares
underlying warrants, 100,000 shares underlying options and 73,333 shares
issuable upon conversion of Series B Preferred Stock.
(15) Held jointly with Mr. McChesney's wife.
(16) Includes 2,000 shares underlying warrants and 155,900 share underlying
options.
(17) Represents 30,000 shares underlying options.
(18) Represents 70,000 shares underlying options.
(19) Represents 60,000 shares underlying options.
(20) Dr. Hunt and Mr. Moley are each executive officers with Lilly or its
wholly owned subsidiary, PCS Holding Corporation, which beneficially
owns 3,660,200 shares of Common Stock. See footnote (22) and "SPECIAL
FACTORS TO BE CONSIDERED-Background to the Merger." Both Dr. Hunt and
Mr. Moley disclaim beneficial ownership of all shares beneficially owned
by Lilly.
(21) Assumes that all Series B Preferred Stock is converted into shares of
Common Stock and all options and warrants are exercised into shares of
Common Stock.
(22) Includes 3,000,000 shares of common stock underlying Series C
Preferred Stock and 500,000 shares into which shares of Series C
Preferred Stock underlying warrants are convertible. See footnote
(20) and "SPECIAL FACTORS TO BE CONSIDERED-Background to the
Merger." Dr. Hunt and Mr. Moley disclaim beneficial ownership of
all shares beneficially owned by Lilly.
77
MANAGEMENT OF IMS
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth as of the date hereof certain
information with respect to the persons who are expected to serve as
executive officers and directors of IMS following the Merger.
NAME AGE POSITION
--------------------------- --- --------------------------------------------
Kevin R. Green............. 40 President, Chief Executive Officer and
Director
Charles I. Brown........... 63 Executive Vice President, Chief Financial
Officer and Director
James T. Murphy............ 51 Executive Vice President-Corporate Business
Development and Director
George R. Beauchamp, M.D... 52 Senior Vice President-Strategic Development
Donald S. Chenoweth........ 48 Senior Vice President-Corporate Services
and Assistant Secretary
Joseph G. Ferguson, Sr..... 44 Senior Vice President-Development and
Engineering
William B. Hein, Sr........ 45 Senior Vice President-Sales
Edward B. Daniels.......... 44 Senior Vice National Network Services
Charles S. Iobe, Sr........ 53 Senior Vice President-Field Operations
Richard J. Smeltz.......... 53 Vice President-Finance
Michael S. Hunt, Ph.D...... 49 Director
Kevin E. Moley............. 48 Director
All members of the Board of Directors hold office until the next annual
meeting of shareholders or until their successors are duly elected and
qualified. Executive officers serve at the discretion of the Board of
Directors.
KEVIN R. GREEN has served as the President and CEO of the Company
since March 1995 and as a director of the Company since March 1995. From
1992 to 1995, Mr. Green served as the Executive Vice President, Senior Vice
President of Operations and President of Western Region. From 1982 to 1992,
Mr. Green was with CyCare Systems, a New York Stock Exchange company
serving in a number of capacities including Senior Vice President in charge
of one of three operating divisions; Vice President of Acquisitions and
Mergers, and Vice President of Field Operations. Mr. Green began his career
with Westinghouse Information Services in 1979. Mr. Green received both his
MBA and his BA from the University of San Diego in 1979, where he was the
recipient of the Franklin Award as the Outstanding Graduating Student.
CHARLES I. BROWN has served as the Executive Vice President and
Chief Financial Officer of the Company since March 1995 and as a director
of the Company since 1992. From 1992 to March 1995, Mr. Brown was a Senior
Vice President and the Chief Financial Officer of the Company. From 1983 to
1992, Mr. Brown was active as a financial consultant to, and a director of,
several banks and corporations. He was formerly Chairman of the Board of
American National Bank-Laramie, Laramie, Wyoming, from 1986 to 1992, the
Chairman of the Board of the Rawlins National Bank, Rawlins,
78
Wyoming, from 1983 to 1991, and the Chairman of the Board of Prudential
Bank of Denver, Colorado from 1984 to 1986. He has served as a
director of The Original Sixteen to One Mine, Inc., Allegheny,
California, a publicly held gold mining company, since 1986 and as a
director of Izzo Systems, Inc., Denver, Colorado, a private
manufacturer of golf bags and related products since 1992. From 1974
to 1982, he served as Senior Vice President and Director of Energy
Fuels Corporation, a Denver based, privately owned mining company.
From 1959 to 1974, he served as Vice President/Finance and Director of
Western Nuclear, Inc., a publicly-owned mining company listed on the
American Stock Exchange prior to its acquisition by Phelps Dodge
Corporation in 1970. Since 1978, he has served as a Trustee of the
Colorado State University Research Foundation, Fort Collins, Colorado
and since 1974, he has served as a Trustee of the Colorado Outward
Bound School. Mr. Brown received a master of business administration
degree with distinction from Harvard Graduate School of Business
Administration in 1959 and a bachelor of arts from Williams College in
1954.
JAMES T. MURPHY has served as the Executive Vice President
for Corporate Business Development of the Company since March 1995 and
as a director of the Company since April 1995. From January 1994 to
April 1995, Mr Murphy was President or Executive Vice President and
Chief Operating Officer of the Company. From 1991 to 1993, Mr. Murphy
was President/Eastern Region for the Company. From 1989 to 1992, Mr.
Murphy was an independent consultant involved in the capital financing
of several emerging healthcare ventures. From 1984 to 1988, Mr. Murphy
served as the President for Medaphis Corporation, a company that
provides billing services for the medical community and that became a
public company in 1991. From 1973 to 1982, Mr. Murphy was the Director
of Corporate Marketing for Humana, Inc., which was then an owner and
operator of hospitals. Mr. Murphy is also a director of AmHealth,
Inc., a small public company. Mr. Murphy obtained a bachelor's degree
from the University of Delaware in 1968.
GEORGE R. BEAUCHAMP, M.D. has served as the Senior Vice
President for Strategic Development for the Company since December 1994
and was Vice President-Medical Affairs for the Company from 1991 to
1994. From 1975 to present, Dr. Beauchamp has practiced medicine as a
Pediatric Ophthalmologist. From 1987 to 1990, Dr. Beauchamp served as
Medical Director of the Office of Regional Health Affairs Foundation
and held numerous positions of authority and responsibility in American
ophthalmology, including the American Board of Ophthalmology where he
has served as a director since 1990. Dr. Beauchamp received his
undergraduate degree (bachelor of arts, physiology) from the University
of California, Berkeley in 1965 and his doctor of medicine degree from
Northwestern University in Chicago in 1968. After internship and
residency training in ophthalmology at Walter Reed Army Medical Center
in Washington, D.C., and completing his military service obligation,
Dr. Beauchamp undertook additional specialized training in corneal
surgery and pediatric ophthalmology.
DONALD S. CHENOWETH has served as the Senior Vice President
and Assistant Secretary of the Company since 1991. From 1985 to 1991,
Mr. Chenoweth held various hospital senior management positions,
including Senior Vice President Corporate Services, St. Joseph's Health
Network and President, St. Joseph's Preferred Provider Corporation from
1990 to 1991; Vice President Corporate Services, Good Samaritan
Hospital and Health Center from 1980 to 1985; and Assistant Vice
President for Management Services, Methodist Hospitals of Dallas from
1975 to 1978. From 1978 to 1980 Mr. Chenoweth was a manager with CSF,
Ltd., a healthcare management consulting firm and from 1971 to 1975 Mr.
Chenoweth was regional manager, senior consultant, project manager and
systems analyst of Medicus Systems Corporation, a healthcare management
consulting firm. Mr. Chenoweth obtained bachelor's degrees in
industrial engineering in 1970 and a master's degree in systems
engineering (computer science) in 1971 from Southern Methodist
University and an A.M.P. (advanced management program) degree from the
Wharton Business School in 1988.
JOSEPH G. FERGUSON, SR. has served as the Senior Vice
President for Engineering and Development of the Company since March
1995. Mr. Ferguson has 20 years of experience in the development of
commercial software application products in various industries. From
1990 to 1994
79
Mr. Ferguson was Vice President for Product Engineering at Community
Health Computing, in Houston, Texas, a hospital information systems
company, where he was responsible for the development of Community
Health Computing's new generation of clinical application products.
From 1982 to 1989 Mr. Ferguson was Vice President for Engineering and
co-founder of Covalent Systems, a provider of turnkey manufacturing
systems, which provides application software solutions to the graphic
arts industry. From 1973 to 1982 Mr. Ferguson was with Hewlett-Packard
in various capacities related to the development and marketing of
Hewlett-Packard's internal and commercial manufacturing application
products. Mr. Ferguson holds a master of business administration
degree from the Wharton School of Business and bachelor's degree from
the University of California at Santa Cruz.
WILLIAM B. HEIN has served as the Senior Vice President of
Sales of the Company since 1994. Mr. Hein was previously the
President/Central Region for the Company and was Vice President of the
Company from 1988 to 1993. From 1979 to 1987, Mr. Hein was with
Control Data Corporation, a computer systems and service company, where
he managed field sales and support organizations and developed
strategic plans for domestic and international computer sales programs.
From 1972 to 1979, Mr. Hein was Vice President and a principal of
Computing Associates, Inc., a software development and consulting
organization. Mr. Hein received a bachelor of science degree in
engineering from the University of Arizona in 1973, where he also took
post graduate courses in business administration.
EDWARD B. DANIELS has served as the Senior Vice President for
National Network Services of the Company since 1994. From 1993 to 1994
Mr. Daniels was Vice President of Cornerstone Health Management, a
geriatric services company, in Dallas, Texas. From 1984 to 1993, Mr.
Daniels served as Vice President and then President of GeriMed of
America, Inc., a geriatric services company. In 1984, Mr. Daniels was
Vice President of Envisioneering, a laboratory information software
development company. From 1981 to 1984, Mr. Daniels served as Regional
Director of Health Care Systems at Arthur Young & Company, an
accounting firm. From 1976 to 1980, Mr. Daniels held both technical
and management positions in computer services and operations analysis
at Henry Ford Hospital in Detroit, Michigan. Mr. Daniels obtained a
bachelor's degree in psychology from Southern Illinois University in
1972 and a master's degree in industrial engineering from the State
University of New York at Buffalo in 1976.
CHARLES S. IOBE, SR. has served as the Senior Vice President
of Field Operations of the Company since 1994. From 1990 to 1993, Mr.
Iobe was Executive Vice President of TME, Inc., a medical imaging
company. From 1981 to 1983, Mr. Iobe was Chief Operating Officer of
Humana, Inc.'s Health Services Division. Mr. Iobe received his
bachelor's degree in business administration from Texas Christian
University in 1964 and a master of business administration degree from
the George Washington University in 1967.
RICHARD J. SMELTZ has served as the Vice President of Finance
of the Company since 1991. From 1988 to 1990, Mr. Smeltz was the Vice
President/Chief Financial Officer for Medical Warehouse, Inc., a
membership warehouse specializing in medical supplies for doctor's
offices and home healthcare and pharmacies. From 1982 to 1988, Mr.
Smeltz was Vice President and Treasurer of Pace Membership Warehouse,
Inc. a membership warehouse. From 1974 to 1982, Mr. Smeltz was Vice
President/Controller of Handyman Home Improvement Centers, which has
retail hardware outlets. Mr. Smeltz received a bachelor of science in
accounting from California State University of Los Angeles in 1965 and
a juris doctor degree from Loyola University School of Law in 1973.
Mr. Smeltz also has instructed college courses in accounting, business
law and federal income tax.
MICHAEL S. HUNT has served as a director of the Company since
1994. Since 1994, Mr. Hunt has been the Vice President, North American
Business Development for Lilly. From 1993 to 1994, Mr. Hunt served as
Vice President of Pharmaceutical Strategic Planning and Japan Business
Planning for Lilly. Mr. Hunt joined Lilly in 1974 and had increasing
responsibilities until he was appointed Vice President of Finance and
Treasurer in 1985. Mr. Hunt is a member of the Board of Directors for
Circle Income Shares, and the Indianapolis Symphony Orchestra
Financing. Mr. Hunt received a bachelor of arts
80
degree in economics from Carlton College in 1968 and a doctorate of
philosophy degree in business and economics from Harvard University.
KEVIN E. MOLEY has served as a director of the Company since
1994 and was interim Chief Executive Officer of the Company from July
1994 to December 1994. Mr. Moley is Senior Vice President, Health
Systems Management of PCS Health Systems, Inc., a subsidiary of Lilly.
Mr. Moley served as Deputy Secretary of the U.S. Department of Health
and Human Services ("HHS") from February 1992 until January 1993. His
career at HHS included tenures as Assistant Secretary for Management
and Budget, from 1989 to 1992, Chief Financial Officer from 1989 to
1992, and director of the office of Prepaid Health Care from 1986 to
1988. He served as Vice Chairman of the President's Council on
Management Improvement from 1989 to 1992 and on the steering committee
of the National Health Policy Forum from 1989 to 1993. Prior to
serving at HHS, Mr. Moley held several positions with CNA from 1969 to
1974 and New England Life Insurance in marketing and underwriting
management from 1974 to 1983. He attended Georgetown University in
Washington, D.C., served in the United States Marines in Vietnam and
was awarded the Navy Commendation medal with Combat V and the Purple
Heart.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid by
the Company to, or accrued by the Company on behalf of, the Chief
Executive Officer and the four most highly compensated executive
officers other than the Chief Executive Officer (hereafter collectively
referred to as the "Named Executive Officers") for the fiscal years
ended December 31, 1994, 1993 and 1992.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------------------- OTHER
ANNUAL
COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS($) SATION($)
-------------------------------- ---- ----------- ---------- ---------
Kevin R. Green(1)............... 1994 124,999.92 25,000(2) -
President, Chief Executive 1993 123,333.16 168,750(3) -
Officer 1992 92,907.87 -
Charles I. Brown................ 1994 124,999.92 25,000(2) -
Executive Vice President and 1993 108,333.39 - -
Chief Financial Officer 1992 91,666.73 - -
James T. Murphy................. 1994 141,666.64 25,000(2) -
Executive Vice President- 1993 108,333.19 - -
Corporate Business 1992 72,475.83 25,000 -
Development
Donald S. Chenoweth............. 1994 124,999.92 25,000 -
Senior Vice President 1993 108,333.18 - -
-Corporate Services and 1992 99,230.71 10,000 -
Assistant Secretary
William B. Hein, Sr............. 1994 124,999.92 25,000(2) -
Senior Vice President-Sales 1993 133,333.39 104,500(4) -
1992 74,759.70 - -
Kevin E. Moley(1)............... 1994 - - -
Director 1993 - - -
1992 - - -
81
John A. McChesney(1)............ 1994 199,999.02 166,478(5) -
Director 1993 99,999.84 - -
1992 100,640.88 - -
(1) John A. McChesney was the Company's President and Chief Executive
Officer until April, 1994. Mr. Moley was the Company's Vice
Chairman and Chief Executive Officer from July 1994 to December,
1994. Kevin R. Green became the President and Chief Executive
Officer of the Company in March, 1995.
(2) Paid in 1995 for 1994.
(3) Paid in 1994 and 1993 for 1993 and prior years and includes
$25,000 in cash and 47,500 shares of Common Stock valued at
$143,750.
(4) Paid in 1994 and 1993 for 1993 and includes $17,000 in cash and
25,000 shares of Common Stock valued at $87,500.
(5) Paid in 1994 for services in prior years.
OPTION GRANTS TABLE
The following table provides information as to options granted to
the Named Executive Officers during the fiscal year ended December 31,
1994. No stock appreciation rights have ever been granted by the
Company.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
---------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO
/WARRANTS EMPLOYEES IN EXERCISE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR 1994 ($/SH) DATE
---- ------------- ------------------- --------------- ----------
Kevin R. Green........ 100,000 19.0 $4.00 8/31/04
Charles I. Brown...... 100,000 19.0 $4.00 8/31/04
James T. Murphy....... 100,000 19.0 $4.00 8/31/04
Donald S. Chenoweth... 100,000 19.0 $4.00 8/31/04
William B. Hein, Sr... 100,000 19.0 $4.00 8/31/04
Kevin E. Moley........ - 0 - - - -
John A. McChesney..... 79,302(1) 25.6(2) $4.00 1/21/97
------- ---- ----- -------
(1) Represents warrants issued at an exercise price of $4.00 per
share.
(2) Percentage based on numbers of warrants granted to all employees
in 1994.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION VALUES
The following table provides information as to options held
by the Named Executive Officers as of December 31, 1994.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS/WARRANTS AT OPTIONS/WARRANTS AT
SHARES ACQUIRED DECEMBER 31, 1994 DECEMBER 31, 1994
ON EXERCISE (#) VALUE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE*
NAME ----------------- -------------- ------------------------- ---------------------------------
Kevin R. Green............ - 0 - - 0 - 78,131/73,669 $116,156/$74,044
Charles I. Brown.......... - 0 - - 0 - 234,886/74,114 $303,914/$74,114
James T. Murphy........... 10,000(1) $25,000 77,781/73,419 $ 90,631/$73,669
Donald S. Chenoweth....... - 0 - - 0 - 79,606/73,294 $115,369/$73,481
William B. Hein, Sr....... - 0 - - 0 - 83,131/73,669 $198,656/$74,044
Kevin E. Moley............ - 0 - - 0 - - 0 - / - 0 - - 0 - / - 0 -
John A. McChesney......... 27,000(2) $67,500 293,052/-0- $ 496,552/ - 0 -
-------------
82
* Share value based on fair market value of the Company's common stock of
$5.00 as determined by the board of directors in 1994.
(1) Exercised warrants to purchase 10,000 shares at $2.50 per share.
(2) Exercised warrants to purchase 27,000 shares at $2.50 per share.
COMPENSATION OF DIRECTORS
All directors are reimbursement for actual out-of-pocket expenses
incurred in connection with attending meetings.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Amended Articles of Incorporation prior to the Merger
and the New By-Laws following the Merger, each contain a provision
eliminating or limiting director liability to the Company and its
shareholders for monetary damages arising from acts or omissions in the
director's capacity as a director. The provisions do not, however,
eliminate or limit the personal liability of a director (i) for any
breach of such director's duty of loyalty to the Company or its
shareholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
under the Colorado statutory provision making directors personally
liable, under a negligence standard, for unlawful dividends or unlawful
stock purchases or redemptions, or (iv) for any transaction from which
the director derived an improper personal benefit. This provision
offers persons who serve on the Board of Directors of the Company
protection against awards of monetary damages resulting from breaches of
their duty of care (except as indicated above). As a result of these
provisions, the ability of the Company or a shareholder thereof to
successfully prosecute an action against a director for a breach of his
duty of care is limited. However, the provisions do not affect the
availability of equitable remedies such as an injunction or rescission
based upon a director's breach of his duty of care. The Commission has
taken the position that these provisions will have no effect on claims
arising under the federal securities laws.
CERTAIN TRANSACTIONS
The Company has issued warrants to purchase 10,000 shares
(aggregate) of its common stock to eight directors of the Company as
consideration for their guarantee of the Company's revolving line of
credit.
During 1993 and 1994, the Company paid $61,000 and $125,000,
respectively, to David R. Holbrooke, a director, as reimbursement for
costs and expenses incurred by him directly or indirectly in connection
with certain litigation or claims related to IMS-NET of Northern
California, Inc. and related matters, concluded in early 1995, in
accordance with obligations of the Company to provide indemnification
for such expenses.
The Company's founder and former Chairman, President and Chief
Executive Officer, John A. McChesney, was an employee and maintained an
office for the Company near San Diego, California through 1994. In early
1995, Mr. McChesney resigned as an officer and employee of the Company,
but remained as a director. In connection with the change, the Company
agreed to continue Mr. McChesney's compensation through 1995, to pay
certain office expenses incurred in closing the San Diego office and to
pay office rent through June 1995. As a result, the Company charged
$479,439 to expenses of reorganization in the fourth quarter of 1994,
including amounts to be paid to Mr. McChesney in 1995. In connection
with the resignation, Mr. McChesney has entered into a noncompetition
and confidentiality agreement with the Company.
The Company advanced Kevin Green, the Company's President and Chief
Executive Officer, approximately $90,000 in connection with his
relocation from Phoenix, Arizona to Golden, Colorado in June 1995. Mr.
Green repaid the Company $60,000 of the advance and the balance was
83
deemed by the Compensation Committee of the Board of Directors to be
relocation expense payable by the Company.
Kevin Green has an employment arrangement with the Company's Board
of Directors, completed in connection with his relocation to Denver in
June 1995, which includes the obligation of the Company to pay him a
severance payment equal to 24 months compensation at the rate of
compensation then paid to him, in the event, upon a change of control of
the Company (such as the Merger), Mr. Green reasonably determines that
due to circumstances which have changed as a result of the change of
control he is unable to perform his services as the Chief Executive
Officer and President of the Company in the manner in which he was
expected to perform such services prior to the change of control.
In 1994, the Company sold software and equipment valued at $177,500
to RMBA Associates, a company owned by Robert M. Bryce, a director of
the Company at that time. RMBA resold these assets and other services
of RMBA to a client which operates an IMS MEDACOM/(R)/ Network to which
the Company provides services.
In 1993, David Holbrooke, a director of the Company advanced the
Company $250,000. In addition, three directors (Robert Bryce, David
Holbrooke and Charles Brown) each advanced $75,000 to the Company in
1993. These advances bore interest at prime plus 3% annually, were
secured by assignments of cash flows, and were repaid in 1993.
In January 1994, the Company issued warrants to purchase 79,302
shares of Company Common Stock at $4.00 per share to John McChesney as
compensation for guarantees of certain company obligations in prior
years and repaid $166,938 to Mr. McChesney for advances made to the
Company in prior years.
In December 1994, the Company exchanged 4,000 shares of Company
Common Stock and 2,000 warrants to purchase Company Common Stock for
each of the 81 outstanding limited partnership interests in a limited
partnership of which a subsidiary corporation was the general partner.
The partnership held an exclusive license to operate an IMS network in
Colorado. Seven of the Company's directors and three other officers of
the Company were also limited partners in the partnership and held a
total of 32 partnership interests, in exchange for which the Company
issued 128,000 shares Company Common Stock and warrants to purchase
64,000 shares at $5.00 per share. The exchanges with each of the
Company offices and directors were on the same terms as the exchanges
with each of the other 37 nonaffiliated limited partners.
AMENDMENT TO THE IMS
1994 EMPLOYEE STOCK OPTION PLAN
On April 22, 1995, subject to shareholder approval, the Board
of Directors of IMS approved an amendment to the 1994 Plan increasing
the number of shares of common stock issuable under the 1994 Plan from
400,000 shares to 838,600 shares which equals the total number of
options previously granted under the 1994 Plan. Under the proposed
amendment the first sentence of Section 2 of the 1994 Plan would be
amended to read as follows:
"The number of shares of the Company's No Par Value Common
Stock ("Common Stock") which may be optioned under this Plan
is 838,600 shares."
The other terms of the 1994 Plan would remain unchanged.
Approval of the Merger by IMS shareholders will be deemed to include
approval of the proposed amendment. Following the Merger,
84
no additional options will be granted under the 1994 Plan. The
description of the proposed amendment to the 1994 Plan is a summary and
does not purport to be fully descriptive.
EXPERTS
The consolidated financial statements of IMS included in this
Proxy Statement-Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts
in giving said report.
The consolidated financial statements of Lilly incorporated
by reference in Lilly's Annual Report (Form 10-K) for the year ended
December 31, 1994, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting
and auditing.
Representatives of both Arthur Andersen LLP and Ernst & Young
LLP will be present at the Special Meeting with the opportunity to make
a statement if they desire to do so and to respond to appropriate
questions.
LEGAL OPINIONS
The validity of the securities to be issued by Lilly in
connection with the Merger will be passed upon by Dewey Ballantine, New
York, New York. In rendering such opinion, such firm will rely, as to
matters governed by the laws of the State of Colorado, upon the opinion
of Holme Roberts & Owen LLC, Denver, Colorado, and as to matters
governed by the laws of the State of Indiana, upon the opinion of Baker
and Daniels, Indianapolis, Indiana. The validity of the securities to
be issued by IMS in connection with the Merger will be passed upon by
Hopper and Kanouff, P.C., Denver, Colorado.
85
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents previously filed by Lilly with the
Commission pursuant to the Exchange Act are hereby incorporated by
reference in this Proxy Statement-Prospectus:
1. Lilly's Annual Report on Form 10-K for the year ended
December 31, 1994.
2. Lilly's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1995 and June 30, 1995.
3. Lilly's Current Reports on Form 8-K dated June 12, 1995.
4. Lilly's Proxy Statement dated March 6, 1995, in
connection with its Annual Meeting of Stockholders held on April 17,
1995.
All documents subsequently filed by Lilly pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the
Special Meeting shall be deemed to be incorporated by reference herein
and to be a part hereof from the date of filing thereof. Any statement
contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for
purposes of this Proxy Statement-Prospectus to the extent that a
statement contained herein, or in any other subsequently filed document
that also is or is deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement-Prospectus.
86
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS OF
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
AS OF DECEMBER 31, 1994 AND JUNE 30, 1995 (UNAUDITED)
AND FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 1994
AND FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
Report of Independent Public Accountants........ F-2
Consolidated Balance Sheets..................... F-3
Consolidated Statements of Operations........... F-5
Consolidated Statements of Shareholders' Equity. F-6
Consolidated Statements of Cash Flows........... F-8
Notes to Consolidated Financial Statements...... F-10
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Integrated Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheet of INTEGRATED
MEDICAL SYSTEMS, INC. (a Colorado corporation) and subsidiaries as of December
31, 1994, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended December 31,
1994. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Integrated Medical
Systems, Inc. and subsidiaries as of December 31, 1994, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As explained in Notes 2 and 4 to the consolidated financial statements,
effective January 1, 1993, the Company changed its method of accounting for
income taxes.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
March 1, 1995.
F-2
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, June 30, 1995
ASSETS 1994 (Unaudited)
------ ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,357,847 $ 1,317,791
Contracts receivable and other (Note 2) 6,802,209 3,102,600
Affiliate receivables - 223,940
Stock subscriptions and joint venturers'
contributions receivable (Note 8) 275,000 -
Prepaid expenses 333,556 994,224
------------ -----------
Total current assets 8,768,612 5,638,575
------------ -----------
CONTRACTS RECEIVABLE, long-term portion (Note 2) 2,166,468 1,005,956
------------ -----------
EQUIPMENT AND FURNITURE (Notes 2 and 5)
Computer equipment 4,058,897 4,751,696
Computer software 387,313 393,463
Furniture and fixtures 524,764 804,259
Leasehold improvements 228,930 275,938
Equipment held under capital leases 239,428 239,428
5,439,332 6,464,784
Less- Accumulated depreciation and amortization (1,250,770) (1,819,296)
----------- -----------
4,188,562 4,645,488
----------- -----------
OTHER 435,662 814,211
----------- -----------
$15,559,304 $12,104,230
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
June 30,
December 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 (Unaudited)
------------------------------------ ------------- -----------
CURRENT LIABILITIES:
Accounts payable $ 2,202,652 $ 1,377,495
Accrued expenses 1,961,779 966,647
Payables to related parties (Note 3) 1,085,834 1,095,789
Deferred contract revenue (Note 2) 2,720,037 2,686,837
Current maturities of long-term debt (Note 5) 181,182 123,777
------------ ------------
Total current liabilities 8,151,484 6,250,545
------------ ------------
LONG-TERM DEFERRED CONTRACT REVENUE (Note 2) 840,751 712,414
------------ ------------
LONG-TERM DEBT (Note 5) 183,998 3,121,378
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
OTHER DEFERRED CREDITS (Note 8) 600,000 600,000
------------ ------------
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 84,521 169,389
------------ ------------
STOCKHOLDERS' EQUITY (Notes 8 and 11):
Series B voting preferred stock, $1 par value,
2,000,000 shares authorized, issued and
outstanding, liquidation preference of
$3,400,000, convertible on a 3 for 2 basis
into common stock 2,000,000 2,000,000
Series C preferred stock, $1 par value,
5,000,000 shares authorized, 2,625,000 and
3,000,000 shares issued and outstanding,
respectively, liquidation preference of
$13,750,000, convertible on a 1 for 1
basis into common stock 11,875,000 13,750,000
Common stock, no par value, 25,000,000
shares authorized, 6,554,730 and 6,577,162
shares issued and outstanding, respectively 8,836,973 8,947,591
Capital contributions from joint venturers 6,508,230 6,508,230
Accumulated deficit (23,441,653) (29,905,317)
Less- Stock subscriptions and joint venturers'
contributions receivable (80,000) (50,000)
------------ ------------
Total stockholders' equity 5,698,550 1,250,504
------------ ------------
$ 15,559,304 $ 12,104,230
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-4
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the Six Months
For the Years Ended December 31 Ended June 30
------------------------------- --------------------------
1993 1994 1994 1995
--------------- -------------- ---------- -----------
(Unaudited)
--------------------------
REVENUES:
Network service agreement revenue $ 5,130,779 $ 7,456,654 $ 3,260,641 $ 5,436,113
Network license agreement revenue 2,550,000 10,057,983 2,893,083 1,371,400
Network license service revenue 112,812 365,726 69,058 1,122,503
----------- ----------- ----------- -----------
7,793,591 17,880,363 6,222,782 7,930,016
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Salaries, payroll taxes and benefits 7,204,422 11,838,793 4,689,073 8,477,812
Facilities 1,679,328 3,187,007 1,364,114 2,377,176
Selling, general and administrative 2,608,918 5,848,436 2,246,355 3,418,612
Costs of subsidiary litigation (Note 6) 1,658,483 784,787 713,576 53,014
Reorganization costs - 479,439 - -
----------- ----------- ----------- -----------
13,151,151 22,138,462 9,013,118 14,326,614
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (5,357,560) (4,258,099) (2,790,336) (6,396,598)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 23,795 343,221 119,927 103,069
Interest expense (171,335) (118,850) (32,507) (85,267)
Loss on dissolution of partnership (213,823) - - -
Other, net (32,534) (64,772) (30,643) -
----------- ----------- ----------- -----------
(393,897) 159,599 56,777 17,802
----------- ----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST IN OPERATIONS OF SUBSIDIARIES (5,751,457) (4,098,500) (2,733,559) (6,378,796)
PROVISION FOR INCOME TAXES - - - -
MINORITY INTEREST IN INCOME FROM OPERATIONS OF SUBSIDIARIES (184,263) (153,281) (57,161) (84,868)
----------- ----------- ----------- -----------
NET LOSS $(5,935,720) $ 4,251,781) $(2,790,720) $(6,463,664)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE $(1.01) $(0.70) $(0.46) $(0.99)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,868,577 6,099,120 6,008,509 6,563,019
=========== =========== =========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
----------------------------------------------
AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 (Unaudited)
------------------------------------------------------
(See Note 8)
Series B Series C
Preferred Stock Preferred Stock Common Stock
---------------------- ---------------------- -----------------------
Shares Amount Shares Amount Shares Amount
--------- ---------- --------- ---------- ---------- -----------
BALANCES, December 31, 1992 2,000,000 $2,000,000 - $ - 5,783,368 $5,612,143
Issuance of common stock - - - - 40,000 240,000
at $5.00 per share
including accretion to
put price of $6.00 per
share
Issuance of common stock - - - - 50,000 250,000
at $5.00 per share
Issuance of common stock - - - - 18,500 64,750
at $3.50 per share
Exercise of common stock - - - - 62,500 93,750
purchase warrants at
$1.50 per share
Exercise of employee - - - - 16,500 41,250
common stock purchase
options at $2.50 per share
Issuance of Series C - - 1,250,000 5,000,000 - -
preferred stock at $4.00
per share
Stock subscriptions - - - - - -
receivable subsequently
collected
Joint venturers - - - - - -
contributions receivable
subsequently collected
Joint venturers - - - - - -
contributions
Issuance of common stock - - - - 45,000 225,000
at $5.00 per share
Repurchase and retirement - - - - (45,000) (225,000)
of common stock at put
price of $6.00 per share
Net loss - - - - - -
--------- ---------- --------- ---------- ---------- -----------
BALANCES, December 31, 1993 2,000,000 $2,000,000 1,250,000 $5,000,000 $5,970,868 $6,301,893
========= ========== ========= ========== ========== ===========
Stock
Subscriptions
Capital and Joint
Contributions Ventures
Accumulated from Joint Contributions
Deficit Ventures Receivable Total
----------- ------------- -------------- ------------
BALANCES, December 31, 1992 $(13,169,152) $2,285,100 $(208,875) $(3,480,784)
Issuance of common stock (40,000) - - 200,000
at $5.00 per share
including accretion to
put price of $6.00 per
share
Issuance of common stock - - - 250,000
at $5.00 per share
Issuance of common stock - - - 64,750
at $3.50 per share
Exercise of common stock - - - 93,750
purchase warrants at
$1.50 per share
Exercise of employee - - - 41,250
common stock purchase
options at $2.50 per share
Issuance of Series C - - - 5,000,000
preferred stock at $4.00
per share
Stock subscriptions - - 28,875 28,875
receivable subsequently
collected
Joint venturers - - 50,000 50,000
contributions receivable
subsequently collected
Joint venturers - 4,073,130 - 4,073,130
contributions
Issuance of common stock - - - 225,000
at $5.00 per share
Repurchase and retirement (45,000) - - (270,000)
of common stock at put
price of $6.00 per share
Net loss (5,935,720) - - (5,935,720)
----------- ------------- ----------- -----------
BALANCES, December 31, 1993 $(19,189,872) $6,358,230 $(130,000) $ 340,251
=========== ============= =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
----------------------------------------------
AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 (Unaudited)
------------------------------------------------------
(See Note 8)
Series B Series C
Preferred Stock Preferred Stock Common Stock
--------------------- ---------------------- ----------------------
Shares Amount Shares Amount Shares Amount
--------- ---------- --------- ----------- --------- -----------
BALANCES, December 31, 1993 2,000,000 $2,000,000 1,250,000 $ 5,000,000 5,970,868 $6,301,893
Issuance of Series C - - 1,000,000 5,000,000 - -
preferred stock at $5.00
per share
Exercise of Series C - - 375,000 1,875,000 - -
preferred stock purchase
warrants at $5.00 per
share
Exercise of common stock - - - - 122,000 305,000
purchase warrants at
$2.50 per share
Issuance of common stock - - - - 37,500 131,250
at $3.50 per share
Issuance of common stock - - - - 409,000 2,045,000
at $5.00 per share
Joint venturers - - - - - -
contributions
Exercise of common stock - - - - 15,000 52,500
purchase warrants at
$3.50 per share
Exercise of employee - - - - 236 826
common stock purchase
options at $3.50 per share
Exercise of employee - - - - 126 504
common stock purchase
options at $4.00 per share
Joint venturers - - - - - -
contributions receivable
subsequently collected
Net loss - - - - - -
--------- ---------- --------- ----------- --------- -----------
BALANCES, December 31, 1994 2,000,000 2,000,000 2,625,000 11,875,000 6,554,730 8,836,973
UNAUDITED:
Issuance of Series C - - 375,000 1,875,000 - -
preferred stock at $5.00
per share
Exercise of common stock - - - - 1,000 5,000
purchase warrants at
$5.00 per share
Exercise of employee - - - - 1,213 4,852
common stock purchase
options at $4.00 per share
Exercise of employee - - - - 219 766
common stock purchase
options at $3.50 per share
Issuance of common stock - - - - 20,000 100,000
to purchase minority
interest in IMS-Net of
Kansas City, Inc.
Joint venturers - - - - - -
contributions receivable
subsequently collected
Net loss - - - - - -
--------- ---------- --------- ----------- --------- -----------
BALANCES, June 30, 1995 (Unaudited) 2,000,000 $2,000,000 3,000,000 $13,750,000 6,577,162 $8,947,591
========= ========== ========= =========== ========= ===========
Stock
Subscriptions
Capital and Joint
Contributions Ventures
Accumulated from Joint Contributions
Deficit Ventures Receivable Total
-------------- ------------- ------------- ----------
BALANCES, December 31, 1993 $(19,189,872) $6,358,230 $(130,000) $ 340,251
Issuance of Series C - - - 5,000,000
preferred stock at $5.00
per share
Exercise of Series C - - - 1,875,000
preferred stock purchase
warrants at $5.00 per
share
Exercise of common stock - - - 305,000
purchase warrants at
$2.50 per share
Issuance of common stock - - - 131,250
at $3.50 per share
Issuance of common stock - - - 2,045,000
at $5.00 per share
Joint venturers - 150,000 - 150,000
contributions
Exercise of common stock - - - 52,500
purchase warrants at
$3.50 per share
Exercise of employee - - - 826
common stock purchase
options at $3.50 per share
Exercise of employee - - - 504
common stock purchase
options at $4.00 per share
Joint venturers - - 50,000 50,000
contributions receivable
subsequently collected
Net loss (4,251,781) - - (4,251,781)
-------------- ------------- ------------- ----------
BALANCES, December 31, 1994 (23,441,653) 6,508,230 (80,000) 5,698,550
UNAUDITED:
Issuance of Series C - - - 1,875,000
preferred stock at $5.00
per share
Exercise of common stock - - - 5,000
purchase warrants at
$5.00 per share
Exercise of employee - - - 4,852
common stock purchase
options at $4.00 per share
Exercise of employee - - - 766
common stock purchase
options at $3.50 per share
Issuance of common stock - - - 100,000
to purchase minority
interest in IMS-Net of
Kansas City, Inc.
Joint venturers - - 30,000 30,000
contributions receivable
subsequently collected
Net loss (6,463,664) - - (6,463,664)
-------------- ------------- ------------- ----------
BALANCES, June 30, 1995 (Unaudited) $(29,905,317) $6,508,230 $ (50,000) $ 1,250,504
============== ============= ============= ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------
For the Six Months
For the Years Ended December 31 Ended June 30
------------------------------- ----------------------
1993 1994 1994 1995
------------- --------------- -------- -----------
(Unaudited)
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $(5,935,720) $(4,251,781) $(2,790,720) $(6,463,664)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 407,207 743,313 297,923 572,110
Minority interest in income of subsidiaries 184,263 153,281 57,161 84,868
Loss on dissolution of partnership 213,823 - - -
Changes in operating assets and liabilities-
Contracts receivable and other (1,781,418) (6,120,108) (775,888) 3,621,192
Long-term contract receivable - - - 1,160,512
Prepaid expenses (54,371) (211,402) 50,858 (570,000)
Other long-term assets - (207,142) (101,032) (372,822)
Accounts payable (6,471) 1,151,965 48,088 (825,157)
Accrued expenses 571,852 1,292,325 (125,609) (995,131)
Deferred contract revenue 915,052 782,210 125,556 (161,538)
----------- ----------- ----------- -----------
Net cash used in operating activities (5,485,783) (6,667,339) (3,213,663) (3,949,630)
----------- ----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of equipment and furniture (568,761) (3,396,099) (1,279,840) (1,025,451)
----------- ----------- ----------- -----------
Net cash used in investing activities (568,761) (3,396,099) (1,279,840) (1,025,451)
----------- ----------- ----------- -----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of common stock 874,750 490,080 137,580 10,618
Proceeds from issuance of Series C preferred stock - 5,875,000 - 1,875,000
Proceeds from lines of credit 2,200,000 - - -
Principal payments on lines of credit (2,650,000) - - -
Proceeds from issuance of long-term debt 1,250,087 935,000 - 3,000,000
Principal payments on long-term debt (1,097,799) (1,536,555) (384,807) (120,025)
Related party borrowings, net 92,159 474,382 (96,296) (135,568)
Increase in other deferred credits 1,600,000 - - -
Joint venturers' contributions 4,073,130 150,000 150,000 30,000
Stock and partnership subscriptions receivable collected 454,003 4,556,250 4,556,250 275,000
Minority interest distributions (133,076) (244,276) (109,551) -
Repurchase of common stock (270,000) - - -
----------- ----------- ----------- -----------
Net cash provided by financing activities 6,393,254 10,699,881 4,253,176 4,935,025
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 338,710 636,443 (240,327) (40,056)
F-8
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------
For the Six Months
For the Years Ended December 31 Ended June 30
------------------------------- -------------------------------
1993 1994 1994 1995
---------- ---------- -------- ----------
(Unaudited)
CASH AND CASH EQUIVALENTS, beginning of period $ 382,694 $ 721,404 $721,404 $1,357,847
========== ========== ======== ==========
CASH AND CASH EQUIVALENTS, end of period $ 721,404 $1,357,847 $481,077 $1,317,791
========== ========== ======== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 154,920 $ 83,483 $ 58,548 $ -
========== ========== ======== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligation incurred
through lease for new equipment $ - $ 107,055 $ - $ -
========== ========== ======== ==========
Exchange of partners' investment in
limited partnership for common stock (Note 7) $ - $1,820,000 $ - $ -
========== ========== ======== ==========
Other deferred credits applied to issuance of
Series C preferred stock (Note 8) $ - $1,000,000 $ - $ -
========== ========== ======== ==========
Subscription receivable for common stock $ - $ 225,000 $ - $ -
========== ========== ======== ==========
Conversion of note payable to Series C
preferred stock $ 500,000 $ - $ - $ -
========== ========== ======== ==========
Subscription receivable for Series C $4,500,000 $ - $ - $ -
preferred stock (Note 8) ========== ========== ======== ==========
Long-term debt assumed and issued to limited
partners in exchange for profits interests $ 423,201 $ - $ -
========== ========== ========
Accretion of accumulated deficit for common stock
issued subject to a put option $ 40,000 $ - $ - $ -
========== ========== ======== ==========
Issuance of stock to obtain minority $ - $ - $ - $ 100,000
interest in subsidiary ========== ========== ======== ==========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-9
INTEGRATED MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1994
-----------------
(Including Notes Applicable to Unaudited Periods
for the Six Months Ended June 30, 1995 and 1994)
(1) ORGANIZATION AND LIQUIDITY
--------------------------
Organization
------------
Integrated Medical Systems, Inc., ("IMS" or the "Company") develops and
markets medical communication networks and related products and services to
hospitals, managed care companies, clinical laboratories and other healthcare
organizations throughout the United States.
Merger
------
On August 2, 1995, the Company and Eli Lilly and Company ("Lilly") signed
an Agreement and Plan of Merger through which Lilly will acquire 100% of the
Company's common stock.
Liquidity
---------
Since its inception, the Company has incurred significant losses from
operations, cash flow deficits and had an accumulated deficit at December 31,
1994 and June 30, 1995 of approximately $23.4 million and $29.9 million,
respectively. Through December 31, 1994, the Company relied on the sale of
preferred and common equity on capital contributions from joint venturers to
fund operating losses. In the six months ended June 30, 1995, the Company
raised approximately $4.7 million from the exercise of Series C preferred stock
purchase warrants and from the sale of the rights to the remaining payments due
under certain network license agreements (see Notes 8 and 10) and through August
28, 1995 Lilly has provided loans to IMS of $5 million (see Note 3). In
addition to ongoing sales of network licenses and service agreements, funding
through the sale of equity, the sale of network license contracts receivable or
the issuance of debt instruments, which management believes will be available in
1995, will be required to fund planned 1995 operations and network expansion.
As of December 31, 1994, the Company has working capital of approximately
$617,000 and has cancelable and noncancelable network services agreements, joint
venture agreements and agreements for the sale of licenses of approximately $44
million, net of receivables sold subsequent to year end. Of this amount,
approximately $34 million will be collected over the next three years at the
rate of approximately $14 million, $11 million and $9 million in each of these
years, respectively.
In management's opinion, these events will provide sufficient cash
resources to fund operations through fiscal 1995. To the extent these events do
not provide sufficient cash flow, management believes Lilly will continue to
provide the funding necessary for the Company to continue its development and
expansion until it is self sufficient.
F-10
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Unaudited Financial Statements
------------------------------
The consolidated financial statements and related notes to consolidated
financial statements as of June 30, 1995, and for the six months ended June 30,
1994 and 1995, are unaudited. In the opinion of management, the unaudited
consolidated financial statements reflect all adjustments necessary for a fair
presentation. All such adjustments were of a normal and recurring nature.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
IMS and the following subsidiaries:
IMS Ownership Interest
as of December 31
------------------------
Subsidiary 1993 1994 (G)
---------------------------------------- ----------- -----------
IMS-Net of Alabama, Inc. 100% 100%
IMS-Net of Alabama Joint Venture 51 (C) 51 (C)
IMS-Net of Arizona, Inc. 100 100
IMS-Net of Arizona Joint Venture, 50 (C) 50 (C)
Ltd.
IMS-Net of Arkansas, Inc. 51 51
IMS-Net of Central Florida, Inc. 51 51
IMS-Net of Colorado, Inc. 100 100
Colorado Healthcare Network, L.P. (E) (E)
("CHCN, L.P.")
IMS-Network of Colorado, Ltd. (B) (B)
IMS-Net of Illinois, Inc. 100 100
Illinois Medical Information 68 (C) 68 (C)
Network, Inc.
IMS-Net of Kansas City, Inc. 97 97
IMS-Net of Northern California, Inc. 51 100 (F)
IMS-Net of Sacramento, Inc. (A) (A)
IMS-Net of Pennsylvania, Inc. 100 (D) (D)
IMS-Net of San Diego, Inc. 100 (D) (D)
IMS-Net of Texas, Inc. 100 (D) (D)
Indiana Medical Communication Network, LLC 51 51
Medical Communication Networks, Inc. 49 49
Minnesota Medical Communication 90 90
Network, LLC
(A) 100% owned by IMS-Net of Northern California, Inc.
(B) IMS-Net of Colorado, Inc. was the 1% General Partner of this partnership
which was dissolved as of December 31, 1994 (see Note 7).
(C) IMS's indirect ownership interest through its wholly owned subsidiary.
(D) The dissolution of these entities was in process at December 31, 1993
and completed in 1994.
(E) As of May 31, 1993, IMS purchased the remaining 35% limited partner
profits interest in CHCN, L.P. for $300,000 and dissolved the
partnership.
(F) As of December 31, 1994, the outstanding 49% minority stock interest in
IMS-Net of Northern California, Inc. ("Norcal") was retired by Norcal,
thereby increasing the Company's interest from 51% to 100% (see Note 6).
(G) IMS ownership interests as of June 30, 1995 are the same as December 31,
1994 with the exception of the purchase of the remaining 3% of IMS-Net
of Kansas City, Inc., to bring the IMS ownership to 100%.
(H) Several of the entities listed above are governed by shareholders'
or operating agreements which contain buy/sell provisions. These
provisions give the Company and the joint owners of these entities the
right to initiate
F-11
buy/sell elections relating to the entities' ownership. The price of the
exchanges are at fair market value or as specifically defined in the
agreements.
All majority owned and controlled subsidiaries are consolidated and all
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers highly
liquid debt instruments purchased with original maturities of three months or
less to be cash equivalents.
Revenue Recognition
-------------------
The Company follows the provisions of the American Institute of Certified
Public Accountants Statement of Position 91-1, "Software Revenue Recognition".
The Company licenses software under long-term network license agreements.
License fee revenue is recognized when the network is operational, customer
acceptance has occurred and all significant obligations have been satisfied.
Post-contract support ("PCS") activities, including software updates and
maintenance, are provided to customers either as part of a network license
agreement or under a separate network license service agreement. When PCS is
provided as part of a network license agreement, the Company allocates a portion
of the network license agreement fee to PCS activities. The portion of the fee
allocated to PCS activities is based on the pricing of separate network license
service agreements. All PCS revenue is recognized ratably over the period such
activities are provided.
The Company also generates revenue from network service agreements. Under
these agreements customers are provided network access, network communication
and installation. Fees are typically paid quarterly in advance and recognized
as revenue ratably over the service period.
Third-party joint venture fees resulting from the formation of consolidated
subsidiaries are recorded as capital contributions from joint venturers.
Contracts Receivable and Deferred Contract Revenue
--------------------------------------------------
Contracts receivable are comprised of amounts due the Company under network
services and network license agreements for implementation and network access
fees. Revenues associated with advance payments received under network services
agreements are deferred and recognized ratably over the period services are
performed.
Equipment and Furniture
-----------------------
Equipment and furniture are stated at cost. Depreciation and amortization
is provided using the straight-line method over the estimated useful lives of
the assets, ranging from 2 to 10 years.
F-12
Income Taxes
------------
Effective January 1, 1993, the Company implemented the provisions of
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting
for Income Taxes". SFAS 109 utilizes the liability method and deferred taxes
are determined based on the estimated future tax effects of differences between
the financial statement and tax bases of assets and liabilities and net
operating loss carryforwards given the provisions of enacted tax laws (see Note
4).
Net Loss Per Share
------------------
Net loss per share is computed on net loss less preferred stock dividends
and the weighted average number of common and common equivalent shares
outstanding during the year. All outstanding stock options and warrants were
excluded from the computation because they were antidilutive.
Software Development Costs
--------------------------
Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", capitalization of software development costs begins upon
the establishment of technological feasibility of the product and ends when the
product is ready for general release. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Amounts that could have been capitalized under this statement after
consideration of the above factors were immaterial and, therefore, no software
development costs have been capitalized by the Company to date.
Reclassifications
-----------------
Certain 1993 amounts have been reclassified to conform to the 1994
presentation.
(3) RELATED PARTY TRANSACTIONS
--------------------------
On June 12, 1995, the Company received $3,000,000 from Eli Lilly and
Company (a stockholder) as a bridge loan. The note bears interest at a rate of
10% per annum and matures on July 1, 1996. An additional $1,000,000 was
received from Eli Lilly on July 27, 1995 with maturity of July 1, 1996, bearing
interest at 10% per annum and an additional $1,000,000 was received from Eli
Lilly on August 28, 1995 with maturity of July 1, 1996, bearing interest at 10%
per annum (see Note 5). The loans from Eli Lilly are subordinated to IMS's
other indebtedness and are secured by a pledge of most of the assets of IMS.
The loans become immediately due and payable if IMS breaches the Merger
Agreement (see Note 11), subject to certain rights of IMS to cure such breach.
In January 1995, the Company's chairman transitioned from his role in day-
to-day management to that of a board member only. The Company will continue his
compensation at its present rate through December 31, 1995. These and other
related costs are included in payables to related parties in the accompanying
consolidated 1994 balance sheet.
The Company issued warrants to purchase 79,302 shares of common stock at $4
per share to its chairman in January of 1994. The Company owed amounts to its
chairman at
F-13
December 31, 1993 totaling $166,938. This amount was paid in 1994. Such amount
was noninterest bearing and due on demand.
During 1993, the Company's board of directors established a management
committee comprised of five senior vice presidents in charge of the Company's
five functional areas. As part of their 1993 compensation, the members of the
management committee received fully vested options to purchase 25,000 shares of
common stock each at $4.00 per share. As part of their 1994 compensation, the
----
members of the management committee received options to purchase 100,000 shares
of common stock each at $4.00 per share.
----
In the normal course of business, the Company's networks incur costs
payable to the Company's joint venture partners. At December 31, 1994, such
payables totaled approximately $707,000, and were included in payables to
related parties in the accompanying consolidated balance sheets.
During 1994 and 1993, the Company reimbursed a director of the Company for
approximately $61,000 and $125,000, respectively, of legal fees paid on behalf
of the Company under an indemnification agreement.
During 1994, the Company sold $177,500 of software and equipment to a
company owned by a director of the Company, who in turn sold these items to a
hospital. The Company recorded this revenue upon the network becoming
operational and all significant obligations of the Company being fulfilled.
During 1993, an affiliate of a shareholder loaned the Company $250,000
under the terms of a 9% promissory note. This amount was repaid in 1994.
In 1992, a limited partner in IMS-Network of Colorado, Ltd. loaned the
Company $165,000 pursuant to two $82,500 promissory notes, secured by a
collateral assignment of payments due under a network license agreement. During
1993, the Company repaid one of these promissory notes. The remaining note was
repaid in 1994.
During 1993, a director of the Company advanced $250,000 to the Company to
meet short-term cash requirements. Also, three directors advanced $75,000 each
($225,000 total) to the Company to meet short-term cash requirements. These
advances were interest bearing (short-term bank rates) and were secured by
assignments of cash flows. These advances were repaid prior to December 31,
1993.
During 1992, a senior vice president of the Company funded a $200,000
security bond for the Company related to the litigation described in Note 6.
This same officer also sold certain of his common stock in the Company to an
unrelated party and loaned the proceeds of $90,000 to the Company. These loans
were repaid by the Company in 1993.
In consideration for certain loans and/or personal guarantees related to
the Company's borrowings, as discussed above, from a bank and other obligations,
the Company issued warrants to purchase 28,000 and 191,800 shares of common
stock to directors and a shareholder during 1994 and 1993, respectively, at
$3.50-$5.00 per share (see Note 8).
F-14
(4) INCOME TAXES
------------
The Company adopted SFAS 109 as of January 1, 1993. This change in
accounting principle had no cumulative effect on the Company's financial
position or results of operations as of January 1, 1993.
The net deferred tax assets and liabilities as of December 31, 1994, are
comprised of the following:
December 31, 1994
-----------------
Current:
Accrued vacation $ 93,600
-----------
Current deferred tax assets 93,600
Noncurrent:
Share in losses from joint $ 207,700
ventures/partnerships
Reorganization costs (177,400)
Deferred Revenue 311,100
Depreciation (285,900)
Tax credits 67,600
Net Operating loss carryforwards 4,186,700
Other 26,600
-----------
Noncurrent net deferred tax assets 4,330,400
-----------
Total net deferred tax assets 4,430,000
before valuation allowance
Valuation allowance (4,430,000)
-----------
Net deferred tax assets $ -
===========
The Company has determined that $4,430,000 of net deferred tax assets as of
December 31, 1994 do not satisfy the realization criteria set forth in SFAS 109.
Recognition of these assets requires future taxable income, the attainment of
which is uncertain.
Accordingly, a valuation allowance has been recorded to offset the entire
deferred tax asset.
At December 31, 1994, the Company has tax credit carryforwards available to
offset future taxable income of approximately $67,600 which expire through 2006.
In addition, the Company has net operating loss carryforwards of approximately
$11,300,000 which expire through 2009.
F-15
The net operating loss and credit amounts are subject to examination by the
tax authorities. The Internal Revenue Code contains provisions which may limit
the net operating loss and tax credit carryforwards available to be used in any
given year upon the occurrence of certain events, including significant changes
in ownership.
At December 31, 1994, the Company had no current federal or state income
taxes payable.
The difference between the 1993 and 1994 losses reported for financial
reporting and the losses reported for income tax purposes was primarily the
result of the treatment of contributions from joint venturers as capital
contributions for financial reporting purposes and as taxable income for tax
reporting purposes, accelerated depreciation for tax purposes, and certain
accruals not currently deductible for tax reporting purposes.
The difference between the statutory federal income taxes and the Company's
effective income taxes is summarized as follows:
For the Year Ended
December 31
------------------------------
1993 1994
-------------- ------------
Federal income tax benefit computed at $(2,018,100) $(1,445,600)
the statutory rate
Increase (decrease) as a result of-
Joint venture capital contributions 1,384,800 51,000
treated as
income for tax reporting purposes
Other (48,400) 37,100
Valuation allowance 681,700 1,357,500
----------- -----------
Effective taxes $ - $ -
=========== ===========
F-16
(5) LONG-TERM DEBT
--------------
Long-term debt is comprised of the following at December 31, 1994 and June 30,
1995:
December 31, June 30,
1994 1995
---------- ------------
(Unaudited)
Note payable to Lilly-secured by stock, equipment and inventory,
interest at 10% per annum, due in full
on July 1, 1996 $ - $3,000,000
Note payable to a corporation-secured by certain contracts,
interest at 9.5%, monthly principal and
interest payments of $8,008, due September 24, 1996 154,376 112,845
Notes payable to individuals-unsecured, interest at 8%, quarterly
principal and interest payments of
$30,714, due May 31, 1995 59,634 -
Capital lease obligations-secured by equipment and letter of
credit, interest ranging from 6% to 11.4%,
due in varying monthly installments through 1999 151,170 132,310
------- ----------
Total debt 365,180 3,245,155
Less-Current maturities (181,182) (123,777)
-------- ----------
Long-term debt 183,998 $3,121,378
======= ==========
Long-term debt matures as follows:
Year Ended Year Ended
December 31 June 30
----------- ----------
1995 $181,182 1996 $ 123,777
1996 104,264 1997 3,060,199
1997 29,551 1998 22,370
1998 23,673 1999 25,053
1999 26,510 2000 13,756
----------- ----------
$365,180 $3,245,155
=========== ==========
F-17
(6) COMMITMENTS AND CONTINGENCIES
-----------------------------
Litigation
----------
The Company was involved, beginning in January 1992, in a dispute with
NewHealth Group, Inc. ("NHG"), the former 49% owner of IMS-Net of Northern
California, Inc. ("Norcal") and the former manager of Norcal and IMS-Net of
Sacramento, Inc. ("Sacto"), its 100% owned subsidiary.
During 1994 and early 1995, all of the litigation surrounding this dispute was
terminated in favor of the Company. Additionally, the Company won monetary and
punitive judgments against NHG and its officers and Norcal has recovered and
retired the outstanding 49% minority interest in Norcal, formerly owned by NHG,
so that the Company owns 100% of Norcal as of December 31, 1994. As the Company
is uncertain as to the ultimate collectibility of the judgments, the monetary
and punitive judgments will be recognized for financial reporting purposes when
and if the judgments are collected. No value was recorded for recovery and
retirement of the 49% minority interest.
During 1993, 1994 and the first six months of 1995, the Company expensed
approximately $1,658,000, $785,000 and 53,000, respectively, in legal costs
relating to this litigation.
Conversion Obligation
---------------------
Under the terms of a joint venture agreement between the Company and a
corporation, the corporation, as limited partner in the joint venture, may elect
to exchange all or increments of 20% of its rights to profits allocations in the
joint venture for shares of the Company's common stock. The number of shares is
to be determined by dividing $3.5 million by the market price of IMS common
stock at the time of exchange. Such option is available to the corporation for
three years and 120 days after commencement of a public offering of the common
stock of the Company.
Obligation to Fund Joint Ventures
---------------------------------
The Company has agreed to fund operating cash shortfalls of certain networks
under the terms of certain joint venture and network services agreements.
Lease Obligations
-----------------
The Company has entered into various noncancelable operating leases for
office space. Total rental expense related to these lease agreements in 1993
and 1994 was $654,331 and $1,035,111, respectively.
F-18
Future minimum lease payments under noncancelable operating lease agreements
as of December 31, 1994 are as follows:
1995 $ 990,198
1996 880,812
1997 671,552
1998 275,835
1999 131,280
Thereafter 4,237
----------
Total $2,953,914
==========
Subsequent to December 31, 1994, the Company entered into various operating
leases for office space. Future minimum lease payments related to these leases
total approximately $704,000 and have been included in the above table.
Letters of Credit
-----------------
At December 31, 1994, the Company had letters of credit outstanding totaling
approximately $213,000 collateralizing certain capital lease and tenant
finishings. The letters of credit expire at various dates through 1999.
(7) PARTNERS' INVESTMENT IN LIMITED PARTNERSHIP
-------------------------------------------
During 1992, the Company, through its wholly-owned subsidiary IMS-Net of
Colorado, Inc. ("IMS-Colorado"), obtained a 1% general partner interest in IMS-
Network of Colorado, Ltd. (the "Partnership"), a Colorado limited partnership.
The Partnership was formed for the purpose of obtaining business and technology
licenses from the Company to operate a medical communication network (the
"Network") in Colorado and to sublicense such rights to IMS-Colorado. IMS-
Colorado operates the Network and paid license fees to the Partnership based on
gross revenues received from the Network.
During 1993 and 1994, the Partnership distributed $143,559 and $209,219,
respectively, to the limited partners representing 99% of the royalties earned
by the Partnership. The accounts of the Partnership were consolidated in the
accompanying 1993 financial statements as IMS-Colorado was the general partner.
All intercompany transactions and accounts were eliminated in the accompanying
consolidated 1993 financial statements. As of December 31, 1994, the
Partnership was dissolved as discussed below.
Due to the Company's various obligations to the limited partners, amounts
received from the limited partners ($1,820,000 at December 31, 1993) were
excluded from stockholders' equity in 1993. Such amounts were converted and
reclassified to common stock in 1994 as discussed below.
On December 9, 1994, the Company made an exchange offering (the "Exchange")
to each limited partner of the Partnership and each holder of IMS-Colorado
preferred stock.
F-19
Pursuant to the Exchange, each Partnership unit and each preferred share of IMS-
Colorado was surrendered to the Company in exchange for 4,000 shares of common
stock of the Company and also received one nontransferable common stock purchase
warrant entitling the holder to purchase up to 2,000 and 4,000 additional shares
of common stock at $5 per share, respectively. Each warrant is exercisable in
accordance with its terms for a period of three years through December 1997.
Each limited partner and shareholder accepted the Exchange and 324,000 and
40,000 shares of common stock and warrants to purchase 162,000 and 40,000 shares
of common stock were issued to the holders of the Partnership units and IMS-
Colorado preferred stock, respectively, as set forth above, and the Partnership
was dissolved as of December 31, 1994.
(8) STOCKHOLDERS' EQUITY
--------------------
Series B Preferred Stock
------------------------
Each share of Series B voting preferred stock ("Series B") is convertible
at a price per share of $1.50, at the option of the holder into common stock.
Such conversion is automatic at the consummation of an initial public offering
by the Company. The Series B is entitled to receive cumulative dividends of 10%
of the liquidation value ($.10 per share) on an annual basis. Accumulated
undeclared and unpaid dividends were $1,300,000 and $1,400,000 at December 31,
1994 and June 30, 1995, respectively. Such cumulative dividends have not been
accrued as the Company has an accumulated deficit and, therefore, is unable to
declare or pay dividends. As dividends have not been declared as of June 30,
1995 no accrual has been made in the accompanying financial statements. In the
event of liquidation, holders of Series B will be entitled to a liquidation
preference of $1.00 per share plus accrued and unpaid dividends. The Company was
not in compliance with certain reporting covenants of the Series B Preferred
Stock Agreement at December 31, 1994.
Series C Preferred Stock
------------------------
Under terms of a Subscription Agreement dated December 30, 1993, a Series C
Preferred Stock Purchase Agreement dated January 6, 1994, and a Network
Sponsorship and Participation Agreement dated November 17, 1993, a corporation
purchased 1,250,000 shares of IMS's Series C convertible preferred stock
("Series C") at $4 per share for a total of $5 million on January 6, 1994. On
July 12, 1994, this corporation also purchased an additional 1,000,000 shares of
Series C at $5 per share by applying as partial payment the $1 million in
national network sponsorship and access fees paid in 1993. The Series C has
liquidation preferences over the Company's common stock but is subordinate to
holders of Series B and is convertible on a 1-to-1 basis to the Company's common
stock at the purchaser's option. Such conversion is automatic at the
consummation of an initial public offering above certain thresholds. Upon the
occurrence of certain circumstances, the Series C preferred stock has
noncumulative voting rights equal to shares of the Company's common stock and is
not redeemable.
The Company also issued warrants to the purchasing corporation in
connection with its investment in the Company's Series C and in conjunction with
the Network Sponsorship and Participation Agreement. In conjunction with the
first and second tranches of Series C as discussed above, the Company issued
warrants to purchase 750,000 and 500,000 shares, respectively, of Series C. In
1994, this corporation exercised warrants to purchase 375,000 shares of Series C
for $1,875,000. Subsequent to yearend, this corporation exercised warrants to
purchase an additional 375,000 shares of Series C for $1,875,000. The additional
500,000
F-20
warrants are exercisable during the two-year period after grant at $6 and $7 per
share during the first and second years, respectively.
In connection with the investment in the Company, the Company granted the
purchasing corporation a right of first offer on IMS shares under certain
circumstances. If the Company receives an offer from a potential investor, it
is obligated, except with respect to certain investors, to offer shares to the
purchasing corporation under substantially the same terms as those negotiated
with the potential investor. During November 1994, the purchasing corporation
was acquired by Eli Lilly and Company who may or may not have succeeded to these
rights.
Under terms of a Letter of Intent and Option Agreement dated November 10,
1993, another corporation has paid the Company $600,000 which is reflected as
other deferred credits in the accompanying consolidated balance sheets. The
option agreement was terminated in January 1995. If the corporation does not
make such an investment, the $600,000 will be applied to payments due under the
corporation's Communications Services Agreement with the Company.
Stock Warrants
--------------
Stock warrants have been issued to certain investors. Common stock warrant
activity during 1993 and 1994, and the first six months in 1995 is as follows:
Exercise Price
Shares Per Share
-------- --------------
Balance, December 31, 1992 387,000 $1.50 - 3.50
Granted 191,800 3.50 - 5.00
Canceled (12,500) 3.50
Exercised (62,500) 1.50
-------- --------------
Balance, December 31, 1993 503,800 1.50 - 5.00
Granted 309,303 4.00 - 5.00
Exercised (137,000) 1.50
Expired (25,000) 2.50 - 3.50
-------- --------------
Balance, December 31, 1994 651,103 1.50 - 5.00
Granted 10,000 6.50
Exercised (1,000) 5.00
-------- --------------
Balance, June 30, 1995 (unaudited) 660,103 $1.50 - 6.50
========
F-21
The warrants are fully vested at date of grant and are exercisable at varying
times through July 1998.
Series C Warrants
-----------------
In 1994, the Company also issued Series C warrants, as discussed above, of
which warrants to purchase 1,250,000 shares of Series C at prices ranging from
$5.00 - $7.00 were granted and 375,000 were exercised at $5.00 per share.
Subsequent to yearend, holder of such warrants exercised warrants to purchase an
additional 375,000 shares of Series C for $1,875,000.
Common Stock Option Plans
-------------------------
The Company has adopted its 1989 Stock Option Plan (the "1989 Plan")
providing for the grant of options to purchase a maximum of 1,600,000 shares of
common stock to key employees. Under the terms of the 1989 Plan, the option
exercise price is to be no less than the fair market value of IMS' stock on the
date of grant. Options are exercisable three months following the date of grant
and up to 10 years from such date. If employment is terminated for any reason,
the holder of the options has three months in which to exercise before
cancellation unless written approval of the compensation committee extends such
exercise to 12 months.
Stock option activity during 1993 and 1994, and the first six months in 1995
for the 1986 Plan is as follows:
Exercise Price
Shares Per Share
--------- --------------
Balance, December 31, 1992 814,322 $1.00 - 3.50
Granted 767,100 3.50 - 4.00
Canceled (17,500) 2.50 - 3.50
Exercised (16,500) 2.50
--------- --------------
Balance, December 31, 1993 1,547,422 1.00 - 4.00
Granted 38,000 4.00
Canceled (19,273) 2.50 - 4.00
Exercised (362) 3.50 - 4.00
--------- --------------
Balance, December 31, 1994 1,565,787 1.00 - 4.00
Canceled (7,563) 3.50 - 4.00
Exercised (1,432) 4.00
--------- --------------
Balance, June 30, 1995 (unaudited) 1,556,792 $1.00 - 4.00
=========
F-22
Stock options from the 1989 Plan vest ratably at times ranging from one to
three years and are exercisable at various times through 1999. As of December
31, 1994, 1,115,174 options were exercisable.
On April 22, 1994, the shareholders of IMS approved the 1994 Employee Stock
Option Plan (the "1994 Plan"). The 1994 Plan may grant incentive and
nonqualified stock options; however, in 1994, only nonqualified stock options
were granted. Under the 1994 Plan, the Company is authorized to grant options
to purchase a maximum of 400,000 shares of common stock to key employees. As of
December 31, 1994, the Company had granted more options than authorized in the
1994 Plan. Subsequent to yearend, the Company's board of directors approved
increasing the number of authorized shares by 438,600 and intends to seek
shareholders' approval at the next Shareholders' meeting. In management's
opinion, this increase will be approved. Such options are exercisable six
months following the date of grant. All other terms are similar to the 1989
Plan.
Stock option activity since 1994 for the 1994 Plan is as follows:
Shares Exercise Price
Per Share
--------------------------
Outstanding at beginning of year - -
Granted 492,730 $3.50 - 5.00
------- -------------
Balance, December 31, 1994 492,730 $3.50 - 5.00
Granted 340,870 5.00 - 6.50
Canceled (3,755) 5.00
------- -------------
Balance, June 30, 1995 (audited) 829,845 $3.50 - 6.50
=======
Stock options from the 1994 Plan vest ratably over three years and are
exercisable at various times through 2004. As of December 31, 1994, 25,401
options were exercisable. Upon the Merger becoming effective, all options
become fully vested.
Subscriptions Receivable
------------------------
Stock subscriptions and joint venturers' contributions receivable consist of
amounts to be received for sale of common stock and formation of joint ventures.
The amounts shown as current assets were collected subsequent to yearend.
(9) 401(k) PLAN
-----------
In 1993, the Company adopted a 401(k) plan for its employees. Under this
plan, the Company may contribute to the plan at its discretion. The total
amount contributed by the Company to the plan during the years ended December
31, 1993 and 1994 was $50,067 and $79,353, respectively.
F-23
(10) ACCOUNTS RECEIVABLE SALES
-------------------------
Subsequent to December 31, 1994, the Company sold without recourse its
rights to the remaining payments due under certain network license agreements
for a price equal to the present value of the remaining noncancelable license
fee payments. Proceeds from the sales were approximately $2.8 million.
(11) MERGER WITH ELI LILLY AND COMPANY (UNAUDITED)
---------------------------------------------
As noted earlier, the Company signed an Agreement and Plan of Merger (the
"Plan") with Lilly on August 2, 1995. The following discussion outlines the
general terms and consideration of the Plan and the impact of the Plan on the
Company's capital structure.
If the Merger is approved by the Company's shareholders, each share of
common stock will be converted into the right to receive $8.00 in cash or one
share of new Series D preferred stock ("Preferred D"). Each share of Series B
preferred stock will be converted into the right to receive $5.33 in cash plus
any accrued unpaid dividends as of the closing date or two-thirds of a Preferred
D share plus any accrued unpaid dividends on the original Series B as of the
closing date, or such Series B shareholders may elect to retain the Series B
shares with the amended terms and conditions set forth in the Plan and exhibits
thereto.
Each Series C preferred share will convert to one share of common stock.
Option and warrant holders have the right either to (i) receive $8.00 in
cash per share into which each such option or warrant was exercisable as of the
closing date net of the exercise price, or (ii) retain the right to purchase one
share of Preferred D stock for each share of common stock into which such option
or warrant was exercisable as of the closing date. Company option holders have
the further option to receive fully vested options to acquire shares of common
stock of Lilly under the 1994 Lilly Stock Plan.
All new Preferred D shareholders will have the option to enter into a
Put/Call Agreement with Lilly whereby each holder of Preferred D shares would
have the right to put their shares to Lilly during two put periods beginning one
year after the closing date and 30 months after the closing date. Pursuant to
the Put/Call Agreements, Lilly would have the right to call the Preferred D
stock, which right could be exercised any time after three years from the
closing date. The put and call purchase price is $8.00 per share plus any
unpaid dividends accrued prior to the purchase date.
The Preferred D shares also carry mandatory redemption features. For the
period of 30 days after the fifth anniversary of the effective date of the
Merger, the holders may demand redemption of their shares for $8.00 per share
plus all accrued and unpaid dividends. The Company has the option, beginning on
the fifth anniversary of the Merger effective date, to redeem any or all shares
of Preferred D at a redemption price of $8.00 per share plus all accrued and
unpaid dividends.
F-24
APPENDIX A
ARTICLES OF MERGER
OF TRANS-IMS CORPORATION
WITH AND INTO
INTEGRATED MEDICAL SYSTEMS, INC.
The undersigned, organized and existing under and by virtue of the Colorado
Business Corporation Act (the "Act"), DOES HEREBY CERTIFY THAT:
FIRST: The name and state of incorporation of each of the constituent
-----
corporations in the merger (the "Constituent Corporations") are as follows:
State of
Name Incorporation
---- -------------
TRANS-IMS CORPORATION Colorado
INTEGRATED MEDICAL SYSTEMS, INC. Colorado
SECOND: An Agreement and Plan of Merger, dated as of August 2, 1995 (the
------
"Plan of Merger"), by and among Eli Lilly and Company, an Indiana corporation
("Lilly"), Trans-IMS Corporation, a Colorado corporation, and Integrated Medical
Systems, Inc., a Colorado corporation, has been approved and adopted by each of
the Constituent Corporations in accordance with the requirements of Section 7-
111-103 of the Colorado Business Corporation Act.
THIRD: The name of the surviving corporation is "Integrated Medical
-----
Systems, Inc." (the "Surviving Corporation").
FOURTH: The Articles of Incorporation of the Surviving Corporation are
------
hereby amended and restated to read as follows:
FIRST: The name of the corporation is Integrated Medical Systems,
Inc.
SECOND: The street address of the registered office of the
corporation is ____________________, ______________________ Colorado
_______. The name of its registered agent at such address is
______________. The address of the corporation's principal office is 15000
West 6th Avenue, Suite 400, Golden, Colorado.
THIRD: (a) Authorized Capital. The aggregate number of shares
------------------
that the corporation shall have authority to issue is 20,000,000 shares of
common stock without par value, and 14,000,000 shares of preferred stock,
$0.01 par value.
(b) Relative Rights and Preferences and Voting of Shares
----------------------------------------------------
(i) Preferred Stock. Except with respect to the Series B
---------------
Preferred Stock, par value $1.00 per share, and the Series D Preferred
Stock, par value $0.01 per share, the preferences, limitations and relative
rights of which are described in Articles FOURTH and FIFTH below,
respectively, the board of directors shall determine preferences,
limitations and relative rights of the preferred stock and any series of
preferred stock prior to the issuance of any shares of preferred stock or
series of preferred stock.
(ii) Common Stock. Each shareholder of record entitled to vote
------------
shall have one vote for each share of stock standing in his name on the
books of the corporation, except that in the election of directors he shall
have the right to vote such number of shares for as many persons as there
are directors to be elected. Cumulative voting shall not be allowed in the
election of directors or for any other purpose.
(iii) Distributions. Notwithstanding the restrictions contained
-------------
in Section 7-106-401(3)(b) of the Colorado Business Corporation Act (the
"Act"), the corporation may make distributions to shareholders if, in
making any such distribution, and after giving effect to such distribution,
the corporation's total assets are not less than its total liabilities, and
the distribution otherwise is permitted under the Act.
(iv) Extraordinary Matters. In each case where the Colorado
---------------------
Corporation Code as in effect immediately before July 1, 1994 required a
two-thirds vote of all of the outstanding shares of the corporation
entitled to vote, or of all of the outstanding shares of each class where
class voting was required, such required vote is hereby reduced to a
majority of all the votes entitled to be cast on the matter by each voting
group entitled to vote separately on the matter.
FOURTH: The corporation is authorized and empowered to issue up to a
maximum of 2,000,000 shares of Series B Preferred Stock, having the
following preferences, limitations and relative rights:
2
1. Par Value and Liquidation Value. The Series B Preferred Stock
-------------------------------
shall have a par value of One Dollar ($1.00) per share and a value on
liquidation of One Dollar ($1.00) per share plus accrued and unpaid
dividends (the "Liquidation Value").
2. Dividends. The Series B Preferred Stock shall earn cumulative
---------
dividends at a rate of ten percent (10%) of the Liquidation Value (i.e.,
ten cents ($.10) per share annually) beginning July 1, 1988, which shall be
payable quarterly each September 30, December 31, March 31 and June 30
thereafter until and unless converted as provided in paragraph 6 below. No
interest shall be earned or paid on the Series B Preferred Stock prior to
July 1, 1988. All payments of dividends on the Series B Preferred Stock
and the outstanding Series D Preferred Stock (the "Series D Preferred
Stock") shall be made in pari passu among the holders of the Series D
-- ---- -----
Preferred Stock and the holders of the Series B Preferred Stock and no
holder of Series D Preferred Stock or holder of Series B Preferred Stock
shall be preferred over the other.
3. Voting Rights. Outstanding shares of Series B Preferred Stock
-------------
shall have no voting rights other than such voting rights as shall be
required by the Act.
4. Preemptive or Purchase Rights. No holder of a share or shares of
-----------------------------
Series B Preferred Stock shall, because of his or her ownership of such
stock, have a preemptive right to purchase, subscribe for or take any part
of any capital stock of the corporation nor shall any such holder have a
preemptive right to purchase, subscribe for or take any part of notes,
debentures, bonds or any other securities of the corporation, including,
but not limited to, securities convertible into or carrying options or
warrants to purchase capital stock of the corporation.
5. Rights on Liquidation, Dissolution and Winding-up of the
--------------------------------------------------------
Corporation. Upon any liquidation, dissolution or winding-up of the
-----------
corporation, the holders of the Series B Preferred Stock will be entitled
to be paid, before any distribution or payment is made to the holders of
the corporation's outstanding common stock without par value (the "Common
Stock"), an amount in cash equal to the aggregate Liquidation Value of all
the Series B Preferred Stock then outstanding, and the holders of the
Series B Preferred Stock will not be entitled to any further or additional
payment. The Series B Preferred Stock and the Series D Preferred Stock
shall be parity stock in respect of rights to payment upon liquidation,
dissolution or winding-up.
3
6. Conversion of Series B Preferred Stock. The holders of the Series
--------------------------------------
B Preferred Stock shall have conversion rights as follows (the "Conversion
Rights"):
6.1 Right to Convert. Each share of Series B Preferred Stock
----------------
shall be convertible, at the option of the holder thereof, at any time, at
the office of the corporation or any transfer agent for the Series B
Preferred Stock, into either (i) the Liquidation Value, payable in cash, of
the Series B Preferred Stock on the date of conversion, without interest,
or (ii) two-thirds of a share of the corporation's Series D Preferred
Stock, par value $.O1 per share (the "Series D Preferred Stock").
6.2 Mechanics of Conversion. Before any holders of Series B
-----------------------
Preferred Stock shall be entitled to convert the same into cash or shares
of Series D Preferred Stock, such holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the corporation or
of any transfer agent for the Series B Preferred Stock, and shall give
written notice to the corporation at such office that such holder elects to
convert the same into cash or Series D Preferred Stock. The corporation
shall, as soon as practicable thereafter, either pay the required cash to
the holder of Series B Preferred Stock or issue and deliver at such office
to such holder of Series B Preferred Stock a certificate or certificates
for the number of shares of Series D Preferred Stock to which such holder
shall be entitled as aforesaid. Such payment or conversion shall be deemed
to have been made immediately prior to the close of business on the date of
such surrender of the shares of Series B Preferred Stock to be cashed out
or converted, and, if the holder elects to acquire Series D Preferred
Stock, the person or persons entitled to receive the shares of Series D
Preferred Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Series D
Preferred Stock on such date.
6.3 Fractional Shares. No fractional shares of Series D
-----------------
Preferred Stock shall be issued upon conversion of the Series B Preferred
Stock. Fractional shares shall not be issued; and, in lieu of fractional
shares to which the holder would otherwise be entitled, the corporation
shall pay cash equal to said fraction multiplied by 150% of the Liquidation
Value of a share of the Series B Preferred Stock.
4
6.4 Changes in Series D Preferred Stock.
-----------------------------------
6.4.1 The corporation shall not issue any shares of Series D
Preferred Stock other than those shares issued in connection with the
merger of Trans-IMS Corporation into the corporation or any shares
subsequently issued upon conversion of Series B Preferred Stock as provided
in this Article Fourth or upon exercise of the Company Options and the
Company Warrants contemplated by the Articles of Merger for such merger.
6.4.2 The number of shares of Series D Preferred Stock
outstanding at any time after the date hereof may not be increased by a
stock dividend payable in shares of Series D Preferred Stock or by a
subdivision or split-up of shares of Series D Preferred Stock.
6.4.3 The number of shares of Series D Preferred Stock
outstanding at any time after the date hereof may not be decreased by a
combination of the outstanding shares of Series D Preferred Stock.
6.4.4 If at any time after the date hereof there occurs any
capital reorganization, or any reclassification of the capital stock of the
corporation (other than a change in par value or as a result of a stock
dividend or subdivision, split-up or combination of shares), or the
consolidation or merger of the corporation with or into another person
(other than a consolidation or merger in which the corporation is the
continuing entity and which does not result in any change in the Series D
Preferred Stock), or the sale or other disposition of all or substantially
all of the properties and assets of the corporation as an entity to any
other person, the shares of Series B Preferred Stock shall, after such
reorganization, reclassification, consolidation, merger, sale or other
disposition, be convertible into the kind and number of shares of stock or
other securities or property of the corporation or of the entity resulting
from such consolidation or surviving such merger or to which such
properties and assets shall have been sold or otherwise disposed to which
such holder would have been entitled if, immediately prior to such
reorganization, reclassification, consolidation, merger, sale or other
disposition, such holder had converted his shares of Series B Preferred
Stock into Series D Preferred Stock. The provisions of this Section 6.4.4
shall similarly apply to successive reorganizations, reclassifications,
consolidations, mergers, sales or other dispositions.
7. No Impairment. The corporation shall not, by amendment of its
-------------
Articles of Incorporation or through any
5
reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities, or any other voluntary action, avoid or seek
to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the corporation, but shall at all times in good
faith assist in the carrying out of all the provisions of this Section 7
and in the taking of all such action as may be necessary or appropriate in
order to protect the Conversion Rights of the holders of Series B Preferred
Stock against impairment.
8. Notices of Record Date. In the event of any taking by the
----------------------
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, the
corporation shall mail to each holder of Series B Preferred Stock, at least
twenty (20) days prior to the date specified herein, a notice specifying
the date on which any such record is to be taken for the purpose of such
dividend or distribution.
9. Reservation of Stock Issuable Upon Conversion. The corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but
unissued shares of Series D Preferred Stock solely for the purpose of
effecting the conversion of the shares of Series B Preferred Stock such
number of its shares of Series D Preferred Stock as shall from time to time
be sufficient to effect the conversion of all outstanding shares of the
Series B Preferred Stock; and, if at any time the number of authorized but
unissued shares of Series D Preferred Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series B
Preferred Stock, the corporation shall take such corporate action as may,
in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Series D Preferred Stock to such number of shares as
shall be sufficient for such purpose.
10. Notices. Any notice required to be given to the holder of shares
-------
of Series B Preferred Stock shall be deemed given if deposited in the
United States mail, postage prepaid, and addressed to each holder of record
at his address appearing on the books of the corporation.
11. Protective Provisions. So long as any of the Series B Preferred
---------------------
Stock shall be outstanding, the corporation shall not, without first
obtaining the approval (by vote or written consent, as provided by law) of
the holders of at least fifty-one percent (51%) of the outstanding shares
of Series B Preferred Stock, alter or
6
change the rights, preferences or privileges of the Series B Preferred
Stock.
12. No Reissuance of Preferred Stock. No share or shares of Series B
--------------------------------
Preferred Stock acquired by the corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares
shall be cancelled, retired and eliminated from the shares that the
corporation shall be authorized to issue.
13. Amendment and Waiver. Amendments, modifications or waivers of
--------------------
any of the terms hereof will be binding and effective if the prior written
consent of holders of at least 51% of the Series B Preferred Stock
outstanding at the time such action is taken is obtained; provided that no
such action will change (a) the rate at which or the manner in which
dividends on the Series B Preferred Stock accrue or the times at which such
dividends become payable, unless the prior written consent of the holders
of at least 91% of the Series B Preferred Stock then outstanding is
obtained, (b) the Conversion Rights of the Series B Preferred Stock or the
number of shares or class of stock into which the Series B Preferred Stock
is convertible, unless the prior written consent of the holders of at least
91% of the Series B Preferred Stock then outstanding is obtained or (c) the
percentage required to approve any change described in clauses (a) and (b)
above, unless the prior written consent of the holders of at least 91% of
the Series B Preferred Stock then outstanding is obtained.
FIFTH: The corporation is authorized and empowered to issue shares
-----
of Series D Preferred Stock, having the following preferences, limitations and
relative rights:
1. Designation and Amount. The shares of such series shall be
----------------------
designated as the Series D Preferred Stock (the "Series D Preferred Stock")
and the number of shares initially constituting such series shall be
12,000,000, which number may be decreased (but not increased) by the Board
of Directors without a vote of the shareholders; provided, however, that
such number may not be decreased below the sum of the number of then
currently outstanding shares of Series D Preferred Stock and the number of
shares of Series D Preferred Stock reserved for issuance upon exercise of
then currently outstanding options and warrants of the corporation. Shares
of Series D Preferred Stock shall have a preference over shares of the
corporation's common stock, without par value (the "Common Stock") upon
liquidation, dissolution or winding up of the corporation.
7
2. Dividends. Holders of the outstanding shares of Series D Preferred
---------
Stock shall be entitled to receive, if, as and when declared by the Board
of Directors out of funds legally available therefor, cumulative cash
dividends at an annual rate of $0.62 per share, in preference to and in
priority over any dividends with respect to the Common Stock. Dividends on
the outstanding shares of Series D Preferred Stock shall begin to accrue
and be cumulative (regardless of whether such dividends have been declared
by the Board of Directors) beginning on the date of issuance, and shall be
payable annually in arrears each December 31 until and unless redeemed by
the corporation.
3. Voting Rights. (a) Outstanding shares of Series D Preferred
-------------
Stock shall have no voting rights other than such voting rights as shall be
required by the Colorado Business Corporation Act or as otherwise provided
below in this Section 3.
(b) Whenever, at any time or times, dividends payable on any share or
shares of Series D Preferred Stock shall be in arrears in an amount equal
to at least two full annual dividends (whether or not declared and whether
or not consecutive and whether or not funds are legally available for such
dividends), the holders of record of the outstanding Series D Preferred
Stock shall have the exclusive right, voting separately as a single class,
to elect one director of the corporation at a special meeting of
shareholders of the corporation or at the corporation's next annual meeting
of shareholders, and at each subsequent annual meeting of shareholders, as
provided below. At elections for such director, the holders of shares of
Series D Preferred Stock shall be entitled to cast one vote for each share
held.
(c) Upon a failure by the corporation to redeem any shares of Series
D Preferred Stock pursuant to any demand duly made pursuant to Section 4(a)
below (whether or not such failure results from the corporation's failure
to have sufficient funds legally available for such redemption), then the
holders of record of the Series D Preferred Stock shall have, as their sole
remedy in respect of such failure, the exclusive right, voting separately
as a single class, to elect the smallest number of directors of the
corporation that shall constitute a majority of the authorized number of
members of the Board of Directors (including new directorships created
pursuant to Section 4(d) below) at a special meeting of shareholders of the
corporation or at the corporation's next annual meeting of shareholders,
and at each subsequent annual meeting of shareholders, as provided below.
At elections for such directors, the
8
holders of shares of Series D Preferred Stock shall be entitled to cast one
vote for each share held. If such holders exercise such right to elect a
majority of the directors, then following the election of such directors
and during the period in which a majority of the directors are persons
elected by such holders (or the successors of such directors), the
corporation shall be required to redeem all of the shares of Series D
Preferred Stock for which redemption was duly demanded pursuant to Section
4(a) below as soon as practicable if and to the extent that funds are
legally available therefor. Any such redemption shall be made in
accordance with the procedures set forth in Section 4(c) below as if it
were a redemption pursuant to Section 4(b) but subject to being given the
priority set forth in the proviso to Section 4(c)(i) below. During any
period while the right to elect directors pursuant to this Section 3(c) is
vested, the director, if any, elected pursuant to Section 3(b) and then in
office shall be deemed to be one of the directors elected pursuant to this
Section 3(c).
(d) Upon the vesting of such right of the holders of the Series D
Preferred Stock to elect any directors pursuant to Section 3(b) or (c)
above, the maximum authorized number of members of the Board of Directors
shall be automatically increased, (i) in case of a right pursuant to
Section 3(b) above, by one and, (ii) in the case of a right pursuant to
Section 3(c) above, by the maximum number of members of the Board of
Directors immediately theretofore authorized (but excluding from such
maximum number the member, if any, authorized pursuant to Section 3(b)),
plus one, and the vacancy or vacancies so created shall be filled by vote
of the holders of the outstanding Series D Preferred Stock as hereinafter
set forth. A special meeting of the shareholders of the corporation then
entitled to vote shall be called by the Chairman of the Board of Directors
or the President or the Secretary of the corporation, if requested in
writing by the holders of record of not less than 25% of the Series D
Preferred Stock then outstanding. At such special meeting, or, if such
special meeting shall not have been called, then at the next annual meeting
of shareholders of the corporation, the holders of the Series D Preferred
Stock shall elect, voting as above provided, a director or directors to
fill the aforesaid vacancy or vacancies created by the automatic increase
in the number of members of the Board of Directors. At any and all such
meetings for such election, the holders of a majority of the outstanding
shares of the Series D Preferred Stock shall be necessary to constitute a
quorum for such election, whether present in person or by proxy, and such
director or directors
9
shall be elected by the vote of at least a plurality of shares held by such
shareholders present or represented at the meeting. Any director elected
by holders of the Series D Preferred Stock pursuant to this Section may be
removed at any annual or special meeting, by vote of a majority of the
outstanding shares of the Series D Preferred Stock, with or without cause.
In case a director so elected shall vacate such position, such vacancy may
be filled by unanimous agreement of the remaining directors so elected, or
their successors then in office, if any, or may be filled in the same
manner as is provided above for the initial election of a director by the
holders of the Series D Preferred Stock.
(e) The right of the holders of the Series D Preferred Stock, voting
separately as a class, to elect one director of the Board of Directors
pursuant to Section 3(b) above shall continue until, and only until, such
time as all arrears in dividends (whether or not declared) on the Series D
Preferred Stock shall have been paid or declared and set apart for payment,
at which time such right shall terminate, except as expressly provided by
law, subject to revesting in the event of each and every subsequent default
of the character above-mentioned. The right of such holders, voting
separately as a class, to elect directors pursuant to Section 3(c) above
shall continue until, and only until, such time as the corporation has
redeemed all of the shares of Series D Preferred Stock for which redemption
was duly demanded pursuant to Section 3(c) above, at which time such right
shall terminate, except as expressly provided by law. Upon any termination
of the right of the holders of the Series D Preferred Stock as a class to
vote for a director or directors as herein provided, the term of office of
any such director or directors then in office shall terminate immediately.
Whenever the term of office of any director elected by the holders of the
Series D Preferred Stock pursuant to this Section shall terminate and the
special voting powers vested in the holders of the Series D Preferred Stock
pursuant to this Section shall have expired, the maximum number of members
of the Board of Directors shall be such as may be provided for in the By-
Laws of the corporation irrespective of any increase made pursuant to the
provisions of this Section.
4. Redemption. (a) At the Option of Holders. During, and only
---------- ------------------------
during the period of 30 days beginning on the fifth anniversary of the
effective date of the merger of Trans-IMS Corporation into the corporation,
any one or more holders of shares of Series D Preferred Stock, at the
option of such holders, may demand that the corporation redeem any or all
of their shares of Series D Preferred Stock at a redemption price of $8.00
per
10
share, plus an amount equal to all accrued and unpaid dividends thereon
(whether or not declared) to and including the date of redemption. Such
demand shall be made by delivering to the corporation at its principal
executive offices a written demand during the aforesaid 30-day period.
Such demand shall specify the number of shares to be redeemed and shall be
irrevocable, except with the consent of the corporation. Following receipt
of any such demand, the corporation may, at its option, choose to redeem,
or not to redeem, shares in accordance with such demand and the provisions
of this Section 4. If shares are to be so redeemed, the corporation shall
fix a redemption date that shall be not later than 90 days after such fifth
anniversary. The corporation shall give notice of redemption by first
class mail, postage prepaid, mailed not less than 20 days prior to the date
fixed for redemption to the holders whose shares are to be redeemed at
their respective addresses appearing on the stock books of the corporation.
Notice so mailed shall be conclusively presumed to have been duly given
whether or not actually received. Such notice shall state: (i) the date
fixed for redemption; (ii) the redemption price; (iii) the number of shares
of Series D Preferred Stock to be redeemed and if less than all the shares
held by such holder are to be redeemed, the number of shares to be so
redeemed from such holder; (iv) the place where certificates for such
shares are to be surrendered for payment of the redemption price; and (v)
that after the close of business on such date fixed for redemption the
shares to be so redeemed shall not accrue dividends. If the corporation
does not redeem all of the shares of Series D Preferred Stock for which
redemption has been duly demanded pursuant to this Section, the sole remedy
of the holders of such shares in respect of such failure to redeem shall be
the exercise of the voting rights conferred by Section 3(c) above. For the
purposes of Section 3 above, the corporation shall be considered to have
redeemed any shares for which redemption has been duly demanded if such
shares are thereafter purchased by the corporation or any person or entity
that then owns, directly or indirectly, at least 50% of the corporation's
then outstanding Common Stock.
(b) At the Option of the Corporation. On and after the fifth
--------------------------------
anniversary of the effective date of the merger of Trans-IMS Corporation
into the corporation, the corporation, at its option, may redeem any or all
shares of Series D Preferred Stock at a redemption price of $8.00 per
share, plus an amount equal to all accrued and unpaid dividends thereon
(whether or not declared) to and including the date of redemption.
11
(c) Redemption Procedures. (i) If, pursuant to Section 4(a), the
---------------------
corporation will redeem less than all of the shares for which demands for
redemption were duly made, or if less than all of the outstanding shares of
Series D Preferred Stock are to be redeemed pursuant to Section 4(b), the
shares to be redeemed shall be selected pro rata (subject to rounding to
avoid fractional shares) as nearly as practicable or by lot, or by such
other method as the Board of Directors may determine to be equitable;
provided, however, that if the corporation is proposing to redeem shares
pursuant to Section 4(b) and any shares for which demands for redemption
were duly made pursuant to Section 4(a) have not been redeemed, then
priority shall be given to the redemption of such shares for which such
demands were duly made.
(ii) Notice of any redemption pursuant to Section 4(b) shall be given
by first class mail, postage prepaid, mailed not less than 30 nor more than
60 days prior to the date fixed for redemption to the holders of record of
the Series D Preferred Stock to be redeemed at their respective addresses
appearing on the stock books of the corporation. The Board of Directors of
the corporation shall fix a record date for determining holders of record
who are entitled to receive notice of any redemption, not more than 10 days
prior to the mailing of such notice. Notice so mailed shall be
conclusively presumed to have been duly given whether or not actually
received. Such notice shall state: (i) the date fixed for redemption;
(ii) the redemption price; (iii) the number of shares of Series D Preferred
Stock to be redeemed and if less than all the shares held by such holder
are to be redeemed, the number of shares to be so redeemed from such
holder; (iv) the place where certificates for such shares are to be
surrendered for payment of the redemption price; and (v) that after the
close of business on such date fixed for redemption the shares to be so
redeemed shall not accrue dividends.
(iii) Upon surrender in accordance with the notice of redemption
referred to in Section 4(a) or 4(c)(ii), the certificate for any shares of
Series D Preferred Stock so redeemed (duly endorsed or accompanied by
appropriate instruments of transfer, if so required by the corporation in
such notice), the holders of record of such shares shall be entitled to
receive the redemption price, without interest. In case fewer than all the
shares represented by any such certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares without cost to the
holder thereof.
(iv) Notice of redemption having been mailed as provided in Section
4(a) or 4(c)(ii), from and after the
12
redemption date (unless default shall be made by the corporation in
providing money for the payment of the redemption price) dividends on the
shares of the Series D Preferred Stock called for redemption shall cease to
accrue, and said shares shall no longer be deemed to be outstanding, and
all rights of the holders thereof as stockholders of the corporation
(except the right to receive from the corporation the redemption price)
shall cease.
5. No Preemptive Rights. No holder of a share or shares of Series D
--------------------
Preferred Stock shall, because of such holder's ownership of such stock,
have a preemptive right to purchase, subscribe for or take any part of any
capital stock of the corporation nor shall any such holder have a
preemptive right to purchase, subscribe for or take any part of notes,
debentures, bonds or any other securities of the corporation, including,
but not limited to, securities convertible into or carrying options or
warrants to purchase capital stock of the corporation.
6. Liquidation Preference. Upon any voluntary or involuntary
----------------------
liquidation, dissolution or winding-up of the corporation, the holders of
the Series D Preferred Stock will be entitled to receive out of the assets
of the corporation available for distribution to stockholders, before any
distribution of assets is made to the holders of shares of Common Stock, an
amount in cash equal to $8.00 per share, plus an amount equal to all
accumulated and unpaid dividends on such shares of Series D Preferred Stock
to and including the date of such liquidation, dissolution or winding up.
If, upon any voluntary or involuntary liquidation, dissolution or winding
up of the corporation, the amounts payable with respect to the Series D
Preferred Stock and any parity stock are not paid in full, the holders of
the Series D Preferred Stock and such parity stock shall share ratably in
any such distribution of assets of the corporation in proportion to the
full respective preferential amounts (including accumulated and unpaid
dividends) to which they are entitled. After payment to the holders of the
Series D Preferred Stock (including accumulated and unpaid dividends)
provided for in this Section 6, the holders of Series D Preferred Stock
shall be entitled to no further participation in any distribution of assets
of the corporation.
7. Conversion Rights. Holders of the Series D Preferred Stock shall
-----------------
have no rights to convert the Series D Preferred Stock into any other class
of capital stock of the corporation.
13
8. Cancellation of Redeemed Shares. All shares of Series D Preferred
-------------------------------
Stock redeemed pursuant to Section 4 shall be cancelled and shall not be
issuable by the corporation, and the Articles of Incorporation shall be
appropriately amended, if required, to effect the corresponding reduction
in the corporation's authorized capital.
9. No Other Rights. The shares of Series D Preferred Stock shall not
---------------
have any preferences, voting powers or relative, participating or other
special rights except as set forth above and in the Articles of
Incorporation or as otherwise required by applicable law.
SIXTH: The number of directors on the corporation shall be fixed and
may be altered from time to time as provided in the by-laws of the
corporation.
SEVENTH: No shareholder of the corporation shall have any preemptive
or similar right to acquire or subscribe for any additional unissued shares
of stock, or other securities of any class, or rights, warrants or options
to purchase stock or scrip, or securities of any kind convertible into
stock or carrying stock purchase warrants or privileges.
EIGHTH: To the fullest extent permitted by the Act, as the same
exists or may hereafter be amended, a director of the corporation shall not
be personally liable to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director, except that this
provision shall not eliminate or limit the liability of a director to the
corporation or to its shareholders for monetary damages otherwise existing
for (i) any breach of the director's duty of loyalty to the corporation or
to its shareholders; (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) acts
specified in Section 7-108-403 of the Act relating to any unlawful
distribution; or (iv) any transaction from which the director directly or
indirectly derived any improper personal benefit. If the Act is hereafter
amended to eliminate or limit further the liability of a director, then, in
addition to the elimination and limitation of liability provided by the
preceding sentence, the liability of each director shall be eliminated or
limited to the fullest extent permitted by the Act as so amended. Any
repeal or modification of this Article by the shareholders of the
corporation shall be prospective only and shall not adversely affect any
right or protection of a director of the corporation existing at the time
of such repeal or modification.
14
NINTH: The corporation shall indemnify officers, directors, employees
or agents to the extent provided in the corporation's bylaws.
FIFTH: A copy of the executed Plan of Merger is attached hereto.
-----
SIXTH: The merger shall become effective immediately upon filing
-----
these Articles of Merger with the Secretary of State of Colorado in accordance
with the provisions of Section 7-111-105 of the Colorado Business Corporation
Act.
15
SEVENTH: The number of votes cast for the Plan of Merger by each
-------
voting group entitled to vote separately on the merger was sufficient for
approval by that voting group.
DATED as of this ____ day of ______________
INTEGRATED MEDICAL SYSTEMS, INC.,
a Colorado Corporation
By:________________________________
_________________
President
TRANS-IMS CORPORATION,
a Colorado Corporation
By:________________________________
_________________
President
16
APPENDIX B
PUT/CALL AGREEMENT
------------------
THIS PUT/CALL AGREEMENT, dated _________ is among Eli Lilly and Company, an
Indiana corporation ("Lilly"), Integrated Medical Systems, Inc., a Colorado
corporation ("IMS"), and the person or entity or persons or entities whose name
or names appears on the signature page hereto as Holder (each, a "Holder").
PRELIMINARY STATEMENT
---------------------
Holder is the owner of shares of Common Stock or Series B Preferred Stock
of IMS, or is the owner of rights to acquire such shares pursuant to options or
warrants, as specified on the signature page hereof.
Pursuant to an Agreement and Plan of Merger, dated as of August 2, 1995
(the "Merger Agreement"), following approval by the IMS shareholders, a
subsidiary of Lilly has been, or will be, merged into IMS (the "Merger"), and
upon the Merger the outstanding shares of Common Stock and certain outstanding
shares of Series B Preferred Stock have been, or will be, converted into cash or
shares of Series D Preferred Stock, par value $0.01 per share, of IMS (the "New
Preferred Stock"). In addition, rights to acquire Common Stock following the
Merger pursuant to options or warrants, or upon the conversion of Series B
Preferred Stock, have or will become rights to acquire New Preferred Stock.
Holder may elect to receive shares of New Preferred Stock in the Merger
(the "Merger Shares") and/or to acquire additional shares of New Preferred Stock
following the Merger pursuant to the exercise of options or warrants or the
conversion of Series B Preferred Stock (the "Additional Shares").
Holder and Lilly desire to grant each other certain rights regarding the
possible future purchase of such number of the Merger Shares and Additional
Shares as are specified on the signature page hereof (such Merger Shares and
Additional Shares so subject to the rights provided herein being herein called
the "Subject Shares").
In order to facilitate the possible future purchase of the Subject Shares,
the parties will execute an Escrow Agreement (the "Escrow Agreement") with
___________
an agent named therein (the "Agent") substantially in the form of Exhibit A
hereto.
AGREEMENT
---------
The parties agree as follows:
1. PUT RIGHT. (a) Grant. Lilly hereby grants to Holder, subject to the
--------- -----
terms and conditions of this Agreement, the right to require Lilly (or Lilly's
designee(s)) to purchase any or all of the Subject Shares at the Purchase Price
(as defined below) during the Put Periods specified below.
(b) Put Periods. The initial Put Period shall be a period of at least 10
-----------
business days beginning on the first anniversary of the Merger; the second Put
Period shall be a period of at least 10 business days beginning on ___________,
1998 [date to be about 30 months after Merger]. The Put Period shall be
specified in the applicable Put Notification (as defined below) and shall be
subject to extension, suspension or deferral as provided in Section 1(c) below.
During each Put Period, Holder may exercise the Put Right in whole or in part by
delivering to Lilly a Put Exercise Notice that specifies the number of Subject
Shares to be sold to Lilly during that Put Period. A Put Exercise Notice shall
be revocable until such time as Lilly shall have delivered a Put Purchase
Certificate and thereafter shall not be revocable unless the Subject Shares
specified in such Put Exercise Notice are not purchased by Lilly within 45 days
after Lilly's receipt of the Put Exercise Notice, in which event the Put
Exercise Notice may be revoked by delivering written notice of revocation to
Lilly.
(c) Extensions; Suspensions; Deferrals. Lilly may elect, in its
----------------------------------
discretion, to extend any Put Period beyond the period specified in the Put
Notification. In addition, Lilly shall have the right to defer commencement of
a Put Period, or to suspend a Put Period that has commenced, or to defer the
making of purchases pursuant to the Put Right, in order to permit compliance
with all applicable laws; provided, however, that Lilly will use its
-------- -------
commercially reasonable efforts to cause such compliance so as to avoid or
minimize any such deferral or suspension, except that if commencement or
continuation of a Put Period, or the making of purchases pursuant to the Put
Right, would require the disclosure to Holder of information about IMS or Lilly
that, in Lilly's reasonable judgment, it is not then in the best interests of
IMS or Lilly to disclose, Lilly may, in its discretion, defer the commencement
of, or may suspend, the Put Period or defer such purchases, for up to 90 days.
Lilly shall give prompt written notice of any such
2
extension, suspension or deferral by sending an amended Put Notification to
Holder. Any such extension, suspension or deferral shall not prevent Holder
from revoking Holder's Put Exercise Notice, as provided in Section 1(b) above.
(d) Put Notification. At least 10 and not more than 30 days prior to the
----------------
beginning of a Put Period, Lilly shall send a notice (the "Put Notification") to
Holder, together with a form of Put Exercise Notice to be used by Holder in
exercising the Put. The Put Notification shall inform Holder of (i) the rights
of Holder to require Lilly to purchase the Subject Shares, (ii) the date of the
commencement and termination of the Put Period (subject to possible extension,
suspension or deferral pursuant to Section 1(c) above), (iii) the Purchase
Price, (iv) instructions as to how to exercise the Put and (v) the address to
which payment for the Purchase Price will be mailed unless Lilly receives notice
from Holder at least three business days prior to the purchase date that payment
should be mailed to another address, or should be sent, at Holder's expense, to
a specified address via a reputable overnight courier delivery service or
another delivery method reasonably acceptable to Lilly, or should be held by the
Agent for delivery at its office to Holder or Holder's authorized
representative.
(e) Purchase and Payment. At any time following receipt of a proper Put
--------------------
Exercise Notice, but not later than the third business day following the end of
a Put Period (as modified pursuant to Section 1(c) above), Lilly shall purchase
the Subject Shares covered by such Put Exercise Notice by delivering to the
Agent a Put Purchase Certificate executed on behalf of Lilly by an officer or
other authorized signatory that shall state:
(1) Lilly has received a Put Exercise Notice executed by Holder in
compliance with this Agreement;
(2) Such Put Exercise Notice has not been revoked;
(3) The number of Subject Shares being sold pursuant to such Put
Exercise Notice;
(4) The aggregate Purchase Price of such Subject Shares (net of any
applicable taxes to be withheld pursuant to Section 3 below); and
(5) The name of Holder and the address to which payment for the
aggregate Purchase Price should be mailed (or otherwise delivered in
accordance with Holder's instructions as specified in the Put Exercise
Notice);
3
and shall deposit with the Agent funds sufficient to pay the aggregate
Purchase Price for such Subject Shares, and shall instruct the Agent to release
the certificates and related stock powers for such Subject Shares to Lilly and
as promptly as practicable to pay the aggregate Purchase Price to Holder.
(f) Partial Exercise. If the number of Subject Shares being sold by a
----------------
Holder pursuant to a Put Exercise Notice is less than the number of shares
represented by the relevant stock certificate held in escrow under the Escrow
Agreement, Lilly and IMS will cause a new certificate for the remaining shares
to be issued in the name of such Holder and deposited in such escrow. Holder
will, if so requested by Lilly, execute and deliver to Lilly prior to the
purchase date under the Put Exercise Notice an undated stock power endorsed in
blank relating to such remaining shares, and Lilly will deposit such stock power
into the escrow.
2. CALL RIGHT. (a) Grant. Holder hereby grants to Lilly, subject
---------- -----
to the terms and conditions of this Agreement, the right to require Holder to
sell any or all of the Subject Shares to Lilly (or its designee(s)) at the
Purchase Price (the "Call Right").
(b) Call. Lilly may exercise the Call Right in whole at any time or
----
in part from time to time after the third anniversary of the Merger by giving
notice to Holder specifying the number of Subject Shares to be purchased and the
scheduled date of purchase, which date shall be at least 10 days after the date
such notice is given. Lilly may revoke such notice, or may defer the scheduled
date of purchase, by giving notice to Holder at any time prior to Lilly's
purchase of Subject Shares pursuant to the Call notice. On the purchase date,
Lilly shall deliver to the Agent a Call Purchase Certificate executed on behalf
of Lilly by an officer or other authorized signatory that shall state:
(1) Lilly has exercised its Call Right in compliance with this
Agreement;
(2) Such exercise has not been revoked;
(3) The number of Subject Shares being purchased pursuant to such
exercise;
(4) The aggregate Purchase Price of such Subject Shares (net of any
applicable taxes to be withheld pursuant to Section 3 below); and
4
(5) The name of Holder and the address to which payment for the
aggregate Purchase Price should be mailed (or otherwise delivered in
accordance with Holder's instructions received by Lilly at least three
business days prior to the scheduled date of purchase);
and shall deposit with the Agent funds sufficient to pay the aggregate Purchase
Price for such Subject Shares, and shall instruct the Agent to release the
certificates and related stock powers for such Subject Shares to Lilly and as
promptly as practicable to pay the aggregate Purchase Price to Holder.
3. PURCHASE PRICE. The Purchase Price shall be $8.00 per Subject
--------------
Share, plus any unpaid dividends accrued to the date on which Lilly deposits
funds with the Agent sufficient to pay the Purchase Price, but less any delivery
expenses to be charged to Holder in accordance with Section 1(d)(v) above. If
the IMS Preferred Stock shall be split or combined, the Purchase Price shall be
appropriately adjusted. The Purchase Price shall be paid by issuance of the
Agent's check, payable to Holder's order in New York Clearing House (next day)
funds. Lilly shall be entitled to deduct and withhold from the Purchase Price
such amounts as Lilly is required to deduct and withhold with respect to the
making of such payment under the Internal Revenue Code, or any provision of
state, local or foreign tax law. To the extent that amounts are so withheld by
Lilly, such withheld amounts shall be treated for all purposes of this Agreement
as having been paid to Holder.
4. ESCROW. (a) The parties hereto agree that the Agent will be a
------
bank or trust company with capital surplus and undivided profits of at least
$100 million and with offices located in New York City, Chicago or Denver (which
bank or trust company also may be the transfer agent and/or paying agent for the
New Preferred Stock), such Agent to be selected by Lilly and be reasonably
acceptable to IMS.
(b) Escrow of Merger Shares. Holder is executing and delivering to
-----------------------
IMS an undated stock power endorsed in blank relating to the portion of the
Merger Shares subject to the rights herein provided. Holder hereby authorizes
IMS to, and IMS will promptly following the Merger, insert into the stock power
the certificate numbers of the stock certificates representing such Merger
Shares and deliver to the Agent the certificates for such Merger Shares,
together with the stock power, to be held, and be subject to release, in
accordance with the Escrow Agreement.
(c) Escrow of Additional Shares. If Holder acquires any Additional
---------------------------
Shares subject to the rights herein provided, Holder agrees that Holder will
cause the
5
certificates for such Additional Shares and, if there are not already on deposit
in the escrow sufficient appropriate stock powers, an undated stock power
endorsed in blank relating to such Additional Shares to be delivered to the
Agent to be held, and be subject to release, in accordance with the Escrow
Agreement. Holder hereby authorizes IMS to cause any certificates for such
Additional Shares to be delivered directly to the Agent.
5. TRANSFERS OF SUBJECT SHARES. Holder shall have the right to
---------------------------
sell, assign, donate, pledge or otherwise transfer or encumber any or all of the
Subject Shares and any related rights and obligations under this Agreement only
with Lilly's prior written consent (any transfer or encumbrance being herein
called a "transfer"). Lilly will grant such consent provided that:
(a) the transferee shall have executed and delivered an agreement
reasonably satisfactory to Lilly confirming that the Subject Shares being
transferred will remain subject to this Agreement, including, without
limitation, the Call Right;
(b) the certificates for the Subject Shares being transferred are or
remain deposited in the escrow with the Agent and the transferee shall have
executed and delivered to the Agent an undated stock power endorsed in blank
regarding those Subject Shares; provided, however, that if Holder wishes to make
a bona fide pledge to a bank, financial institution or brokerage firm, Lilly
will consent to the pledge and to the release from escrow and delivery to the
pledgee of the related stock certificates and stock powers provided the pledgee
shall have executed and delivered an agreement (which shall satisfy clause (a)
above) reasonably satisfactory to Lilly confirming that the pledged shares will
remain subject to this Agreement and that upon release of the pledge the pledged
shares will be returned to the Agent for deposit in the escrow and that upon any
exercise of the Call Right the certificates and stock powers for the pledged
shares will be delivered to Lilly, free and clear of the pledge or any claim or
encumbrance created thereby; and
(c) Lilly is reasonably satisfied that the transfer (i) will comply
with all applicable Federal and state securities laws and other applicable legal
requirements and (ii) will not result in the outstanding New Preferred Stock
being held of record by 500 or more persons within the meaning of Section 12(g)
of the Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder.
6
6. LEGENDS. Each certificate representing the Subject Shares shall
-------
bear the following legend:
"The shares represented hereby are subject to (i) redemption by the
Corporation during the periods, at the prices and on the terms and
conditions specified in the Articles of Incorporation, (ii) an option
on the part of the holder to require Eli Lilly and Company to
purchase, and an option on the part of Eli Lilly and Company to
require the holder to sell, such shares, at the times and at the
prices and on the terms and conditions specified in a Put/Call
Agreement and a related Escrow Agreement, both dated as of ________,
1995, copies of which are available for inspection at the
Corporation's executive offices. These shares are not transferrable
except as provided in the Put/Call Agreement."
7. NO RESTRICTIONS ON LILLY. (a) Holder hereby acknowledges that
------------------------
the existence of the Put Right and the Call Right will not impair or restrict in
any way Lilly's right, following the Merger, to transfer all or any of its
interest in IMS or to cause IMS to merge, sell its assets or engage in other
extraordinary transactions, including, without limitation, transactions that
would result in the cashing out of the New Preferred Stock or the exchange of
the New Preferred Stock for other securities, except that prior to the third
anniversary of the Merger Lilly will not cause IMS to engage in a merger or
other extraordinary transaction that would result in Holder's being deemed for
Federal income tax purposes to have sold Subject Shares in such merger or other
extraordinary transaction. Lilly represents that, as of this Agreement, it has
no present intention to cause IMS to engage in such a merger or other
extraordinary transaction prior to the fifth anniversary of the Merger.
(b) If pursuant to a merger, consolidation, recapitalization,
reorganization, sale of substantially all of the assets or other such
transaction involving IMS, the outstanding shares of New Preferred Stock are
converted into or exchanged for cash, property or securities of IMS or any other
issuer, then the Put Right and the Call Right shall apply to such cash, property
or securities and the Purchase Price and other terms hereof shall be subject to
appropriate adjustment, so as to preserve unchanged to the fullest extent
possible the rights and obligations of the parties to this Agreement.
7
8. REPRESENTATIONS AND WARRANTIES.
------------------------------
(a) By Holder. Holder hereby represents and warrants to Lilly
---------
and IMS as follows:
(i) Holder has full power and authority to enter into, and to carry
out Holder's obligations under, this Agreement and the Escrow Agreement, and
Holder has duly executed and delivered this Agreement and the Escrow Agreement,
which constitute valid, legally binding and enforceable obligations of Holder;
(ii) Holder is the sole record owner and, except in the case of a
Holder who holds as a trustee, is the sole beneficial owner, of the number of
shares of Common Stock or Series B Preferred Stock of IMS, and has the right to
acquire the number of additional shares, specified on the signature page hereof,
subject to no lien, security interest, proxy or other right, claim or interest
of any third party; and
(iii) upon delivery of certificates and stock powers to Lilly
and payment by Lilly therefor as contemplated hereby, Lilly will become the sole
beneficial and record owner of the Subject Shares, subject to no lien, security
interest, proxy or other right, claim of interest of Holder or any other person
or entity.
(b) By Lilly and IMS. Lilly and IMS each hereby represents and
----------------
warrants to Holder that the warranting party has full corporate power and
authority to enter into, and to carry out its obligations under, this Agreement
and the Escrow Agreement, which constitute its valid, legally binding and
enforceable obligations.
9. NOTICES. All notices, requests, demands, consents and other
-------
communications required or permitted to be given or made hereunder shall be in
writing and shall be deemed to have been duly given or made if delivered
personally, or sent by reputable overnight courier delivery or by telecopy or
similar facsimile transmission, or mailed by prepaid registered or certified
mail, return receipt requested, to Holder at the address specified on the
signature page hereto or to Lilly or IMS at the address set forth below (or in
any such case to such other address as a party shall designate for itself by
notice given or made in accordance herewith);
8
Eli Lilly and Company
Lilly Corporate Center
Indianapolis, Indiana 46285
Attention: General Counsel
Integrated Medical Systems, Inc.
15000 West Sixth Avenue, Suite 400
Golden, Colorado 80401
Any such notice, request or other communication shall be deemed delivered and
given or made on the third business day after the date of mailing, if mailed by
registered or certified mail, or on the first business day after date of
transmittal, if sent by courier delivery or by telecopy or similar facsimile
transmission, or on the date of delivery, if delivered personally.
Notwithstanding the foregoing, a Put Exercise Notice shall not be deemed given
or delivered, and no revocation of a Put Exercise Notice pursuant to Section
1(b) above or change of payment delivery instructions shall be deemed given or
delivered, until it is actually delivered to Lilly during the applicable time
period, unless Lilly elects to waive such requirement.
10. ASSIGNMENT. This Agreement shall not be assignable by Holder
----------
except that rights and obligations relating to Subject Shares may be assigned to
a transferee of those Subject Shares pursuant to Section 5 above. This
Agreement shall be assignable in whole at any time or in part from time to time
by Lilly and IMS. Following any assignment, the assignor shall remain liable
for the performance of the assignor's obligations under this Agreement. Subject
to the foregoing, the terms and provisions of this Agreement shall be binding
upon and inure to the benefit of and be enforceable by the parties and their
respective heirs, beneficiaries, representatives, successors and permitted
assigns.
11. WAIVER, AMENDMENT, ETC. None of the terms or provisions of this
----------------------
Agreement may be waived, altered, modified or amended except by a writing duly
signed by Holder, Lilly and IMS.
12. EXECUTION IN COUNTERPARTS. This Agreement may be executed in two
-------------------------
or more counterparts, each of which shall be deemed an original and all of which
counterparts taken together shall constitute one and the same instrument.
13. GOVERNING LAW. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws in effect in the State of Colorado
without giving effect to its conflicts of law principles.
9
14. SUBMISSION TO JURISDICTION. The parties hereto irrevocably
--------------------------
submit to the jurisdiction of any state or federal court sitting in the State of
Colorado over any action or proceeding arising out of this Agreement, and hereby
irrevocably agree that all claims in respect of such action or proceeding may be
heard and determined in such state or federal court. Each of the parties hereby
irrevocably waives, to the fullest extent such party may effectively do so, the
defense of an inconvenient forum to the maintenance of such action or
proceeding. The parties irrevocably consent to the service of any and all
process in any such action or proceeding by the mailing of copies of such
process to each of them at their respective addresses for notices pursuant to
Section 9 above. Nothing in this Section 14 shall affect the right of any party
to serve legal process in any other manner permitted by law or affect the right
of any party, assuming proper jurisdiction exists, to bring any action or
proceeding against any party in the courts of any other jurisdiction.
15. EFFECT OF HEADINGS. The section headings in this Agreement are
------------------
for convenience only and shall not affect the construction hereof.
10
[Signature Page for Holder]
___________________________________
(name of Holder)
___________________________________
(signature of Holder)
Address:
Number of Shares
----------------
Right Right
to Acquire to Acquire
Owned Under Options Under Warrants
----- ------------- --------------
Common Stock
Series B Preferred Stock
Number of Shares
To Be Acquired in Merger
------------------------
Under Under
Owned Options Warrants
----- ------- --------
Series D Preferred Stock
Number of Shares of
Series D Preferred Stock
Subject to Put/Call
------------------------
Under Under
Owned Options Warrants
----- ------- --------
Series D Preferred Stock
11
[Signature Page for Lilly and IMS]
ELI LILLY AND COMPANY
By_______________________________
INTEGRATED MEDICAL SYSTEMS, INC.
By_______________________________
12
EXHIBIT A
ESCROW AGREEMENT
This Escrow Agreement, dated as of ______________, 1995, by and among Eli
Lilly and Company, an Indiana corporation ("Lilly"), Integrated Medical Systems,
Inc., a Colorado corporation ("IMS"), one or more shareholders of IMS identified
on the signature pages hereof ("Holders") and _________________, a
_______________ (the "Escrow Agent").
PRELIMINARY STATEMENT
---------------------
Each Holder is the owner of shares of Common Stock or Series B Preferred
Stock of IMS, or is the owner of rights to acquire such shares pursuant to
options or warrants or the conversion of convertible securities.
Pursuant to an Agreement and Plan of Merger, dated as of August 2, 1995
(the "Merger Agreement"), following approval by the IMS shareholders, a
subsidiary of Lilly has been or will be merged into IMS (the "Merger"), and upon
the Merger the outstanding shares of Common Stock and certain outstanding shares
of Series B Preferred Stock of IMS have been or will be converted into cash or
shares of Series D Preferred Stock of IMS (the "New Preferred Stock"). In
addition, rights to acquire Common Stock of IMS pursuant to
options or warrants or the conversion of Series B Preferred Stock have or will
become rights to acquire New
Preferred Stock.
Lilly, IMS and Holders have entered into Put/Call Agreements pursuant to
which Holders and Lilly have granted each other certain rights regarding the
possible future purchase of some or all of the New Preferred Stock that such
Holders may acquire (the "Subject Shares").
Lilly, IMS and Holders desire that the stock certificates and related stock
powers for the Subject Shares be held in escrow pending the possible purchase
thereof pursuant to the Put/Call Agreements.
AGREEMENT
---------
Section 1. Establishment of Escrow.
-----------------------
Lilly, IMS or any Holder may from time to time deliver to the Escrow
Agent certificates representing Subject Shares registered in the name of Holder
and undated stock powers endorsed in blank by such Holder relating to those
Subject Shares (such certificates and stock powers are herein called "Escrowed
Shares"). Escrowed Shares shall be held, administered and disposed of by the
Escrow Agent in accordance with the terms and conditions of this Escrow
2
Agreement. The Escrow Agent shall deliver promptly to Lilly and IMS written
notice of the receipt by the Escrow Agent of any Escrowed Shares that are
delivered by a Holder rather than by Lilly or IMS.
Section 2. Custody and Release.
-------------------
(a) The Escrow Agent shall act as custodian of the Escrowed Shares.
(b) Upon delivery by Lilly to the Escrow Agent of one or more Put
Purchase Certificates or Call Purchase Certificates, together with funds
sufficient to pay the aggregate Purchase Price for the Escrowed Shares specified
in such Certificates, the Escrow Agent shall immediately release such Escrowed
Shares to Lilly. In addition, the Escrow Agent shall as promptly as
practicable, and in any event not later than five business days after Lilly
delivery of such Certificates, issue its checks payable to the order of the
Holders specified in the Put Purchase Certificates or Call Purchase
Certificates. Such checks shall be in New York Clearing House funds and shall
be sent to the addresses and in the manner specified in the applicable Put
Purchase Certificates or Call Purchase Certificates. As used in this Escrow
Agreement, a Put Purchase Certificate shall mean a properly executed Certificate
substantially in the form of Exhibit 1 attached hereto, and a Call Purchase
Certificate
3
shall mean a properly executed Certificate substantially in the form of Exhibit
2 attached hereto.
(c) Upon delivery to the Escrow Agent of instructions signed by Lilly
and any Holder to release any Escrowed Shares held of record by such Holder, the
Escrow Agent shall immediately release such Escrowed Shares to such Holder in
accordance with such instructions.
(d) If for any reason the Escrow Agreement has not been terminated by
December 31, 2001, the Escrow Agent shall release promptly all Escrowed Shares
to the respective Holders who are the record owners thereof.
[add boilerplate per form of escrow agreement to be provided by the
Agent and reasonably satisfactory to Lilly and IMS]
4
Exhibit 1
PUT PURCHASE CERTIFICATE
------------------------
Eli Lilly and Company ("Lilly") hereby certifies to ___________, as Agent
under the Escrow Agreement dated ___________________, 1995 as follows:
1. Lilly has received Put Exercise Notices executed by Holders
pursuant to Section 1(d) of the Put/Call Agreement, dated __________, 1995
(the "Agreement"), as specified on Attachment 1 hereto;
2. Such Put Exercise Notices have not been revoked;
3. The number of Subject Shares being sold by each Holder pursuant to
such Put Exercise Notices is specified on Attachment 1 hereto, and the
aggregate number of Subject Shares being sold by all such Holders is
________________;
4. The Purchase Price of the Subject Shares (net of any applicable
taxes to be withheld pursuant to Section 3 of the Agreement) being sold by
each such Holder is specified on Attachment 1 hereto, and the aggregate
purchase price (net of such taxes) for all such Subject Shares is
$_________; and
5. The names of the Holders and the addresses to which payment for
the Purchase Price should be mailed (or otherwise delivered in accordance
with instructions as specified in the applicable Put Exercise Notice) are
set forth on Attachment 1 hereto.
Upon Agent's receipt of funds sufficient to pay the aggregate Purchase
Price for the aforesaid Subject Shares, Agent is hereby instructed to release
the certificates and related stock powers for such Subject Shares to Lilly and
as promptly as practicable to pay the Purchase Price to the Holders in
accordance with clause 5 above.
IN WITNESS WHEREOF, Lilly has executed this Certificate on
______________, 199_.
ELI LILLY AND COMPANY
By_______________________
2
Attachment 1
------------
Number of
Name and Address*# Shares Being Purchase
of Holder Sold Price
------------------ ------------ --------
________________________
* Address to which payment should be mailed
# [Any special delivery instructions to be noted here]
A-1
Appendix C
----------
August 2, 1995
The Board of Directors
Integrated Medical Systems, Inc.
15000 West 6th Avenue
Suite 400
Golden, Colorado 80401
Members of the Board:
You have requested our opinion as to the fairness, from a financial
point of view, of the consideration to be offered to the holders of the common
stock of Integrated Medical Systems, Inc. (the "Company"), other than Eli Lilly
and Company and its subsidiaries (collectively, "Lilly"), and the holders of the
Series B Preferred Stock of the Company (the holders of common stock and Series
B Preferred Stock of the Company, other than Lilly, are hereinafter collectively
referred to as the "Majority Shareholders"), pursuant to the Agreement and Plan
of Merger, dated as of July 31, 1995, by and among Eli Lilly and Company, Trans-
IMS Corporation (the "Subsidiary") and the Company (together with the exhibits
thereto, the "Merger Agreement"), As more fully described in the Merger
Agreement, and subject to the terms and conditions specified therein, the
Subsidiary shall be merged with and into the Company (the "Merger") and (a) each
holder of common stock of the Company (other than Lilly) will have the
opportunity to elect to receive, for each share held, either $8.00 in cash or
one share of newly issued Series D Preferred Stock ("Series D Preferred Stock")
of the Company and (b) each holder of Series B Preferred Stock of the Company
will have the opportunity to elect to receive, for each share held, either $5.33
in cash or 2/3 of a share of Series D Preferred Stock, in each case subject to
dissenters' appraisal rights (such cash elections and stock elections to be
offered to such shareholders pursuant to the Merger Agreement are hereinafter
collectively referred to as the "Merger Consideration").
The Board of Directors
Integrated Medical Systems, Inc.
August 2, 1995
Page 2
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of the Company concerning the business, operations and prospects of
the Company. We participated in discussions and negotiations among
representatives of the Company and Lilly and their financial and legal advisors.
We examined certain business and financial information relating to the Company
as well as certain financial forecasts and other data which were provided to us
by the management of the Company. We reviewed the financial terms of the Merger
Consideration in relation to, among other things, the Company's historical and
projected earnings and the capitalization and financial condition of the
Company. We also considered, to the extent publicly available, the financial
terms of certain other transactions which we deemed comparable to the Merger and
analyzed certain financial and other publicly available information relating to
the businesses of other companies whose operations we considered comparable to
the Company. In addition, we conducted such other analyses and examinations and
considered such other financial, economic and market criteria as we deemed
necessary to arrive at our opinion.
In rendering our opinion, we have assumed and relied upon, without
independent verification, the accuracy and completeness of all financial and
other information publicly available or furnished to or otherwise reviewed by or
discussed with us. Except as described above, we have not conducted any review
or investigation of the Company or Lilly. With respect to financial forecasts
and other information provided to or otherwise reviewed by or discussed with us,
we assumed that such forecasts and other information were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
management of the Company as to the expected future financial performance of the
Company. We have not made or been provided with an independent valuation or
appraisal of the assets, liabilities (contingent or otherwise) or reserves of
the Company nor have we made any physical inspection of the properties or assets
of the Company. We have assumed the correctness of and relied upon the
representations and warranties of the Company, the Subsidiary and Eli Lilly and
Company in the Merger Agreement and have not attempted to independently verify
the same. We were not asked to, and did not, solicit acquisition proposals from
any third parties. Our opinion is necessarily based upon information available
to us, and financial, stock market and other conditions and circumstances
existing and disclosed to us, as of the date hereof.
The Board of Directors
Integrated Medical Systems, Inc.
August 2, 1995
Page 3
Our opinion does not address the relative merits of the Merger as
compared to any alternative business strategies that might exist for the Company
or the effect of any other transaction in which the Company may engage.
We were not asked to, and do not, express any opinion as to the relative
merits of receiving the cash consideration or the stock consideration in the
Merger and accordingly, this opinion is not intended to be and shall not be
deemed to be a recommendation to any shareholder as to whether or not to make a
cash election. In addition, we were not asked to, and do not, express any
opinion as to (a) what the value of the Series D Preferred Stock actually will
be when issued to shareholders of the Company pursuant to the Merger - or the
price at which the Series D Preferred Stock will trade, if at all, subsequent to
the Merger, (b) any election by any shareholder of the Company to retain
shares of Series B Preferred Stock of the Company or (c) the relative fairness
of the Merger to the holders of the common stock of the Company and the holders
of the Series B Preferred Stock of the Company.
Smith Barney has been engaged to render financial advisory services
to the Company in connection with the Merger and will receive a fee for our
services, a significant portion of which is contingent upon completion of the
Merger. We will also receive a fee upon delivery of this opinion. In the
regular course of our business, we and our affiliates may actively trade the
equity and debt securities of Lilly for our own account or for the account of
our customers and, accordingly, may at any time hold a long or short
position in such securities. In addition, we and our affiliates (including The
Travelers Inc. and its affiliates) may maintain business relationships with the
Company, Lilly and their affiliates.
Our advisory services, and the opinion expressed herein, are provided
solely for the use of the Company (including its Board of Directors) in its
evaluation of the proposed Merger and are not on behalf of, and are not intended
to confer rights or remedies upon, Lilly, any stockholder of the Company or
Lilly, or any person other than the Board of Directors or the Company. Our
opinion may not be published or otherwise used or referred to, nor shall any
public reference to Smith Barney be made, without our prior written consent,
except that we consent to disclosure of this opinion in the proxy statement
relating to the Merger so long as such disclosure is provided to us and our
counsel for review and comment prior to its publication. This opinion is not
intended to be and shall not be deemed to be a recommendation to any stockholder
of the Company to vote in favor of the Merger.
The Board of Directors
Integrated Medical Systems, Inc.
August 2, 1995
Page 4
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Merger Consideration to be
offered to the Majority Shareholders pursuant to the Merger Agreement is fair,
from a financial point of view, to the Majority Shareholders.
Very truly yours,
SMITH BARNEY INC.
APPENDIX D
COLORADO BUSINESS CORPORATION ACT
ARTICLE 113
DISSENTERS' RIGHTS
PART 1
RIGHT OF DISSENT--PAYMENT FOR SHARES
7-113-101 DEFINITIONS.--For purposes of this article:
(1) "Beneficial shareholder" means the beneficial owner of shares held in a
voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring domestic or foreign
corporation, by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 7-113-102 and who exercises that right at the
time and in the manner required by part 2 of this article.
(4) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action except to the extent that exclusion would
be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at the legal rate as
specified in section 5-12-101, C.R.S.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
that are registered in the name of a nominee to the extent such owner is
recognized by the corporation as the shareholder as provided in section 7-107-
204.
(7) "Shareholder" means either a record shareholder or a beneficial
shareholder.
7-113-102 RIGHT TO DISSENT.--(1) A shareholder, whether or not entitled
to vote, is entitled to dissent and obtain payment of the fair value of his or
her shares in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party
if:
(I) Approval by the shareholders of that corporation is required for the
merger by section 7-111-103 or 7-111-104 or by the articles of incorporation, or
COLORADO BUSINESS CORPORATION ACT
(II) The corporation is a subsidiary that is merged with its parent
corporation under section 7-111-104;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired;
(c) Consummation of a sale, lease, exchange, or other disposition of all,
or substantially all, of the property of the corporation for which a shareholder
vote is required under section 7-112-102(1); and
(d) Consummation of a sale, lease, exchange, or other disposition of all,
or substantially all, of the property of an entity controlled by the corporation
if the shareholders of the corporation were entitled to vote upon the consent of
the corporation to the disposition pursuant to section 7-112-102(2).
(2) A shareholder, whether or not entitled to vote, is entitled to dissent
and obtain payment of the fair value of the shareholder's shares in the event
of:
(a) An amendment to the articles of incorporation that materially and
adversely affects rights in respect of the shares because it:
(I) Alters or abolishes a preferential right of the shares; or
(II) Creates, alters, or abolishes a right in respect of redemption of the
shares, including a provision respecting a sinking fund for their redemption or
repurchase; or
(b) An amendment to the articles of incorporation that affects rights in
respect of the shares because it:
(I) Excludes or limits the right of the shares to vote on any matter, or to
cumulate votes, other than a limitation by dilution through issuance of shares
or other securities with similar voting rights; or
(II) Reduces the number of shares owned by the shareholder to a fraction of
a share or to scrip if the fractional share or scrip so created is to be
acquired for cash or the scrip is to be voided under section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair
value of the shareholder's shares in the event of any corporate action to the
extent provided by the bylaws or a resolution of the board of directors.
(4) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this article may not challenge the corporate action
creating such entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
2
COLORADO BUSINESS CORPORATION ACT
7-113-103 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.--(1) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the record shareholder's name only if the record shareholder
dissents with respect to all shares beneficially owned by any one person and
causes the corporation to receive written notice which states such dissent and
the name, address, and federal taxpayer identification number, if any, of each
person on whose behalf the record shareholder asserts dissenters' rights. The
rights of a record shareholder under this subsection (1) are determined as if
the shares as to which the record shareholder dissents and the other shares of
the record shareholder were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder causes the corporation to receive the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder dissents with respect to all shares
beneficially owned by the beneficial shareholder.
(3) The corporation may require that, when a record shareholder dissents
with respect to the shares held by any one or more beneficial shareholders, each
such beneficial shareholder must certify to the corporation that the beneficial
shareholder and the record shareholder or record shareholders of all shares
owned beneficially by the beneficial shareholder have asserted, or will timely
assert, dissenters' rights as to all such shares as to which there is no
limitation on the ability to exercise dissenters' rights. Any such requirement
shall be stated in the dissenters' notice given pursuant to section 7-113-203.
PART 2
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
7-113-201 NOTICE OF DISSENTERS' RIGHTS.--(1) If a proposed corporate
action creating dissenters' rights under section 7-113-102 is submitted to a
vote at a shareholders' meeting, the notice of the meeting shall be given to all
shareholders, whether or not entitled to vote. The notice shall state that
shareholders are or may be entitled to assert dissenters' rights under this
article and shall be accompanied by a copy of this article and the materials, if
any, that, under articles 101 to 117 of this title, are required to be given to
shareholders entitled to vote on the proposed action at the meeting. Failure to
give notice as provided by this subsection (1) to shareholders not entitled to
vote shall not affect any action taken at the shareholders' meeting for which
the notice was to have been given.
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104, any written or oral solicitation of a shareholder to execute
a writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or
3
COLORADO BUSINESS CORPORATION ACT
may be entitled to assert dissenters' rights under this article, by a copy of
this article, and by the materials, if any, that, under articles 101 to 117 of
this title, would have been required to be given to shareholders entitled to
vote on the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection
(2) to shareholders not entitled to vote shall not affect any action taken
pursuant to section 7-107-104 for which the notice was to have been given.
7-113-202 NOTICE OF INTENT TO DEMAND PAYMENT.--(1) If a proposed
corporate action creating dissenters' rights under section 7-113-102 is
submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights shall:
(a) Cause the corporation to receive, before the vote is taken, written
notice of the shareholder's intention to demand payment for the shareholder's
shares if the proposed corporate action is effectuated; and
(b) Not vote the shares in favor of the proposed corporate action.
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104, a shareholder who wishes to assert dissenters' rights shall
not execute a writing consenting to the proposed corporate action.
(3) A shareholder who does not satisfy the requirements of subsection (1)
or (2) of this section is not entitled to demand payment for the shareholder's
shares under this article.
7-113-203 DISSENTERS' NOTICE.--(1) If a proposed corporate action
creating dissenters' rights under section 7-113-102 is authorized, the
corporation shall give a written dissenters' notice to all shareholders who are
entitled to demand payment for their shares under this article.
(2) The dissenters' notice required by subsection (1) of this section shall
be given no later than ten days after the effective date of the corporate action
creating dissenters' rights under section 7-113-102 and shall:
(a) State that the corporate action was authorized and state the effective
date or proposed effective date of the corporate action;
(b) State an address at which the corporation will receive payment demands
and the address of a place where certificates for certificated shares must be
deposited;
(c) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(d) Supply a form for demanding payment, which form shall request a
dissenter to state an address to which payment is to be made;
4
COLORADO BUSINESS CORPORATION ACT
(e) Set the date by which the corporation must receive the payment demand
and certificates for certificated shares, which date shall not be less than
thirty days after the date the notice required by subsection (1) of this section
is given;
(f) State the requirement contemplated in section 7-113-103(3), if such
requirement is imposed; and
(g) Be accompanied by a copy of this article.
7-113-204 PROCEDURE TO DEMAND PAYMENT.--(1) A shareholder who is given a
dissenters' notice pursuant to section 7-113-203 and who wishes to assert
dissenters' rights shall, in accordance with the terms of the dissenters'
notice:
(a) Cause the corporation to receive a payment demand, which may be the
payment demand form contemplated in section 7-113-203(2)(d), duly completed, or
may be stated in another writing; and
(b) Deposit the shareholder's certificates for certificated shares.
(2) A shareholder who demands payment in accordance with subsection (1) of
this section retains all rights of a shareholder, except the right to transfer
the shares, until the effective date of the proposed corporate action giving
rise to the shareholder's exercise of dissenters' rights and has only the right
to receive payment for the shares after the effective date of such corporate
action.
(3) Except as provided in section 7-113-207 or 7-113-209(1)(b), the demand
for payment and deposit of certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the shareholder's
share certificates as required by the date or dates set in the dissenters'
notice is not entitled to payment for the shares under this article.
7-113-205 UNCERTIFICATED SHARES.--(1) Upon receipt of a demand for
payment under section 7-113-204 from a shareholder holding uncertificated
shares, and in lieu of the deposit of certificates representing the shares, the
corporation may restrict the transfer thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
7-113-206 PAYMENT.--(1) Except as provided in section 7-113-208, upon the
effective date of the corporate action creating dissenters' rights under section
7-113-102 or upon receipt of a payment demand pursuant to section 7-113-204,
whichever is later, the corporation shall pay each dissenter who complied with
section 7-113-204, at the address stated in the payment demand, or if no such
address is stated in the payment demand, at the address shown on the
corporation's current record of shareholders for the record shareholder holding
the dissenter's
5
COLORADO BUSINESS CORPORATION ACT
shares, the amount the corporation estimates to be the fair value of the
dissenter's shares, plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall be
accompanied by:
(a) The corporation's balance sheet as of the end of its most recent fiscal
year or, if that is not available, the corporation's balance sheet as of the end
of a fiscal year ending not more than sixteen months before the date of payment,
an income statement for that year, and, if the corporation customarily provides
such statements to shareholders, a statement of changes in shareholders' equity
for that year and a statement of cash flow for that year, which balance sheet
and statements shall have been audited if the corporation customarily provides
audited financial statements to shareholders, as well as the latest available
financial statements, if any, for the interim or full-year period, which
financial statements need not be audited;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under section 7-
113-209; and
(e) A copy of this article.
7-113-207 FAILURE TO TAKE ACTION.--(1) If the effective date of the
corporate action creating dissenters' rights under section 7-113-102 does not
occur within sixty days after the date set by the corporation by which the
corporation must receive the payment demand as provided in section 7-113-203,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(2) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 occurs more than sixty days after the date set by
the corporation by which the corporation must receive the payment demand as
provided in section 7-113-203, then the corporation shall send a new dissenters'
notice, as provided in section 7-113-203, and the provisions of sections 7-113-
204 to 7-113-209 shall again be applicable.
7-113-208 SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER
ANNOUNCEMENT OF PROPOSED CORPORATE ACTION.--(1) The corporation may, in or with
the dissenters' notice given pursuant to section 7-113-203, state the date of
the first announcement to news media or to shareholders of the terms of the
proposed corporate action creating dissenters' rights under section 7-113-102
and state that the dissenter shall certify in writing, in or with the
dissenter's payment demand under section 7-113-204, whether or not the dissenter
(or the person on whose behalf dissenters' rights are asserted) acquired
beneficial ownership of the shares before that date. With respect to any
dissenter who does not so certify in writing, in or with the payment demand,
that the dissenter or the person on whose behalf the dissenter asserts
dissenters' rights acquired beneficial ownership of the shares before such date,
6
COLORADO BUSINESS CORPORATION ACT
the corporation may, in lieu of making the payment provided in section 7-113-
206, offer to make such payment if the dissenter agrees to accept it in full
satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by section 7-113-206(2).
7-113-209 PROCEDURE IF DISSENTER IS DISSATISFIED WITH PAYMENT OR OFFER.--
(1) A dissenter may give notice to the corporation in writing of the
dissenter's estimate of the fair value of the dissenter's shares and of the
amount of interest due and may demand payment of such estimate, less any payment
made under section 7-113-206, or reject the corporation's offer under section 7-
113-208 and demand payment of the fair value of the shares and interest due, if:
(a) The dissenter believes that the amount paid under section 7-113-206 or
offered under section 7-113-208 is less than the fair value of the shares or
that the interest due was incorrectly calculated;
(b) The corporation fails to make payment under section 7-113-206 within
sixty days after the date set by the corporation by which the corporation must
receive the payment demand; or
(c) The corporation does not return the deposited certificates or release
the transfer restrictions imposed on uncertificated shares as required by
section 7-113-207(1).
(2) A dissenter waives the right to demand payment under this section
unless the dissenter causes the corporation to receive the notice required by
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
PART 3
JUDICIAL APPRAISAL OF SHARES
7-113-301 COURT ACTION.--(1) If a demand for payment under section 7-113-
209 remains unresolved, the corporation may, within sixty days after receiving
the payment demand, commence a proceeding and petition the court to determine
the fair value of the shares and accrued interest. If the corporation does not
commence the proceeding within the sixty-day period, it shall pay to each
dissenter whose demand remains unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in subsection
(1) of this section in the district court of the county in this state where the
corporation's principal office is located or, if it has no principal office in
this state, in the district court of the county in which its registered office
is located. If the corporation is a foreign corporation without a registered
office in this state, it shall commence the proceeding in the county in this
state where the registered office of the domestic corporation merged into, or
whose shares were acquired by, the foreign corporation was located.
7
COLORADO BUSINESS CORPORATION ACT
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unresolved parties to the proceeding commenced
under subsection (2) of this section as in an action against their shares, and
all parties shall be served with a copy of the petition. Service on each
dissenter shall be by registered or certified mall, to the address stated in
such dissenter's payment demand, or if no such address is stated in the payment
demand, at the address shown on the corporation s current record of shareholders
for the record shareholder holding the dissenter's shares, or as provided by
law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to such order. The
parties to the proceeding are entitled to the same discovery rights as parties
in other civil proceedings.
(5) Each dissenter made a party to the proceeding commenced under
subsection (2) of this section is entitled to judgment for the amount, if any,
by which the court finds the fair value of the dissenter's shares, plus
interest, exceeds the amount paid by the corporation, or for the fair value,
plus interest, of the dissenter's shares for which the corporation elected to
withhold payment under section 7-113-208.
7-113-302 COURT COSTS AND COUNSEL FEES.--(1) The court in an appraisal
proceeding commenced under section 7-113-301 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation; except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under section 7-113-209.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any dissenters if the court
finds the corporation did not substantially comply with the requirements of part
2 of this article; or
(b) Against either the corporation or one or more dissenters, in favor of
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to said counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefitted.
8
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Eli Lilly and Company
Sections 23-1-37-1 to 23-1-37-15 of the Indiana Business
Corporation Law give Indiana corporations broad powers to indemnify
their directors and officers and those of affiliated corporations
against liability incurred in any proceeding to which they are made
parties by reason of being or having been such directors or officers,
subject to specified conditions and exclusions; authorizes the payment
for or reimbursement of reasonable expenses incurred by such persons in
such proceedings; gives a director or officer who successfully defends
a proceeding the right to be so indemnified; and authorizes Indiana
corporations to buy directors' and officers' liability insurance. Such
indemnification is not exclusive of any other rights to which those
indemnified may be entitled under the corporation's articles of
incorporation or by-laws, resolution of the board of directors or
stockholders or otherwise.
Article 12(g) of the Amended Articles of Incorporation
of Lilly provides as follows:
"The Corporation shall indemnify each person who is or was a
director, officer or employee of the Corporation, or of any other
corporation which he is serving or served in any capacity at the
request of the Corporation, against any and all liability and
reasonable expense that may be incurred by him in connection with or
resulting from any claim, action, suit, or proceeding (whether actual
or threatened, brought by or in the right of the Corporation or such
other corporation or otherwise, civil, criminal, administrative,
investigative, or in connection with an appeal relating thereto), in
which he may become involved, as a party or otherwise, by reason of his
being or having been a director, officer, or employee of the
Corporation or of such other corporation, or by reason of any past or
future action taken or not taken in his capacity as such director,
officer, or employee, whether or not he continues to be such at the
time such liability or expense is incurred, provided such person acted
--------
in good faith, in what he reasonably believed to be the best interests
of the Corporation or such other corporation, as the case may be, and,
in addition, in any criminal action or proceeding, had no reasonable
cause to believe that his conduct was unlawful. As used in this
Article 12(g), the terms "liability" and "expense" shall include, but
shall not be limited to, attorneys' fees and disbursements and amounts
of judgments, fines, or penalties against, and amounts paid in
settlement by, a director, officer, or employee. The termination of
any claim, action, suit, or proceeding, civil or criminal, by judgment,
settlement (whether with or without court approval) or conviction or
upon a plea of guilty or of nolo contendere, or its equivalent, shall
not create a presumption that a director, officer, or employee did not
meet the standards of conduct set forth in the first sentence of this
Article 12(g).
"Any such director, officer, or employee who has been wholly
successful, on the merits or otherwise, with respect to any claim,
action, suit, or proceeding of the character described herein shall be
entitled to indemnification as of right. Except as provided in the
preceding sentence, any indemnification hereunder shall be made at the
discretion of the Corporation, but only if (1) the Board of Directors,
acting by a quorum consisting of directors who are not parties to or
who have been wholly successful with respect to such claim, action,
suit or proceeding, shall find that the director, officer, or employee
has met the standards of conduct set forth in the first sentence of
this Article 12(g), or (2) independent legal counsel (who may be
regular counsel of the Corporation) shall deliver to it their written
opinion that such director, officer, or employee has met such
standards.
II-1
"If several claims, issues, or matters of action are involved, any
such person may be entitled to indemnification as to some matters even
though he is not so entitled as to others.
"The Corporation may advance expenses to, or where appropriate may
at its expense undertake the defense of, any such director, officer or
employee upon receipt of an undertaking by or on behalf of such person
to repay such expenses if it should ultimately be determined that he is
not entitled to indemnification under this Article 12(g).
"The provisions of this Article 12(g) shall be applicable to
claims, actions, suits or proceedings made or commenced after the
adoption hereof, whether arising from acts or omissions to act
occurring before or after the adoption hereof.
"The rights of indemnification provided hereunder shall be in
addition to any rights to which any person concerned may otherwise be
entitled by contract or as matter of law, and shall inure to the
benefits of the heirs, executors, and administrators of any such
person."
Lilly has insurance coverages indemnifying directors, officers and
certain other employees for expenditures incurred by them in connection
with certain acts in their capacities as such, and providing
reimbursement to Lilly for expenditures in indemnifying directors,
officers and other insured employees for such acts. The maximum
aggregate coverage for Lilly and insured individuals is currently
$130,000,000 per policy year, with the policies subject to self-
retention and deductible provisions. Reference is made to the Cover
Notes for Directors and Officers Liability including Company
Reimbursement insurance coverage and Excess Directors and Officers
Liability and Corporate Reimbursement coverage filed as Exhibit 6 to
Lilly's Registration Statement No. 2-66741 and incorporated herein and
made a part hereof.
Lilly also has insurance coverage indemnifying directors,
officers, and employees for expenditures incurred by them as a result
of liabilities that may be imposed under the Employee Retirement Income
Security Act of 1974 by reason of their acting as fiduciaries in
relation to certain employee benefit plans of Lilly. The maximum
aggregate coverage under such insurance is currently $20,000,000 per
policy year, with the policy subject to deductible provisions.
Reference is made to the Corporate Fiduciary's Liability Insurance
Policy and Excess Corporate Fiduciary Liability Policy filed as Exhibit
4.2 to Lilly's Registration Statement No. 2-63891 and incorporated
herein and made part hereof.
Integrated Medical Systems, Inc.
Article 109 of the Colorado Business Corporation Act provides that
the Company may indemnify directors, officers, employees, fiduciaries
and agents of the Company.
Article VIII of the Company's Amended Articles of Incorporation in
effect prior to the Merger which are filed herewith as Exhibit 4.3,
provide that the Company, through the Company's Board of Directors,
shall possess and may exercise all powers of indemnification of
directors, officers, employees, agents and other persons whether or not
such powers and authority are provided for by the Colorado Business
Corporation Act. The Articles of Incorporation to be in effect
following the Merger do not contain any provisions regarding
indemnification.
II-2
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
2.1 - Agreement and Plan of Merger, dated August 2, 1995, among Lilly, Trans-IMS
Corporation, and IMS.
2.2 - Form of Put/Call Agreement among Lilly, IMS and certain shareholders of IMS
(attached as Appendix B to the Proxy Statement-Prospectus).
2.3 - Form of Support Agreement, dated August 2, 1995, between Lilly and certain
shareholders of IMS.
2.4/*/ - Forms of IMS Warrants and Options to Purchase Series D Preferred Stock.
2.5 - Form of Proxy for holders of stock of IMS.
4.1 - Articles of Incorporation to be in effect following the Merger (included in the
Articles of Merger attached as Appendix A to the Proxy Statement-Prospectus).
4.2 - By Laws of IMS to be in effect following the Merger.
4.3 - Amended Articles of Incorporation of IMS in effect prior to the Merger.
4.4 - By-Laws of IMS in effect prior to the Merger.
5.1/*/ - Opinion of Dewey Ballantine as to the legality of the Lilly securities to be issued
in the Merger.
5.2/*/ - Opinion of Hopper and Kanouff, P.C. as to the legality of the IMS securities to
be issued in the Merger.
8.1/*/ - Tax Opinion of Dewey Ballantine.
8.2/*/ - Tax Opinion of Cleary, Gottlieb, Steen & Hamilton.
10.1 - Stock Purchase Agreement, dated January 6, 1994, between IMS and McKesson
Corporation.
10.2 - Sponsorship and Participation Agreement, dated November 17, 1993, between
IMS and McKesson Corporation.
10.3 - Stockholder's Rights Agreement, dated January 6, 1994, between IMS and
McKesson Corporation.
10.4 - Senior Subordinated Note from IMS (which includes the registration rights for
Charles Brown).
10.5 - Indemnification Agreement, dated August 14, 1992, between IMS and David
Holbrooke.
10.6 - IMS 1989 Restated Stock Option Plan.
II-3
10.7 - IMS 1994 Employee Stock Option Plan.
10.8 - Promissory Note, dated June 12, 1995, between Lilly and IMS.
10.9 - Security Agreement, dated June 12, 1995, between Lilly and IMS.
10.10 - Pledge Agreement, dated June 12, 1995, between Lilly and IMS.
10.11 - Promissory Note, dated July 27, 1995, between Lilly and IMS.
10.12 - Security Agreement, dated July 27, 1995, between Lilly and IMS.
10.13 - Pledge Agreement, dated July 27, 1995, between Lilly and IMS.
10.14 - Promissory Note, dated August 28, 1995, between Lilly and IMS.
10.15 - Security Agreement, dated August 28, 1995, between Lilly and IMS.
10.16 - Pledge Agreement, dated August 28, 1995, between Lilly and IMS.
10.17 - Form of Registration Agreement applicable to holders of Series B Preferred
Stock.
21.1 - List of Subsidiaries of IMS.
23.1 - Consent of Arthur Andersen LLP.
23.2 - Consent of Ernst & Young LLP.
23.3 - Consent of Dewey Ballantine (included in Exhibits 5.1 and 8.1 hereto).
23.4 - Consent of Hopper and Kaunoff, P.C. (included in Exhibit 5.2 hereto).
23.5 - Consent of Cleary, Gottlieb, Steen & Hamilton (included in Exhibit 8.2 hereto).
----------------------
/*/ To be filed by amendment.
(b) Financial Statement Schedules
(c) Information Provided Pursuant to Item 4(b)
Fairness Opinion provided by Smith Barney Inc. is included as
Appendix C to the Proxy Statement-Prospectus.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the
II-4
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expense
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information called for
by the other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed
pursuant to the immediately preceding paragraph, or (ii) that purports
to meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for purposes
of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to deliver or cause
to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or
Rule 14c-3 under the Securities Exchange Act of 1934; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or cause
to be delivered to each person whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial
information.
The undersigned registrant hereby undertakes to supply by
means of post-effective amendment all information concerning a
transaction, and the company being acquired involved therein, that was
not the subject of and included in the registration statement when it
became effective.
II-5
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
INDIANAPOLIS, STATE OF INDIANA, ON SEPTEMBER 7, 1995.
Eli Lilly and Company
By /s/ Randall L. Tobias
------------------------------------
Randall L. Tobias,
Chairman of the Board of Directors
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints Randall L. Tobias and Sidney
Taurel his true and lawful attorneys-in-fact and agents, each acting
alone, with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities, to sign any or
all amendments to this Registration Statement, including post-effective
amendments, and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange
Commission, granting unto attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person,
and hereby ratifies and confirms all that said attorney-in-fact and
agents, each acting alone, or their substitute or substitutes, may
lawfully do or cause to be done.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
--------- ----- ----
/s/ Randall L. Tobias
------------------------- Chairman of the Board of Directors and September 7, 1995
Randall L. Tobias Chief Executive Officer and a Director
(principal executive officer)
/s/ James M. Cornelius
------------------------- Vice President, Finance, and a September 7, 1995
James M. Cornelius Director principal financial officer)
/s/ Arnold C. Hanish
------------------------- Chief Accounting Officer (principal September 7, 1995
Arnold C. Hanish accounting officer)
/s/ Steven C. Beering, M.D.
------------------------- Director September 7, 1995
Steven C. Beering, M.D.
/s/ James W. Cozad Director September 7, 1995
--------------------------------------
James W. Cozad
/s/ Alfred G. Gilman, M.D. Ph.D. Director September 7, 1995
--------------------------------------
Alfred G. Gilman, M.D., Ph.D.
/s/ Karen N. Horn, Ph.D Director September 7, 1995
--------------------------------------
Karen N. Horn, Ph.D
/s/ J. Clayburn La Force Jr., Ph.D. Director September 7, 1995
--------------------------------------
J. Clayburn La Force Jr., Ph.D.
/s/ Kenneth L. Lay, Ph.D. Director September 7, 1995
--------------------------------------
Kenneth L. Lay, Ph.D.
/s/ Franklyn G. Prendergast, M.D., Ph.D. Director September 7, 1995
----------------------------------------
Franklyn G. Prendergast, M.D., Ph.D.
/s/ Kathi P. Seifert Director September 7, 1995
--------------------------------------
Kathi P. Seifert
/s/ Sidney Taurel Director September 7, 1995
--------------------------------------
Sidney Taurel
/s/ August M. Watanabe, M.D. Director September 7, 1995
--------------------------------------
August M. Watanabe, M.D.
-------------------------------------- Director
Alva O. Way
/s/ Richard D. Wood
-------------------------------------- Director September 7, 1995
Richard D. Wood
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF GOLDEN, STATE OF COLORADO, ON SEPTEMBER 7, 1995.
Integrated Medical Systems, Inc.
By /s/ Kevin R. Green
------------------------------------
Kevin R. Green
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose
signature appears below constitutes and appoints Charles I. Brown and
Kevin R. Green his true and lawful attorneys-in-fact and agents, each
acting alone, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to
sign any or all amendments to this Registration Statement, including
post-effective amendments, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do
in person, and hereby ratifies and confirms all that said attorney-in-
fact and agents, each acting alone, or their substitute or substitutes,
may lawfully do or cause to be done.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
--------- ----- ----
/s/ Kevin R. Green September 7, 1995
------------------- President and Chief Executive Officer
Kevin R. Green and a Director (principal executive
officer)
/s/ Charles I. Brown September 7, 1995
------------------- Chief Financial Officer and a
Charles I. Brown Director (principal financial officer)
/s/ Richard J. Smeltz September 7, 1995
------------------- Vice President - Finance (principal
Richard J. Smeltz accounting officer)
/s/ James A. Larson September 7, 1995
------------------- Director
James A. Larson
/s/ Alan S. Danson September 7, 1995
------------------- Director
Alan S. Danson
/s/ John W. Hanes, Jr. Director September 7, 1995
-------------------------------------
John W. Hanes, Jr.
/s/ David R. Holbrooke Director September 7, 1995
--------------------------------------
David R. Holbrooke
/s/ Michael S. Hunt Director September 7, 1995
--------------------------------------
Michael S. Hunt
/s/ John A. McChesney Director September 7, 1995
--------------------------------------
John A. McChesney
/s/ Kevin E. Moley Director September 7, 1995
--------------------------------------
Kevin E. Moley
/s/ James T. Murphy Director September 7, 1995
--------------------------------------
James T. Murphy